SmallBusiness.com Guide to Taxes – SmallBusiness.com https://smallbusiness.com Small business information, insight and resources | SmallBusiness.com Thu, 15 Nov 2018 17:41:39 +0000 en-US hourly 1 https://wordpress.org/?v=4.9.8 Comparison Chart of Previous vs. New Small Business Tax Laws | 2018 https://smallbusiness.com/2018-tax-law/small-business-tax-2/ https://smallbusiness.com/2018-tax-law/small-business-tax-2/#respond Thu, 01 Nov 2018 19:54:36 +0000 https://smallbusiness.com/?p=33367

This chart was supplied by IRS.gov. It compares the old tax law provisions vs. the new that are part of the Tax Cuts and Jobs Act (TCJA). The side-by-side comparison can help you understand the changes — but you should also seek advice from your trusted and professional accounting, finance, and tax advisors.  Provisions of the TCJA that affect individual taxpayers can also affect business taxes. Businesses and self-employed individuals should review tax reform changes for individuals and determine how these provisions work with their business situation. One more time, remember: Different small businesses may have different factors that will cause the provisions to be different than yours. Also, see the IRS PDFs for more detail.: Publication 535, Business Expenses; Publication 946, How to Depreciate Property.


Deductions

Deductions 2017 Law Changes under TCJA

New deduction for qualified business income of pass-through entities

No previous law for comparison. This is a new provision.

This new provision, also known as Section 199A, allows a deduction of up to 20% of qualified business income for owners of some businesses. Limits apply based on income and type of business.

Limits on deductions for meals and entertainment expenses

A business can deduct up to 50% of entertainment expenses directly related to the active conduct of a trade or business or incurred immediately before or after a substantial and bona fide business discussion.

The TCJA generally eliminated the deduction for any expenses related to activities considered entertainment, amusement or recreation. However, under the new law, taxpayers can continue to deduct 50% of the cost of business meals if the taxpayer (or an employee of the taxpayer) is present and the food or beverages are not considered lavish or extravagant. The meals may be provided to a current or potential business customer, client, consultant or similar business contact.  If provided during or at an entertainment activity, the food and beverages must be purchased separately from the entertainment, or the cost of the food or beverages must be stated separately from the cost of the entertainment on one or more bills, invoices, or receipts

Notice 2018-76 provides additional information on these changes.

New limits on deductions for business interest expenses

The deduction for net interest is limited to 50% of adjusted taxable income for firms with a debt-equity ratio above 1.5. Interest above the limit can be carried forward indefinitely.

The change limits deductions for business interest incurred by certain businesses. Generally, for businesses with 25 million or less in average annual gross receipts, business interest expense is limited to business interest income plus 30% of the business’s adjusted taxable income and floor-plan financing interestThere are some exceptions to the limit, and some businesses can elect out of this limit. Disallowed interest above the limit may be carried forward indefinitely, with special rules for partnerships.

Changes to rules for like-kind exchanges

Like-kind exchange treatment applies to certain exchanges of real, personal or intangible property.

Like-kind exchange treatment now applies only to certain exchanges of real property

For more information, see Form 8824, Like-Kind Exchanges, and its instructions, as well as Publication 544, Sales and Other Disposition of Assets.

Payments made in sexual harassment or sexual abuse cases

No previous law for comparison. This is a new provision.

No deduction is allowed for certain payments made in sexual harassment or sexual abuse cases.

Changes to deductions for local lobbying expenses

Although lobbying and political expenditures are generally not deductible, a taxpayer can deduct payments related to lobbying local councils or similar governing bodies.

TCJA repealed the exception for local lobbying expenses. The general disallowance rules for lobbying and political expenses now apply to payments related to local legislation as well.

Depreciation

Depreciation

2017 Law

What changed under TCJA

Temporary

100 percent expensing for certain business assets

Certain business assets, such as equipment and buildings, are depreciated over time.

Bonus depreciation for equipment, computer software, and certain improvements to nonresidential real property allows an immediate deduction of 50% for equipment placed in service in 2017, 40% in 2018, and 30% in 2019.

Long-lived property generally is not eligible. The phase down is delayed for certain property, including property with a long production period.

TCJA temporarily allows 100% expensing for business property acquired and placed in service after Sept. 27, 2017 and before Jan. 1, 2023.

The 100% allowance generally decreases by 20% per year in taxable years beginning after 2022 and expires Jan. 1, 2027.

The law now allows expensing for certain film, television, and live theatrical productions, and used qualified property with certain restrictions.

For more information, see Tax Reform: Changes to Depreciation Affect Businesses Now and New 100-percent depreciation deduction for businesses.

Changes to rules for expensing depreciable business assets (section 179 property)

A taxpayer can expense the cost of qualified assets and deduct a maximum of $500,000, with a phaseout threshold of $2 million.

