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Tax Reforms Change the Divorce Alimony System

Posted on May 21st, 2018

KEY FACTORS

  • The new tax laws are now allowing divorce alimony recipients to no longer have to pay taxes on their received income, hence creating a purely tax-free alimony for all recipient spouses
  • The days of tax deductions for spouses paying alimony are over as new tax laws are forcing those paying the alimony to also pay the taxes for the amount they pay

INITIATION OF NEW RULES

  • The new rules being implemented on account of the tax reforms will be put into action on December 31st, 2018

Tax Plans for Payer of Alimony

  • Finalizing your divorce before December 31st, 2018 is essential in order to avoid losing your alimony-based tax deduction
  • Retaining money is only possible if you push for the majority of the money to be allocated towards alimony payments
  • Avoid allocation of money to Child support as it will cost you high amounts  

Tax Plans for Recipient of Alimony

  • Completing all divorce settlements after the date December 31st, 2018 will allow for you to save yourself from the burden of having to pay taxes on the Alimony you receive instead of getting tax free cash from your ex-spouse
  • Receiving the most money possible from the settlement is only possible if you allocate more money towards Child Support
  • Avoid allocating money to alimony payments at all costs as it will cost you potential winnings


NEW TAX LAW CHANGES FOR 2017

Posted on January 6th, 2017

EXTENDERS MADE PERMANENT:

State & Local Sales Tax Deductions

  • Permanent extensions of itemized deductions for state and local sales taxes
  • Option deductions have been restored and made permanent

Educator’s Expense Deduction

  • “Eligible educators” can claim deductions on out-of-pocket education and classroom related expenses
  • Up to $250

American Opportunity Tax Credit

  • Qualified tuition and certain related expenses
  • Applicable for the first 4-years of secondary education
  • Max credit: $2,500/ year
  • Lower Income Taxpayers: Up to 40%of the allowable credit is refundable

Refundable Child Tax Credit

  • Claim a $1,000 child tax credit per child
  • Generally nonrefundable

Earned Income Credit

  • Low income tax payers
  • Depends on number of children, household income, taxpayer adjusted gross income
  • Stricter on improper, intentional inaccurate reporting, inflated claims

Transportation Benefit Parity

  • Equal to the amount for the qualified parking benefits exclusion
  • $130-$250/ month
  • Month cap on both mass transportation and parking benefits is $255/month

Charitable Conservation Contributions

  • Limited to 30% of a taxpayer’s contribution base
  • Contributions of real property now 50%

Charitable IRA Distributions

  • Permits taxpayers 70.5 years and older to exclude charitable distributions from an IRA
  • Limited to $100,000 for tax-free distributions

NON-PERMANENT EXTENDERS:

Mortgage Forgiveness Exclusion

  • Permits exclusion from gross income for a discharge of qualified principal residence
  • Allows the exclusion for qualified

Mortgage Insurance Premium Deduction

  • Treat premiums paid for mortgage insurance on a primary/secondary home as deductible home mortgage interest
  • Deduction is phased out for homeowners with AGI between $100,000-$109,000

Tuition and Fees Deduction

  • For qualified tuition and all related expenses
  • Max deduction is $4,000 for AGI:
    • up to $130,000 (joint filers)
    • $65,000 (single/other filers)
  • Max deduction is $2,000 for AGI
    • Between $130,000-$160,000 (joint filers)
    • Between $65,000-$80,000 (other filers)
  • Taxpayers above limits cannot claim deductions
  • Max deductions overall is $2,000

Nonbusiness Energy Property Credit

  • Nonrefundable credit for homeowners installing “green” or energy efficient property
    • Windows, doors, insulation, water heaters, heating systems
  • Total credit claimed for all tax years: $500
    • No more than $200 for windows

Residential Energy Efficient Property Credit

  • Residential Energy Efficient Property (REEP)
  • Can claim for 30% of the following property cost
    • Solar electric
    • Solar water heater
    • Fuel cells (up to max credit for $500 per 0.5kw capacity
    • Small wind energy
    • Geothermal heat pump
  • REEP credit of 30% valid up till 2020
    • For solar electric, solar ware hearing
  • REEP credit for 30% valid up till 2016
    • For fuel cell, wind energy, and geothermal heat pump


Are You Inviting An IRS Audit? Deciding the Right Salary Structure For Your S Corporation

