IRS kicks off 2019 tax-filing season as tax agency reopens

For ways to save on taxes on business and investment transactions, please call Kevin M. Sayed, J.D., LL.M., at 252-321-2020. The following materials were originally published by the IRS.

WASHINGTON ― The Internal Revenue Service successfully opened the 2019 tax-filing season today as the agency started accepting and processing federal tax returns for tax year 2018. Despite the major tax law changes made by the Tax Cuts and Jobs Act, the IRS was able to open this year’s tax-filing season one day earlier than the 2018 tax-filing season.

More than 150 million individual tax returns for the 2018 tax year are expected to be filed, with the vast majority of those coming before the April tax deadline. Through mid-day Monday, the IRS had already received several million tax returns during the busy opening hours.

“I am extremely proud of the entire IRS workforce. The dedicated IRS employees have worked tirelessly to successfully implement the biggest tax law changes in 30 years and launch tax season for the nation,” said IRS Commissioner Chuck Rettig. “Although we face various near- and longer-term challenges, our employees are committed to doing everything we can to help taxpayers and get refunds out quickly.”

Following the government shutdown, the IRS is working to promptly resume normal operations.

“The IRS will be doing everything it can to have a smooth filing season,” Rettig said. “Taxpayers can minimize errors and speed refunds by using e-file and IRS Free File along with direct deposit.”

The IRS expects the first refunds to go out in the first week of February and many refunds to be paid by mid- to late February like previous years. The IRS reminds taxpayers to check “Where’s My Refund?” for updates. Demand on IRS phones during the early weeks of tax season is traditionally heavy, so taxpayers are encouraged to use IRS.gov to find answers before they call.

April deadline; help for taxpayers through e-file, Free File

The filing deadline to submit 2018 tax returns is Monday, April 15, 2019, for most taxpayers. Because of the Patriots’ Day holiday on April 15 in Maine and Massachusetts and the Emancipation Day holiday on April 16 in the District of Columbia, taxpayers who live in Maine or Massachusetts have until April 17 to file their returns.

With major changes made by the Tax Cuts and Jobs Act, the IRS encouraged taxpayers seeking more information on tax reform to consult two online resources: Publication 5307, Tax Reform: Basics for Individuals and Families, and Publication 5318; Tax Reform What’s New for Your Business. For other tips and resources, visit IRS.gov/taxreform or check out the Get Ready page on IRS.gov.

The IRS expects about 90 percent of returns to be filed electronically. Choosing e-file and direct deposit remains the fastest and safest way to file an accurate income tax return and receive a refund.

The IRS Free File program, available at IRS.gov, gives eligible taxpayers a dozen options for filing and preparing their tax returns using brand-name products. IRS Free File is a partnership with commercial partners offering free brand-name software to about 100 million individuals and families with incomes of $66,000 or less. About 70 percent of the nation’s taxpayers are eligible for IRS Free File. People who earned more than $66,000 may use Free File Fillable Forms, the electronic version of IRS paper forms.

Most refunds sent in less than 21 days; EITC/ACTC refunds starting Feb. 27

The IRS expects to issue more than nine out of 10 refunds in less than 21 days. However, it’s possible a tax return may require additional review and take longer. “Where’s My Refund?” has the most up to date information available about refunds. The tool is updated only once a day, so taxpayers don’t need to check more often.

The IRS also notes that refunds, by law, cannot be issued before Feb. 15 for tax returns that claim the Earned Income Tax Credit or the Additional Child Tax Credit. This applies to the entire refund — even the portion not associated with the EITC and ACTC. While the IRS will process the EITC and ACTC returns when received, these refunds cannot be issued before Feb. 15. Similar to last year, the IRS expects the earliest EITC/ACTC related refunds to actually be available in taxpayer bank accounts or on debit cards starting on Feb. 27, 2019, if they chose direct deposit and there are no other issues with the tax return.

