TaxEsqBlog -by Ronald J. Cappuccio, J.D., LL.M.(Tax)

Selling your business? Defer — and possibly reduce — tax with an installment sale You’ve spent years building your company and now are ready to move on to something else, whether launching a new business, taking advantage of another career opportunity or retiring. Whatever your plans, you want to get the return from your business that you’ve earned from all of the time and money you’ve put into it. That means not only getting a good price, but also minimizing the tax hit on the proceeds. One option that can help you defer tax and perhaps even reduce it is an installment sale. Tax benefits With an installment sale, you don’t receive a lump sum payment when the deal closes. Instead, you receive installment payments over a period of time, spreading the gain over a number of years. This generally defers tax, because you pay most of the tax liability as you receive the payments. Usually tax deferral is beneficial, but it could be especially beneficial if it would allow you to stay

Now’s the time to review your business expenses As we approach the end of the year, it’s a good idea to review your business’s expenses for deductibility. At the same time, consider whether your business would benefit from accelerating certain expenses into this year. Be sure to evaluate the impact of the Tax Cuts and Jobs Act (TCJA), which reduces or eliminates many deductions. In some cases, it may be necessary or desirable to change your expense and reimbursement policies. What’s deductible, anyway? There’s no master list of deductible business expenses in the Internal Revenue Code (IRC). Although some deductions are expressly authorized or excluded, most are governed by the general rule of IRC Sec. 162, which permits businesses to deduct their “ordinary and necessary” expenses. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your business. (It need not be indispensable.) Even if an

Year-End Tax Planning - 2018 Year-end planning for 2018 takes place against the backdrop of a new tax law — the Tax Cuts and Jobs Act — that make major changes in the tax rules for individuals and businesses. For individuals, there are new, lower income tax rates, a substantially increased standard deduction, severely limited itemized deductions and no personal exemptions, an increased child tax credit, and a watered-down alternative minimum tax (AMT), among many other changes. For businesses, the corporate tax rate is cut to 21%, the corporate AMT is gone, there are new limits on business interest deductions, and significantly liberalized expensing and depreciation rules. And there's a new deduction for non-corporate taxpayers with qualified business income from pass-through entities. We have compiled a checklist of actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you

Tax-free fringe benefits help small businesses and their employees In today’s tightening job market, to attract and retain the best employees, small businesses need to offer not only competitive pay but also appealing fringe benefits. Benefits that are tax-free are especially attractive to employees. Let’s take a quick look at some popular options. Insurance Businesses can provide their employees with various types of insurance on a tax-free basis. Here are some of the most common: Health insurance. If you maintain a health care plan for employees, coverage under the plan isn’t taxable to them. Employee contributions are excluded from income if pretax coverage is elected under a cafeteria plan. Otherwise, such amounts are included in their wages but may be deductible on a limited basis as an itemized deduction. Disability insurance. Your premium payments aren’t included in employees’ income, nor are your contributions to a trust providing disability benefits. Employees’ pr

Could a cost segregation study help you accelerate depreciation deductions? Businesses that acquire, construct or substantially improve a building — or did so in previous years — should consider a cost segregation study. It may allow you to accelerate depreciation deductions, thus reducing taxes and boosting cash flow. And the potential benefits are now even greater due to enhancements to certain depreciation-related breaks under the Tax Cuts and Jobs Act (TCJA). Real property vs. tangible personal property IRS rules generally allow you to depreciate commercial buildings over 39 years (27½ years for residential properties). Most times, you’ll depreciate a building’s structural components — such as walls, windows, HVAC systems, elevators, plumbing, and wiring — along with the building. Personal property — such as equipment, machinery, furniture, and fixtures — is eligible for accelerated depreciation, usually over five or seven years. And land improvements — fences, outdoor

