Four Tax Deductions that Disappeared in 2018Posted on March 24th, 2019
Marianne Kern, CPA
Kern & Associates CPA, P.A.
Tax reform eliminated a number of deductions that many taxpayers counted on to reduce their taxable income. Here are four that could affect you.
- Personal Exemptions
Personal exemptions enabled individual taxpayers to reduce their taxable income in addition to the standard deduction, but were repealed for tax years 2018 through 2025. While the standard deduction did increase significantly under tax reform to compensate – $12,000 for individuals, $24,000 for married taxpayers filing jointly, $18,000 for heads of household – some taxpayers could still lose out.
- Tax Preparation Fees
Tax preparation fees, which fell under miscellaneous fees on Schedule A of Form 1040 (and were also subject to the 2% floor), were also eliminated for tax years 2018 through 2025 as well. Examples of tax preparation fees include payments to accountants, tax prep firms, and the cost of tax preparation software.
- Unreimbursed Job Expenses
For tax years starting in 2018 and expiring at the end of 2025, miscellaneous unreimbursed job-related expenses that exceed 2% of adjusted gross income (AGI) are no longer deductible on Schedule A (Form 1040). Unreimbursed job-related expenses include union dues, continuing education, employer-required medical tests, regulatory and license fees (provided the employee was not reimbursed), and out-of-pocket expenses paid by an employee for uniforms, tools, and supplies.
- Moving Expenses
Prior to tax reform (i.e., for tax years starting before January 1, 2018), taxpayers were able to deduct expenses related to moving for a job as long as the move met certain IRS criteria. However, for tax years 2018 through 2025, moving expenses are no longer deductible–unless you are a member of the Armed Forces on active duty who moves because of a military order.
If you have any questions about tax reform and how it affects your particular tax situation, consult a tax professional.
Taxable vs. Nontaxable IncomePosted on March 20th, 2019
Marianne Kern, CPA
Kern & Associates CPA, P.A.
Taxable income includes any money you receive, such as wages and tips, but it can also include non-cash income from property or services. For example, both parties in a barter exchange must include the fair market value of goods or services received as income on their tax return.
Tip Income. If you get tips on the job from customers, that income is subject to taxes. Here’s what you should keep in mind when it comes to receiving tips on the job:
- Tips are taxable. You must pay federal income tax on any tips you receive. The value of non-cash tips, such as tickets, passes or other items of value are also subject to income tax.
- Include all tips on your income tax return. You must include the total of all tips you received during the year on your income tax return. This includes tips directly from customers, tips added to credit cards and your share of tips received under a tip-splitting agreement with other employees.
- Report tips to your employer. If you receive $20 or more in tips in any one month, from any one job, you must report your tips for that month to your employer. The report should only include cash, check, debit and credit card tips you receive. Your employer is required to withhold federal income, Social Security and Medicare taxes on the reported tips. Do not report the value of any noncash tips to your employer.
- Keep a daily log of tips. Use the Employee’s Daily Record of Tips and Report to Employer (IRS Publication 1244), to record your tips.
Bartering Income. Bartering is the trading of one product or service for another. Small businesses sometimes barter to get products or services they need. For example, a plumber might trade plumbing work with a dentist for dental services. Typically, there is no exchange of cash. If you barter, the value of products or services from bartering is taxable income. Here are four facts about bartering that you should be aware of:
- Barter exchanges. A barter exchange is an organized marketplace where members barter products or services. Some exchanges operate out of an office and others over the Internet. All barter exchanges are required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions. The exchange must give a copy of the form to its members who barter and file a copy with the IRS.
- Bartering income. Barter and trade dollars are the same as real dollars for tax purposes and must be reported on a tax return. Both parties must report as income the fair market value of the product or service they get.
- Tax implications. Bartering is taxable in the year it occurs. The tax rules may vary based on the type of bartering that takes place. Barterers may owe income taxes, self-employment taxes, employment taxes or excise taxes on their bartering income.