Generally, qualified assets consist of machinery, equipment, off-the-shelf computer software and certain improvements to nonresidential real property.

TCJA increased the maximum deduction to $1 million and increased the phase-out threshold to $2.5 million.

It also modifies the definition of section 179 property to allow the taxpayer to elect to include certain improvements made to nonresidential real property.

Publication 946, How to Depreciate Property, and the Additional First Year Depreciation Deduction (Bonus) FAQs provide additional resources on this topic.

Changes to depreciation of luxury automobiles

There are limits on depreciation deductions for owners of cars, trucks and vans.

TCJA increased depreciation limits for passenger vehicles. If the taxpayer doesn’t claim bonus depreciation, the greatest allowable depreciation deduction is:

  • $10,000 for the first year,

  • $16,000 for the second year,

  • $9,600 for the third year, and

  • $5,760 for each later taxable year in the recovery period.

If a taxpayer claims 100% bonus depreciation, the greatest allowable depreciation deduction is $18,000 for the first year, and the same as above for later years.

Changes to listed property

Computers and peripheral equipment are categorized as listed property. Their deduction and depreciation is subject to strict substantiation requirements.

TCJA removes computer or peripheral equipment from the definition of listed property.

Changes to the applicable recovery period for real property

The General Depreciation System (GDS) and the Alternative Depreciation System (ADS) of the Modified Accelerated Cost Recovery System (MACRS) provide that the capitalized cost of tangible property is recovered over a specified life by annual deductions for depreciation.

The general depreciation system recovery periods are still 39 years for nonresidential real property and 27.5 years for residential rental property. The alternative depreciation system recovery period for the nonresidential real property is still 40 years. However, TCJA changes the alternative depreciation system recovery period for residential rental property from 40 years to 30 years. Qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property are no longer separately defined and given a special 15-year recovery period under the new law.

 

Businesses with employees: Changes to fringe benefits and new credit

For businesses that have employees, there are changes to fringe benefits and a new tax credit that can affect a business’s bottom line.

Fringe benefit

2017 law

What changed under TCJA

Suspension of the exclusion for qualified bicycle commuting reimbursements

Up to $20 per month in employer reimbursement for bicycle commuting expense is not subject to income and employment taxes of the employee.

Under TCJA, employers can deduct qualified bicycle commuting reimbursements as a business expense.

Employers must now include 100% of these reimbursements in the employee’s wages, subject to income and employment taxes.

Suspension of exclusion for qualified moving expense reimbursements

An employee’s moving expense reimbursements are not subject to income or employment taxes.

Under TCJA, employers must include moving expense reimbursements in employees’ wages, subject to income and employment taxes. Generally, members of the U.S. Armed Forces can still exclude qualified moving expense reimbursements from their income.

Prohibition on cash, gift cards and other non-tangible personal property as employee achievement award

Employers can deduct the cost of certain employee achievement awards. Deductible awards are excludible from employee income.

Special rules allow an employee to exclude certain achievement awards from their wages if the awards are tangible personal property. An employer also may deduct awards that are tangible personal property, subject to certain deduction limits. TCJA clarifies that tangible personal property doesn’t include cash, cash equivalents, gift cards, gift coupons, certain gift certificates, tickets to theater or sporting events, vacations, meals, lodging, stocks, bonds, securities, and other similar items.

Tax Credit

2017 law

What changed under TCJA

New employer credit for paid family and medical leave

No previous law for comparison. This is a new provision.

The TCJA added a new tax credit for employers that offer paid family and medical leave to their employees.

The credit applies to wages paid in taxable years beginning after December 31, 2017, and before January 1, 2020.

The credit is a percentage of wages (as determined for Federal Unemployment Tax Act (FUTA) purposes and without regard to the $7,000 FUTA wage limitation) paid to a qualifying employee while on family and medical leave for up to 12 weeks per taxable year. The percentage can range from 12.5% to 25%, depending on the percentage of wages paid during the leave.

For more information on the new credit, see Notice 2018-71 and New credit benefits employers who provide paid family and medical leave.

 

Business structure and accounting methods

An organization’s business structure is an important consideration when applying tax reform changes. The Tax Cuts and Jobs Act changed some things related to these topics.

Business structure topic

2017 law

What changed under TCJA

Changes to cash method of accounting for some businesses

Small business taxpayers with average annual gross receipts of $5 million or less in the prior three-year period may use the cash method of accounting.

The TCJA allows small business taxpayers with average annual gross receipts of $25 million or less in the prior three-year period to use the cash method of accounting. The law expands the number of small business taxpayers eligible to use the cash method of accounting and exempts these small businesses from certain accounting rules for inventories, cost capitalization and long-term contracts. As a result, more small business taxpayers can change to cash method accounting starting after Dec. 31, 2017.

Revenue Procedure 2018-40 provides further details on these changes.

