Tax Cuts and Jobs Act

Top 10 things accountants do after deadline - TCJA edition

Our readers have come to count on our “Top 10 thing accountant do the day after deadline” lists. Every year, we poll the Raich Ende Malter staff on their plans for the day after the busy season deadline.

This year was a tough one for nearly all CPAs and tax preparers, thanks to the Tax Cuts and Jobs Act. We were so busy and exhausted that, for the first time in all the years we’ve been publishing The REM Cycle, we fell behind schedule. That may explain the number one item on this year’s list, which everyone wanted to do all week.

We’re happy to announce that we’re back on schedule. Thanks to all our readers for hanging in there with us, and thanks to all of our great colleagues here at Raich Ende Malter. We’re in this together, and this year we relied on one another more than ever.

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Honorable mentions:

  • Taking my daughter to the doctor to have her adenoids removed. (Hey, let us know how she’s doing! - Editors)

  • Road trip!

  • Go on a diet!

  • TIME SHEETS TIME SHEETS TIME SHEETS TIME SHEETS TIME SHEETS TIME SHEETS

  • Moving to California!

Overtime loss in Boston Bruins vs. IRS

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iStock

Posted by Evan Piccirillo, CPA

In 2017, a high-profile case (Jacobs v. Commissioner) pitted the owner of the Boston Bruins, an NHL hockey team, against the IRS, and the Bruins won—but… thanks to the Tax Cuts and Jobs Act (TCJA) we all lost.

The IRS had denied tax deductions relating to meals that the team provided to players and other staff for road games; these costs were not included in those employees’ wages and therefore, according to the IRS, only 50% deductible. The Bruins argued that the cost of meals counted as fully-deductible de minimis fringe benefits rather than only 50% deductible meals and entertainment expenses. The disagreement went to court and the ruling was in favor of the Bruins, but stretched the definition of certain aspects of the code that would allow for a full deduction.

Prior to the TCJA going into effect in 2018, taxpayers were allowed to deduct 100% of the costs of meals provided to employees if those costs were included in the wages of the employee. There was an exception to the requirement to include the costs in the employee’s wages if the facility providing the meals is on or near the business premises of the employer and the meals were considered provided for the convenience of the employer, along with some other technicalities which I won’t get into here.

A major part of the case hinged on the definition of “business premises.” Because these meals were on the road, the IRS argued that they could not be on the business premises of the employer. The Bruins claimed that travel was in the very nature of their business and the hotel space became their “business premises” since they had team meetings and attendance was mandatory. Like I said, it seems like a stretch of the definition, and in a recent “Action on Decision” memo released by the IRS they make it clear that those aspects of the ruling do not create a precedent for other taxpayers to follow. The IRS also stated it would narrowly apply this decision only to sports teams with very similar facts—not much help for the rest of us.

Ultimately, the big win by the Bruins in this case is not much to celebrate, because thanks to the TCJA effective 1/1/18, such de minimis fringe benefits are only 50% deductible. The worse news is that these expenses are nondeductible beginning on 1/1/26. Sorry, sports teams (and fans)!

The changes to deductibility of meals and entertainment under the TCJA don’t stop at de minimis fringe benefits and impact a much broader base of taxpayers than sports teams. If you have questions about how you are treating meals and entertainment expenses for your business, please reach out to your tax advisor. Or REM. We know a thing or two about this sort of thing.

Not your ordinary losses!

iStock and Amy Frushour Kelly

iStock and Amy Frushour Kelly

Posted by Konstantinos A. Kokkosis, Senior Tax Accountant

New year, new blog… and time to dive into some of the new changes that have made ordinary tax concepts, well, not so ordinary. What better way to start than with net operating losses (NOLs).

