Important State and Federal Tax Changes in 2019

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Changes in tax law and pending legislation don’t always make the headlines. Businesses must stay informed to avoid the price of being caught unawares.

Tax laws are ultimately no different from any other in that they’re subject to legislative change. These changes may be sweeping and significant but are most often incremental shifts as policy evolves and adapts to a changing world.

Unlike other laws, alterations to tax rules only catch the public attention if they’re sufficiently impactful such as the Tax Cuts and Jobs Act, which initiated more than 600 rule changes. This makes it vital for individuals and especially businesses to watch for less-publicized shifts which could make a big difference to their tax return. Here are some of 2019’s most notable tax developments.

What happened in July

Many states saw tax changes come into force on July 1st, the opening of the fiscal year for 2020. These changes covered multiple areas from income and sales tax to fuel and capital gains. Some examples indicative of the wider changes:

  • New York and Vermont amended property tax codes to net more revenue from property transfers. The “Mansion Tax” was one of several things impacted by Senate Bill 1509, which added a surcharge to real estate transfer taxes on high-value properties. This is a significant change as it helps address the controversial issue of wealth imbalance.
  • New sales tax collection requirements were imposed or expanded on remote sellers (e-commerce retailers) in 13 states, expanding the remote sales tax collection laws to include marketplace facilitators. Generally, these changes apply to sellers with sales of over $100,000 or a transaction count of 200 within their state. Sellers wondering if they’ve been impacted by the Streamlined Sales and Use Tax Agreement should check the status of their home state.
  • California, Illinois, Montana, Nevada, Ohio, South Carolina, and Tennessee saw gas tax increases.
  • Gross income is now affected for businesses in Washington. This Business and Occupation tax is relatively low but is set to increase again in January 2020.
  • Private-sector employers in Massachusetts and the District of Columbia will be taxed to fund a new paid medical and family leave. An initiative is set to begin paying benefits in Massachusetts starting in January 2021. This payroll tax is shared between employers and employees in Massachusetts totaling 0.63 percent of wages up to $132,900 (the Social Security wage base for 2019). For D.C. private sector employers, this tax change is set at 0.62 of the employer’s gross wages paid and is set to payout starting in July 2020.

The full extent of July’s changes can be read via the Tax Foundation’s free report.

Pending Senate treaties could foreshadow significant change

Tax treaties at the national level saw four bills passed by the Senate Foreign Relations Committee. These treaties impact agreements with Japan, Switzerland, Spain, and Luxembourg. Other treaties are pending which would affect America’s tax relations with additional nations.

U.S. businesses with operations overseas share a symbiotic relationship with those countries. Of the 58 income tax treaties America currently has in place, seven of those countries have injected over $1.2 trillion into the U.S. generating a great many jobs. These bilateral treaties help to smooth out the often- rocky differences in tax issues between different nations facilitating trade and investment.

The recent passage of these four treaties is significant, as such shifts are usually glacial. Now finally in place, the tax benefits are available to be felt by all involved. The tax changes implemented by these treaties help to sidestep double taxation and align tax withholding, as well as provide some measure of prevention against tax evasion.

These changes make the U.S. a more attractive trade prospect; good news for American businesses, many of which can realistically look forward to new opportunities and growth.

A new W-4 design for 2020

The IRS released a working draft of a new W-4 framework designed to simplify accurate withholding for employees starting next year. This is a direct result of the changes made by the Tax Cuts and Jobs Act and will see the new W-4 do away with the concept of withholding allowances which was previously linked to the amount of personal exemption.

The IRS plans to release the final version of the new W-4 form in November for use in 2020, maintaining that it will bring greater accuracy, privacy, and simplicity to the payroll process for employees and employers alike. Employers who submitted a W-4 prior to 2020 won’t be expected to submit a second one but can instead use the employee’s most recent form.

The IRS has also created a Paycheck Checkup tool available which they encourage taxpayers to use, especially if they’ve recently undergone any significant life changes or adjustments of status. The tool is also useful for any taxpayers who work freelance or form part of the gig economy.

2019 credits and reductions for small businesses

Many types of businesses and self-employed individuals became eligible for the Section 199A deduction in 2019. The new rule allows for up to a 20 percent deduction in qualified business income as well as a further 20 percent in qualified publicly traded partnership income and qualified real estate investment trust income. The deduction will be available again in 2020.

