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Gregory L Buhrow CPA PC

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Tax Reform Watch
House Bill Highlights

Business

The House Bill will change the highest marginal tax rate from 35% to a flat 20% for all corporations and 25% for personal services corporations.

Net operating losses (NOLs) would be limited to 90% of current year taxable income and able to be carried forward indefinitely.

Elimination of student loan interest deduction

The cash accounting method would be more widely available.

Individuals

Only four tax rates with the lowest at 12% and highest at 39.6%

The standard deduction would increase to $12,200 (single) and $24,400 (married)

Itemized Deductions lost:

State and Local taxes (SALT)

Property tax on personal property capped at $10,000

Casualty losses

Miscellaneous itemized deductions

Tax preparation fees

Personal exemptions ($4,050 per person in 2016) eliminated

Mortgage interest and charitable contributions are retained but changed

Alternative Minimum Tax repealed

Senate Bill Highlights

Business

The House Bill will change the highest marginal tax rate from 35% to a flat 20% for all corporations and 25% for personal services corporations.

Net operating losses (NOLs) would be limited to 90% of current year taxable income and able to be carried forward indefinitely.

The cash accounting method would be more widely available.

Individuals

Only four tax rates with the lowest at 12% and highest at 39.6%

The standard deduction would increase to $12,200 (single) and $24,400 (married)

Medical expense deduction increased via drop in AGI threshold from 10% to 7.5%

Itemized Deductions lost:

Home equity mortgage interest

State and Local taxes (SALT)

Property tax on personal property capped at $10,000

Casualty losses - except for federally declared disasters

Miscellaneous itemized deductions

Tax preparation fees

Mortgage interest and charitable contributions are retained as they currently exist

Personal exemptions ($4,050 per person in 2016) eliminated

Personal residence sale gain exclusion timeframe increased (5 out of 8 years vs 2 out of 5 currently)

Alternative Minimum Tax thresholds increased but not repealed

Repeal of the individual shared responsibility payment of the Affordable Care Act

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Observations

Congress is reducing corporate income tax rates from 35% to 20% in order to stimulate growth in the overall economy, thus increasing tax revenue and maybe repatriating jobs.

Did you know that the AVERAGE corporate tax rate, according to the GAO using the latest data from IRS, for tax years from 2008 - 2012 was approximately 14.1% - which includes corporations with net operating losses?

If you exclude the NOL deduction, the corporate effective tax rate (average for all taxable income) is roughly 19.5% of taxable income, which is LESS than what they are attempting to implement!!

The federal government deficit will explode!!

For most Americans, health care expenses have increased as a result of the Affordable Care Act.

Now the House of Representatives wants to take away our ability to deduct those increased premiums.

Many non-state income tax states have high property tax and sales and local taxes to ameliorate the loss of income tax revenue.  That will be eliminated, except for a $10,000 cap on property tax.

Both bills repeal the Personal Exemptions but increase the Standard Deduction.  If a taxpayer and spouse have roughly $16,000 of itemized deductions and two children, the personal exemption for them (in 2017) is four (4) at $4,050 per exemption or roughly a reduction in tax liability of $2,430, assuming a 15% marginal tax rate.

The total tax liability reduction in the above example is $4,830 (including the itemized deductions).  With the proposed tax plan, the tax liability decrease would only amount to $3,600, an increase in tax of over $1,200!!

More Evidence ... That Congress is Clueless

House Ways and Means Committee ranking Democrat member Richard Neal (MA) and Senate Finance Committee ranking Democrat member Ron Wyden (OR) recently conveyed their concern to the acting IRS Commissioner David Kautter regarding the possibility of political pressure being exerted on IRS when developing the 2018 federal income tax withholding tables.

They stated that "If a large amount of taxes is underwithheld by employers this year, they pointed out, millions of people will owe taxes next year instead of receiving a tax refund ... and" it will "appear the tax cuts are larger than they really are, with the result that taxpayers will end up owing more money on their taxes next year."

Their apparent logic is that Republicans will unduly influence IRS so that the withholding tables will deliberately underwithhold taxes and the American taxpayer will believe he is receiving significant tax relief during 2018 but will owe tax in 2019 when they complete their 2018 tax returns.  This will then pave the way for a Republican landslide in the 2018 mid-term elections.

What?

Do they not understand that the withholding tables have absolutely nothing to do with tax liability?  It only determines how much is paid into the Treasury during the year and can be adjusted using Form W-4.  Then, based on the tax liability versus the amount withheld one either owes tax or receives a refund of the tax overwithheld.

 

Withholding has nothing to do with tax liability.

Another example that Congress is clueless when it comes to tax legislation ...

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Small Corporation Tax Decrease ... Think Again

After all the political rhetoric about how corporate tax decreased to 21% from 35% - a slight increase from what was proposed in the House and Senate bills - what do you think of this tax INCREASE small corporation owner?

Yes, I said that right ... you have probably been paying tax at a marginal rate of 15% or maybe 25% with an effective rate near 18%.

Do you realize that the tax DECREASE promised by the TCJA is actually a tax INCREASE for you?

