2017 YEAR-END TAX PLANNING
Tax Advantages for 2017-2018
The President and the Republican leadership in Congress have now elevated tax reform to be their highest legislative priority. Most of the proposals so far have dealt with lowering tax rates and reducing the number of tax brackets, doubling the standard deduction, and getting rid of the personal exemptions as well as almost all personal deductions except for the charitable contribution deduction and home mortgage interest deduction. There has also been talk of eliminating the AMT and estate taxes.
I'm hesitant to speculate what the end result will be, and many of the proposed changes do not lend themselves to year-end planning opportunities. The one big exception is the potential repeal of most personal deductions, which does create a stronger than usual incentive to accelerate deductions into the current year. Whether that's a smart move depends on other factors, such as whether you'll be subject to AMT this year, and what direction you see your income heading in next year. But it's definitely something we should discuss.
CALL US to discuss any of these that may apply to you. We want our clients to pay the least amount of taxes, legally. In case you are not aware, we have moved to a new location right down the street. Our new address is 201 Continental Blvd. Suite 310, El Segundo, CA 90245 (310) 414-1500. Our phone numbers and emails remain the same. We look forward to seeing you soon. We now have lots of parking spots.
Timing income and deductions to your tax advantage for 2017-2018
Accelerating Income into 2017
Depending on your projected income for 2018, it may make sense to accelerate income into 2017 if you expect 2018 income to be significantly higher because of increased income or substantially decreased deductions. Options for accelerating income include: (1) harvesting gains from your investment portfolio, keeping in mind the 3.8 percent NIIT; (2) converting a retirement account into a Roth IRA and recognizing the conversion income this year; (3) taking IRA distributions this year rather than next year; (4) if you are self-employed and have clients with receivables on hand, try to get them to pay before year end; and (5) settling any outstanding lawsuits or insurance claims that will generate income this year.
Deferring Income into 2018
If it looks like you may have a significant decrease in income next year, either from a reduction in income or an increase in deductions, it may make sense to defer income into 2018 or later years. Some options for deferring income include: (1) if you are due a year-end bonus, having your employer pay the bonus in January 2018; (2) if you are considering selling assets that will generate a gain, postponing the sale until 2018; (3) if you are considering exercising stock options, delaying the exercise of those options; (4) if you are planning on selling appreciated property, consider an installment sale with larger payments being received in 2018; and (5) consider placing investments in deferred annuities.
Deferring Deductions into 2018
If you anticipate a substantial increase in taxable income next year, it may be advantageous to push deductions into 2018 by: (1) postponing year-end charitable contributions, property tax payments, and medical and dental expense payments, to the extent deductions are available for such payments, until next year; and (2) postponing the sale of any loss-generating property.
Accelerating Deductions into 2017
If you expect a decrease in income next year, accelerating deductions into the current year can offset the higher income this year. Some options include: (1) prepaying property taxes in December; (2) making January mortgage payment in December; (3) if you owe state income taxes, making up any shortfall in December rather than waiting until your state income tax return is due; (4) since medical expenses are deductible only to the extent they exceed 10 percent of adjusted gross income, bunching large medical bills not covered by insurance into 2017 to help overcome this threshold; (5) making any large charitable contributions in 2017, rather than 2018; (6) selling some or all loss stocks; and (7) if you qualify for a health savings account, setting one up and making the maximum contribution allowable.
Alternative Minimum Tax
A growing number of taxpayers are subject to the alternative minimum tax (AMT). If it looks like you may be subject to the AMT this year, there are certain strategies we should review to see if they may reduce or eliminate the impact of the AMT in your situation. All taxpayers are eligible for an exemption from the AMT, the amount of which depends on your filing status. For 2017, the exemption amounts for individuals, other than those subject to the kiddie tax, are (1) $84,500 in the case of a joint return or a surviving spouse; (2) $54,300 in the case of an individual who is unmarried and not a surviving spouse; and (3) $42,250 in the case of a married individual filing a separate return. However, these exemptions are phased out by an amount equal to 25 percent of the amount by which your alternative minimum taxable income (AMTI) exceeds: (1) $160,900 in the case of married individuals filing a joint return and surviving spouses; (2) $120,700 in the case of other unmarried individuals; and (3) $80,450 in the case of married individuals filing separate returns.
