Important Tax Changes for 2018
As the New Year rolls around, it’s always a sure bet that there will be changes to current tax law and 2018 is no different now that many of the tax provisions pursuant to the Tax Cuts and Jobs Act of 2017 (TCJA) are in full effect. From health savings accounts to tax rate schedules and standard deductions, here’s a checklist of tax changes to help you plan the year ahead.
In 2018, a number of tax provisions are affected by inflation adjustments, including Health Savings Accounts, retirement contribution limits, and the foreign earned income exclusion. Many others have been revised or eliminated due to the TCJA.
While the tax rate structure, which now ranges from 10 to 37 percent, remains similar to 2017 in that there are seven tax brackets, the tax-bracket thresholds increase significantly for each filing status. Standard deductions also rise significantly; however, personal exemptions have been eliminated through tax year 2025.
In 2018, the standard deduction increases to $12,000 for individuals (up from $6,350 in 2017) and to $24,000 for married couples (up from $12,700 in 2017).
Alternative Minimum Tax (AMT)
In 2018, AMT exemption amounts increase to $70,300 for individuals (up from $54,300 in 2017) and $109,400 for married couples filing jointly (up from $84,500 in 2017). Also, the phaseout threshold increases to $500,000 ($1 million for married filing jointly). Both the exemption and threshold amounts are indexed for inflation.
For taxable years beginning in 2018, the amount that can be used to reduce the net unearned income reported on the child’s return that is subject to the “kiddie tax,” is $1,050 (same as 2017). The same $1,050 amount is used to determine whether a parent may elect to include a child’s gross income in the parent’s gross income and to calculate the “kiddie tax.” For example, one of the requirements for the parental election is that a child’s gross income for 2018 must be more than $1,050 but less than $10,500.
For 2018, the net unearned income for a child under the age of 19 (or a full-time student under the age of 24) that is not subject to “kiddie tax” is $2,100.
Health Savings Accounts (HSAs)
Contributions to a Health Savings Account (HSA) are used to pay current or future medical expenses of the account owner, his or her spouse, and any qualified dependent. Medical expenses must not be reimbursable by insurance or other sources and do not qualify for the medical expense deduction on a federal income tax return.
A qualified individual must be covered by a High Deductible Health Plan (HDHP) and not be covered by other health insurance with the exception of insurance for accidents, disability, dental care, vision care, or long-term care.
For calendar year 2018, a qualifying HDHP must have a deductible of at least $1,350 for self-only coverage or $2,700 for family coverage and must limit annual out-of-pocket expenses of the beneficiary to $6,650 for self-only coverage and $13,300 for family coverage.
Medical Savings Accounts (MSAs)
There are two types of Medical Savings Accounts (MSAs): the Archer MSA created to help self-employed individuals and employees of certain small employers, and the Medicare Advantage MSA, which is also an Archer MSA, and is designated by Medicare to be used solely to pay the qualified medical expenses of the account holder. To be eligible for a Medicare Advantage MSA, you must be enrolled in Medicare. Both MSAs require that you are enrolled in a high-deductible health plan (HDHP).
Self-only coverage. For taxable years beginning in 2018, the term “high deductible health plan” means, for self-only coverage, a health plan that has an annual deductible that is not less than $2,300 (up $50 from 2017) and not more than $3,450 (up $100 from 2017), and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $4,550 (up $100 from 2017).Family coverage. For taxable years beginning in 2018, the term “high deductible health plan” means, for family coverage, a health plan that has an annual deductible that is not less than $4,550 and not more than $6,850 (up $100 from 2017), and under which the annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits do not exceed $8,400 (up $150 from 2017).
Penalty for not Maintaining Minimum Essential Health Coverage
Under the TCJA, the penalty for not maintaining minimum essential health coverage has been eliminated but only for months beginning after December 31, 2018.
AGI Limit for Deductible Medical Expenses
In 2018, the deduction threshold for deductible medical expenses is temporarily reduced to 7.5% percent of adjusted gross income (AGI). This is retroactive to the tax year starting Jan. 1, 2017 and ends on Dec. 31, 2018.
Eligible Long-Term Care Premiums
Premiums for long-term care are treated the same as health care premiums and are deductible on your taxes subject to certain limitations. For individuals age 40 or younger at the end of 2018, the limitation is $420. Persons more than 40 but not more than 50 can deduct $780. Those more than 50 but not more than 60 can deduct $1,530 while individuals more than 60 but not more than 70 can deduct $4,160. The maximum deduction is $5,200 and applies to anyone more than 70 years of age.
The additional 0.9 percent Medicare tax on wages above $200,000 for individuals ($250,000 married filing jointly), which went into effect in 2013, remains in effect for 2018, as does the Medicare tax of 3.8 percent on investment (unearned) income for single taxpayers with modified adjusted gross income (AGI) more than $200,000 ($250,000 joint filers). Investment income includes dividends, interest, rents, royalties, gains from the disposition of property, and certain passive activity income. Estates, trusts, and self-employed individuals are all liable for the new tax.
