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Tax Tip of the Week | Ohio Small Business Deduction – TAKE IT! August 28, 2019

Posted by bradstreetblogger in : Business Consulting, Deductions, General, tax changes, Tax Planning Tips, Tax Preparation, Tax Tip, Taxes, Uncategorized , add a comment

We work with many attorneys for a myriad of reasons. Some specialize in business dealings such as mergers, acquisitions, etc. Mr. Jeff Senney, a prominent business attorney with Pickrel, Schaeffer and Ebeling, wrote the following article which discusses a deduction that owners, or equity investors, of an Ohio business who file an Ohio individual income tax return may be eligible to take each year. The deduction is commonly known as the Ohio Small Business Deduction (SBD) and began in its earliest form in 2013. The SBD allowed the taxpayer to deduct 50% of up to $250,000 of Ohio business income, for a maximum deduction of $125,000. In 2014, the deduction increased to 75% of $250,000 for a maximum deduction of $187,500. Adjustments were required also, such as add-backs for retirement contributions, the self-employment tax deduction, and the self-employed health insurance deduction that were reported on the taxpayer’s federal return for both 2013 and 2014. The deduction remained at 75% for 2015 and the requirement to add back the above-mentioned adjustments was eliminated. In its current form, the deduction is for 100% of $250,000. We hope you enjoy Jeff’s article as reproduced below.

      – Norman S. Hicks, CPA

For 2016 (and subsequent years), each individual small business owner filing single or married filing jointly is eligible for a “small business” income tax deduction (SBD) against their state income tax liability equal to 100% of the first $250,000 of business income the owner receives or is allocated from a sole proprietorship or pass-through entity (“PTE”). Married filing separate taxpayers will be able to deduct 100% of business income in 2016 but only up to $125,000. Any remaining business income above these threshold amounts is taxed at a flat 3% rate.

For tax years 2014 and 2015, the SBD percentage for all taxpayers was only 75%.

PTEs include partnerships, “S” corporations and limited liability companies (“LLCs”). Income generated by the business and passed through to the owners/investors is subject to personal income tax. The deduction was originally applicable only for Ohio-sourced business income. But beginning in tax year 2015, the deduction was expanded to include eligible business income from all sources.

Individuals who directly or indirectly through a tiered structure own at least a 20% interest in profits or capital of a PTE may also include their wages and guaranteed payments from that PTE in the calculation of the SBD. It was not originally clear whether the direct or indirect ownership included constructive ownership from family members. But the Ohio Department of Taxation has recently made clear that stock attribution among family members (such as husband to wife) does not count in determining whether the individual owns the requisite 20% interest.

Taxpayers who failed to claim the SBD on their originally income tax returns should give serious thought to filing amended returns to claim the SBD for all open years. While the SBD is referred to as the “small business deduction,” there is no limit on gross receipts or assets that the PTE can have.

The SBD can be taken not only by Ohio residents on all their business income received, but also by Ohio nonresidents and part-year residents.

While electing to be included in a composite tax return makes financial sense in most states, taxpayers could be missing out on the SBD tax savings available in Ohio. A PTE cannot deduct the SBD on a composite tax return filed on a taxpayer’s behalf, and the SBD cannot be claimed on any other non-individual tax return, such as a trust return and even a nonresident withholding return. Accordingly, if an individual taxpayer has been included in a composite return or has had withholding performed by a PTE, the taxpayer may be paying more Ohio tax than necessary.

Many taxpayers may not have taken the SBD because they mistakenly thought they were required to own 20% or more of a PTE in order to qualify for the SBD. But that is not the case. The 20% ownership requirement only applies to deduction of compensation and guaranteed payments. Taxpayers owning less than 20% are still eligible to claim the SBD on their share of other qualifying business income.

Many taxpayers also do not realize that the 20%-or-more requirement only needs to be met once during a tax year. If an individual owner meets the 20% ownership test at any point during the calendar year, the individual’s entire year of compensation or guaranteed payments may qualify as business income. While not entirely clear, it is likely the Ohio Department of Taxation would try to deny the SBD where a husband and wife transferred ownership back and forth during a year in order to make them both 20% owners on at least one day during the year.

