Tag Archives: taxes

The SECURE Act changes the rules for employers on retirement plans

Advice, Articles, Uncategorized, , , ,

The Setting Every Community Up for Retirement Enhancement (SECURE) Act is the first significant retirement-related legislation in more than a dozen years. It brings many changes that affect employers of all sizes, including some that could be particularly beneficial for smaller employers that sponsor retirement plans. Some of the changes, however, may increase the burden on employers. Here are some of the most important developments for employers, many of which took effect for plan years beginning after December 31, 2019. Please read and see how it can help you design tax strategies for this year

Greater access to multiple employer plans

Multiple employer plans (MEPs) allow small and midsize unrelated businesses to team up to provide their employees a defined contribution plan, such as a 401(k) or SIMPLE IRA plan. By pooling plan participants and assets in one large plan, rather than several separate plans, it’s possible for small businesses to give their workers access to the same low-cost plans offered by large employers. Employers enjoy reduced fiduciary duties and administrative burdens by using outside administrators to manage the plan.

Currently, MEPs generally are limited to participating employers that share some commonality — for example, being in the same industry or geographic location or using the same professional employer organization. The SECURE Act creates a new type of “open MEP” that covers employees of employers with no relationship other than their joint participation in the MEP. These pooled employer plans (PEPs) will be administered by a pooled plan provider (PPP), such as a financial services company. The PPP also will be the named fiduciary of the plan, but each employer is responsible for choosing and monitoring the PPP.

PEPs will be permitted for plan years starting in 2021 or later. The U.S. Department of Labor and the IRS are expected to provide guidance before then, as PEPs generally are subject to the same Employee Retirement Income Security Act (ERISA) and Internal Revenue Code rules as single-employer plans.

In addition, the SECURE Act eliminates the so-called “one bad apple” rule that deterred some employers from taking advantage of MEPs. Under the rule, a regulatory violation by one employer participant (such as failing to make contributions to the plan on schedule) could jeopardize the MEP’s tax-qualified status. The SECURE Act lays out certain requirements that a PEP can satisfy to protect its status in such a situation.

The SECURE Act also provides an alternative to MEPs for small employers seeking the economies of scale they provide regarding administration. It allows a group of plans with a common plan administrator to file a consolidated Form 5500 annual report, with a single audit report, if certain conditions are met.

Looser notice and amendment rules on safe harbor plans

As of January 1, 2020, plan sponsors no longer are required to give notice to plan participants before the beginning of the plan year when the sponsor is making qualified nonelective contributions — that is, contributions an employer makes regardless of whether an employee contributes — of at least 3% to all eligible participants. The requirement to provide advance notice when making safe harbor matching contributions continues.

Plan sponsors also can amend 401(k) plans that don’t use a matching contribution safe harbor to include a 3% nonelective contribution safe harbor any time before the 30th day before the end of the plan year. The amendment can be made later than that only if it provides for a qualified nonelective contribution of at least 4% of compensation, rather than 3%, and the amendment is done no later than the close of the following plan year.

Annuity options

Annuities can help reduce the risk that retirees will run out of money before the last years of their lives, when health care expenses can run high. But many employers have been reluctant to offer annuities for fear of facing lawsuits alleging breach of fiduciary duty if the annuity providers they selected run into financial problems down the road. The SECURE Act preempts this hurdle by immunizing employers from liability if they choose a provider that meets certain requirements, starting December 20, 2019.

The SECURE Act, however, also requires employers to include a lifetime income disclosure on a plan participant’s benefit statements at least annually. The disclosure will show the estimated monthly payments the participant would receive if the total account balance were used to purchase an annuity for the participant and his or her surviving spouse. Before employers can implement this requirement, the U.S. Department of Labor must issue applicable guidance.

Participation by part-time employees

Employers generally have been allowed to exclude employees who work fewer than 1,000 hours per year from defined contribution plans, including 401(k) plans. Starting in 2021, the SECURE Act generally expands the rule by requiring employers to allow not just those who work at least 1,000 hours in one year (about 20 hours per week) to participate, but also those who work at least 500 hours in three consecutive years and are at least age 21 at the end of the three-year period.

