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Ohio Income Tax Updates January 29, 2020

Posted by bradstreetblogger in : 2019 Taxes, General, tax changes, Tax Planning Tips, Tax Tip, Taxes, Taxes , add a comment

A filing season approaches, we are often focused on the federal changes to tax law, but one shouldn’t fail to keep their eyes and ears open to the state changes.  For those of us in Ohio, the 2019 tax law changes were fairly mild.  Below are a few of the key changes to Ohio tax law for the 2019 tax year.

Change in Tax Brackets:

Following the example of the Federal government, Ohio has decreased the number of tax brackets and overall tax rates which are applicable to the 2019 tax year.  The change in rates are displayed below:

Ohio Earned Income Credit:

The Ohio Earned Income Credit (EIC) was also expanded and simplified for 2019.  Historically, the credit was calculated utilizing 10% of the Federal EIC, and possibly subject to limitations based on income.  For the 2019 tax year, the credit is simply 30% of the Federal EIC.

Modified Adjusted Gross Income (MAGI):

The 2019 tax law introduces a new term for purposes of means testing.  Means testing is applied to determine exemption amounts and qualifications for certain credits.  Historically, Ohio Adjusted Gross Income (OAGI) was used in means testing.  The primary difference with this new metric is that income which would have been excluded under Ohio’s generous Business Income Deduction is now included for means testing.  Note, that this doesn’t mean that the business income is now taxable.  It simply means that this income will be considered when determining exemptions and credit qualifications.

In the ever-changing world of taxes, the changes take place not only on the Federal level, but on the state, and even local as well.  We strive to stay abreast of these changes, and help you make the best tax-conscious decisions. 

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 – Josh Campbell

Tax Tip of the Week | Should You Gift Land (or Anything Else) in 2019? November 20, 2019

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

Our current lifetime estate and gift exemption is currently $11.4 million per person (indexed for inflation) through 2025. In other words, you may gift or have an estate of that value without any gift or estate tax. And, your spouse also has the same $11.4 million exemption. So, each couple has a combined total exemption of $22.8 million per couple. This current lifetime exclusion has never been higher. But as the old saying goes – nothing is forever. The House has proposed a new bill to carve 2 years from the 2025 sunset provision. Some of the Presidential candidates propose ending this $11.4 million exemption even sooner than 2023 as proposed by the House.

Considering the current law, pending tax proposals and campaign trail promises, one may make a good argument, that 2019 may be as good of a year as ever to consider making a gift. Please remember that you may make an annual gift of up to $15 thousand a person(s) without it counting against your lifetime exclusion of $11.4 million and your spouse may likewise do the same.

                                     –    Mark Bradstreet

“Tax reform doubled the lifetime estate and gift exemption for 2018 through 2025. This means in 2019, you can gift during your lifetime or have assets in your estate of $11.4 million and not owe any estate or gift tax. Your spouse has the same amount. However, many states continue to assess an estate tax. Be sure to check on your state’s rules (Note: currently Ohio does not have an estate tax.)

This means farm couples worth $30 million or more won‘t owe any estate or gift tax. Discounts of around 30% (or more) reduce the value of land (or other assets) put into a limited liability company (LLC) or another type of entity. Gifts during your lifetime will shrink the amount subject to an estate tax.

Understand The Numbers

For example, mom and dad have farmland and other assets worth $30 million. They place the land into an LLC with a gross value of $20 million. This qualifies for a 35% discount ($7 million), dropping the estate valuation to $13 million. This drops their taxable estate to $23 million, which is about equal to their combined lifetime exemption amounts.

However, there is a chance the lifetime exemption will go back to the old numbers (or even less). The House has proposed a new bill that will make the exemption revert to the old law two years earlier. Some Presidential candidates propose making it even sooner or perhaps reducing it even lower (some would like to see it go to $3.5 million).

Let’s look at our previous example. If the exemption amount reverts to the old numbers, the heirs would face an estate tax liability of about $5 million. But if they make a gift of about $12 million now, no estate tax would be due.

Now might be the time to consider gifting some of your farmland to your kids, grandkids or into some type of trust. We normally like to have grain, equipment and other assets go through an estate so we can get a step-up in basis and a new deduction for the heirs.

However, farmland is not allowed to be depreciated. If it will be in the family for multiple generations, a step-up does not create any value anyway.

If your net worth is more than $10 million, now is a good time to discuss this with your estate tax planner. If you wait and the rules change, you could cost your heirs a lot of money.

Gifting Assets is Powerful

Remember you and your spouse can give $15,000 each year to as many people as you’d like in the form of gifts (not a total of $15,000 each year). This does not eat into your lifetime exemption. As a result, it is a smart strategy to take advantage of gifting each year.