“Where’s My Refund?” ‎on IRS.gov and the IRS2Go mobile app remain the best way to check the status of a refund. “Where’s My Refund?” will be updated with projected deposit dates for most early EITC and ACTC refund filers on Feb. 17, so those filers will not see a refund date on “Where’s My Refund?” ‎or through their software packages until then. The IRS, tax preparers and tax software will not have additional information on refund dates, so these filers should not contact or call about refunds before the end of February.

This law was changed to give the IRS more time to detect and prevent fraud. Even with the EITC and ACTC refunds and the additional security safeguards, the IRS still expects to issue more than nine out of 10 refunds in less than 21 days. However, it’s possible a particular tax return may require additional review and a refund could take longer. Even so, taxpayers and tax return preparers should file when they’re ready. For those who usually file early in the year and are ready to file a complete and accurate return, there is no need to wait to file.

New Form 1040

Form 1040 has been redesigned for tax year 2018. The revised form consolidates Forms 1040, 1040A and 1040-EZ into one form that all individual taxpayers will use to file their 2018 federal income tax return.

The new form uses a “building block” approach that can be supplemented with additional schedules as needed. Taxpayers with straightforward tax situations will only need to file the Form 1040 with no additional schedules. People who use tax software will still follow the steps they’re familiar with from previous years. Since nearly 90 percent of taxpayers now use tax software, the IRS expects the change to Form 1040 and its schedules to be seamless for those who e-file.

Free tax help

Low- and moderate-income taxpayers can get help filing their tax returns for free. Tens of thousands of volunteers around the country can help people correctly complete their returns.

To get this help, taxpayers can visit one of the more than 12,000 community-based tax help sites that participate in the Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) programs. To find the nearest site, use the VITA/TCE Site Locator on IRS.gov or the IRS2Go mobile app.

Filing assistance

No matter who prepares a federal tax return, by signing the return, the taxpayer becomes legally responsible for the accuracy of all information included. IRS.gov offers a number of tips about selecting a preparer and information about national tax professional groups.

The IRS urges all taxpayers to make sure they have all their year-end statements in hand before filing. This includes Forms W-2 from employers and Forms 1099 from banks and other payers. Doing so will help avoid refund delays and the need to file an amended return.

Online tools

The IRS reminds taxpayers they have a variety of options to get help filing and preparing their tax returns on IRS.gov, the official IRS website. Taxpayers can find answers to their tax questions and resolve tax issues online. The Let Us Help You page helps answer most tax questions, and the IRS Services Guide links to these and other IRS services.

Taxpayers can go to IRS.gov/account to securely access information about their federal tax account. They can view the amount they owe, pay online or set up an online payment agreement; access their tax records online; review the past 18 months of payment history; and view key tax return information for the current year as filed. Visit IRS.gov/secureaccess to review the required identity authentication process.

The IRS urges taxpayers to take advantage of the many tools and other resources available on IRS.gov.

The IRS continues to work with state tax agencies and the private-sector tax industry to address tax-related identity theft and refund fraud. As part of the Security Summit effort, stronger protections for taxpayers and the nation’s tax system are in effect for the 2019 tax filing season.

The new measures attack tax-related identity theft from multiple sides. Many changes will be invisible to taxpayers but will help the IRS, states and the tax industry provide additional protections, and tighter security requirements will better protect tax software accounts and personal information.

Renew ITIN to avoid refund delays

Many Individual Taxpayer Identification Numbers (ITINs) expired on Dec. 31, 2018. This includes any ITIN not used on a tax return at least once in the past three years. Also, any ITIN with middle digits of 73, 74, 75, 76, 77, 81 and 82 (Example: 9NN-73-NNNN) is now expired. ITINs that have middle digits 70, 71, 72 or 80 expired Dec. 31, 2017, but taxpayers can still renew them. Affected taxpayers should act soon to avoid refund delays and possible loss of eligibility for some key tax benefits until the ITIN is renewed. An ITIN is used by anyone who has tax-filing or payment obligations under U.S. tax law but is not eligible for a Social Security number.