Changes regarding conversions from an S corporation to a C corporation

In the case of an S corporation that converts to a C corporation:

  • Net adjustments that are needed to prevent amounts from being duplicated or omitted as a result of an accounting method change and attributable to the revocation of the S corporation election (e.g. adjustments required because of a required change from the cash method to an accrual method): net adjustments that decrease taxable income generally were taken into account entirely in the year of change, and net adjustments that increase taxable income generally were taken into account during the four-taxable-year period beginning with the year of change.

  • Distributions of cash by the C corporation to its shareholders during a post-termination transition period (generally one year after the conversion) are, to the extent of stock basis tax-free, then capital gain to the extent of remaining accumulated adjustments account (AAA). Distributions more than AAA are treated as dividends coming from accumulated Earnings and Profits (E&P).  Distributions after that period are dividends to the extent of E&P and taxed as dividends.

The TCJA makes two modifications to existing law for a C corporation that (1) was an S corporation on Dec. 21, 2017 and revokes its S corporation election after Dec. 21, 2017, but before Dec. 22, 2019, and (2) has the same owners of stock in identical proportions on the date of revocation and on Dec. 22, 2017.

The following modifications apply to these entities:

  • The period for including net adjustments that are needed to prevent amounts from being duplicated or omitted as a result of an accounting method change and attributable to the revocation of the S corporation election is changed to six years. This six-year period applies to net adjustments that decrease taxable income as well as net adjustments that increase taxable income.

  • Distributions of cash following the post-termination transition period are treated as coming out of the corporation’s AAA and E&P proportionally.

See Revenue Procedure 2018-44 for more detailed information.

Businesses or individuals that rehabilitate historical buildings

Topic

2017 law

What changed under TCJA

Changes to the rehabilitation tax credit

Owners of certified historic structures were eligible for a tax credit of 20% of qualified rehabilitation expenditures.Owners of pre-1936 buildings were eligible for a tax credit of 10% of qualified rehabilitation expenditures.

TCJA keeps the 20% credit for qualified rehabilitation expenditures for certified historic structures but requires that taxpayers take the 20% credit over five years instead of in the year they placed the building into service.The 10% credit for pre-1936 buildings is repealed under TCJA.

 

Opportunity for tax-favored investments

Opportunity Zones are a tool designed to spur economic development and job creation in distressed communities. Businesses or individuals can participate.

Topic 2017 law What changed under TCJA

Opportunity Zones

No previous law for comparison. This is a new provision.

Investments in Opportunity Zones provide tax benefits to investors. Investors can elect to temporarily defer tax on capital gains that are reinvested in a Qualified Opportunity Fund (QOF). The tax on the gain can be deferred until the earlier of the date on which the QOF investment is sold or exchanged, or Dec. 31, 2026. If the investor holds the investment in the QOF for at least ten years, the investor  may be eligible for a permanent exclusion of any capital gain realized by the sale or exchange of the QOF investment.For more information, see Notice 2018-48 and Revenue Procedure 2018-16.

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What Business Owners Should Know About the 20 Percent Tax Deduction https://smallbusiness.com/2018-tax-law/small-business-tax/ https://smallbusiness.com/2018-tax-law/small-business-tax/#respond Tue, 30 Oct 2018 15:10:56 +0000 https://smallbusiness.com/?p=33315

As we always advise, small business owners should seek advice regarding taxes and finance from a trusted business, tax, or financial professional. This year, that advice is especially important. Why? Because last year’s tax legislation begins to have an impact on your taxes for the first time this year (in 2018). The increased deductions most small businesses will see will start showing up on the federal income tax return you file in 2019. Here are some things the IRS would like you to know. (Also, see the bottom of this page for a collection of IRS services we’ve posted.)


Eligible taxpayers may deduct up to 20 percent of certain business income from domestic businesses operated as…

  • Sole proprietorships
  • Partnerships
  • S corporations
  • Trusts
  • Estates
  • Certain dividends

 

Things business owners should know about the 20 percent deduction

  • The deduction applies to qualified:– Business income
    – Real estate investment trust dividends
    – Publicly traded partnership income
  • Qualified business income is the net amount of qualified items of income, gain, deduction and loss connected to a qualified U.S. trade or business. Only items included in taxable income are counted.
  • The deduction is available to eligible taxpayers, whether they itemize their deductions on Schedule A or take the standard deduction.
  • The deduction is generally equal to the lesser of these two amounts:– Twenty percent of qualified business income plus 20 percent of qualified real estate investment trust dividends and qualified publicly traded partnership income.
    – Twenty percent of taxable income computed before the qualified business income deduction minus net capital gains.
  • For taxpayers with taxable income computed before the qualified business income deduction that exceeds $315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers, the deduction may be subject to additional limitations or exceptions. These are based on the type of trade or business, the taxpayer’s taxable income, the amount of W-2 wages paid by the qualified trade or business, and the unadjusted basis immediately after acquisition of qualified property held by the trade or business.
  • Income earned through a C corporation or by providing services as an employee is not eligible for the deduction.
  • Taxpayers may rely on the rules in the proposed regulations until final regulations appear in the Federal Register.

