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Tax Tip of the Week | Gifts to Charity: Six Facts About Written Acknowledgements September 19, 2018

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

Tax Tip of the Week
September 19, 2018

Throughout the year, many taxpayers contribute money or gifts to qualified organizations eligible to receive tax-deductible charitable contributions. Taxpayers who plan to claim a charitable deduction on their tax return must do two things:

•    Have a bank record or written communication from a charity for any monetary contributions.
•    Get a written acknowledgment from the charity for any single donation of $250 or more.

Here are six things for taxpayers to remember about these donations and written acknowledgements:

1.    Taxpayers who make single donations of $250 or more to a charity must have one of the following:
o    A separate acknowledgment from the organization for each donation of $250 or more.
o    One acknowledgment from the organization listing the amount and date of each contribution of $250 or more.
2.    The $250 threshold doesn’t mean a taxpayer adds up separate contributions of less than $250 throughout the year.
o    For example, if someone gave a $25 offering to their church each week, they don’t need an acknowledgement from the church, even though their contributions for the year are more than $250.
3.    Contributions made by payroll deduction are treated as separate contributions for each pay period.
4.    If a taxpayer makes a payment that is partly for goods and services, their deductible contribution is the amount of the payment that is more than the value of those goods and services.
5.    A taxpayer must get the acknowledgement on or before the earlier of these two dates:
o    The date they file their return for the year in which they make the contribution.
o    The due date, including extensions, for filing the return.
6.    If the acknowledgment doesn’t show the date of the contribution, the taxpayers must also have a bank record or receipt that does show the date.

This article was provided by the Internal Revenue Service in Tax Tip 2017-59.  If you have any questions concerning charitable donations, let us know.  We can help.

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.

–until next week.

Tax Tip of the Week | Ohio’s Small Business Deduction September 12, 2018

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

Tax Tip of the Week
September 12, 2018

 

This will be the last week for Common Misconceptions, we have had wonderful feedback, thank you!  Let us know via email, what are common business misconceptions that you have come across; markb@bradstreetcpas.com?

This week we wanted to discuss Ohio’s Small Business Deduction. This deduction allows for a portion of an individual’s net business income to be deducted on his or her Ohio return, and began in its earliest form in 2013. This law was enacted to give Ohio businesses a more competitive advantage with other states. The deduction was originally calculated on Form IT SBD – Small Business Investor Income Deduction Schedule. The Ohio website’s definition was “the portion of a taxpayer’s adjusted gross income that is business income reduced by deductions from business income and apportioned or allocated to Ohio . . .” So, it sounds fairly simple right? Take a look at the very first item on the form:

1.    Self-employment income (federal Schedule C, C-EZ or F), guaranteed payments and/or compensation received from each pass-through entity in which you have at least a 20% direct or indirect ownership interest. Note: Reciprocity agreements do not apply (see line instructions)………………………..

Wow! So it would seem not to be so simple after all, and it didn’t get much better from there. First, one had to decide what constitutes “business income”. Did it include rental activities? Did it include all pass-through K-1 income, whether passive or active? Then there were numerous adjustments to “business income” including some at the state level such as Ohio depreciation adjustments, and additional adjustments for federal deductions such as retirement plan contributions, the self-employment tax and the self-employed health insurance deductions, and the domestic production activities deduction. There were also apportionments that had to be made if not all of the income was earned in Ohio. The small business deduction was then calculated at 50% of the first $250,000 of adjusted “net business income”, for a maximum deduction of $125,000 on a joint return.

Very little changed in 2014 with one exception: the deduction increased to 75% of $250,000, or $187,500 on a joint return.

In 2015, the deduction and the form were completely revised and the form’s new name became the Ohio IT BUS – Business Income Schedule. Ohio must have decided the old form was just too complicated (as did all of us in the tax preparation community) because the calculations for the small business deduction actually became simpler. There were no longer depreciation adjustments to include on the form, nor any adjustments for federal deductions. There were also no longer apportionments to deal with, just a requirement that the income be included in Ohio adjusted gross income. The deduction remained at 75% of net adjusted business income of $250,000, or $187,500 on a joint return.

