Dear Clients and Friends of our CPA Firm:

Experimental Newsletter Format

There have been a number of important tax developments in the second quarter of 2018. I do not want to give you a barrage of boring tax information so I have left references lines in the body of this letter; if you want more details of a particular item, simply cut and past the reference and email me a request for more information. The supporting detailed reference memos are ready to email.

Introduction

The following is a summary of important tax developments that have occurred in April, May, and June of 2018 that may affect you, your family, your investments, and your livelihood. Please email us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

…Postcard tax form. The IRS released a new draft version of the 2018 Form 1040, U.S. Individual Income Tax Return. The new Form is markedly different from the 2017 version of the form and would replace the current Form 1040, as well as the Form 1040A and the Form 1040EZ. In addition to reflecting a number of changes made by the Tax Cuts and Jobs Act (TCJA; P.L. 115-97, 12/22/2017), the “postcard” draft form is about half the size of the current version and contains far fewer lines than its predecessor. However, this reduction in length is countered by the fact that the draft form has six new accompanying schedules.

For more information, copy the following reference and email it back to me:  “2018 draft Form 1040 reduced to “postcard” size but requires more schedules.”

…States in in bid to tax online/internet sales. The U.S. Supreme Court ruled that the correct standard in determining the constitutionality of a state tax law is whether the tax applies to an activity that has “substantial nexus” with the taxing state. The case (South Dakota v. Wayfair) involved South Dakota’s imposition of tax collection and remittance duties on out-of-state sellers meeting certain gross sales and transaction volume thresholds. With the rise of the digital economy, states have lost significant sales tax revenues because they have been unable to tax online/internet sales under the old physical presence nexus standards. Overturning its prior precedents, the Court held that the prior physical presence rule was an “unsound and incorrect” interpretation of the Commerce Clause that has created unfair and unjust marketplace distortions favoring remote sellers and causing states to lose out on enormous amounts of tax revenue. The Court held that the State had established that the vendor had substantial nexus in this case through “extensive virtual presence.”

For more information, copy the following reference and email it back to me:  “Supreme Court Abandons Physical Presence Standard: An In-Depth Look at South Dakota v. Wayfair .”

…The IRS advises a “payroll checkup. The IRS has encouraged taxpayers who have typically itemized their deductions to use the withholding calculator on the IRS’s website to perform a “payroll checkup,” noting that changes made by the Tax Cuts and Jobs Act (TCJA, P.L. 115-97, 12/22/2017) may warrant an adjustment. TCJA made a number of law changes, effective for tax years beginning after 2017 and before 2026, which affect the amount of itemized deductions that can be claimed and whether taxpayers choose to itemize or claim the standard deduction. They include: nearly doubling standard deductions; limiting the deductions for state and local taxes; limiting the deduction for home mortgage interest in certain cases; and eliminating deductions for employee business expenses, tax preparation fees and investment expenses (including investment management fees, safe deposit box fees and investment expenses from pass-through entities). In light of these changes, some individuals who formerly itemized may now find it more beneficial to take the standard deduction, which could affect how much a taxpayer needs to have their employer withhold from their pay. Also, even those who continue to itemize deductions should check their withholding because of TCJA changes. The IRS warned that having too little tax withheld could result in an unexpected tax bill or penalty at tax time in 2019, and also noted that taxpayers who have too much tax withheld may prefer to receive more in their paychecks instead of in the form of a tax refund.

For more information, copy the following reference and email it back to me:  “Itemizers encouraged to check withholding in light of TCJA changes.”

…Tax reform’s effect on vehicle and unreimbursed employee expenses. The IRS has provided updated information to taxpayers and employers about changes from the Tax Cuts and Jobs Act (TCJA, P.L. 115-97, 12/22/2017) affecting vehicle and unreimbursed employee expenses. Shortly before the enactment of the TCJA, the IRS released optional standard mileage rates for 2018, as well as the maximum standard automobile cost that may be used in computing the allowance under a fixed and variable rate (FAVR) plan. However, TCJA made many tax law changes, including those affecting move-related vehicle expenses, unreimbursed employee expenses, and vehicle expensing. The IRS advised taxpayers that TCJA generally suspended the deduction for moving expenses for tax years beginning after 2017 and before 2026, with an exception for certain members of the Armed Forces. Accordingly, no deduction is allowed for use of an automobile as part of a move using the pre-TCJA 18¢ mileage rate. For the same period, TCJA also suspended all miscellaneous itemized deductions that are subject to the 2%-of-adjusted gross income (AGI) floor, including unreimbursed employee travel expenses. Thus, the 54.5¢ business standard mileage rate generally can’t be used to claim an itemized deduction for unreimbursed employee travel expenses (but the 54.5¢ rate still applies for expenses that are deductible in determining AGI, such as for unreimbursed employee travel expenses claimed by reservists and certain state or local government officials). And, for purposes of computing the allowance under a FAVR plan, the maximum standard automobile cost may not exceed $50,000 for passenger automobiles, trucks and vans placed in service after 2017 (up from the pre-TCJA $27,300 for passenger automobiles and $31,000 for trucks and vans).

For more information, copy the following reference and email it back to me: “ IRS updates pre-TCJA guidance on vehicle and unreimbursed employee expenses.”

…Family and medical leave credit. The IRS has provided guidance on the new family and medical leave credit, which was added by the Tax Cuts and Jobs Act (TCJA, P.L. 115-97, 12/22/2017). Under new Code Sec. 45S , for wages paid in tax years beginning in 2018 and 2019, eligible employers can claim a general business credit equal to the applicable percentage (between 12.5% and 25%) of the amount of wages paid to qualifying employees for up to 12 weeks per tax year while the employees are on family and medical leave, if certain requirements are met. For purpose of the credit, family and medical leave includes leave for: the birth of an employee’s child and to care for the child; placement of a child with the employee for adoption or foster care; 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; and care for a service member who is the employee’s spouse, child, parent, or next of kin.

For more information, copy the following reference and email it back to me: “ FAQs provide guidance on employer-paid family and medical leave credit. ”

…Million dollar FBAR penalty. The Supreme Court declined to review a Ninth Circuit decision (U.S. v. Bussell), which, on finding that a taxpayer willfully failed to file a Report of Foreign Bank and Foreign Accounts (FBAR) with regard to her foreign account, let stand a million dollar FBAR penalty. Each U.S. person who has a financial interest in or signature or other authority over any foreign financial accounts, including bank, securities, or other types of financial accounts in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, must report that relationship tor that calendar year by filing an FBAR with the Department of the Treasury. Those who willfully fail to file their FBARs on a timely basis can be assessed a penalty of up to the greater of $100,000 (as adjusted for inflation) or 50% of the balance in the unreported bank account for each year they fail to file a required FBAR. The Ninth Circuit rejected a variety of the taxpayer’s arguments, including that the imposition of the penalty violated the U.S. Constitution because the fine was excessive under the Eighth Amendment. The taxpayer argued that the penalty was a punitive forfeiture, grossly disproportional to the gravity of the offense, but the Court held that the assessment was proper because the taxpayer defrauded the government and reduced public revenues.

For more information, copy the following reference and email it back to me:  “Supreme Court lets million dollar FBAR penalty stand.”

…Inflation-adjusted HSA amounts for 2019. The IRS has released the annual inflation-adjusted contribution, deductible, and out-of-pocket expense limits for 2019 for health savings accounts (HSAs). Eligible individuals may, subject to statutory limits, make deductible contributions to an HSA. Employers, as well as other persons (e.g., family members), also may contribute on behalf of an eligible individual. A person is an “eligible individual” if he is covered under a high deductible health plan (HDHP) and is not covered under any other health plan that is not a HDHP, unless the other coverage is permitted insurance (e.g., for worker’s compensation, a specified disease or illness, or providing a fixed payment for hospitalization). For calendar year 2019, the limitation on deductions for an individual with self-only coverage under an HDHP is $3,500 (up from $3,450 for 2018). For calendar year 2019, the limitation on deductions for an individual with family coverage under an HDHP is $7,000 (up from $6,900 for 2018). For calendar year 2019, an HDHP is defined as a health plan with an annual deductible that is not less than $1,350 (same as for 2018) for self-only coverage or $2,700 (same as for 2018) for family coverage, and with respect to which the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,750 (up from $6,650 for 2018) for self-only coverage or $13,500 (up from $13,300 for 2018) for family coverage.

For more information, copy the following reference and email it back to me: “ IRS issues inflation-adjusted health savings account figures for 2019.”

…More returns to be filed electronically. The IRS has issued proposed regulations that would require all information returns, regardless of type, to be taken into account in determining whether a person met the 250-return threshold and thus was required to file the returns electronically. The proposed Regs would also require any person required to file information returns electronically to file corrected information returns electronically, regardless of the number of corrected information returns being filed. Existing Regs provide that the 250-return threshold applies separately to each type of information return and each type of corrected information return filed. Accordingly, under the existing rules, different types of forms are not aggregated for purposes of determining whether the 250-return threshold is satisfied, with the result that fewer taxpayers are required to file electronically. The proposed Regs are proposed to go into effect for returns filed after Dec. 31, 2018.

For more information, copy the following reference and email it back to me:  “Prop regs: all info returns count towards 250-return e-file threshold.”

Conclusion

Careful planning will be an important part of the 2018, 2019 and 2020 Tax Years; it is these transitional years that will allow us to learn the ins and outs of working with the “Tax Cuts and Jobs Act”; it is the most significant tax overhaul since 1988.

Don’t delay you tax planning. The longer you wait, the less likely it is that you’ll be able to achieve the maximum tax benefits afforded by the new law.

Please don’t hesitate to call us with questions or for additional strategies on reducing your tax bill. We’d be glad to set up a planning meeting or assist you in any other way that we can.  As always, I enjoy visiting with my clients and friends!

Very truly yours,

Steve Richardson, CPA

 

 

Newsletter from
Steve Richardson & Company, Certified Public Accountants

July 3, 2018

Legal challenges to the Housing Allowance

To Our Clients and Friends:

A Hot Topic

We get questions about Ministerial Housing Allowance multiple times every day.  The Ministerial or Clergy Housing Allowance is authorized by §107 of the Internal Revenue Code (Code).  This allowance has been a part of the Code from the beginning of Income Tax Law in 1913.  The first Rules and Regulations related to the Housing Allowance date to 1916! This is old law.