Net operating losses have always featured two elements. One element was how an entity or individual used the NOL, which was to offset dollar for dollar any losses carried forward or back against taxable income. The second element was how the entity or individual was able to apply an NOL. Historically, we would carry the NOL back two years or forward 20 years to offset any taxable income that the entity or individual incurred in the preceding or subsequent years. Thanks to the Tax Cuts and Jobs Act, as of December 31, 2017 and going forward, we have big changes. Changes that make us look at net operating losses entirely differently. Firstly, we will not be allowed to take a dollar for dollar deduction anymore. We will only be allowed to offset 80% of our taxable income with the NOL. Secondly, we will no longer be able to carry back the NOLs two years and instead of carrying them forward for only 20 years, we will be allowed to carry forward the NOLs indefinitely. How lucky are we! Due to the different treatment of the NOLs, the pre-2018 NOLs and the post 2018 NOLs need to be tracked separately.

Now, this is where we venture off into the great unknown. Things get a little tricky in the year where we need to use the pre-2018 NOLs and the post-2018 NOLs. As I stated earlier, for any NOLs incurred prior to December 31, 2017, we can take a full dollar for dollar deduction. But as of January 1, 2018, under the new tax law, we are only allowed to offset 80% of our taxable income by using up NOLs. The following example illustrates why there is uncertainty:

  • Corporation A has $90 million in NOLs generated in 2017 and $20 million generated in 2018.

  • In 2019, if corporation A had $90 million of income, Corporation A would be able to use up the entire 2017 NOL against the $90 million of income.

  • If on the other hand, Corporation A had $100 million of income, the correct answer is not as clear as before.

    • Could Corporation A argue that they should be able to offset the additional $10 million of income with the $8 million of NOL? …or…

    • Are they not allowed to utilize the 2018 NOL at all, since 80% of $100 million is $80 million, which is less than the $90 million of NOL applied to the current tax year?

The answer? Nobody knows… yet.

With so many changes that are being made to the tax law via the Tax Cuts and Jobs Act, tax planning has become more complicated than ever. The changes that have been made to NOLs will change how many entities and individuals plan for not only this year but for many years into the future! It is never too late to consult your tax advisor and see how these new changes affect you.

REM Cycle Review: Amazon divorce and a GILTI proposal

Ahhhh, Friday. The work week is almost over, the weekend is almost upon us, and it’s time to lean back in your chair and relax with another edition of the REM Cycle Review, the only weekly tax roundup written on an Apple MacIntosh. (The last part of this statement is not true.) We’ve got tax news that might have slipped under your radar this week, as well as this week’s staff video picks. Let’s dive in!

When Amazon founder Jeff Bezos couldn’t re-Kindle Fire into his marriage, the entire world took note—including tax professionals. One thing Jeff and MacKenzie Bezos may not have Primed themselves for is the new divorce rules under the Tax Cuts and Jobs Act (TCJA)... [Fox Business]

There is no average taxpayer anymore—not that there was an average taxpayer to begin with. But now that the TCJA has turned filing requirements upside down, New Yorkers will find their requirements even more complex, as NYS has decoupled its tax policies from the new federal laws. [Rochester Democrat & Chronicle]

A GILTI proposal. The American Institute of CPAs has requested that the IRS and Department of the Treasury change proposed regulations to the Global Intangible Low Tax Income provision in the TCJA. [Tax Pro Today]

Cryptocurrency markets plunge 11% in a single day. As of this writing, the biggest losers are Bitcoin Cash, EOS, Tron, and Cardano. So…not a super-great day to be a crypto investor. [Ethereum World News]

This week we’re watching…

The REM Cycle editorial staff recommends one professional development video and one funny or thought-provoking video each week.

Craig Wortmann shares five elements to running a high-impact business meeting.

Did Pepsi really run a commercial promising drinkers a military aircraft? Uhhh…

The REM Cycle Review is a weekly compilation of newsworthy articles pertaining to taxation, accounting, and life in general. Got a hot tip? Email us at REMCycle@rem-co.com.

