Focusing on Employee Health Could Net Organizations Tax Benefits

Employers who provide paid family and medical leave to employees may qualify for a business tax credit through 2019

As the U.S. unemployment rate has seen record lows this year (3.7 percent in August), companies are scrambling to update their recruitment processes and benefits packages to stay competitive in the battle for talent acquisition.

As such, benefits like paid family and medical leave are being incorporated more and more, in addition to more standard health insurance and vacation benefits. Paid family and medical leave offers employees paid the time away to care for a new child or for a family member with a severe illness, or paid the time away for the employee if he or she has a medical issue rendering them unable to work.

The Family and Medical Leave Act of 1993 implemented entitlements for workers to have unpaid leave for these issues, but “no federal law requires private-sector employers to provide paid leave of any kind,” noted the Congressional Research Service in a recent report. Thus, paid leave is still dependent on the employer.

Research from the Bureau of Labor Statistics shows that in 2018, just 17 percent of all civilian workers had paid family leave benefits, while 89 percent had access to unpaid family leave. In private industry specifically, 16 percent of workers had paid family leave, and 88 percent had unpaid family leave.

So, even though paid family and medical leave may be becoming more commonplace, it’s clear that the majority of the workforce still doesn’t have access to these benefits which can encourage new mothers or those facing illnesses to return to their jobs after a necessary time away.

To incentivize organizations to include these offerings in their benefits packages, the IRS has implemented tax benefits to employers who provide paid family and medical leave for 2018 and 2019.

Details of the tax credit for employers

The Tax Cuts and Jobs Act (TCJA) of 2017 enacted the new tax credit for employers. For the purposes of this benefit, an employer is “any person for whom an individual performs services as an employee under the usual common-law rules applicable in determining the employer-employee relationship.”

The tax credit applies to wages paid after December 31, 2017, and before January 1, 2020. There are ways to claim the credit retrospectively if employers meet all the requirements. The credit is between 12.5 percent and 25 percent of the wages paid to an employee during his or her leave, for up to 12 weeks per taxable year. The minimum of 12.5 percent is increased in 0.25 percent increments for every percentage point by which the amount paid to the employee exceeds half of the employee’s wages, and the limit is 25 percent.

Eligibility requirements include the following:

  • There must be a written policy in place that states that full-time employees have at least two weeks of paid family and medical leave per year, and this amount can be pro-rated for part-time workers.
  • The family and medical leave pay must be at least 50 percent of the employee’s normal wages.
  • The employee must have been employed by the employer for at least one year and must not have earned more than $72,000 in compensation for the prior year (2017 or 2018).

Employers must also ensure that they do not “discharge or discriminate against any individual for opposing any practice prohibited by the policy,” according to the IRS.

The tax credit applies only to family and medical leave that was taken for:

  • The birth of and care for an employee’s child
  • A child was adopted by the employee or placed with them for foster care
  • The employee cared for a close family member—a child, spouse, or parent—with a serious health condition
  • The employee had a serious health condition, making them incapable of doing their job
  • There was a qualifying need for an employee’s absence related to their child, spouse, or parent being on covered active duty in the Armed Forces
  • A service member who is a child, spouse, parent, or next of kin to the employee needed care

Although the tax credit ends after 2019, it’s possible that it could be extended.

If you have questions about tax planning, get in touch with our team at Provident CPA & Business Advisors. We’ll walk you through applicable tax law, and help you pay the least amount of tax legally possible.

The Tax Benefits of Investing in Opportunity Zones

Learn why opportunity zones continue may be an attractive option to some investors thanks to government tax incentives

The Tax Cuts and Jobs Act of 2017 (TCJA) brought many changes to the tax law, including changes to the standard deduction and tax brackets.

Another big change was the creation of tax incentives for investments in qualified opportunity zones, which, according to the IRS, are meant to encourage economic development and create jobs within “distressed” communities. Significant tax benefits can be had by investors who decide to invest capital into these opportunity zones.

This is a first-of-its-kind investment opportunity that has the potential to benefit both struggling communities and investors alike, through investing in some areas that carry a risk for commercial real estate projects.

So, what are opportunity Zones and Qualified Opportunity Funds, and what are the tax benefits of investing in them?

The definition of an opportunity zone

The creation of these zones is essentially an economic development tool from the government that’s meant to help develop low-income areas in urban, suburban, and rural areas of the U.S. In order for a location to qualify as an opportunity zone, it must be nominated by the state and must be certified by the Secretary of the U.S. Treasury. A Qualified Opportunity Fund is one that is created to invest in a qualified opportunity zone property and files a tax return that is either a partnership or corporation.

There are now opportunity zones within all 50 U.S. states, as well as the District of Columbia and five of the U.S. territories, according to the IRS. There are 8,700 opportunity zones in total.

The tax benefits of opportunity zone investment

Tax benefits are offered to investors in opportunity zones to encourage this new avenue of funding developing communities. Investors can defer tax on their qualified capital gains from their investments in a Qualified Opportunity Fund until the earlier of either the date when the investment is sold or exchanged or December 31, 2026.

If the investment is held in the fund for more than five years, there is a 10 percent exclusion of the deferred gain, and 15 percent if it’s held for more than seven years. If it’s held for at least 10 years, investors are then eligible for an increase in the basis of the investment equal to the fair market value on the date that the investment is sold or exchanged. Investors don’t have to live or run a business within an opportunity zone in order to take advantage of the tax benefits.

Because the opportunity zones are part of a 10-year program that is accretive in nature, investors should act soon to see the biggest advantages of these investments. The biggest returns will be seen by those who invested in the first year of the program.

To summarize, the tax benefits of opportunity zone investments are:

  • The deferral of capital gains reinvested in an opportunity fund
  • The step-up in basis when investments are held for five or seven years
  • A permanent exclusion of capital gains from taxable income if the investment is held for at least 10 years (on gains accrued after investment in an opportunity fund)

According to the Economic Innovation Group (EIG), the potential for this program to help communities is $6.1 trillion of unrealized capital gains. This number comes from an EIG analysis of the Federal Reserve Survey of Consumer Finances and Financial Accounts, which found that U.S. households alone were “sitting on” over $2 trillion in unrealized capital gains in stocks and funds at the end of 2015, and $3.8 trillion at the end of 2017. Add that number to unrealized capital gains of U.S. corporations ($2.3 trillion) and the total potential capital eligible for reinvestment in opportunity zones is $6.1 trillion.

Even if these numbers aren’t fully realized in the program, it’s clear that this program is both a huge step for community development as well as a community investment. Nevertheless, it has unique risks in terms of commercial real estate. Location, location, location is, of course, the mantra of real estate investing, and some of the distressed communities have significant challenges that spur the need for these incentives in the first place. Nevertheless, the right project may reap significant tax breaks that significantly reduce this risk and create the potential for significant rewards.

At Provident CPA & Business Advisors, our priority is helping you pay the least amount of tax legally possible. We’ll help you get total control over your tax expenses and provide you with proactive, safe, and proven ways to lower income taxes. Contact us today to learn more about our tax minimization and growth and profit improvement services.

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.

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.