 

 Also on SmallBusiness.com

IRS Resources Related to How the New Tax Law May Affect Your Business | Q3-2018

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Two Financial Practices Small Business Owners Should Change | 2018 https://smallbusiness.com/taxes/financial-advice/ Wed, 05 Sep 2018 17:19:58 +0000 https://smallbusiness.com/?p=32686

Some small business owners may be a little more confident in their financial practices than they should be, according to a recent survey from Clutch, a business-to-business research and reviews company. Here are two examples of risky financial practices and some financial advice you should follow instead.


Advice #1 | Use professional tax help

The decision to prepare and pay taxes without the help of a professional tax preparer or accountant may be a practice that seems to save money but could lead to a greater loss (especially for 30 percent of the survey respondents).

30% | Percentage of small business owners who believe they overpay their taxes and could claim more deductions and credits.
93% | Percentage of small business owners who rate themselves as “very” or “somewhat confident” in their ability to accurately file taxes.

Or, in other words, 30 percent of survey respondents simultaneously believe they can accurately file taxes while think they overpay.


Advice #2 | Keep personal and business banking in two separate accounts

Here’s another financial practice small businesses should follow, but many don’t.

27% | Percentage of small businesses who do not keep their personal and business finances in separate bank accounts.
23% | Percentage of small businesses who have experienced challenges with mixing business and personal finances in the past year.

Or, in other words, nearly the same percentage of small business owners who co-mingle their business and personal bank accounts have experienced a financial challenge due to the practice.

Bottom line | Do the math. Get help doing your taxes and have two separate bank accounts.


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IRS Resources Related to How the New Tax Law May Affect Your Business | Q3-2018 https://smallbusiness.com/2018-tax-law/new-tax-law/ Wed, 15 Aug 2018 16:31:22 +0000 https://smallbusiness.com/?p=32452

To begin tracking the implementation of the Tax Cuts and Jobs Act (TCJA), the IRS has set up a page on its website for updates and resources. We have mirrored that information here and will update this page to reflect new information the IRS will be issuing.

Our standard but stern warning related to taxes | The new law and accompanying regulations and rules are complex. We can’t stress enough the importance of you discussing the changes in the law with your trusted accounting or tax advisor. It will be worth every cent you spend to get the best possible information — related specifically to your personal situation.

Below, you will find links to information about the implementation of the new legislation that is being issued by the IRS. The links will take you to the IRS website. (Clicking on a heading will reveal information related to that topic.) 


Income (including Gains and Losses)

The Tax Cuts and Jobs Act extended the holding period with respect to certain carried interests (i.e. applicable partnership interests) to three years.

Carried interests are ownership interests in a partnership that share in the partnership’s net profits. Carried interests often are issued to investment managers in connection with the investment manager’s services. These interests often result in the holder receiving capital gains which are taxed at a lower rate, rather than ordinary income.

The Tax Cuts and Jobs Act, Section 1031 changed like-kind exchanges and now it applies only to exchanges of real property and not to exchanges of personal or intangible property. An exchange of real property held primarily for sale still does not qualify as a like-kind exchange.

Deductions and Depreciation

Many owners of sole proprietorships, partnerships, trusts, and S corporations may be eligible for a new deduction – referred to as Section 199A – allowing them to deduct up to 20 percent of their qualified business income.

Proposed regulations | On August 8, the IRS  issued proposed regulations for a new provision allowing many owners of sole proprietorships, partnerships, trusts and S corporations to deduct 20 percent of their qualified business income.

The deduction is available for tax years beginning after Dec. 31, 2017. Eligible taxpayers can claim it for the first time on the 2018 federal income tax return they file next year.

The deduction is generally available to eligible taxpayers whose 2018 taxable incomes fall below $315,000 for joint returns and $157,500 for other taxpayers. It’s generally equal to the lesser of 20 percent of their qualified business income plus 20 percent of their qualified real estate investment trust dividends and qualified publicly traded partnership income or 20 percent of taxable income minus net capital gains.

Deductions for taxpayers above the $157,500/$315,000 taxable income thresholds may be limited. Those limitations are fully described in the proposed regulations.

Qualified business income includes domestic income from a trade or business. Employee wages, capital gain, interest and dividend income are excluded.

In addition, Notice 2018-64, also issued on August 8, 2018, provides methods for calculating Form W-2 wages for purposes of the limitations on this deduction. More information in the form of FAQs on Section 199A can be found on IRS.gov.