Note the AMT rates and exemptions, and work with us, your tax advisor to project whether you could be subject to the AMT this year or next. You may be able to time income and deductions to avoid the AMT, or at least reduce its impact.
Tax Planning: Home-related tax breaks
Property tax deduction. Before paying your bill early to accelerate this itemization deduction into 2017, review your AMT situation. If you’re subject to the AMT this year, you’ll lose the benefit of the deduction for the prepayment.
Mortgage interest deduction. Interest on a home can generally be deducted up to a total of $1 million debt. This includes the debt to purchase, build or improve your principal residence and a second residence. Points paid related to your principal residence also may be deductible. Note: This is one item our current lawmakers may change.
Home equity debt interest deduction. Interest on home equity debt used for any purpose (debt limit of $100,000) may be deductible. So consider using a home equity loan or line of credit to pay off credit cards or auto loans, for which interest isn’t deductible and rates may be higher. Warning: If home equity debt isn’t used for home improvements, the interest isn’t deductible for AMT purposes.
Home office deduction. If your use of a home office is for your employer’s benefit and it’s the only use of the space, you generally can deduct a portion of your mortgage interest, property taxes, insurance, utilities and certain other expenses, and the depreciation allocable to the space. For employees, home office expenses are a miscellaneous itemized deduction, and you’ll enjoy a tax benefit only if these expenses plus your other miscellaneous itemized expenses exceed 2% of your AGI. For self-employed, no limits to this deductibility. Note: This is one item our current lawmakers may change.
Rental income exclusion. If you rent out all or a portion of your principal residence or second home for less than 15 days, you don’t have to report the income. But, expenses directly associated with the rental, such as advertising and cleaning, won’t be deductible either.
Home sale gain exclusion. When you sell your principal residence, you can exclude up to $250,000 for a single person ($500,000 for married couples filing jointly) of gain if you meet certain tests.
Home sale loss deduction. Losses on the sale of any personal residence aren’t deductible. But if part of your home is rented out or used exclusively for your business, the loss attributable to that portion may be deductible.
Energy-related breaks. A few breaks designed to encourage energy efficiency and conservation are still available. Consult us for details.
Tax Planning: Charitable donations
Donations to qualified charities are generally fully deductible for both regular tax and AMT purposes, and they may be the easiest deductible expense to time to your tax advantage. For large donations, discuss with us which assets to give and the best ways to give them. Example:
Appreciated stock: Appreciated publicly traded stock you’ve held more than one year can make one of the best charitable gifts. Why? Because you can deduct the current fair market value and avoid the capital gains tax you’d pay if you sold the property.
PATH Act. The PATH Act, passed at the end of 2015, exempts certain IRA-to-charity transfers from income tax. For most people, moving money from an IRA to a Charity is a taxable withdrawal, subject to income tax. However, once you reach age 70 ½, such transactions may be untaxed as a Qualified Charitable Distribution (QCD).
QCD’s are now permanent tax code provision. Everyone who passes the age test can donate up to $100,000 a year from a traditional IRA to one or more charities. A QCD generally must go directly from the IRA to an eligible charity. (Transfers to donor advised funds are not considered QCDs).
Tax Planning: Tax-advantaged saving for Health Care
You may be able to save taxes by contributing to one of these accounts:
HSA. If you’re covered by a qualified high-deductible health insurance, you can contribute pretax income to an employer-sponsored Health Savings Account – or make deductible contributions to an HSA you set up yourself – up to $3,400 for self-only coverage and $6,750 for family coverage for 2017. Plus, if you’re age 55 or older, you may contribute an additional $1,000. HSAs can bear interest or be invested, growing tax-deferred similar to an IRA. Withdrawals for qualified medical expenses are tax-free, and you can carry over a balance from year to year.