Employer contributions aren’t a requirement of the new participation rules for part-time employees. And employers can exclude the latter category of part-time employees from testing under the nondiscrimination and coverage rules, as well as from the application of the top-heavy rules.

Expanded tax credits

The SECURE Act establishes a new tax credit of up to $500 per year to offset start-up costs for new 401(k) and SIMPLE IRA plans with an eligible automatic contribution arrangement (EACA), beginning in 2020. This credit is on top of the plan start-up credit already available and is available for three years. It’s also available to employers that convert an existing plan to one with an EACA.

The new law also boosts the amount of the credit available for small employer pension plan start-up costs. (A “small employer” is one with no more than 100 employees.) The new law changes the calculation of the flat dollar amount limit on the credit to the greater of 1) $500 or 2) the lesser of:

  • $250 multiplied by the number of non-highly compensated employees who are eligible to participate in the plan, or
  • $5,000.

Like the automatic enrollment tax credit, it’s available beginning in 2020 and applies for up to three years.

Higher automatic enrollment safe harbor cap

Even before the SECURE Act, employers could automatically enroll employees in a 401(k) plan under a safe harbor with a qualified automatic contribution arrangement (QACA). However, elective deferrals for QACAs have been limited to 10% of compensation.

The SECURE Act increases the maximum amount of an employee’s compensation that can be automatically deferred after the employee’s first plan year, from 10% to 15%. (The cap for the first year in the plan is 10%.) The increase is effective for plan years beginning after December 31, 2019.

Adoption deadlines

Previously, many types of retirement plans were required to be set up during the tax year for which they were to take effect. The SECURE Act extends the adoption deadline for a tax year to the due date of the employer’s tax return (including extensions), providing more flexibility to make contributions and reduce tax liabilities.

Costlier penalties

The SECURE Act increases the penalties for failing to file retirement plan tax returns, as follows:

  • The penalty for failing to file a Form 5500 is $250 per day, not to exceed $150,000 (up from $25 per day, with a maximum of $15,000).
  • The penalty for failing to file a registration statement (IRS Form 8955-SSA) is $10 per participant per day, not to exceed $50,000 (up from $1 per participant per day, with a maximum of $5,000).
  • The penalty for failure to provide a notification of change of certain information (for example, the plan name, sponsor or administrator) is $10 per day, not to exceed $10,000 (up from $1 per day, with a maximum of $1,000).
  • The penalty for failing to provide a required withholding notice is $100 for each failure, not to exceed $50,000 for all failures during any calendar year (up from $10 for each failure, with a maximum of $5,000).

The penalty hikes apply for filings, registrations and notifications required after December 31, 2019.

Promising, but complicated

These and other changes in the SECURE Act are intended to make it easier and less expensive for employers to offer retirement plans to their employees. (The law also contains a number of significant changes for individuals.) The applicable laws and regulations can prove tricky to navigate. Please contact us with any questions regarding the SECURE Act.

© 2020

Congress gives a holiday gift in the form of favorable tax provisions

Advice, Articles, Uncategorized, , ,

A good news for all of those who are planning their Tax Return preparation, as part of a year-end budget bill, Congress just passed a package of tax provisions that will provide savings for some taxpayers. The White House has announced that President Trump will sign the Further Consolidated Appropriations Act of 2020 into law. It also includes a retirement-related law titled the Setting Every Community Up for Retirement Enhancement (SECURE) Act.

Here’s a rundown of some provisions in the two laws.

The age limit for making IRA contributions and taking withdrawals is going up. Currently, an individual can’t make regular contributions to a traditional IRA in the year he or she reaches age 70½ and older. (However, contributions to a Roth IRA and rollover contributions to a Roth or traditional IRA can be made regardless of age.)

Under the new rules, the age limit for IRA contributions is raised from age 70½ to 72.

The IRA contribution limit for 2020 is $6,000, or $7,000 if you’re age 50 or older (the same as 2019 limit).

In addition to the contribution age going up, the age to take required minimum distributions (RMDs) is going up from 70½ to 72.

It will be easier for some taxpayers to get a medical expense deduction. For 2019, under the Tax Cuts and Jobs Act (TCJA), you could deduct only the part of your medical and dental expenses that is more than 10% of your adjusted gross income (AGI). This floor makes it difficult to claim a write-off unless you have very high medical bills or a low income (or both). In tax years 2017 and 2018, this “floor” for claiming a deduction was 7.5%. Under the new law, the lower 7.5% floor returns through 2020.