 

Related information: IR-2018-162 , Section 199A – Deduction for Qualified Business Income FAQs , REG-107892 , Notice 2018-64

Newly amended section 163(j) of the Internal Revenue Code imposes a limitation on deductions for business interest incurred by certain large businesses. For most large businesses, business interest expense is limited to any business interest income plus 30 percent of the business’ adjusted taxable income.

Related information: IR-2018-82


Production Period for Beer, Wine, and Distilled Spirits

The Production Period for Beer, Wine, and Distilled Spirits provision provides an opportunity to deduct the interest expenses occurred during the “aging period” for these beverages (subject to other possible interest deduction limitations included in TCJA).

Related information: Production Period for Beer, Wine, and Distilled Spirits Frequently Asked Questions

Businesses can immediately expense more under the new law. A taxpayer may elect to expense the cost of any section 179 property and deduct it in the year the property is placed in service. The new law increased the maximum deduction from $500,000 to $1 million. It also increased the phase-out threshold from $2 million to $2.5 million.

Related information: FS-2018-9


Proposed regulations have been issued on the new 100-percent depreciation deduction that allows businesses to write off most depreciable business assets in the year they are placed in service by the business.

Related information: IR-2018-159 , REG-104397-18

The new law disallows employer deductions for (1) activities generally considered to be entertainment, amusement, or recreation; (2) membership dues for clubs organized for business, pleasure, recreation, or other social purposes; or (3) a facility used in connection with the above items, even if the activity is related to the active conduct of trade or business.

It also disallows deductions for expenses associated with transportation fringe benefits or expenses incurred providing transportation for commuting (except as necessary for employee safety ).

Related information: Employer Update

The new law imposes dollar limitations on the depreciation deduction for the year the taxpayer places the passenger automobile in service and for each succeeding year.

Partner Resources: Revenue Procedure 2018-25

No deduction for certain payments made in sexual harassment or sexual abuse cases.

Related information: Notice-2018-23

Credits

A general business credit employers may claim, based on wages paid to qualifying employees while they are on family and medical leave, subject to certain conditions.

Related information: Tax Reform Tax Tip 2018-69, Frequently Asked Questions about Employer Credit for Paid Family and Medical Leave

The legislation requires taxpayers take the 20-percent credit ratably over five years instead of in the year they placed the building into service and eliminates the 10 percent rehabilitation credit for the pre-1936 buildings. This provision is effective for amounts that taxpayers pay or incur for qualified expenditures after December 31, 2017.

International

Learn more about how international businesses will be impacted by the Tax Cuts and Jobs Act (TCJA).

Taxes

Many U.S. corporations elect to use a fiscal year end and not a calendar year end for federal income tax reporting purposes. Due to a provision in the Tax Cuts and Jobs Act (TCJA), a corporation with a fiscal year that includes Jan. 1, 2018 will pay federal income tax using a blended tax rate and not the flat 21 percent tax rate under the TCJA that would generally apply to taxable years beginning after Dec. 31, 2017.

Related information: Notice 2018-38

Newly enacted section 965 of the Internal Revenue Code imposes a transition tax on untaxed foreign earnings of foreign subsidiaries of U.S. companies by deeming those earnings to be repatriated. Foreign earnings held in the form of cash and cash equivalents are taxed at a 15.5 percent rate, and the remaining earnings are taxed at an 8 percent rate. The transition tax generally may be paid in installments over an eight-year period.

Related information: IR-2017-212, IR-2018-09, IR-2018-25, IR-2018-53, IR-2018-79, IR-2018-158 , REG-104226-18, IR-2018-158 , REG-104226-18

The new law treats a foreign taxpayer’s gain or loss on the sale or exchange of a partnership interest as effectively connected with the conduct of a trade or business in the United States to the extent that gain or loss would be treated as effectively connected with the conduct of a trade or business in the United States if the partnership sold all of its assets.

In this circumstance, the new law also imposes a withholding tax on the disposition of a partnership interest by a foreign taxpayer.

Related information: IR-2018-81, Notice 2018-08, Notice 2018-29

The Treasury Department and the Internal Revenue Service issued Notice 2018-14 and Publication 15, Employer’s Tax Guide to help businesses apply law changes to withholding. These materials are designed to help employers and employees with a variety of withholding matters during and after the transition to new, reduced tax rates and updated withholding tables.

More information is available in Notice 1036 and the IRS Withholding Tables Frequently Asked Questions.

Accounting Method Changes

The Production Period for Beer, Wine, and Distilled Spirits provision provides an opportunity to deduct the interest expenses occurred during the “aging period” for these beverages (subject to other possible interest deduction limitations included in TCJA).

Related information: Production Period for Beer, Wine, and Distilled Spirits Frequently Asked Questions

Changes in accounting periods and method of accounting (Transitional guidance under sec. 451 related to inclusion of income associated with advance payments.)