FSA. You can redirect pretax income to an employer-sponsored Flexible Spending Account up to an employer-determined limit- not to exceed $2,600 in 2017 The plan pays or reimburses you for qualified medical expenses. What you don’t use by the plan year’s end, you generally lose – though your plan might allow you to roll over up to $500 to the next year. Or it might give you a 2½ month grace period to incur expenses to use up the previous year’s contribution. If you have an HSA, your FSA is limited to funding certain “permitted” expenses.
Tax Planning: Medical Expense deduction
Under the Affordable Care Act, passed in 2010 the threshold for deducting unreimbursed medical and dental outlays was raised in 2013 from 7.5% to 10% of AGI. However, the 7.5% hurdle was kept in place for four years for taxpayers 65 or older. (Only unreimbursed medical bills greater than the threshold can be deducted.)
Starting this year, 2017, the 10% threshold will apply to everyone. Once you’ve cleared this relevant hurdle, all medical costs will be fully deductible.
Premiums included. You might be surprised at how many expenses can be classed as medical deductions. Medicare Part B premiums, for example, count as potentially deductible medical expenses. That’s true even if you have those premiums withheld from the Social Security payments that are deposited into your bank accounts each month. The same is true for any premiums paid for Medicare Part D prescription drug plans and for money you spend directly on prescription drugs as well as for premiums paid for Medicare Supplement (Medigap) policies.
In addition, money spent on Long-Term Care (LTC) Insurance policies probably will be deductible, up to certain age-based limits. For 2017, policyholders age 41-50 can include LTC premiums up to $770 as medical expenses. The deductible amount increases to $1,530 for taxpayers age 51-60, $4,090 for taxpayers age 61-70 able to include LTC premiums, and $5,110 for taxpayers age 71 or older.
All dental services, are deductible. All prescription drugs paid are deductible. Mileage driven for health care purposes – at 17 cents per mile for 2017 – also can be deducted.
Consider bunching non-urgent medical procedures (and any other services and purchases whose timing you can control without negatively affecting your or your family’s health) into one year to exceed the 10% floor.
If one spouse has high medical expenses and a relatively lower AGI, filing separately may allow that spouse to exceed the AGI floor and deduct some medical expenses that wouldn’t be deductible if the couple filed jointly.
Tax Planning: Itemized deductions
For 2017, the standard deduction is $6,350 for single taxpayers (and for married persons filing separately) and $12,700 for married couples filing jointly. For heads of household, the standard deduction is $9,350. People who have reached age 65 by year-end can take an additional standard deduction of $1,250, if married, or $1,550, if not married. Taxpayers who are blind also get this additional standard deduction.
For effective year-end planning, estimate your potential itemized deductions for 2017 well in advance of December 31. If you see you will benefit by itemizing, you may decide to accelerate certain payments into 2017. In many cases, the extra payments will be fully deductible. Conversely, if you are far below the standard deduction amounts, you won’t get any tax benefit from, for example, writing a modest check to charity. You may decide to postpone the donation until sometime in 2018, when you might be itemizing and get a tax benefit from your contribution. Note: This is another area Washington lawmakers have discussed – elimination of employee business itemize deductions.
Tax Planning: Deducting Taxes paid
A new law makes the Sales Tax deduction permanent. Keep in mind that if you deduct sales tax instead of state and any local income tax, you can’t deduct both.
The new provision obviously will benefit taxpayers who live in Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming, none of which has state income tax. If you live in such a state and it pays for you to itemize, you can deduct sales tax you paid.
Residents of other states who itemize their deductions must decide whether to deduct sales OR income tax.
If you decide to deduct State and Local Income Tax payments rather than sales tax, you might choose to accelerate estimated state and local income tax payments due in early 2018 to late 2017, increasing the deductible amount for this year.
Similarly, you may be able to move scheduled property tax payments from 2018 to 2017 for an earlier deduction. Both of those tactics, though, may raise your tax bill if you’ll owe the alternative minimum tax (AMT). Our office can let you know how the AMT would affect prepaying state or local taxes. Note: Washington lawmakers have discussed eliminating this deduction for state and local Income tax and limiting real estate property tax deductions.