If you’re paying college tuition, you may (once again) get a valuable tax break. Before the TCJA, the qualified tuition and related expenses deduction allowed taxpayers to claim a deduction for qualified education expenses without having to itemize their deductions. The TCJA eliminated the deduction for 2019 but now it returns through 2020. The deduction is capped at $4,000 for an individual whose AGI doesn’t exceed $65,000 or $2,000 for a taxpayer whose AGI doesn’t exceed $80,000. (There are other education tax breaks, which weren’t touched by the new law, that may be more valuable for you, depending on your situation.)

Some people will be able to save more for retirement. The retirement bill includes an expansion of the automatic contribution to savings plans to 15% of employee pay and allows some part-time employees to participate in 401(k) plans.

Also included in the retirement package are provisions aimed at Gold Star families, eliminating an unintended tax on children and spouses of deceased military family members.

Stay tuned

These are only some of the provisions in the new laws. We’ll be writing more about them in the near future. In the meantime, contact us with any questions.

© 2019

GAAP Memo

Advice, Articles, , ,

REVENUE RECOGNITION

For 2019, there is a new accounting rule for revenue recognition that applies to non-public companies. In addition, there are other accounting rules for coming years.  It is important to know these changes as they will change your accounting and financials and will help in Tax preparation services.  Most banks, lenders, and investors want to see Generally Accepted Accounting Principles (GAAP) financial statements.  Having GAAP financial statements allows a reader to use standard GAAP reporting to understand your financial statements, apply financial ratios and compare to industry ratios.  Be prepared and contact us if we can assist.

Background

In May 2014, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) issued substantially converged final standards on revenue recognition. These final standards were the culmination of a joint project between the Boards that spanned many years. The FASB’s Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), provides a robust framework for addressing revenue recognition issues, and upon its effective date, replaces almost all pre-existing revenue recognition guidance in current U.S. generally accepted accounting principles (GAAP). Implementation of the robust framework provided by ASU 2014-09 should result in improved comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. The effective dates for the new guidance are staggered. Public entities have already implemented the new guidance, and nonpublic entities are required to implement the new guidance in their first annual reporting period beginning after December 15, 2018.

Scope

All customer contracts fall within the scope of ASC 606 except those for which other guidance is provided in the ASC (e.g., leases, insurance contracts, financial instruments, guarantees, non-monetary exchanges).

Core principle and key steps

Revenue is now recognized in a five-step process:

  1. Identify the contract with the customer
  2. Identify the performance obligations in the contract
  3. Determine the transaction price
  4. Allocate the transaction price to the performance obligations
  5. Recognize revenue when (or as) each performance obligation us satisfied.

        LEASES

Starting in 2021, there is a new accounting rule for leases that applies to non-public companies. Early adoption is allowed and recommended. Although this new standard doesn’t need to be implemented for private companies until 2021, we are recommending applying it for 2020, so the company will have comparable financial statements for 2021.  We feel this law is mean to get the lease liability on the balance sheet.  For income taxes, a different method will probably apply.

Background

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842). The new standard requires that all leases should result in an asset and corresponding liability be recognized on the balance sheet. This asset reflects the right to use an asset that is owned by someone else. A corresponding liability reflecting future lease payments is also recognized on the balance sheet.

Scope

All leases with a lease term of over 12 months

Core principle and key steps

  1. Capital leases are now called finance leases and the reporting of these types of leases did not significantly change.
  2. Operating leases are now shown on the balance sheet as a liability and a right to use asset for the present value of the future lease payments.

