New tax legislation provides numerous tax benefits for individuals for 2018 through 2025. But not all the changes are likely to align with your go-to tax strategy from previous years. Here are five big tax breaks that could leave you with a tax surprise come April 2019 if you haven’t adjusted your current tax plan:
- State and local taxes: You may have prepaid taxes at year-end to increase your SALT deduction in previous years. Hold off this year if there’s no tax benefit. The new tax law limits the deduction for state and local taxes (SALT) to $10,000 annually. This includes any combination of property taxes AND income or sales taxes.
- Entertainment expenses: You can no longer deduct 50 percent of your entertainment expenses. But there’s still some leeway. According to a new IRS ruling, you may deduct 50 percent of food and beverages paid separately from entertainment like a basketball or hockey game. Also, a business can deduct 100 percent of the cost of its holiday party.
- Miscellaneous expenses: The new law eliminates deductions for miscellaneous expenses, such as out-of-pocket employee business expenses. If possible, have these expenses reimbursed by your employer’s accountable plan. Generally, the expenses are deductible by the employer and tax-free to employees.
- Kiddie tax: The kiddie tax continues to apply to unearned income above $2,100 received by a dependent child under 19 or full-time student under 24. But the new law puts more teeth into this tax. The kiddie tax is now based on the tax rates for estate and trusts. This generally produces a higher tax, so plan intra-family transfers accordingly.
- Home equity loans: In the past, a homeowner could deduct mortgage interest paid on the first $100,000 of home equity debt, regardless of use of the proceeds. The new law eliminates this deduction for home equity debt, unless the proceeds from the loan are used to buy, build or substantially improve your home. Fortunately, you may still deduct interest on the first $750,000 of acquisition debt. Take advantage!
Under recent tax legislation, the deduction for miscellaneous expenses has been eliminated, effective for 2018 through 2025. This wipes out any write-off for employee business expenses you pay out of your own pocket.
However, employers will often agree to authorize a plan that reimburses business expenses, like those involving travel. As a result, reimbursements you get from your employer may be tax-free to you, while the payments remain deductible by the company.
Your employer’s accountable plan
Your employer may authorize a plan that reimburses travel expenses by using an accountable plan, which helps ensure that expenses qualify for favorable tax treatment. The plan complies with tough IRS rules requiring substantiation for the date, time, place, amount and business purpose of business travel. Similarly, an accountable plan may be used to reimburse employees for the cost of tools, uniforms or other expenses.
In order for an accountable plan to qualify for tax breaks, it must meet the following requirements (and you can help):
- The expenses must have a business connection. The plan may reimburse your travel expenses to a distant location on behalf of the company, but not a disguised vacation. For instance, if you go on a business trip and spend most of the time lying on the beach drinking margaritas, your expenses likely won’t be considered related to business. It may be a good idea to confirm with your employer what type of expenses qualify before you go on a business trip.
- Employees must account for expenses to the employer within a reasonable time. Usually, you’ll file the paperwork with the accounting department once you return from the trip. But this process can’t drag on for months. Ask your employer how much time you have to report your business expenses.
- Employees must return excess reimbursements within a reasonable time. For example, 90 days might be the max. You can avoid putting your tax breaks in jeopardy by asking your employer what the deadline is to return any excess when you first receive the reimbursements.
If the accountable plan doesn’t comply with these rules, payments won’t be deductible by your company. Even worse, you and other employees will be taxed on the reimbursements — even though you incurred the costs doing your job! Check with accounting to ensure the requirements are met.
New tax legislation eliminated the tax deferral on exchanges of like-kind exchanges of property, except for real estate. This change (generally effective in 2018) may apply to more transactions than you think. For instance, it comes into play when you trade in one business car for another.
Here’s what matters for business vehicles
Under prior law, no current tax was due on an exchange of like-kind properties, like vehicles, if certain requirements were met. You only had to pay tax on any “boot” you received (e.g., cash on a car trade-in). But now taxpayers must contend with a convoluted set of rules that could result in a taxable gain.
Let’s look at an example involving a trade-in before and after the new law:
- Before the new law: You bought a truck for your business for $50,000 that has been fully depreciated. So your “basis” for computing any gain or loss is zero. If you trade in the truck for a new one costing $55,000 and give the dealer $30,000 in cash, no current tax is due on the like-kind exchange. Your adjusted basis equals your basis plus any additional amount you pay. As a result, your adjusted basis going forward is $30,000.