Foreign Earned Income Exclusion
For 2018, the foreign earned income exclusion amount is $103,900, up from $102,100 in 2017.
Long-Term Capital Gains and Dividends
In 2018 tax rates on capital gains and dividends remain the same as 2017 rates (0%, 15%, and a top rate of 20%); however threshold amounts are different in that they don’t correspond to new tax bracket structure as they did in the past. For taxpayers in the lower tax brackets (10 and 12 percent), the rate remains 0 percent; however, the threshold amounts are $38,600 for individuals and $77,200 for married filing jointly. For taxpayers in the four middle tax brackets, 22, 24, 32, and 35 percent, the rate is 15 percent. For an individual taxpayer in the highest tax bracket, 37 percent, whose income is at or above $425,800 ($479,000 married filing jointly), the rate for both capital gains and dividends is capped at 20 percent.
Pease and PEP (Personal Exemption Phaseout)
Both Pease (limitations on itemized deductions) and PEP (personal exemption phase-out) have been eliminated under TCJA.
Estate and Gift Taxes
For an estate of any decedent during calendar year 2018, the basic exclusion amount is $11.18 million, indexed for inflation (up from $5,490,000 in 2017). The maximum tax rate remains at 40 percent. The annual exclusion for gifts increases to $15,000.
Individuals – Tax Credits
In 2018, a non-refundable (only those individuals with tax liability will benefit) credit of up to $13,810 is available for qualified adoption expenses for each eligible child.
Earned Income Tax Credit
For tax year 2018, the maximum earned income tax credit (EITC) for low and moderate income workers and working families rises to $6,431, up from $6,318 in 2017. The credit varies by family size, filing status, and other factors, with the maximum credit going to joint filers with three or more qualifying children.
Child Tax Credits
For tax years 2018 through 2025, the child tax credit increases to $2,000 per child, up from $1,000 in 2017, thanks to the passage of the TCJA.
The enhanced child tax credit, which was made permanent by the Protecting Americans from Tax Hikes Act of 2017 (PATH), remains under TCJA. The refundable portion of the credit increases from $1,000 to $1,400 so that even if taxpayers do not owe any tax, they can still claim the credit. Under TCJA, a $500 nonrefundable credit is also available for dependents who do not qualify for the child tax credit (e.g., dependents age 17 and older).
Child and Dependent Care Credit
The Child and Dependent Care Credit also remains under tax reform. If you pay someone to take care of your dependent (defined as being under the age of 13 at the end of the tax year or incapable of self-care) in order to work or look for work, you may qualify for a credit of up to $1,050 or 35 percent of $3,000 of eligible expenses in 2018.For two or more qualifying dependents, you can claim up to 35 percent of $6,000 (or $2,100) of eligible expenses. For higher income earners the credit percentage is reduced, but not below 20 percent, regardless of the amount of adjusted gross income.
Individuals – Education
American Opportunity Tax Credit and Lifetime Learning Credits
The American Opportunity Tax Credit (formerly Hope Scholarship Credit) was extended to the end of 2018 by ATRA but was made permanent by PATH in 2017. There was no change under TCJA. The maximum credit is $2,500 per student. The Lifetime Learning Credit remains at $2,000 per return; however, the adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit is $114,000, up from $112,000 for tax year 2017.
Interest on Educational Loans
In 2018 (as in 2017), the $2,500 maximum deduction for interest paid on student loans is no longer limited to interest paid during the first 60 months of repayment. The deduction is phased out for higher-income taxpayers with modified AGI of more than $65,000 ($135,000 joint filers).
Individuals – Retirement
The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan increases to $18,500. Contribution limits for SIMPLE plans remain at $12,500. The maximum compensation used to determine contributions increases to $275,000 (up from $270,000 in 2018).
Income Phase-out Ranges
The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by an employer-sponsored retirement plan and have modified AGI between $63,000 and $73,000, up from $62,000 to $72,000.
For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by an employer-sponsored retirement plan, the phase-out range increases to $101,000 to $121,000, up from $99,000 to $119,000. For an IRA contributor who is not covered by an employer-sponsored retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s modified AGI is between $189,000 and $199,000, up from $186,000 and $196,000.
The modified AGI phase-out range for taxpayers making contributions to a Roth IRA is $120,000 to $135,000 for singles and heads of household, up from $118,000 to $133,000. For married couples filing jointly, the income phase-out range is $189,000 to $199,000, up from $186,000 to $196,000. The phase-out range for a married individual filing a separate return who makes contributions to a Roth IRA is not subject to an annual cost-of-living adjustment and remains $0 to $10,000.
In 2018, the AGI limit for the saver’s credit (also known as the retirement savings contribution credit) for low and moderate income workers is $63,000 for married couples filing jointly, up from $62,000 in 2017; $47,250 for heads of household, up from $46,500; and $31,500 for married individuals filing separately and for singles, up from $31,000 in 2017.
Standard Mileage Rates
In 2018, the rate for business miles driven is 54.5 cents per mile, up from 53.5 cents per mile in 2017.