Happy holidays from the REM Cycle editors and contributors

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Posted by Evan Piccirillo, Managing Editor

Without question, 2018 has been the biggest year yet for the little blog we decided to produce once a month in the summer of 2016 here at Raich Ende Malter. The Tax Cuts and Jobs Act gave us more material to write about than we could ever hope to cover in a bimonthly column, so we went weekly. Now we’re posting twice a week—one serious original tax piece, usually on Tuesday, and a Friday tax news roundup featuring REM Randy, pictured above (hi, Randy!). It’s a significant change in format and frequency, and a far cry from the occasional thought piece in our original vision.

This year, we’ve seen more new contributors, with content covering areas we haven’t touched on before. It’s all been incredibly exciting, and we’re currently hard at work on a new REM Cycle project. It should be arriving in your inboxes sometime next month. We think you’re going to like it.

But enough talk. Happy holidays, happy new year, and thank you for reading. See you in 2019.

Introducing: the new business loss limitation

iStock

iStock

Posted by Evan Piccirillo, CPA

A new provision included in the Tax Cuts and Jobs Act introduces the concept of excess business losses (EBLs). Beginning in tax years starting after December 31, 2017, a tax deduction for losses from business activities that exceed $250k for single filers and $500k for married filers are considered EBLs and will be disallowed.

Digging into this piece of hastily-written code section we don’t find much in the way of details, but we do get some important information:

  1. The EBL converts to a net operating loss (NOL) in the following year

  2. EBLs are figured by aggregating the income and loss from trades or businesses that exceed the limit

  3. The limits of $250k and $500k are indexed for inflation

  4. The limitation is applied at the partner or shareholder level in the case of a partnership or S corporation, respectively

  5. The EBL is figured after the other business loss limits: basis, at-risk, and passive activity

  6. This provision is set to expire in 2026

What does it all mean?

Taxpayers may not be able to shelter as much of their other types of income with losses from their active trades or businesses. Also, the NOLs generated from these EBLs are the new flavor of NOL which cannot be carried back, will be carried forward indefinitely, and are limited in their usage to 80% of taxable income. These NOLs are less potent than their predecessors, but the upside is that they don’t expire. We’ll have more on the NOL topic in a future article.

What don’t we know?

  • Does this limitation apply to trusts? The prevailing belief is that it does.

  • Are wages and/or guaranteed payments from sources subject to this limit considered to be trade or business income and therefore aggregated to figure the EBL? It seems they should be included, but this requires further guidance.

  • Will other items of income and loss such as interest income or 1231 gains/losses from sources subject to this limitation be aggregated to figure the EBL? This is also unclear and will require further guidance.

Let’s take a look at a simplified example:

A single taxpayer has nonbusiness income of $400k and net allowable business losses of $350K. Under these circumstances in 2017, this taxpayer would be able to shelter most of their income with the business losses and only pay tax on $50k of income ($400k - 350k = $50k). With the same set of facts in 2018, the taxpayer’s business losses will be limited to $250k and tax will be paid on $150k ($400k – 250k = $150k), resulting in a $100k swing in income. The EBL of $100k will convert to a NOL to be used in future years, which is nice, but this taxpayer still needs to pay tax presently on an extra $100k of income. Not an ideal outcome for our hypothetical taxpayer.

This limitation adds yet another layer of complexity to an already complex tax planning landscape. If your tax situation resembles what you have just read, you should consult with your tax advisor to see if there is anything you can do before the end of the year to account for this potentially expensive tax consequence.

Navigating the Tax Cuts and Jobs Act: Volume 4 – Individual year-end planning

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Posted by Evan Piccirillo, CPA

[Editor’s note: this is one of an ongoing series of articles parsing and clarifying the tax reform commonly known as the Tax Cuts and Jobs Act. Previous articles are linked at the end of the post.]

Nearly everything involving taxes in our country has been acutely affected by the Tax Cuts and Jobs Act (TCJA). Unfortunately, owing and paying tax are still necessary and required in most cases, but on the other hand we are treading on new terrain for year-end tax planning. We will explore some actions taxpayers can make before the end of 2018 that can provide a tax benefit.