It can take up to 11 weeks to process a complete and accurate ITIN renewal application. For that reason, the IRS urges anyone with an expired ITIN needing to file a tax return this tax season to submit their ITIN renewal application soon.

Sign and validate electronically filed tax returns

All taxpayers should keep a copy of their tax return. Some taxpayers using a tax filing software product for the first time may need their adjusted gross income (AGI) amount from their prior-year tax return to verify their identity.

Taxpayers using the same tax software they used last year will not need to enter their prior year information to electronically sign their 2017 tax return. Taxpayers can learn more about how to verify their identity and electronically sign tax returns at Validating Your Electronically Filed Tax Return.

Like-Kind Exchanges Now Limited to Real Property

For ways to save on taxes on business and investment transactions, 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 reminded taxpayers that like-kind exchange tax treatment is now generally limited to exchanges of real property. The Tax Cuts and Jobs Act, passed in December 2017, made tax law changes that will affect virtually every business and individual in 2018 and the years ahead.

Effective Jan. 1, 2018, exchanges of personal or intangible property such as machinery, equipment, vehicles, artwork, collectibles, patents, and other intellectual property generally do not qualify for nonrecognition of gain or loss as like-kind exchanges. However, certain exchanges of mutual ditch, reservoir or irrigation stock are still eligible.

Like-kind exchange treatment now applies only to exchanges of real property that is held for use in a trade or business or for investment. Real property, also called real estate, includes land and generally anything built on or attached to it. An exchange of real property held primarily for sale still does not qualify as a like-kind exchange.

A transition rule in the new law allows like-kind treatment for some exchanges of personal or intangible property. If the taxpayer disposed of the personal or intangible property on or before Dec. 31, 2017, or received replacement property on or before that date, the exchange may qualify for like-kind exchange treatment.

Properties are of like-kind if they’re of the same nature or character, even if they differ in grade or quality. Improved real property is generally of like-kind to unimproved real property. For example, an apartment building would generally be of like-kind to unimproved land. However, real property in the United States is not of like-kind to real property outside the U.S.

To report a like-kind exchange, taxpayers must file Form 8824, Like-Kind Exchanges, with their tax return for the year the taxpayer transfers property as part of a like-kind exchange. This form helps a taxpayer figure the amount of gain deferred as a result of the like-kind exchange, as well as the basis of the like-kind property received, if cash or property that isn’t of like kind is involved in the exchange. Form 8824 helps compute the amount of gain the taxpayer must report.

For more information about this and other tax reform changes, visit irs.gov/taxreform.

 

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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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.

Share this tip on social media — #IRSTaxTip: New 100-percent depreciation deduction benefits business taxpayers. https://go.usa.gov/xPkUb

What do I do if I receive a threat from the IRS to seize my property?

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If the IRS has threatened to initiate a levy on your property, call 252-321-2020 today to ask for assistance from attorney Kevin Sayed.  All material here originally published by the Internal Revenue Service.

Taxpayers now have more time to challenge a levy

The IRS reminds individuals and businesses that they have additional time to file an administrative claim or bring a civil action for wrongful levy or seizure. Tax reform legislation enacted in December extended the time limit from nine months to two years.

Here are some facts about levies and the extension of time to file a claim or civil action:

  • An IRS levy permits the legal seizure and sale of property to satisfy a tax debt. For purposes of a levy, the term “property” includes wages, money in bank or other financial accounts, vehicles and real estate.
  • The timeframes apply when the IRS has already sold the property it levied. Taxpayers can make an administrative claim for return of their property within two years of the date of the levy.
  • If an administrative claim is made within the extended two-year period, the two-year period for bringing suit is extended for one of two periods, whichever is shorter:o Twelve months from the date the person filed the
    claim.
    o Six months from the date the IRS disallowed the
    claim.
  • The change in law applies to levies made before, on or after December 22, 2017, as long as the previous nine-month period hadn’t yet expired.
  • Anyone who receives an IRS bill titled, Final Notice of Intent to Levy and Notice of Your Right to A Hearing, should immediately contact the IRS. By doing so, a taxpayer may be able to make arrangements to pay the liability, instead of having the IRS proceed with the levy.

