New 20% Tax Deduction

Rejoice if you operate your business as a sole proprietorship, partnership, or S corporation.  The simplified synopsis:

You can reduce your business profit by 20% if your overall annual income (not counting capital gains)  is less than $315K (married-filing-jointly) or $157.5K (single).

If you make more than $315K/$157.5K, then the discussion starts to become complicated – the law was written to try to keep high-earners from converting from a W-2 employee to a self-employed business; so you may not be entitled to the deduction if you make over these amounts.

It appears that the average middle class W-2 wage earner is going to be tempted to convince his employer to treat him as an independent contractor in order to:

  • Receive the 20% deduction
  • Be able to deduct 100% of his un-reimbursed business expenses (which are non-deductible under the new tax law)
  • Create and fund a retirement plan (401k/SIMPLE/SEP) that works for him
  • Reduce FICA tax by converting to an S Corporation and paying himself a wage less than his profit

Imagine a married salesman who makes $120K/year.  The salesman has $20K of un-reimbursed work-related expenses.

Under the current law, the salesman pays tax on $120K at the following rates:

  • Social Security and Medicare tax:  7.65% times $120K = $9,180
  • Federal Income Tax:  15% times $120K = $18,000

Total Federal Taxes are $27,180.

If the salesman forms an S Corporation and convinces his employer to give him a 1099 instead of a W-2, then:

  • He can deduct the $20K of un-reimbursed expenses
  • He then gets a deduction of 20% of his profit (profit is: $120K minus $20K of now-deductible expenses) – this yields another $20K deduction
  • His Social Security and Medicare tax would remain unchanged (long story – just trust me) = $9,180
  • His Federal Income Tax would now be 15% times $80K = $12,000

Total Federal Taxes are $21,180…a savings of $6,000.

There are, of course, potential downsides/risks to this decision (foregoing the retirement plan matches from employer, foregoing subsidized health insurance from employer, increased audit risk) that have to be weighed.

As with most tax-related issues, the devil is in the details – contact us to make sure you know all of the angles.

Meals and Entertainment Changes Under Tax Reform

In general, the new tax Act provides for stricter limits on the deductibility of business meals and entertainment expenses. Under the Act, entertainment expenses incurred or paid after December 31, 2017 are nondeductible unless they fall under the specific exceptions in Code Section 274(e). One of those exceptions is for “expenses for recreation, social, or similar activities primarily for the benefit of the taxpayer’s employees, other than highly compensated employees”. (i.e. office holiday parties are still deductible). Business meals provided for the convenience of the employer are now only 50% deductible whereas before the Act they were fully deductible. Barring further action by Congress those meals will be nondeductible after 2025.


Office Holiday Parties are 100% deductible

Meals with clients or others (business related): 50% deductible

Event/Sport/Entertainment tickets:  No deduction

Employee Travel Meals: 50% deductible

Meals Provided for Convenience of Employer (provide meals to keep your employees working/on site):  50% deductible


A business can no longer deduct as a business expense:  golf, skiing, football tickets, basketball tickets, baseball tickets, disneyland tickets

Auto-Related Tax Deductions

Do you use your personal vehicle for work purposes?

If you drive your personal car to and from job-related destinations, you qualify to deduct the miles driven off of your taxes. For example, driving to a sales meeting, going to buy office equipment, or going to the airport would count as a write off. At a minimum, for each trip, you should keep records of the destination, the number of miles driven, and the business-purpose of the trip.  You can deduct 53.5 cents for each mile driven for business for the 2017 tax season.

Keep in mind that the commute from home to work is never deductible (unless you have a qualified home office). But, if you are temporarily assigned to another location that is further from your house than your regular office, you can deduct the extra miles driven. If your employer reimburses you for mileage or provides you with a company car, then you cannot deduct this from your taxes.  

Confusing?  For sure, but keep in mind that we are always here whenever you call so call anytime.

Uber/Lyft Business

As the Uber and Lyft community are continuously growing, tax questions come into play. It’s an easy way to make money and create your own work hours. That’s two great advantages wanted in any job! The downfall is, of course, taxes will come due on all that earned income.
Since a vehicle is a necessity, it is assuring to know that you can deduct some expenses to lessen the tax hit. You have two method options, Actual Expense Method or Standard Mileage Method.
Under the Actual Expense Method, you can deduct actual expenses like gas charges, wireless phone plans/accessories, repairs/maintenance and insurance. These are all of course limited on the percentage of business use vs. personal use. This method requires strict record keeping.
Under the Standard Mileage Method, you deduct $.535 (for 2017) per mile used for business use. This is favored sometimes because you don’t have to have in depth record keeping. Just keep track of miles used while working.
Depending on how much time is spent “Ubering” or “Lyfting” will determine which method is more advantageous. We all want the bigger tax deduction!