Posted on January 5th, 2017

It is common for service-oriented small businesses to optimize their tax options.  Many small businesses are encouraged to set up as an S Corporation to maximize benefits.  One such upside is to decrease likely self-employment liability. However, many corporations and small business owners fall into “traps” of choosing the salary structures and funneling income into the wrong fields. Unfortunately, when an S Corporation owner fails to report correctly, they can face a large tax liability, tax court, and an IRS audit.  S Corporation owners are tempted with tax savings when their salary structure allows the S Corp to pay a salary less than the gross amount it earns in receipts.  However, it is important to keep in mind the nature of the income in relation to the shareholders and employees.  When a small business owner is the sole shareholder, the earned income would go to him/her.  It is imperative to understand how to compensate the S Corp shareholder or employee in a reasonable manner.  If it is too low, the IRS would attest that distributive share would serve as compensation.  The key takeaway here is that the reported income and the separation of the company, does not allow the taxpayer or owner to disclose the income at will or in their best interest.

 

A recent court case pertaining to salary structure educates future business owners on how to select the breakdown for your S Corp. The case is Fleisher V. Commissioner.  We have included an excerpt of an article by Forbes.com, written by Leslie Book:

“Fleisher is a licensed financial consultant. Based on the advice of his CPA and lawyer, he set up an S Corporation. Fleisher was the president, secretary, treasurer and sole shareholder of the corporation. Fleisher entered into an employment agreement with the S Corporation, and pursuant to that agreement the S Corp paid him a salary in his capacity as financial advisor. In his individual capacity, Fleisher also entered into contracts with financial service companies Mass Mutual and LPL. Those contracts generated significant commissions, which Mass Mutual and LPL reported to the IRS and to Fleisher individually on various Form 1099’s over the years.

The key to the employment tax savings when all works well in this structure is that the S Corp pays a salary less than the gross receipts it receives. The shareholder/employee has employment tax liability to the extent only of the wages that the S Corp pays to the shareholder/employee. Fleisher paid employment tax on his wages from the S Corp. And while Fleisher’s status as sole shareholder meant that all of the S Corp’s income would flow through to him, the nature of the income matters. Individuals who earn service income directly have to pay Social Security and Medicare taxes, which are often referred to collectively as the self-employment tax. [Note that the tax rate for Social Security taxes is 12.4% and the rate for Medicare taxes is 2.9%; for 2017 Social Security taxes are levied only on the first $127,200 while the Medicare rate applies to all service income]. If the S corporation, rather than the individual, earns that income, then the S corporation does not have a separate employment tax liability and the shareholder does not have self-employment tax liability on his share of the S corporation’s income.

Fleisher’s S Corp paid him a salary of about $35,000. The net income the S Corp earned varied over the years, going as high in one year as about $150,000. When, as was the case here, the S Corp’s wages paid are less than its net service income, the shareholder/employee can potentially avoid the self-employment income tax if that income were earned directly by the shareholder/employee or the employment tax if the S Corporation does not pay a salary commensurate with the corporation’s net income.”

CITATION: Book, Leslie. “Financial Consultant Fails To Avoid Self-Employment Tax With S Corp Structure.” Forbes. Forbes Magazine, 05 Jan. 2017. Web. 05 Jan. 2017.


8A Continuation Eligibility

Posted on November 4th, 2016

8(A) CONTINUED ELIGIBILITY PROGRAM

Getting into an 8(a) business development program can be challenging, however maintaining the status once you’re in, can be just as difficult.  Below, we’ve addressed some common mistakes and key requirements