For instance, if mom and dad have five kids, each married, they can give $150,000 total (including spouses, or children and spouses) without filing a gift tax return or eating into their lifetime exemption amount.

Credit is given to Paul Neiffer. This article was published in the Farm Journal article in September, 2019.  Paul gives some great examples and further commentary on this topic.  

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 C. Bradstreet, CPA

–until next week.

Tax Tip of the Week | Veterans Who Own Small Businesses Can Follow the IRS on Their Smart Phones November 13, 2019

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

I am a subscriber of IRS publications and recently received the following article which I wanted to share with our readers. The article is directed toward veterans who are small business owners but the following article and the links provided can be used by any small business owner, and by individuals as well. To all the veterans out there – all of us at Bradstreet & Company would like to thank you for your service and hope you had a great Veterans Day.

                                    -Norman S. Hicks

Veterans who are small business owners likely have lots of questions about their business taxes. National Veterans Small Business Week is as good a time as any other to connect with the IRS over social media.

These business owners can pull out their smart phone or their computer and follow the IRS on these social media sites and apps:

Twitter
@IRSsmallbiz tweets geared specifically to small business owners
@IRSnews posts tax-related announcements and tips
@IRStaxpros tweets news and guidance for tax professionals
@IRSenEspanol has the latest tax information in Spanish
@IRSTaxSecurity tweets tax scam alerts

Instagram
Small business taxpayers can get tax tips and helpful news from the IRS on Instagram. The agency’s official Instagram account is IRSNews, which users can access on their smartphone.

YouTube
The IRS offers video tax tips on its small business playlist. Videos are available in English, Spanish and American Sign Language.

Facebook
The IRS uses Facebook to post news and information for taxpayers and tax return preparers. The IRS also has a Facebook page in Spanish.

LinkedIn
The IRS uses LinkedIn to share agency updates and job opportunities.

IRS2Go App
The IRS also has their own app, IRS2Go. Taxpayers can use this free mobile app to check their refund status, pay taxes, find free tax help, watch IRS YouTube videos and get IRS Tax Tips by email. Like Instagram, the IRS2Go app is available from the Google Play Store for Android devices or from the Apple App Store for Apple devices. IRS2Go is available in both English and Spanish.

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 | A Retirement Plan Too Often Ignored September 11, 2019

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

If your business fits the definition of an owner-only employee business then a Solo 401(k) retirement plan may be a great idea for you.  And, oh yeah, another caveat – you are not allowed to have any employees other than you and your spouse. If your sole proprietorship, partnership, S corporation or C corporation fits the necessary parameters then you may make contributions to a Solo 401(k) plan.

This type of retirement plan allows higher contribution amounts and more investment options than many other retirement plans. The Solo 401(k) even has ROTH options and its account holder may borrow against the plan assets. They are also inexpensive to setup and maintain. Even though created by Congress in 2001 – we still don’t see as many of these plans as I think we should.

If you think you may qualify for the Solo 401(k), please remember that this plan must be formed by year-end for the contributions to be deducted for that same year.

The below WSJ article by Jeff Brown was published on July 9, 2019 and contains additional details.

                                                                                                            -Mark Bradstreet

Millions of U.S. workers rely on employer-sponsored 401(k)s to save for retirement. But what about freelancers, sole proprietors and workers in the mushrooming gig economy, or people who want to leave the corporate cocoon and strike out on their own?

Financial advisers say that far from being left out in the cold, these workers have access to an often-overlooked retirement-savings vehicle that offers some distinct advantages: an “individual” or “solo” 401(k).

Available to self-employed people, as well as business owners and their spouses, solo 401(k)s allow participants to make contributions as both an employer and employee. That means individuals can sock away large sums that dramatically reduce income taxes, among other perks.

Although enrollment data is hard to come by, financial advisers say solo 401(k)s have been slow to get the respect they deserve since they were created by Congress in 2001. Many financial-services firms waited years to start offering the plans, and many business owners who could have them don’t know they exist.

“You’d be surprised how many people don’t know about solo 401(k)s, especially accountants,” says Sean Williams, wealth adviser with Sojourn Wealth Advisory in Timonium, Md.

Perks advisers like

Solo K’s, as some call them, allow participants to avoid the complex rules covering corporate 401(k)s. Not only do solo K’s permit virtually unlimited investing options, they allow participants to choose between making traditional tax-deductible contributions or after-tax Roth contributions. Some advisers prefer them over better-known options for people who work on their own, such as SEP-IRAs (simplified employee pension individual retirement arrangements) and Simples (savings incentive match plan for employees).

“Solo 401(k)s are better than the other options,” says Vincenzo Villamena, a certified public accountant with Online Taxman in New York, “because of the ability to contribute to a Roth and the higher contribution limits.”