For 2016, 2017 and 2018, the deduction has been increased to 100% of $250,000. In addition, for business income above $250,000, a 3% tax rate was established. For example, if your net business income for any year after 2015 is $500,000, the first $250,000 is exempted, and the next $250,000 is taxed at 3%. Any remaining taxable Ohio income is taxed at ordinary rates.

The deduction can still be fairly complicated to calculate, but is much better than it was in its earlier years. Some of the issues we have seen include the deduction being ignored completely, or business interest, dividends and / or capital gains being left out of the calculation, or similar non-business items being included when they shouldn’t be.

If you have any questions concerning this deduction or any others, please give us a call.

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 | Miscellaneous Itemized Deductions Are Now Gone September 5, 2018

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Tax Tip of the Week
Sept 5, 2018 
 

Keep the Common Misconceptions coming, we have had wonderful feedback, thank you!  Let us know via email, what are common business misconceptions that you have come across; markb@bradstreetcpas.com?   

As discussed before, the new tax law has nixed miscellaneous itemized deductions. They are no longer a part of your itemized deductions on Schedule A. These include your unreimbursed employee business expenses such as mileage, meals, travel, uniforms and other expenses such as tax prep fees, brokerage fees, etc. Some of the aforementioned expenses are still deductible as business expenses – that hasn’t changed.

Many people are upset about the loss of these tax deductions. Before deciding if a person has the right to be upset, some questions must first be answered. First, how much income tax did you save as a result of these deductions? Well, if you were ineligible to itemize your deductions, you didn’t miss out on anything – nada. And, even if you were able to itemize, the total miscellaneous deductions must exceed 2% of adjusted gross income (AGI) before any benefit is realized. Lastly, even If you cleared these first two hurdles, you may still flunk because of additional Alternative Minimum Tax (AMT) being created.

So, let’s walk through a real-life example – your AGI is $150,000 and itemizing your deductions is to your benefit.  More good news – you are not subject to AMT. The grand total of your miscellaneous tax deductions is $4,000. Now, remember that only the portion that exceeds 2% of the $150,000 AGI or a $3,000 floor is of any value at all. Yes, in this case, we have a $1,000 additional deduction or tax savings of roughly $275. Better than nothing – but not worth writing home about. Also, no benefit exists on either the Ohio or School District returns. Sometimes, the unreimbursed employee business expenses are deductible to a taxing city but they almost always generate tax correspondence which takes away most of that fun.

So, at the end of the day, the press is making a big to do about taking away something most people never had anyway!

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 – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | No. 472 | The Tax Cuts and Jobs Act August 8, 2018

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

Tax Tip of the Week | Aug 8, 2018 | No. 472 | The Tax Cuts and Jobs Act

We have shared information on various aspects of the Tax Cuts and Jobs Act in several previous tax tips. The following is a nice refresher brought to us by our Western CPE sponsors which we wanted to share this week.

Tax Reform and What it Means for Your Personal Taxes 

President Trump, when he was on the campaign trail, promised that he would push for tax reform legislation. On Dec, 22, 2017, he signed The Tax Cuts and Jobs Act into law, the first major tax reform in 31 years. The new law makes many changes to the tax code. Every taxpayer is impacted. A highlight of the changes follows:

Tax rates.  Tax rates are reduced. The top rate is reduced from 39.6% to 37%. Lower rates are also reduced.

Exemptions and the child tax credit.  The deduction for personal exemptions is eliminated. An expanded child tax credit will help make up for the loss of personal exemptions for some families. The credit is increased to $2,000 (from $1,000) for qualifying children under 17. For children 17 and older and for other dependents, the credit is $500.

Standard deduction.  The new tax reform law doubles the standard deduction. The higher standard deduction ($12,000 for singles, $18,000 for heads of household, and $24,000 for married filing joint) means that fewer taxpayers will benefit from itemizing deductions.

