Category Archives: tax credits

Congress Passes Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act, which was passed in both houses of Congress earlier this week, was signed into law by President Trump on December 22, 2017. The majority of the provisions contained in the sweeping reform legislation go into effect as of January 1, 2018. Read on for a few recommendations on actions to be taken before the end of 2017 followed by an overview of items included in the act.

Initial Recommendations:

For Individuals

  • Pay state income taxes due before December 31, 2017.
  • Accelerate your charitable contributions into 2017 since all brackets will benefit.
  • If you make charitable contributions to the athletic department of your favorite university in order to be entitled to purchase tickets to athletic events, definitely make those contributions before December 31, 2017.
  • Prepay 2% itemized deductions due (such as investment advisory fees, tax preparation fees, professional licenses, etc.) before December 31, 2017.
  • Prepare for additional estate gifting beginning January 1, 2018.

For Businesses

  • Consider a change of accounting methods for business below $25MM to a cash basis method or completed contract accounting (as opposed to percentage of completion)
  • Consider accelerating equipment purchases for immediate write-offs.
  • Close 1031 exchanges on personal property before 12-31-17
  • Pay for business entertainment in 2017
  • Pay for R&D expenditures in 2017
  • Consider timing of terminated partnerships—technical termination rules go away in 2018
  • Consider choice of business entity.

Items Affecting Individuals:

Tax Rates – The act keeps the seven tax brackets but reduces the rates for five of them. The new bracket rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The maximum rate is for income above $600,000 married filing jointly and $300,000 for singles.

Standard Deduction and Personal Exemptions – The standard deduction is increased to $24,000 for married filing jointly and $12,000 for singles. Personal exemptions are repealed.

Mortgage Interest – The mortgage interest deduction is capped at interest on $750,000 of mortgage debt each for a principal residence and a second home. The deduction for interest on home equity lines of credit is repealed.

Taxes – The act puts a $10,000 cap on deductions in connection with state and local income, property, and sales taxes. It also provides that no deduction will be allowed in 2017 for prepayment of tax for years beginning after December 31, 2017.

Medical Expenses – The threshold for deducting medical expenses is temporarily reduced from 10% to 7.5% (for the 2017 and 2018 tax years only).

Child Tax Credit – The per-child tax credit is doubled, rising from $1,000 to $2,000 per qualifying child. The phase out threshold is increased to $400,000 for married filing jointly and $200,000 for those filing singly.

Credit for Non-Child Dependents – The act temporarily allows parents to take a $500 credit for each non-child dependent whom they support, such as a child 17 or older, an ailing elderly parent, or an adult child with a disability.

Pass-Through Income – The act includes a 20% deduction on Qualified Business Income from sole proprietors, S-Corporations, LLCS, and partnerships (subject to limitations).

Alternative Minimum Tax – The act reduces the number of filers who would be hit by this tax by raising the income exemption levels to $70,300 for singles and $109,400 for married filing jointly.

Affordable Care Act Individual Mandate – The individual mandate is repealed as of 2019.

College Athletic Fund Contributions – These contributions, made in exchange for preferential seating, are no longer deductible.

Alimony Deduction – This is repealed after 2018.

Estate Tax – This tax remains at 40% but the exemption is doubled to $10.98 million per individual.

Miscellaneous Tax Breaks – The act preserves some smaller, but popular, tax breaks, including deductions for student loan interest and classroom supplies bought with a teacher’s own money. It also keeps the tax-free status of tuition waivers for graduate students.

Items Affecting Businesses:

Corporate Tax Rate – The corporate tax rate is reduced from a top graduated rate of 35% to a flat 21%.

Corporate Alternative Minimum Tax – The act repeals this tax.

Full Expensing for Certain Business Assets – The bill provides 100% expensing of qualified property acquired and placed in service after September 27, 2017 and before January 1, 2023. It also increases (tenfold) the Sec. 179 expensing limitation ceiling and phase out threshold to $5 million and $20 million, respectively, both indexed for inflation.

Interest Expense – For tax years beginning after December 31, 2017, every business, regardless of its form, is generally subject to a disallowance of a deduction for net interest expense in excess of 30% of the business’s adjusted taxable income. Farming businesses can elect out of these rules if they use ADS to depreciate any property used in the farming business with a recovery period of ten years or more.

Net Operating Losses (NOL) – For NOLS arising in tax years ending after December 31, 2017, the two-year carryback and the special carryback provisions are repealed, so losses can only be carried forward. However, a two-year carryback applies in the case of certain losses incurred in the trade or business of farming.

Foreign Provisions – The act includes several international tax changes including a repatriation provision—US shareholders owning at least 10% of a foreign subsidiary will include in income the share of the post-1986 historical earnings and profits (E&P) of the foreign subsidiary, to the extent that E&P have not been previously subject to US tax. The portion of E&P attributable to cash or cash equivalents would be taxes at a 12% rate and the remainder would be taxed at a 5% rate.

