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Preparing for Annual Income Tax Return

The year-end is over, but you are most likely still closing out your books for the corporate income tax
return and finalizing financial statements for the year. Accountants enjoy these details, accounting stuff
and making sure that the books and records are nice and tidy. The resulting neat and completed year-
end package is the pretty curb appeal but requires a lot of foundation building and organizing sourced
documents. Below is a review of a few of the important year-end topics to help you with the final
preparation of 2018 financial records.

Preparing for Annual Income Tax Return

To close out the year and prepare for the annual tax filing, you should organize accounting records to
provide to your tax preparer. These documents will be used to prepare the return and ultimately
substantiate income reported, deductions taken, etc. on the returns. Reports from the accounting
software are part of this support but are not the exclusive supporting records. Other accounting records
typically used include:

 Payroll tax filings (941’s, 940, W-3)
 Bank reconciliations
 Closing statements
 Loan documents
 Inventory valuation calculations
 Sales tax filings
 Organizational documents (operating agreements, ownership percentages.)

In the event of an IRS audit the business will need paper or digital records to substantiate the reported
figures claimed on the tax filing form. Retaining receipts is very important to support business expenses,
especially if the transaction was conducted using a credit card. The credit card statement itself will not
provide adequate support.

Mileage Log

Keep a business mileage log. If you are using personal vehicles for business purposes this log will
provide the basic support needed for the deduction. This log should include:
 Beginning and ending year odometer reading
 Beginning and ending odometer reading for each business trip
 Date of business travel
 Description of where you went for business

By keeping an accurate mileage log you are entitled to a deduction for those miles.
Taxpayers may qualify to use the optional annual issued standard mileage rates for calculating
deductible cost of operating an automobile for business, charitable, medical or moving expense
purposes. The 2018 standard business mileage rate is adjusted to 54.5 cents per mile. Unreimbursed
employee travel expenses which are reported as a miscellaneous itemized deduction are suspended for
taxable years beginning after December 31, 2017, and before January 1, 2026. The deduction for
moving expenses are also suspended for the same taxable years. Activity duty members of the armed
forces of the United States may qualify for an 18 cents per mile deduction.

A taxpayer may also elect to calculate the auto deduction using the actual expenses. Adequate records
will need to be maintained as documentary evidence to support the expenses claimed. The mileage log
will still be needed which will also assist with allocating these expenses to the business usage.

Client and Prospect Business Meal Deductions

As of the date this article is prepared, the IRS has not issued proposed regulations on business meals
deductions under the Tax Cuts and Jobs Act nor have they listed any new or changed standards. The
proposed regulations should provide details for what records will be needed for providing support.
Meanwhile documentation should provide proof of payment and occurrence.
Maintain receipts to support business meals and entertainment expenses. These receipts should
include:

 Date
 Name of the restaurant (location)
 Who was in attendance
 Business purpose of the meal (ex. Lunch meeting to discuss timeline of tax preparation, etc.)
Often business expenses are overlooked when they are paid from personal funds. To help prevent this
oversite, use one credit card exclusively for business purposes which will also support proof of payment.
You may deduct 50 percent of your client and prospect business meals if the expense is:
 Ordinary and necessary expense incurred during the taxable year in carrying on any trade or
business
 Not lavish or extravagant under the circumstances
 The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or
beverages
 The food or beverages are provided to a current or potential business customer, client,
consultant, or similar business contact
 In the case of food and beverages provided during or at an entertainment activity, the food and
beverages are purchased separately from the entertainment, or the cost of the food and
beverages are stated separately from the cost of the entertainment on one or more bills,
invoices or receipts

Hopefully, these topics will assist you prepare for your 2018 income tax returns and be audit ready of if
needed.

