Does your business reimburse employees’ work-related travel expenses? If you do, you know that it can help you attract and retain employees.
If you don’t, you might want to start, because changes under the Tax Cuts and Jobs Act (TCJA) make such reimbursements even more attractive to employees. Travel reimbursements also come with tax benefits, but only if you follow a method that passes muster with the IRS. The TCJA’s impact Before the TCJA, unreimbursed work-related travel expenses generally were deductible on an employee’s individual tax return (subject to a 50% limit for meals and entertainment) as a miscellaneous itemized deduction. However, many employees weren’t able to benefit from the deduction because either they didn’t itemize deductions or they didn’t have enough miscellaneous itemized expenses to exceed the 2% of adjusted gross income (AGI) floor that applied. For 2018 through 2025, the TCJA suspends miscellaneous itemized deductions subject to the 2% of AGI floor. That means even employees who itemize deductions and have enough expenses that they would exceed the floor won’t be able to enjoy a tax deduction for business travel. Therefore, business travel expense reimbursements are now more important to employees.
The potential tax benefits Your business can deduct qualifying reimbursements, and they’re excluded from the employee’s taxable income. The deduction is subject to a 50% limit for meals. But, under the TCJA, entertainment expenses are no longer deductible. To be deductible and excludable, travel expenses must be legitimate business expenses and the reimbursements must comply with IRS rules. You can use either an accountable plan or the per diem method to ensure compliance. Reimbursing actual expenses An accountable plan is a formal arrangement to advance, reimburse or provide allowances for business expenses. To qualify as “accountable,” your plan must meet the following criteria: Payments must be for “ordinary and necessary” business expenses. Employees must substantiate these expenses — including amounts, times and places — ideally at least monthly. Employees must return any advances or allowances they can’t substantiate within a reasonable time, typically 120 days. The IRS will treat plans that fail to meet these conditions as nonaccountable, transforming all reimbursements into wages taxable to the employee, subject to income taxes (employee) and employment taxes (employer and employee).
Keeping it simple With the per diem method, instead of tracking actual expenses, you use IRS tables to determine reimbursements for lodging, meals and incidental expenses, or just for meals and incidental expenses, based on location. (If you don’t go with the per diem method for lodging, you’ll need receipts to substantiate those expenses.) Be sure you don’t pay employees more than the appropriate per diem amount. The IRS imposes heavy penalties on businesses that routinely overpay per diems. What’s right for your business? To learn more about business travel expense deductions and reimbursements post-TCJA, contact us at 727-530-0036. We can help you determine whether you should reimburse such expenses and which reimbursement option is better for you.
Once upon a time, some parents and grandparents would attempt to save tax by putting investments in the names of their young children or grandchildren in lower income tax brackets.
To discourage such strategies, Congress created the “kiddie” tax back in 1986. Since then, this tax has gradually become more far-reaching. Now, under the Tax Cuts and Jobs Act (TCJA), the kiddie tax has become more dangerous than ever. A short history Years ago, the kiddie tax applied only to children under age 14 — which still provided families with ample opportunity to enjoy significant tax savings from income shifting. In 2006, the tax was expanded to children under age 18. And since 2008, the kiddie tax has generally applied to children under age 19 and to full-time students under age 24 (unless the students provide more than half of their own support from earned income). What about the kiddie tax rate? Before the TCJA, for children subject to the kiddie tax, any unearned income beyond a certain amount ($2,100 for 2017) was taxed at their parents’ marginal rate (assuming it was higher), rather than their own likely low rate.
A fiercer kiddie tax The TCJA doesn’t further expand who’s subject to the kiddie tax. But it will effectively increase the kiddie tax rate in many cases. For 2018–2025, a child’s unearned income beyond the threshold ($2,100 again for 2018) will be taxed according to the tax brackets used for trusts and estates. For ordinary income (such as interest and short-term capital gains), trusts and estates are taxed at the highest marginal rate of 37% once 2018 taxable income exceeds $12,500. In contrast, for a married couple filing jointly, the highest rate doesn’t kick in until their 2018 taxable income tops $600,000. Similarly, the 15% long-term capital gains rate takes effect at $77,201 for joint filers but at only $2,601 for trusts and estates. And the 20% rate kicks in at $479,001 and $12,701, respectively. In other words, in many cases, children’s unearned income will be taxed at higher rates than their parents’ income.