Your tax is now a flat 21% instead of a graduated rate from 15% to 25% to 35% ...

Thus,

 

  • if your taxable income was $25,000 before, you paid $3,750 in tax, now you will pay $5,250

  • if your taxable income was $60,000 before, you paid $10,000 in tax, now you will pay $12,600

Be carefule what you wish for ...

What about those Meal and Entertainment expenses?

If you entertain clients and regularly foot the bill for large meals with prospective customers, those expenses have been seriously curtailed and any many instances, completely eliminated.

Even though meals and entertainment expenses have been limited to 50% deductibility (80% for those in the transportation industry) for a number of years, all entertainment has now been eliminated when related to the taxpayer's trade or business.

And lavish and extravagant meals have always been non-deductible, those entertainment expenses that are considered lavish and extravagant, cannot simply be reclassified to meals.

Further, any and all activities considered as amusement or recreation are also non-deductible.

The substantiation requirements are no longer provided since no entertainment is deductible.

Business meals are still only 50% deductible and the taxpayer must be present at the meal.  Substantiation of the meal as a "business" meal is now more imperative than before, with names of attendees and the topic of discussion accompanying the receipt.

I would imagine the "Cohan" rule will no longer be applicable, especially in light of IRC Sec 274(d) and the TCJA update.

Highlights of the Tax Cuts and Jobs Act

Click here to download a pdf of these highlights

Individuals

Medical expense deduction – 7.5% for 2018; 10% for 2019 and afterwards


SALT (State and Local Tax) maximum - $10,000 for all


Mortgage interest deduction - $750,000 mortgage debt limit for interest; home equity
interest discarded


Casualty loss – only federally declared disaster area


Charitable contributions – 60% of AGI; mandatory Contemporary Written
Acknowledgement (CWA) from the charity for contributions of $250 or more

 

Miscellaneous itemized deductions – no longer deductible; Lost deductions:


Employee business expenses
Investment expenses
Tax return preparation fees

 

Qualified business income deduction – 20% of pass-through income with limits


Child Tax Credit – increased amount; children must have SSNs


Other Dependents Credit – new $500 credit for qualifying relative


Moving expenses – only for military


Kiddie Tax – taxed at trust rates instead of parent's rate


Alternative Minimum Tax – higher threshold


Affordable Care Act – individual responsibility payment repealed in 2019 forward

Businesses

Depreciation – 100% bonus and higher Section 179 limits


Business interest – limited unless revenues less than $25 million


UNICAP – exemption if revenues less than $25 million; cash method; need to file Form 3115 to elect a Change in Accounting Method


Net Operating Loss – no carryback; maximum of 80% of taxable income


Meals & Entertainment – no more entertainment expenses; meals 50% deductible

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The Postcard Form 1040?

The man to the right wants you to believe he has YOUR best interests at heart.  Rep Kevin Brady displays what he believes to be the next Form 1040 - a postcard-sized tax return that can be dropped into any mail slot to file your taxes.

Despite IRS's stated goal to encourage more electronic filing and the increasing complexity of financial information received and used as a source for your tax return, this man believes a postcard will capture all of that information.

Rep Kevin Brady (R-TX) Chairman of House Ways and Means Committee; Originally published November 3, 2017

The New and Improved Form 1040

In fact, Congress/IRS has redesigned Form 1040 into what they think you will believe is a much simpler and more efficient Form 1040.  It is still a two-page form but only one-half of each page is used.  Click here to see.

However, as you will probably notice, in addition to the two half-page forms, there are SIX additional schedules that apply to Form 1040.  Not all taxpayers will use all the schedules and a majority will use only pages 1 and 2.

Further, if you click here you will see that Congress/IRS squeezed what was a two-page form (prior year 1040s) into a three-page form, if you place all the additional schedules onto one continuous form.

Sometimes words simply cannot describe what Congress is thinking ... or if they are thinking ...

UPDATE:  IRS Cancels Postcard-Sized Income Tax Return

According to the CPA Practice Advisor, August 4, 2019, the IRS has officially scrapped its plan to provide taxpayers with a postcard-sized income tax return that one can simply complete and drop into the mailbox.

IRS states that despite the TCJA (Tax Cuts and Jobs Act) it still requires more information in order to file a complete and accurate return than what a postcard-sized form with gather.

 "We never believed that it would be a postcard. Never. Not for a moment," House Ways & Means Committee Chairman Richard Neal (D-MA) told Bloomberg News. "I heard that over and over again during my time and career and I think that makes more for a good photograph than it does for a good policy”

 

Who says you can't teach an old dog new tricks ... 

IRS Out With Dirty Dozen

Every year and especially this year, after tax reform, IRS discloses some of the top tax scams.  Here are a few of the more prevalent in this area:

A PTIN is a "Preparer Tax Identification Number" and a valid number begins with "P"

You can also verify that a tax preparer is a CPA at www.cpaverify.org

Does "Get the Maximum Refund Allowed by Law" language count?

EITC or "Earned Income Tax Credit" is essentially a Welfare Program administered by IRS.  Sometimes the more income reported will result is a larger credit.

This is a partial list originally published by AccountingToday