Tax Planning: Child and Adoption credits
Tax credits reduce your tax bill dollar-for-dollar, so make sure you’re taking every credit you’re entitled to. For each child under age 17 living with you at the end of the year, you may be able to claim a $1,000 child credit. If you adopt in 2017 you may qualify for an adoption credit – or for an income exclusion under an employer adoption assistance program. Both are up to $13,570 per eligible child. Warning: These credits phase out for higher-income taxpayers. Speak to us for details if this applies to you.
Tax Planning: Child Care expenses
For children under 13 or other qualifying dependents, you may be eligible for a tax credit for a percentage of your dependent care expenses. Eligible expenses are limited to $3,000 for one dependent and $6,000 for two or more. Income-based limits reduce the credit percentage but does not phase it out altogether.
You can contribute up to $5,000 pretax to an employer-sponsored child and dependent care Flexible Spending Account (FSA). The plan pays or reimburses you for these expenses. This is an excellent tax savings vehicle.
Tax Planning: IRAs for teens
IRA’s (Individual Retirement Accounts) can be perfect for teenagers because they likely will have many years to let their accounts grow tax-deferred or tax-free. The 2017 contribution limit is the lesser of $5,500 or 100% of earned income. A teen’s traditional IRA contributions typically are deductible, but distributions will be taxed. Roth IRA contributions aren’t deductible, but qualified distributions will be tax-free. Choosing a Roth IRA is typically a no-brainer if a teen doesn’t earn income that exceeds the standard deduction ($6,350 for 2017 for single taxpayers). Because he or she will likely gain no benefit from the ability to deduct a traditional IRA contribution. Even above that amount, the teen probably is taxed at a very low rate, so the Roth will typically still be the better answer.
If they don’t have earned income and you own a business, consider hiring them. As the business owner, you can deduct their pay, and other tax benefits may apply. Warning: The children must be paid in line with what you’d pay non-family employees for the same work.
Tax Planning: 529 plans
If you’re saving for college, consider an IRS Code Section 529 plan. You can choose a prepaid tuition program to secure current tuition rates or a tax-advantaged savings plan to fund college expenses:
- Although contributions aren’t deductible for federal purposes, any growth is tax deferred. (Some states do offer breaks for contributing).
- Distributions used to pay qualified expenses (such as tuition, mandatory fees, books, supplies, computer equipment, software, internet service and, generally, room and board) are income-tax-free for federal purposes and typically for state purposes as well, thus making the tax deferral a permanent savings.
- The plans usually offer high contribution limits, and there are no income limits for contributing.
- There’s generally no beneficiary age limit for contributions or distributions.
- You can control the account, even after the child is of legal age.
- You can make tax-free rollovers to another qualifying family member.
- A special break for 529 plans allows you to front-load five years’ worth of annual gift tax exclusions and make up to a $70,000 contribution (or $140,000 if you split the gift with your spouse).
The biggest downsides may be that your investment options – and when you can change them – are limited.
Tax Planning: Educational credits and deductions
If you have children in college now, are currently in school yourself or are paying off student loans, you may be eligible for a credit or deduction:
American Opportunity credit. This tax break covers 100% of the first $2,000 of tuition and related expenses and 25% of the next $2,000 of expenses. The maximum credit, per student, is $2,500 per year for the first four years of postsecondary education.
Lifetime Learning credit. If you’re paying postsecondary education expenses beyond the first four years, you may benefit from the Lifetime Learning credit (up to $2,000 per tax year).
Tuition and fees deduction. In some cases, deducting up to $4,000 of qualified higher education tuition and fees will save more tax than a credit. This deduction has been extended through 2017.
Student loan interest deduction. If you’re paying off student loans, you may be able to deduct the interest. The limit is $2,500 per tax return.
Warning. Income-based phase-outs apply to these breaks. If your income is too high for you to qualify, your child might be eligible. But if your dependent child claims the credit, you must forgo your dependency exemption for him or her (and the child can’t take the exemption). Call us, if applicable.