Related information: Notice 2018-35, Revenue Procedure 2018-29

Other Information

Opportunity Zones are an economic development tool—that is, they are designed to spur economic development and job creation in distressed communities. Opportunity Zones are designed to spur economic development by providing tax benefits to investors.

Partner Resources: Opportunity Zones Frequently Asked Questions


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Small Business Employers Should Monitor Outsourced Payroll Tax Deposits | 2018 https://smallbusiness.com/taxes/monitor-tax-service-provider/ Wed, 08 Aug 2018 19:33:01 +0000 https://smallbusiness.com/?p=32383

Many small business employers hire third-party payroll service providers to perform their payroll processing functions and tax-related duties. This may include the service making employment tax deposits through the Electronic Federal Tax Payment System (EFTPS), a free way to pay federal taxes through a secure government website.


 

Why the IRS says you should monitor tax payments made by a tax management service provider

According to the IRS, the most important reason a small business should monitor its tax deposits is this:

In most cases, the small business remains liable for any unpaid employment taxes. This includes any penalties and interest resulting from underpayment, even if you use a third-party payroll service provider.

(Note: This may not apply to employers using Certified Professional Employer Organization(PEO).

Tips to help employers meet their employment tax responsibilities

  • Establish an EFTPS account to monitor deposits.
  • Sign up for email notifications at EFTPS.gov)
  • Contact your third-party payroll service provider immediately regarding incorrect or missing tax deposits.

 

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What the IRS Wants You to Know About the Employer Credit for Paid Family and Medical Leave | 2018 https://smallbusiness.com/employees/family-leave-tax-credit/ Fri, 04 May 2018 17:17:21 +0000 https://smallbusiness.com/?p=31638

An employer credit for paid family and medical leave was created by the “Tax Cuts and Jobs Act”  passed in 2017. Employers may claim the credit based on wages paid to qualified employees while they are on family and medical leave. 


(Information via IRS.)

Facts about the paid family and leave credit

To claim the credit, employers must have a written policy that meets certain requirements:

  • Employers must provide at least two weeks of paid family and medical leave annually to all qualifying employees who work full time. This can be prorated for employees who work part-time.
  • The paid leave must be not less than 50 percent of the wages normally paid to the employee.

A qualifying employee is any employee who:

  • Has been employed for one year or more.
  • For the preceding year, had compensation that did not exceed a certain amount. For 2018, the employee must not have earned more than $72,000 in 2017.

For purposes of this credit, “family and medical leave” is leave for one or more of the following reasons:

  • Birth of an employee’s child and to care for the newborn.
  • Placement of a child with the employee for adoption or foster care.
  • To care for the employee’s spouse, child, or parent who has a serious health condition.
  • A serious health condition that makes the employee unable to perform the functions of his or her position.
  • Any qualifying event due to an employee’s spouse, child, or parent being on covered active duty – or being called to duty – in the Armed Forces.
  • To care for a service member who is the employee’s spouse, child, parent, or next of kin.

The credit is a percentage of the wages paid to a qualifying employee while on family and medical leave for up to 12 weeks per taxable year.

An employer must reduce its deduction for wages or salaries paid or incurred by the amount determined as a credit.  Any wages taken into account in determining any other general business credit may not be used towards this credit.

The credit is generally effective for wages paid in taxable years of the employer beginning after December 31, 2017. It is not available for wages paid in taxable years beginning after December 31, 2019.


Questions & Answers | Employer Credit for Paid Family and Medical Leave

Q | What is the employer credit for paid family and medical leave?

A |  This is a general business credit employers may claim, based on wages paid to qualified employees while they are on family and medical leave, subject to certain conditions.


Q | Who may claim the employer credit for paid family and medical leave?

A | Employers must have a written policy in place that meets certain requirements, including providing:

  • At least two weeks of paid family and medical leave (annually) to all qualifying employees who work full time (prorated for employees who work part-time), and
  • The paid leave is not less than 50 percent of the wages normally paid to the employee.

Q | Who is a qualifying employee?

A | A qualifying employee is an employee under the Fair Labor Standards Act who has been employed by the employer for one year or more and who, for the preceding year, were compensated more than a certain amount. For an employer claiming a credit for wages paid to an employee in 2018, the employee must not have earned more than $72,000 in 2017.

Q | What is “family and medical leave” for purposes of the paid family and medical leave credit?

A | This is a leave for one or more of the following reasons:

  • Birth of an employee’s child and to care for the child.
  • Placement of a child with the employee for adoption or foster care.
  • To care for the employee’s spouse, child, or parent who has a serious health condition.
  • A serious health condition that makes the employee unable to perform the functions of his or her position.
  • Any qualifying exigency due to an employee’s spouse, child, or parent being on covered active duty (or having been notified of an impending call or order to covered active duty) in the Armed Forces.
  • To care for a service member who is the employee’s spouse, child, parent, or next of kin.