Section 179 Expensing
Under the Tax Cuts and Jobs Act of 2017, the Section 179 expense deduction increases to a maximum deduction of $1 million of the first $2,500,000 of qualifying equipment placed in service during the current tax year. Indexed to inflation after 2018, the deduction was enhanced to include improvements to nonresidential qualified real property such as roofs, fire protection and alarm systems and security systems, and heating, ventilation, and air-conditioning systems.
Businesses are allowed to immediately deduct 100% of the cost of eligible property placed in service after September 27, 2017, and before January 1, 2023, after which it will be phased downward over a four-year period: 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026.
Section 199 Deduction for Domestic Production Activities
Under the TCJA, the Section 199 deduction was repealed for taxable years beginning after December 31, 2017.
Work Opportunity Tax Credit (WOTC)
Extended through 2019, the Work Opportunity Tax Credit has been modified and enhanced for employers who hire long-term unemployed individuals (unemployed for 27 weeks or more) and is generally equal to 40 percent of the first $6,000 of wages paid to a new hire. There was no change to this tax credit under TCJA.
Research & Development Tax Credit
Starting in 2018, businesses with less than $50 million in gross receipts are able to use this credit to offset alternative minimum tax. Certain start-up businesses that might not have any income tax liability will be able to offset payroll taxes with the credit as well. There was no change to this tax credit under TCJA.
Employee Health Insurance Expenses
For taxable years beginning in 2018, the dollar amount of average wages is $26,600 ($26,200 in 2017). This amount is used for limiting the small employer health insurance credit and for determining who is an eligible small employer for purposes of the credit.
Business Meals and Entertainment Expenses
The deduction remains at 50% for taxpayers who incur food and beverage expenses associated with operating a trade or business. For tax years 2018 through 2025, however, the 50% deduction expands to include expenses incurred for meals furnished to employees for the convenience of the employer. Amounts after 2025 are not deductible. Under the TCJA, in 2018, office holiday parties remain 100% deductible. Employee meals while on business travel also remain deductible at 50%. For tax years 2018 through 2025; however, the 50% deduction expands to include expenses incurred for meals furnished to employees for the convenience of the employer. Amounts after 2025 are not deductible. Further, the deduction for business entertainment expenses is eliminated (only meals at 50%).
Employer-provided Transportation Fringe Benefits
If you provide transportation fringe benefits to your employees, in 2018 the maximum monthly limitation for transportation in a commuter highway vehicle as well as any transit pass is $260, and the monthly limitation for qualified parking is $260. Parity for employer-provided mass transit and parking benefits was made permanent by PATH.
While this checklist outlines important tax changes for 2018, additional changes in tax law are more than likely to arise during the year ahead. Don’t hesitate to call if you want to get an early start on tax planning for 2018!
Small Business: Be Alert to Identity Theft
Small business identity theft is a big business for identity thieves. Just like individuals, businesses may have their identities stolen, and their sensitive information used to open credit card accounts or used to file fraudulent tax refunds for bogus refunds. As such, small business owners should be on guard against a growing wave of identity theft against employers.
In the past year, the Internal Revenue Service has noted a sharp increase in the number of fraudulent Forms 1120, 1120S and 1041 as well as Schedule K-1. These fraudulent filings apply to partnerships as well as estate and trust forms.
Security Summit partners (IRS, state tax agencies, and the private-sector tax community) have expanded efforts to protect business filers better and identify suspected identity theft returns.
Identity thieves display a sophisticated knowledge of the tax code and industry filing practices and have long made use of stolen Employer Identification Numbers (EINs), which they use to create fake Forms W-2. These fake Forms W-2 are then used to file with fraudulent individual tax returns.
Fraudsters also used EINs to open new lines of credit or obtain credit cards but until recently were only targeting individuals. Now, they are using company names and EINs to file fraudulent returns.
What to Watch out for
As with fraudulent individual returns, there are certain signs that may indicate business identity theft. Business, partnerships and estate and trust filers should be alert to potential identity theft and contact the IRS if they experience any of these issues:
- Extension to file requests are rejected because a return with the Employer Identification Number or Social Security number is already on file;
- An e-filed return is rejected because of a duplicate EIN/SSN is already on file with the IRS;
- An unexpected receipt of a tax transcript or IRS notice that doesn’t correspond to anything submitted by the filer.
- Failure to receive expected and routine correspondence from the IRS because the thief has changed the address.
New Procedures to Protect Business in 2018
The IRS, state tax agency, and software providers also share certain data points from returns, including business returns, which help identify a suspicious filing. The IRS and states also are asking that business and tax practitioners provide additional information that will help verify the legitimacy of the tax return.
For 2018, these “know your customer” procedures are being put in place and include the following questions:
- The name and SSN of the company executive authorized to sign the corporate tax return. Is this person authorized to sign the return?
- Payment history. Were estimated tax payments made? If yes, when were they made, how were they made, and how much was paid?