Like corporate 401(k)s, the maximum contribution this year for solo K’s is $56,000, including up to $19,000 in pretax individual income, plus an employer contribution. (For people age 50 or older, the maximum is $62,000, due to a catch-up provision.) By comparison, Simples limit employee contributions to $13,000 this year ($16,000 for investors age 50 or over), and employer matches to 3% of compensation up to a maximum of $5,600. SEPs, meanwhile, limit annual employer contributions to $56,000 or 25% of income, whichever is less, and there is no employee contribution.

Contributions to solo K’s cannot exceed self-employment income, which is counted separately from any income earned by working for others.

According to Donald B. Cummings Jr., managing partner of Blue Haven Capital in Geneva, Ill., contributions can come from other sources if regular income from the business is needed to pay ordinary expenses. “Say a 50-plus-year-old business owner inherits $500,000 from a deceased relative. She now has access to better cash flow and can theoretically contribute 100% of her compensation” up to the limit, he says.

An investor also can move cash into a solo K from a taxable investment account, reducing taxable income and getting tax deferral on any future gains.

Opening one up typically takes only a few minutes of paperwork with a financial firm such as Vanguard Group, Fidelity Investments or Charles Schwab Corp. SCHW 1.03% Providers typically don’t require a minimum contribution to open an account, or minimum annual contributions.

Business owners who set up the solo plan as a traditional 401(k) get a tax deduction on contributions, tax deferral on gains and pay income tax on withdrawals after age 59½. (If they withdraw before 59½, they generally will pay both income tax and a penalty.) If they choose to go the Roth route, contributions are after taxes but qualified withdrawals are tax-free, which can be a plus for those who expect to be in a higher tax bracket later in life. And unlike ordinary Roth IRAs, which are available only to people with incomes below certain thresholds, anyone who opens a solo K can pick the Roth option. “The single largest benefit of a solo 401(k) is the ability to contribute Roth dollars,” says Brandon Renfro, a financial adviser and assistant finance professor at East Texas Baptist University in Marshall, Texas. “Since you are the employer in your solo 401(k), you can simply elect that option,” he says. “This is a huge benefit over the other types of self-employed plans.”

Another plus is that account holders can borrow against the assets in a solo 401(k), says Pedro M. Silva, wealth manger with Provo Financial Services in Shrewsbury, Mass. That isn’t allowed with alternatives such as SEPs.

“Business owners often write large checks, and having access to an extra $50,000 for emergencies or opportunities is a valuable feature of the plan,” Mr. Silva says.

Words of caution

A solo 401(k) must be set up by the end of the calendar year for contributions to be subtracted from that year’s taxable income. But, as with an IRA, money can be put in as late as the tax deadline the following April, or by an extension deadline.

Investors who want to change providers can transfer assets from one solo 401(k) to another with no tax bill, as long as the investments go directly from the first investment firm to the second. But if the assets go to the investor first there may be tax consequences, even if they are then sent to the new provider.

Business owners should be aware that the hiring of just a single employee aside from a spouse would require the plan to meet the tricky nondiscrimination test that applies to regular 401(k)s, says Stephanie Hammell, an investment adviser with LPL Financial in Irvine, Calif. That test is designed to make sure executives don’t get a better deal than employees.

Business owners in that situation might do better with a SEP or Simple plan, which don’t have the nondiscrimination hurdle, according to Dr. Renfro.

And as with all financial products, it pays to shop around for the best combination of investment offerings, fees and customer service, experts say.

“Set up your account with an investment provider that either doesn’t charge fees for the administration of the account, or charges very minimal fees,” says Natalie Taylor, an adviser in Santa Barbara, Calif. “Choose an investment provider that offers high-quality, low-cost investment options inside of the individual 401(k) account.”

Credit Given to:  Jeff Brown. This appeared in the July 9, 2019, print edition of the Wall Street Journal as ‘The ‘Solo’ 401(k) Is Often Overlooked.’ Mr. Brown is a writer in Livingston, Mont. He can be reached at reports@wsj.com.

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 | A Need to Know on Capital Gains Taxes September 4, 2019

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

Generally, capital assets that are held in excess of one year and sold at a profit may be taxed at three (3) possible tax rates: (1) 0%, (2) 15% or (3) 20%. For most people, the rate used depends upon their filing status and the amount of their taxable income. Gains from the sale of capital assets not held for a year are taxed as ordinary income. If capital assets are sold at a loss – generally, only $3,000 ($1,500 married filing separate) may be deducted annually unless other capital gains are available as an offset.

