How the HIT Tax Could Eventually Impact Individuals and Entrepreneurs

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.

How Entrepreneurs Can Avoid IRS Tax Scams

IRS tax scams continue to occur every year, and scammers update their tactics to be more sophisticated. As an entrepreneur, here’s how to steer clear of these frauds

One of the most common types of scams out there is related to alleged tax crimes. These scammers take advantage of the fact that taxes are complicated and that many Americans may not fully understand all laws and regulations and what’s expected of them.

And for entrepreneurs—whether they’re business owners or freelancers—taxes can be an even more complex process to deal with each year. Because of common insecurities about taxes and owing money to the IRS, many individuals are often more vulnerable to attempts at fraud.

It’s important to know the warning signs and to be prepared to detect when you’re being tricked. Here’s more information about what to look for and what you can do if you find yourself in trouble:

Where do scammers usually start?

According to the IRS, the most common type of tax scams occur over the phone or via email, when the scammer pretends to be a representative from the IRS and demands that the person pay up or provide personal information. Email fraudsters will often use the IRS logo and even fake IRS badge numbers to try to look legitimate.

How to detect the warning signs

First of all, the IRS says it would never leave a recorded message that is “urgent or threatening” regarding a tax issue. And it will not call taxpayers if they owe money until the organization has already sent a bill via the regular mail service.

The IRS warns that some of these voicemail messages will claim that the victim will be subject to arrest if they don’t respond. Because callers can get fake numbers to appear on your caller ID, it can be hard to know who is calling from where especially if you recognize the area code and think it is just a normal call.

With email messages, it’s the same story—the IRS doesn’t reach out to taxpayers via email asking for any kind of personal information. While they do occasionally call a taxpayer or visit their home, this is due to overdue or delinquent tax returns or other tax issues that may involve an investigation.

It’s important to be wary of any phone or email message that you receive from someone claiming to be from the IRS. They’ll often ask you to provide your bank account information or personal information in attempts to steal money and identities.

The IRS says it will never:

  • Make demands about payment via these methods and without giving the taxpayer the opportunity to appeal or question what is owed
  • Require payment in one specific way
  • Ask for payment information over the phone (e.g., credit or debit card number)
  • Threaten arrest
  • Threaten legal action

These methods are simply not the way the IRS notifies taxpayers about issues, so if you experience any of the above, you are dealing with a scammer.

Recent tax crimes to be aware of

The IRS cites two examples of recent tax scams they’re been dealing with. One relates to social security numbers, where the scammer claims that a victim’s SSN could be suspended or canceled. They take a similar approach to the IRS impersonation methods mentioned above.

The other happens when scammers pretend to be from a fake tax agency called “The Bureau of Tax Enforcement” or something similar. This is not, of course, a real entity.

It’s important to be aware of these two new developments in tax scamming, and to be on the lookout for similar attempts that will likely arise in the next year.

What to do if you are a victim of a tax scam attempt

If one of these scams happens to you, the IRS has a reporting method. You can send any emails from scammers pretending to be the IRS to phishing@irs.gov.

And if you’ve fallen for fraud and lost any money because of one of these incidents, the IRS suggests reporting it to the Treasury Inspector General Administration and to also file a complaint with the Federal Trade Commission.

The IRS also has a webpage that covers the ins and outs of what kind of tax fraud activity you may have experienced and the steps you should take next.

Provident CPA & Business Advisors serves successful professionals, entrepreneurs, and investors who want to get more out of their business and work less, so they can make a positive impact in their lives and communities. Typically, our clients reduce their taxes by 20 percent or more and create tax-free wealth for life. Contact us for expert advice on tax planning and business strategy, and to find out how we can help your business exceed your expectations.

U.S. Taxes for Ex-Pat Entrepreneurs

Pay close attention to U.S. tax laws even if you live and run your business overseas

One of the perks of being an entrepreneur or self-employed worker is that you can live and work from anywhere, including other countries. However, taxes still need to be filed in the U.S., even if you’re living and working on growing your business overseas.

Here are tips and important information to know when filing taxes in the U.S. as an ex-pat entrepreneur.

Self-employed general tax requirements

First, let’s cover the basics of self-employment taxes that you’d have to pay whether living here or abroad. If you make over $400 in a given year, you must file a tax return that includes Schedules C and C-EZ. There are two components that make up the self-employment tax rate of 15.3 percent: 12.4 percent for social security and 2.9 percent for Medicare. These payments would normally be taken out of your pay check if you worked for an employer.

Self-employed professionals also must pay quarterly tax payments that are estimated taxes owed. Without paying quarterly taxes, or the adequate amounts on these quarterly payments, penalties may be incurred when you file your annual tax return.