If an employer provides paid vacation leave, personal leave, or medical or sick leave (other than leave specifically for one or more of the purposes stated above), that paid leave is not considered family and medical leave.  In addition, any leave paid by a State or local government or required by State or local law will not be taken into account in determining the amount of employer-provided paid family and medical leave.

The credit is a percentage of the amount of wages paid to a qualifying employee while on family and medical leave for up to 12 weeks per taxable year.

Q | How is the paid family and medical leave credit calculated?

A | The credit is a percentage of the amount of wages paid to a qualifying employee while on family and medical leave for up to 12 weeks per taxable year.  The minimum percentage is 12.5% and is increased by 0.25% for each percentage point by which the amount paid to a qualifying employee exceeds 50% of the employee’s wages, with a maximum of 25%.  In certain cases, an additional limit may apply.

Q | How does the credit impact an employer’s deduction for the wages paid to an employee while on family and medical leave or claim for any other general business credits?

A | An employer must reduce its deduction for wages or salaries paid or incurred by the amount determined as a credit.  Also, any wages taken into account in determining any other general business credit may not be used in determining this credit.

Q | What is the effective date of the paid family and medical leave credit?

A | The credit is generally effective for wages paid in taxable years of the employer beginning after December 31, 2017, and it is not available for wages paid in taxable years beginning after December 31, 2019.

Q | Will the IRS provide additional information on the credit?

A | The IRS expects that additional information will be provided that will address, for example, when the written policy must be in place, how paid “family and medical leave” relates to an employer’s other paid leave, how to determine whether an employee has been employed for “one year or more,” the impact of State and local leave requirements, and whether members of a controlled group of corporations and businesses under common control are treated as a single taxpayer in determining the credit.

(Information via IRS.)


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How Some Small Businesses Are Trying to Master the New Tax Code | 2018 https://smallbusiness.com/taxes/tax-bill-2018/ Tue, 03 Apr 2018 21:29:18 +0000 https://smallbusiness.com/?p=31345

WSJ.com takes a look at how some small businesses are seeking to lower their 2018 tax bills by splitting their company in two, changing their legal status and reclassifying workers. (Note: Don’t try these at home without the hands-on help of your trusted advisors. Even then, if you’re out in front too far, you should expect some future conversations with the IRS .) 


Quote from WSJ.com:

“Owners of closely held businesses … are splitting operations apart, reclassifying them and re-categorizing their activities, all in an effort to get as much of their income taxed at the new low rates as possible. The legislation contains more uncertainties than usual for a tax overhaul because of the speed of its drafting, which left little opportunity for the public and congressional scrutiny that often identifies confusion in bills.

“Tax experts are searching for moves business owners can make that will disrupt their businesses the least, while best qualifying for new tax breaks Congress has dangled. The private sector’s old game of cat-and-mouse with the Internal Revenue Service and Congress, in other words, is intensifying, and is likely to play out over years in regulations, audits, appeals, and litigation.”

Continue reading at WSJ.com | “Crack and Pack: How Companies are Mastering the New Tax Code”


 

 

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Use this IRS Withholding Calculator to Perform a Quick Paycheck Checkup | 2018 https://smallbusiness.com/taxes/irs-withholding-calculator/ Wed, 28 Mar 2018 18:37:44 +0000 https://smallbusiness.com/?p=31259

Important to note: While the withholding calculator works for most taxpayers, people with more complex tax situations, including many types of small business owners, should use the instructions in Publication 505, Tax Withholding and Estimated Tax, expected to be updated in early spring, 2018. (Link to the latest version of Publication 505.)


The IRS encourages everyone to use the withholding calculator to perform a quick “paycheck checkup.”  This is even more important this year because of recent changes to the tax law for 2018. The calculator helps you identify a taxpayer’s tax withholding to make sure you have the right amount of tax withheld from your paycheck at work. While you should always seek help from your tax preparer or accountant regarding taxes, this IRS tool can be even more helpful this year because of recent changes to the tax law for 2018. (If you haven’t used the IRS withholding calculator previously, see information on this page, below the link to the calculator.)


Ready to start? Click here!

https://apps.irs.gov/app/withholdingcalculator

Note | The withholding calculator does not ask the user for personally identifiable information, such as name, social security number, address, or bank account numbers. The IRS does not save or record the information the taxpayer enters in the calculator.

Withholding calculator video provided by IRS

Why should you check your withholding?

There are several reasons to check your withholding:

  • Checking your withholding can help protect against having too little tax withheld and facing an unexpected tax bill or penalty at tax time next year.
  • At the same time, with the average refund topping $2,800, you may prefer to have less tax withheld up front and receive more in your paychecks.

If you are an employee, the withholding calculator helps you determine whether you need to give your employer a new Form W-4, Employee’s Withholding Allowance Certificate. You can use your results from the calculator to help fill out the form and adjust your income tax withholding.