Everyone thinks that Congress designed the zero-percent capital gain rate just for them. That thinking is only natural since so many reporters and so many politicians have over-hyped the catchy expression of “zero-percent rate.” The truth is VERY few taxpayers will ever be in position to take advantage of the zero-percent long-term capital gain rate. To do so, for most single and married couples filing jointly, their taxable income not including the capital gains must be less than $39,375 or $78,750, respectively. Remember your taxable income might include any Form W-2s, interest and dividend income, business and rental income etc. But, it also includes the capital gain itself. So, not a very big window exists for the possibility of qualifying for using the zero-percent rate. If your income other than capital gains, less your deductions exceeds these taxable income ceilings then the window not only shuts but disappears as though it never existed. This capital gain tax calculation is not made the same as the calculation of income taxes which are calculated using the incremental tax brackets. And, depending upon the amount of your regular taxable income not including the capital gains above and beyond the amounts of $39,375/$78,750 – you will then use either the 15% OR the 20% tax bracket for the capital gains rate. Don’t forget the “net investment income tax” of 3.8% which could be an additional tax along with your particular state income tax. Ohio taxes capital gains as ordinary income. Also, technically outside the tax world – various income levels may also affect the amount of your Alternative Minimum Tax (AMT), Medicare insurance premiums and the amount of student loan repayments (if applicable).

More information and explanations follow in the article below by Tom Herman as published by the Wall Street Journal on Monday, June 17, 2019.

                            -Norm Hicks and Mark Bradstreet

By tax-law standards, the rules on capital-gains taxes may appear fairly straightforward, especially for taxpayers who qualify for a zero-percent rate.

But many other taxpayers, especially upper-income investors, “often find the tax law around capital gains is far more complicated than they had expected,” says Jordan Barry, a law professor and co-director of graduate tax programs at the University of San Diego Law School.

Here is an update on the brackets for this year and answers to questions readers may have on how to avoid turning capital gains into capital pains.

Who qualifies for the zero-percent rate?

For 2019, the zero rate applies to most singles with taxable income of up to $39,375, or married couples filing jointly with taxable income of up to $78,750, says Eric Smith, an IRS spokesman. Then comes a 15% rate, which applies to most singles up to $434,550 and joint filers up to $488,850. Then comes a top rate of 20%.

But don’t overlook a 3.8% surtax on “net investment income” for joint filers with modified adjusted gross income of more than $250,000 and most singles above $200,000. That can affect people in both the 15% and 20% brackets. For those in the 20% bracket, that effectively raises their top rate to 23.8%. “That 23.8% rate is the rate we use to plan around for high net-worth individuals,” says Steve Wittenberg, director of legacy planning at SEI Private Wealth Management.

There are several other twists, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. Among them: a maximum of 28% on gains on art and collectibles. There are also special rates for certain depreciable real estate and investors with certain types of small-business stock. See IRS Publication 550 for details. There also are special rules when you sell your primary residence.

State and local taxes can be important, too, especially in high-tax areas such as New York City and California. This has become a much bigger issue in many places, thanks to the 2017 tax overhaul that included a limit on state and local tax deductions. As a result, many more filers are claiming the standard deduction and thus can’t deduct state and local taxes. But some states, including Florida, Texas, Nevada, Alaska and Washington, don’t have a state income tax. Check with your state revenue department to avoid nasty surprises.

How long do I typically have to hold stocks or bonds to qualify for favorable long-term capital-gains tax treatment?

More than one year, says Alison Flores, principal tax research analyst at The Tax Institute at H&R Block. Gains on securities held one year or less typically are considered short-term and taxed at the same rates as ordinary income, she says. The rules are “much more complex” for investors using options, futures and other sophisticated strategies, says Bob Gordon, president of Twenty-First Securities in New York City. IRS Publication 550 has details, but investors may need to consult a tax pro.

The holding-period rules can be important for philanthropists who itemize their deductions. Donating highly appreciated shares of stock and certain other investments held more than a year can be smart. Donors typically can deduct the market value and can avoid capital-gains taxes on the gain. But don’t donate stock that has declined in value since you purchased it. “Instead, sell it, create a capital loss you can use, and donate the proceeds” to charity, Mr. Gordon says. You can use capital losses to soak up capital gains. Investors whose losses exceed gains may deduct up to $3,000 of net losses ($1,500 for married taxpayers filing separately) from their wages and other ordinary income. Carry over additional losses into future years.

If you sell losers, pay attention to the “wash sale” rules, says Roger Young, senior financial planner at T. Rowe Price . A wash sale typically occurs when you sell stock or securities at a loss and buy the same investment, or something substantially identical, within 30 days before or after the sale. If so, you typically can’t deduct your loss for that year. (However, add the disallowed loss to the cost basis of the new stock.) Mr. Young also says some investors may benefit from “tax gain harvesting,” or selling securities for a long-term gain in a year when they don’t face capital-gains taxes.

While taxes are important, make sure investment decisions are based on solid investment factors, not just on taxes, says Yolanda Plaza-Charres, investment-solutions director at SEI Private Wealth Management. And don’t wait until December to start focusing on taxes.