Now that you know these basics of what self-employment taxes entail, let’s look at what’s different for those living outside of the U.S.

Taxes for ex-pats

The U.S. taxes its citizens even if they’ve lived outside of the country for years. Income received when working from any country must be reported.

However, the Foreign Earned income Exclusion (FEIE) allows qualifying ex-pats to make around $100,000 a year without having to pay any income taxes. This applies to many working people living abroad. Additionally, if you’re paying income tax wherever you live (outside of the U.S.), these tax payments can be considered credits on your taxes. But this doesn’t apply to income from things like interest, dividends, or social security payments, among others.

Remember that where you live matters. Some countries outside of the U.S. will not charge business tax, while others could be as high as 40 percent.

Deductions

Another positive for the self-employed is the deductions. And ex-pat entrepreneurs can take advantage of reporting expenses for business-related things like travel expenses, supplies, rent, and taxes. These deductions help to offset the tax burden on entrepreneurs.

Vendors

Many ex-pats may do business with vendors in countries outside of the U.S. There are tax laws that apply in these cases, including withholding rules and procedures. One rule is that vendors should file out a W-8 to keep on file, which can also be used to justify a withholding rate or an exemption.

Type of business

Entrepreneurs’ taxes are affected by what kind of business structure is set up; for instance, an LLC (limited liability company). For a foreign LLC, Forms 8832 and 8858 must be filed each year for the LLC to be “disregarded,” which means that the company can be reported on your individual tax return and it doesn’t require separate corporate reporting.

There is also a repatriation tax that is paid by U.S. citizens who are owners of foreign businesses.

FATCA

FATCA, which is the Foreign Account Tax Compliance Act, indicates that the IRS can enforce taxes on transactions that don’t take place in the U.S. This could include passive foreign income or subpart F income, and a controlled foreign corporation that gets more than 75 percent of its income from dividends or royalties and the like is then considered a Passive Foreign Investment Company.

Local taxation

Wherever you’re living, be aware that certain tax benefits in the U.S. could be eliminated or changed because of local taxation. For instance, retirement plan tax benefits could be reduced because of the interactions of local laws with U.S. laws. Some bilateral tax treaties determine whether or not ex-pats have to pay the self-employment tax as well. This is because some countries will allow the ex-pat to pay a similar tax in their country, so the American citizen wouldn’t have to pay both. This also means that ex-pats could take advantage of retirement benefits in the country where they’re living and running their business as well.

Other considerations

Many analysts suggest that ex-pats don’t incorporate their businesses overseas because of the complexities of filing their taxes and hidden fees, among other reasons.

Another important point is that the Foreign Bank Account Report (FBAR) requires ex-pats to file FBAR if they have over $10,000 in their foreign bank account. This applies even if separate accounts don’t equal $10,000 on their own but do if combined. FBAR isn’t something that is filed with the IRS—it is an electronically filed report with the Treasury Department.

It’s always smart to sit down with a tax professional to ensure that all laws and regulations are being followed to avoid penalties and headaches. Provident CPA & Business Advisors is here to help you navigate guidelines and file taxes wisely—no matter where you live and work.

Cybersecurity Best Practices for Taxpayers: How to Stay Safe

When it comes to cybercrime, nobody is safe. From government agencies to senior citizens, online scams surge around tax time to exploit human and digital vulnerabilities.

April is a busy month for law-abiding taxpayers and the individuals who help them file. It’s also the busiest month for criminals out to exploit the personal data and finances of millions of Americans. According to the Federal Trade Commission (FTC), scam attempts peak in the days between April 15 and April 21 and gradually tail off toward the end of the month.

The old approach of scam phone calls is still active, but now unsuspecting recipients can fall afoul of year-round emails ready to exploit their lack of awareness. These fake communications come loaded with misleading links and virus-packed attachments that do a lot more than hijack a web browser; they can make off completely with your identity.

The growing danger of cyberattacks on taxes

The IRS issued a warning ahead of the 2019 tax filing period, alerting the public to the huge increase in ever-more-sophisticated scams and highlighting how the holidays are just as likely a time for criminals to strike as April.

Incidents were up 60 percent from the previous year, as phishing scams stole Social Security numbers, bank details and more. The troubling and simultaneously comforting fact is that the public is the only real line of defense against phishing scams—the more we know, the less effective these slippery attacks will be.

It’s not just the public who is being attacked. The IRS itself has been operating with an outdated and overwhelmed cyber framework for years, an issue it vowed to correct in a statement released in April. Page 30 of the full IRS Integrated Modernization Business Plan details the cybersecurity steps they’re taking (as does this shorter IRS factsheet).