State Department denying passports! Under President Obama's urging, Congress in 2015 passed a nefarious law denying passports to taxpayers owing $50,000 or more To the IRS.  The State Department is now issuing letters denying passports to individuals owing taxes. If you owe taxes to the IRS you need to immediately contact a tax attorney to fight the issue to prevent losing your existing passport were being denied a passport renewal! Here is a letter issued this week from the State Department:

Businesses aren’t immune to tax identity theft Tax identity theft may seem like a problem only for individual taxpayers. But, according to the IRS, increasingly businesses are also becoming victims. And identity thieves have become more sophisticated, knowing filing practices, the tax code and the best ways to get valuable data. How it works In tax identity theft, a taxpayer’s identifying information (such as Social Security number) is used to fraudulently obtain a refund or commit other crimes.  Business  tax identity theft occurs when a criminal uses the identifying information of a business to obtain tax benefits or to enable individual tax identity theft schemes. For example, a thief could use an Employer Identification Number (EIN) to file a fraudulent business tax return and claim a refund. Or a fraudster may report income and withholding for fake employees on false W-2 forms. Then, he or she can file fraudulent individual tax returns for these “employees” to clai

Be sure your employee travel expense reimbursements will pass muster with the IRS 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

2018 Q4 tax calendar: Key deadlines for businesses and other employers Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2018. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements. October 15 If a calendar-year C corporation that filed an automatic six-month extension: File a 2017 income tax return (Form 1120) and pay any tax, interest and penalties due. Make contributions for 2017 to certain employer-sponsored retirement plans. October 31 Report income tax withholding and FICA taxes for third quarter 2018 (Form 941) and pay any tax due. (See exception below under “November 13.”) November 13 Report income tax withholding and FICA taxes for third quarter 2018 (Form 941), if you deposited on time and in full all of the associated taxes due.

Keep it SIMPLE: A tax-advantaged retirement plan solution for small businesses If your small business doesn’t offer its employees a retirement plan, you may want to consider a SIMPLE IRA. Offering a retirement plan can provide your business with valuable tax deductions and help you attract and retain employees. For a variety of reasons, a SIMPLE IRA can be a particularly appealing option for small businesses. The deadline for setting one up for this year is October 1, 2018. The basics SIMPLE stands for “savings incentive match plan for employees.” As the name implies, these plans are simple to set up and administer. Unlike 401(k) plans, SIMPLE IRAs don’t require annual filings or discrimination testing. SIMPLE IRAs are available to businesses with 100 or fewer employees. Employers must contribute and employees have the option to contribute. The contributions are pretax, and accounts can grow tax-deferred like a traditional IRA or 401(k) plan, with distributions taxed when ta

Choosing the right accounting method for tax purposes The Tax Cuts and Jobs Act (TCJA) liberalized the eligibility rules for using the cash method of accounting, making this method — which is simpler than the accrual method — available to more businesses. Now the IRS has provided procedures a small business taxpayer can use to obtain automatic consent to change its method of accounting under the TCJA. If you have the option to use either accounting method, it pays to consider whether switching methods would be beneficial. Cash vs. accrual Generally, cash-basis businesses recognize income when it’s received and deduct expenses when they’re paid. Accrual-basis businesses, on the other hand, recognize income when it’s earned and deduct expenses when they’re incurred, without regard to the timing of cash receipts or payments. In most cases, a business is permitted to use the cash method of accounting for tax purposes unless it’s: Expressly  prohibited  from using the cash me

An FLP can save tax in a family business succession One of the biggest concerns for family business owners is succession planning — transferring ownership and control of the company to the next generation. Often, the best time tax-wise to start transferring ownership is long before the owner is ready to give up control of the business. A family limited partnership (FLP) can help owners enjoy the tax benefits of gradually transferring ownership yet allow them to retain control of the business. How it works To establish an FLP, you transfer your ownership interests to a partnership in exchange for both general and limited partnership interests. You then transfer limited partnership interests to your children. You retain the general partnership interest, which may be as little as 1% of the assets. But as general partner, you can still run day-to-day operations and make business decisions. Tax benefits As you transfer the FLP interests, their value is removed fro