Important law

It’s important law because it has an impact on a large number of people subject to US Taxation; these people can be working inside the USA or anywhere in the world.  It has an impact on more than the people actually in receipt of a Housing Allowance; employers, church members, board members and contributors to churches and other §501(c)(3) organizations.

Interesting!

Here is one interesting bit of tax law.  A minister who is employed as a minister by a non-church §501(c)(3) not-for-profit organization can have a housing allowance.  Here is another even more interesting bit of tax law: a minister (who is employed as a minister) by a for-profit corporation can also have a housing allowance! Surprised? Most people are surprised to learn that Ford Motor Company actually employs chaplains on its staff and compensate them as ministers. Other company that employ ministers on their staff include General Motors, Coca-Cola, Tyson Foods and literally hundreds of other commercial enterprises of all sizes.

Who can employ a minister?

To recount: churches, non-church §501(c)(3) organization and even commercial companies can employ members of the clergy on their staff and allow them to receive a ministerial housing allowance.  Interesting indeed!

The Ministerial Housing Allowance is under constant legal challenge

One of the more recent challenges to the ministerial housing allowance was on November 22, 2013.

 

The Legal Challenge

Federal district court judge Barbara Crabb of the District Court for the Western District of Wisconsin struck down the ministerial housing allowance as an unconstitutional preference for religion. [Freedom from Religion Foundation, Inc., v. Lew, 983F. Supp.2d 1051 (W.D.Wis.2013)]. The ruling was in response to a lawsuit brought by the Freedom from Religion Foundation (FFRF) and two of its officers challenging the constitutionality of the housing allowance and the parsonage exclusion.

A Narrow Defense Strategy

The federal government, which defended the housing allowance because it is a federal statute, asked the court to dismiss the lawsuit on the ground that the plaintiffs lacked standing to pursue their claim in federal court.

Judge Crabb ruled in favor of the FFRF saying that the plaintiff (FFRF) did have standing because ‘they would have been denied a housing allowance exclusion had they claimed one on their tax return’.  The government appealed to the US Court of Appeals for the Seventh Circuit in Chicago.

A Narrow Appeal

On November 13, 2014, the appeals court issued its ruling reversing the Wisconsin court’s decision. It concluded that a ‘hypothetical’ situation did not establish any reasonable standing to pursue their challenge to the housing allowance.

The FFRF Response

The FFRF responded to the appeals court’s ruling by designating a housing allowance for two of its officers. The officers reported their allowances as taxable income on their tax returns and thereafter filed amended tax returns seeking a refund of the income taxes paid on the amounts of their designated housing allowances. The FFRF claims that in 2015, the IRS denied the refunds sought by its officers.

Having endeavored to correct the standing problem, the FFRF renewed its legal challenge to the housing allowance in the federal district court in Wisconsin. Agreeing that the FFRF had standing, Judge Crabb struck down the ministerial housing allowance again as an unconstitutional preference for religion. The federal court’s decision regarding the housing allowance is currently being appealed to the Seventh Circuit, which is expected to deliver a decision sometime this year.

How Will the Seventh Circuit Rule?

That is entirely up to the Judges of the Seventh Circuit; we will need to wait and see.

This case is not going away

If the Seventh Circuit again overturns Judge Crabb, which I expect to happen, the FFRF and other groups opposed to the ministerial housing allowance will find time and venue to launch a renewed attack.

If the Seventh Circuit agrees with Judge Crabb’s and determines that the ministerial housing allowance is unconstitutional, legal responses and challenges could put this issue into the hands of the US Supreme Court.  [Note: the US Supreme Court accepts less than 1% of all cases appealed to that level.]

Which way it goes, no one knows.

My only complaint is that The Department of Justice has, again, chosen another narrow basis on which to appeal.  To me, it looks like legal nit-picking.  I would prefer a much more robust appeal where we put the real issues before the court and let them rule; is the ministerial housing allowance constitutional or not.

Be Aware

The ministerial housing allowance is under attack; this will not change or end soon.  The tax implications of losing the housing allowance are significant.

Tax Planning!

Win, lose or draw, there are always tax planning options.  One thing we are considering is a Home Equity Allowance.  Not a perfect solution but a good thought.

Newsletter from
Steve Richardson & Company, Certified Public Accountants

June 27, 2018

Tax Cuts and Jobs Act Planning Letter for Business Clients

To Our Clients and Friends:

Over the past six months, we have been trying to digest the many tax law changes brought by the Tax Cuts and Jobs Act (TCJA). From a significantly lower corporate tax rate to a new deduction for qualified business income, the TCJA brings a host of planning opportunities for your business. This letter presents some tax planning ideas under the TCJA for you to think about this summer while there’s sufficient time left in 2018 to take tax-saving actions.

The Obvious Requirement to have any Tax Planning Strategy

Unless you are making profit in business, or have excellent prospect to make a business profit in the future, there is no Tax Planning Strategy appropriate for you!  Losing money is not tax planning!  Making a profit opens many doors; one of these doors is the ability to develop a tax planning strategy.

Maximize Your Qualified Business Income Deduction

You may have heard a lot of talk in the news about a new deduction for “pass-through” income, but it’s actually available for qualified business income from a sole proprietorship (including a farm), as well as from pass-through entities such as partnerships, LLCs, and S corporations. Under the TCJA, business owners may deduct up to 20% of their qualified business income; however, the deduction is subject to various rules and limitations.

Although official guidance is lacking on this new deduction, there are some planning strategies that can be considered now. For example, there are ways to adjust your business’s W-2 wages to maximize your qualified business income deduction. Also, it may be helpful to convert your independent contractors to employees, assuming the benefit of the deduction outweighs the increased payroll tax burden. Other planning strategies include investing in short-lived depreciable assets, restructuring the business, and leasing or selling property between businesses. We will work with you to determine which strategies produce the best outcome.

Rethink Entity Choice

The TCJA makes major changes to the choice of entity decision. Because C corporations are now taxed at a flat rate of 21% (as opposed to a top rate of 35% under prior law), many business owners wonder whether they should structure or restructure their business operations as a C corporation.

Generally speaking, for most small businesses, I recommend against C corporations.

For one thing, the top individual tax rate also fell, from 39.6% to 37%. Also, the new qualified business income deduction isn’t available for C corporations or their shareholders. There are other factors to consider as well, such as self-employment and state taxes.

It’s also important to note that C corporations are subject to double taxation, meaning that corporate income is taxed once at the entity level and again when it’s distributed to shareholders as dividends. This can be avoided if the corporation retains all profits to finance growth. However, this opens the door to the accumulated earnings tax (or personal holding company tax) if profits accumulate beyond the reasonable needs of the business.

Although C corporations are now more attractive thanks to the lower rate, it may make more sense to continue operating as a pass-through entity. This is particularly true if (1) you can claim the full 20% deduction for qualified business income and (2) you plan to exit the business in a relatively short period of time. Generally, it’s risky to hold significant assets that are likely to go up in value (like real estate) in a C corporation. If the assets are sold for substantial gains, it may be impossible to get the profits out of the corporation without double taxation.

As you can see, the choice of entity decision is complicated, but we’re here to help. We would be happy to analyze your particular circumstances to see if a C corporation is right for you.

Acquire Assets

Thanks to the TCJA, this is a great time to acquire business assets. Your business may be able to take advantage of very generous Section 179 deduction rules. Under these rules, businesses can elect to write off the entire cost of qualifying property rather than recovering it through depreciation. The maximum amount that can be expensed this year is $1 million (up from $510,000 for 2017). This amount is reduced (but not below zero) by the amount by which the cost of qualifying property exceeds $2.5 million (up from $2.03 million for 2017).

There’s more good news: the Section 179 deduction is now available for certain tangible personal property used predominantly to furnish lodging and certain improvements to nonresidential real property (roofs, HVAC, fire protection systems, alarm systems, and security systems).  This is new!

Note: Watch out if your business is already expected to have a tax loss for the year (or close) before considering any Section 179 deduction. This is because:

You can’t claim a Section 179 write-off that would create or increase an overall business tax loss.

Above and beyond the Section 179 deduction, your business also can claim first-year bonus depreciation. The TCJA establishes a 100% first-year deduction for qualified property acquired and placed in service after 9/27/17 and before 1/1/23 (1/1/24 for certain property with longer production periods).

Unlike under prior law, this provision applies to new and used property.

The bonus percentage will phase down for years 2023 through 2026. Note that 100% bonus depreciation deductions can create or increase a Net Operating Loss (NOL) for your business’s 2018 tax year.

NOLs

NOL is a common tax acronym that means a Net Operating Loss. Under the TCJA, the NOL generally can’t be carried back to an earlier tax year. However, it can be carried forward indefinitely. Unfortunately, NOLs arising in tax years beginning after 2017 can’t reduce taxable income by more than 80%.

Given these generous provisions, your asset acquisition plan is more important than ever. If you’re planning on acquiring a business, we suggest you pursue an asset acquisition rather than a stock deal. Also, there may be reasons to elect out of bonus deprecation or use different expensing techniques in individual tax years. We can help with that.

Adopt a More Favorable Accounting Method

The cash method of accounting, which allows you to recognize sales when cash is received, is attractive to many small businesses due to its simplicity. For tax years beginning after 2017, the ability to use the cash method is greatly expanded. Any entity (other than a tax shelter) with three-year average annual gross receipts of $25 million or less can use the cash method regardless of whether the purchase, production, or sale of merchandise is an income-producing factor. Likewise, C corporations and partnerships with C corporation partners can use the cash method if they meet the $25 million gross receipts test.

Under pre-TCJA law, the cash method of tax accounting was not allowed to many taxpayers.  That has changed dramatically!

Now that the rules have changed, your business may be eligible to adopt the cash method of accounting. Since the $25 million gross receipts test is made on a year-by-year basis, we can monitor whether your average annual gross receipts fall below the threshold. If they do, we can discuss the pros and cons of changing your accounting method. Assuming a change would be beneficial, we can file the appropriate paperwork with the IRS to change your method of accounting.

Personally, as a CPA, I like the cash method of accounting.

Determine Eligibility for Credit for Employer-paid Family and Medical Leave

The TCJA establishes a new credit for employer-paid family and medical leave. The credit is for tax years beginning in 2018 and 2019 and is equal to 12.5% of the amount of wages paid to qualifying employees on family and medical leave. However, the employer must pay at least 50% of the wages normally paid to the employee. The credit is increased by 0.25 percentage points (but not above 25%) for each percent by which the payment rate exceeds 50%. This could be a valuable incentive for your business, so let’s discuss at your earliest convenience.