ABLE accounts. Achieving a Better Life Experience (ABLE) accounts offer a tax-advantaged way to fund qualified disability expenses for a beneficiary who became blind or disabled before age 26. For federal purposes, tax treatment is similar to that of Section 529 college savings plans.
Tax planning for your investments:
What you need to know for 2017/2018
Tax planning for investments demands careful thought. You must consider the tax consequences of your investments as you buy and sell, but not let tax concerns propel your investment decisions. Your investment goals, time horizon, risk tolerance, asset allocation fees, and charges should also come into play. Nevertheless, tax factors are important! Here’s a look at what you need to know.
Capital gains tax timing. Although time, not timing, is generally the key to long-term investment success, timing can have a dramatic impact on tax consequences of investment activities. Your long-term capital gains rate might be as much as 20 percentage points lower than your ordinary-income rate. The long-term gains rate applies to investments held for more than 12 months. The applicable rate depends on your income level and the type of asset. Hence, holding on to an investment until you’ve owned it more than a year may help substantially cut tax on any gain.
Use unrealized losses to absorb gains. To determine capital gains tax liability, realized capital gains are netted against any realized capital losses. Both long- and short-term gains and losses can offset one another. If you’ve cashed in some big gains during the year and want to reduce your 2017 tax liability, before year end look for unrealized losses in your portfolio and consider selling them to offset your gains.
Avoid wash sales. If you want to achieve a tax loss with minimal change in your portfolio’s asset allocation, keep in mind the wash sale rule. It prevents you from taking a loss on a security if you buy a substantially identical security (or an option to buy such a security) within 30 days before or after you sell the security that created the loss. You can then recognize the loss only when you sell the replacement security.
Fortunately, there are ways to avoid triggering the wash sale rule and still achieve your goals. For example, you can immediately buy securities of a different company in the same industry or shares in a mutual fund that holds securities much like the ones you sold. Or, you can wait 31 days to repurchase the same security. Alternatively, before selling the security, you can purchase additional shares equal to the number you want to sell at a loss, and then wait 31 days to sell the original portion.
Swap your bonds. With a bond swap, you sell a bond, take a loss and then immediately buy another bond of similar quality and duration from a different issuer. Generally, the wash sale rule doesn’t apply because the bonds aren’t considered substantially identical. Thus, you achieve a tax loss with virtually no change in economic position.
Mind your mutual funds. Mutual funds with high turnover rates can create income that’s taxed at ordinary-income rates. Choosing funds that provide primarily long-term gains can save you more tax dollars because of the lower long-term rates.
Also pay attention to earnings re-investments. Unless you or your investment advisor increases your basis accordingly, you may report more gain than required when you sell the funds. Brokerage firms are required to track (and report to the IRS) your cost basis in mutual funds acquired during the tax year.
Finally, beware of buying equity mutual fund shares late in the year. Such funds often declare a large capital gains distribution at year end. If you own the shares on the distribution’s record date, you’ll be taxed on the full distribution amount even if it includes significant gains realized by the fund before you owned the shares.
See if a loved one qualifies for the 0% rate. The 0% rate applies to long-term gain that would be taxed at 10% or 15% based on the taxpayer’s ordinary-income rate. If you have adult children in one of these tax brackets, consider transferring appreciated assets to them so they can sell the assets and enjoy the 0% rate.
Warning: If the child will be under age 24 on Dec.31, first make sure he or she won’t be subject to the “kiddie tax”. Also, consider any gift tax consequences.
If net losses exceed net gains, you can deduct only $3,000 ($1,500 for married taxpayers filing separately) of the net losses per year against dividends or ordinary income (such as wages, self-employment and business income, and interest).
You can carry forward excess losses indefinitely. Loss carryovers can be a powerful tax-saving tool in future years if you have a large investment portfolio, real estate holdings or a closely held business that might generate substantial future capital gains.
Finally, remember that capital gains distributions from mutual funds can also absorb capital losses.