Even so, it will take six years to fully roll out and protect the IRS from the 1.4 billion cyberattacks the agency is subjected to every year. What can taxpayers do to be safer in the meantime?

Taxpayers should take these steps

It bears repeating that cyber criminals hunt for targets year-round, not just during holidays and filing time. Everyone should be aware of the hallmarks of fraudulent communications:

  • Beware of tax-related emails which claim to come from legitimate sources like the IRS, business partners, or even friends and family. Cybersecurity experts and the IRS recommend a healthy dose of distrust, no matter who the sender seems to be. A legitimate party could have had their account compromised without their knowledge and it’s now under the control of a scammer.
  • There are usually links and attachments connected to emails that, if followed or opened, will take personal data or infect a device with malicious software that will steal that data. Never click on either of these.
  • These emails are typically overly insistent and even threatening in nature, designed to play on people’s fear of punishment by demanding information or contact.
  • Broken English is another giveaway, but this is a flaw that’s gradually disappearing.

Assuming that a tax payer avoids this particular danger, they’re still taking a huge risk by not operating with security protection like anti-malware/anti-virus software, a strong password, and multi-factor authentication on their accounts and devices. These should be applied wherever possible when dealing with tax-related matters and also to anything related to personal/business finances.

Likewise, the same strict standards should apply to an individual’s entire online life. Never provide personally identifying information or financial data to any website that isn’t trusted or fully security encrypted—at minimum, look for the https prefix (vs. http) on any website address in your browser. It’s a short step from purchasing groceries online to finding your entire identity has been stolen and exploited.

Some cyber criminals aren’t looking to download data; they simply want to destroy it. We recommend that businesses and individuals always back up their tax documents on a secondary, removable or cloud drive to provide a further security layer.

One of the most important pieces of advice we can offer is to thoroughly check the credentials of the tax professionals you’ve chosen to work with. Scammers go so far as to pretend to be established tax agencies offering a helping hand, when they’ve only appeared in time to steal details and exploit them. Worse, some established agencies or their representatives may operate to defraud their clients of funds.

One last tip is a perennial piece of advice from tax pros—file your taxes early. This increases security because the IRS only accepts one tax return per Social Security number, meaning that if the real taxpayer files first, any subsequent attempt by a cybercriminal using stolen details will be rendered impossible.

The bottom line is to stay vigilant, question every tax-related communication, and protect all online activity with the proper cybersecurity measures.

Who should taxpayers tell if they suspect a scam?

Inform the IRS if any digital communications seem suspect—it never hurts to be cautious. If you’ve received a demand for an outstanding amount and aren’t sure if it’s legitimate, then there are two ways to verify without complying with a suspicious request: individuals can view their personal IRS account, and businesses or their designated third party can receive a free transcript of their account on request.

The Federal Trade Commission can and should be contacted via the Complaint Assistant. For further information on crime prevention, businesses can benefit from the National Institute of Standards and Technology’s handbook for data security.

Stay safe out there!

Provident CPA and Business Advisors offer a wide range of services in taxes, 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.

Tax 101 for Gig Economy Entrepreneurs

Remote and “gig” work are on the rise, and that means there are new tax considerations for this new sector of the workforce

Many workers across the nation are taking advantage of the rising gig economy—whether taking on side jobs to earn extra income, like driving for Uber on the weekends, or freelancing full-time. Some estimates show that around a third of the workforce is taking part in the gig economy, and that number may continue to increase, as workers want better work/life balance, flexible work arrangements, and the potential for higher overall income.

With this surge in self-employment, taxes have become confusing for workers, especially after the Tax Cuts and Jobs Act (TCJA) made some significant changes.

Here are important tax considerations and recent changes for gig economy workers to keep in mind.

1099 forms

First, 1099 forms are likely the most common tax document that a self-employed worker will see. Usually, a company will send a 1099-MISC to freelancers with all income reported above $600. Or, a 1099-K may be sent from third-party providers if a worker had more than 200 transactions and earned at least $20,000. The 1099-K form is meant to report payments that a business receives from credit or debit cards or processors such as PayPal.

However, these forms can create confusion for freelancers, as some clients may not provide them. Gig economy workers should be aware that they need to report all income, even if they made below these thresholds and/or didn’t receive the forms.

Self-employment taxes

Another important tax item to be aware of is the self-employment tax. This is a 15.3 percent tax in addition to income tax. The reason this extra tax exists is so that self-employed workers can pay Social Security and Medicare taxes that would normally be taken out by a traditional employer.

Even though this may seem like a pretty high tax, freelancers can deduct half of it to offset income.