Paying Back That Large Tax Debt

Nobody likes owing the IRS a large debt. Don’t stress yourself too bad, you have some options to help ease the burden of that large tax bill. There are two specific options I will outline for you. These include the OIC Program and Installment Agreements.

The Offer in Compromise (OIC) program allows a settlement of the tax liability for less than the full amount owed. The amount offered has to be equal to or greater than the value that is realized from the taxpayer’s assets. There are three ways the IRS will accept the OIC Program:
• There is doubt that the amount owed is fully collectible. The taxpayer’s income and assets are less that the tax liability owed.
• There is doubt in regards to the existence or amount of tax debt under law related to the liability.
• The tax amount owed would create an economic hardship or would be unequitable.

The Installment Agreements allows a taxpayer to make a series of monthly payments overtime if the full amount owed can’t be paid in 120 days. To set up the installments you must file form 9465. You have a few options on how to make the monthly payments. Some of these include:
• Payroll deductions
• Debit to your bank account each month
• Online/phone payments

So, when you see that large tax bill during tax season don’t be so alarmed. You have plenty of ways to get it paid back without putting your bank account in the negative.

Housing BOOM

All have taken notice to the for-sale signs everywhere. It seems the real estate market is on a spiral only going up. While the higher homes prices and bidding wars are not ideal for the buyer’s market, it has great advantages for the sellers.

Are you or do you know of anyone frightened by the large amount of profit turned on the sale of a home? Well you’re in luck! Talking tax, there is a fantastic residential gain exclusion for singles and married couples. It is quite generous at a $250,000 excluded gain for singles and $500,000 excluded for married couples.

There are a few conditions that must be met that include an ownership, use and frequency test. The ownership and use tests require that the individual(s) own and use the home as a principal residence for at least two out of five years prior to the sale. The frequency test is a limitation that allows the annual exclusion to be used only once every two years.

For example, Jimmy bought a home in 2005 for $200,000 and then married Julie in 2008, whom moved in with Jimmy. In 2016, they sold their home for $700,000. They can exclude the entire $500,000 gain on a joint return because all tests are met.

A Double Whammy for Retirement Savings

How can you benefit yourself now and in the future at the same time? It’s simple, save money in a tax-deferred retirement account like a traditional IRA. A traditional IRA is a personal savings plan that allows a taxpayer to accumulate money tax free. For 2017, you can qualify for up to $5,500 in tax-deferred contributions made. If you’re 50 or older it is an extra $1,000.

To provide a clear picture, let’s say you contribute $5,500 to a traditional IRA. If you’re in the 25% tax bracket, this allows $1,375 in tax savings! Not only do you receive a tax savings, you also accumulate for retirement days.

Along with a tax deduction for traditional IRA contributions, there is a “Saver’s Credit” available to lower income individuals. You can receive a maximum credit of up to $2,000. Credits are much more beneficial than a deduction for the fact they reduce your tax liability dollar for dollar. Why not get both?

College Tax Credits

Credits are deducted straight from your tax liability usually preferred over a deduction. Did you know If you have qualifying education expenses you are allowed up to a $2,500 tax credit per student, of which up to $1,000 is refundable on the American Opportunity Tax Credit! The credit equals 100% of the first $2,000 of qualified expenses plus 25% of up to $2,000 in excess, equaling a possible $2,500. What’s a qualified expense? Included are tuition and fees required for enrollment, course materials and textbooks. The limitations on this credit are; you cannot include room and board or activity fees, must be expenses related to the first four years of post-secondary education and only used four times per student.
What tax incentives are there for going to graduate school? The Lifetime Learning credit is a credit worth up to $2,000 per student (20% of $10,000 of expenses per year). This credit can be used for an unlimited number of years and for post-secondary educational expenses.

Easy Tax-Free Rental Income

All income is taxable unless excluded by law.

One of those exclusions is rental income received by you from the rental of your personal residence for 14 days or less.

That means that 14 days of AirBnB rental income is tax-free.

That means that your business can pay you to rent out your home for a company christmas party, company meeting, etc and create a deduction on your business tax return with no corresponding income on your personal tax return. Imagine your business renting out your home for $2,000. You can deduct the $2,000 from your business tax return and still keep the money.

This is a tax freebie. But if you rent your home for 15 days or more, then the entire tax break goes away.

How to Deduct County Club Dues (Kinda)

Membership dues (which let you use the golf course) you pay to a county club are never deductible.

…but “golf outings” are deductible if, before you committed to spend money on the golf outing, you:

  • expected to generate income or other specific business benefits other than goodwill at some point, and
  • you engaged in the discussion, negotiation, business meeting, or other bona fide transaction
  • you kept your receipts from the golf expenditures and documented the business purpose within a week (the IRS safe-harbor)

Try this:

If you purchase a “corporate golf membership that allows you to play once a day with up to three guests of your choosing”, then you have a deductible “season pass”.  No food discounts, no social memberships…nothing but golf.  That is how you can turn your non-deductible membership into a deductible pre-paid series of outings.