Single taxpayers with modified adjusted gross income (MAGI) over $200,000 per year ($250,000 for joint filers and $125,000 for married filing separately) may owe the net investment income tax, in addition to other taxes already discussed here. The NIIT equals 3.8% of the lesser of your net investment income or the amount by which your MAGI exceeds the applicable threshold. Net investment income can include capital gains, dividends, interest and other investment-related income. The rules are somewhat complex, so consult us for more information, if applicable.
Penalty for Failing to Carry Health Insurance
Despite numerous attempts by Congress to repeal Obamacare, the law is still with us and so is the penalty for not having health insurance coverage. You may be liable for this penalty if you or any of your dependents didn't have health insurance for any month in 2017. The penalty is 2.5 percent of your 2017 household income exceeding the filing threshold or $695 per adult, whichever is higher, and $347.50 per uninsured dependent under 18, up to $2,085 total per family. However, you may be eligible for an exemption from the penalty if certain conditions apply.
Reporting Healthcare Coverage
According to the IRS, if your tax return does not indicate whether or not you and your family had healthcare coverage during the year, your return will not be processed. This is the first year that the IRS is refusing to process returns if this information is omitted from the return.
Retirement Plans Considerations
Fully funding your company 401(k) with pre-tax dollars will reduce current year taxes, as well as increase your retirement nest egg. For 2017, the maximum 401(k) contribution you can make with pre-tax earnings is $18,000. For taxpayers 50 or older, that amount increases to $24,000.
If you have a SIMPLE 401(k), the maximum pre-tax contribution for 2017 is $12,500. That amount increases to $15,500 for taxpayers age 50 or older.
If certain requirements are met, contributions to an individual retirement account (IRA) may be deductible. For taxpayers under 50, the maximum contribution amount for 2017 is $5,500. For taxpayers 50 or older but less than age 70 1/2, the maximum contribution amount is $6,500. Contributions exceeding the maximum amount are subject to a 6 percent excise tax. Even if you are not eligible to deduct contributions, contributing after-tax money to an IRA may be advantageous because it will allow you to later convert that traditional IRA to a Roth IRA. Qualified withdrawals from a Roth IRA, including earnings, are free of tax, while earnings on a traditional IRA are taxable when withdrawn.
If you already have a traditional IRA, we should evaluate whether it is appropriate to convert it to a Roth IRA this year. You'll have to pay tax on the amount converted as ordinary income, but subsequent earnings will be free of tax. And if you have a traditional 401(k), 403(b), or 457 plan that includes after-tax contributions, you can generally rollover these after-tax amounts to a Roth IRA with no tax consequences. A rollover of a SIMPLE 401(k) into a Roth IRA may also be available. As with all tax rules, there are qualifications that apply to these rollovers that we should discuss before you take any actions.
Foreign Bank Account Reporting
The IRS has been actively pursuing individual who fail to report their holdings in foreign accounts. If you have an interest in a foreign bank account, it must be disclosed; failure to do so carries stiff penalties. You must file a Report of Foreign Bank and Financial Accounts (FBAR) if: (1) you are a U.S. resident or a person doing business in the United States; (2) you had one or more financial accounts that exceeded $10,000 during the calendar year; (3) the financial account was in a foreign country; and (4) you had a financial interest in the account or signatory or other authority over the foreign financial account. If you are unclear about the requirements or think they could possibly apply to you, please let me know.
The deadline for filing a FBAR is April 15. However, a six-month extension is available. If you are abroad, the due date is automatically extended until June 15, with an additional four-month extension available until October 15.
Running a profitable business these days isn’t easy. You have to operate efficiently, market aggressively and respond swiftly to competitive and financial challenges. But even when you do all of that, taxes may drag down your bottom line more than they should. Don’t let that happen. Take steps like these – and work with your tax advisor – to make your tax bill as small as possible.
Projecting income. Projecting your business’s income for this year and next can allow you to time income and deductions to your advantage. It generally – but not always – better to defer tax, so consider:
Deferring income to next year. If your business uses the cash method of accounting, you can defer billing for products or services at year end. If you use the accrual method, you can delay shipping products or delivering services.