2019 changes to things like business use of a home and other business-related expenses look set to stand. The General Business Credit contains further tax credits for businesses with one other important benefit: if a taxpayer is eligible for credits but is unable to use them in 2019, they’ll be able to retroactively apply them or carry them on to a future year.

Today’s blog was just a snapshot of the always-shifting world of tax law. Get in touch with us at the details below for more insight and advice on making the most informed decisions.

Provident CPA & Business Advisors offers a wide range of services in tax, accounting, and beyond. Our core focus is to help professionals achieve financial freedom and build a better business. Get in touch today to start strengthening your finances.

Understanding Business Travel Expenses and Tax Deductions

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The TCJA changes how to treat business travel expenses when filing taxes

Entrepreneurs have plenty to manage, from growing their business to paying employees to managing client and vendor relationships. Paying taxes is a big consideration and can be complex, especially when the tax law continues to change and thus requirements are hard to follow.

The Tax Cuts and Jobs Act (TCJA) made some major changes to tax requirements for businesses and the self-employed, including what are considered deductible business travel expenses. What follows is a look at the basics you need to know for deducting business travel costs.

Business travel tax basics

It’s first important to understand what the IRS deems business travel. You cannot claim deductions under this category if the expenses were incurred in your tax home, or the location of your main place of business. (This can be different than your place of residence or family home.) The IRS says that the most important consideration for figuring out your main tax home for business is the length of time you spend in each location.

For instance, if you are on a temporary work assignment and need to travel, related expenses are deductible. However, if your work assignment is indefinite, they are not deductible.

The IRS outlines common applicable business travel expenses:

  • Transportation, including airplane, train, bus, car, and taxi costs
  • Shipments between your work location and a temporary location, such as baggage or display materials
  • Car expenses while you’re at your temporary work location
  • Meals and hotel/lodging expenses (but see the next section)
  • Expenses related to laundry, including dry cleaning
  • Communications while you are away, including business calls
  • Tips/gratuity for these services

Personal activities that a worker may take on a trip are not deductible—only those related to business. And if a spouse or dependent travel with the taxpayer, his or her travel expenses are generally nondeductible, unless certain conditions are met, such as that he or she is the employee of the taxpayer.

Self-employed workers can deduct travel expenses on Form 1040, Schedule C, Profit or Loss from Business (Sole Proprietorship) or Form 1040, Schedule C-EZ, Net Profit from Business (Sole Proprietorship). Unlike other employees claiming business expenses, self-employed taxpayers don’t have to meet the requirement that expenses must exceed two percent of their adjusted gross income.

Per diems

Taxpayers can use per diems to calculate business travel costs. These allowances are provided for reasonable daily expenses and rates are set for both U.S. and overseas travel. Because the rates are different for different locations, the government has the current per diem rates available online by state and city, if applicable.

TCJA changes to travel expenses

The TCJA made some significant changes to what you can claim for business expenses. Meals while traveling are now subject to a limitation of 50 percent, meaning that only half of the cost of applicable business-related meals can be deducted. But employers can still reimburse employees for the full cost of their meals.

Before 2018, business travel expenses could also include entertainment expenses with the 50 percent limitation, but the TCJA eliminated the deduction for entertainment, amusement, or recreation expenses beginning in the 2018 tax year. Any food or drinks that are had during entertainment activities are not considered entertainment if they were purchased separately from the entertainment event, according to the IRS guidelines.

Cruise chip business expenses may still be deductible if an employee attends conventions, seminars, or similar events that are held on cruise ships. Taxpayers can deduct a maximum of $2,000 per year, and only if:

  • The event is directly related to the taxpayer’s business or trade
  • The ship is registered in the U.S.
  • All of the ship’s ports are in the U.S.
  • The taxpayer attaches to their tax return a signed, written statement that includes information about the trip, such as total days, number of hours each day spent in business activities and a program of activities
  • The taxpayer attaches a signed, written statement from an officer of the organization that sponsored the meeting or event that includes a schedule of business activities and the number of hours the taxpayer attended the activities

Because tax law is not something to treat lightly, it’s a good idea to talk through these matters with a tax professional. Provident CPA & Business Advisors can provide you and your business a variety of tax and financial services, so contact our team of professionals today. We can walk you through tax season so you can rest assured that you are following all applicable laws and paying the least amount of tax legally possible.