- After the new law: Assume the same scenario above. Although you’re eligible to claim favorable depreciation deductions for the vehicle, especially in the first year of ownership, your adjusted basis under the new rules is $55,000. Therefore, you must report a $25,000 taxable gain.
There are other tax complications, but you get the basic idea.
Keep these new rules in mind when you negotiate the price of a new business vehicle and the trade-in value of your old one. Alternatively, you might sell the vehicle personally and pay the full price for a new one. Call Carl Heinemann, your Chattanooga CPA, for help determining your best approach.
Tax filing season kicks off in a few weeks. What records should you assemble? Due to recent tax law changes, you may not need all the records you’ve kept before. Here are several key areas to focus on:
- Personal information: You still must provide your Social Security number (SSN), and SSNs for your spouse and dependents.
- Employment information: Have all Forms W-2 for you and your spouse. A self-employed person must report income from Forms 1099-MISC and Forms K-1, plus information for calculating the new deduction on qualified business income (QBI).
- Child expenses: Provide information for claiming the increased Child Tax Credit (CTC) and Child and Dependent Care Credit. This may include details for a dependent care provider.
- Investments: Include all information on various Forms 1099 for capital gains and losses (including cost/basis information), dividends and interest. Fortunately, this can often be scanned electronically.
- Retirement plans/IRAs: Report contributions to plans and IRAs, the value of accounts and distributions received on Forms 1099-R.
- Rental properties: This requires records of income received and expenses paid in 2018, including amounts, dates and places.
- State and local taxes (SALT): Recent legislation limits annual SALT deductions to $10,000 for 2018-2025, but itemizers still need relevant records of SALT payments.
- Charitable donations: If you itemize, you generally need records for both monetary gifts and donations of property, plus appraisals for property valued above $5,000.
- Mortgage interest: Itemizers must have Forms 1098 for mortgage interest on acquisition debts that remain deductible.
- Medical expenses: Collect records and receipts for medical expenses that may push you above the “floor” of 7.5 percent of adjusted gross income (AGI) for 2018.
- Education expenses: Provide information required for claiming higher education credits, including Forms 1098-T.
Under the new legislation, you may not need records this year for miscellaneous expenses, many casualty and theft losses, moving expenses and home equity debts. Call Carl Heinemann, your Chattanooga CPA, if you have tax record questions about your particular situation.
Whether you’re a seasoned investor or new to the game, you’ll want to make a conscious effort to avoid these three common investment mistakes:
Franchise opportunities abound. A solid franchise company can offer a proven business model, staff training, advertising expertise and many other benefits for jumpstarting a business. But whether you’re selling fast food or repairing cars, it makes sense to identify and scrutinize potential risks before you sign a contract. Here’s what to look out for:
- Unrealistic forecasts. The company may have highlighted only successful franchisees in booming markets in its sales pitch. Average income can be deceptive, explaining little about how individual franchisees have performed. Rosy predictions based on historical data don’t always pan out. Obtain market research for the areas you’ve staked out, and talk to other franchisees to identify a realistic timeframe for breaking even.
- Unexpected costs. Advertising, initial inventory, legal costs, training, ongoing royalty fees — these expenses and many others can tank a business early on. Identify every potential outlay and build a reserve to cover costs while waiting for revenues to grow. When it comes to expenses, guess high.
- Unusually high turnover. The Federal Trade Commission requires franchise companies to provide potential buyers with a Franchise Disclosure Document (FDD). Among other important details, the FDD provides contact information for current franchisees and others who have opted out of the franchise system. Talk to these folks about their experiences, both positive and negative. If the franchise company has been buying a significant number of properties from unit owners, take note. Storm clouds may be brewing.
- Unfulfilled promises. Franchise companies may pledge the moon, but deliver something entirely different. For example, you may expect the company to use your advertising fees to promote your local outlet. Instead, the company may pump those dollars into unrelated national advertising.
Franchise companies can help you build a successful business. But don’t forget to analyze the details before signing up. Call Carl Heinemann, your Chattanooga CPA, for assistance.