Accelerating deductible expenses into the current year. If you’re a cash-basis taxpayer, you may pay business expenses by Dec. 31, so you can deduct them this year rather than next. Both cash – and accrual-basis taxpayers can charge expenses on a credit card and deduct them in the year charged, regardless of when the credit card bill in paid.
Warning: Don’t let tax considerations get in the way of sound business decisions. For example, the negative impact of these strategies on your cash flow might not be worth the potential tax benefit
Taking the opposite approach. If it’s likely you’ll be in a higher tax bracket next year, accelerating income and deferring deductible expenses may save you more tax over the two-year period.
Tax Planning: Depreciation
For assets with a useful life of more than one year, you generally must depreciate the cost over a period of years. In most cases, the Modified Accelerated Cost Recovery System (MACRS) will be preferable to other methods because you’ll get larger deductions in the early years of an asset’s life.
Section 179 deduction. Until further notice, Section 179 will be permanent at the $500,000 level. Businesses exceeding a total of $2 million of purchases in qualifying equipment have the Section 179 deduction phase-out dollar-for-dollar and completely eliminated above $2.5 million. Additionally, the Section 179 cap will be indexed to inflation in $10,000 increments in future years. That means for taxable years beginning in 2017, the aggregate cost of any 179 property cannot exceed $510,000 and is reduced dollar-for-dollar if the cost of 179 property exceeds $2,030,000
Tangible property repairs. A business that has made repairs to tangible property, such as buildings, machinery, equipment, and vehicles can expense those costs and take an immediate deduction. But costs incurred to acquire, produce or improve tangible property must be depreciated. Final IRS regulations released in late 2013 distinguish between repairs and improvements and include safe harbors for small business and routine maintenance. The final regs are complex and are still being interpreted, so contact us.
Tax Planning: Vehicle-related deductions
Business-related vehicle expenses can be deducted using the mileage-rate method (53.5 cents per mile driven in 2017) or the actual-cost method (total out-of-pocket expenses for fuel, insurance, repairs and other vehicle expenses, plus depreciation).
Purchases of new or used vehicles may be eligible for Sec. 179 expensing. However, many rules and limits apply. For example, the normal Sec. 179 expensing limit generally applies to vehicles with a gross vehicle weight rating between 6,000- 14,000 pounds. A $25,000 limit applies to vehicles (typically SUVs) rated at more than 6,000 pounds.
Vehicles rated at 6,000 pounds or less are subject to the passenger automobile limits. The amount that may be deducted under the combination of MACRS depreciation and Sec. 179 for the first year is limited under the luxury auto rules to $11,160.
In addition, if a vehicle is used for business and personal purposes, the associated expenses, including depreciation, must be allocated between deductible business use and nondeductible personal use. The depreciation limit is reduced if the business use is less than 100%. If business use is 50% or less, you can’t use Sec.179 expensing or the accelerated regular MACRS; you must use the straight-line method.
Offering a variety of benefit not only can help you attract and retain the best employees, but also save tax:
Qualified deferred compensation plans. These include pension, profit-sharing, SEP and 401(K) plans, as well as SIMPLEs. You take a tax deduction for your contributions to employees’ accounts.
HSAs and FSAs. If you provide employees with a qualified high-deductible health plan (HDHP), you can also offer them Health Savings Accounts. Regardless of the type of health insurance you provide, you can offer Flexible Spending Accounts for health care. If you have employees who incur day care expenses, consider offering FSAs for child and dependent care
HRAs. A Health Reimbursement Account reimburses an employee for medical expenses up to a maximum dollar amount. Unlike an HSA, no HDHP is required. Unlike an FSA, any unused portion can be carried forward to the next year. But only the employer can contribute to an HRA.
Fringe benefits. Some fringe benefits – such as employee discounts, group term-life insurance (up to $50,000 annually per person), parking (up to $255 per month), mass transit / van pooling (also up to $255 per month for 2017, because Congress has parity permanent) and health insurance – aren’t included in employee income. Yet the employer can still receive a deduction for the portion, in any, of the benefit it pays and typically avoid payroll tax as well.