As a result, income shifting to children subject to the kiddie tax will not only not save tax, but it could actually increase a family’s overall tax liability. The moral of the story To avoid inadvertently increasing your family’s taxes, be sure to consider the big, bad kiddie tax before transferring income-producing or highly appreciated assets to a child or grandchild who’s a minor or college student. If you’d like to shift income and you have adult children or grandchildren who’re no longer subject to the kiddie tax but in a lower tax bracket, consider transferring such assets to them. Please contact us for more information about the kiddie tax — or other TCJA changes that may affect your family. Contact us for a free strategy session on your tax situation at 727-530-0036.
Over the last several years, virtual currency has become increasingly popular. Bitcoin is the most widely recognized form of virtual currency, also commonly referred to as digital, electronic or crypto currency.
While most smaller businesses aren’t yet accepting bitcoin or other virtual currency payments from their customers, more and more larger businesses are. And the trend may trickle down to smaller businesses. Businesses also can pay employees or independent contractors with virtual currency. But what are the tax consequences of these transactions?
Bitcoin has an equivalent value in real currency and can be digitally traded between users. It also can be purchased with real currencies or exchanged for real currencies. Bitcoin is most commonly obtained through virtual currency ATMs or online exchanges. Goods or services can be paid for using “bitcoin wallet” software. When a purchase is made, the software digitally posts the transaction to a global public ledger. This prevents the same unit of virtual currency from being used multiple times.
Tax impact Questions about the tax impact of virtual currency abound. And the IRS has yet to offer much guidance. The IRS did establish in a 2014 ruling that bitcoin and other convertible virtual currency should be treated as property, not currency, for federal income tax purposes. This means that businesses accepting bitcoin payments for goods and services must report gross income based on the fair market value of the virtual currency when it was received, measured in equivalent U.S. dollars. When a business uses virtual currency to pay wages, the wages are taxable to the employees to the extent any other wage payment would be. You must, for example, report such wages on your employees’ W-2 forms. And they’re subject to federal income tax withholding and payroll taxes, based on the fair market value of the virtual currency on the date received by the employee. When a business uses virtual currency to pay independent contractors or other service providers, those payments are also taxable to the recipient. The self-employment tax rules generally apply, based on the fair market value of the virtual currency on the date received. Payers generally must issue 1099-MISC forms to recipients. Finally, payments made with virtual currency are subject to information reporting to the same extent as any other payment made in property.
Deciding whether to go virtual Accepting bitcoin can be beneficial because it may avoid transaction fees charged by credit card companies and online payment providers (such as PayPal) and attract customers who want to use virtual currency. But the IRS is targeting virtual currency transactions in an effort to raise tax revenue, and it hasn’t issued much guidance on the tax treatment or reporting requirements. So bitcoin can also be a bit risky from a tax perspective.
To learn more about tax considerations when deciding whether your business should accept bitcoin or other virtual currencies — or use them to pay employees, independent contractors or other service providers — contact us at 727-530-0036.
Although the drop of the corporate tax rate from a top rate of 35% to a flat rate of 21% may be one of the most talked about provisions of the Tax Cuts and Jobs Act (TCJA), C corporations aren’t the only type of entity significantly benefiting from the new law.
Owners of noncorporate “pass-through” entities may see some major — albeit temporary — relief in the form of a new deduction for a portion of qualified business income (QBI). A 20% deduction For tax years beginning after December 31, 2017, and before January 1, 2026, the new deduction is available to individuals, estates and trusts that own interests in pass-through business entities. Such entities include sole proprietorships, partnerships, S corporations and, typically, limited liability companies (LLCs). The deduction generally equals 20% of QBI, subject to restrictions that can apply if taxable income exceeds the applicable threshold — $157,500 or, if married filing jointly, $315,000.
QBI is generally defined as the net amount of qualified items of income, gain, deduction and loss from any qualified business of the noncorporate owner. For this purpose, qualified items are income, gain, deduction and loss that are effectively connected with the conduct of a U.S. business. QBI doesn’t include certain investment items, reasonable compensation paid to an owner for services rendered to the business or any guaranteed payments to a partner or LLC member treated as a partner for services rendered to the partnership or LLC.
The QBI deduction isn’t allowed in calculating the owner’s adjusted gross income (AGI), but it reduces taxable income. In effect, it’s treated the same as an allowable itemized deduction. The limitations For pass-through entities other than sole proprietorships, the QBI deduction generally can’t exceed the greater of the owner’s share of: 50% of the amount of W-2 wages paid to employees by the qualified business during the tax year, or The sum of 25% of W-2 wages plus 2.5% of the cost of qualified property. Qualified property is the depreciable tangible property (including real estate) owned by a qualified business as of year end and used by the business at any point during the tax year for the production of qualified business income. Another restriction is that the QBI deduction generally isn’t available for income from specified service businesses.