“We believe in year-round tax management,” she says.

What if I sell my home for more than I paid for it?

Typically, joint filers can exclude from taxation as much as $500,000 of the gain ($250,000 for most singles). To qualify for the full exclusion, you typically must have owned your home—and lived in it as your primary residence—for at least two of the five years before the sale. But if you don’t pass those tests, you may qualify for a partial exclusion under certain circumstances, such as if you sold for health reasons, a job change or certain “unforeseen circumstances,” such as the death of your spouse. See IRS Publication 523 for details. When calculating your cost, don’t forget to include improvements, such as a new room or kitchen modernization.

Credit given to Tom Herman. This article appeared in the June 17, 2019, print edition as ‘A Need to Know on Capital-Gains Taxes.’ Mr. Herman is a writer in New York City. He was formerly The Wall Street Journal’s Tax Report columnist. Send comments and tax questions to taxquestions@wsj.com.

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 & Norman S. Hicks, CPA

–until next week.

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 | Growing up to be Entrepreneurs July 31, 2019

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

While the majority of us will spend most of our careers working for someone else, having an entrepreneurial spirit or background can open up new possibilities and ways to approach everyday life. The following article was published in the Wall Street Journal on April 28, 2019 by Molly Baker.

                              -Brianna Anello

From the very beginning, Bob Burch has exposed his children to entrepreneurship. When his first daughter, Neely, was born, Bob Burch’s first instinct was to introduce Neely to the office. So, he brought her by to show her off on their way back from the hospital. This poses the famous question on whether entrepreneurs are born or made? Throughout the Burch family this can be seen in both aspects. Entrepreneurships started with Mr. Burch and his brother Chris. They are the founders of a successful retail clothing line, Tony Burch. 

Mr. Burch believes a crucial part of becoming an entrepreneur is nurturing a sense of entrepreneurship. Immersion started at an early age for the Burch children, from encouraging local lemonade sales to teaching them what you need to start a business, to going across the country to show his family potential business ventures. They believe that entrepreneurs should be independent, creative and persistent when wanting to start their own business. These experiences have taught the Burch family lessons that they will hold close to their heart for the rest of their lives. 

Today the three oldest children are travelling the same path as their father, in becoming successful entrepreneurs. Roby, Bob’s son, will never forget his dad’s words of wisdom, “I can’t teach you how to be a lawyer, and I can’t teach you how to be a doctor. I can teach you how to be in business for yourself and how to be good at it.” The Burch children believe their parents, Bob and Susan, never really had certain hopes and dreams for their careers. Bob and Susan wanted their children to think beyond what college they wanted to attend or what they wanted to be when they grew up. They encouraged their children to think big. The process to thinking big included engaging and debating at the dinner table over work ideas. Bob explains that there is no such thing as solo effort. This process is a team effort and will enable the children to release their creativity. At the table, the children also absorbed business lingo and the strategies that they may use one day.

Entrepreneurship is about having the “ready for anything” mindset. One example Bob recalls is the most memorable turnaround story. When he was launching his first fashion show, the first truckload of products arrived and the sweaters had sleeves three inches too short. At this time, he didn’t have the time or money to replace them. Bob and his brother were on their toes. They created a design where Oxford shirt sleeves were rolled over the misfit sweater. It allowed them to showcase their go-to fashion and created opportunity to be successful and avoid potential failure. Because of this fashion show the business earned $100 million in annual sales. 

All of these lessons have influenced the Burch children’s careers. In college, Chloe and Neely pursued online ventures separately. Since they have joined forces, their handbags line is in more than 140 retailers nationwide. Their experiences have even helped their younger brother Roby. Roby is currently trying to launch a premium outdoor lifestyle brand. Bob believes that working as a team has not only created a bond between them, but will lead them to a more fulfilling life.

Credit given to:  Baker, M. (2019, April 29). A Generation of Siblings, Raised to Be Entrepreneurs. 

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.

Tax Tip of the Week | IRS Audit Rate Falls – Should You Relax? July 24, 2019

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

I cringe every time the newspaper headlines read that the IRS audit rate is falling. My worries are that our clients may become lazy on their record keeping along with the retention of appropriate supporting business documentation (e.g. receipts, cancelled checks, deposits slips, paid bills, invoices, etc.). Thankfully, my fears have remained unfounded as the stakes are too high with the IRS to become complacent.

As a side note, many taxpayers fail to realize that if your record keeping is poor – the IRS simply won’t use your records. Instead, the IRS may consider all of your deposits as taxable income whether they were otherwise taxable or not. And, if no supporting documentation was retained then all of your expenses may be disallowed. Ouch!

On May 21, 2019, the WSJ ran an article authored by Richard Rubin, IRS’s Audit Rate Continues to Fall. This article below shares further insights on who is being audited and to what extent the IRS budget is being increased.  