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New Tax Deduction from the Tax Cuts and Jobs Act

A new 20-percent deduction is available for qualified, pass-through business income. A welcomed relief
to the closely held and/or small business owners. The Qualified Business Income Deduction or Provision
11011 Section 199A of the Tax Cuts and Jobs Act is the provision that allows pass-through entities to
receive the tax reduction benefit offered to C-Corps and other tax paying entities under the Tax Cuts and
Jobs Act. Without this provision, the small business owner representing the vast majority of businesses
would not receive the benefit of the reduced corporate tax rates.
There are a few items to touch on in this article about this new deduction.
1. What is Qualified Business Income (QBI)
2. Who qualifies for the deduction
3. What type of income qualifies and limitations that apply
4. Where is the deduction reported
5. How is the deduction computed
What is QBI – In general, QBI is taxable income from any qualified trade or business resulting from trade
or business within the United States. Capital gains and losses, dividends and interest income are
excluded from QBI. The business income can be generated from a proprietorship, a partnership, or an S
Corporation.
Who qualifies for the deduction – The deduction is taken by individuals, trusts and estates, qualified
REIT dividends or qualified REIT dividends or qualified TPT income.
What type of income qualifies and limitations that apply – This is very large swath and includes any
trade or business, with two exceptions: (1) Specified service trade or business (SSTB); and (2) performing
services as an employee.
A SSTB includes businesses that perform the following services:
 Health
 Law
 Accounting
 Actuarial science
 Performing arts
 Consulting (see definition of Consulting below)
 Athletics
 Financial services
 Investing and investment management
 Trading
 Dealing in certain assets
 Any business that the principal asset is the reputation or skill of one or more of its employees
The exception for SSTB’s is applicable if the taxpayer’s taxable income exceeds $415,000 for a married
couple filing a joint return, or $207,500 for all other taxpayers. The Section 199A tax deduction is
eliminated when taxable income is greater than this threshold for a SSTB business. The tax deduction is
subject to limitations when taxable income is greater than $315,000/$157,500 and less than the

$415.000/$207,500 threshold. Of course complications arise and require further evaluation when
taxable income is above the limits and business income is composed of both SSTB and non SSTB income.
Another issue is when a business provides 80% or more of its property or services to an SSTB business
and they share 50% or more of a common ownership. In this case the business providing the property
or services to the SSTB is also considered an SSTB.
Definition of Consulting – Consulting income is one of the SSTB’s that could result in limitation or
exclusion of the QBI deduction. So, it is important to understand the definition and if possible how to
classify income different than consulting, if appropriate.
Consulting includes providing advice and counsel to clients in order to achieve goals or solve problems.
This classification also includes activities like lobbying or attempts to influence governmental officials or
legislative bodies. However, consulting and sales are considered different classifications. Sales income is
not included in the list of SSTB’s. The facts and circumstances will determine if the activity should be
classified as sales or consulting.
Where is the deduction reported – Since many of the QBI will be derived from S-Corps, Partnerships and
other entities that are not taxpayers, the QBI is passed through to the partners, members and
shareholders of these entities. These pass-through income sources will require the identification of the
trade or business individually.
The Qualified business income deduction is a below-the-line deduction (applied after the applying the
standard deduction or itemized deductions.) The deduction reduces the total taxable income and is
reported on Page 2, Line 9 of the Form 1040. The deduction does not have a supporting form or
schedule for filing. A simplified worksheet can be found in the 2018 Form 1040 instructions to assist
taxpayers with the calculation.
How is the deduction calculated – Initially the qualified business income (QBI) is determined. This
determination is made separately if multiple qualified businesses are applicable. The QBI is the net
amounts of income, gain, deduction and loss associated with the qualified business. Short-term and
long-term capital gains and losses, dividends and interest income not applicable to the business are not
included in the calculation. Reasonable compensation payments and guaranteed payments made to the
taxpayer for services provided to the qualified business are also excluded.
The deduction is 20% of the QBI. If multiple qualified businesses are applicable the 20% is applied to the
QBI for each business then totaled. When taxable income is below the lower $315,000/$157,500
threshold the 199A deduction is equal to the lessor of (1) 20% of the QBI or (2) 20% of taxable income
minus net capital gains.
When the taxable income is above the lower $315,000/$157,500 limits and depending on the type of
business then additional test and limitations are applied to the deduction calculation.