- Reporting rules. How you report bartering on a tax return varies. If you are in a trade or business, you normally report it on Form 1040, Schedule C, Profit or Loss from Business.
Here are some types of income that are usually not taxable:
- Gifts and inheritances
- Child support payments
- Welfare benefits
- Damage awards for physical injury or sickness
- Cash rebates from a dealer or manufacturer for an item you buy
- Reimbursements for qualified adoption expenses
In addition, some types of income are not taxable except under certain conditions, including:
- Life insurance proceeds paid to you are usually not taxable. But if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable.
- Income from a qualified scholarship is normally not taxable. This means that amounts you use for certain costs, such as tuition and required books, are not taxable. However, amounts you use for room and board are taxable.
- If you received a state or local income tax refund, the amount may be taxable. You should have received a 2018 Form 1099-G from the agency that made the payment to you. If you didn’t get it by mail, the agency may have provided the form electronically. Contact them to find out how to get the form. Be sure to report any taxable refund you received even if you did not receive Form 1099-G.
Questions about Taxable vs. Nontaxable Income?
If you have any questions or would like more information about taxable and nontaxable income, contact a tax professional.
Which Type of Business Entity Should I Choose?Posted on March 12th, 2019
Marianne Kern, CPA
Kern & Associates CPA, P.A.
When you decide to start a business, one of the most important decisions you’ll need to make is choosing a business entity. It’s a decision that impacts many things–from the amount of taxes you pay to how much paperwork you have to deal with and what type of personal liability you face, and with the passage of the Tax Cuts and Jobs Act of 2017, it’s more important than ever to choose the business entity that benefits your business.
Forms of Business
The most common forms of business are Sole Proprietorships, Partnerships, Limited Liability Companies (LLCs), and Corporations (C-Corporations). Federal tax law also recognizes another business form called the S-Corporation. While state law controls the formation of your business, federal tax law controls how your business is taxed.
What to Consider
Businesses fall under one of two federal tax systems:
- Taxation of both the entity itself on the income it earns and the owners on dividends or other profit participation the owners receive from the business. C-Corporations fall under this system of federal taxation.
- “Pass through” taxation. This type of entity (also called a “flow-through” entity) is not taxed, but its owners are each taxed (more or less) on their proportionate shares of the entity’s income. Pass-through entities include:
- Sole Proprietorships
- Partnerships, of various types
- Limited liability companies (LLCs)
- “S-Corporations” (S-Corps), as distinguished from C-corporations (C-Corps)
The first major consideration when choosing a business entity is whether to choose one that has two levels of tax on income or one that is a pass-through entity with only one level directly on the owners.
The second consideration, which has more to do with business considerations rather than tax considerations, is the limitation of liability (protecting your assets from claims of business creditors).
Let’s take a general look at each of the options more closely:
Types of Business Entities
The most common (and easiest) form of business organization is the sole proprietorship. Defined as any unincorporated business owned entirely by one individual, a sole proprietor can operate any kind of business (full or part-time) as long as it is not a hobby or an investment. In general, the owner is also personally liable for all financial obligations and debts of the business.
Note: If you are the sole member of a domestic limited liability company (LLC), you are not a sole proprietor if you elect to treat the LLC as a corporation.
Types of businesses that operate as sole proprietorships include retail shops, farmers, large companies with employees, home-based businesses and one-person consulting firms.
As a sole proprietor, your net business income or loss is combined with your other income and deductions and taxed at individual rates on your personal tax return. Because sole proprietors do not have taxes withheld from their business income, you may need to make quarterly estimated tax payments if you expect to make a profit. Also, as a sole proprietor, you must also pay self-employment tax on the net income reported.
A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.
There are two types of partnerships: Ordinary partnerships, called “general partnerships,” and limited partnerships that limit liability for some partners but not others. Both general and limited partnerships are treated as pass-through entities under federal tax law, but there are some relatively minor differences in tax treatment between general and limited partners.