More Information:

Please call Kevin M. Sayed, J.D., LL.M. Taxation, with Colombo Kitchen Attorneys for help with IRS tax issues.  

Enforced Collection Actions

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The IRS recently decided to begin a campaign to aggressively levy wages and income, bank accounts, and other payments and assets that serve as cash or cash equivalents. For the last few years the IRS would routinely intercept federal payments (which will continue) to businesses or individuals. The IRS will soon begin aggressive collection campaigns on cash or payments. See the website below for common types of levy and collection and enforcement actions available to the IRS.

https://www.irs.gov/businesses/small-businesses-self-employed/enforced-collection-actions

If taxes are not paid timely, and the IRS is not notified why the taxes cannot be paid, the law requires that enforcement action be taken, which could include the following:

  • Issuing a Notice of Levy on salary and other income, bank accounts or property (legally seize property to satisfy the tax debt)
  • Assessing a Trust Fund Recovery Penalty for certain unpaid employment taxes
  • Issuing a Summons to the taxpayer or third parties to secure information to prepare unfiled tax returns or determine the taxpayer’s ability to pay

Note: To collect delinquent tax debts, certain federal payments (vendor, OPM, SSA, federal salary, and federal employee travel) disbursed by the Department of the Treasury, Bureau of Fiscal Service (BFS) may be subject to a levy through the Federal Payment Levy Program (FPLP).

Important Information for Employers

Employment taxes are:

  • The amounts an employer should withhold from employees for income, social security, and Medicare taxes (also called withheld or trust fund taxes), plus
  • The amount of social security tax and Medicare taxes an employer pays on behalf of each employee

Paying employment taxes late, or not including payment with a return if required, could result in additional penalties and interest on any unpaid balance. Failure to Deposit (FTD) penalties of up to 15 percent of the amount not deposited may be charged, depending on how many days the payment is late.

Enrolling in and making current tax deposits through the Electronic Federal Tax Payment System (EFTPS) can help employers stay up-to-date with their payment requirements.

If you need help with employment or contracts, business or corporate matters, or business tax optimization, call Kevin M. Sayed, J.D., LL.M. Taxation at Colombo Kitchin attorneys, 252-321-2020.

 

Taxpayers should look out for disaster scams during hurricane season

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With hurricane season running through November 30, taxpayers should remember that criminals and scammers often try to take advantage of generous taxpayers who want to help disaster victims. Everyone should be vigilant, because scams often pop up after a hurricane.

These disaster scams normally start with unsolicited contact in several ways. The scammer contacts their possible victim by telephone, social media, email or in-person. Scammers also use a variety of tactics to lure information out of people.

Here are some things for people to know so they can recognize a scam and avoid becoming a victim:

  • Some thieves pretend they are from a charity. They do this to get money or private information from well-intentioned taxpayers.
  • Bogus websites use names that are similar to legitimate charities. They do this scam to trick people to send money or provide personal financial information.
  • Scammers even claim to be working for ― or on behalf of ― the IRS. The thieves say they can help victims file casualty loss claims and get tax refunds.
  • Disaster victims can call the IRS toll-free disaster assistance telephone number at 866-562-5227. Phone assistors will answer questions about tax relief or disaster-related tax issues.
  • Taxpayers who want to make donations can get information to help them on IRS.gov. The Tax Exempt Organization Search helps users find or verify qualified charities. Donations to these charities may be tax-deductible.
  • Taxpayers should always contribute by check or credit card to have a record of the tax-deductible donation.
  • Donors should not give out personal financial information to anyone who solicits a contribution. This includes things like Social Security numbers or credit card and bank account numbers and passwords.