Qualified business income pass-through deduction

The TCJA added a qualified business income deduction of 20 percent, which means that certain businesses could owe less tax. This deduction applies to the following entities, with certain qualifying factors:

  • Sole proprietorships
  • Partnerships
  • S-corporations
  • Some estates and trusts

This is a pass-through deduction that intends to provide help to smaller businesses, as the income limit is $157,500 per year or $315,000 for joint filers. Gig economy workers who are incorporated in certain ways may be able to take advantage of this deduction, in addition to their other qualifying business expenses. Consult with a qualified tax advisor to determine if and how you may be eligible.

Quarterly taxes

Another important part of paying taxes as a freelancer or gig economy worker is the fact that quarterly taxes are often now due. These are estimated tax payments due four times per year, and if freelancers fail to pay them, they’ll could have to pay tax penalties at the end of the year.

This requirement is due to the fact that taxes aren’t automatically withheld from freelance income, as with a traditional employer. Note, however, that gig economy workers who have a main salary that does have taxes withheld may not need to make quarterly estimated tax payments—though it’s advisable to avoid a potentially surprising, large tax bill on the freelance income when April rolls around.

Business equipment deduction

The TCJA increased the deduction amount for business equipment. Now, up to $1 million can be deducted in equipment purchases, including computers, furniture, software, and more. However, actual business income will determine how much can be deducted and freelancers must carefully adhere to qualifying categories of equipment.

Other deductions for gig economy workers

The TCJA cut some deductions, including those for meals and entertainment. This means that some client expenses, such as a dinner meeting, won’t be able to be fully deducted. However, 50 percent of meals still may be eligible, so long as they were directly related to the business.

Other deductions that gig economy workers are eligible for include the home office deduction and the health insurance deduction (if they pay for their own insurance). Many other expenses related to running a business, such as a vehicle, a professional subscription, exchange rate fees, and more, may be deductible, so workers should keep track of all these expenses.

It’s important for those already in the gig economy and those considering entering it to understand these tax issues. Taxes need to be handled carefully so that all income is reported correctly and expenses are accurate.

Gig economy workers need to remember that:

  • Income must be reported regardless of whether a client sends a 1099 form
  • Self-employment tax is in addition to income tax
  • Freelancers may be eligible for the qualified business income deduction of 20 percent
  • Quarterly estimated taxes should be paid to avoid penalties or a surprising yearly payment
  • The TCJA increased the business equipment deduction
  • Meals and entertainment are no longer fully deductible

To discuss tax guidelines with a professional, contact Provident CPA & Business Advisors. We provide tax planning and business consulting services to help you navigate requirements while growing your business.

Sidestep These Errors to Keep More of Your Tax Dollars

Paper filing. Sloppy record keeping. Missing out on deductions. All these and more could mean you’re throwing money away. Here’s how to make your tax return as financially efficient as possible.

There are many ways for a tax return to be filed incorrectly. The IRS offers a list of the 9 most common errors which result in processing delays and hamper the chances of a quick refund. Those 9 can be classed as simple oversights; ones that are easy to overcome with some focus. This blog includes other potentially costly errors which take a little more thought to avoid.

Paper filing could be costing more than necessary

Tax filing is traditionally a chore. Today, going online to complete your returns digitally is not only a timesaver, it will also save you money.

More and more people are making this their go-to filing method. IRS figures show that 127,939,000 tax returns were e-filed for Tax Year 2018. Online filing may sidestep fees associated with having someone file your taxes for you and the cost of postage/a trip to the post office if you’ve been filing paper taxes yourself. It’s also a statistically safer option—costly tax form errors are around 21 percent more likely on paper compared to less than 1 percent on digital.

The IRS offers the Free File/Fillable Form program which allows taxpayers to prepare and file their federal individual income tax return for free using specially-created tax software. The Free File option applies to individuals whose personal income was under $66,000 for the tax year, while the Fillable Forms option is for those who made more than $66,000.

Using either of these systems could cut your expenses compared to paperwork. E-filing combined with Direct Deposit can make it easier and faster to claim and track any tax refunds. The Free File option also allows up to a six-month extension if taxpayers feel they won’t have their forms submitted in time.

That said, having a professional who knows the ins and outs of tax code will likely save you a lot more money than filing taxes on your own, however you do it.

Don’t forget to keep accurate financial records

Some commonsense steps in this area could save a lot of money later. Entrepreneurs risk steep misfiling fees and time-consuming audits if they don’t keep bank statements, invoices, payroll records, and receipts which will support any claims about income, expenses, credits, or deductions.

These records must be made easily available to the IRS and should be kept for at least three years (four in the case of employment records) after filing or payment, whichever is later. The IRS may audit you many years after a misfiling. In certain tax situations, they may have an indefinite period to call businesses and individuals to account.