     OTHER NEW PRONOUNCEMENTS

  1. Accounting Standards Update No. 2018-17- Private Company Council (PCC) recommended change to simplify the variable interest entity rules for non-public companies- real estate leased to a related party does not have to be combined now under certain circumstances. Early adoption is permitted. A variable interest entity is a related party entity that cannot stand on its own without a significant financial interest from the related entity.
  2. Accounting Standards Update No. 2017-04-Simplifying the Test for Goodwill Impairment – Step 2 of the goodwill impairment test was eliminated in order to simplify the test for accounting. Early adoption is permitted. Since 2015, private companies have been allowed the option to amortize goodwill over 10 years, but, if the impairment test is still in place, rather than amortization, then step 2 of the impairment process has been eliminated. Step 2 included determining the implied fair value of goodwill and comparing it with the carrying amount of that goodwill.
  3. Accounting Standards Update No. 2018-07-Non-employee stock-based compensation – Simplifies, updates and aligns non-employee stock-based compensation with employee accounting.
  4. Accounting Standards Update No. 2016-15 Cash flow classification –. Aims to eliminate the diversity in practice related to the classification of certain cash receipts and payments.
  5. Accounting Standards Update No. 2016-18 Restricted cash – Eliminates diversity in the classification of restricted cash on the balance sheet and classification and presentation of changes in restricted cash on the cash flows statement.

The table below shows the effective dates for these other new pronouncements:

Summary:

In summary, we are providing you with some information about some new accounting changes.  Other changes may be required, so please contact us to discuss the application of these accounting changes and to review your financial statements if we are not already.  This memo is meant to provide you with information on accounting changes, we are not providing accounting advice.

It’s not too late to trim your 2019 tax bill

Advice, Articles, Uncategorized, , , , , ,

Fall is in the air and that means it’s time to turn your attention to year-end tax planning. While several clear strategies and tactics emerged during the first tax filing season under the Tax Cuts and Jobs Act (TCJA), 2019 and subsequent years bring potential twists that must be considered, too. Let’s take a closer look at year-end tax planning strategies that can reduce your 2019 income tax liability.

Deferring income and accelerating expenses

Deferring income into the next tax year and accelerating expenses into the current tax year is a time-tested technique for taxpayers who don’t expect to be in a higher tax bracket the following year. Independent contractors and other self-employed individuals can, for example, hold off on sending invoices until late December to push the associated income into 2020. And all taxpayers, regardless of employment status, can defer income by taking capital gains after January 1. Be careful, though, because by waiting to sell you also risk the possibility that your investment might become less valuable.

Bear in mind, also, that there may be other reasons that taking the income this year can be more beneficial. For starters, future tax rates can go up. It’s possible that income tax rates might increase substantially by 2021, especially for those with higher incomes, depending on 2020 election results. In any event, in 2026, the higher tax rates that were in place for 2017 are scheduled to return.

Moreover, taxpayers who qualify for the qualified business income (QBI) deduction for pass-through entities (that is, sole proprietors, partnerships, limited liability companies and S corporations) could end up reducing the size of that deduction if they reduce their income. It might make more sense to maximize the QBI deduction — which is scheduled to end after 2025 — while it’s available.

Timing itemized deductions

The TCJA substantially boosted the standard deduction. For 2019, it’s $24,400 for married couples and $12,200 for single filers. With many of the previously popular itemized deductions eliminated or limited, some taxpayers can find it challenging to claim more in itemized deductions than the standard deduction. Timing, or “bunching,” those deductions may make it easier.

Bunching basically means delaying or accelerating deductions into a tax year to exceed the standard deduction and claim itemized deductions. You could, for example, bunch your charitable contributions if it means you can get a tax break for one tax year. If you normally make your donations at the end of the year, you can bunch donations in alternative years — say, donate in January and December of 2020 and January and December of 2022.

If you have a donor-advised fund (DAF), you can make multiple contributions to it in a single year, accelerating the deduction. You then decide when the funds are distributed to the charity. If, for instance, your objective is to give annually in equal increments, doing so will allow your chosen charities to receive a reliable stream of yearly donations (something that’s critical to their financial stability), and you can deduct the total amount in a single tax year.

If you donate appreciated assets that you’ve held for more than one year to a DAF or a nonprofit, you’ll avoid long-term capital gains taxes that you’d have to pay if you sold the property and (subject to certain restrictions) also obtain a deduction for the assets’ fair market value. This tactic pays off even more if you’re subject to the 3.8% net investment income tax or the top long-term capital gains tax rate (20% for 2019).

What if you’re looking to divest yourself of assets on which you have a loss? Rather than donate the asset, the better move from a tax perspective is more likely going to be to sell it to take advantage of the loss and then donate the proceeds.