- Parent company information. Is there a parent company? If yes, who?
- Additional information based on deductions claimed
- Filing history. Has the business filed Form(s) 940, 941 or other business-related tax forms?
Sole proprietorships. Sole proprietorships that file Schedule C and partnerships filing Schedule K-1 with Form 1040 also will be asked to provide additional information items, such as a driverâ€™s license number. Providing this information will help the IRS and states identify suspicious business-related returns.
Security. For small businesses looking for a place to start on security, the National Institute of Standards and Technology (NIST) produced the publication: Small Business Information Security: The Fundamentals. NIST is the branch of the U.S. Commerce Department that sets information security frameworks followed by federal agencies.
The United States Computer Emergency Readiness Team (US-CERT) has a special section on its website dedicated to Resources for Small and Midsize Businesses. Many secretaries of state also provide resources on business-related identity theft as well.
For more information about business-related identity theft visit the IRS website and search for Identity Protection: Prevention, Detection and Victim Assistance.
If you believe your business identity has been used for fraudulent purposes don’t hesitate to call the office for assistance.
Got Debt? How to Improve your Financial Situation
If you are having trouble paying your debts, it is important to take action sooner rather than later. Doing nothing leads to much larger problems in the future, whether it’s a bad credit record or bankruptcy resulting in the loss of assets and even your home. If you’re in financial trouble, then here are some steps to take to avoid financial ruin in the future.
If you’ve accumulated a large amount of debt and are having difficulty paying your bills each month, now is the time to take action–before the bill collectors start calling.
1. Review each debt. Make sure that the debt creditors claim you owe is actually what you owe and that the amount is correct. If you dispute a debt, first contact the creditor directly to resolve your questions. If you still have questions about the debt, contact your state or local consumer protection office or, in cases of serious creditor abuse, your state Attorney General.
2. Contact your creditors. Let your creditors know you are having difficulty making your payments. Tell them why you are having trouble, perhaps it is because you recently lost your job or have unexpected medical bills. Try to work out an acceptable payment schedule with your creditors. Most are willing to work with you and will appreciate your honesty and forthrightness.
Tip: Most automobile financing agreements permit your creditor to repossess your car any time you are in default, with no advance notice. If your car is repossessed, you may have to pay the full balance due on the loan, as well as towing and storage costs, to get it back. Do not wait until you are in default. Try to solve the problem with your creditor when you realize you will not be able to meet your payments. It may be better to sell the car yourself and pay off your debt than to incur the added costs of repossession.
3. Budget your expenses. Create a spending plan that allows you to reduce your debts. Itemize your necessary expenses (such as housing and healthcare) and optional expenses (such as entertainment and vacation travel). Stick to the plan.
4. Try to reduce your expenses. Cut out any unnecessary spending such as eating out and purchasing expensive entertainment. Consider taking public transportation or using a car sharing service rather than owning a car. Clip coupons, purchase generic products at the supermarket and avoid impulse purchases. Above all, stop incurring new debt. Leave your credit cards at home. Pay for all purchases in cash or use a debit card instead of a credit card.
5. Pay down and consolidate your debts. Withdrawing savings from low-interest accounts to settle high-rate loans or credit card debt usually makes sense. In addition, there are a number of ways to pay off high-interest loans, such as credit cards, by getting a refinancing or consolidation loan, such as a second mortgage.
Tip: Selling off a second car not only provides cash but also reduces insurance and other maintenance expenses.
Caution: Be wary of any loan consolidations or other refinancing that actually increase interest owed, or require payments of points or large fees.
Caution: Second mortgages greatly increase the risk that you may lose your home.
You can regain financial health if you act responsibly. But don’t wait until bankruptcy court is your only option. If you’re having financial troubles, don’t hesitate to call.
Choosing a Business Entity
When you decide to start a business, one of the most important decisions you’ll need to make is choosing a business entity. It’s a decision that impacts many things–from the amount of taxes you pay to how much paperwork you have to deal with and what type of personal liability you face, and with the passage of the Tax Cuts and Jobs Act of 2017, it’s more important than ever to choose the business entity that benefits your business.
Forms of Business
The most common forms of business are Sole Proprietorships, Partnerships, Limited Liability Companies (LLCs), and Corporations (C-Corporations). Federal tax law also recognizes another business form called the S-Corporation. While state law controls the formation of your business, federal tax law controls how your business is taxed.
What to Consider
Businesses fall under one of two federal tax systems:
1. Taxation of both the entity itself on the income it earns and the owners on dividends or other profit participation the owners receive from the business. C-Corporations fall under this system of federal taxation.2. “Pass through” taxation. This type of entity (also called a “flow-through” entity) is not taxed, but its owners are each taxed (more or less) on their proportionate shares of the entity’s income. Pass-through entities include:
- Sole Proprietorships
- Partnerships, of various types
- Limited liability companies (LLCs)
- “S-Corporations” (S-Corps), as distinguished from C-corporations (C-Corps)
The first major consideration when choosing a business entity is whether to choose one that has two levels of tax on income or one that is a pass-through entity with only one level directly on the owners.