Keep financial records and receipts in a digital format whenever possible This makes them harder to lose and easier to back up against damage. Watch this short IRS informational video for more information on proper record keeping.

Professionals could be entitled to deductions they’re not claiming

Have you been reluctant to claim a tax deduction for business expenses because you feared you’d be turned down or worse, audited?

This could mean you’re losing out on legitimate deductions which should be straightforward to claim if you’re keeping detailed financial records. Deductible business expenses can be anything the IRS deems ordinary (one commonly accepted in your line of work) and necessary (appropriate and helpful for your business).

Professionals who use a part of their home for business can claim a deduction, as can anyone using their vehicle for business travel as well as personal purposes. Publication 463 offers more information on how to make this deduction safely, as well as other expenses such as business meals.

Other types of deductible business expenses are:

  • Federal, state, local, and foreign taxes directly attributable to your trade or business
  • Employees’ pay
  • Rent paid for the use of property you don’t own.
  • Interest charged for the use of money you borrowed for business activities
  • The ordinary and necessary cost of insurance as a business expense, if it is for your trade, business, or profession

Don’t neglect the proper security steps

More taxpayers filing online also makes more businesses and individuals vulnerable to cybercriminals. It’s true that digital recordkeeping is more effective against thieves than a filing cabinet full of receipts, but failure to safeguard digital data can see it stolen or corrupted—which could mean trouble with the IRS and losing out on refunds.

The information businesses retain and send to the IRS contains the sensitive data of themselves and their employees including social security numbers, home addresses, and bank details. Data thieves can use this data to commit tax-related identity theft and even steal refunds which rightfully belong to their victims.

There are several steps to take which help minimize digital tax risks. Installing personal firewalls and antimalware software can block cybercriminals, as can staying current with any updates or patches in your operating system.

Multi-factor authentication or encryption should be used to safeguard any place data is stored. At the very least, taxpayers should make all passwords related to sensitive data both unique and difficult to guess—and routinely change them.

The IRS recommends learning to recognize and avoid phishing emails, threatening calls, and texts from thieves posing as legitimate organizations such as your bank, credit card company, and even the IRS itself. Do not click on links or download attachments from unknown or suspicious emails. Professionals can learn more to keep their taxes safe here and by reviewing these further IRS guidelines.

These are just a few of the pitfalls which can cause you a headache at tax time. Provident CPA & Business Advisors are here to give our clients the complete picture on how to maximize tax efficiency and minimize risk.

Provident CPA & Business Advisors offer 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.

How the 2018 Tax Cuts and Jobs Act May Impact Your 2020

Even though it began in 2018, the TCJA’s effects are only now in full swing. How will it impact you in the next year?

Changes in the Tax Cuts and Jobs Act (TCJA), which first went into effect in 2018, have really only been felt now that we’re well into 2019, and 2018 taxes have been filed. You may be aware of some of the bigger changes, like adjusted income tax brackets, but the TCJA actually brought updates to quite a few areas. And some changes didn’t go into effect until 2019 and will thus be new for 2020 tax filing.

As the U.S. Department of Treasury website indicates, the TCJA is the “most comprehensive tax legislation passed in more than 30 years.” While you may not feel the impact of each and every change, it’s important to be aware of how updates could affect you moving forward.

Here is a guide to some of the ways the 2018 TCJA may impact your 2020.

An overview of select changes

Income tax brackets: The TCJA made changes to the income-tax brackets, mostly lowering the rates—for instance, the tax rate for a single taxpayer with a salary of $50,000 went from 25 percent in 2017 to 22 percent in 2018. The last bracket was changed from a 39.6 percent tax rate for income over $418,400 in 2017 to a 37 percent rate for income over $500,000 in 2018. The bracket for income between $0 and just over $9,000 remained at 10 percent.

Health insurance: The Affordable Care Act (ACA) is still in effect, but the TCJA removed the requirement to have health insurance coverage. This means that there’s no longer a penalty for those that don’t have it. This is pretty significant for many people, since the penalty had been almost $700.

Estate tax: The federal estate tax will be $11.4 million for single filers and $22.8 million for married couple beginning in 2019, meaning that the tax will impact even fewer people than it did before.

Standard deduction: In 2017, the standard deduction was $6,350 for single filers, and that almost doubled under the TCJA to $12,000 in 2018.

College savings: Under the TCJA, parents can distribute up to $10,000 per year, per student, from a 529 savings account (college) for tuition and other expenses.

Child tax credit: Another increase came to the child tax credit, which is now doubled to $2,000 per child. Because this credit only applies to children under 17, another $500 credit has been created for dependents who are over 17.