Itemized deductions

The only itemized deductions that have survived the TCJA are:

  1. medical expenses in excess of 7.5% of adjusted gross income

  2. state income and real estate taxes, limited to $10k

  3. mortgage interest including home equity interest paid, subject to limits

  4. charity

One of the most impactful changes to individual taxpayers is the limitation on state income tax and real estate tax paid (the so-called SaLT deduction) to $10,000. Many taxpayers, especially those in high-tax states, were itemizing their deductions primarily due to their state tax burden. Couple this limit with the drastic increase of the standard deduction ($24k for married filing joint taxpayers), and you will find most taxpayers will no longer itemize their deductions.

Tax planning points

  1. Bunching deductions. If you have significant deductions that are just below the standard deduction, you might consider “bunching” your deductions, i.e. paying charitable contributions on January 1st and December 31st of year one, and then not making such contributions in year two. As a result, you will itemize deductions in year one and tax the standard deduction in year two, then alternate this method each year.

  2. For estimated taxpayers, there is no more pressure to get your 4th quarter estimated state tax payment in on or before December 31st since you will likely already exceed the $10k cap, and therefore receive no benefit from paying the estimate two weeks early (they are due January 15th).

Sec. 199A – The 20% Deduction

To put individual taxpayers on more even ground with corporations that now have a 21% flat tax rate, the TCJA provides a deduction of up to 20% of income from pass-through entities. Depending on the income level of a taxpayer and the type of business that generates the income, this 20% deduction may be limited or altogether eliminated. We will discuss this provision in depth in a different article, but we will explore basic tax planning here.

Tax planning points

  1. For s-corporation shareholders, consider adjusting owner’s salaries to maximize the deduction. If a taxpayer’s income is over the threshold and the business is qualified, the 20% deduction may be limited to 50% of the wages paid by the company. Since only the pass-through income and not the wages earned from the company get the benefit of a 20% deduction you would prefer the pass-through income to be as high as possible and the wages paid to be as low as possible. There is a sweet spot in the relationship between the wages and the pass-through income that will offer the optimal deduction assuming the owner’s compensation is still considered to be reasonable.

  2. An alternate limitation is 25% of wages plus 2.5% of depreciable property. Taxpayers might consider making an investment in tangible property for the business before the end of the year, especially in partnerships or sole proprietorships where owners are precluded from paying themselves wages. There are also enhanced accelerated depreciation incentives in the new tax law that make this an even sweeter deal.

Gain Deferral – Qualified Opportunity Zones

An incredible tax deferral tool provided by the TCJA is the advent of qualified opportunity funds (QOFs) which are entities that invest in qualified opportunity zones (QOZs). QOZs are economically depressed areas that have been identified by state governments. The intention of the law is to spur economic investment in these depressed areas. QOFs may present an attractive option for taxpayers that have significantly appreciated property and would like to dispose, but do not want to pay tax on the gain.

Tax planning points

A taxpayer may defer paying tax on a capital gain, if they invest the gain in a QOF within a 180-day window. If specified holding periods are met, those taxpayers may receive a deemed step up in basis of up to 15%, thereby permanently eliminating tax on that portion of the gain. In addition, the appreciation on the investment in the QOF is not taxed if held 10 years.

Bottom line

Only two months remain in 2018, but that is enough time for savvy taxpayers to take advantage of some of the changes to the tax code… and these are just a few of the options available to taxpayers looking to decrease their federal tax liability. As always, consult with your advisor before taking it upon yourself to engage in any of these tactics. Everyone’s personal income tax situation is nuanced, and certain actions may not yield expected results.


WAKE UP WITH REM: Tax evasion for fun and profit

 
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Some of the big news of the past week has involved tax evasion, both potential and proven. Let’s dive right in, shall we?