Timing also comes into play with medical expenses. The TCJA lowered the threshold for deducting unreimbursed medical expenses to 7.5% of adjusted gross income (AGI) for 2017 and 2018, but it bounces back to 10% of AGI for 2019. Bunching qualified medical expenses into one year could make you eligible for the deduction.

You also could bunch property tax payments (assuming local law permits you to pay in advance). This approach might, however, bring your total state and local tax deduction over the $10,000 limit, which means that you’d effectively forfeit the deduction on the excess.

As with income deferral and expense acceleration, you need to consider your tax bracket status when timing deductions. Itemized deductions are worth more when you’re in a higher tax bracket. If you expect to land in a higher bracket in 2020, you’ll save more by timing your deductions for that year.

Loss harvesting against capital gains

2019 has been a turbulent year for some investments. Thus, your portfolio may be ripe for loss harvesting — that is, selling underperforming investments before year end to realize losses you can use to offset taxable gains you also realized this year, on a dollar-for-dollar basis. If your losses exceed your gains, you generally can apply up to $3,000 of the excess to offset ordinary income. Any unused losses, however, may be carried forward indefinitely throughout your lifetime, providing the opportunity for you to use the losses in a subsequent year.

Maximizing your retirement contributions

As always, individual taxpayers should consider making their maximum allowable contributions for the year to their IRAs, 401(k) plans, deferred annuities and other tax-advantaged retirement accounts. For 2019, you can contribute up to $19,000 to 401(k)s and $6,000 for IRAs. Those age 50 or older are eligible to make an additional catch-up contribution of $1,000 to an IRA and, so long as the plan allows, $6,000 for 401(k)s and other employer-sponsored plans.

Accounting for 2019 TCJA changes

Most — but not all — provisions of the TCJA took effect in 2018. The repeal of the individual mandate penalty for those without qualified health insurance, for example, isn’t effective until this year. In addition, the TCJA eliminates the deduction for alimony payments for couples divorced in 2019 or later, and alimony recipients are no longer required to include the payments in their taxable income.

Act now

The future of tax planning is uncertain — even without dramatic change in Washington, D.C., many of the most significant TCJA provisions are set to expire within six years. Contact us for help with your year-end tax planning.

© 2019

Passports and Taxes – Can your passport be revoked?

Uncategorized, , , , , , ,

If you owe the IRS back taxes, they can revoke or refuse to renew your USA passport.

The Fixing America’s Surface Transportation (FAST) Act of 2015, the IRS is required to notify the State Department of taxpayers the IRS has certified as owing a “seriously delinquent tax debt” (IRC Sec. 7345). In July 2019, the IRS temporarily suspended passport certification procedures for anyone who had a case open with the Taxpayer Advocate Service (TAS).

Image result for passport

Since then, the agency has determined that a blanket, systemic exception for anyone with an open TAS case is overly broad and could undermine the effectiveness of the FAST Act to collect a seriously delinquent tax debt. Therefore, the IRS will resume passport revocation procedures for affected taxpayers. According to the IRS, the agency will continue to fairly and impartially oversee the certification process with the State Department to uphold the law while also respecting the rights of all taxpayers.

For more information, see www.irs.gov/newsroom/update-on-passport-certifications-and-taxpayer-advocate-service .

Summer: A good time to review your investments

Advice, Articles, Uncategorized, , , ,

You may have heard about a proposal in Washington to cut the taxes paid on investments by indexing capital gains to inflation. Under the proposal, the purchase price of assets would be adjusted so that no tax is paid on the appreciation due to inflation.

While the fate of such a proposal is unknown, the long-term capital gains tax rate is still historically low on appreciated securities that have been held for more than 12 months. And since we’re already in the second half of the year, it’s a good time to review your portfolio for possible tax-saving strategies.

The federal income tax rate on long-term capital gains recognized in 2019 is 15% for most taxpayers. However, the maximum rate of 20% plus the 3.8% net investment income tax (NIIT) can apply at higher income levels. For 2019, the 20% rate applies to single taxpayers with taxable income exceeding $425,800 ($479,000 for joint filers or $452,400 for heads of households).

You also may be able to plan for the NIIT. It can affect taxpayers with modified AGI (MAGI) over $200,000 for singles and heads of households, or $250,000 for joint filers. You may be able to lower your tax liability by reducing your MAGI, reducing net investment income or both.