For example, general partners must pay self-employment tax on their net earnings from self-employment assigned to them from the partnership. Net earnings from self-employment include an individual’s share, distributed or not, of income or loss from any trade or business carried on by a partnership. Limited partners are subject to self-employment tax only on guaranteed payments, such as professional fees for services rendered.
Partners are not employees of the partnership and do not pay any income tax at the partnership level. Partnerships report income and expenses from its operation and pass the information to the individual partners (hence the pass-through designation).
Because taxes are not withheld from any distributions partners generally need to make quarterly estimated tax payments if they expect to make a profit. Partners must report their share of partnership income even if a distribution is not made. Each partner reports his share of the partnership net profit or loss on his or her personal tax return.
Limited Liability Companies (LLC)
A Limited Liability Company (LLC) is a business structure allowed by state statute. Each state is different, so it’s important to check the regulations in the state you plan to do business in. Owners of an LLC are called members, which may include individuals, corporations, other LLCs and foreign entities. Most states also permit “single member” LLCs, i.e., those having only one owner.
Depending on elections made by the LLC and the number of members, the IRS treats an LLC as either a corporation, partnership, or as part of the LLC’s owner’s tax return. A domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it elects to be treated as a corporation.
An LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes), unless it elects to be treated as a corporation.
In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation’s capital stock. A corporation conducts business, realizes net income or loss, pays taxes and distributes profits to shareholders.
A corporate structure is more complex than other business structures. When you form a corporation, you create a separate tax-paying entity. The profit of a corporation is taxed to the corporation when earned and then is taxed to the shareholders when distributed as dividends. This creates a double tax.
The corporation does not get a tax deduction when it distributes dividends to shareholders. Earnings distributed to shareholders in the form of dividends are taxed at individual tax rates on their personal tax returns. Shareholders cannot deduct any loss of the corporation.
If you organize your business as a corporation, generally you are not personally liable for the debts of the corporation, although there may be exceptions under state law.
An S-corporation has the same corporate structure as a standard corporation; however, its owners have elected to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S-corporations generally have limited liability.
Generally, an S-Corporation is exempt from federal income tax other than tax on certain capital gains and passive income. It is treated in the same way as a partnership, in that generally; taxes are not paid at the corporate level. S-Corporations may be taxed under state tax law as regular corporations, or in some other way. Shareholders must pay tax on their share of corporate income, regardless of whether it is actually distributed. Flow-through of income and losses are reported on their personal tax returns, and they are assessed tax at their individual income tax rates, allowing S-Corporations to avoid double taxation on the corporate income.
Note: One major advantage of S-Corporations over other pass-through entities, is that in an S-Corporation, you pay self-employment (Social Security and Medicare) taxes only on the amount you declare and report on your W-2 (i.e., “Officer Salaries” paid to the owner(s)). Whereas, with other pass-through entities, you pay self-employment taxes on the entire amount of the net taxable income of the business. For example, say your salary is $50,000, and your Net Income after your salary is $50,000. As an S-Corporation, your Social Security and Medicare taxes (Employer plus Employee portions) would be 15.3% x $50,000 = $7,650, paid monthly. As a sole proprietorship or single member LLC, your “self-employment” taxes (Social Security and Medicare) taxes would be 15.3% x $100,000 = $15,300, paid in all at once with your tax return at year-end.
Thus, the tax savings with an S-Corporation can be substantial depending upon the amount of your taxable net income relative to the amount of salary you declare. HOWEVER, extreme care must be taken here, as the IRS routinely monitors tax returns for abuse, meaning business owners who do not declare what the IRS considers to be a “reasonable” salary (see IRS article, “Wage Compensation for S-Corporation Officers”). A client recently asked us why he needed payroll services, and this is precisely the reason why – the need to monitor w-2 wages (i.e., “reasonable salaries”) and pay in taxes throughout the year.
When making a decision about which type of business entity to choose each business owner must decide which one best meets his or her needs. One form of business entity is not necessarily better than any other and obtaining the advice of a tax professional is critical. If you need assistance figuring out which business entity is best for your business, don’t hesitate to call.