Trump administration considers taking inflation into account when taxing capital gains As reported by Reuters: The Trump administration is considering bypassing Congress to grant a $100 billion tax cut (as projected over a decade) to taxpayers by taking inflation into account when determining capital gains tax liabilities, the New York Times reported on Monday, July 30. The 20% capital gains tax rate is currently applied to the difference between an asset's value when it is purchased and when it is sold. But the calculation does not take the effects of inflation into account, which can raise the size of the tax bill significantly depending on the inflation rate. Quoting from an interview with Treasury Secretary Steven Mnuchin, the newspaper said the Administration could change the definition of "cost" used to calculate capital gains, allowing taxpayers to adjust the value of an asset for inflation when it is sold. "If it can't get done through a legislati

Do you qualify for the home office deduction? Under the Tax Cuts and Jobs Act, employees can no longer claim the home office deduction. If, however, you run a business from your home or are otherwise self-employed and use part of your home for business purposes, the home office deduction may still be available to you. Home-related expenses Homeowners know that they can claim itemized deductions for property tax and mortgage interest on their principal residences, subject to certain limits. Most other home-related expenses, such as utilities, insurance and repairs, aren’t deductible. But if you use part of your home for business purposes, you may be entitled to deduct a portion of these expenses, as well as depreciation. Or you might be able to claim the simplified home office deduction of $5 per square foot, up to 300 square feet ($1,500). Regular and exclusive use You might qualify for the home office deduction if part of your home is used as your principal place of bu

The high tax States, including New Jersey, are suing the Federal Government because of the Tax Reform Act. They are arguing the $10k cap on State and Local Taxes is somehow Unconstitutional. They will lose. There is no right to have a Federal Tax Deduction for local taxes. It would be surprising if the Courts side with the States. Here is a good article on the lawsuit from Thompson-Reuters: NEW YORK, (Reuters) - Four U.S. states sued the federal government on Tuesday to void the new $10,000 cap on the federal deduction for state and local taxes, included as part of the President Donald Trump's 2017 tax overhaul. The lawsuit by New York, Connecticut, Maryland and New Jersey came seven months after Trump signed into law the $1.5 trillion overhaul, which also lowered taxes for many wealthy Americans and slashed the corporate tax rate. It also adds to the many legal battles between Democratic-led and -leaning states, including several that impose comparatively high taxes, and t

How to avoid getting hit with payroll tax penalties For small businesses, managing payroll can be one of the most arduous tasks. Adding to the burden earlier this year was adjusting income tax withholding based on the new tables issued by the IRS. (Those tables account for changes under the Tax Cuts and Jobs Act.) But it’s crucial not only to withhold the appropriate taxes — including both income tax and employment taxes — but also to remit them on time to the federal government. If you don’t, you, personally, could face harsh penalties. This is true even if your business is an entity that normally shields owners from personal liability, such as a corporation or limited liability company. The 100% penalty Employers must withhold federal income and employment taxes (such as Social Security) as well as applicable state and local taxes on wages paid to their employees. The federal taxes must then be remitted to the federal government according to a deposit schedule. If a bus

Close-up on the new QBI deduction’s wage limit The Tax Cuts and Jobs Act (TCJA) provides a valuable new tax break to noncorporate owners of pass-through entities: a deduction for a portion of qualified business income (QBI). The deduction generally applies to income from sole proprietorships, partnerships, S corporations and, typically, limited liability companies (LLCs). It can equal as much as 20% of QBI. But once taxable income exceeds $315,000 for married couples filing jointly or $157,500 for other filers, a wage limit begins to phase in. Full vs. partial phase-in When the wage limit is fully phased in, at $415,000 for joint filers and $207,500 for other filers, 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 during the tax year, or The sum of 25% of W-2 wages plus 2.5% of the cost of qualified business property (QBP). When the wage limit applies but isn’t yet fully phased in, the amount o