                                                                    -Mark Bradstreet

WASHINGTON—The Internal Revenue Service audited just 0.59% of individual tax returns last year, marking the seventh consecutive annual decline as the tax agency copes with smaller budgets and fewer workers.

That total was down from 0.62% the year before and hit the lowest mark since 2002, according to data released Monday.

Audits of the highest-income households dropped sharply, to their lowest levels since the IRS began reporting that data in 2008. In fiscal 2018, the IRS audited 6.66% of returns of filers with more than $10 million in adjusted gross income, down from 14.52% in 2017. Among households with income between $1 million and $5 million, the audit rate dropped from 3.52% to 2.21%.

The IRS released the data as it is trying to persuade Congress to make long-run investments in the agency’s technology and enforcement staff. So far, however, key Republicans in Congress remain skeptical, and there are mixed signals about whether the government will reverse the steady decline in tax enforcement.

“I’m not averse to beefing up their budget a little bit but I want to see results,” said Sen. John Kennedy (R., La.), who heads the subcommittee that oversees the IRS budget. “I’ve got a lot of confidence in the new commissioner and in the new secretary, but I’m not into just throwing money at the wall because the bureaucracy says we need more.”

President Trump has proposed boosting the IRS’s budget by 1.5% for the fiscal year that starts Oct. 1, to $11.5 billion from $11.3 billion, including a down payment on improving the agency’s technology.

The administration also is proposing a $15 billion, decadelong increase in IRS enforcement funding, which the agency says would generate $47 billion in additional federal revenue. That net gain of more than $30 billion would come from enforcing existing laws.

The IRS has been shrinking steadily, partly because electronic filing has increased its efficiency. But many of the recent changes have stemmed from Republican spending cuts after they took control of the House in 2011 and after the IRS said in 2013 that it had improperly scrutinized some conservative nonprofit groups.

Adjusted for inflation, the 2019 IRS budget is smaller than in 2000 and is 19% below peak funding in 2010, according to the Government Accountability Office. The agency’s workforce declined 4% in 2018 and is now 21% below where it was eight years ago, and the number of examiners that performs audits shrunk 38% from 2010 to 2017, according to the agency’s inspector general. Those cuts came as Congress handed the IRS more responsibility to administer the Affordable Care Act and police offshore bank accounts.

Declining IRS resources contributed to the decline in audits but weren’t the only cause, said David Kautter, assistant Treasury secretary for tax policy, who was acting IRS commissioner for much of fiscal 2018.

“In this age of technology, it’s easier to identify areas of noncompliance,” he said Monday.

Democrats say the IRS budget cuts are disproportionately benefiting high-income households.

“Republicans in the Senate and the House have been very much geared towards a policy that has produced lots of poor people being audited and lots of well-off people basically getting off the hook,” said Sen. Ron Wyden (D., Ore.), the top Democrat on the Senate Finance Committee. “It takes more resources. There’s no way around it.”

Mr. Kennedy said he wants more details on the IRS modernization plans, pointing to the agency’s difficulties overhauling its technology.

Sen. James Lankford (R., Okla.) said he wants more updated information on the tax gap—the difference between taxes owed and taxes paid—which should be released in the coming months.

“We need to be able to see it and know what we actually could get a return on, from enforcement,” he said.

The Congressional Budget Office estimates that an extra $20 billion spent on IRS enforcement could yield $55 billion over the next decade and more beyond that as audits generate revenue. Once the IRS completed staff training and computer upgrades, the government could get as much as $5.20 in additional revenue for every $1 spent, according to CBO.

The agency started 2,886 criminal investigations in 2018, down from 5,234 just five years earlier, according to the agency’s inspector general. The IRS criminal investigations unit had 26% fewer special agents than it did in 2012.

The IRS also has fewer employees working to collect taxes from people who already owe. Each collections officer generates about $2 million a year, which means the smaller IRS is leaving $3.3 billion a year on the table, just from collections, according to the agency’s inspector general.

Tax experts say the agency’s performance could be improved through better taxpayer service and a simpler tax system. So would rules that gave the IRS more information about sources of income—such as profits from cash businesses—that they lack now.

Taxpayers are extremely likely to comply with tax rules when the IRS independently has access to information about their finances. Wages reported on Form W-2 almost always show up on tax returns. When the IRS doesn’t have withholding payments or information, people are more likely to underreport their income.

“I don’t believe the solution is more agents, more audits and more intrusive government into taxpayers,” said Rep. Kevin Brady (R., Texas), the top Republican on the House Ways and Means Committee. “I think it’s smarter audits.”

But the drops in enforcement and the IRS budget have run in tandem, and the nonpartisan estimates from CBO, GAO and the IRS inspector general say reversing the spending cuts would generate money.