More Information:
Report Phishing
Disaster relief

For more information on how to protect your assets, please contact Kevin Sayed at 252-321-2020.

New Tax Bill

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Late on December 1, 2017, the Senate passed their version of the “Tax Cuts and Jobs Act” (H.R. 1). Next, a conference committee will work to consolidate the House and Senate proposals, in a form that will pass both legislative bodies.

Following is a summary of the two bill versions. At this point, it is fair to assume that some combination of the proposals will be enacted. Where the two bills are substantively identical, this leads one to strongly know what the final bill will propose in that area. Unless otherwise stated, these provisions would begin in 2018.

One key difference is that Senate budget rules require that the bill either get 60 votes (not going to happen) or not increase the deficit beyond ten years. This requirement means that the individual tax provisions expire after 2025 (the corporate provisions are permanent). This sunset will have to remain in a final bill, again unless, 60 Senate votes can be obtained or the bill does not increase the deficit in the long term.

Individual tax provisions

Tax rates.

  • Current rule. For ordinary income, seven graduated tax rates apply to individuals – 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The special long-term capital gains and qualified dividends, the rate is 0% for a taxpayer otherwise in the 10% or 15% rate. For a taxpayer otherwise in the 25% to 35%, the special rate is 15%. For those in the top 39.6% rate, the special rate is 20%.
  • House bill. Replace the seven rates with four – 12%, 25%, 35%, and 39.6%. The top rate applies at approximately twice the current amount of income. Long-term capital gains and qualified dividends rates are retained, and the 20% rate would apply at current rate brackets. The benefit of the lowest rate is recaptured for those at the 39.6% rate, making that marginal rate even higher.
  • Senate bill. Replace the seven rates with a different, slightly lower, seven – 10%, 12%, 22%, 24%, 32%, 35%, and 38.5%. Greatly increase the amount of income subject to each bracket. Long-term capital gains and qualified dividends – same as current law. No recapture of the lowest rate. Again, these rates sunset after 2025, reverting to current law.
  • Observation. The size of the House brackets means that the cuts are more aggressive as compared to the Senate, and accordingly, the revenue loss. House members will feel that the Senate proposal is the status quo, not reform. The brackets will be indexed for inflation in the future.

 

Standard deduction.

  • Current rule. Single – $6,350; Married-filing-jointly – $12,700; Head of household –$9,350.
  • House bill. Single – $12,200; Head of household – $18,300; Married-filing-jointly – $24,400.
  • Senate bill. Single – $12,000; Head of household – $18,000; Married-filing-jointly – $24,000.
  • Observation. Bill-writers believe that the large interest in the standard deduction, coupled with the restriction on itemized deductions, will result in 90% of taxpayers being able to avoid itemizing. Also, this cushions the blow for many specific itemized deductions that have been eliminated.

Personal exemptions.

  • Current rule. An exemption from tax applies to $4,050 of income, for the taxpayer, spouse, and any dependents.
  • House bill. Repealed.
  • Senate bill. Repealed.
  • Observation. Bill-writers say that the much larger standard deduction and an expanded child tax credit will address this loss, with simplification as a side effect. Lower to middle income taxpayers with many dependent children though will be adversely affected.

Child tax credit.

  • Current rule. A credit of $1,000 per dependent child under age 17 is allowed. The credit phases out beginning at $75,000 of single income ($110,000 joint).
  • House bill. Increase the credit to $1,600 per child and move the phase-out starting point to $115,000 single ($230,000 joint). Also, an additional credit of $300 is allowed for non-child dependents through 2022 only.
  • Senate bill. Increase the credit to $2,000 per child and move the phase-out starting point to $500,000. No supplemental credit for non-children.
  • Observation. The increased phase-outs and credit will make the credit much more valuable to most taxpayers than under current law.

Itemized deductions.