Watch out for New Business Interest Expense Limit

Regardless of its form, every business will be subject to a net interest expense disallowance. Starting in 2018, net interest expense in excess of 30% of your business’s adjusted taxable income will be disallowed. However, your business won’t be subject to this rule if its average annual gross receipts for the prior three years is $25 million or less. Also, real property trades or businesses can choose to have the rule not apply if they elect the Alternative Depreciation System (ADS) for real property used in their trade or business. Since ADS is a slower way to depreciate property, real property trades or businesses will need to look at the trade-off between currently deducting their business interest expense and deferring depreciation expense. If you find yourself in this predicament, we can model out both scenarios to determine the best course of action.

Consider Qualified Equity Grants

The TCJA provides a new tax election for equity-based compensation from private employers. Specifically, the election covers stock received in connection with the exercise of an option or in settlement of a Restricted Stock Unit (RSU). From a tax perspective, many employees struggle with these forms of compensation because they don’t have the ability to liquidate their shares to pay their tax bill. This new election provides some relief.

Starting with options exercised or RSUs settled after 2017, qualified employees of eligible private companies may elect to defer income from those instruments for up to five years. To take advantage of this election, various requirements must be met. This includes having a written plan under which at least 80% of full-time employees are granted stock options or RSUs.

If you’re interested in offering qualified equity grants to your employees, we can determine if you’re an eligible corporation under this new provision. We can also assist you and your legal counsel in preparing the necessary documentation. Please contact us if you have questions or want more information.

I’m still exploring how qualified equity grants may impact professional organizations such as attorneys, physicians, engineers, architects and others.

Monitor State Response to Tax Reform

Our CPA Firm has active clients in 35 states; state tax issues are a daily reality in our office!

States react differently to changes to federal tax law. For example, some states automatically conform to federal tax law as soon as legislation is passed. Other states require their legislatures to adopt federal tax law as of a fixed date. This generally occurs on an annual basis. There are some states, however, that pick and choose which federal provisions to adopt. Because of this, your state income tax rules may be drastically different than the federal income tax rules. For example, some states may not adopt the new 100% bonus depreciation rules or the NOL rules. We have monitored your state’s response to the TCJA and will help you minimize your state income tax bill.

Set up a Qualified Small Business Corporation

As we mentioned earlier, the TCJA establishes a flat 21% federal income tax rate for C corporations, including Qualified Small Business Corporations (QSBCs). A QSBC is generally a domestic C corporation whose assets don’t exceed $50 million. In addition, 80% or more of the corporation’s assets must be used in the active conduct of a qualified business. There are other requirements as well, but we can fill in the details if you decide a QSBC is right for you.

By far, the biggest benefit of owning QSBC stock is the ability to shelter 100% of the gain from a stock sale. A more-than-five-year holding period requirement must be met to claim this exclusion. Another major benefit of owning QSBC stock is the ability to roll over (defer) the gain on a stock sale to the extent you acquire replacement QSBC stock within 60 days of the original sale. You must have held the QSBC stock for more than six months to take advantage of this break. Once the gain is rolled over, you must reduce the tax basis of the replacement stock by the amount of gain deferred. However, if the replacement stock is QSBC stock when it’s sold, the applicable gain exclusion break is available if the more-than-five-year holding period requirement is met.

The 100% gain exclusion and rollover breaks combined with the flat 21% corporate tax rate can make operating a newly formed business as a QSBC more tax-efficient than operating it as a pass-through entity (sole proprietorship, partnership, LLC, or S corporation). That is big news because pass-through entities have traditionally been the first choice for most small and medium-sized businesses. However, not all start-up businesses will qualify for QSBC status.

A Qualified Small Business Corporations (QSBCs) is not out of the questions for some small businesses.  Essentially, a corporation can elect to become a QSBC if it is in a business other than one involving personal services; banking, insurance, financing, leasing, or investing; farming; mining; or operating a hotel, motel, or restaurant. Essentially, then, permissible businesses include manufacturing, retailing, technology, and wholesaling.  There are circumstances among our clients where a QSBC election may make sense.

Conclusion

As we said at the beginning, this letter is to get you thinking about tax planning moves for the rest of the year. This year is definitely unique given the numerous tax law changes brought by the TCJA. Even with uncertainty about some of the TCJA’s provisions, there are things you can do to improve your business’s situation. Please don’t hesitate to contact us if you want more details or would like to schedule a tax planning session.

I love my job! Thanks to all of my clients and friends who have allowed me to make a good living by doing what I love to do!

Thanks You!

Steve Richardson, CPA

Asset Protection

Introduction

Asset Protection is an important part of any financial or tax planning discussion.

A Crisis Averted

A new client came to our CPA Firm last week after settling a frightening lawsuit. The possibility that they could have lost several million dollars in assets was very real; it was close!

Increasingly people and “for profit” and “not-for-profit” businesses face the routine threat of litigation.  The “Assets Protection” concepts discussed in this newsletter apply equally to commercial businesses just as well as it does to “not-for-profit” businesses.

What follows is, in large part, extracted from the “Asset Protection” letter that I drafted to help my new client avoid the future possibility of losing substantial assets due to litigation.

Social Welfare Services, Inc.

The name that I have arbitrarily assigned to this entity for confidentiality reasons is: Social Welfare Services, Inc.

A Consulting engagement

Not-for-profit organizations, such as Social Welfare Services, Inc., face complex and often dangerous tax situations and legal situations. Our CPA firm has (and has had) many hundreds of §501(c)(3) clients over the years; we have clients who are not-for-profit organizations in 35 states and 25 foreign countries. We have seen non-profits accomplish remarkable and positive things; on rare occasions, these accomplishments had powerful, worldwide impact. We have also seen the opposite; situations so bad that they are beyond belief or comprehension.

Catastrophe

The first rule of managing a catastrophe is this: avoid it!

A “Tax Opinion” Letter

This is a “tax opinion” letter. This letter is subject to strict ethical and legal standards governed by my Code of Conduct, IRS Circular 230 and the Internal Revenue Code.

IRS Circular 230, Section 10.37, sets the required standard to which I must comply when providing a tax opinion in any written communications.

A summary of the rules to which I must comply are:

• Base the written advice on reasonable factual and legal assumptions, including assumptions as to future events;
• Reasonably consider all relevant facts the practitioner knows or reasonably should know;
• Use reasonable efforts to identify and ascertain the facts relevant to written advice on each federal tax matter;
• Not rely on representations, statements, findings, or agreements (including projections, financial forecasts, or appraisals) of the taxpayer or any other person if reliance on them would be unreasonable;
• Relate applicable law and authorities to facts; and
• In evaluating a federal tax matter, not take into account the possibility that a tax return will not be audited or that a matter will not be raised on audit.

I am required to include in the opinion a recitation of the relevant facts, apply the law to those facts, and state the conclusions from applying the law to the facts. The sanctions for a CPA who fail to meet these well understood ethical and legal obligations are harsh.

My Team

I will outline a tax plan that has positive tax and legal consequences. I’m not a lawyer; I rely heavily on outside legal counsel in designing and implementing this sort of plan.

The legal work that will be required to implement this plan will need to be done by competent legal counsel. Some of the law that I will discuss is relatively new. Inexperienced or uninformed attorneys (or accountants) could make mistakes of profound implications.

The “New” Law (2006)

In late 2006 (December 8, 2006), the IRS established a new concept in tax law called a “disregarded entity”. Early on, Alabama allowed for what was at the time a unique corporation called a “Single Member LLC”. Since then, all states now allow this special type of entity.

A “Single Member LLC”, which I will hereinafter refer to as a SMLLC, is a deceptively simple organization with hidden super powers. Two of these “super powers” are that a SMLLC can “disappear” for all purposes of federal income tax law and it can offer strong liability protections under Alabama law.

But, there are other super powers in addition to these two.

Confidence

Early in 2007, prior to clarifying IRS Regulations, I started to explore the use of SMLLCs in connection with §501(c)(3) and other entities to good effect.

Each time I employed a SMLLC ahead of IRS Regulations, the IRS and the Regs ultimately endorsed my actions. I think my forays into this, at the time, obscure branch of tax planning, encouraged my own attorney to be a bit more aggressive in his study of and use of SMLLCs in tax and legal planning.

Thus far, our plans have been effective in accomplishing the intended purposes.

The “Single Member LLC”

The SMLLC is a unique tax entity. A SMLLC has, as you might expect, a single member. That single member could be any legally existing tax entity. For example, a SMLLC could be owned by:

• An Individual
• A partnership
• A corporation
• A trust, or, as will be the case in this tax plan, or,
• A §501(c)(3) entity.

A SMLLC has the same limited liability as a Corporation

A SMLLC offers the same limited liability to its owners as corporations for all purposes of state law. Alabama has good, well crafted, laws that support LLCs in general and SMLLC in our particular case.

In fact, LLCs and SMLLCs have, in my opinion, better limited liabilities than a regular (old fashioned) corporation because the old fashioned corporations could have the limited liability shield broken by a long list of accidental or inadvertent oversights such as a failure to have required annual meetings, etc. These meetings are not required for LLCs.

A SMLLC is a Disregarded Entity

Although the SMLLC has some of the more desirable corporate characteristics under Alabama law, it is, for all purposes of federal income tax law, a “disregarded entity”.

As a “disregarded entity” for federal income tax law, a SMLLC then becomes the “same” taxpayer as the owner. If, for example, a SMLLC is owned by a §501(c)(3), then, as far as the IRS is concerned, the SMLLC is a §501(c)(3).

There is no need to seek an IRS determination letter; if the SMLLC is owned by a §501(c)(3), then the SMLLC is automatically a §501(c)(3). (There is a bit more to this in terms of organization and operations in a manner consistent with the exempt purposes of the §501(c)(3), but, not much.)

The Plan

Recent Alabama law related to LLCs and SMLLC has been substantially improved to allow for creative restricting of all business entities including §501(c)(3) organizations.

What I recommend is as follows: Social Welfare Services, Inc. should form the following entities.

1. Operations and Management, SMLLC
2. Real Estate, SMLLC
3. Equipment, SMLLC
4. Thrift Store #1, SMLLC
5. RBC Thrift Store #2, SMLLC
6. Development Funds and Endowment, SMLLC

This structure is seven entities:

• The parent entity, Social Welfare Services, Inc., an approved §501(c)(3), and:
  • Operations and Management, SMLLC
  • Real Estate, SMLLC
  • Equipment, SMLLC
  • Thrift Store #1, SMLLC
  • RBC Thrift Store #2, SMLLC
  • Development Funds and Endowment, SMLLC

I have tried to apply hypothetical names to these various entities to make the purpose and function obvious; when selecting actual names, I suggest you try to accomplish the same goal.