Examples include businesses that involve investment-type services and most professional practices (other than engineering and architecture). The W-2 wage limitation and the service business limitation don’t apply as long as your taxable income is under the applicable threshold. In that case, you should qualify for the full 20% QBI deduction.
Careful planning required Additional rules and limits apply to the QBI deduction, and careful planning will be necessary to gain maximum benefit. Please contact us for more details at 727-530-0036.
The Tax Cuts and Jobs Act (TCJA) may create opportunities for research and development (R&D) credits to be used for tax savings not previously considered. The topics listed below should be evaluated for prospects to use R&D credits:
What’s Changed Under The New Laws?
Why cashflow planning is critical in 2018
Cashflow is simply the amount of money coming in versus going out. Sounds simple right?
Sometimes it is not a matter of simply having more coming in than going out, but how the ebb and flow is structured and if there is a plan in place to assure that positive cashflow is consistent.
Cash is King
Without cash in, your business is basically a hobby. Your business needs cash to run. Expenses like rent, people who work for you, raw materials, supplies, and material you resell are required daily to keep the doors open. Positive cashflow means that everything is going well, and more money is coming in than going out. The higher the positive cashflow, the easier it is to grow your business with new equipment, more people or even added places you do business.
However, to manage your cashflow you need a plan. Cashflow in most businesses is somewhat of a moving target. Some months, cash flow in can fluctuate while your cashflow out can remain static (rent, employees, etc.). Management of cashflow is critical so that you can predict fluctuations and maintain your ability to provide cashflow out.
Your company history can provide insight into seasonal fluctuations as can an intelligent review of expenses that are recurring and might be coming on the horizon.
These reviews can often uncover issues that can affect a business negatively. Annual licenses, rental agreements, inventory predictions, and capital equipment like computers and machinery often impact a business with “surprises”. However, these surprises could have been predicted with a thorough review.
Improving Cash Flow with Planning
A review of how billing is structured is often a place quick gains can be made. Are you losing money in collections or slow billing? Could you structure payment differently to ensure cashflow (especially for longer projects or long-term goals)?
Regarding cashflow out, if you have cash on hand, you may be able to benefit from discounts for full payments, or be able to use payment terms to their fullest. You want to pay all your bills on time and in full, but there are specific strategies to setting up and even negotiating terms based on your business goals, from setting yourself up for a large capital purchase to even selling a business.
Cashflow Planning is Critical
Today’s business can weather changing business environments, tax changes and seasonal sale cycles with a good plan. It is not just if your business has money coming in, it is specifically how you spend that money. A smart cashflow plan can help you develop protocol for your business that will help you understand what is going on in your business, your employees understand procedures on how they handle payments and operations and help the people you pay set expectations of how they work with you and creating a level of trust for your company.
Speaking to a qualified business advisor can help your business increase profits from a good cash flow plan. Call us at (727) 530-0036 to schedule a time for a free strategy session to review your current plan.
Finding the right Accountant for your business is a critical step in ensuring financial success. It’s important to find someone that will help you reach your goals. Many business owners fail because they do not have a trusted financial advisor that is invested in the long-term success of their business operations. The items below are points to consider when finding the right Accountant.
Experience: It is extremely important to find an Accountant that understands your business. Find out about their background, what they specialize in, and what types of clients they serve.
Services Match Your Needs: Make sure that the Accountant you choose offers the services necessary to effectively run your business. Gain an understanding of what is included in your services and what is not included in your services.
Personality and Communication: Financial matters are often challenging. You want to choose an Accountant that has a good personality and is easy to talk to. You want an Accountant that can communicate well and help you understand financial matters that affect your business.
Valuable to Your Business Strategy: Gain an understanding from the Accountant as to how he/she will bring value to you and your overall business strategy.
Utilizing Cutting Edge Technology: You want an Accountant that is utilizing cutting edge technology to ensure your work is being done properly. Also, you want an Accountant that can effectively communicate and deliver relevant information and content in electronic format.
Research Customer Reviews: Consider performing an internet search to gather information about the Accountant’s reputation. You can often find customer reviews online.
Fee Structure: Make sure you gain a clear understanding of how the fees are structured and calculated so you don’t have any surprises once service begins.
Accountant’s Continuing Education and Memberships: Find out where and how the Accountant keeps up to date with industry knowledge and important changes to legislation that may affect your business. It’s also a good idea to know which memberships and networking groups the Accountant is associated with.
Contact us for a free strategy session regarding your accounting needs and find out how we might be able to help you. Click Here To Learn More.