What about losing investments that you’d like to sell? Consider selling them and using the resulting capital losses to shelter capital gains, including high-taxed short-term gains, from other sales this year. You may want to repurchase those investments, so long as you wait at least 31 days to avoid the “wash sale” rule.

If your capital losses exceed your capital gains, the result would be a net capital loss for the year. A net capital loss can also be used to shelter up to $3,000 of 2019 ordinary income (or up to $1,500 if you’re married and file separately). Ordinary income includes items including salaries, bonuses, self-employment income, interest income and royalties. Any excess net capital loss from 2019 can be carried forward to 2020 and later years.

Consider gifting to young relatives

While most taxpayers with long-term capital gains pay a 15% rate, those in the 0% federal income tax bracket only pay a 0% federal tax rate on gains from investments that were held for more than a year. Let’s say you’re feeling generous and want to give some money to your children, grandchildren, nieces, nephews, or others. Instead of making cash gifts to young relatives in lower federal tax brackets, give them appreciated investments. That way, they’ll pay less tax than you’d pay if you sold the same shares.

(You can count your ownership period plus the gift recipient’s ownership period for purposes of meeting the more-than-one-year rule.)

Even if the appreciated shares have been held for a year or less before being sold, your relative will probably pay a much lower tax rate on the gain than you would.

Increase your return

Paying capital gains taxes on your investment profits reduces your total return. Look for strategies to grow your portfolio by minimizing the amount you must pay to the federal and state governments. These are only a few strategies that may be available to you. Contact us about your situation.

© 2019

You may have to pay tax on Social Security benefits

Advice, Articles, Uncategorized, , , , ,

During your working days, you pay Social Security tax in the form of withholding from your salary or self-employment tax. And when you start receiving Social Security benefits, you may be surprised to learn that some of the payments may be taxed.

If you’re getting close to retirement age, you may be wondering if your benefits are going to be taxed. And if so, how much will you have to pay? The answer depends on your other income. If you are taxed, between 50% and 85% of your payments will be hit with federal income tax. (There could also be state tax.)

Important: This doesn’t mean you pay 50% to 85% of your benefits back to the government in taxes. It means that you have to include 50% to 85% of them in your income subject to your regular tax rates.

Calculate provisional income

To determine how much of your benefits are taxed, you must calculate your provisional income. It starts with your adjusted gross income on your tax return. Then, you add certain amounts (for example, tax-exempt interest from municipal bonds). Add to that the income of your spouse, if you file jointly. To this, add half of the Social Security benefits you and your spouse received during the year. The figure you come up with is your provisional income. Now apply the following rules:

If you file a joint tax return and your provisional income, plus half your benefits, isn’t above $32,000 ($25,000 for single taxpayers), none of your Social Security benefits are taxed.
If your provisional income is between $32,001 and $44,000, and you file jointly with your spouse, you must report up to 50% of your Social Security benefits as income. For single taxpayers, if your provisional income is between $25,001 and $34,000, you must report up to 50% of your Social Security benefits as income.
If your provisional income is more than $44,000, and you file jointly, you must report up to 85% of your Social Security benefits as income on Form 1040. For single taxpayers, if your provisional income is more than $34,000, the general rule is that you must report up to 85% of your Social Security benefits as income.
Caution: If you aren’t paying tax on your Social Security benefits now because your income is below the floor, or you’re paying tax on only 50% of those benefits, an unplanned increase in your income can have a significant tax cost. You’ll have to pay tax on the additional income, you’ll also have to pay tax on (or on more of) your Social Security benefits, and you may get pushed into a higher tax bracket.

For example, this might happen if you receive a large retirement plan distribution during the year or you receive large capital gains. With careful planning, you might be able to avoid this tax result.

Avoid a large tax bill

If you know your Social Security benefits will be taxed, you may want to voluntarily arrange to have tax withheld from the payments by filing a Form W-4V with the IRS. Otherwise, you may have to make estimated tax payments.

Contact us to help you with the exact calculations on whether your Social Security will be taxed. We can also help you with tax planning to keep your taxes as low as possible during retirement.