Itemized deductions.  Itemized deductions for all state and local taxes, including property taxes, are capped at $10,000. The limit on mortgage debt for purposes of the mortgage interest deduction is reduced from $1,000,000 to $750,000 for loans made after Dec. 15, 2017. Loans made before Dec. 15, 2017 are grandfathered at the $1,000,000 debt limit. The interest on home equity borrowing is no longer deductible in most cases. The threshold for medical expense deductions is lowered to 7.5% of adjusted gross income (from 10%) for tax years 2017 and 2018. Miscellaneous itemized deductions subject to the 2% of AGI limitation are not allowed. Miscellaneous itemized deductions lost because of the new law include employee business expenses, investment adviser fees, union dues, and tax preparation fees. Personal casualty losses are not allowed unless the losses were suffered in a federally declared disaster area.

Alimony.  The new tax reform law eliminates the alimony deduction for agreements signed after Dec. 31, 2018. Alimony income is not taxable for agreements signed after Dec. 31. 2018. There is no change to the law for agreements signed before Jan. 1, 2019.

Moving expenses.  The new tax reform law eliminates the moving expense deduction and makes employer reimbursement of moving expenses taxable to the employee beginning in 2018.

AMT.  The new tax reform law temporarily increases the alternative minimum tax (AMT) exemption for tax years 2018 through 2025. The increase in the exemption, as well as the elimination of major tax preferences (exemptions, state taxes above $10,000 and miscellaneous itemized deductions) means that fewer people will be subject to AMT under the new law.

Education.  The new tax reform law modifies qualified tuition programs – §529 plans. Funds in the 529 plan can now be used to pay for grades K to 12 private school tuition. The above-the-line deduction for college tuition expenses was renewed in later legislation, but only for 2017. The American Opportunity and the Lifetime Learning credits continue to be available.

Roth IRA conversions.  The new tax reform law repeals the special rule permitting recharacterization of Roth IRA conversions. A conversion of a traditional IRA to a Roth IRA may still be advisable, but once the conversion is completed, it can’t be undone.

These are just a few of the changes included in the Tax Cuts and Jobs Act. Your 2018 taxes will be affected. That’s guaranteed by the scope of the changes. The degree of impact depends on your personal situation.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. 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 | No. 471 | Ohio Worker’s Compensation August 1, 2018

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

Tax Tip of the Week | Aug 1, 2018 | No. 471 | Ohio Worker’s Compensation

To Start: Having a business in Ohio requires you to obtain Worker’s Compensation insurance for your employees and possibly your subcontractors. The application, payments and returns are all filed through the Ohio Bureau of Workers’ Compensation (OBWC) website at https://www.bwc.ohio.gov.

For new employers an application form U-3 requires a $120 non-refundable application fee. Based on your estimated payroll for the following 12 months and the type of work that your employees do (manual number), OBWC will set your annual fee. It is very important that you are specific in the type of work being done and the equipment being used to accurately assign the manual numbers and rates.

Reporting & Paying: Depending on the amount set for your annual fee, you will either need to pay the entire amount up front or it will be broken down into 6 equal payments. You can make these payments online or pay the installments through the mail. Once a year, you can elect to make your 6 payments monthly, quarterly or annually. BWC runs on a fiscal year of July 1- June 30. A true-up report is due annually on August 15 and is required to be filed on their website reporting the actual payroll for the prior fiscal year. Depending on the actual versus the estimated, either an overpayment will be refunded or a balance will be due. If you have a significant increase in your payroll, you may want to increase your payments during the year so that you don’t owe a large sum with the true up.

Rebates: In 2018 OBWC is issuing rebates for the 2016-2017 fiscal year of 85% of the premiums paid for that year. Checks were mailed out in July. Rebates have also been issued in 3 of the past 4 years.

Lowering your rates:  There are various methods to help lower your rates including: belonging to a group, participating in safety programs, i.e. Policy Activity Rebate (PAR) and training through Better You, Better Ohio! as well as other rating programs. Various rules apply to these, including claim history and some may not be combined.

Let us help answer any of your questions about Workers’ Compensation or other tax matters.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. 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 – Linda J. Johannes, CPA

–until next week.