Personal exemption: The personal exemption, which allowed you to deduct a certain amount for each eligible member of your household, is no longer an option. In 2017, this amount was $4,050 for yourself, in addition to $4,050 for your spouse and each of your children or dependents. This was expected to increase to $4,150 in 2018, but it’s now $0 because of the TCJA.

The TCJA for businesses

Deduction changes: The TCJA added a new deduction, the qualified business income (QBI) deduction, that gives certain businesses a 20 percent deduction if they are an S corporation, partnership, sole proprietorship, or sometimes, a trust or estate.

The deduction for expenses that relate to activities including entertainment, amusement, or recreation was eliminated. But the IRS says that taxpayers may still deduct 50 percent of business meals if the items aren’t considered “lavish or extravagant.”

Another significant deduction change is a limitation on the business interest deduction for some businesses. Those with less than $25 million in average annual gross receipts have an interest expense limit of business interest income plus 30 percent of the adjusted taxable income and floor-plan financing interest.

Changes for businesses with employees: Some changes only apply specifically to businesses that have employees. One such change is that employers can now deduct reimbursements for bicycle commuting as a business expense, and employers have to include 100 percent of these reimbursements in the applicable employee’s wages. Moving-expense reimbursements must also be included in employee wages.

The TCJA also introduced a tax credit for employers who give paid family and medical leave to employees. However, this credit only applies after December 31, 2017, and before January 1, 2020.

Looking into 2020

So how will the TCJA changes impact your tax experience in 2020, when you file your 2019 taxes?

  • Be aware that income tax brackets have increased a bit again in 2019 due to inflation.
  • The elimination of the personal exemption, while seemingly a big loss, was meant to be counteracted by an increase in the standard deduction and child tax credit.
  • The standard deduction got another increase: up to $12,200 for single taxpayers and $24,400 for married couples.
  • If you don’t have health insurance, you will no longer receive a penalty because of the TCJA. This didn’t go into effect until 2019.

Remember that all of the changes brought by the TCJA aren’t permanent—many are set to expire on December 31, 2025, and lots could change in the political environment before then.

If you have any questions about tax reform and how it will impact you, get in touch with the professionals at Provident CPA & Business Advisors.

How Start-Ups and Established Businesses Can Make the Most of Taxes

Entrepreneurs want to save every cent they can. Here are 5 pieces of advice, whether you’re an established operator or just starting out.

Tax-time doesn’t always need to be a big bite out of your bottom line. There are a variety of methods available to entrepreneurs which can represent significant savings, either immediately or over time. Take a look at five of them:

Capitalize on start-up benefits

Expenses quickly mount for start-up businesses. Even researching how to get an enterprise off the ground can take time and money. Federal law supports entrepreneurs by providing research and development deductions when that research results in the successful opening of a business. This benefit does not apply if the research does not result in a business being launched.

Research and development deductions allow entrepreneurs to deduct up to $5,000 of start-up expenses during their first year in business. The remainder of the start-up costs can be deducted over a period of years in equal installments. Expenses which qualify for this deduction are:

  • Salaries/Wages/Employee training
  • Investigating possible sites for a business
  • Consultancy fees
  • Product or market research
  • Ordering supplies

Claiming on wear and tear and depreciation

The Modified Accelerated Cost Recovery System is how the IRS calculates the depreciation of business assets. Except for land, the IRS deems most tangible property as depreciable.

Wear and tear on buildings (providing they are owned by the taxpayer and used for an income-producing activity for longer than a year), furniture, equipment, vehicles, and machinery all qualify, as do some intangible properties like computer software, patents, and copyrights. Depreciation can be claimed overtime or taken in a lump sum.

The Tax Cuts and Jobs Act made some amendments in 2018 to depreciation claims made on business premises, automobiles, and personal-use items. These changes were particularly valuable to small business owners, as they allowed them to expand their scope of expenses. Entrepreneurs can catch up on all changes via the IRS website.

Claim deductibles on hospitality and travel

Entrepreneurs can deduct 50 percent of dining and entertainment costs, provided they are incurred when entertaining business guests. Always record the names of the individuals present and the business discussed to provide the IRS with complete records. Retaining all receipts will accurately record the time, place, and cost of the entertainment/meal.

Travel expenses are fully tax-deductible and apply to a wide range of related expenses. Entrepreneurs operating their own vehicle can claim for fuel, repair, and insurance expenses as well as a number of miles traveled in that year.

Claiming by the mile uses the standard mileage rate released annually by the IRS. Entrepreneurs selecting this method must use it for the first year, after which they may switch to the actual expense method. This considers operating costs for the vehicle multiplied by the percentage of business use.