Trump’s taxes and you: Five questions answered. Last week, the New York Times’s report on their special investigation into the Trump family’s wealth and possible tax avoidance was largely buried by the ongoing Kavanaugh investigation. This week, pundits were able to catch their collective breath and dive into the Times report. [The Hill]

Can I write off employee gifts as a tax deduction? Thanks to the Tax Cuts and Jobs Act, the answer is, “probably not…but…maybe?” The central issue here is the value of the gift. If the gift is valued over a certain (surprisingly small) amount, it qualifies as income for the employee. [Influencive]

 
 

Filing taxes on cryptocurrency is still a tricky prospect. The IRS considers virtual currency to be property, treated similarly to stocks. Easy-peasy, right? Think again. Because cryptocurrency is unregulated and standards vary, investors will have to filter their transaction history and differentiate between taxable and non-taxable transactions and activities to determine how much tax is actually due. [CryptoGlobe]

 
 

What would Snooki and JWoww say? On Friday, “The Jersey Shore” star Mike “The Situation” Sorrentino was sentenced to eight months in federal prison for tax evasion. His brother Marc was sentenced to two years in prison for his part in the plot. Together, the brothers conspired with their accountant, Gregg Marks, to avoid paying between $550,000 to $1,500,000 in taxes. We hope there will be hair gel in the prison commissary. [Variety]

The Wake-Up Call is The REM Cycle’s biweekly compilation of newsworthy articles pertaining to taxation, accounting, and life in general. Got a hot tip? Email us at REMCycle@rem-co.com.

Z is for (opportunity) zone

iStock

iStock

Posted by Courtney Kopec, CPA

If you are holding appreciated property that you are looking to offload, but don’t want to pay income tax on the appreciation right now, then Congress has a solution for you: Qualified Opportunity Zones. This is an incredibly taxpayer-friendly provision that was included in the Tax Cuts and Jobs Act.

Get in the Zone

Congress passed Subchapter Z to entice private investors to invest in low-income urban and rural areas by providing “temporary deferral of inclusion in gross income for capital gains reinvested in a qualified opportunity fund and the permanent exclusion of capital gains from the sale or exchange of an investment in the qualified opportunity fund.” Translation: under this law, an investor may defer any gains from the sale of property to an unrelated party by reinvesting the capital gains portion of the proceeds in a qualified opportunity fund (“QOF”) within 180 days of the sale. The gains are deferred until the QOF is sold or exchanged, with the tax benefits increasing substantially the longer the holding period of the fund (up until December 26, 2026, the law’s tax recognition date). The principal cost portion of the sale proceeds does not need to be reinvested, and there is no tax benefit in doing so.

The best-case tax savings scenario is where an investor reinvests realized capital gains in a QOF by December 31, 2019, and the QOF is held for 10 years. In this scenario, on December 31, 2026 the taxpayer holding the QOF recognizes and includes gain in gross income as calculated to that date. The original reinvested deferred gain is reported and 15% of that deferred gain is treated as additional or “stepped-up” basis. This reduces the amount of the original reinvestment to be taxed by the 15% stepped up basis. Thereafter, if the fund is held for the full 10 years, no additional capital gains will be recognized. But the law contains other requirements and lesser tax savings scenarios that make the Qualified Opportunity Zones a tax savings opportunity that should not be overlooked, even if a shorter holding period is desired.

What is a Qualified Opportunity Fund?

A QOF is an investment vehicle designated by IRS guidelines and qualifications. No approval or action by the IRS is required to establish a QOF. The fund self-certifies and can be a partnership, corporation, or limited liability company. QOF requirements do include some technical guidelines. For example, the fund must hold at least 90% of its assets in QOZ Property (“QOZP”). QOZP includes QOZ stock, a QOZ partnership interest, or QOZ business property in a Qualified Opportunity Zone. QOZP must be acquired after December 31, 2017 in exchange for cash.

A qualified zone business owns or leases substantially all of its tangible property in QOZ business property and generates 50% of its income from active trade or business with “less than 5% of the average of its aggregate unadjusted bases of the property of such entity attributable to nonqualified financial property.” Investments in certain “sin” businesses are not eligible investments. A penalty is assessed each month the QOF fails to meet compliance requirements referred to above.