Credit given to Jeff Senney. He can be reached at 937-223-1130 or Jsenney@pselaw.com or https://www.pselaw.com/attorneys/jeffrey-senney. Jeff’s article can be found at: https://www.pselaw.com/ohio-small-business-deduction-take-it/ 

Thank you for all of your questions, comments and suggestions for future topics. We may be reached in Dayton at 937-436-3133 and in Xenia at 937-372-3504. Or visit our website.  

This Week’s Author – Norman S. Hicks, CPA

–until next week.

Tax Tip of the Week | Can S Corporations Save Taxes? Apparently, Some Politicians Think So. August 21, 2019

Posted by bradstreetblogger in : Business consulting, Deductions, Depreciation options, General, tax changes, Tax Planning Tips, Tax Preparation, Tax Tip, Taxes , add a comment

In an effort to save federal income taxes, many people and not just some politicians route their business income through S corporations.  Their profits which may be retained by the S corporation and/or distributed to the shareholder(s) are typically the result of keeping the shareholder’s reasonable wages at a level that assures a corporate profit.  Keeping these reasonable wages below the FICA ceiling ($132,900 for 2019) may save taxes of 15.3% from FICA and Medicare, combined.  If, these wages exceed the FICA ceiling then the potential tax savings drop to only the Medicare tax of 2.9% plus another .9% if individual’s wages are over $200,000 ($250,000 married filing jointly).

The point to be made here is that at the right income levels, significant tax savings may exist with the proper use of an S corporation.  However, these savings come along with the possibility of additional IRS scrutiny.  And, since you may be paying less social security taxes, your future social security benefits may be dinged ever so slightly; but these tax savings are now in your own pocket.

The below WSJ article authored by Richard Rubin covers a portion of this age-old tax saving strategy along with some interesting commentary.

               -Mark Bradstreet

Democratic presidential candidate Joe Biden used a tax loophole that the Obama administration tried and failed to close, substantially lowering his tax bill.

Mr. Biden and his wife, Dr. Jill Biden, routed their book and speech income through S corporations, according to tax returns the couple released this week. They paid income taxes on those profits, but the strategy let the couple avoid the 3.8% net investment income tax they would have paid had they been compensated directly instead of through the S corporations.

The tax savings were as much as $500,000, compared to what the Biden’s would have owed if paid directly or if the Obama proposal had become law.

“As demonstrated by their effective federal tax rate in 2017 and 2018—which exceeded 33%—the Biden’s are committed to ensuring that all Americans pay their fair share,” the Biden campaign said in a statement Wednesday.

The technique is known in tax circles as the Gingrich-Edwards loophole—for former presidential candidates Newt Gingrich, a Republican, and John Edwards, a Democrat—whose tax strategies were scrutinized and drew calls for policy changes years ago. Other prominent politicians, including former President Barack Obama and fellow Democrat Hillary Clinton, as well as current contenders for the 2020 Democratic nomination Sens. Elizabeth Warren and Bernie Sanders, received their book or speech income differently and paid self-employment taxes.

Some tax experts have pointed to pieces of President Trump’s financial disclosures and leaked tax returns to suggest that he has used a similar tax-avoidance strategy.

Unlike his Democratic rivals and predecessors in both parties, Mr. Trump has refused to release his tax returns, and his administration is fighting House Democrats’ attempt to use their statutory authority to obtain them. Democratic presidential candidates have released their tax returns and welcomed criticism to draw a contrast with Mr. Trump.

“There’s no reason for these to be in an S corp—none, other than to save on self-employment tax,” said Tony Nitti, an accountant at RubinBrown LLP who reviewed the returns.

Mr. Biden, who was vice president from 2009 to 2017, has led the Democratic field in polls since entering the race. He is campaigning on making high-income Americans pay more in taxes and on closing tax loopholes that benefit the wealthy.

Mr. Biden has decried the proliferation of such loopholes since Ronald Reagan’s presidency and said the tax revenue could be used, in part, to help pay for initiatives to provide free community-college tuition or to fight climate change.