It’s essential to keep receipts for all travel expenses including hotel/lodging costs like room rates, meals, and telephone calls. Entrepreneurs can use an app which accurately tracks miles traveled to provide proof to the IRS.

Claim on your home office

If you’re regularly and exclusively using part of your home as an office, you could qualify for this deduction. It must be your principal place of business; entrepreneurs generally can’t have another office elsewhere on business property, but some exceptions do occur. Alternatively, space must be used to meet with clients. This deduction also applies to extended and free-standing parts of your property such as garages, studios, and barns.

How much you’ll be able to deduct depends on two things: the size of the space and whether you apply a simplified calculation or a regular one. The simplified option allows for deductions on home office space up to 300 square feet at $5 per square foot. The regular method requires determining the expenses of the home office such as mortgage interest, utilities, or repairs.

The regular method is typically based on the percentage of the home being used for business, so it’s necessary to know that number when applying for a deduction. This is achieved by dividing the square feet of the office by that of the entire home.

A 2,000 square foot home with an office of 200 square feet equals 10 percent of the home used for business, equating to a 10 percent tax deduction toward maintaining your home.

Get advice from the professionals

Staying current on tax deductibles can be a full-time job for entrepreneurs. Around 80 percent of all Americans missed an important change when filing 2018 taxes, meaning they could lose out on a refund. It can be even more costly when a business makes a mistake.

The IRS also adds a late payment penalty on the outstanding amount if a tax return error results in owing more tax than you filed. The penalty rate is 0.5 percent a month up to 25 percent of the total amount owed. Businesses will also be charged daily interest until the total is paid.

We don’t recommend going it alone on your taxes to cut down on expenses. Working with Provident CPAs is an investment that could save you a great deal of money and time in the future. Our collective experience lowers taxes legally and ethically, helping our clients take control of their finances and get closer to prosperity.

Provident CPA and Business Advisors offer 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.

How Understanding Tax Rules Can Maximize Profits from a Business Sale

A record number of American business owners are selling up. It pays to know what this means for your next tax return if you’re ready to close a deal.

More people than ever are looking to become their own boss in 2019, so if you’re ready to sell your business, you may find no shortage of takers. New sales records were set in 2016–2017 and these were again broken in 2018. But achieving a truly successful sale means navigating the best ways to avoid taking a hit on taxes. Here are some key things to consider before closing a deal.

The money from your business sale is subject to income tax

This is the first thing to consider in order to minimize losses to the IRS. Selling your business doesn’t mean it’s no longer a source of income because it will make you money when it changes hands.

The type of business being sold—LLC, sole proprietorship, S Corp, or partnership, etc.—affects how much tax you pay, as does selling your business as assets or as stock certificates. In any case, business owners must declare the full amount gained from the sale on their next income tax return.

Consider closing the sale through installments or deferred payments

Business owners may be reluctant to accept anything less than the entire purchase price at closing. This is understandable and removes the risk that a buyer might default on installments, but it isn’t always possible, as many deals mandate a structured, incremental buyout. It’s also not necessarily the best tax move. Accepting all sales proceeds in a single year will land you in a higher tax bracket.

Agreeing to installments over several years can lower the tax liability of your business sale since you pay much of the tax over time as you get the payments. In such a competitive buyer’s market, offering installments could also make your business more attractive to buyers who won’t have to pay everything at once.

Installments also mean you remain part of the operation until closure. This keeps the original owner around to offer advice and ensure things are being run properly, which minimizes performance risk and lowers the likelihood of the buyer defaulting on installments.

Where you live could be a tax advantage (or a liability)

Your state of residency is a benefit or a burden when selling your business because state and local income tax can be applied on top of federal taxes.

Stock sales are generally more favorable than asset sales in this scenario. If your business makes an asset sale it will typically owe taxes in the state or states where it has assets, sales, or payroll, or has gained income in the past. Stocks, on the other hand, are usually taxed in the state of residence.

This means that a business owner living in the “right” state (and choosing an all-stock sale) could avoid a significant tax bite. Of all states, only nine are exempt from income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.

Business owners making an all-stock sale while living in any of those could avoid tax entirely, even if the company does business in another state. In addition, stocks are generally immune from the transfer, sales, and use taxes.

Your sale could qualify as totally tax-free

When one C or S corporation buys another, it’s possible to set the deal up as a capital gains tax-free merger. One way to do so is through a stock exchange or “corporate reorganization.”

The “buyer” and the “seller,” in this instance, can swap stocks in their respective companies until the buyer is in full possession of the other’s business. This can avoid income tax completely since a stocks-for-stocks exchange classifies as non-cash assets.