“We’re just in never-never land here. The IRS has had its capacity to do its job attacked. There’s no other way to say it,” Rep. Earl Blumenauer (D., Ore.) said at a recent hearing. “They can’t keep pace with what they’re up against.”

Credit given to:  Richard Rubin. This article was written May 20, 2019. You can write to Richard Rubin at richard.rubin@wsj.com

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 | Are You Considering Early Retirement? Maybe You Should Reconsider… July 10, 2019

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

Effects of Early Retirement

While many people look forward to retirement, after years of hard work and dedication, most people do not think about the potential physical, emotional and cognitive issues arising from the cessation of their life filled with the routine of working every day. Research suggests that early retirement may even kill you. You may think: How can that be? How can working longer be better for your health?

Early retirement offers many positive benefits. People have more time to pursue other passions and interests that they may have been longing to try. This gives them time to step away from stressful work and the high demand of work. 

Early retirees do not consider their potential unhealthy behaviors. These include being uninvolved with others, being too sedentary, over eating, and consuming too much alcohol. These factors arise because the retirees no longer have the purpose to fulfill work duties. Life as they have known it is suddenly gone.  This can lead to depression, lack of engagement, or even death. According to Richard W. Johnson, work and the work environment creates intellectual stimulation, while retirement can accelerate cognitive decline. He explains that it is important to keep the brain stimulated. 

Another risk to retirement is the possibility of becoming socially isolated. Many people do not realize the impact that a work environment can have on a person. Colleagues are there to engage and support each other, which adds significant social fulfillment to one’s life. Research suggests that avoiding social isolation by working even part time or volunteering may give retirees a longer life. Social isolation can reduce life satisfaction and affect your physical and mental health. Johnson discovered that only one-third of Americans age 55 and older will actually participate in community groups or unpaid activities. Being involved in activities or even having a part time job can provide stimulation and social interaction similar to that experienced by those who are engaged in full-employment.

Retiring early also has a significant financial impact. Some believe that this is the biggest danger to retirement. Being financially secure is something that people worry about each day while in paid employment. How much time do people think about it when they are in actual retirement? At age 62, you are eligible to receive Social Security, however, it will only cover about 40% of your paycheck. Johnson suggests that workers who remain in their careers can save some of their additional earnings for retirement and will accumulate more Social Security in the long run. 

When you turn 62…

At age 62 everyone thinks about the possibility of retiring. It is like a light bulb that goes off to indicate that you should consider taking the long break you have earned. A study by Maria Fitzpatrick at Cornell University and Timothy Moore at the University of Melbourne shows that there is a correlation between an increase in mortality rates and retirement. It states the risk factors include smoking and lack of physical activity, which are downfalls to early retirement. Many people believe they should retire by a certain age or they feel the pressure to retire early, which is a psychological effect. Johnson explains that as a society we should be encouraging older workers to stay on the job. This can boost long term health, longevity and the emotional and physical strength of the brain. Older workers are protected from age discrimination by Federal law. By allowing older workers to work longer the companies can not only benefit from the skilled workers but will enable the workers to live a longer healthier life. 

Credit given to:  Johnson, R. W. (2019, April 22). The Case Against Early Retirement. 

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.

Tax Tip of the Week | Retirees July 3, 2019

Posted by bradstreetblogger in : General, tax changes, Tax Preparation, Tax Tip, Taxes, Uncategorized , add a comment

Everywhere you turn whether it is your doctor’s office or the WSJ or wherever, we see thought-provoking, often mind-numbing articles on the pros and the cons of retiring. Well, the article that follows is one from the WSJ written by Cheryl Winokur Munk. She delves into some of the more commonly made errors made by retirees. We have noticed many of these errors made by our friends and neighbors but of course we would never commit any of them ourselves.

                               -Mark Bradstreet

There are almost as many paths to retirement as there are retirees. But when it comes to financial mistakes that can derail their retirement, familiar patterns often emerge. Many retirees tend to invest too conservatively, spend too much too soon, pay too much in taxes or fall for too-good-to-be-true investments.

Retirees could ensure their nest egg lasts longer by avoiding these common mistakes:

Mistake No. 1: Investing too conservatively

A number of retirees try to eliminate risk by stashing their savings in cash, certificates of deposit or municipal bonds of very short duration. Though taking a more conservative approach in retirement can be prudent, playing it too safe can severely limit retirees’ earning potential, increasing the chances they’ll run out of money.

“It’s important to build a portfolio that incorporates an appropriate mix of fixed income and equities based on their other assets—including Social Security and rental income—their spending requirements and their life expectancy,” says David Savir, chief executive of Element Pointe Advisors, a registered investment adviser in Miami. The average American man will live to age 76, and the average American woman to age 81, according to the Centers for Disease Control and Prevention.