Operations and Management, SMLLC

This first SMLLC from our list above, Operations and Management, SMLLC, will be the entity that provides facilities, personnel and financial management.

Operations and Management SMLLC is an entity with no tangible assets. Its function is to manage the operations of Social Welfare Services, Inc. in a manner consistent with the organization’s exempt purposes. It will be responsible for all bookkeeping, accounting, personnel and payroll activities for all the entities.

Operations and Management SMLLC should keep minimal cash in the bank balances for operational purposes only. Savings accounts and other cash assets need to be move to the Development Funds and Endowment, SMLLC.

Did I mention other “super powers”?

A SMLLC is a disregarded entity for all purposes of federal income tax law. It is, however, not a disregarded entity for all purposes of federal payroll tax law. Interesting!

One of the more common catastrophes of the not-for-profit world are payroll tax mismanagement. Catastrophic is the appropriate word. The Directors, members of the board, secretaries and payroll clerks and, in some cases, even banks, can be held responsible for unpaid payroll taxes and penalties. Harsh!

SMLLCs, Payroll and payroll tax functions

By placing all payroll and payroll tax functions into Operations and Management, SMLLC, and by crafting operating agreements and employee job descriptions carefully, it is possible that any payroll tax issues can be confined to that entity and to only a few designated (or perhaps, only one) individual who could be a designated “responsible party” for IRS purposes.

This could offer asset protection for the other related entities in the group and quickly move any payroll tax dispute onto the shoulders of the responsible party. This is not necessarily a bad outcome. Having agreements in place to indemnify any responsible party for payroll tax liabilities could quickly reduce payroll tax assessments to one-third (¹/₃) of the original assessment and thereby offer the consolidated entities a clear pathway to full financial recovery.

I have successfully worked this odd twist in payroll tax law three or four times in the past but never with a §501(c)(3) in the mix. I see no reason why it would not work just as well in the not-for-profit area of law.

Real Estate, SMLLC

The second entity from the above list is Real Estate, SMLLC. The function of this entity is to own land and buildings.

The management and maintenance of this real estate will be accomplished by Operations and Management, SMLLC. This second entity, Real Estate, SMLLC, is merely a real estate holding entity with no management or operational functions.

Equipment, SMLLC

The fourth and final entity from our list shown above is Equipment, SMLLC. This entity is for the sole purpose of owning all tangible property and equipment that is not land or buildings. This entity will have no management or operational functions for this entity.

Thrift Store #1, SMLLC and RBC Thrift Store #2, SMLLC

Even in the commercial world, separating retail operations by location is a common use of SMLLCs. The liabilities unique to retail are then confined to that location by the SMLLC. For example, a disastrous sales tax audit at the Attalla store can be confined to that store; the assets of the organization are protected. Likewise, a slip fall injury; etc.

Development Funds and Endowment, SMLLC

Each SMLLC can receive donations that are tax deductible. By using a SMLLC to hold and manage development and endowment funds, you isolate these funds from operations and create an additional layer of protection from the organization’s potential liabilities.

This organizational structure is helpful for special fund raising events, such as a capital fund campaign or to develop an endowment fund.

I have recently used this to avoid imminent litigation with profoundly positive results. Because an endowment fund can be its own SMLLC, it can have its own board of directors and the needed additional layer of liability protection.

In the recent case, successfully navigated by good entity and tax planning, I had to deal with potential litigants who were actually members of the board of directors of the parent organization! We caused a substantial (multimillion) contribution to be made to a new SMLLC for that purpose thus isolating these funds from the direct control of the renegade board members to a SMLLC (who had their own unique board) and accomplished two positive things:

• Assets were protected and
• The renegade board members regained perspective and fulfilled their board obligations admirably.

I am very fond of isolating development and endowment funds by use of SMLLC!

Management Issues

The organization delivers services as it always has; from the point of view of the children and the donors, nothing will appear to have changed. Internal management will change. These changes are not onerous.

• Each SMLLC becomes what the law refers to as a fully integrated auxiliary of the parent organization. As such, each SMLLC is obligated to:
  • Make regular and routine financial reports to the management of the parent organization, in this case, Social Welfare Services, Inc.
    • This may require that Operations and Management, SMLLC make modest modifications to how the bookkeeping is accomplished.
    • Financial reports should be unique to the operations and function of the SMLLC to which they relate.
      • We can help set these up.
    • Also, each SMLLC is required to make operational and management reports to the parent organization.
      • Each SMLLC should have a report unique to the function of that SMLLC, for example, Real Estate, SMLLC should include two items, one for maintenance and the other for needed but deferred maintenance.
        • We can help set these up.
      • Each SMLLC can have a unique board of directors. Even with a unique board of directors, each SMLLC must report to the parent organization.

More Super Powers!

SMLLCs have a large variety of attributes and abilities that, in the right context, become super powers. The §501(c)(3) world offers a rich context to apply these abilities. A full list of these abilities are beyond the scope of this letter and, frankly, beyond my skill level and competence. That’s why I rely on outside legal counsel. By brain storming together, we and I have often discovered hidden applications for LLCs and SMLLCs that evolved into super powers.

A small list follows; each SMLLC can:

• Have a unique EIN Number
  • This does not change how the IRS Form 990 is filed.
• Have a separate bank account
  • Keeping money away from Social Welfare Services, Inc. is a good idea for reasons I will discuss in the next section of this letter.
• Have a unique and separate board of directors.
  • This can be a good idea for a number of reasons; marketing is only one good reason.
  • A unique “junior” board of directors can groom the next generations of donors and management.

I promised a short list of alleged super powers; I have delivered. This list is too short by a large factor. Discovering new super powers that apply to your organization are where an ongoing relationship with a CPA Firm and an Attorney with deep skill sets in this area become important. None of us can anticipate all future situations. The attributes of LLCs and SMLLCs only become “super” with the right situation and timing. Going forward, that is our real job.

Liability Protection

The point of this proposed reorganization is asset protection. Each entity, including the parent entity, Social Welfare Services, Inc., enjoys a layer of liability protection.

Any meaningful discussion of liability protection through entity selection and management structure is the strict domain of attorneys. For that reason, I will ask our own attorney to review this letter and will allow him to make suggestions and, if he chooses to, make changes or add comments.

Social Welfare Services, Inc. is the provider of services to the children. If a child is hurt or killed in delivering these services, Social Welfare Services, Inc. will likely be a primary party in any legal action. Social Welfare Services, Inc. has no assets other than the limited funds in the operating bank account.

In the event that Social Welfare Services, Inc. is a party to a legal action, it is very likely that Operations and Management, SMLLC will also be named as a party to that legal action because it provides financial and personal management. To this point, the additional layer of protection from legal liability is thin. From the point of view of managing legal liability, it offers some but minimal additional protect. The mere fact that it is another legal entity complicates any potential plaintiff’s case.

For that reason, both Social Welfare Services, Inc. and Operations and Management, SMLLC should maintain minimal cash balances. All cash, not essential to day-by-day operations, should be held by Development Funds and Endowment, SMLLC.

Because Social Welfare Services, Inc. and Operations and Management, SMLLC does not own land, buildings or equipment, or the assets held by the Development Funds and Endowment, SMLLC they actually become a less attractive target for litigation.

The following entities:

• Real Estate, SMLLC
• Equipment, SMLLC
• Thrift Store #1, SMLLC
• RBC Thrift Store #2, SMLLC
• Development Funds and Endowment, SMLLC

Because they are owned by a §501(c)(3), each of these entities will be important in achieving the goal of asset protection.

The purpose of LLC laws nationwide

LLC laws are now an important part of legal environment for businesses and not-for-profits in all fifty states. These laws were created were to offer liability protection to business owners and operations.

At the heart of the laws relating to LLC is the desire to accomplish liability protection for businesses and §501(c)(3), business owners, directors and employees.

This letter is not a radical or new interpretation of the law; this letter addresses the heart and purpose of LLC laws. State LLC laws and federal tax laws have made in clear that LLCs and SMLLC apply to not-for-profit organizations; again, I am not bending or twisting the law.

My letter is a mainstream application of the law. This is not risky or pioneering legal or tax work, this is simply an application of the law!

Conclusion

I enjoy working with §501(c)(3) organizations. Our CPA Firm has more than a few such organizations. In general, these organization have deep convictions that their work is essential. In your case, caring for children, especially boys, is essential!

Your need to protect assets is 100% driven by your desire to see that these children receive essential services in the future.

I am 100% committed to helping you accomplish that task!

Sincerely,

Steve Richardson, CPA

For the Firm

Newsletter from
Steve Richardson & Company, Certified Public Accountants

January 10, 2018

Tax Planning for limited state and local taxes

Dear Clients & Friends of the Firm:

Complex new tax laws create both problems and planning opportunities.  In this newsletter I am going to discuss the limitation on the deduction of state and local taxes (SALT), how good state law and good tax planning can help minimize the impact of the SALT limitation. I am also going to touch on how §529 education accounts can now be used.  Oddly enough, these three issues are related.

SALT (state and local taxes) are limited!

The new tax law limits the amount of state and local tax deductions to $10,000.  For some people, that is a problem.  This newsletter is not only written for taxpayers who pay more than $10,000 in SALT taxes; middle income taxpayer can enjoy substantial benefits from the “Alabama Accountability Act of 2013”.

Section 529 educational savings plans

In the past, these plans were really good; now they are much better!  The new 529 accounts can have a positive impact on elementary or secondary public, private, religious school or, in my opinion, a home school, up to a $10,000 limit per tax year. This is new!  More about this will be discussed later in this newsletter.

Alabama tax law leads the nation

In 2013, Alabama passed an unusual law called the “Alabama Accountability Act of 2013”; California and New York are considering similar laws for the sole purpose of getting around the $10,000 limitation of SALT deductions.

The 2013 Alabama law clearly was long before the 2017 federal tax bill but, without intending to, it neatly steps around the SALT limitation.

Alabama Accountability Act of 2013

This is a super cool law; it allows an Alabama taxpayer to make a contribution to certain pre-approved 501(c)(3) organizations dedicated to education – and – get a 100% Tax Credit against your Alabama income taxes!

