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New Tax Deduction for Owners of Qualified Businesses

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Good news for partnerships, S corporations, sole proprietorships, and estates and trusts

(pass-throughs) which can deduct  up to 20% of their Qualified Business Income (QBI) under new IRS Section 199(A).

What is Qualified Business Income? Qualified Business Income is net income that is received from a Qualified Trade or Business. Capital gains, and dividend and interest income are not considered business income. Guaranteed payments or wages paid to owners are excluded.
What is a Qualified Trade or Business? A Qualified Trade or Business is any trade or business that is not a “Specified Service Trade or Business” defined by the IRS as the following:
• businesses in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services,
• any banking, insurance, financing, leasing, investing, or similar business,
• operating a hotel, motel, restaurant, or similar business, and
• businesses involved in investing and investment management, trading, or dealing in securities

Income Limitation for Specified Service Trade or Businesses Owners of a Specified Service Trade or Business may take the QBI Deduction if their taxable income for 2018 is below $157,500 for single filers ($315,000 for Married Filing Joint) to be eligible for the full deduction. For 2019 these limits are $160,700 for single filers and $321,400 for Married Filing Joint to be eligible for the full deduction.

How is the QBI Deduction Calculated? The QBI Deduction usually is the smaller of 20% of the Qualified Business Income or 20% of taxable income. For example, a single self-employed lawyer has $150,000 of QBI. His taxable income is $138,000(below the income limitation). Therefore, his QBI deduction is $27,600, which is 20% of his taxable income.

Good news for staffing firms, and the real estate industry! The IRS proposed regulations clarify that the following businesses qualify for the QBI deduction with  no income limitation: staffing firms, real estate agents and the rental of tangible or intangible property to a related business. Other rental real estate properties may qualify if the activity rises to the level of a business.

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Limitations for Qualified Businesses – these businesses have no income limitations but may be limited based on the business’s W-2 wages and unadjusted basis in qualified property. The amount of the tax deduction will vary depending on the specific taxpayer circumstances.
Want to maximize your deduction? Whether your business is a Qualified Business or a Specified Service Trade or Business and regardless of your income level, there are numerous tax moves one can do to maximize this new Sec 199(A) deduction- even for 2018! Please consult with us about your situation.

Home Equity Loan Interest is Still in Play in 2018

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Most of us will agree that our biggest investment is in our home. So, it shouldn’t surprise you that your house or condo is your first port-of-call whenever there’s a need to borrow money. And the easiest way to draw funds against the security of real estate is by arranging a Home Equity Loan.

Home Equity Loans have New Limitations

Home Equity funding helps us in important ways:

  • Number one, the interest rates payable on this type of loan are arguably the lowest available.
  • Secondly, you can get the cash working for you quickly with the least bother, paperwork and tedious protocol.
  • Then there’s the third big reason: help from Uncle Sam.

Up to now all interest payments on a Home Equity Loan were tax-deductible. It made borrowing almost a no-brainer! Who wouldn’t opt for already-low interest rates to be pulled even lower? Benefits like this are rare in our modern world where it seems like everything, including financing fees, are only going up.

Well, it’s time for a retake on the “Uncle Sam thing”: the new taxation laws as per the Tax Cuts and Jobs Act of 2017, enacted in December of the same year, have removed some delectable treats from the traditional “Home Equity feast”.

Is it likely to change your borrowing behavior anytime soon? No, but it should give you pause. There’s a certain logic to it that really can’t be argued with.

Here are the new Home Equity items to keep in mind:

  • The amount you can borrow is tied to the value of the residence, be it a primary or secondary home. The I.R.S. has decided that your total loan value cannot be more than the original cost of the home (plus the cost of substantial improvements) as a start.
  • And in combination with all other mortgages cannot exceed $750,000. So Home Equity lending is not the bottomless well some may believe it to be.
  • Tax breaks haven’t disappeared but at the same time, they simply are not what they used to be. Any Home Equity draws you make from now on have to be used to build, renovate or essentially improve your residence to qualify the interest payable on them for a tax deduction.

On this last point, for example: if you use your new funds to pay off student loans, reduce your credit card debt or splurge it on a vacation, nobody is going to stop you. What they are going to stop is anyone claiming tax relief for this type of expenditure for the foreseeable future.

Don’t hesitate to consult with our professional tax team when it comes to making your Home Equity decisions, or to clarify your thinking on any tax matter. We often see benefits buried under the “strict letter of the law” – we could make a difference.

NJ Death Taxes are not all Dead

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Prior to 2018, all NJ estates in excess of two million dollars were subject to the NJ estate tax. As of Jan. 1, 2018, NJ repealed its long-standing estate tax. Even out-of staters with beach houses no longer are subject to the NJ estate tax.

When Aunt Em passed away, you as the favorite niece expect to inherit without any NJ death tax. Not so fast, the wicked witch is still not dead.

NJ Inheritance Taxes are still haunting us

New Jersey imposes two death taxes- the estate tax and the inheritance tax. The inheritance tax in NJ is alive and kicking. This tax has different rates depending on who the beneficiaries are.

Is anyone exempt from this inheritance tax? Immediate family members, who are Class A beneficiaries, can inherit without paying the tax. Class A beneficiaries include spouses, parents, grandparents and descendants- children, grandchildren and great-grandchildren of the deceased.

What are the rates? For assets passing to Class C beneficiaries the rate is 11% to 16% for amounts in excess of $25,000. This class of beneficiaries includes siblings, and the spouse, widow or widower of a child of the decedent. For assets passing to all other beneficiaries (Class D beneficiaries-nieces, nephews, sisters and brothers-in-law, cousins, etc.) the inheritance tax rate is 15% to 16%.