“We don’t have to punish anybody, including the rich. But everybody should start paying their fair share a little bit. When I’m president, we’re going to have a fairer tax code,” Mr. Biden said last month during a speech in Davenport, Iowa.

The U.S. imposes a 3.8% tax on high-income households—defined as individuals making above $200,000 and married couples making above $250,000. Wage earners have part of the tax taken out of their paychecks and pay part of it on their returns. Self-employed business owners have to pay it, too. People with investment earnings pay a 3.8% tax as well.

But people with profits from their active involvement in businesses can declare those earnings to be neither compensation nor investment income. The Obama administration proposed closing that gap by requiring all such income to be subject to a 3.8% tax, and it was the largest item on a list of “loophole closers” in a plan Mr. Obama released during his last year in office. The administration estimated that proposal, which didn’t advance in Congress, would have raised $272 billion from 2017 through 2026.

Under current law, S-corporation owners can legally avoid paying the 3.8% tax on their profits as long as they pay themselves “reasonable compensation” that is subject to regular payroll taxes. S corporations are a commonly used form for closely held businesses in which the profits flow through to the owners’ individual tax returns and are taxed there instead of at the business level.

The difficulty is in defining reasonable compensation, and the IRS has had mixed success in challenging business owners on the issue. The Bidens’ S corporations—CelticCapri Corp. and Giacoppa Corp.—reported more than $13 million in combined profits in 2017 and 2018 that weren’t subject to the self-employment tax, while those companies paid them less than $800,000 in salary.

If the entire amount were considered compensation, the Bidens could owe about $500,000. An IRS inquiry might reach a conclusion somewhat short of that.

“The salaries earned by the Bidens are reasonable and were determined in good faith, considering the nature of the entities and the services they performed,” the Biden campaign statement said.

For businesses that generate money from capital investments or from a large workforce, less of the profits stem from the owner’s work, and thus reasonable compensation can be lower. For businesses whose profits are largely attributable to the owner’s work, the case for reasonable compensation that is far below profits is harder to make.

To the extent that the Bidens’ profits came directly from the couple’s consulting and public speaking, “to treat those as other than compensation is pretty aggressive,” said Steve Rosenthal, a senior fellow at the Tax Policy Center, a research group run by a former Obama administration official.

Mr. Nitti said he uses a “call in sick” rule for his clients trying to navigate the reasonable-compensation question: If the owner called in sick, how much money could the company still make?

“The reasonable comp standard is a nebulous one,” Mr. Nitti said. “This is pretty cut and dried. If you’re speaking or writing a book, it’s all attributable to your efforts.”

The IRS puts more energy into cases where the business owners pay so little reasonable compensation that they owe the full Social Security and Medicare payroll taxes of 15.3%, Mr. Nitti said.

In a statement released Tuesday along with the candidate’s tax returns, the Biden campaign noted that the couple employs others through its S corporation and calls the companies a “common method for taxpayers who have outside sources of income to consolidate their earnings and expenses.”

Credit given to: Richard Rubin. This article was written July 10, 2019. You can write to Richard Rubin at richard.rubin@wsj.com—Ken Thomas contributed to this article.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.  

This week’s author – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | Health Care Plans Gain More Flexibility August 14, 2019

Posted by bradstreetblogger in : General, Healthcare, tax changes, Tax Planning Tips, Tax Tip, Taxes , add a comment

On June 13, 2019, the IRS issued final regulations regarding health reimbursement arrangements (HRAs).  These types of plans were radically changed and restricted by the Affordable Care Act. The new regulations reinstate the ability of employers to use HRAs to reimburse employees who buy their own health insurance, but the rules can be fairly complicated in certain situations. The full set of rules can be found in the federal register at https://www.federalregister.gov/documents/2019/06/20/2019-12571/health-reimbursement-arrangements-and-other-account-based-group-health-plans. In pdf form (and in typical IRS fashion), this article is 140 pages long. It appears to be a collaboration between the IRS, the Employee Benefits Security Administration, the Department of Labor, the Centers for Medicare & Medicaid Services, and the Department of Health and Human Services, and is titled “Health Reimbursement Arrangements and Other Account-Based Group Health Plans”. 