Tips for Converting your Appreciated Home into a Rental

You can exclude up to $250,000 ($500,000 if married) of gain from taxation when you sell your home.  Your home, for this exclusion, is the place where you reside for a 2 year period out of the last 5 years.

Problems arise when you move out of your appreciated home and convert it to a rental.  If you rent it for more than 3 years after moving out, then you no longer meet the 2-out-of-5 rule and will now need to pay tax on all of the price appreciation that your home has enjoyed since the day you bought it.

How can you preserve this valuable exclusion and convert it to a long-term rental?

Form an S Corporation and sell the home to the S Corporation within 3 years of moving out of the home.  The sale triggers the gain to be recognized, and since you would meet the 2-out-of-5 rule, you can exclude the gain.  You then have your S Corporation rent the property for whatever duration is necessary.

If You’re Self-Employed, Hire Your Child in your Business

You can hire your child and compensate them for their labor.  If your child is under age 18, and your business is not a C Corp or an S Corp, then the wage payments to the child are not subject to employment taxes.  When you pay the child, you will be deducting the payment at your higher tax rate (assuming 33% Federal and 4.3% Indiana) and the child will be taxed on the payment at their lower tax rate (which likely will be 0% for Federal and 4.3% Indiana).

Suppose it is time for the child’s first car which costs $6,000.  You employ your child, pay him $6,000, and deduct it.  Child then pays close to $0 tax on the $6,000 of wage income and uses the money to buy a car.  You have effectively deducted the cost of your child’s car – a personal expense – in your business.

If the child does not need to spend the money, then the money can be put into the child’s ROTH IRA to grow tax free for a very long time.  You have essentially created a deductible ROTH IRA contribution.  $5,000 put into a ROTH IRA when the child is 18 will be worth $212,000 when the child turns age 65 if growing at 8% per annum.

Are you age 70+…Try This

The US Government allows a taxpayer who is over age 70 1/2 (don’t ask me why it can’t just be age 70) to donate up to $100,000 from his IRA to charity.

Why is this a good thing?

A taxpayer who is over age 70 1/2 is required to take money from his IRA and include it in his taxable income.  If that same taxpayer makes a donation to a charity and doesn’t itemize, then he doesn’t get to enjoy a deduction for that donation.  Thus, he would have income with no offsetting deduction.

This provision allows that same taxpayer to send the money directly from his IRA to the charity and avoid putting the IRA income on his tax return (because he never touched the money – it went directly from his IRA to the charity)  In effect, the amount that goes from his IRA to the charity is deducted from his income, as if he had itemized.

In addition, when the money goes directly from the IRA to the charity, it potentially could allow the taxpayer to pay less tax on their social security earnings, and well as enjoy other positive tax effect.

…something worth considering if you are over age 70 1/2.


Six Tips for Year-End Gifts to Charity

If you’re thinking about making a charitable donation during the holiday season this year and want to claim a tax deduction for your gifts, you must itemize your deductions. This is just one of several tax rules that you should know about before you give. Here’s what else you need to know:

1. Qualified charities. You can only deduct gifts you give to qualified charities. Call the office if you’re not sure if the group you give to is a qualified organization. Remember that you can deduct donations you give to churches, synagogues, temples, mosques and government agencies.

2. Monetary donations. Gifts of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction. You must have a bank record or a written statement from the charity to deduct any gift of money on your tax return. This is true regardless of the amount of the gift. The statement must show the name of the charity and the date and amount of the contribution. Bank records include canceled checks, or bank, credit union, and credit card statements.

If you donate through payroll deductions, you should retain a pay stub, a Form W-2 wage statement or another document from your employer. It must show the total amount withheld for charity, along with the pledge card showing the name of the charity.

3. Household goods. Household items include furniture, furnishings, electronics, appliances and linens. If you donate clothing and household items to charity they generally must be in at least good used condition to claim a tax deduction. If you claim a deduction of over $500 for an item it doesn’t have to meet this standard if you include a qualified appraisal of the item with your tax return.

4. Records required. You must get an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. Additional rules apply to the statement for gifts of that amount. This statement is in addition to the records required for deducting cash gifts. However, one statement with all of the required information may meet both requirements.

5. Year-end gifts. You can deduct contributions in the year you make them. If you charge your gift to a credit card before the end of the year it will count for 2015. This is true even if you don’t pay the credit card bill until 2016. Also, a check will count for 2015 as long as you mail it in 2015.

6. Special rules. Special rules apply if you give a car, boat or airplane to charity. For more information about this and other questions about charitable giving, please contact the office.