Archive for May 2018

Tax Deductions for Business Meals

In April of 2018 the AICPA asked the House Committee on Ways and Means for an update to tax deductions for business meals with clients and prospects. The AICPA wanted to confirm that the Tax Cuts and Job Acts disallowance of entertainment as understood by the Ways and Means Committee included the disallowance of client and prospect meals and there was no plan to change this.

The committee’s response to this was that the focus of the change in the TCJA is on entertainment expenses, with meals subject to separate rules that were not modified. There are no plans for changes. They also stated that further guidance will be provided in the ordinary course, including through regulations.

Veena Murthy legislative counsel for the Joint Committee on Taxation, stated that the 50 percent deduction for meals is still the law and the new prohibition is that meals considered entertainment are no longer deductible.

AICPA recommended to the IRS that they need to clarify under the TCJA that business meals with clients and prospects at restaurants are deductible, subject to the 50 percent cut. They also recommended that under the TCJA, business meals with clients and prospects in a restaurant before, after, or during a sporting or entertainment event, whether inside or outside the venue are deductible subject to the 50 percent cut.

Until further guidance is issued the AICPA is recommending that you document your business meals as if no tax reform took place.  Substantiation of this includes the following:

  • The name of the person you had the meal with.
  • The name of the restaurant where you had the meal
  • A short description of the business discussed
  • If the meal costs $75 or more, keep the receipt that shows the name of the restaurant, number of people at the table, and an itemized list of food and drink consumed.

To provide guidance to clients until we hear further, here is a chart we hope you will find useful:

Deductible or non-deductible for 2018
Description 100% deductible 50% deductible 0% deductible
Office Holiday Party for all employees & spouses X
Meals for general public for marketing presentation X
Team-building recreational event for all employees X
Golf outing for all employees & spouses X
Employee meals for convenience of employer X
Employee meals for required business meeting X
Meal served at Chamber of Commerce meeting X
Meals while traveling away from home overnight X
Meals with clients and prospects X
Entertainment with clients and prospects X
Year-end party with customers X
Sporting event with customers X

If you own a business and have a child in high school or college, hiring him or her for the summer can provide a multitude of benefits, including tax savings. And hiring your child may make more sense than ever due to changes under the Tax Cuts and Jobs Act (TCJA).

How it works

By shifting some of your business earnings to a child as wages for services performed, you can turn some of your high-taxed income into tax-free or low-taxed income. For your business to deduct the wages as a business expense, the work done must be legitimate and the child’s wages must be reasonable.

Here’s an example: A sole proprietor is in the 37% tax bracket. He hires his 20-year-old daughter, who’s majoring in marketing, to work as a marketing coordinator full-time during the summer. She earns $12,000 and doesn’t have any other earnings.

The father saves $4,440 (37% of $12,000) in income taxes at no tax cost to his daughter, who can use her $12,000 standard deduction (for 2018) to completely shelter her earnings. This is nearly twice as much as would have been sheltered last year, pre-TCJA, when the standard deduction was only $6,350.

The father can save an additional $2,035 in taxes if he keeps his daughter on the payroll as a part-time employee into the fall and pays her an additional $5,500. She can shelter the additional income from tax by making a tax-deductible contribution to her own traditional IRA.

Family taxes will be cut even if an employee-child’s earnings exceed his or her standard deduction and IRA deduction. Why? The unsheltered earnings will be taxed to the child beginning at a rate of 10% instead of being taxed at the parent’s higher rate.

Avoiding the “kiddie tax”

TCJA changes to the “kiddie tax” also make income-shifting through hiring your child (rather than, say, giving him or her income-producing investments) more appealing. The kiddie tax generally applies to children under age 19 and to full-time students under age 24. Before 2018, the unearned income of a child subject to the kiddie tax was generally taxed at the parents’ tax rate.

The TCJA makes the kiddie tax harsher. For 2018-2025, a child’s unearned income will be taxed according to the tax brackets used for trusts and estates, which for 2018 are taxed at the highest rate of 37% once taxable income reaches $12,500. In contrast, for a married couple filing jointly, the 37% rate doesn’t kick in until their taxable income tops $600,000. In other words, children’s unearned income often will be taxed at higher rates than their parents’ income.