  • Current rule. Popular itemized deductions include medical expenses, state and local taxes (sales or income, but not both), real estate taxes, mortgage interest expense, charitable contributions, casualty losses, unreimbursed employee expenses, and tax preparation expenses. For mortgage interest, you can deduct interest on up to $1,000,000 of acquisition debt on a principal residence and one second home, plus interest on up to $100,000 of home equity debt from whatever source.
  • House bill. Eliminates medical, state and local income or sales taxes, casualty losses (unless a federal disaster), unreimbursed employee expenses, and tax preparation fees. Retains deductions for local property taxes (capped at $10,000), charitable contributions (some technical changes), and mortgage interest. Current mortgages for a principal residence are grandfathered, but new mortgages would be limited to the first $500,000 of acquisition debt. No deduction for equity loans, and vacation homes – without grandfathered protection.
  • Senate bill. Same as House for deduction of taxes. Retains the medical deduction, in fact, providing an improved 7.5% floor for medical expenses (currently 10%) for 2017 and 2018 only. For mortgage interest, only the home equity interest deduction would be repealed, with no other changes. Same as House for loss of miscellaneous deductions.
  • Observation. These changes would greatly reduce the need and ability to itemize deductions. Depending on your specific situation, the changes can have a minor effect or dramatically impact your income tax obligation.

Other deductions.

  • Current rule. Deductions allowed without the need to itemize for alimony, student loan interest, an educator deduction (up to $250), and moving expenses. Employer moving allowances are not included in income.
  • House bill. All are eliminated. Alimony income would not be taxable, and employer moving allowances would not be excluded from income.
  • Senate bill. The educator deduction is not only retained, but doubled. Only the moving expense and allowance is eliminated, the others retained.
  • Observation. A further move towards simplicity, again with winners and losers, depending on your facts.

 Gain on sale of a residence.

  • Current rule. A single taxpayer can exclude up to $250,000 of gain from the sale of a principal residence. Joint filers get up to $500,000 if both meet the requirements. Two key rules. One – you can claim this only once every two years. Two – the house must have been your principal residence for some two of the prior five years.
  • House bill. The two-out-of-five rule is replaced with a five-out-of-eight rule. The exclusion is available once every five years. Also, once income exceeds $500,000, the maximum exclusion phases out. The end result is that a married couple making $1 million is not eligible for an exclusion, regardless of other facts.
  • Senate bill. Same as House, except that the exclusion does not phase out for upper incomers.
  • Observation. The move to five-out-of-eight rule will keep home “flippers” from using the exclusion, but the House income test would represent the first limitation on using a home sale exclusion for upper-incomers.

Alternative minimum tax.

  • Current rule. Imposed on all taxpayers.
  • House bill. Repealed.
  • Senate bill. Retained with an increase in the exemption of about 40%.
  • Observation. Repealing the AMT is stalwart GOP position, but the Senate bill found it too expensive to get enough votes to pass. This will surely disappoint House members, who campaigned on AMT as a core belief. Expect them to fight to keep a full repeal.

Estate and gift tax.

  • Current rule. Estates over $5.5 million ($11 million married) are taxed at 40% of the excess. Lifetime gifts are taxed against this same limitation.
  • House bill. Doubles the exemption to over $10 million, and after 2024, repeal it entirely. The gift tax remains.
  • Senate bill. Double the exemption for both the estate and gift tax, without future repeal.
  • Observation. The estate tax currently affects only 0.2% of taxpayers under the present system.

Some other specific personal tax rules.

  • Roth IRA recharacterizations. Currently, income from the conversion of a regular IRA to Roth is taxable income. However, by October 15 of the subsequent year, the taxpayer can change his/her mind and return the IRA to its regular status, and amend their tax return to remove the income. This “undoing” is known as a recharacterization.
    • House bill. Repeals the right to a recharacterization.
    • Senate bill. Same as House.
  • Graduate student income. Currently, tuition waivers are not taxable income.
    • House bill. Taxes the value of the tuition waiver.
    • Senate bill. No change from current law.
  • Cost basis of securities sold. Currently, the taxpayer can use the FIFO method to account for which securities were sold (“first-in, first-out”), or the taxpayer can specifically identify which securities were sold. OR, in the case of a mutual fund only, average cost can be used.
    • House bill. No change from current law.
    • Senate bill. Would require the use of the FIFO method.