The second consideration, which has more to do with business considerations rather than tax considerations, is the limitation of liability (protecting your assets from claims of business creditors).
Let’s take a general look at each of the options more closely:
Types of Business Entities
The most common (and easiest) form of business organization is the sole proprietorship. Defined as any unincorporated business owned entirely by one individual, a sole proprietor can operate any kind of business (full or part-time) as long as it is not a hobby or an investment. In general, the owner is also personally liable for all financial obligations and debts of the business.
Note: If you are the sole member of a domestic limited liability company (LLC), you are not a sole proprietor if you elect to treat the LLC as a corporation.
Types of businesses that operate as sole proprietorships include retail shops, farmers, large companies with employees, home-based businesses and one-person consulting firms.
As a sole proprietor, your net business income or loss is combined with your other income and deductions and taxed at individual rates on your personal tax return. Because sole proprietors do not have taxes withheld from their business income, you may need to make quarterly estimated tax payments if you expect to make a profit. Also, as a sole proprietor, you must also pay self-employment tax on the net income reported.
A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.
There are two types of partnerships: Ordinary partnerships, called “general partnerships,” and limited partnerships that limit liability for some partners but not others. Both general and limited partnerships are treated as pass-through entities under federal tax law, but there are some relatively minor differences in tax treatment between general and limited partners.
For example, general partners must pay self-employment tax on their net earnings from self-employment assigned to them from the partnership. Net earnings from self-employment include an individual’s share, distributed or not, of income or loss from any trade or business carried on by a partnership. Limited partners are subject to self-employment tax only on guaranteed payments, such as professional fees for services rendered.
Partners are not employees of the partnership and do not pay any income tax at the partnership level. Partnerships report income and expenses from its operation and pass the information to the individual partners (hence the pass-through designation).
Because taxes are not withheld from any distributions partners generally need to make quarterly estimated tax payments if they expect to make a profit. Partners must report their share of partnership income even if a distribution is not made. Each partner reports his share of the partnership net profit or loss on his or her personal tax return.
Limited Liability Companies (LLC)
A Limited Liability Company (LLC) is a business structure allowed by state statute. Each state is different, so it’s important to check the regulations in the state you plan to do business in. Owners of an LLC are called members, which may include individuals, corporations, other LLCs and foreign entities. Most states also permit “single member” LLCs, i.e., those having only one owner.
Depending on elections made by the LLC and the number of members, the IRS treats an LLC as either a corporation, partnership, or as part of the LLC’s owner’s tax return. A domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it elects to be treated as a corporation.
An LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes), unless it elects to be treated as a corporation.
In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation’s capital stock. A corporation conducts business, realizes net income or loss, pays taxes and distributes profits to shareholders.
A corporate structure is more complex than other business structures. When you form a corporation, you create a separate tax-paying entity. The profit of a corporation is taxed to the corporation when earned and then is taxed to the shareholders when distributed as dividends. This creates a double tax.
The corporation does not get a tax deduction when it distributes dividends to shareholders. Earnings distributed to shareholders in the form of dividends are taxed at individual tax rates on their personal tax returns. Shareholders cannot deduct any loss of the corporation.
If you organize your business as a corporation, generally are not personally liable for the debts of the corporation, although there may be exceptions under state law.
An S-corporation has the same corporate structure as a standard corporation; however, its owners have elected to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S-corporations generally have limited liability.
Generally, an S-Corporation is exempt from federal income tax other than tax on certain capital gains and passive income. It is treated in the same way as a partnership, in that generally; taxes are not paid at the corporate level. S-Corporations may be taxed under state tax law as regular corporations, or in some other way.
Shareholders must pay tax on their share of corporate income, regardless of whether it is actually distributed. Flow-through of income and losses are reported on their personal tax returns, and they are assessed tax at their individual income tax rates, allowing S-Corporations to avoid double taxation on the corporate income.
To qualify for S-Corporation status, the corporation must meet a number of requirements. Please call if you would like more information about which requirements must be met to form an S-Corporation.
When making a decision about which type of business entity to choose each business owner must decide which one best meets his or her needs. One form of business entity is not necessarily better than any other and obtaining the advice of a tax professional is critical. If you need assistance figuring out which business entity is best for your business, don’t hesitate to call.
The Basics of Starting a Home-Based Business
More than half of all businesses today are home-based. Every day, people are striking out and achieving economic and creative independence by turning their skills into dollars. Garages, basements, and attics are being transformed into the corporate headquarters of the newest entrepreneurs–home-based business people.
And, with technological advances in smartphones, tablets, and iPads as well as rising demand for “service-oriented” businesses, the opportunities seem to be endless.
Is a Home-Based Business Right for You?
Choosing a home business is like choosing a spouse or partner: Think carefully before starting the business. Instead of plunging right in, take the time to learn as much about the market for any product or service as you can. Before you invest any time, effort, or money take a few moments to answer the following questions:
- Can you describe in detail the business you plan on establishing?