The concept of the 199A deduction seems fairly simple especially when taxable income is under the
threshold. Complications can be triggered which CPAs can provide further explanation of the rules and
provide tax planning.

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How to report loss to the IRS

The curb appeal of homes and businesses has been impacted by Hurricane Michael on October 10, 2018. Reporting the losses to the IRS is part of the financial recovery process that the tax payer will need to do in the 2018 or maybe the 2017 income tax returns. The Tax Cuts and Jobs Act (TCJA) signed in 2018 does change how casualty losses are reported.

 

In general, the TCJA raises the bar for claiming a tax deduction for a personal casualty loss by mostly eliminating personal casualty loss deductions beginning in the tax year 2018. However, if the casualty loss is a federally declared disaster and your property is in the declared disaster zone, the taxpayer can make a special election to report the loss in the preceding tax year of the loss. The election has to be made no later than six months after the federal filing due date for the year of the disaster not including extensions.  Individuals claiming a casualty loss for personal use property report casualty losses as an itemized deduction on Form 1040, Schedule A. When to report the loss is dependent on the individual’s circumstances, including:

  • AGI in each year
  • When returns were filed
  • Taxable income in each year
  • Need for cash

 

Different tax rules apply to the 2016-2017 tax years compared to 2018 and beyond. So, to determine the best result for the taxpayer, each circumstance should be considered. The best evaluation method is to input the loss numbers in each year’s tax return and calculate the result.   

 

Losses Exceed Income (Net Operating Loss)

Once the loss is reported in the proper year to maximize the taxpayers benefit, a net loss may be the result. Individuals, just like businesses can have a net operating loss, especially with reporting casualty and disaster losses. Although the TCJA eliminates the carryback of NOL’s to a previous year, it does allow for a carryforward to future years without an expiration period.

 

Retirement Plan Used for Disaster Recovery

The IRS has made provisions to relax regulations relating to Retirement Plan Hardship Distributions. 401(k) plans and similar employer-sponsored retirement plans can make loans and hardship distributions to victims of both Hurricane Michael and Hurricane Florence. And, members of their families may also be eligible. A person who lives outside the disaster area can take a loan or distribution for assistance to a son, daughter, parent, grandparent or other dependent who lived or worked in the disaster area. The ‘relaxing regulations’ means that the taxpayer will be able to access their money in the retirement plan easier and faster. Although access to the retirement plan money is much easier, the tax treatment of loans and distributions remains unchanged. Loans are typically not taxable, but distributions are subject to a 10-percent early withdrawal tax.

 

Calculating the Loss

The taxpayer will need to compile records to support the amount of the loss deducted. The loss to be reported is the smaller of:

  • Adjusted basis in the property before the casualty
  • Decrease in the fair market value (FMV)

 

The adjusted basis of property is generally the purchase price and adjustments for events, such as an increase due to improvements.  The FMV is generally the value that the property can be sold. The FMV will have to be determined prior to the casualty and immediately after the casualty.  Without an appraisal of the property to provide the decrease in the FMV caused by the casualty, the actual cost of the cleanup and repairs can be used to determine the amount of loss.  This is a safe harbor method available for determining the casualty loss from a federally declared disaster. A safe harbor method is also available to help determine the casualty loss for personal belongings.  

 

The calculated casualty loss figure will also need to be decreased by any insurance reimbursements that have been received or expected to be received.  Insurance payments received to cover living expenses when the use of the main home is lost does not reduce the casualty loss. If the insurance reimbursement is more than the adjusted basis in the property then a gain will be reported and may be subject to tax.   

 

Hopefully, this explanation helps with the basics of reporting an individual personal property casualty loss.  Many resources can be found at IRS.gov to assist with questions or you may want to consult your friendly CPA.   

  

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Five ways the new tax code will affect your small business

It’s 2019! And with the start of the New Year, comes a new tax season!

 

With the newly enacted Tax Cuts and Jobs Act, or TCJA, nearly every business’s bottom line will be affected differently from previous years.  

1.Deductions

New provisions and hefty changes define this section of the new tax law.