Sellers must receive a certain percent of the buyer’s stock (typically between 40 and 100 percent) for this kind of deal to go through. Two important notes here:

  • Even if sellers get off tax-free on a stock exchange, they’ll still be taxed later if they choose to sell the shares.
  • Federal law prohibits selling shares gained in this manner for a set period if the seller wants to hold on to that tax-free status.

For taxes filed in 2020, many taxpayers will pay 15 percent long-term capital gains tax if they’ve been holding new shares for over a year and decide to sell. The standard income tax rate will apply if they choose to sell new shares they’ve held for a shorter time.

The corporate reorganization process is complex and laid out in Section 368 (a) of the Internal Revenue Code. If your business wishes to go this route, it’s vital to speak to a qualified CPA who can guide you safely through it.

Each of the above suggestions are potential tax implications; everything has its own element of risk and there are frequently exceptions to rules. Connect with Provident CPAs to get the full picture on which sales solution will save your business the most come tax time.

Provident CPA and Business Advisors offer a wide range of services in taxes, 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.

Should You Sell Your Business to Employees?

Perhaps your employees would make the best next owners of the business. How do make that happen?

“I just work here.” This can sum up the perspective of an average employee who does not own stock or have any real ownership in an organization. There’s no tangible investment. Many individuals go to work to earn a paycheck, and a lack of engagement is reflected in attitude, morale, and productivity.

As a business owner, you may be looking for ways to change this value proposition for your top employees. Or you may want to earmark a specific internal successor or successors to sell the company to—and provide the means to do it—giving you options when it comes time to cash out.

Doing all of this has reciprocal benefits because it can also increase the value of the business. And sometimes, the best buyer for your company is your own employees.

Succession planning

Do you have an exit plan? It’s a question we ask all of our clients. Succession planning can be a complex process, something you shouldn’t only attempt to put in place when you are ready to step away from your business.

Business succession planning is a process of financial and logistical decisions about who will take over the organization. One of the biggest decisions is whether you will sell the business to an outside individual or organization, or to turn management and ownership over to members within your company, and potentially sell to them directly.

When to sell to an employee—and the advantages of doing so

The asking price of your business could likely exceed the capability of any employee to afford its purchase. You also may conclude that you have no employees capable or willing to succeed you as the business owner. These are signs that it might be wise to explore selling to an outside third party, or to start setting up mechanisms for them to afford the purchase (these will soon be explained under “Sticker shock”).

With planning and a commitment to building the value that your employees contribute to the company, a succession plan that sells the company internally can be your best choice—especially because of the lucrative tax benefits it offers.

Selling to your employees also provides peace of mind by providing business continuity. If you built an organization, you’ll probably care about what happens to it even after you no longer own it. Turning ownership over to workers who understand and contribute to the company culture provides assurance that it will continue to operate as intended.

There’s also the advantage of familiarity. Employees already know the details and value propositions of what they’re buying. It doesn’t obviate proper due diligence on anyone’s part. But as an owner, you will spend far less time identifying and attempting to sell your company internally than you would to prospects.

Sticker shock

Selling your business to employees may not be possible, though, as they often don’t have the means to purchase the company. You might opt to lower the price or otherwise offer concessions that make it affordable for them—but is this in your best interest?

A better choice is to help fund the sale of your business to your team through an Employee Stock Ownership Plan (ESOP). An ESOP paves the way to company ownership by allowing employees to own stock in your company without having to purchase shares.

After an ESOP is implemented, employees receive an ownership stake in the business as a part of their compensation. These shares are held in trust. They cannot be used while employed but must be liquidated if an employee leaves the company.

As a business owner, you have the option to use an ESOP as a way to fund the sale of your company to employees. The employees can use its value to buy your shares. This can happen as an immediate purchase if the ESOP has been in place for an extended period of time. Or, the ESOP can be funded through commercial loan financing.

In many cases, the sale of a company using an ESOP is not immediate. As the company owner, you finance the sale. The ESOP purchases your ownership and offers you a note that yields an attractive interest rate. Your employees now own the company, and you receive the sale price plus interest over time.

Some owners also opt for setting up and funding a dedicated ownership fund that—and this is also applicable to shares in an ESOP—an employee can use as collateral for an outside loan from the bank.

More options

Depending on the transaction’s structure, it can also offer tax advantages such as capital gains deferral. Selling your company to employees with an ESOP is just one of the ways you can plan a successful exit and maintain business continuity.

In many cases, you end up being the “bank” that finances the transaction. Do you have employees with access to capital but not enough for an outright purchase? You can assist them with the outright purchase by cosigning a loan. You can also structure a staged buyout that allows your employees to purchase the business and still benefit from your presence.

We can help you with expert advice on succession planning and exit strategies.