Business tax provisions

 Corporate income tax.

  • Current rule. Taxed at graduated rates from 15% to 35%. Personal service corporations (“PSCs”) are taxed at the top marginal rate.
  • House bill. Taxed at a flat 20%, beginning in 2018. PSCs are taxed at a flat 25%.
  • Senate bill. Taxed at a flat 20%, beginning in 2019. No special rate for PSCs.
  • Observation. The date will be the key difference to reconcile.

Tax rate on business income from partnerships, LLCs, and S corporations.

  • Current rule. Taxed as ordinary income at marginal tax rates.
  • House bill. Impose a maximum tax rate of 25%, where the income is based on capital investment. Where the income is also compensatory in nature, some ratio of income will qualify for the 25% while the rest is taxed at top marginal rates. Owners of PSC-type businesses will be considered entirely compensation and thus not eligible for this break. Smaller businesses could be taxed as low as 9% if the taxpayer was otherwise in the new 12% rate.
  • Senate bill. These owners will get a deduction for 23% of their “qualified business income”, limited to 50% of the wages paid by the business to its employees. PSC-type businesses are eligible to the extent that taxable income does not exceed $250,000 single, $500,000 married-filing-jointly. Note that this is a generalized response for a complicated concept.
  • Observation. Very different approaches, either of which, if enacted, would be one of the most complicated provisions in this bill.

Section 179 – depreciation expensing.

  • Current rule. Can deduct up to $500,000 per year, but it cannot create a loss. Begin to lose the ability to claim the deductions at $2 million of eligible additions in that year.
  • House bill. Deduction increased for up to $5 million, with a phase out beginning at $20 million.
  • Senate bill. Deduction increased for up to $1 million, with a phase out beginning at $2.5 million.
  • Observation. A significant tax incentive for small to medium-sized businesses, with a very different scope between the two bills. Taxpayers should expect that states will not follow this.

Section 168(k) – “bonus” depreciation.

  • Current rule. Can deduct 50% of the 2017 cost of certain “new” additions per year, no cap. Phases down to 40% in 2018, and ends with 30% in 2019.
  • House bill. Can deduct 100% of the cost for acquisitions after 9/27/2017. No longer required to be “new”. Effective 2018 through 2022.
  • Senate bill. Same as House except that provision phases out by 20% a year beginning in 2023. Also, the Senate does not change the current “new” requirement.
  • Observation. Another significant tax incentive for all businesses, beginning before 2018. Taxpayers should expect that states will not follow this treatment.

Some specific business tax rules set to change.