A 100% Tax Credit

A Tax Credit is not some mundane tax deduction; it is a dollar-for-dollar off-set against Alabama income taxes.  For example, if you made a charitable contribution of $10,000 to one of these pre-approved 501(c)(3) organizations, you get dollar-for-dollar write off of $10,000 against Alabama income taxes – AND – a federal charitable deduction.

There is a limitation

You can only use this tax credit to off-set 50% of your State of Alabama income taxes.  Not a serious limitation from my point of view.

Why is this important?

Federal deductions for charitable contributions are not limited (well not very much – I’ll talk about that later) but deductions of Alabama taxes (SALT) are limited to $10,000.  We can now skip over the SALT limit.

But! That’s not all!

Ok, I know that sounds like a TV salesman; but, in this case it’s true!

If you spend $10,000 on one of these preapproved §501(c)(3) organizations, you spent $10,000.  You get a $10,000 dollar-for-dollar payback with a reduction in your Alabama taxes; there is no money lost; you are 100% made whole.

AND

Did I mention that you also get a federal tax deduction for a charitable donation?  If you are in a 32% tax bracket, your $10,000 tax deduction is worth $3,200.

Therefore

If you spend $10,000 under the Alabama Accountability Act, which allows you to pay $10,000 of the Alabama income tax that you were required to pay anyway, plus you get a federal tax deduction worth $3,200, then your $10,000 spending is worth $13,200 in cash!

That’s not hypothetical cash; this is real spending money!

What’s the catch?

That’s the point of this memo, there is no catch; this was the intent of the Alabama legislature.

The politics of this Act are complex and beyond the scope of this letter.  The intent of the law and the thought processes behind this law are very much a part of this letter.  When there is a tax controversy in court, the “intent” of the law becomes an important factor.

The Intent of the Law

The people in support of this law believe that Alabama has serious problems in Alabama’s education system for children and high school students.  (They’re right too.)  They also believe that State of Alabama Tax money, diverted to private sector organizations dedicated to education, can have a profound and positive impact on the quality of education.

The State of Alabama intentionally diverted tax money to private sector educational organizations with the hope that the quality of education in Alabama would be improved.

Is it working?

The short answer is yes.  I have visited many schools that are funded, in part, by the Alabama Accountability Act of 2013, and they are, without exception, outstanding!

My only reservation is that the substantial improvements in the quality of education, related to this act, do not reach enough students.  But, the impact on students it does reach is profound!

Lessening the Burdens of Government

Lessening the Burdens of Government has long been the underlying basis for Tax Exemption under IRC Section 501(c)(3).  The burdens of government are the health, education and general welfare of the citizens; these demands are too general and too complex to be managed by government alone.  In any government, a functional partnership must exist between the government and private sector for there to be any hope of success.

By deliberately moving money from the public sector (the State of Alabama), to the private sector, (the various pre-approved §501(c)(3) charitable organizations), Alabama has made an effort to increase the amount of funds targeted to a specific public issue (education) by relying more on the private sector.

There’s no Catch – except?

As I said, there are no catches; except for one small catch that will not have any relevance to most taxpayers.  The new tax law now allows a charitable tax deduction in any tax year not to exceed 60% of Adjusted Gross Income (also called AGI).  This is an increase from prior law that allowed charitable deductions not to exceed 50% of AGI.

The new tax law wants to encourage taxpayers to make as many charitable deductions as possible.

How this works: to most of us, this may not make much sense.  If, for example, your family earns $100,000 per year, your maximum charitable deduction is only $60,000.  $60,000!  Like I said, this new provision in tax law makes no sense to most of us.

It is, nevertheless, an important change in the law. 

I see a trend in tax law that is encouraging.  When people move up from a middle class income to an upper middle class or higher income, the level of charitable giving, as a percentage of income goes up; often it goes up very fast. This is a cultural trend that I find encouraging.  Warren Buffett, Bill Gates and others are giving up to 90% of their income to charity; they are leaders in this cultural trend.

We are fortunate to have some very generous clients; some who give 60, 70 or even 80% of their income to charity.  As a rule, they are “well-to-do” financially; other than that, they are no different than anyone else.  Often you would not know who they are; they live in modest homes, drive modest cars and are basically nice friends and neighbors.  Typically, these generous givers do not give 60, 70 or 80% of their income away every year; most years they may give 10 to 20% of their income away.  Every so often, every fifth, eighth or tenth year, they will make substantial donations.  These generous givers are different from other historical charitable giving norms; they are very careful, deliberate givers.  These charitable givers research and plan their giving with care to maximize the impact of their donations.

It is a joy and this is a growing trend in the not-for-profit industry.

Stories

I have many wonderful stories about how some of these very generous donors plan their charitable giving.  If you are interested, I may get permission to tell a story about a woman who put $5,000,000 on her American Express Card to move aid quickly to Indonesia the day of ‘The Great Tsunami’ and got that aid on the ground in less than 24 hours!

Congress moved the Charitable Deduction AGI limit from 50% to 60% in an attempt to encourage this charitable giving trend.  Getting more money into the hands of §501(c)(3) organization is a good thing.

The New Tax Law

The new tax law seeks to limit the tax value of SALT deductions (Remember that SALT is State and Local Taxes). Bummer.

Quite the opposite, the new law seeks to encourage more money to move into the hands of §501(c)(3) organizations. Good!

The “Alabama Accountability Act of 2013” is an outstanding tax tool that allows a person to plan around the $10,000 SALT deduction limitation and increase charitable giving substantially.  It is a VERY GOOD TOOL.

The “Alabama Accountability Act of 2013” is so good that it is proving to be an inspiration to California and New York.  If these two states are successful at implementing similar legislation, I think we will see an interesting national trend in state tax laws.

On a Separate but Related Issue!

Section 529 of the new tax law substantially expanded the use of §529 accounts; these funds are no longer limited to “higher education” alone.  The new §529 rules allow for these funds to be used for tuition at an elementary or secondary public, private, or religious school, up to a $10,000 limit per tax year.  It is my opinion that this applies to home schools too.

Once again, this time on a federal level, government is encouraging the private not-for-profit sector to shoulder more of the burden of educating our citizens.

The more I read the new tax law

This law is complicated. I’m doing my dead-level best to understand the new law but I have a lot to learn! As I learn more, I will keep you posted with newsletters and memos.

Thanks!  I love my job and, without you, I would not be able to do what I do.  Thank You!

Steve Richardson, CPA

Newsletter from
Steve Richardson & Company, Certified Public Accountants

December 28, 2017

Tax Planning for Charitable Contributions!

Generous People!

Most people are, by nature, generous in their charitable giving; they will certainly take full advantage of any tax deductions available. But!

But a Tax Deduction will not motivate people to give!

Very few (if any) people make donations to get a tax deduction. Tax deductions do not motivate people to give.

Tax Law Defines a Charitable Organization

Most Charitable Organizations are non-profit entities that qualify under §501(c)(3) of the Internal Revenue Code. These organizations include churches, synagogues, mosques and a variety of other religious organizations. They also include a wide variety of non-religious organizations such as:

• educational,
• scientific,
• literary,
• testing for public safety,
• fostering national or international amateur sports competition,
• preventing cruelty to children or animals
• And other charitable organizations

And other charitable organizations

And other charitable organizations: if that sounds like a “catch-all” it is. Charitable organizations that qualify for §501(c)(3) status are so diverse and complex, that they cannot be listed in the law but must be defined by function.

For Example:

I spend a great deal of time and money investing in the West Alabama Food Bank. The mission of this entity is to feed people who are hungry in nine West Alabama Counties. Where a man puts his time and his money – there goes his heart. This mission is important to me. This organization is clearly one of those “other charitable organizations.”

Why did Congress create §501(c)(3) of the Code?

Congress was motivated to create §501(c)(3) of the Code to “Lessen the Burdens of Government”.  Governments, at every level, have legal and ethical obligations to see to the health, education and welfare of the people.  This obligation is too big and too diverse for the government to meet without significant assistance from the private sector.  Charitable organizations are necessary to help governments see to the needs of the people.

It is for this reason that tax deductions are granted for charitable contributions.

Charitable Organizations are concerned about the New Tax Law!

It is true, many churches and other charitable organization are concerned; personally, I think that many of these concerns are unfounded.

I do not believe that the nation’s churches and other charitable organizations will see any significant decline in donations.

To Charitable Individuals and Corporations

As a CPA, I would advise two things:

• Continue to give. In fact, reevaluate your giving and take a hard look at your motivations to contribute money to the charitable organizations that you support. If you honestly reassess the reasons that you give, it may be that your level of giving may actually increase.
• If you are entitled to a tax deduction for donations, take it, but do not let the deduction confuse why you are making the donation.
• Even with less tax motivation, there are still tax planning opportunities!

Tax Planning for Charitable Giving

Many of our clients are generous givers. Some of our clients give right around that $20,000 a year mark (some much more, even up to a $1,000,000 or more a year). Consider this: double up your giving in one year and skipping the following year. In this way you can have $40,000 in charitable tax deductions in one year followed by zero dollars the following year.

Caution: if you do choose to “stagger” your charitable giving, please talk to the charitable organizations that you support so that they are fully aware of your tax planning. Staggered giving represents budgeting problems for most churches and charitable organizations; they need to know your intent so that they can put into place certain budgetary controls.

To Charitable Organizations:
How do you deal with the new tax law?

Because of the new tax law, many organizations believe that charitable contributions will drop. I believe these concerns are unfounded. I think I am right; I hope I’m right! But, this is a new fund raising environment.

My advice is this:

• Restate your mission and purpose with clarity.
  1. Clear mission statements
  2. Publish your actions plans
• Communicate your mission and purpose with your donors better.
  1. Communication is the key to successful fund raising.
  2. Explore new methods of communication
  3. Do not abandon the old tried and true methods of communication: a personal visit, a warm hand shake, a face-to-face visit.
  4. Always make a clean and clear ask. Ask your donors for their support! Always Ask.
• Inform your donors of your successes and, believe it or not, your failures too. Such information makes your donors more a part of your process.
  1. Donors are more educated and sophisticated today; most can spot hype and hyperbole; when you communicate with your donors, tell them the truth.
  2. Discuss your failures and tragedies. Trust me on this one.
• Create more non-financial ways for your donors to participate in your mission and purpose with time, skills, planning and activities. A donor that has made these types of commitments to your organization will likely become lifetime committed financial supporters.