Does your business have to begin collecting sales tax on all out-of-state online sales? You’ve probably heard about the recent U.S. Supreme Court decision allowing state and local governments to impose sales taxes on more out-of-state online sales. The ruling in  South Dakota v. Wayfair, Inc.  is welcome news for brick-and-mortar retailers, who felt previous rulings gave an unfair advantage to their online competitors. And state and local governments are pleased to potentially be able to collect more sales tax. But for businesses with out-of-state online sales that haven’t had to collect sales tax from out-of-state customers in the past, the decision brings many questions and concerns. What the requirements used to be Even before  Wayfair , a state could require an out-of-state business to collect sales tax from its residents on online sales if the business had a “substantial nexus” — or connection — with the state. The nexus requirement is part of the Commerce Clause of

Choosing the best business entity structure post-TCJA For tax years beginning in 2018 and beyond, the Tax Cuts and Jobs Act (TCJA) created a flat 21% federal income tax rate for C corporations. Under prior law, C corporations were taxed at rates as high as 35%. The TCJA also reduced individual income tax rates, which apply to sole proprietorships and pass-through entities, including partnerships, S corporations, and, typically, limited liability companies (LLCs). The top rate, however, dropped only slightly, from 39.6% to 37%. On the surface, that may make choosing C corporation structure seem like a no-brainer. But there are many other considerations involved. Conventional wisdom Under prior tax law, conventional wisdom was that most small businesses should be set up as sole proprietorships or pass-through entities to avoid the double taxation of C corporations: A C corporation pays entity-level income tax and then shareholders pay tax on dividends — and on capital

Supreme Court issues an Opinion Allowing States to Force online US Retailers to Collect Sales Tax What a disaster for US online businesses! In SD v. Wayfair, the US Supreme Court slapped online retailers the burden of collecting Sales Tax on sales out-of-state. This means small businesses must comply with thousands of state and local sales tax rates and the different laws of each jurisdiction. This was backed by the big online companies such as Amazon, Apple, Walmart, as well as the big storefront retailers. Compliance will be next to impossible with expensive services and will drive small US online companies out of business, jacking-up prices for consumers. The large online companies and non-US companies will have a big advantage.  Starting a new online business means many people will choose a foreign entity and complicated ownership structures to remain competitive. Poor decision! The full case: https://www.supremecourt.gov/opinions/17pdf/17-494_j4el.pdf

2018 Q3 tax calendar: Key deadlines for businesses and other employers Here are some of the key tax-related deadlines affecting businesses and other employers during the second quarter of 2018. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements. July 31 Report income tax withholding and FICA taxes for second quarter 2018 (Form 941), and pay any tax due. (See the exception below, under “August 10.”) File a 2017 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension. August 10 Report income tax withholding and FICA taxes for second quarter 2018 (Form 941), if you deposited on time and in full all of the associated taxes due. September 17 If a calendar-year C corporation, pay the third installment of 2018 estimated income taxes. If a calendar-year S corporation or partnership th

Tax Law changes that may affect your business’s 401(k) plan When you think about recent tax law changes and your business, you’re probably thinking about the new 20% pass-through deduction for qualified business income or the enhancements to depreciation-related breaks. Or you may be contemplating the reduction or elimination of certain business expense deductions. But there are also a couple of recent tax law changes that you need to be aware of if your business sponsors a 401(k) plan. 1. Plan loan repayment extension The Tax Cuts and Jobs Act (TCJA) gives a break to 401(k) plan participants with outstanding loan balances when they leave their employers. While plan sponsors aren’t required to allow loans, many do. Before 2018, if an employee with an outstanding plan loan left the company sponsoring the plan, he or she would have to repay the loan (or contribute the outstanding balance to an IRA or his or her new employer’s plan) within 60 days to avoid having the loan bal