Farms Property – For property placed in service after December 31, 2017, in tax years ending after that date, the cost recovery period is shortened from seven years to five years for any machinery or equipment (other than any grain bin, cotton ginning asset, fence, or other land improvement) used in a farming business, the original use of which commences with the taxpayer. Additionally, the required use of the 150% declining balance depreciation method for property used in a farming business (i.e., for 3-, 5-, 7-, and 10-year property) is repealed. The 150% declining balance method continues to apply to any 15-year or 20-year property used in the farming business to which the straight-line method does not apply, and to property for which the taxpayer elects the use of the 150% declining balance method.

Cash Method of Accounting – The act increases the cash accounting method applicability threshold for most business up to $25 million in revenue, including businesses with inventory.

Percentage of Completion Requirements – The act increases the percentage-of-completion method applicability threshold to business with average revenue of $25 million or more.

Deduction for Entertainment – This deduction is repealed; previously entertainment was 50% deductible.

Research and Development Expenses – Must be capitalized and amortized over five years.

Technical Termination of Partnership Rules – The act repeals these.

House Passes Child Tax Credit Improvement Bill

Michael Blitstein, CJBS

Michael Blitstein, CJBS

by Michael W. Blitstein, CPA

Married couples with children would no longer face a tax penalty when claiming the child tax credit under a House bill passed on July 25, 2014. House lawmakers voted 237 to 173 to approve the Child Tax Credit Improvement Bill of 2014.  The bill would eliminate the marriage penalty in the child tax credit by increasing the income phase-out threshold for couples filing joint tax returns from $110,000 to $150,000 ($75,000 for individuals and married taxpayers filing separately).

The bill would also index for inflation the phase-out threshold for the $1,000 credit beginning in calendar year 2015. To combat fraud, taxpayers would be required to include their Social Security numbers on tax returns in order to receive the Additional Child Tax Credit (ACTC), which is refundable.

Ways and Means Chairman Dave Camp noted that the Treasury Inspector General for Tax Administration has reported that the number of filers for the ACTC without a Social Security number grew from 62,000 filers (claiming $62 million in benefits) in 2000 to 2.3-million filers (claiming $4.2 billion in benefits) in 2010. “This is a common-sense provision that will help safeguard taxpayer dollars from fraud, and put it in line with other refundable tax credits, like the Earned Income Tax Credit, which require a Social Security number,” he said.

House Rules Committee Chairman Pete Sessions said Republicans are fighting to make sure that hardworking American families keep more of their paychecks. “That’s why today the House passed legislation to provide common-sense reforms to ensure that the child tax credit keeps up with the rising cost of living,”” he said.

According to the Joint Committee on Taxation (JCT), eliminating the marriage penalty in the child tax credit and adding the inflation adjustment would cost $114 billion over the next decade. Part of that cost would be offset, in the amount of $24 billion, by requiring the use of Social Security numbers for the ACTC. In total, the JCT estimates that would cost $90.3 billion.

Under the bill, a married couple making $160,000 with two children would get an additional $2,200 in their 2018 tax refund, according to a study by the Center on Budget and Policy Priorities (CBPP).  The CBPP study estimates that a single mother of two making $14,500 would see her refund cut by $1,750 under the legislation.

The White House has threatened to veto the bill if it passes Congress. The measure would raise taxes for millions of struggling working families while enacting expensive new tax cuts without offsetting their costs, reflecting fundamentally misplaced priorities, the administration said. “If Republicans want to show they are serious about helping working families through the Child Tax Credit, they should start by extending current provisions past 2017,” the statement reads.

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

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Tax Reform Proposals Released From White House, Congress; Next Steps Uncertain

Michael Blitstein

Michael Blitstein

by Michael W. Blitstein, CPA

Shortly before President Obama unveiled his proposed fiscal year 2015 Federal budget on March 4th, House Ways and Means Chair Dave Camp (R-Mich.), introduced a sweeping tax reform bill. While President Obama did not call for such a mammoth overhaul of the Tax Code as Camp did, the President did include many tax proposals in his budget, affecting individuals, businesses and tax administration.

In Camp’s bill, two greatly affected groups are taxpayers in high-tax states, who would be impacted by elimination of the deduction for state and local taxes, and corporations, which would benefit from a corporate tax cut, but one that would be partially paid for by higher taxes on small and mid-size businesses that are generally structured as pass-through entities.

Both the President and Camp quickly took to social media to promote their proposals. At a news conference, House Speaker John Boehner (R-Ohio), indicated it was unlikely Camp’s bill would come before the House for a vote. Republican support for many of the President’s proposals remains even less likely before mid-term elections.

Obama’s proposals

As in past budgets, President Obama proposed tax incentives for manufacturing, research, energy, and job creation. The President called for Congress to make permanent the research tax credit and expand incentives for employers to hire veterans. Carried interest would taxed as ordinary income and payroll taxes would be extended to cover distributions from certain pass-through entities engaged in a professional service business.

President Obama signaled a willingness to reduce the corporate tax rate but would require the elimination of some business incentives, particularly tax preferences for fossil fuels, in exchange. The President also proposed a number of international and insurance taxation reforms.

For individuals, President Obama proposed to enhance the earned income credit (EIC) for individuals without children and noncustodial parents, and make permanent the American Opportunity Tax Credit. The President also proposed to reduce the value of certain tax expenditures for higher income individuals.