If you’re self-employed, you can deduct 100% of health insurance costs for yourself, your spouse and your dependents. This above-the-line deduction is limited to your net self-employment income. You also can take an above-the-line deduction for contributions made to a retirement plan.
You pay both the employee and employer portions of employment taxes on your self-employment income. The employer portion (6.2% for Social Security tax and 1.45% for Medicare tax) is deductible above the line.
And you may be able to deduct home office expenses from your self-employment income. Call us to help you with this tax planning, if applicable.
Retirement plan credit. Small employers (generally those with 100 or fewer employees) that create a retirement plan may be eligible for a $500 credit per year for three years. The credit is limited to 50% of qualified startup costs.
Small-business health care credit. The maximum credit is 50% of group health coverage premiums paid by the employer, provided it contributes at least 50% of the total premium or of a benchmark premium. For 2017, the full credit is available for employers with 10 or fewer full-time equivalent employees (FTEs) and average annual wages of less than $26,200 per employee. Partial credits are available on a sliding scale to businesses with fewer than 25 FTEs and average annual wages up to a set amount of $52,400 in 2017. Warning: To qualify for the credit, online enrollment in the Small Business Health Options Program (SHOP) generally is required. In addition, the credit can be taken for only two years, and they must be consecutive. (Credits taken before 2014 don’t count, however).
Income taxation and owner liability are the main factors that differentiate one business structure from another. Many businesses choose entities that combine flow-through taxation with limited liability, namely limited companies (LLCs) and S corporations.
The top individual tax rate is higher (39.6%) than the top corporate tax rate (generally 35%), which might affect business structure decisions. For tax or other reasons, a structure change may be beneficial in certain situations, but there also may be unwelcome tax consequences.
There are additional differences between structures that may provide tax planning opportunities, such as differences related to salary vs. distributions/dividends:
S Corporations. Only income that shareholder-employees receive as salary is subject to employment taxes and, if applicable, the additional 0.9% Medicare tax, which generally applies to taxpayers with earned income exceeding the same thresholds as those for the NIIT. To reduce these taxes, you may want to keep your salary “relatively - but not unreasonably - low” and increase your distributions of company income, because distributions generally aren’t taxed at the corporate level or subject to the 0.9% Medicare tax or the 3.8% NIIT.
C corporations. Only income that shareholder-employees receive as salary is subject to employment taxes and, if applicable, the 0.9% Medicare tax. Nevertheless, you may prefer to take more income as salary (which is deductible at the corporate level) as opposed to dividends (which aren’t deductible at the corporate level, yet are still taxed at the shareholder level and could be subject to the 3.8% NIIT) if the overall tax paid by both the corporation and you would be less.
Warning: The IRS is cracking down on misclassification of corporate payments to shareholders-employees, so tread carefully. WASHINGTON LAWMAKERS are discussing major changes for these entities: repatriation of foreign assets, lower tax rates, etc…
Due Date Changes Coming in 2018 for Some Tax Returns
Partnership returns (Form 1065) Due on March 15th (two and a half months) rather than April 15th and will have available a six-month automatic extension until September 15th.
C corporation returns (Form 1120) Due April 17th filing in 2018 (three and a half months) rather than March 15th and will have a five month automatic extension available. (For C corporations with a June 30th year-end, the three and a half month filing due date will not apply until tax years beginning after December 31, 2025).
Fiduciary returns for trusts and estates (Form 1041) Due April 17th in 2018 but will have a five and a half month automatic extension until September 30th.
S corporation returns (Form 1120S) Due March 15th and the automatic six month extension until September 15th will not change.
Individual returns (Form 1040) Due April 17th in 2018 and the automatic six month extension until October 15th will not change.
Form 5500 series (Annual Return/Report of Employee Benefit Plan) This will still be due July 31st, but the available extension will be for three and a half months until November 15th instead of the current two and a half months.
FinCEN Form 114 This form is used to report an interest in a foreign bank account and has been due on June 30th with no extension available. For returns for tax years beginning after December 31, 2015, this return will now be due on April 15th with an extension until October 15th possible.
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