Tax Tip of the Week | No. 470 | The Offer In Compromise – IRS Debt Relief For Those Who Are Eligible July 25, 2018

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Tax Tip of the Week | July 25, 2018 | No. 470 | The Offer In Compromise – IRS Debt Relief For Those Who Are Eligible

Do you owe a huge tax bill to the IRS? If you meet certain conditions, you might be eligible to file for an Offer in Compromise (OIC), and if successful, to eliminate thousands of dollars in tax, penalties and interest – permanently! An OIC is not a payment plan, although there will undoubtedly be some payments involved. Some OIC’s will require payments for 24 months, others for 5 or 6 months, and some will require only one or two payments, depending on the “offered” terms, and / or the “accepted” terms.

There is a multitude of paperwork involved in applying for an OIC. Forms that will have to be submitted will include Collection Information Statements and the Offer in Compromise packet itself. These are not easy forms to fill out. They require information on all of your assets, liabilities, and income and expenses. You will also have to provide at least three months of bank statements, any mortgage statements, pay stubs and other personal information. If you want to see if you qualify for an OIC before filling out all of the paperwork, you can go to IRS.gov and use the Offer in Compromise Pre-Qualifier tool.

An OIC is an agreement between the taxpayer and the IRS that settles a tax debt for less than the full amount owed. It can provide the taxpayer with a fresh start for tax purposes. In order to get an offer accepted, the offer must be appropriate based on what the IRS considers your true ability to pay, but there are conditions. For example, you must have filed all tax returns legally required to be filed. You must also be receiving notices from the IRS for your tax debts. And you cannot be in an open bankruptcy proceeding. Generally, the IRS will not accept an offer if they believe you can pay your tax debt in full, either currently with cash or equity in assets, or through an installment agreement.

The IRS will look at your situation extensively before accepting your OIC. They will only agree to proceed if they believe one of the following situations exists: there is Doubt as to Collectibility, Doubt as to Liability, or it will help with Effective Tax Administration. Doubt as to Collectibility is the reason used most often.

In the application for an Offer in Compromise, you have to name the terms of the offer you are submitting, and 24 months is the default time span for payments. For example, you might offer to pay $100 per month for 24 months on a $50,000 debt, thereby saving over $47,000. And there is generally an application fee of $186. So there will be a payment due with the submission of the OIC of the application fee plus the first payment as offered in your application. Both of these payments can be waived if you meet the Low-Income Certification.

As you might suspect, submitting an Offer in Compromise can be a very long and drawn out process. After submission of the application and any payments due, it might take a few months for the IRS to get back with you. And undoubtedly, they will want more information. However, the end result can be very rewarding if the offer is accepted. Rules continue to apply though, even after acceptance. You must stay current on your tax returns and any taxes due after acceptance, and any refunds on returns filed while the offer is being considered or while it runs its course are applied toward your tax debt, and are not considered payments toward your offer. Other rules might also apply and remember, this is a negotiation, so you should probably have a professional on your side.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. 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 | No. 468 | New Tax Laws and Buying Your Dream Vacation Home July 12, 2018

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

Tax Tip of the Week | July 11, 2018 | No. 468 | New Tax Laws and Buying Your Dream Vacation Home

Vacation-home buyers are impacted by the Tax Cuts and Jobs Act of 2017, passed by Congress in December of last year. Aside from a few exceptions the new laws are effective on January 1, 2018. The new laws that impact vacation homes generally revolve around the deductibility of mortgage interest and property taxes. This tax tip will not delve into any tax aspects of a second home rental.

Let’s chat first about the property taxes on your dream vacation home.
These property taxes are still deductible. But, like the property taxes on your personal residence there are now more hoops to jump through and they are higher. Being able to itemize now is more difficult since all of your taxes, a part of your itemized deductions, may not exceed $10,000.

Moving on to the deductibility of mortgage interest whether it be from home-equity loans, home-equity lines of credit (HELOCS) or second mortgages have also been adversely affected by the new tax laws.

Generally, mortgage interest is no longer deductible unless the loan proceeds are used to purchase, construct or significantly improve the home that secures the loan. Often, in the past, prior to the passage of the new tax laws – vacation-home buyers of ski chalets and oceanfront homes were using mortgages on their primary residence to purchase the second home. IRS now says that this interest is no longer deductible since the mortgage is on another home. However, it is okay to use a first mortgage on your vacation home for its purchase. But you must keep in mind that you can only deduct the interest on a grand total of $750,000 in mortgage loans. Any “excess” interest is not deductible.