  • Deduction of interest expense.
    • Current rule. No limit.
    • House bill. Limited to 30% of EBITDA, with the excess available for up to five years. Does not apply to small taxpayers under $25 million gross receipts.
    • Senate bill. Limited to 30% of “adjusted taxable income”, with a non-expiring carryover of the excess. The 30% is applied to net business income before NOL and the 23% pass-through deduction, if applicable. Does not apply to those under $15 million gross receipts.
  • Alternative minimum tax.
    • Current rule. Imposed on corporations.
    • House bill. Fully repealed.
    • Senate bill. No change from current law.
  • Entertainment deduction
    • Current rule. Generally 50% deductible.
    • House bill. Not deductible.
    • Senate bill. Same as House.
  • Real estate depreciation.
    • Current rule. Residential real estate is depreciated over 27.5 years; commercial over 39 years.
    • House bill. No provision.
    • Senate bill. Life reduced to 25 years, allowing for a faster recovery of the investment.
  • Net operating losses (“NOLs”).
    • Current rule. Can carry back for two years, and/or carry forward for up to twenty years.
    • House bill. No further carry backs after 2017. Carry forwards are limited to 90% of income (still must pay tax on 10% even if you have plenty of NOLs).
    • Senate bill. Same as House, except the limit becomes 80% after 2022.
  • Like-kind exchanges.
    • Current rule. Allowed for real and personal property used for investment or in a business.
    • House bill. Repealed for all assets except real property.
    • Senate bill. Same as House.
  • Domestic production deduction.
    • Current rule. Deduction of 9% of production activity income.
    • House bill. Repealed after 2017.
    • Senate bill. Repealed after 2017 for pass-through, after 2018 for others.
  •  “C” corporations forced to use the accrual method of accounting.
    • Current rule. At $5 million gross receipts.
    • House bill. At $25 million gross receipts.
    • Senate bill. At $15 million gross receipts.
  • Required to comply with Section 263A capitalization rules.
    • Current rule. At $10 million for resellers, no threshold for manufacturers.
    • House bill. At $25 million gross receipts.
    • Senate bill. At $15 million gross receipts.
  • Local lobbying expenses.
    • Current rule. Deductible.
    • House bill. Deduction repealed.
    • Senate bill. Same as House.
  • Work Opportunity Tax Credit.
    • Current rule. Provides a tax credit for a percentage of the wages paid to certain disadvantaged groups.
    • House bill. Repealed.
    • Senate bill. No provision.
  • Technical termination rule.
    • Current rule. A partnership (or an entity taxed as a partnership) is considered terminated and a new partnership started where there is a sale or exchange of more than 50% of the ownership interests in a 12-month period.
    • House bill. Repeal the rule.
    • Senate bill. No provision.

This information above was shared with us by Milton Howell, CPA, the tax partner with DMJ in Greensboro, NC.  DMJ & Co. is a CPA and accounting firm located North Carolina specializing in tax preparation, financial planning and wealth management.

For more information on how these tax changes affect you or your business, please contact Kevin Sayed, 252-321-2020.

House Passes Tax Reform

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House Passes Tax Reform

See this link for the tax changes that have been approved by the U.S. House:   House Passes Tax Reform

Employee or Independent Contractor? Know the Rules

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All material below original issued by the Internal Revenue Service. If you need help with employment or contracts, business or corporate matters, or business tax optimization, call Kevin M. Sayed, J.D., LL.M. Taxation at Colombo Kitchin Attorneys, 252-321-2020.

Issue Number:    IRS Small Business Week Tax Tip 2017-02

Inside This Issue

The IRS encourages all businesses and business owners to know the rules when it comes to classifying a worker as an employee or an independent contractor.

An employer must withhold income taxes and pay Social Security, Medicare taxes and unemployment tax on wages paid to an employee. Employers normally do not have to withhold or pay any taxes on payments to independent contractors.

Here are two key points for small business owners to keep in mind when it comes to classifying workers:

  1. Control. The relationship between a worker and a business is important. If the business controls what work is accomplished and directs how it is done, it exerts behavioral control. If the business directs or controls financial and certain relevant aspects of a worker’s job, it exercises financial control. This includes:
  • The extent of the worker’s investment in the facilities or tools used in performing services
  • The extent to which the worker makes his or her services available to the relevant market
  • How the business pays the worker, and
  • The extent to which the worker can realize a profit or incur a loss
  1. Relationship. How the employer and worker perceive their relationship is also important for determining worker status. Key topics to think about include:
  • Written contracts describing the relationship the parties intended to create
  • Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation or sick pay
  • The permanency of the relationship, and
  • The extent to which services performed by the worker are a key aspect of the regular business of the company
  • The extent to which the worker has unreimbursed business expenses

The IRS can help employers determine the status of their workers by using form Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. IRS Publication 15-A, Employer’s Supplemental Tax Guide, is also an excellent resource.