- What will be your product or service?
- Is there a demand for your product or service?
- Can you identify the target market for your product or service?
- Do you have the talent and expertise needed to compete successfully?
Before you dive headfirst into a home-based business, it’s essential that you know why you are doing it and how you will do it. To achieve success your business must be based on something greater than a desire to be your own boss and involves an honest assessment of your own personality, an understanding of what’s involved, and a lot of hard work. You have to be willing to plan ahead and make improvements and adjustments along the way.
While there are no “best” or “right” reasons for starting a home-based business, it is vital to have a very clear idea of what you are getting into and why. Ask yourself these questions:
- Are you a self-starter?
- Can you stick to business if you’re working at home?
- Do you have the necessary self-discipline to maintain schedules?
- Can you deal with the isolation of working from home?
Working under the same roof that your family lives under may not prove to be as easy as it seems. It is important that you work in a professional environment. If at all possible, you should set up a separate office in your home. You must consider whether your home has space for a business and whether you can successfully run the business from your home. If so, you may qualify for a tax break called the home office deduction. For more information see the article, Do You Qualify for the Home Office Deduction? below.
Compliance with Laws and Regulations
A home-based business is subject to many of the same laws and regulations affecting other businesses, and you will be responsible for complying with them. There are some general areas to watch out for, but be sure to consult an attorney and your state department of labor to find out which laws and regulations will affect your business.
Be aware of your city’s zoning regulations. If your business operates in violation of them, you could be fined or closed down.
Restrictions on Certain Goods
Certain products may not be produced in the home. Most states outlaw home production of fireworks, drugs, poisons, sanitary or medical products, and toys. Some states also prohibit home-based businesses from making food, drink, or clothing.
Registration and Accounting Requirements
You may need the following:
- Work certificate or a license from the state (your business’s name may also need to be registered with the state)
- Sales tax number
- Separate business telephone
- Separate business bank account
If your business has employees, you are responsible for withholding income, social security, and Medicare taxes, as well as complying with minimum wage and employee health and safety laws.
Money fuels all businesses. With a little planning, you’ll find that you can avoid most financial difficulties. When drawing up a financial plan, don’t worry about using estimates. The process of thinking through these questions helps develop your business skills and leads to solid financial planning.
Estimating Start-Up Costs
To estimate your start-up costs include all initial expenses such as fees, licenses, permits, telephone deposit, tools, office equipment and promotional expenses.
In addition, business experts say you should not expect a profit for the first eight to ten months, so be sure to give yourself enough of a cushion if you need it.
Projecting Operating Expenses
Include salaries, utilities, office supplies, loan payments, taxes, legal services and insurance premiums, and don’t forget to include your normal living expenses. Your business must not only meet its own needs but make sure it meets yours as well.
It is essential that you know how to estimate your sales on a daily and monthly basis. From the sales estimates, you can develop projected income statements, break-even points, and cash-flow statements. Use your marketing research to estimate initial sales volume.
Determining Cash Flow
Working capital–not profits–pays your bills. Even though your assets may look great on the balance sheet, if your cash is tied up in receivables or equipment, your business is technically insolvent. In other words, you’re broke.
Make a list of all anticipated expenses and projected income for each week and month. If you see a cash-flow crisis developing, cut back on everything but the necessities.
If a home-based business is in your future, then a tax professional can help. Don’t hesitate to call if you need assistance setting up your business or making sure you have the proper documentation in place to satisfy the IRS.
Early Retirement Distributions and Your Taxes
Taxpayers may sometimes find themselves in situations when they need to withdraw money from their retirement plan early. What they may not realize is that taking money out early from your retirement plan may trigger an additional tax. Here are 10 things taxpayers should know about early withdrawals from retirement plans:
1. Payments you receive from your Individual Retirement Arrangement before you reach age 59 1/2 are generally considered early or premature distributions.
2. If you made a withdrawal from a plan last year, you must report the amount you withdrew to the IRS. You may have to pay income tax as well as an additional 10 percent tax on the amount you withdrew.
3. The additional 10 percent tax does not apply to nontaxable withdrawals. Nontaxable withdrawals include withdrawals of your cost to participate in the plan. Your cost includes contributions that you paid tax on before you put them into the plan.
4. A rollover is a type of nontaxable withdrawal. You usually have 60 days to complete a rollover to make it tax-free. Generally, a rollover is a distribution to you of cash or other assets from one retirement plan that you contribute to another retirement plan. The amount you roll over is generally taxed when the new plan makes a distribution to you or your beneficiary.
5. If you made nondeductible contributions to an IRA and later take early distributions from your IRA, the portion of the distribution attributable to those nondeductible contributions is not taxed.
6. If you received an early distribution from a Roth IRA, the distribution attributable to your prior contributions is not taxed.
7. If you received a distribution from any other qualified retirement plan, generally the entire distribution is taxable unless you made after-tax employee contributions to the plan.