Any surprise situations? Frequently there are unusual situations which unexpectedly trigger the NJ Inheritance Tax. Uncle Henry, a widower, leaves all his assets to his children. No NJ Inheritance tax- right? Read the Will carefully. Henry had been living with his girlfriend in recent years and left her the right to remain in his home for two years after his passing. This right to live in the home is called a life estate. It is an asset subject to NJ inheritance tax in this case because the recipient, his girlfriend, is a Class D beneficiary.

Grandpa Zeke was widowed and remarried. He leaves all his assets to his grandchildren and to the grandchildren of his second wife. Step-children are Class A beneficiaries and exempt from the inheritance tax. However, step-grandchildren are not Class A beneficiaries but rather Class D and subject to the tax.

How is the tax paid? The NJ Inheritance Tax Return, Form IT-R for residents or Form IT-NR for non-residents, must be filed with the state and the tax paid within eight months after the decedent’s date of death. The state automatically places liens against a decedent’s property until inheritance taxes are paid, or it is established that the recipient of the property is exempt.

Need estate tax planning? We work with many qualified estate tax attorneys who are wizards in estate taxation and can assist you in estate planning. Our CPA firm prepares NJ Inheritance Tax Returns and assists executors in filing timely and paying the lowest tax possible.

 

Avoid Paying Corporate Income Tax Rates with an S Corporation

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One reason small business owners like the S corporation tax structure is because profits generally aren’t taxed at the corporate level.

Tax Savings

They “pass through” and are taxed only once to the individual shareholders. S corporation shareholders also can take money out of the company free of federal employment and self-employment taxes. But only up to a point.

Put Yourself on the Payroll

It can be tempting for S corporation owner/employees to underpay themselves to keep employment taxes low and then supplement their income with distributions or other payments that aren’t subject to employment taxes.

But the IRS is on the lookout for owners reporting low or no income. So if you’re an owner/employee, make sure your compensation is “reasonable” for the services you provide. If it isn’t, the IRS may reclassify your “other” compensation as salary and assess a stiff penalty (100% of the unpaid taxes) for failure to remit payroll taxes.

Comparable Is Key

There is no set definition of reasonable compensation. However, you can be reasonably certain that such factors as your duties and responsibilities, how much time and effort you put into your business, and how much training and experience you’ve had should be included when determining your compensation. To get an idea of how much similar businesses are paying for comparable services, you can go to www.bls.gov, a website with salary information hosted by the U.S. Bureau of Labor Statistics.

The topic of S corporation compensation has become an IRS audit issue. Avoid problems by paying yourself a reasonable salary.

For more help with individual or business taxes, connect with us today. Our team can help you with all your tax issues, large and small.

An S Corporation Loss Equals a Personal Tax Deduction

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Business owners aren’t in business to lose money. So there’s not much to like about a nonprofitable year. For a shareholder in an S corporation, however, a down year can have an upside

Tax Savings

–– the corporate loss may give rise to a personal tax deduction.

Standing between an S shareholder and the loss deduction is

a tricky tax computation known as “adjusted basis.” Under the tax law, a shareholder’s loss deduction is limited to the shareholder’s adjusted basis in his/her corporate stock and in any debt the company owes the shareholder.

What is adjusted basis, anyway? Essentially, it’s a figure that tracks the shareholder’s investment in the company for tax purposes. The basis number changes every year to account for any money flowing between the company and the shareholder — distributions, capital contributions, loans, and loan repayments — as well as for the shareholder’s allocated share of corporate income or loss.

If a net operating loss is anticipated for the year, S shareholders should find out whether they will have enough basis to benefit from the projected loss deduction. If not, it may be possible to increase basis by making a contribution to capital or by loaning the company money before year-end.  Our tax professionals can offer guidance so that the transaction will pass IRS muster.

Home Office Tax Tips

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Working from home can potentially deliver some attractive tax advantages.

Your New Home Office!

If you qualify for the home office deduction, you can deduct all direct expenses and part of your indirect expenses involved in working from home.

Direct expenses are costs that apply only to your home office. The cost of painting your home office is an example of a direct expense. Indirect expenses are costs that benefit your entire home, such as rent, deductible mortgage interest, real estate taxes, and homeowner’s insurance. You can deduct only the business portion of your indirect expenses.

What Space Can Qualify?

Your home office could be a room in your home, a portion of a room in your home, or a separate building next to your home that you use to conduct business activities. To qualify for the deduction, that part of your home must be one of the following:

Your principal place of business. This requires you to show that you use part of your home exclusively and regularly as the principal place of business for your trade or business.

A place where you meet clients, customers, or patients. Your home office may qualify if you use it exclusively and regularly to meet with clients, customers, or patients in the normal course of your trade or business.

A separate, unattached structure used in connection with your trade or business. A shed or unattached garage might qualify for the home office deduction if it is a place that you use regularly and exclusively in connection with your trade or business.

A place where you store inventory or product samples. You must use the space on a regular basis (but not necessarily exclusively) for the storage of inventory or product samples used in your trade or business of selling products at retail or wholesale.

Note: If you set aside a room in your home as your home office and you also use the room as a guest bedroom or den, then you won’t meet the “exclusive use” test.

Simplified Option

If you prefer not to keep track of your expenses, there’s a simplified method that allows qualifying taxpayers to deduct $5 for each square foot of office space, up to a maximum of 300 square feet.