Why do People Give?

People give for a variety of reasons, but the core reason is the mission and the effectiveness of the organizations that they support.

The tax deduction for charitable organization has not gone away! 

The itemized deduction for charitable contributions won’t be going away anytime soon. But because most other itemized deductions will be eliminated in exchange for a larger standard deduction (e.g., $24,000 for joint filers), charitable contributions after 2017 may not yield a tax benefit for many because they won’t be able to itemize deductions. If you think you will fall in this category, consider accelerating some charitable giving into 2017.

Thanks! I love my job and, without you, I would not be able to what I do. Thank You!

Steve Richardson, CPA

 

Newsletter from
Steve Richardson & Company, Certified Public Accountants

December 27, 2017

Unreimbursed Business Expenses

Dear Clients & Friends of the Firm:

Promised Tax Planning Memos

As promised, here is the first of a few tax planning memos that relate to the new tax law. This memo deals with unreimbursed employee business expenses.

Unreimbursed employee business expenses

It is typical for people who work in several trades and businesses to incur substantial unreimbursed employee business expenses. Some of these trades and businesses are:

• Ministers & Clergy
• Outside Sales People
• Construction Workers

There are, of course, many other employees who also incur unreimbursed employee business expenses.

A Cry for Help!

Following is an email I got from a fellow accountant asking me for advice; it is reproduced below verbatim:

Steve,

I have a client who gets paid with a W-2 of $600,000, but has $150,000 in misc. itemized deductions. In light of the tax change below, any suggestions?

“Miscellaneous Itemized Deductions Suspended Under pre-Act law, taxpayers were allowed to deduct certain miscellaneous itemized deductions to the extent they exceeded, in the aggregate, 2% of the taxpayer’s adjusted gross income. New law. For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for miscellaneous itemized deductions that are subject to the 2% floor is suspended. (Code Sec. 67(g), as added by Act Sec. 11045)”

My friend and fellow accountant has an excellent question. His client is an outside salesman; obviously well compensated. But, the unreimbursed expenses are high! $150,000!

Under this new law, these expenses are not tax deductible.

Tax Planning: an “Accountable Expense Plan.”

There is only one solution; the employer needs to create an “Accountable Expense Plan.”

An “Accountable Expense Plan” is a plan that allows an employee to account for his expenses (typically in an expense report), turn those expenses into his employer and be reimbursed. These reimbursements, if done correctly, are not taxable.

The “Accountable Expense Plans” are excellent; they have been around for many years and the work well. The problems, all of which can be overcome with good planning, are:

• How can the business afford to pay these expenses?
• How can the business and employees organize and account for these expenses correctly so that they qualify as a part of an accountable plan?

How can the business afford to pay these expenses?

Obviously, it will be difficult for a business to financially absorb the cost of substantial unreimbursed employee business expenses. The solution is simple: reconsider the entire compensation scheme for the business.

Guidelines for how to reconsider compensation:

• Be fair; try not to use this as an opportunity to cut compensation costs. In the long-run this could undermine your business.
• Calculate the average employee costs of unreimbursed employee business expenses. This can be done in two ways:
  • On an employee by employee basis
  • On an employee class basis
• Reduce compensation by employee or by employee class
• Create an accountable reimbursement plan (We can help!).
  • The plans must be in writing
  • The plans can be employee by employee or by employee classification
  • The plans can have dollar limits, once again, the dollar limits can be applied on an employee basis or on an employee class basis.
• Organize the paper work
  • Create an expense report (We can help!).
  • Create an internal accounting system to track the reimbursements.

This is a good law (at least I can make the best out of a not-so-good situation)

I (sort of) like this new law. We have many clients (literally hundreds) that have employees with substantial unreimbursed employee expenses. As you might expect, we have a significant number of these employee-clients (who incur substantial unreimbursed employee expenses).

There is often a “disconnect” between the employers (who feel that the compensation that they pay is excellent) and the employees (who feel that their compensation is being sapped by the unrelenting pressure of unreimbursed employee expenses). This is a cause for employee discontent and can lead to high employee turnover.

With this new law, the old problem of unreimbursed employee expenses will be brought into sharp focus.

The new business standard

This new law will, I believe, cause many more employers to adopt accountable reimbursement plans. If the employers do so correctly, it will not increase their financial costs. What it will do is this: the employee job satisfaction will improve and, with a bit of good planning, so will employee productivity.

Also, the new law will force all parties to take a fresh look at the true economic costs of doing business.

The Business and the Non-Profit Worlds

The problem of unreimbursed employee business expenses in the business world is obvious. The problem in the non-profit and church world is much-much worse for a variety of reasons.

Often non-profit organizations are strapped for cash, lacking in quality internal bookkeeping, and stuck in an early 20^th century mindset that their employees are somehow obligated to be poor.

We can help employees and employers in the church and non-profit world overcome these barriers and establish functional accountable reimbursement plans.

Lemons for lemonade

There is a saying in tax practice: if the tax law gives you lemons, make lemonade.  (Ok; I just made that up, but it’s a good principle.)  The new tax law takes something away from employees engaged in outside business activities. Outside salespeople and people employed by nonprofit agencies may be seriously disadvantaged by this new law.

I will say it again: I think this could be a good law!

If so, how?

From a pure accounting point of view, this will allow businesses to more closely follow the basic economic principal of matching economic income with true economic costs. Unreimbursed employee business expenses are actually expenses incurred in creating income for the business.  This is an important concept that has good real world business application.  Done well, I think this concept will help businesses compete successfully with Amazon and other online retailers.

Economic trends in the USA

We are facing serious economic dislocations in the USA and in the world. The retail sector is dying fast; Amazon and other online retailers are killing local retail. Retail is not the only business sector being hard-hit.

I have a client that sells high quality baseball equipment; their major supplier is Mizuno (an important name in baseball). After 30-plus years in business, Mizuno has decided to complete with their own retailer by selling the same products online.  Worse, the online price is actually higher than the wholesale price that the local retailer can purchase the same products.  Unfair competition! Unfair; yes; but an all too common situation in modern retail.

It’s not just retail that faces this distorted economic playing field.

Industrial products and supplies are increasingly available from high quality online suppliers.  Building supplies too!

There are success stories!

There is, in my opinion, only one way to beat the online retailers: added value through increased customer services.

My clients have many success stories dealing with on-line competition.  One client added an outside sales force that focuses on providing a level of service impossible for online vendors.  A personal visit with a hand shake and a sit-down discussion of the customers’ needs translated into significant growth in retail sales often at a price premium compared to online competition.

If you are selling athletic equipment, industrial supplies, building supplies or in any other line of business facing the onslaught of online competition, you can win! Look at your sales model and consider the value of an outside sales force.  Any outside sales force, in my opinion, needs an accountable reimbursement plan.

Accountable reimbursement plans

Our CPA firm has helped hundreds of small businesses successfully install accountable reimbursement plans over the years.  If you need help, call me.

Thanks! I love my job and, without you, I would not be able to do what I do. Thank You!

Steve Richardson, CPA

 

Overview of the new tax law

I plan to follow-up this overview with more pertinent and practical tax planning newsletters.  Some tax planning needs to happen in 2017 – obviously I need to start writing a few of these memos today!

Complicated

I’ve read the new law; and read it again (505 Page! My brain hurts!).  Contrary to the press, this is in no way a tax simplification.  The new tax law is complicated – very!

The tax law, as it came out of the Conference Committee, is much better than the initial house version of the bill.  Frankly, this initial tax bill from the House had me spooked!  A lot of good things happened in the Conference Committee.

This bill is effective: January 1, 2018

The new tax law takes effect on January 1, 2018, except for a few provisions such as the individual ACA mandate, which are deferred until January 1, 2019.

MUCH better

A short civics lesson: Tax Laws is born in the House Ways and Means Committee and then, if approved by the full House of Representatives, it goes to the Joint Committee on Taxation; a “nonpartisan” committee composed of both members of the House and Senate.  The Joint Committee on Taxation, typically, will offer substantial changes to the House’s version of the Tax Bill.  This is a MUCH better law than we started with! It’s not perfect by a Long-Shot; but it is not the messy monster that we saw a few months ago.

This is Classic Trickle-Down Economics

Overall, the Tax Cuts and Jobs Act represents the largest one-time reduction in the corporate tax rate in U.S. history, from 35 percent down to 21 percent. The bill also lowers taxes for the vast majority of Americans, as well as for many small-business owners — at least until the cuts expire after eight years.

Thank You Senator Rubio

Last-minute changes to the GOP’s big plan give a larger tax break to the wealthy and preserves certain tax savings for the middle class, including the student-loan interest deduction, the deduction for excessive medical expenses and the tax break for graduate students. A change made Friday morning to win over Rubio expands the child tax credit even further to give more money to working-class families.

Here’s a rundown of what’s in the final bill. (The final bill is 505 pages!)

What is changing?

A new tax cut for the rich: The final plan lowers the top tax rate for top earners. Under current law, the highest rate is 39.6 percent for married couples earning over $470,700. The GOP bill would drop that to 37 percent and raise the threshold at which that top rate kicks in, to $500,000 for individuals and $600,000 for married couples. This amounts to a significant tax break for the very wealthy.

The Conference Committee made a bunch of changes to the law

The new tax break for millionaires goes beyond what was in the original House and Senate bills, with Republicans seeking to ensure wealthy earners in states such as New York, Connecticut and California don’t end up paying substantially higher taxes as a result of the bill.

Changes for Sub-Section “C”, (generally large corporations)

A massive tax cut for corporations: Starting on Jan. 1, 2018, big businesses’ tax rate would fall from 35 percent to just 21 percent, the largest one-time rate cut in U.S. history for the nation’s largest companies. The House and Senate bills originally had the big-business tax rate falling to 20 percent, but Republicans were not able to make the math work to keep the rate that low and start it right away in the new year, so they compromised by moving the rate to 21 percent. It still amounts to roughly a $1 trillion tax cut for businesses over the next decade.

Economic Impact

Republicans argue this will make the economy surge in the coming years; I very much hope that they are correct.

The Individual Tax Deduction for state and local taxes is scaled back

You can deduct just $10,000 in state, local and property taxes: One of the most controversial parts of the GOP tax plan is the push to greatly scale back how much state and local taxes Americans can deduct on their federal income taxes. Under current law, the state and local deduction (SALT) is unlimited. In the final GOP plan, people can deduct up to $10,000 (married couples are also limited to just $10,000). The House initially restricted the $10,000 deduction to just property taxes, but the final bill allows any state and local taxes to be deducted, whether for property, income or sales taxes.