First mortgages on your vacation home or on your primary residence will typically bear similar interest rates. However, unlike a HELOC on your primary residence used for the purchase of a vacation home, lending institutions will ask for at least a 15% down payment for mortgages placed on your vacation home. Be sure to factor this possibility into your cash planning forecast.

Of course, the best work around for managing the mortgage interest deduction on your dream home is not to have any debt. PAY CASH! NOW THAT WOULD BE A DREAM!

Credit given to Robyn A. Friedman, Wall Street Journal, Friday, May, 11, 2018

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. 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 – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | No. 461 | Who Gets the Biggest Breaks Under the New Tax Law? May 23, 2018

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

Tax Tip of the Week | May 23, 2018 | No. 461 | Who Gets the Biggest Breaks Under the New Tax Law?

The richest 1 percent of Americans (annual earnings of more than $732,800) will receive on average a tax savings of about $33,000. The poorest Americans (annual earnings of less than $25,000) will save on average a whopping $40. Yes! $40! Whopping! Dollars! Interesting to say the least!

Now, the good news is that the new personal income tax provisions will reduce taxes for more than 60% of all USA residents. However, the size of the tax savings by state and by taxable income is uneven as shown by the following chart:

Average Tax Savings

UNDER          $25,000 –     $48,000 –      $86,000 –
$25,000        $48,000        $86,000        $148,000

$40              $320              $780            $1,500

When considering all entity tax cuts including corporate income taxes, the richest Americans receive a combined savings of $51,140 while the poorest will save only $60.

Looking at the tax savings by state – how does Ohio fare?  Not that bad. For Ohioans, 69% of its taxpayers will realize savings. North Dakota is at the top of the savings list at 75%. New York, California and New Jersey are among the states with lowest savings.

Note: Please keep in mind that the federal income tax withheld on each of your 2018 paychecks will be calculated using the new withholding tables for 2018. As a result, your federal withholding should decrease at least some so that your tax savings from the new tax law will be received on each pay check as opposed to having a larger tax refund on your 2018 income tax return. I don’t want taxpayers who receive much of their income via a Form W-2 thinking that their new tax savings will be realized instead through a larger tax refund.

Credit given in part to Jeff Stein, Washington Post, published on Sunday, April 2, 2018 in the Dayton Daily News.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. 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 – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | No. 459 | The New Tax Law and Your Charitable Deductions May 9, 2018

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

Tax Tip of the Week | May 9, 2018 | No. 459 | The New Tax Law and Your Charitable Deductions

Granted, for many people, the tax savings is not the number one driver for making charitable contributions, “but rather it’s your desire to impact the lives of others that motivates you to give.” However, having said that, it is always nice for Uncle Sam to give you an even bigger bang for the buck by granting you a tax deduction for your contributions. The resulting tax savings, effectively, helps you fund the contribution.

Much press has been devoted to the new tax law and its impact on your itemized tax deductions. Your charitable contributions are but one of your itemized deductions. And, to be able to “itemize”, you must exceed the standard deduction. Which is all well and fine but the new law increased the amount of the standard deduction. As a result, fewer people will be itemizing since the standard deduction will result in a greater benefit. If you use the standard deduction you will not receive any tax benefit for your charitable contributions. Currently about 30% of the United States itemizes when filing their taxes. Only about half of those will continue to itemize under the new tax law.

The Dayton Foundation, along with other organizations, has what is known as a Donor-Advised Fund or Charitable Checking Account (CCA). The idea behind these are to create the ability to “bundle your charitable giving by making large gifts into your fund or account in one year then dispersing grants to charity over a multi- year period. This allows you to take advantage of the charitable deduction in the year you itemize while taking the standard deductions in other years when you may not meet the threshold.” Please note that the “bundling” technique is not necessary if you have enough to itemize.