But the kiddie tax doesn’t apply to earned income.

Other tax considerations

If your business isn’t incorporated or a partnership that includes nonparent partners, you might also save some employment tax dollars. Contact us to learn more about the tax rules surrounding hiring your child, how the kiddie tax works or other family-related tax-saving strategies

Each year, St. Louis Small Business Monthly polls its readers to compile a list of the region’s best accounting firms. Wamhoff Accounting is honored to announce that, for the ninth year in a row, the firm has been named to the 2018 list of St. Louis’ Best Accounting Firms.

“We have always been committed to serving our clients, not only at tax time, but all year long,” said Sandy Furuya, president of Wamhoff Accounting Services. “Whether it’s an individual or a small business looking for tax or accounting support, we are here to help. We are honored to have been nominated and chosen as one of the Best Accounting Firms for nine years in a row. We are proud of the service we provide our clients, and look forward to continuing that service so they can meet their goals.”

Wamhoff Accounting not only has made the list of Best Accounting Firms for nine consecutive years now, but has also recently been chosen as one of Small Business Monthly’s Best in Customer Service. The professionals at Wamhoff Accounting have been serving business and individuals since 1975.

Services extend beyond taxes and accounting. Wamhoff Accounting also assists with bookkeeping, financial statements, and establishing new businesses. Free initial consultations are available upon contact, and individual tax returns can be completed within the day.

The Best Accounting Firms in St. Louis were announced in the May, 2018 issue of St. Louis Small Business Monthly.

 

About Wamhoff Accounting
Since 1975, the staff at Wamhoff Accounting Services has provided exceptional service to individual, business, and non-profit clients.  The firm prepares over 850 tax returns each year, and provides a wide range of services including accounting, bookkeeping, payroll, financial statements, tax filings, and tax return preparation. Wamhoff Accounting is located at 1520 South Fifth Street at Streets of St. Charles. For more information, call 636-573-1212 or visit WamhoffAccounting.com.

Sending your kids to day camp may provide a tax break

When school lets out, kids participate in a wide variety of summer activities. If one of the activities your child is involved with is day camp, you might be eligible for a tax credit!

Dollar-for-dollar savings

Day camp (but not overnight camp) is a qualified expense under the child and dependent care credit, which is worth 20% of qualifying expenses (more if your adjusted gross income is less than $43,000), subject to a cap. For 2018, the maximum expenses allowed for the credit are $3,000 for one qualifying child and $6,000 for two or more.

Remember that tax credits are particularly valuable because they reduce your tax liability dollar-for-dollar — $1 of tax credit saves you $1 of taxes. This differs from deductions, which simply reduce the amount of income subject to tax. For example, if you’re in the 24% tax bracket, $1 of deduction saves you only $0.24 of taxes. So it’s important to take maximum advantage of the tax credits available to you.

Qualifying for the credit

A qualifying child is generally a dependent under age 13. (There’s no age limit if the dependent child is unable physically or mentally to care for him- or herself.) Special rules apply if the child’s parents are divorced or separated or if the parents live apart.

Eligible costs for care must be work-related. This means that the child care is needed so that you can work or, if you’re currently unemployed, look for work.

If you participate in an employer-sponsored child and dependent care Flexible Spending Account (FSA), also sometimes referred to as a Dependent Care Assistance Program, you can’t use expenses paid from or reimbursed by the FSA to claim the credit.

Determining eligibility

Additional rules apply to the child and dependent care credit. If you’re not sure whether you’re eligible, contact us. We can help you determine your eligibility for this credit and other tax breaks for parents.

It’s not uncommon for businesses to sometimes generate tax losses. But the losses that can be deducted are limited by tax law in some situations. The Tax Cuts and Jobs Act (TCJA) further restricts the amount of losses that sole proprietors, partners, S corporation shareholders and, typically, limited liability company (LLC) members can currently deduct — beginning in 2018. This could negatively impact owners of start-ups and businesses facing adverse conditions.