© 2019

Plug in tax savings for electric vehicles

Advice, Articles, Uncategorized, , ,

While the number of plug-in electric vehicles (EVs) is still small compared with other cars on the road, it’s growing — especially in certain parts of the country. If you’re interested in purchasing an electric or hybrid vehicle, you may be eligible for a federal income tax credit of up to $7,500. (Depending on where you live, there may also be state tax breaks and other incentives.)

However, the federal tax credit is subject to a complex phaseout rule that may reduce or eliminate the tax break based on how many sales are made by a given manufacturer. The vehicles of two manufacturers have already begun to be phased out, which means they now qualify for only a partial tax credit.

Tax credit basics

You can claim the federal tax credit for buying a qualifying new (not used) plug-in EV. The credit can be worth up to $7,500. There are no income restrictions, so even wealthy people can qualify.

A qualifying vehicle can be either fully electric or a plug-in electric-gasoline hybrid. In addition, the vehicle must be purchased rather than leased, because the credit for a leased vehicle belongs to the manufacturer.

The credit equals $2,500 for a vehicle powered by a four-kilowatt-hour battery, with an additional $417 for each kilowatt hour of battery capacity beyond four hours. The maximum credit is $7,500. Buyers of qualifying vehicles can rely on the manufacturer’s or distributor’s certification of the allowable credit amount.

How the phaseout rule works

The credit begins phasing out for a manufacturer over four calendar quarters once it sells more than 200,000 qualifying vehicles for use in the United States. The IRS recently announced that GM had sold more than 200,000 qualifying vehicles through the fourth quarter of 2018. So, the phaseout rule has been triggered for GM vehicles, as of April 1, 2019. The credit for GM vehicles purchased between April 1, 2019, and September 30, 2019, is reduced to 50% of the otherwise allowable amount. For GM vehicles purchased between October 1, 2019, and March 31, 2020, the credit is reduced to 25% of the otherwise allowable amount. No credit will be allowed for GM vehicles purchased after March 31, 2020.

The IRS previously announced that Tesla had sold more than 200,000 qualifying vehicles through the third quarter of 2018. So, the phaseout rule was triggered for Tesla vehicles, effective as of January 1, 2019. The credit for Tesla vehicles purchased between January 1, 2019, and June 30, 2019, is reduced to 50% of the otherwise allowable amount. For Tesla vehicles purchased between July 1, 2019, and December 31, 2019, the credit is reduced to 25% of the otherwise allowable amount. No credit will be allowed for Tesla vehicles purchased after December 31, 2019.

Powering forward

Despite the phaseout kicking in for GM and Tesla vehicles, there are still many other EVs on the market if you’re interested in purchasing one. For an index of manufacturers and credit amounts, visit this IRS Web page. Contact us if you want more information about the tax breaks that may be available for these vehicles.

© 2019

Vehicle-expense deduction ins and outs for individual taxpayers

Advice, Articles, Uncategorized, , ,

It’s not just businesses that can deduct vehicle-related expenses. Individuals also can deduct them in certain circumstances. Unfortunately, the Tax Cuts and Jobs Act (TCJA) might reduce your deduction compared to what you claimed on your 2017 return.

For 2017, miles driven for business, moving, medical and charitable purposes were potentially deductible. For 2018 through 2025, business and moving miles are deductible only in much more limited circumstances. TCJA changes could also affect your tax benefit from medical and charitable miles.

Current limits vs. 2017

Before 2018, if you were an employee, you potentially could deduct business mileage not reimbursed by your employer as a miscellaneous itemized deduction. But the deduction was subject to a 2% of adjusted gross income (AGI) floor, which meant that mileage was deductible only to the extent that your total miscellaneous itemized deductions for the year exceeded 2% of your AGI. For 2018 through 2025, you can’t deduct the mileage regardless of your AGI. Why? The TCJA suspends miscellaneous itemized deductions subject to the 2% floor.

If you’re self-employed, business mileage is deducted from self-employment income. Therefore, it’s not subject to the 2% floor and is still deductible for 2018 through 2025, as long as it otherwise qualifies.

Miles driven for a work-related move in 2017 were generally deductible “above the line” (that is, itemizing isn’t required to claim the deduction). But for 2018 through 2025, under the TCJA, moving expenses are deductible only for certain military families.