How the HIT Tax Could Eventually Impact Individuals and Entrepreneurs

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Even though the health insurance tax (HIT) has been suspended, what will it mean for taxpayers, and especially entrepreneurs, if it’s finally introduced?

The health insurance tax (HIT) is intended as a fee imposed on insurance companies, though its implementation has been delayed by lawmakers since 2015. This year, lawmakers have proposed again suspending it through 2021 in an effort to help stabilize the healthcare market.

But if the suspension on the HIT finally ceases and it goes into effect, premiums will rise, and U.S. taxpayers will be faced with shelling out even more for healthcare than they already pay in the expensive marketplace.

So, what is the HIT? And if it ever goes into effect, what does it mean for entrepreneurs?

A rundown on the HIT

The health insurance tax is an annual fee that insurance companies would have to pay on their health policy premiums if they offer fully insured health insurance coverage. The $16 billion tax was introduced in Section 9010 of the Patient Protection and Affordable Care Act (ACA) of 2010. However, lawmakers have suspended the tax since 2015, and there is again a suspension for 2019.

In early 2019, representatives from both the House and the Senate supported a bill that further delayed the HIT from going into effect until 2021, but it is still set to lapse in 2020. As such, it’s uncertain whether or not the HIT will be applicable, and insurance companies continue to push for a total elimination of the tax.

So, as a taxpayer and small business owner, how would the HIT hit you if it finally takes effect?

What are the impacts on taxpayers?

Unfortunately, the additional costs that the HIT imposes on insurance companies are then passed onto their customers in an effort to make up for this tax. This means, of course, that insurance premiums will go up. This is a big reason that lawmakers from both sides of the aisle have continued to delay the tax—they agree it would negatively impact consumers.

One cost driver is the fact that the HIT is non-deductible on federal taxes for health insurers. And for every dollar that is paid, more than a dollar has to be added to premiums. In an analysis commissioned by UnitedHealth Group, global management consulting firm Oliver Wyman estimated that the impact on premiums in 2018 would have been an added $22 billion, and between 2018 and 2027 it would be over $270 billion.

The report also estimated that premiums would have increased 2.7 percent in 2018, and at a similar rate when projected for the following years. This would equal an additional:

  • $165 per individual in the non-group market
  • $193 for single contracts in small group
  • $523 for every family contract in small group
  • $196 for singles in a large group
  • $563 for family contracts in the large group
  • $255 for every Medicare Advantage member
  • $195 for every Medicaid managed care individual

In sum, this would mean over $2,000 for individuals and managed care enrollees, over $6,000 for families, and over $3,000 for Medicare Advantage members over the ten years following 2018. These are not small costs for self-employed individuals and small businesses.

The national association America’s Health Insurance Plans (AHIP) released a statement earlier this year saying that nearly 150 million Americans would pay more for their health insurance coverage because of the HIT.

Additional effects on entrepreneurs

It’s clear that tax burdens will rise for consumers if the HIT goes into effect. But this is an even bigger consideration for entrepreneurs and small businesses that are fully insured. Individuals who have to bear the full cost of health insurance plans will face increased costs in an already expensive insurance marketplace. As the Small Business and Entrepreneurship Council says, “The high cost of health coverage remains a pain point for small businesses and the self-employed.”

The UnitedHealth report outlines that the HIT going into effect would likely result in both individuals and groups delaying getting insurance coverage—and some individuals will remain completely uninsured because they will not be able to afford the increased rates.

Both individuals and groups may decide to forego coverage if they are younger and healthier, and this creates a “less-stable risk pool,” in addition to creating even higher premiums across the board, the report says.

It’s important to note that these increased premiums caused by the HIT will only impact individuals who purchase their own individual coverage, get it from their employer, or enroll in either Medicare Advantage or Medicare PDP; the government pays the HIT for individuals who are covered by exchange subsidies and Medicaid.

The future of the HIT remains uncertain, as some lawmakers are still pushing to have it totally repealed. But if it is finally implemented in the coming years, the HIT could mean thousands of dollars more in health insurance premiums for consumers, and more uninsured Americans. It’s important as a small business owner to keep up with the latest news regarding the HIT bills and factor this possible cost into future business strategy.

Provident CPA and Business Advisors are here to help you minimize your tax burden and assist you with growth and profit improvement. Get in touch with our experienced team today for more information.