This is a real tax reduction! (Yea!) The bill out of the House was not.

Most Americans will pay less in taxes until 2026. The final plan lowers the tax rates for each income level and nearly doubles the standard deduction (while also scrapping the personal exemption). The result is that the vast majority of Americans will see their tax bills drop next year. Trump is fond of saying the “typical” family will save $2,000, but the reality is the amount will vary greatly depending up the size, location and circumstances of each family. The bill will also increase the number of Americans who owe nothing in taxes from 44 percent today to 47.5 percent after the plan takes effect on January 1, 2018. But all of the individual tax cuts are scheduled to go away after 2025. Republicans opted to make tax cuts for families temporary and reductions for businesses permanent.

Working-class families get a bigger child tax credit: Thanks to a late push by Senator Rubio (R-Florida) and Senator Mike Lee (R-Utah), the child tax credit would be more generous for low-income families and the working class. The current child tax credit is $1,000 per child.

The House and Senate bills expanded the child tax credit, with the Senate going up to a maximum of $2,000 per child. The final bill keeps the $2,000-per-child credit (families making up to about $400,000 get to take the credit), but it also makes more of the tax credit refundable, meaning families that work but don’t earn enough to actually owe any federal income taxes will get a large check back from the government. Benefits for those families were initially limited to about $1,100, but through changes Rubio and Lee pushed for, it’s now up to $1,400.

January 1, 2019

The individual health insurance mandate goes away in 2019: Beginning in 2019, Americans would no longer be required by law to buy health insurance (or pay a penalty if they don’t). The individual mandate is part of the Affordable Care Act, and removing it was a top priority for Trump and congressional Republicans. The final bill does not start the repeal until 2019, though.

There is a “plan”

There is a “plan” to hold down the expected increase in insurance premiums.

The Congressional Budget Office projects the change will increase insurance premiums and lead to 13 million fewer Americans with insurance in a decade, while also cutting government spending by more than $300 billion over that period. Some Republicans hope to make other changes to health care to prevent insurance costs from rising dramatically by the time the repeal kicks in.

Estate Tax Significantly Liberalized (Yea Again!)

You can pass your heirs up to $22 million tax-free: In the end, the estate tax (often called the “death tax” by opponents) would remain part of the U.S. tax code, but far fewer families will pay it. Under current law, Americans can pass on up to $5.5 million tax-free (that threshold is $11 million for married couples). The House wanted to do away with the estate tax entirely, but some senators felt that was too much of a giveaway to the mega-rich. The final compromise was to double the threshold, so now the first $11 million that people pass on to their heirs in property, stocks and other assets won’t be taxed (and yes, that means $22 million for married couples).

Sub-Chapter S Corporation, LLCs, Sole Proprietorship, and more

Most small businesses are organized in “pass-through” entities such as those listed at the top of this paragraph.  That means that they do not pay income taxes on their own but that there taxes are paid by the individuals who own an interest in the “pass-through” companies.

Small businesses are the most important cog in the economy of the United States! By Far!  A small business tax break is long overdue.

Most people simply don’t know or understand the magnitude of the small business sector in the United States. Utilizing the data and definitions from the SBA, small businesses make up the following; 99.7% of United States employer firms, 63% of net new private-sector jobs, 48.5% of private-sector employment, 42% of private-sector payroll, 46% of private-sector output, 37% of high-tech employment, 98% of firms exporting goods and 33 % of exporting value.

(See: https://www.sba.gov/content/small-business-gdp-update-2002-2010)

“Pass through” companies get a 20 percent reduction in taxable income: Most American small businesses are organized as “pass through” companies in which the income from the business is “passed through” to the business owner’s individual tax return. S corporations, LLCs, partnerships and sole proprietorships are all examples of pass-through businesses. In the final GOP bill, the majority of these companies get to deduct 20 percent of their income tax-free, a large reduction that mirrors what was in the Senate bill. The changes, however, expire after 2025. The National Federation of Independent Business initially opposed the House version, arguing that it didn’t do enough for small businesses. But the NFIB later endorsed the House and Senate plans.

But! But; I often hate that word.

Service businesses such as CPA firms (Bummer!), law firms, doctor’s offices and investment offices can take only the 20 percent deduction on their personal tax returns if they make up to $315,000 (for married couples).

AMT Tax Reform!!!

Many of you have heard me refer to the AMT Tax as “Tax Hell”; it is a brutal and unfair tax that was allowed to evolve from its original intent into a tax monster!

No corporate “AMT” tax: The final GOP bill gets rid of the corporate alternative minimum tax, a big relief to the business community. The Senate included the corporate AMT in its version of the bill, but the House did not. The corporate AMT makes it difficult for businesses to reduce their tax bill much lower than 21 percent. CEOs complained that this was a backdoor tax that would make them less likely to build new plants, buy more equipment and invest in more research, since the corporate AMT made the tax credits for those investments essentially null and void.

Individual AMT tax is redirected to accomplish its original purpose: Fewer families will have to pay the individual AMT: The AMT for individuals started in 1969 as a way to prevent rich families from using so many credits and loopholes to lower their tax bill to almost nothing.

The AMT Evolution: but what started out as a way to prevent the wealthiest Americans from tax dodging started to hit more and more families over time. Currently, the AMT kicks in fully for individuals earning over $120,700 and married couples earning over $160,900. Under the final Senate bill, that threshold is lifted to $500,000 for individuals and $1 million for married couples. (Some families in the $200,000 to $500,000 range will still have to pay AMT, but they will pay far less than they were before).

Mortgage Interest Deductions will get smaller:

Under the current tax code, taxpayers can deduct any interest they pay on up to $1 million worth of mortgage loans. House Republicans tried to cap that at $500,000 for new loans (existing mortgages are unaffected by the plan) but in the final version of their, Republicans have settled on a $750,000 cap.

How much does this tax bill cost the USA?

The final bill will cost $1.46 trillion: Republicans decided it would be all right to go into debt up to $1.5 trillion to fund the tax cut. In the end, they nearly hit that mark. The official estimate — released Friday evening alongside the bill — came in at $1.46 trillion.

What is NOT changing?

The Conference Committee, thanks to a few hard-nosed Senators (Rubio), made this bill much better!  The bill keeps in place the student loan deduction, the medical expense deduction and the graduate student tuition waivers.

The House bill got rid of these popular deductions, but the Senate bill kept them, and the final bill even makes the medical deduction a bit more generous for a while (dropping the threshold to take the deduction from expenses over 10 percent of income to expenses over 7.5 percent of income for 2017 and 2018). After that, the medical deduction threshold reverts to 10 percent). In the end, Republicans decided it was better to allow millions of middle-class families to continue using these breaks if they qualify for them.

401(k)s, IRAs and Roth IRAs

Retirement accounts such as 401(k) plans stay the same. No changes to the tax-free amounts people are allowed to put into 401(k)s, IRAs and Roth IRAs.

Johnson Amendment stays in place:

Churches, synagogues, mosques and other nonprofits (the Johnson Amendment stays in place) can’t get political and endorse candidates in elections. Trump and conservative Republicans wanted to “totally destroy” (Trump’s words) the Johnson Amendment, which has been in place since 1954 and prevents religious institutions and nonprofits from getting involved in elections via fundraising or endorsements. The House bill included a repeal of the Johnson Amendment, but Democrats were able to get the Senate parliamentarian to determine that including the repeal in the bill didn’t comply with the rules of the Senate.

Real Property and Rental Income:

There will be a “Shortened Recovery Period for Real Property”; the depreciation rules for real estate will change effect on January 1, 2018.

For property placed in service after Dec. 31, 2017, the Act would shorten the recovery period for determining the depreciation deduction for nonresidential real and residential rental property to 25 years.

It would also eliminate the separate definitions of qualified leasehold improvement, qualified restaurant, and qualified retail improvement property, and would provide a general 10-year recovery period and straight line depreciation for qualified improvement property (certain improvements to the interior of nonresidential realty) and a 20-year ADS recovery period for such property.

For tax years beginning after Dec. 31, 2017, a real property trade or business electing out of the limitation on the deduction for interest expense would have to use ADS to depreciate any of its nonresidential real property, residential rental property, and qualified improvement property.

For property placed in service after Dec. 31, 2017, the Act also shortens the ADS recovery period for residential rental property from 40 years to 30 years.

Complicated

Did I mention that this new law is “complicated”?  This short memo hasn’t touched on a tenth part of the new law.

Thanks!  I love my job and, without you, I would not be able to do what I do.  Thank You!

Steve Richardson, CPA

 

A Federal Grand Jury

Called

In forty-plus years of practice as a CPA I have never been “called” to a Federal Grand Jury to testify.  A large portion of this past week was spent involved with just such an activity.  It was unpleasant.  A Federal Grand Jury is a serious meeting; the Grand Jury is discussing matters that could have an irreversible and catastrophic impact on people’s lives.  Serious is an understatement!

The families involved face the potential of irreversible damage that will include massive financial costs and may well include time in jail.

“Called” is the appropriate word.  I say “called” because attendance is not optional.  I received a summons and was “required” to appear and testify in a potential tax evasion case involving a former client.  Had I been legally and ethically allowed to avoid this “call” I certainly would have.

The Grand Jury’s job is to decide if the prosecution have enough evidence to issue an indictment. An indictment is a required precursor to prosecution.  Unlike state law, upon issuing an indictment, the case advances to court within 70-days.  Things move fast!

A Federal Grand Jury

As indicated, a Federal Grand Jury is a dark unpleasant place; as if to emphasize the unpleasantness of this situation, the Grand Jury is convened in a basement!

Unpleasant facts

First: there is no defense.  The defendant and the defendant’s attorneys are not allowed inside the Grand Jury.

Second: the prosecution presents their evidence indicating a federal crime.  The grand jury is being told the story entirely from the point of view of the prosecution.  As I said before, there is no defense presented.

Third: federal prosecutors are busy people.  They will not waste their professional time unless they feel that they have a good case.  The prosecutors must believe that they have an “excellent” prospect of getting a guilty verdict when this case advances to court.

Fourth: it is very likely, given 1, 2 and 3 above that the Grand Jury will issue an indictment.  It’s not automatic. Grand Juries have been known to decline to indict but it is rare.