  1. Late or Non-Submissions of 8(a) Annual Review- One of the most common mistakes programs make is to not submit the required documents or to submit them late.  It is imperative that all required documents are submitted promptly and completely.  The date to submit your review is on the firm’s certification date annually.  If you do not follow these terms, you can risk losing your 8(a) status. Once lost, you cannot be certified again.
  1. Late or Non-Submission of Financial Statements Sales Level-  It is very important to submit your year-end financial statements and all required documents.  You should be sure that the required documents are signed, dated, and verified by an authorize agent.  There are very clear sales levels that companies should meet and how to have them verified.
    • Sales levels:
      • Less than $2 million: may submit statements prepared in-house
      • Between $2 million- $10 million: must be reviewed documents, prepared by CPA/ Public accountant
      • More than $10 million: Must submit audited financial statements prepared by CPA/Public Accountant
  1. Failure to Keep Your BDS Updated: Contact Info, Address, Phone, Etc.- One key rule often overlooked by 8(a) firms is notifying BDS of any changes or updating information.  If you have any change in address, telephone number, mailing address or P.O. box, and any/all contact info, you MUST notify BDS.  Essentially, the BDS must have accurate contact information on you at all times.  Firms in the past, have lost certification because of a proper lack of notification on updates or because they failed to respond to any correspondence.
  1. Excessive Compensation or Withdrawals from 8(a) Concern- Excessive withdrawals are also grounds for 8(a) status termination.  What constitutes “excessive”?
  • Excessive withdrawals:
    • Cash dividends
    • Distributions in excess amounts needed to pay taxes
    • Cash and property withdrawals
    • Payments to immediate family members not employed by firm
    • Bonuses to officers
    • Investments on behalf of an owner
  • Withdrawals are excessive if during any fiscal year they exceed:
    • $250,000 for firms with sales up to $1,000,000
    • $300,000 for firms with sales between $1,000,000- $2,000,000
    • $400,000 for firms with sales over $2,000,000
  1. Failure to meet Competitive Business Mix targets- Every 8(a) business has to create a business development program consisting of goals, revenue targets, and plans.  It you do not mean these goals, your 8(a) status could be at risk.  You must make
  • Must make maximum efforts to obtain business outside 8(a) Business Development program
    • Development and Transitional stages
  • Follow reasonable marketing strategy to attain targeted goals’
  • Must display a potential for a strong future post- 8(a) program
  • MUST meet non-8(a) business activity targets each year:
Year in Transition Stage Minimum revenue as % of total revenue
1 15%
2 25%
3 35%
4 45%
5 55%
  • If firm cannot meet, ineligible for sole source 8(a) contracts until they correct the situation
  1. Failure of the 8(a) Eligibility Individual to be the Highest Compensated
  • Non-disadvantaged can participate in management of an 8(a)
    • May not receive higher compensation than 8(a) applicant
  • Must obtain written consent for exceptions
  1. Failure of the Participant to Devote Full-Time Management
  • Applicant/participant must be managed on a full-time basis by disadvantaged individual
  • Disadvantaged full-time manager must hold highest officer position
    • President, CEO, etc.
  • Management of applicant must devote full-time hours
  • Manager who wishes to engage in outside employment must notify SBA and seek approval
  1. Failure to Obtain Prior SBA Approval of Ownership Changes
  • May change ownership/business structure
    • Must have one or more disadvantaged individuals own/control after change
  • Must have SBA approval prior to change
  • Change in ownership does not provide new owners with a new 8(a) BD term
  1. Failure to Perform Required % of Work on 8(a) Contract
  • Will perform at least 50% of the cost of the contract
  • At least 50% of the cost of manufacturing supplies/products
  • At least 15% in case of a contract for general construction
  • Construction by special trade contractors, perform at least 25% of cost
  1. Failure to Submit SBA Form 1790 Representative Report
  • Everyone must submit a written report (semi-annual) to assigned BOS, including agents, representatives, attorneys, accountants, consultants, etc.


ITIN Changes

Posted on November 3rd, 2016

Recently the IRS proposed some new changes to the ITIN process.  These changes involve an expiration of certain ITINs and a renewal process.

What is an ITIN?
An individual taxpayer identification number is a tax-processing number issues by the Internal Revenue Service. ITIN’s are commonly assigned to individuals residing in the US who are not eligible for a social security number.  These people would most likely include ones in possession of an F-1, F-4, H-4 visa.

Who needs to renew for 2017?

  1. If your ITIN was issued prior to 2013, and you have not used your ITIN for the past 3 years, then you need to renew
  2. If your ITIN has a “78” or “79” in the middle digits, then you need to renew. For example, 9xx-78-xxxx and 9xx-79-xxxx

Why should I renew my ITIN?
It is imperative for ITIN renewal to happen as soon as possible.  However, the ITIN renewable process takes time. You should renew early to ensure that you will be able to file taxes on time for the 2016 tax year.  There are some serious consequences for not obtaining a new ITIN on time.  You can risk delaying your refund.  Also, without a proper renewal, you can risk ineligibility for certain tax credits such as the American Opportunity tax credit, and the Child Tax credit.

How can I renew my ITIN?

The renewal process can be simple if you take assistance from a certified acceptance agent.  You can also visit an IRS office and as well as mail in the completed form and required documents to the IRS.

Our advice to you:

We here at VG CPA PC recommend that you renew early so you can avoid any potential delays or issues with your 2017 filing.  It is important that to keep in mind that the IRS will no longer accept passports without a date of entry into the United States as a stand-alone ID for all dependents.  You can also renew ITINs simultaneously for families.


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