8. There are several exceptions to the additional 10 percent early distribution tax, such as when the distributions are used for the purchase of a first home (up to $10,000), for certain medical or educational expenses, or if you are totally and permanently disabled. Furthermore, some of the exceptions for retirement plans are different from the rules for IRAs. Please call for details.
9. If you make an early withdrawal, you may need to file Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, with your federal tax return.
10. The rules for retirement plans can be complex. If you need assistance, don’t hesitate to call.
Extended Due Dates for Health Coverage Forms
The due date for certain entities to provide 2017 health coverage information forms to individuals in 2018 has been extended.
Insurers, self-insuring employers, other coverage providers, and applicable large employers now have until March 2, 2018, to provide Forms 1095-B or 1095-C to individuals, which is a 30-day extension from the original due date of January 31, 2018.
Insurers, self-insuring employers, other coverage providers, and applicable large employers must furnish statements to employees or covered individuals regarding the health care coverage offered to them. Individuals may use this information to determine whether, for each month of the calendar year, they may claim the premium tax credit on their individual income tax returns.
The 30-day extension is automatic, and employers and providers don’t have to request it; however, the due dates for filing 2017 information returns with the IRS are not extended. For 2018, the due dates to file information returns with the IRS are:
- February 28, 2018 for paper filers
- April 2, 2018 for electronic filers
Due to these extensions, some individuals may not receive their Forms 1095-B or 1095-C by the time they are ready to file their 2017 individual income tax return. However, while information on these forms may assist in preparing a return, the forms are not required to file a 2017 tax return. Taxpayers do not have to wait for Forms 1095-B or 1095-C to file. Instead, they can prepare and file their returns using other information about their health coverage.
Don’t hesitate to call if you have any questions about extended due dates for employers and providers that issue Health Coverage Forms to individual taxpayers in 2018.
Standard Mileage Rates for 2018
Beginning on January 1, 2018, the standard mileage rates for the use of a car, van, pickup or panel truck are:
- 54.5 cents for every mile of business travel driven, up 1 cent from the rate for 2017.
- 18 cents per mile driven for medical or moving purposes, up 1 cent from the rate for 2017.
- 14 cents per mile driven in service of charitable organizations.
The business mileage rate and the medical and moving expense rates each increased 1 cent per mile from the rates for 2017. The charitable rate is set by statute and remains unchanged.
The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile, including depreciation, insurance, repairs, tires, maintenance, gas, and oil. The rate for medical and moving purposes is based on the variable costs, such as gas and oil. The charitable rate is set by law.
These optional standard mileage rates are used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.
Taxpayers always have the option of claiming deductions based on the actual costs of using a vehicle rather than the standard mileage rates.
A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously. Please call if you need additional information about these and other special rules.
In addition, basis reduction amounts for those choosing the business standard mileage rate, as well as the maximum standard automobile cost that may be used in computing an allowance under a fixed and variable rate plan and the maximum standard automobile cost that may be used in computing the allowance under a fixed and variable rate (FAVR) Plan were also announced by the IRS.
If you have any questions about standard mileage rates or which driving activities you should keep track of as tax year 2018 begins, do not hesitate to contact the office.
Safe Harbors Help Taxpayers Suffering Property Losses
Safe harbor methods are used by individual taxpayers when determining the amount of their casualty and theft losses for their homes and personal belongings. Four of the safe harbor methods may be used for any qualifying casualty or theft loss, and three are specifically applicable only to losses occurring as a result of a Federally declared disaster.
For instance, one of the safe harbor methods allows a homeowner to determine the amount of loss, up to $20,000, by obtaining a contractor estimate of repair costs. Another safe harbor method allows a homeowner to determine the amount of loss resulting from a Federally declared disaster using the repair costs on a signed contract prepared by a licensed contractor. The guidance also provides a handy table for determining the value of personal belongings damaged, destroyed or stolen as a result of a Federally declared disaster.
Under the safe harbor method individuals may use one or more cost indices to determine the amount of loss to their homes as a result of Hurricane and Tropical Storm Harvey, Hurricane Irma and Hurricane Maria (2017 Hurricanes). The cost indices provide tables with cost per square foot for Texas, Louisiana, Florida, Georgia, South Carolina, Puerto Rico and the U.S. Virgin Islands (2017 Disaster Area).
These safe harbor methods are effective on Dec. 13, 2017, for losses that are attributable to the 2017 Hurricanes and that arose in the 2017 Disaster Area after August 22, 2017. IRS Publication 547, Casualties, Disasters, and Thefts provides more information on casualty and theft losses. Taxpayers can explore claiming these losses by filing an original or amended return for Tax Year 2016 or using the new revision of the 2016 Form 4684.
Questions about navigating casualty loss issues? Help is just a phone call away.
Late-Filing Penalty Relief for Partnerships
The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 (Surface Transportation Act) changed the date by which a partnership, real estate mortgage investment conduits (REMICs), or other entity must file its annual return. For calendar year filers, the due date for filing the annual return or request for an extension changed from April 15 (April 18 in 2017) to March 15.