Depending on the income and type of business, you may now be able to deduct up to 20 percent of qualified business income.

There’s also a change in limits of deductions for meals and entertainment. You can continue to deduct 50 percent of a business meal, but with stricter requirements. Entertainment must be billed separately from food or drinks.  The entertainment expense deduction is eliminated.

2. Depreciation

From now until 2023, TCJA allows 100 percent bonus depreciation for qualified property acquired and placed in service after 9/27/17 and before 1/1/2023. Section 179 election for depreciable business assets increased to the maximum deduction of $1 million and the phase-out threshold to $2.5 million.

3. Changes to fringe benefits  

TCJA has prohibited cash, gift cards and other non-tangible personal property as an employee achievement award, but it is awarding employers that offer paid family and medical leave a credit.   The qualified bicycle commuting reimbursement is included in gross income and wages for commuting reimbursements. Moving expense reimbursement are also to be included in employees’ wages.

4. Business structure and accounting methods

In the past, if your business had an average annual gross receipt of $5 million or less, you could use the cash method of accounting. Now, the TCJA has expanded this to $25 million.

5. Opportunities for investments

The TCJA offered benefits to investors in specific opportunity zones as well as a 20 percent credit for rehabilitating certified historic structures.

The new tax code can be a bit confusing for those outside of the accounting industry, but with help from an experienced accountant, you might find that your business will greatly benefit from these new laws. With the Bean Team, we can help you get your business’s finances in order for tax season and help ensure you’re compliant with the new laws.

For more information on the new tax laws, visit https://www.irs.gov or contact us today!

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Preparing for 2018 Taxes


As we approach the end of 2017, tax time is around the corner. The changes of the Trump Tax Plan and the post card tax return will happen in 2018. So, we have another year of the old rules and forms. While taxes can be really complicated, getting your taxes done can be a breeze, you just need to hold on to a few pieces of paper and be prepared to answer a few questions for your accountant. Here are few tips for making sure this tax season is pain-free.

 

  • Form Numbers Are Your Friend! Trying to decide what to hold on to for your tax return can be overwhelming. Many times, tax preparers will get a stack of every piece of paper that has a number and a dollar sign on it. While we do appreciate detail, we also appreciate getting you a return as quickly as possible! The most important tax documents will have a form number. These are the most important things to hold onto. If you get something in the mail that says “Tax Document” on the envelope, chances are it is a form of some variety and it should be kept.
  • The Many Faces of 1099s. 1099s come in all shapes and sizes. The type will be designated by either a letter or a word added on to the end. For example, a 1099 that tells you how much money you earned in bank interest is a “1099-INT”. The most common type is a 1099-MISC, or Miscellaneous. This is typically used to show money made as a subcontractor, or someone who wasn’t having taxes taken out of their earnings. If you receive any form of 1099, hold on to it. You will need to report it on your tax return.
  • Do you C? If you run your own business as a sole proprietor, you don’t need to file a separate return. You do, however, need to fill out a Schedule C on your individual tax return. The Schedule C, Profit or Loss From Business, requires your yearly numbers pertaining to income and expenses. Completing this schedule will be much easier if you have a bookkeeper. A bookkeeper will track your income and expenses by type, often corresponding with the required fields on the Schedule C. If you do not have a bookkeeper, and have not been tracking your expenses, you will have to provide your company’s bank and credit card statements for the year.
  • The Venerable W-2. Chances are, you will receive this in January or February. In short, the W-2 shows you how much you made, and how much was taken out for Federal taxes, Social Security and Medicare, and State Taxes (if applicable). It will also show you how much was taken out for any sort of health plan, or dependent care, along with several other items if they pertain to you. The W-2 is the backbone of your tax return. You should receive one from any job you worked at over the course of the year in which you were officially on a payroll. Basically, if you filled out a W-4, you will receive a W-2.

 

Filing your taxes doesn’t need to be some mystery. More than anything, it is about being prepared, and following instructions. Well, and having a great deal of patience. But as long as you have everything you need, and are willing to take the time to read items over, you will be able to file your taxes without any major hiccups.

 

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