Mr. Savir recommends retirees build a portfolio to match their spending habits and estimated life expectancy—taking into account the national averages as well as their own health and family history—and test it using forward-looking simulations. Those simulations should take into account bear-market scenarios and the chance that returns may be lower—and volatility higher—than historical norms. “This will help a client determine whether they need to spend less, invest slightly more aggressively, or both,” he says.

Mistake No. 2: Spending mishaps

Some retirees shell out significant sums of money early in their retirement, often to pay off debt or enjoy leisure activities they couldn’t do while working. The problem with spending so much in the beginning is that it can be detrimental to a retiree’s long-term financial security, says Tim Sullivan, chief executive of Strategic Wealth Advisors Group, a registered investment adviser in Shelby Township, Mich.

While eliminating debt can be a good thing, large cash outlays can harm retirees’ long-term financial security. It may make even less sense when a retiree’s investments are earning far more than the rate of interest on the debt, Mr. Sullivan says. And while it’s understandable to want to buy a second house, take a pricey European vacation or remodel a home, retirees need to map out the potential lasting effects such hefty spending can have on their finances, Mr. Sullivan says.

He tells of a client in his late 50s who enjoyed a $25,000 African safari so much that upon his return he immediately booked another $20,000 trip. These purchases put such a dent in his nest egg that he risked running out of money six years earlier than expected and had to follow a strict budget to try to minimize the damage, Mr. Sullivan says.

Of course, retirees have to find the right balance, because being too strict with their spending early in retirement can lead to significant regrets later on. Beyond that, there’s a risk for some retirees that by being so frugal they’ll leave so much behind when they die that they will be over the federal or state estate-tax exemption limit, says Alison Hutchinson, senior vice president of private wealth management at Brown Brothers Harriman. They could also end up leaving more to their heirs than they are comfortable with, she says.

Mistake No. 3: Underestimating expenses

Advisers say it’s typical for retirees to underestimate their expenses in retirement, particularly health-care and other periodic, rather than regular, expenses. These incremental expenses—if not built into the budget—can derail a retiree’s financial security, advisers say.

Leslie Thompson, managing principal at Spectrum Management Group, a registered investment adviser in Indianapolis, recommends that people approaching retirement keep track of their expenses for at least a year, ideally two or three, before they leave the workforce, so they have a baseline to work with. They should then make the necessary tweaks to account for expenses they will no longer have and new expenses they may incur during retirement. “A well-thought-out plan should be based upon actual spending needs and future desires, with contingencies for nonrecurring items such as car purchases, major home repairs and remodels, and rising health-care costs,” she says.

Financial support for adult children and grandchildren is another expense that many retirees will want to build into their budget. Many retirees are happy to assist on an as-needed basis, but, to their detriment, they don’t consider the aggregate annual cost, says Alicia Waltenberger, director of wealth planning strategies at TIAA. “A lot of times when they see that collective number, it is eye-opening,” she says.

Mistake No. 4: Creating unnecessary tax expenses

When retirees have both tax-sheltered and taxable accounts, they commonly withdraw exclusively from their taxable account at first. The danger is that growth within the tax-sheltered account could bump the retiree to a higher tax bracket once required minimum distributions kick in, says Paul Lightfoot, president of Optima Asset Management, a registered investment adviser in Dallas. This could also affect the retiree’s Medicare premiums, he says.

Mr. Lightfoot recommends retirees perform yearly assessments using different tax scenarios to determine how best to optimize their accounts. One option may be to take some withdrawals from their tax-deferred account before they turn 70½, provided this doesn’t push them to a higher tax bracket. They might also consider converting some of their taxable-account savings to a Roth IRA because of anticipated tax rates in the future. While there are taxable consequences in the year of conversion, there may be longer-term tax benefits in a conversion, he says.

Mistake No. 5: Falling for investment pitches that are too good to be true

Many retirees are easily swayed by the prospect of finding high-returning investments that have little to no risk, but chasing yield can easily derail the savings they’ve worked hard to build, advisers say. Some advisers are particularly skeptical of products like indexed annuities for retirees, because many people don’t understand the products and think they are getting something they are not.

Dennis Stearns, founder of Stearns Financial Group, a registered investment adviser in Greensboro, N.C., also cautions retirees to pay attention to the fees they pay for investment management. Generally, clients with $500,000 to $5 million in assets should pay in the range of 0.5% to 1% in adviser fees, and keep other custodial fees and ETF and mutual-fund fees low, he says. If they’re paying more for investment management, it might be advisable to rethink the relationship. “The fees can really eat into your retirement savings,” he says.

Credit Given to: Cheryl Winokur Munk. Ms. Winokur Munk is a writer in West Orange, N.J. She can be reached at reports@wsj.com.

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.