Before the TCJA

Under pre-TCJA law, an individual taxpayer’s business losses could usually be fully deducted in the tax year when they arose unless:

  • The passive activity loss (PAL) rules or some other provision of tax law limited that favorable outcome, or
  • The business loss was so large that it exceeded taxable income from other sources, creating a net operating loss (NOL).
After the TCJA

The TCJA temporarily changes the rules for deducting an individual taxpayer’s business losses. If your pass-through business generates a tax loss for a tax year beginning in 2018 through 2025, you can’t deduct an “excess business loss” in the current year. An excess business loss is the excess of your aggregate business deductions for the tax year over the sum of:

  • Your aggregate business income and gains for the tax year, and
  • $250,000 ($500,000 if you’re a married taxpayer filing jointly).

The excess business loss is carried over to the following tax year and can be deducted under the rules for NOLs.

For business losses passed through to individuals from S corporations, partnerships and LLCs treated as partnerships for tax purposes, the new excess business loss limitation rules apply at the owner level. In other words, each owner’s allocable share of business income, gain, deduction or loss is passed through to the owner and reported on the owner’s personal federal income tax return for the owner’s tax year that includes the end of the entity’s tax year.

Keep in mind that the new loss limitation rules apply after applying the PAL rules. So, if the PAL rules disallow your business or rental activity loss, you don’t get to the new loss limitation rules.

Expecting a business loss?

The rationale underlying the new loss limitation rules is to restrict the ability of individual taxpayers to use current-year business losses to offset income from other sources, such as salary, self-employment income, interest, dividends and capital gains.

The practical impact is that your allowable current-year business losses can’t offset more than $250,000 of income from such other sources (or more than $500,000 for joint filers). The requirement that excess business losses be carried forward as an NOL forces you to wait at least one year to get any tax benefit from those excess losses.

If you’re expecting your business to generate a tax loss in 2018, contact us to determine whether you’ll be affected by the new loss limitation rules. We can also provide more information about the PAL and NOL rules.

Employees don’t always fill out their W-4 forms accurately. For example, some may wrongly write “exempt” on the withholding portion of the form to ensure that no federal or state tax is withheld. Others may be inadvertently underwithholding because of recent tax law changes.

Although the employees themselves are liable for improperly completing their W-4s, you can do them a favor by reminding them of possible mistakes. After all, the IRS may eventually come calling on your organization if someone appears to be underwithholding.

Key questions

Here are some questions to ask when determining whether an employee can legitimately claim to be exempt from withholding:

Did the employee have a tax liability in the previous year? If the employee received a refund of all federal income tax paid (or had a right to a refund), he or she may be able to claim exempt status, depending on the answer to the next question.

Does the employee expect to have a tax liability this year? To legitimately claim to be exempt, the employee must be able to state that he or she had no tax liability last year and doesn’t expect to have a tax liability this year.

Also, an “exempt” W-4 is valid for only one year and expires in February of the following year. If your payroll includes employees who claim to be exempt, require them to fill out new W-4 forms annually.

TCJA impact

Because of the many changes wrought by the Tax Cuts and Jobs Act (TCJA), and as you’re likely aware, earlier this year the IRS issued new withholding tables — and withholding amounts have generally dropped. The new tables are intended to work with current W-4 forms. However, just because you’re correctly following the withholding tables for an employee doesn’t mean the employee isn’t having too little (or too much) tax withheld.

Remind all employees that they should use the new IRS calculator (available at irs.gov) to determine whether the appropriate amount is being withheld. If it isn’t, they should submit a new W-4 to you to adjust their withholding. Employees who may be at risk for underwithholding include those who itemize deductions, who hold multiple jobs, or who have dependents age 17 or older.

More changes ahead

IRS Form W-4 is currently in a bit of a state of flux. A new version of the form is expected for 2019 that more clearly reflects the TCJA’s provisions. Some of the applicable rules for filing the form could change along with it. Our firm can keep you apprised of the latest news affecting W-4s and help you gather and verify the right information.