Following is a nice (and much smaller) article published on June 24, 2019, by Jessica Kuester of Taft Stettinius & Hollister, LLP, which helps explain some of the provisions of the new rules, such as who can and cannot be covered, types of HRAs, effective dates, and other features and restrictions of the new HRA regulations.

                                                   –Norman S. Hicks, CPA

Final Regulations Allow Employers to Pay For Employees’ Health Insurance Premiums

Health reimbursement arrangements (HRAs) are a very flexible type of group health plan—they allow employers to reimburse employees for certain medical expenses on a pre-tax basis. Based on the IRS’s interpretation of changes in law that were enacted by the Affordable Care Act (ACA), these arrangements lost most of the flexibility that they had been able to provide for over 50 years. Although HRAs could be integrated with major medical plans offered by employers (i.e., a so-called “integrated HRA”), they could not be offered on a stand-alone basis without the employer incurring a $36,500 per year per participant excise tax. In effect, this meant that employers could no longer reimburse employees for the cost of premiums incurred when purchasing health insurance. New regulations (issued on June 13, 2019) bring back some of the flexibility of HRAs.

What is the new type of HRA?

In a so-called “individual coverage HRA,” employers can reimburse employees for medical expenses (including premiums) that they incur on a pre-tax basis. For each month that they are covered by the individual coverage HRA, employees must be covered by individual health insurance (either offered on the ACA Exchange or not), and employers must substantiate such coverage.

Who can be covered by an individual coverage HRA?

An individual coverage HRA cannot be offered to any employee offered a traditional employer-sponsored group health plan. This means that employees cannot be given a choice between the employer’s traditional group health plan and an individual coverage HRA—employers can only offer one or the other. However, employers can decide to offer an individual coverage HRA to one or more class of employees and a traditional group health plan to the other classes. The acceptable classes are full-time employees, part-time employees, seasonal employees, employees working in the same geographic location (such as the same state or same insurance rating area), collectively bargained employees, salaried employees, hourly employees and newly-hired vs. existing employees. These are only a few examples: there are other types of classes identified in the regulations and additional classes can be formed by combining any of the acceptable classes. In addition, minimum class size rules (generally, 20 class members) apply to employers offering a traditional group health plan to some classes and an Individual Coverage HRA to other classes.

How much can employers reimburse under an individual coverage HRA?

Just like with other types of HRAs, employers can reimburse as much or as little as they want. However, the individual coverage HRA must be offered on the same terms to all employees in the class. So although the amount of reimbursement can vary between classes, they generally cannot vary among the class members (except for variations based on an employee’s age or the number of dependents).

How do employers offer an individual coverage HRA?

Employers offering an individual coverage HRA must notify eligible participants about the individual coverage HRA and its interaction with the premium tax credit that is available to certain individuals under federal tax law. Although the individual coverage HRA itself is considered an employer-sponsored group health plan, the underlying health insurance coverage purchased by the employee is not, so long as the employee’s purchase of the insurance coverage is voluntary, the employer does not select or endorse any particular insurance carrier or coverage, the employer does not receive any kickbacks for an employee’s selection of any particular individual health insurance and each employee is notified annually that the individual health insurance they select is not subject to ERISA.

What about the employer mandate?

The good news: an employer’s offer of reimbursement through an individual coverage HRA counts as an offer of coverage for purposes of the ACA’s employer mandate. The bad news: although the new regulations offer guidance on when an individual coverage HRA will be considered “affordable” for purposes of the premium tax credit, the IRS has not yet issued rules describing when the coverage will be considered “affordable” for purposes of the employer mandate. These rules are likely coming soon.

Are there any other types of new HRAs available under the new regulations?

The new regulations also create an excepted benefit HRA. The excepted benefit HRA is different than the individual coverage HRA in that it only reimburses the employee for costs incurred in connection with “excepted benefits” (such as dental and vision benefits). This new excepted benefit HRA is an HRA offered as part of an employer’s traditional group health program and can reimburse medical expenses even when the employee opts out of the group health plan itself. This is a departure from the current rules that apply to integrated HRAs, which only permit reimbursement of medical expenses when the employee actually enrolls in the group health plan.