Miles driven for health-care-related purposes are deductible as part of the medical expense itemized deduction. Under the TCJA, for 2017 and 2018, medical expenses are deductible to the extent they exceed 7.5% of your AGI. For 2019, the floor returns to 10%, unless Congress extends the 7.5% floor.

The limits for deducting expenses for charitable miles driven haven’t changed, but keep in mind that it’s an itemized deduction. So, you can claim the deduction only if you itemize. For 2018 through 2025, the standard deduction has been nearly doubled. Depending on your total itemized deductions, you might be better off claiming the standard deduction, in which case you’ll get no tax benefit from your charitable miles (or from your medical miles, even if you exceed the AGI floor).

Differing mileage rates

Rather than keeping track of your actual vehicle expenses, you can use a standard mileage rate to compute your deductions. The rates vary depending on the purpose and the year:

  • Business: 54.5 cents (2018), 58 cents (2019)
  • Medical: 18 cents (2018), 20 cents (2019)
  • Moving: 18 cents (2018), 20 cents (2019)
  • Charitable: 14 cents (2018 and 2019)

In addition to deductions based on the standard mileage rate, you may deduct related parking fees and tolls. There are also substantiation requirements, which include tracking miles driven.

Get help

Do you have questions about deducting vehicle-related expenses? Contact us. We can help you with your 2018 return and 2019 tax planning.

© 2019

State Income Tax Filing Requirements and Economic Presence

Advice, Articles, Uncategorized, , , , , ,

Scope: This memo is intended to provide general guidance on how state income tax return filing requirements are determined and to provide an explanation of the Economic Presence standard which several states are now using to determine if a business entity has a tax return filing requirement in that state. Vertical Advisors (VA) determines state tax return filing requirements based on information provided to us from our clients. However, the historic state income tax filing requirements are based on the general standard as described below but each business will ALSO need to decide whether state filing requirements under the Economic Presence standard should be considered. VA is available to be engaged to review income tax filing requirements for our clients.

General Standard: There are multiple factors that affect state tax return filing requirements. This memo is meant to provide a general overview. A detailed analysis of state tax attributes would be needed to fully understand the state tax return filing requirements for a particular business. Attributes that are considered when determining state tax return filing requirements are as follows:

  1. Sales by state
  2. Wages by state (could also include vendor or independent contractors)
  3. Fixed assets by state

Historically, when a business has two or more of the attributes listed above, a state tax return would be required for that state. However, several states are now using the more aggressive Economic Presence standard which can cause a state tax return filing requirement even if only one attribute exists which is usually sales in that state.

Economic Presence Standard: Under the Economic Presence standard, a state tax return may be required if any one of the following conditions exists:

  • Any income derived in the state
  • Sales in the state exceeding certain threshold
  • Licensed intangible properties in the state
  • Doing business or seeking profits in the state

The Economic Presence standard is not new and approximately 43 states currently have an Economic Presence standard. Although the Economic Presence standard has existed for years, the states were not aggressively enforcing tax return filing requirements under this standard. However, due mainly to the growth of the e-commerce industry, it is now common for a company to transact business in several states in which the only connection to that state may be the sales with no actual physical presence in that state. Under the general standard, without a physical presence in the state, there was no state return filing requirement and thus the states could not assess income tax on businesses that had only sales in those states.

Under Economic Presence, the sales alone can cause a tax return filing requirement. Since each state defines Economic Presence standard differently, a detailed analysis by state would be required to understand the possible state tax return filing requirements under the Economic Presence standard.

Conclusion: As mentioned earlier, Vertical Advisors reviews state tax return filing requirements consistent with the general standard and information provided by our clients. However, since states are becoming more aggressive in applying the Economic Presence standard, each business will need to decide if they want to retain us to consider their specific income tax return filing requirement, allocate their internal resources, or to disregard the laws. We recommend a diligent review of income tax return filing requirements annually.

We feel it makes sense to review state tax return filing requirements under the Economic Presence standard and the general standard approach. Ignoring state tax return filing requirements under the Economic Presence standard can result in tax notices, possible penalties and examinations. However, since not all states are aggressively applying the Economic Presence standard, a business will need to balance the risk of not filing against the cost of preparing possibly several state tax returns. For more information on how state income tax filing requirements including the Economic Presence test may affect your business, please contact us.