This is a client newsletter

I think this guy is innocent; stupid! Stupid, but innocent.  Frankly, my opinion doesn’t matter. The facts in this case, for purposes of this newsletter are irrelevant. The purpose of this newsletter is to teach about this unusual aspect of criminal tax law.

And, more important …

This experience with the Federal Grand Jury has reinforced for me two things:

1. It is very important to file fair and accurate tax returns. To state this as a negative: Do Not Cheat on your taxes.
2. It’s also important to be smart in filing your tax return. To state this as a negative: Do Not Be Stupid when filing your tax returns.  Stupid is the right word when stupid can land you in jail.

Do Not Cheat

Well – Duh!

Do Not Be Stupid

I think we all know what cheating is; we know it’s bad and to be avoided.  Stupid is different; maybe we do not all understand what stupid is in connection with tax law.  I use that word, “Stupid” when Stupid can land you in jail.

I hate negative words…

To restate this as a positive: how can you be smart in filing tax returns.

Good Records: Good record keeping is essential.  Do not assume that you know how to keep good records; ask!  Bring your records to us and have me or our staff take a look at your process.  Let us make suggestions.  It’s not difficult to keep good records and you do not necessarily need QuickBooks or other formal accounting systems to keep good records.  I have good clients that keep excellent records with a simple filing system, bank reconciliations and excel sheets.

In today’s plugged in and cyber-connected world, there are multiple options that will allow you to keep excellent records.

Recognize high risk transactions:  Auto reimbursements and other expense reimbursements need to have a bit of additional attention. There are other high risk transactions that you may not recognize; for example, putting your wife on the payroll for the sole purpose of maximizing the family’s retirement accounts. On the surface, that does not sound too risky; but it is.  It is impossible for me to list all the risky tax transactions; the list is simply too long.  But! (I love that word “But”.)  But there is a “Rule of Thumb” that will help you gauge the risk of a tax transaction.  The rule is this: Yes or no; does the tax transaction have economic substance relative to your trade or business.  To restate this rule in different terms: is the tax transaction “ordinary & necessary” for the conduct of your business.

Compensation planning:  Planning compensation allocations, retirement contributions, and tax withholdings and other payroll transactions needs to be done with a high degree of professional care.  Payroll and payroll reporting problems will generate IRS mail quicker than any other tax transaction.

Do the normal things well: The normal things are: bank reconciliations, expense categories and required supporting documentation such as receipts, and separating personal cash and business cash are all essential.  And ask us to take a look and advise.

And – Be honest!  Simple ethical principles apply to tax law: tell the truth.  To quote a wise man, “The truth is like a lion. You don’t have to defend it. Let it loose. It will defend itself”: Augustine of Hippo.

Maybe this case is important

Maybe the details of this particular care are important.

The errors that triggered this catastrophic tax disaster is the commingling of personal and business funds and very bad tax records.

I cannot state this more clearly: Do Not Commingle Business & Personal Funds!  Ever!  Commingling is more that bad business; it is dangerous.

Bad Tax Records!  This client had very bad tax records.  The problem is that the records seemed to be complete and accurate on the surface.  They looked good.  They were reasonable (meaning that they didn’t seem to be inaccurate).  The internal bookkeeper was, or appeared to be competent.  We offered on multiple occasions to review the books but the offer was declined due to the “costs”. For the client, this was a disastrous decision.

Consequences:  I am deeply concerned about this taxpayer and his family.  Other families depend upon him for their livelihood.  If he is indicted and convicted the repercussions are severe!

First Time

I have never been to a Federal Grand Jury before.  I hope I never go again.

Dear Client and Friends:

The Proposed New Tax Law

When the politicians and the news media talk about “Tax Reform” the discussion is more about politics than tax law. I’m no politician (Thank You God!) so I will talk about the facts and personal family economic impact of the proposed new tax law.

Todd Cowart, my friend and a key member of our team, recalculated his own 2016 tax return and discovered, much to his surprise, that he had a $3,000-plus tax increase! He was concerned and asked me to take a closer look at the proposed new tax law.

Of a dozen tax returns that I recalculated using the proposed new tax law, only one, a very high income individual, had a modest tax decrease. Eleven of twelve tax returns showed a significant tax increase!

My first point is this: the new tax law is not a tax reduction for most people!

If you have a taxable income above $250,000 you may have a tax reduction, but, even at this income level, the loss of certain key deductions, exclusions and tax credits do not guarantee a person at this income level any tax relief whatsoever.

The proposed provisions of the new tax law will do a number of unexpected things:

Personal exemptions repealed. The Act would repeal the deduction for personal exemptions (under current law, for 2018, $4,150, subject to a phase out for higher earners), as well as the personal exemption phase out. (Act Sec. 1003).

If you have a large family (my eldest son has four kids) this is a tax increase.

There is a proposed Maximum Rate on Business Income of Individuals; I have no idea exactly how to interpret this yet. The language in the proposal is intentionally vague. Politicians use intentionally vague language like Michelangelo used a paint brush.

If this means:

• All S-Corps and LLC are taxed at a maximum 15%; then this is a real tax reduction on small businesses.
• If this applies only to big businesses and Sub-Chapter “C” businesses, then it will have zero positive benefit on small business.

This is a very important distinction. Historically, tax reductions on businesses have been targeted to big businesses. This has limited economic benefit for the simple reason that the heavy lifting in our economy is done by small businesses.

Small businesses make up: 99.7 percent of U.S. employer firms, 64 percent of net new private-sector jobs, 49.2 percent of private-sector employment, 42.9 percent of private-sector payroll, 46 percent of private-sector output, 43 percent of high-tech employment, 98 percent of firms exporting goods, and 33 percent of our nations export value.

Economic policy that focuses on big businesses will have very limited positive economic impact. Economic policy must, by necessity, focus on small businesses.

The Child Tax Credit will be increased. That’s a good thing. The Act would increase the amount of the child tax credit from $1,000 to $1,600. The Act would also increase the phase out from $110,000 to $230,000 for joint filers. Really Good! But, he who giveth can also taketh away, the Child Tax Credit will no longer be entirely refundable. Even here there is a sneaky little tax increase tucked in the law. I say sneaky, which I admit is an emotionally loaded word, because the restrictions on the refund ability of the child tax credit will only impact lower bracket taxpayers.

Back Door Tax Increases:

The Act would repeal:

• The credit for individuals over age 65 or who have retired on disability; and
• The adoption credit.

I admit that these two tax increases bother me. To increase taxes on the elderly and disabled as a part of an overall business tax reduction plan somehow does not seem fair.

The adoption credit is, to me, a big deal. My family has been impacted by adoption. I have a beautiful adopted grandson; I cannot imagine our family without Ryder. To increase the costs of adoptions to pay for business tax breaks seems a bit mercenary. (I know, I know, I keep using these emotionally loaded words; emotional loading does not mean the description is inaccurate.) Perhaps jaded would have been a better choice of word?

More Back Door Tax Increases:

Mortgage interest deduction retained, but with new limits.

For newly purchased homes, the mortgage interest deduction will be allowed on mortgage amounts of less than $500,000 ($250,000 for a married individual filing separately). (Act Sec. 1302). This is bad for the housing market and it will make the transition to the middle class more difficult. This will be an economic drag.

The Act would also limit taxpayers to one qualified residence. In our highly mobile society, it is not uncommon for families to own two homes for a period of time. Highly mobile people who own two homes in our economy are most often middle class; we have here a middle class tax increase.

State and local property tax deductions are limited. The Act would eliminate the deduction for State and local income or sales tax (see below), but would retain the deduction for real property taxes, subject to a $10,000 maximum. Here, in the sunny South, not a problem; taxes are low. In urban areas and in the rest of the country, State and local taxes are much higher. This is a tax increase.

Other Repeals:

Personal casualty losses under Code Sec. 165 (subject to an exception for disaster losses under the recent Disaster Tax Relief and Airport and Airway Extension Act of 2017); (Act Sec. 1304)

Also:

• State and local income taxes and sales taxes; (Act. Sec. 1303). Once again, it is good to live in the sunny South where we enjoy low taxes.
• Tax preparation expenses under Code Sec. 212; (Act Sec. 1307). Whoa-whoa; slow down here; this is a Sacred Cow! You can’t deduct your CPA fees!!! Give me a break!
• Alimony payments under Code Sec. 215. (I admit, this does not bother me too much; alimony is one of the very few purely personal expenses that enjoy a tax deduction.)
• Moving expenses under Code Sec. 217; (Act Sec. 1310). In a highly mobile society or in ministry where people move often, this is harsh!

Here are two things that really bother me – a lot!

The proposed new act will eliminate the deduction for unreimbursed business expenses on IRS Form 2106. Expenses attributable to the trade or business of being an employee under Code Sec. 262, will no longer be tax deductible.

Why does this bother me? This provision will disproportionally impact members of the Clergy. Ministers often have substantial unreimbursed required business expenses. This is a significant middle or lower middle class tax increase.

My biggest problem with the new tax law:

• Medical expenses under Code Sec. 213 will no longer be tax deductible!

Chronic Illness and Disability

I have a 35 year old client who was physically and mentally crippled in an auto accident at age 18. Every dime he earned in interests and dividends from his financial settlement is spent on his care; 100% of his income is devoted to his physical and medical care. His taxes will go from zero to sky high!

Elder Care

I have, thank God, very few “elder care issues”. Many of my clients do have elder care issues. The repeal of medical expense deductions is a disaster for elder care issues.

The rational of increasing taxes on some of our weakest and most vulnerable citizens escapes me.

Nursing Home Expenses

Nursing home expenses, currently deductible, will no longer be tax deductible.  This is BIG!

Other repeals

• Employee achievement awards under Code Sec. 74; (Act Sec. 1403)
• Dependent care assistance programs under Code Sec. 129; (Act Sec. 1404)
• Qualified moving expense reimbursements under Code Sec. 132; (Act Sec. 1405) and
• Adoption assistance programs under Code Sec. 137. (Act Sec. 1406)

The Spin Doctors!

Let the spin doctors and politicians tell you what they want to but the take away from simple reading of the proposed new tax law are these:

• This is not middle class tax friendly. This is a significant tax increase on low income and middle class taxpayers.
• Unless the largest majority of the still top-secret business tax cuts go to small businesses, this is not going to have any discernable impact on the national economy.

What to do?

Feel free to share my email with whomever you want. Be politically proactive. Voice your concerns about this tax law.

Conclusion

As always, I am pleased and proud to be your CPA and/or your friend.

Sincerely,

Steve Richardson, CPA