The excepted benefit HRA:

When can employers start offering these new types of HRAs?

The new types of HRAs can be offered beginning on Jan. 1, 2020. Note that, in order to start offering coverage under the individual coverage HRA on that date, employers will need to take action before then.  Most notably, the required notice must be provided prior to Jan. 1, and employees will need to take part in the 2020 open enrollment period for individual coverage, which typically occurs in late 2019.

Jessica E. Kuester is an attorney with Taft Stettinius & Hollister, LLP and represents employers in all of their employee benefit needs. She can be reached at jkuester@taftlaw.com. Her article, as reproduced above, can be found at https://www.taftlaw.com/news-events/law-bulletins/final-regulations-allow-employers-to-pay-for-employees-health-insurance-premiums.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author – Norman S Hicks, CPA

–until next week.

Tax Tip of the Week | How to Avoid being Overwhelmed in Times of Death and Illness? August 7, 2019

Posted by bradstreetblogger in : General, Healthcare, Tax Planning Tips, Tax Tip, Taxes, Uncategorized , add a comment

What do you do when one spouse refuses to be or has not been invited to be involved with finances but then an unexpected death or illness occurs?

Dealing with death and illness is a difficult time for a spouse and the family, no matter the circumstances. When the spouse is unaware of how the finances have been handled, it may lead to frozen accounts and assets. Gary Altman, an estate planning attorney in Rockville, MD., explained that it is common to find families in this situation. He recently had a client who had to ask her brother-in-law for financial assistance. Altman stated that his client did not have enough money in their joint accounts. She was unable to make ends meet because the accounts were in her husband’s name alone and the financial institutions will freeze the single-owner accounts when a person dies. 

Financial professionals and attorneys know that these times are sensitive, delicate and trying. They also have encountered many times that the surviving spouse who was hands-off has to deal with missing information and does not have complete knowledge of their net worth or where accounts are held. The surviving spouse will most likely be overwhelmed with the financial decisions while trying to cope with the day to day emotions of grief and loss. Grieving can cause a person to have high emotions, which may lead to unclear decisions. According to Susan Bradley, founder of Sudden Money Institute, grief can reduce cognitive capacity. She recommends that the surviving spouse focus on what is important or pressing during this time. For example, the survivor should pay the bills that are essential to live each day. Slowing down and realizing what is truly important throughout this time will allow prioritizing urgent matters, most importantly, dealing with emotions and getting through the day one step at a time. The surviving spouse should wait until he or she is no longer in shock to make financial decisions and understand their financial needs. 

Here are steps couples should take to prevent frozen accounts when faced with death or illness:

1.    Hire a financial planner who specializes in estate settlement and an accountant to file tax returns for state and/or federal estate tax returns. Establishing a financial advisor, that both spouses like and trust, can reduce these overwhelming decisions that one might need to make without an advisor. Each spouse should be confident and comfortable with this person.

2.    Make sure both spouses give the executor permission to manage digital assets. Enabling both spouses to have access to and control over assets will reduce potential problems in the situation of death or illness. Another way to ensure immediate access is by stating “transferable on death.” This may be done when the couple sets up the account. 

3.    Stay up to date with your online service software to track every account and asset. This will ensure secure accounts and assets. Assets that are jointly held or are held in the survivor’s name alone are protected, unless the survivor co-signed or guaranteed the debts.

Here are steps a surviving spouse should take when dealing with death or illness:

1.    Order multiple copies of the death certificate to use to reassign financial accounts and settle the estate. The death certificate will allow you to contact the spouse’s employer to ask about a 401(k), pension, stock options and life insurance, etc.  

2.    Contact the estate attorney, accountant and financial adviser. Update your will after shock has worn off. 

3.    Gather and rename household bills, bank, brokerage, insurance, and credit-card statements in your name alone. 

4.    Create a new financial plan after you have understood immediate expenses and are able to make long-term decisions. 

Credit given to:  Tergesen, A. (2019, March 29). Estate Planning for the Uninitiated. 

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.  

This Week’s Author – Brianna Anello

–until next week.