Camp’s bill

Camp’s bill would replace the current seven individual income tax rate brackets (10, 15, 25, 28, 33, 35, and 39.6 percent) with three rates: 10, 25 and 35 percent. In addition, many incentives for individuals would be repealed, including the state and local tax deduction, the itemized deduction for medical expenses, the adoption credit, deduction for alimony payments, the deduction for higher education tuition, and residential energy credits. A few incentives would be enhanced, such as the child tax credit.

Two popular individual incentives—the home mortgage interest deduction and the charitable contribution deduction—would survive under Camp’s plan but in modified form.

Camp’s bill would gradually reduce the corporate tax rate to 25 percent. Few targeted business tax incentives would survive. Camp’s plan eliminates the Work Opportunity Tax Credit, many energy-related incentives, the rules for like-kind exchanges, and more. However, Code Section 179 small business expensing would be enhanced. The research tax credit would be retained but modified.

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

www.cjbs.com

Illinois Small Business Jobs Creation Tax Credit Program

by Michael W. Blitstein, CPA 

To help move the Illinois economy to a sustainable recovery, the Small Business Jobs Creation Tax Credit has been extended by Governor Quinn and the General Assembly with some new components.

Effective July 1, 2012, new, full-time jobs created beginning July 1, 2012 to June 30, 2016 will be eligible for tax credits. The program will either run until June 30, 2016 or it will immediately come to a close if $50 million in tax credits are issued prior to that 2016 date.

Overall, not a lot has changed from the pilot program to this extended program. Eligible businesses (and not-for-profit businesses) are still those with 50 or fewer full-time employees. Eligible jobs are those that pay at least $10/hour or $18,200/annually and the position must be sustained for one full year from the hire date.

One important thing to note: You do not have to keep the same individual in the position the entire year, but you will need to make sure the position is filled with any number of employees for at least one year from the actual hire date.

A new piece to this program is that PEO’s (Professional Employer Organizations) would be able to receive a tax credit based on their working relationship with an eligible business. If a PEO has been contracted by an eligible business to issue W-2s and make payment of withholding taxes, then they could enter their information and be eligible to receive a tax credit.

After creating one (or more) new, full-time positions that meet the eligibility requirements, employers are eligible to receive a $2,500 per job tax credit. Theoretically, this will provide an extra boost for employers, enabling them to grow their businesses in Illinois.

To register a position or to learn more about the program please visit www.jobstaxcredit.illinois.gov.

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

www.cjbs.com

IRS Issues Guidance on Expanded Work Opportunity Tax Credit

by Michael W. Blitstein, CPA 

The IRS has released guidance and posted online Frequently Asked Questions (FAQs) for employers planning to claim the enhanced Work Opportunity Tax Credit (“WOTC”) for hiring qualified military veterans.  The guidance contains transition relief, describes electronic submission of the form used to claim the credit and describes the procedures for tax-exempt organizations to claim the credit.

The WOTC was enhanced as part of the VOW to Hire Heroes Act, passed by Congress at the end of November 2011. Employers who hire members of targeted groups, and who obtain a certification from an appropriate state agency as to each employee’s status as a member of the targeted group, are entitled to a tax credit.

For military veterans, the VOW to Hire Heroes Act expanded the WOTC, which rewards employers with a tax credit for hiring individuals from targeted groups. The “Returning Heroes Tax Credit” and the “Wounded Warriors Tax Credit” are intended to encourage employers to hire unemployed military veterans.

Employers that hire veterans who have been looking for employment for more than six months may be eligible for a maximum $5,600 credit per employee (Returning Heroes Tax Credit); employers that hire veterans who have been looking for employment for less than six months may be eligible for a credit of up to $2,400 per employee. Employers that hire veterans with service-connected disabilities who have been looking for employment for more than six months may be eligible for a credit of up to $9,600 per employee (Wounded Warriors Tax Credit).

Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, must be submitted to the state agency within 28 days of the employee beginning work for the employer. The credit applies in the case of qualified veterans who begin work prior to 2013.

The IRS guidance contains transition relief, providing that employers of veterans hired on or after November 22, 2011, and before May 22, 2012, have until June 19, 2012, to complete and submit the newly revised form to the state agency. The 28-day rule will apply to veterans hired after May 21, 2012. This transition relief also applies to qualified exempt organizations claiming the credit. Qualified tax-exempt organizations that employ veterans who are members of a targeted group also may take advantage of the credit.

The FAQs on the IRS website address topics such as how employers claim the enhanced WOTC for hiring qualified veterans, how a non-profit organization can claim the credit, and more.

In the case of exempt organizations, the credit is allowed against the employer’s Federal Insurance Contribution Act (FICA) tax obligation on wages paid to the veteran within one year of hiring. However, the liability on the organization’s employment tax return is not reduced by the credit; rather, the credit is processed separately and the amount properly claimed is refunded to the exempt organization. This is likely to occur after the filing of the return, so organizations are cautioned not to reduce their FICA obligation on their returns in anticipation of the refund.

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

www.cjbs.com