Other new changes include “an increase on the limitation of cash gifts to a charity from 50% of adjusted gross income to 60% as well as a doubling of the estate tax threshold.  One thing that hasn’t changed, however, is the IRA Charitable Rollover provision. Donors ages 70-1/2 or older should consider this tax-wise option first when making a charitable gift. These individuals can donate up to $100,000 annually from their IRA to any 501(c)(3) charitable organization without treating the distribution as taxable income.” In my opinion, this IRA Charitable Rollover provision is one of the more under-utilized provisions in the tax law.

Many other charitable and estate planning opportunities other than the ones above exist. Be sure to work hand in hand with your financial planner and your CPA to optimize the tax savings for yourself and to maximize the dollars that flow to the charitable organizations that you support.

Credit to Joseph Baldasare, MS, CFRE, Chief Development Officer of the Dayton Foundation for some ideas, concepts and excerpts from his article, How the New Tax legislation Could Affect your Charitable Deductions.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. 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 – Mark Bradstreet, CPA

–until next week.

Tax Tip of the Week | No. 458 | Beware of the New Cap on Business Losses May 2, 2018

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

Tax Tip of the Week | May 2, 2018 | No. 458 | Beware of the New Cap on Business Losses

Making money in the business world is not easy. Not many business owners would contest that statement. In spite of the best-laid plans and intentions, business losses can and do occur. I suspicion the IRS and/or Congress became concerned that someone might “create” a business loss only for tax saving purposes using some of the newly enacted faster write-offs for certain fixed assets. For that reason, I believe the IRS and/or Congress developed some of their own self-serving parameters to limit what they deemed as potential abuse. Thusly, the cap on “excess” business losses was apparently born.

This new tax law provision seems to have flown in under the radar. For the most part the press has chosen to write about other more popular topics. This limitation on “excess” business losses applies to individuals. However, remember that the income taxes on profits for many “flow-through” businesses are paid by the individuals on their own individual income tax returns. This new loss provision has been nicknamed the “anti-tax-shelter” measure. In certain instances, it treats taxpayers as though their business losses were from a tax shelter. This loss limitation was created to limit the ability of taxpayers (other than C Corporations) to use business losses to offset other sources of income, such as investment income. Limitations on business losses are not new. The ones already in place include passive activity loss limitations (PAL) and the at-risk basis limitations. Both of these are complicated and may have far-reaching consequences. The new loss limitation adds yet another hurdle to a loss deduction in addition to the ones already in place.

“Excess business loss” is essentially defined as the excess of aggregate business deductions over the taxpayer’s aggregate business income as defined in Internal Revenue Code Section 461(l), plus a floor amount. For 2018, the floor is $500,000 for married filing jointly taxpayers and $250,000 for all other taxpayers. The “excess business loss” that exists for the tax year is disallowed and becomes a net operating loss that will be carried forward for possible use in the future.

Thusly, the new law limits a taxpayer’s net business loss deduction to the threshold amount in the tax year incurred. The limitation also forces taxpayers to wait at least one year before these losses may be used. (Ouch!) In some instances one could draw some parallels between this business loss limitation and the Alternative Minimum Tax (AMT) – both are sneaky behind the curtain calculations that may result in an unpleasant tax surprise.

For illustration purposes:

A married taxpayer filing jointly has investment income from various sources of $875,000. She also has aggregate business losses of $1.2 million. The taxpayer’s excess business loss is $700,000 ($1.2 million aggregate loss – $500,000 threshold). This excess business loss may not be deducted in the year created. It will instead be treated as part of a net operating loss carryforward to later years. As a result, the taxpayer’s gross income for 2018 is $375,000 ($875,000 investment income – $500,000 limited business loss.)

This illustration demonstrates how the new law could limit a taxpayer’s ability to offset his other income with his business losses and result in a tax liability. Under prior law, the taxpayer’s business losses would have been deducted in full. For taxpayers that anticipate aggregate business losses above the threshold amount, they may need to engage in further tax planning.

As with other aspects of the new tax law, we await further IRS guidance and explanations about some of the technical aspects of this provision. We also are aware that further guidance may never be received.

Credit given for some ideas, concepts and excerpts from Tax Reform – The New Overall Loss Limitation February 20, 2018 – Aimee Reaving

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. 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 – Mark Bradstreet, CPA

–until next week.