Many entities filed their returns or their extension request for tax year 2016 by the April deadline, and if not for the Surface Transportation Act, these returns and requests for extension of time to file would have been on time.
Fortunately, penalty relief is now available from the IRS for certain partnerships, real estate mortgage investment conduits (REMICs), and other entities that did not file the required returns by the new due date for tax years beginning in 2016 provided that the following conditions are met:
- The partnership filed the returns (Forms 1065, 1065-B, 8804, 8805, 5471, or other returns) with the IRS and furnished copies (or Schedules K-1) to the partners (as appropriate) by the date that would have been timely before the amendment made by the Surface Transportation Act (April 18, 2017, for calendar year taxpayers); or
- The partnership filed Form 7004 to request an extension of time to file by the date that would have been timely before the amendment made by the Surface Transportation Act and files the return with the IRS and furnishes copies (or Schedules K-1) to the partners by the 15th day of the ninth month after the close of the partnership’s tax year (September 15, 2017, for calendar year partnerships). If the partnership files Form 1065-B and was required to furnish Schedules K-1 to the partners by March 15, 2017, it must have done so to qualify for the penalty relief.
Notice 2017-71, which amplifies, clarifies, and supersedes Notice 2017-47, provides that additional acts, such as the making of various elections, of partnerships, REMICs, and certain other entities made by the date that would have been timely prior to amendment by the Surface Transportation Act are treated as timely.
An earlier release provided this relief only to taxpayers whose taxable years began and ended in 2016, but the revised guidance also applies to fiscal-year filers whose taxable years began in 2016 but did not end until 2017.
Please contact the office if you need further clarification.
Tax Due Dates for January 2018
All employers – Give your employees their copies of Form W-2 for 2017 by January 31, 2018. If an employee agreed to receive Form W-2 electronically, post it on a website accessible to the employee and notify the employee of the posting by January 31.
All Businesses – Give annual information statements to recipients of certain payments you made during 2017. You can use the appropriate version of Form 1099 or other information return. Form 1099 can be issued electronically with the consent of the recipient.
Employees – who work for tips. If you received $20 or more in tips during December 2017, report them to your employer. You can use Form 4070, Employee’s Report of Tips to Employer.
Employers – Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in December 2017.
Individuals – Make a payment of your estimated tax for 2017 if you did not pay your income tax for the year through withholding (or did not pay in enough tax that way). Use Form 1040-ES. This is the final installment date for 2017 estimated tax. However, you do not have to make this payment if you file your 2017 return (Form 1040) and pay any tax due by January 31, 2018.
Employers – Nonpayroll Withholding. If the monthly deposit rule applies, deposit the tax for payments in December 2017.
Farmers and Fisherman – Pay your estimated tax for 2017 using Form 1040-ES. You have until April 17 to file your 2017 income tax return (Form 1040). If you do not pay your estimated tax by January 16, you must file your 2017 return and pay any tax due by March 1, 2018, to avoid an estimated tax penalty.
Employers – Federal unemployment tax. File Form 940 for 2017. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it is more than $500, you must deposit it. However, if you already deposited the tax for the year in full and on time, you have until February 12 to file the return.
Farm Employers – File Form 943 to report social security and Medicare taxes and withheld income tax for 2017. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 12 to file the return.
Certain Small Employers – File Form 944 to report Social Security and Medicare taxes and withheld income tax for 2017. Deposit or pay any undeposited tax under the accuracy of deposit rules. If your tax liability is $2,500 or more from 2017 but less than $2,500 for the fourth quarter, deposit any undeposited tax or pay it in full with a timely filed return. If you deposited the tax for the year timely, properly, and in full, you have until February 12 to file the return.
Employers – Social Security, Medicare, and withheld income tax. File Form 941 for the fourth quarter of 2017. Deposit any undeposited tax. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return.
Employers – Nonpayroll taxes. File Form 945 to report income tax withheld for 2017 on all nonpayroll items, including backup withholding and withholding on pensions, annuities, IRAs, gambling winnings, and payments of Indian gaming profits to tribal members. Deposit any undeposited tax. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 12 to file the return.
Payers of Gambling Winnings – If you either paid reportable gambling winnings or withheld income tax from gambling winnings, give the winners their copies of Form W-2G.
Employers – Give your employees their copies of Form W-2 for 2017 by January 31, 2018. If an employee agreed to receive Form W-2 electronically, post it on a website accessible to the employee and notify the employee by January 31, 2018.
Businesses – Give annual information statements to recipients of certain payments made during 2017. You can use the appropriate version of Form 1099 or other information return. Form 1099 can be issued electronically with the consent of the recipient. This due date only applies to certain types of payments.
Individuals – who must make estimated tax payments. If you did not pay your last installment of estimated tax by January 16, you may choose (but are not required) to file your income tax return (Form 1040) for 2017 by January 31. Filing your return and paying any tax due by January 31, 2018, prevents any penalty for late payment of the last installment. If you cannot file and pay your tax by January 31, file and pay your tax by April 17, 2018.