What is a Qualified Opportunity Zone?

A QOZ is an economically-distressed area where under certain conditions, new investments may be eligible for preferential tax treatment. Governors were asked to nominate low income urban and rural areas for Treasury approval to become QOZs. The current list of designated QOZs can be found here: https://www.cdfifund.gov/Pages/Opportunity-Zones.aspx

Death and taxes? Perhaps not: deferral and abatement

The primary benefit of investing in an QOF is the deferral of reporting taxable gains. Because QOF investors are reinvesting the capital gains portion only and deferring the tax to a future date, their initial reinvestment has no cost basis. An investor who holds a fund for a minimum of five years and initiates the investment by December 31, 2021 will be deemed to have a basis equal to 10% of the reinvested funds on December 26, 2026, the law’s tax recognition date. In other words, by satisfying the investment date and holding period requirement, $100,000 invested in a qualified fund with no basis now qualifies for a deemed $10,000 stepped-up basis. And due to the deemed basis, the taxpayer pays tax on only $90,000, instead of $100,000. For an increase in the tax savings benefits to be considered, the reinvested capital gains must be invested in a QOF by December 31, 2019 and held for seven years. If the Fund invests by year end 2019 and satisfies the seven-year holding period requirement, the investment qualifies for a 15% stepped-up basis. If the fund is held ten years, the basis is stepped up, and deemed to be equal to the fair market value. Therefore, after ten years, no tax is paid on the appreciation of the gains reinvested in the fund. Sweet, sweet tax benefits!

Tax planning considerations

Subchapter Z presents real estate developers an opportunity to establish a fund in order to generate third-party investment capital for their projects. But! QOFs that choose real estate as a primary holding in the fund must meet mandated rehabilitation requirements. For real estate investors with large gains considering a 1031 exchange, the opportunity fund is a viable alternative option in that it requires only gain to be reinvested. However, additional cash invested will be treated separately and will not be eligible for the capital gain exclusion.

Bottom line? The alternative capital gain tax deferral option offered by the fund vehicle is more liquid than reinvesting in another real estate property. In the least favorable scenario, if an investment is held fewer than five years, the gain is deferred until the sale, but no gain is excluded.

Is Subchapter Z right for you? Contact your CPA or trusted advisor to make that determination.

Further reading

WAKE UP WITH REM: Soda tax, tax reform, a reformed form, and marijuana tax

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We can't think of a clever opening paragraph this week. If you can think of one, leave it in the comments below.

Soda taxes again. Several states, including California, Pennsylvania, Oregon, Mississippi, Arizona, and Michigan, are either considering or have already adopted food and/or soda taxes. But what happens when individual municipalities have their own food taxes? [Reason.com]

Tax Reform 2.0. Rep. Kevin Brady (R-Texas), Chairman of the House Ways and Means Committee, released a two-page outline of a plan to reform the nation’s most recent tax reform. The idea is nothing new — for instance, several states have already drafted legislation to mitigate the SALT deduction cap — but it will be interesting to see Brady’s finished plan. [Bloomberg]

ICYMI: Facebook stock drops by more than the worth of the entire global cheese market. John Oliver hopes that this will inspire the return of MySpace. (Strong language warning.) [YouTube]

At last! The new, improved(?) W-4. You know that annoying form you fill out every once in a while? The one where you fill in zeroes and ones, etc., to calculate the number of withholding allowances you can claim? The IRS has revamped it, and you’ll find a few surprises. [Forbes]

New Jersey budgets $20M in medicinal marijuana revenue for FY 2019. But based on tax data from previous years, this would mean handing out more than twice the number of existing cannabis prescriptions. Unless Willie Nelson moves to the Garden State, experts warn that’s not going to happen. [NJ.com]

This week's videos

The Wake-Up Call is The REM Cycle’s biweekly compilation of newsworthy articles pertaining to taxation, accounting, and life in general. Got a hot tip? Email us at REMCycle@rem-co.com.