Plan ahead: Tips for using the calculator

The calculator will ask you to estimate values of your 2018 income, the number of children you will claim for the Child Tax Credit and Earned Income Tax Credit, and other items that will affect your 2018 taxes. This process will take a few minutes.

  • Gather your most recent pay stubs.
  • Have your most recent income tax return handy; a copy of your completed Form 1040 will help you estimate your 2018 income and other characteristics and speed the process.
  • Keep in mind that the calculator’s results will only be as accurate as the information you provide.  If your circumstances change during the year, come back to this calculator to make sure that your withholding is still correct.
  • The Withholding calculator does not ask you to provide sensitive personally-identifiable information like your name, Social Security number, address or bank account numbers. The IRS does not save or record the information you enter on the calculator.

To Change Your Withholding:

  • Use your results from this calculator to help you complete a new Form W-4, Employee’s Withholding Allowance Certificate, and
  • Submit the completed Form to your employer as soon as possible. Withholding takes place throughout the year, so it’s better to take this step as soon as possible.

Special Note for 2019:

If you follow the recommendations at the end of this calculator and change your withholding for 2018, the IRS reminds you to be sure to recheck your withholding at the start of 2019. This is especially important if you reduce your withholding sometime during 2018. A mid-year withholding change in 2018 may have a different full-year impact in 2019. So if you do not file a new Form W-4 for 2019, your withholding might be higher or lower than you intend. To help protect against having too little withheld in 2019, we encourage checking your withholding again early in 2019.

If you have additional questions about your withholding, consult your employer or tax advisor.

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It’s That Season Again: Tips to Prevent Tax Phone Scams | 2018 https://smallbusiness.com/scam/telephone-tax-scams/ Thu, 22 Mar 2018 19:48:12 +0000 https://smallbusiness.com/?p=31232

There are several versions of tax scams. The classic telephone con explained below continues to thrive, especially during filing season. Share these IRS phone scam prevention tips with your employees and you could save someone a big headache — that is, in addition to the big headaches they may be having, just because it’s tax time. 


Here is how the IRS scam telephone call  works

  • Scammers call taxpayers telling them they owe taxes and face arrest if they don’t pay. Sometimes, the first call is a recording, asking taxpayers to call back to clear up a tax matter or face arrest.
  • When taxpayers call back, the scammers often use threatening and hostile language. The thief claims the taxpayers may pay their debts using a gift card, other pre-paid cards or wire transfers.
  • Taxpayers who comply lose their money to the scammers.

Remember! The IRS does none of these

  • Call taxpayers demanding immediate payment using a specific payment method, but will first mail a bill.
  • Threaten to have taxpayers arrested for not paying taxes.
  • Demand payment without giving taxpayers an opportunity to question or appeal the amount the IRS believes they owe.
  • Ask for credit or debit card numbers over the phone.

If you should receive one of these phone calls, the IRS says you should do these

More Information

How to know it’s really the IRS calling or knocking on your door


photo: iStock

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If You Take Money Out of a Retirement Plan Early, Here are Some Things the IRS Wants You to Know | 2018 https://smallbusiness.com/taxes/ira-early-withdrawal/ Fri, 16 Mar 2018 19:05:20 +0000 https://smallbusiness.com/?p=31172

Some small business owners — or any taxpayer with an Individual Retirement Account (IRA) or retirement plan, may need to take out money early from their plan. However, doing so can trigger an additional tax on early withdrawals. They would owe this tax on top of other income tax they may have to pay. Here are a few key points to know provided by the Internal Revenue Service. (Note: Everyone’s situation is different so you should check with your trusted financial advisor before making any decision about money.)


Early withdrawals | An early withdrawal is taking a distribution from an IRA or retirement plan before reaching age 59½.

Additional tax | Taxpayers who took early withdrawals from an IRA or retirement plan must report them when they file their tax return. They may owe income tax on the amount plus an additional 10 percent tax if it was an early withdrawal.

Nontaxable withdrawals |  The additional 10 percent tax doesn’t apply to nontaxable withdrawals, such as contributions that taxpayers paid tax on before they put them into the plan.

Rollover | A rollover happens when someone takes cash or other assets from one plan and puts it in another plan. They normally have 60 days to complete a rollover to make it tax-free.

Exceptions | There are many exceptions to the additional 10-percent tax. Some of the rules for retirement plans are different from the rules for IRAs.

Disaster Relief |  Participants in certain disaster areas may have relief from the 10-percent early withdrawal tax on early withdrawals from their retirement accounts.

File Form 5329 | Taxpayers who took early withdrawals last year may have to file Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts, with their federal tax returns.

 

 


Additional IRS resources

Interactive Tax Assistants

IRA FAQs |  Distributions/Withdrawals
Publication 590-B | Distributions from Individual Retirement Arrangements
Publication 575 | Pension and Annuity Income


 

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