Paola Lijeron | Gilliland & Associates, PC

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November 9 2018

New or revised deductions for businesses

IRS, IRS Rules, Tax Break, Tax Law, Tax Tips business, deduction, income, REIT, Tax

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Qualified business income deduction. Many taxpayers may be eligible for a new deduction for qualified business income (QBI) from a qualified trade or business operated directly or through a pass-through entity.The deduction has two components.1) Eligible taxpayers may be entitled to deduct up to 20 percent of their qualified business income (QBI) from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust or estate. For taxpayers with taxable income that exceeds $315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers, the deduction is subject to limitations such as the type of trade or business, the taxpayer’s taxable income, the amount of W-2 wages paid by the qualified trade or business and the unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business. Income earned through a C corporation or by providing services as an employee is not eligible for the deduction.2) Eligible taxpayers may be entitled to deduct 20 percent of their combined qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income. This component of the section 199A deduction is not limited by W-2 wages or the UBIA of qualified property.
The sum of these two amounts is referred to as the combined qualified business income amount. Generally, this deduction is the lesser of the combined qualified business income amount and an amount equal to 20 percent of the taxable income minus the taxpayer’s net capital gain.

The deduction is available for tax years beginning after Dec. 31, 2017. Most eligible taxpayers can claim it for the first time when they file their 2018 federal income tax return in 2019. The deduction is available regardless of whether an individual itemizes their deductions on Schedule A or takes the standard deduction.

For more information, see the FAQs on the Deduction for Qualified Business Income.
Meal and entertainment expenses. The new law generally eliminated the deduction for any expenses related to activities generally considered entertainment, amusement or recreation. However, under the new law, taxpayers can continue to deduct 50 percent of the cost of business meals if the taxpayer – or an employee of the taxpayer – is present and the food or beverages are not considered lavish or extravagant. The meals may be provided to a current or potential business customer, client, consultant or similar business contact. Food and beverages that are purchased or consumed during entertainment events will not be considered entertainment if purchased separately from the entertainment, or if the cost is stated separately from the entertainment on one or more bills, invoices or receipts.

Fines and penalties paid to a government. Taxpayers can’t deduct certain fines and penalties for violation of the law. See Notice 2018-23 for more details.

Payments made in sexual harassment or sexual abuse cases. Taxpayers can’t deduct certain payments made in sexual harassment or sexual abuse cases.
Payments under state or local tax credit programs. Business taxpayers who make business-related payments to charities or government entities for which the taxpayers receive state or local tax credits can generally deduct the payments as business expenses.

The business expense deduction is available to any business taxpayer, regardless of whether it’s doing business as a sole proprietor, partnership or corporation, as long as the payment qualifies as an ordinary and necessary business expense.

Gilliland & Associates, PC is a full-service CPA firm specializing in tax planning for individuals and businesses in the Northern Virginia area. We are based in Falls Church, VA and also service clients in McLean and Tysons Corner, VA. Gilliland & Associates is known for our superior knowledge and aggressive interpretation and application of tax laws. We help you keep more of your earnings by finding you the lowest possible tax on your business or personal tax return. You can connect with us on Google+, LinkedIn, Facebook, and Twitter.

November 7 2018

Changes to fringe benefit deductions

Credit, IRS, IRS Rules, Tax Break, Tax Tips deductions, Moving Expenses, Reimbursement, tax law

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There are important changes to fringe benefit deductions that employers need to know about. These changes can affect a business’s bottom line and its employee’ deductions.

Transportation fringe benefits. The new law disallows deductions for expenses associated with qualified transportation fringe benefits or expenses incurred providing transportation for commuting (except as necessary for employee safety).
Bicycle commuting reimbursements. Under the new tax law, employers can deduct qualified bicycle commuting reimbursements as a business expense for 2018 through 2025. The new tax law suspends the exclusion of qualified bicycle commuting reimbursements from an employee’s income for 2018 through 2025. Employers must now include these reimbursements in the employee’s wages.
Moving expenses. Employers must now include moving expense reimbursements in employees’ wages. The new tax law suspends the former exclusion for qualified moving expense reimbursements. One exception: Active duty members of the U.S. Armed Forces can still exclude moving expenses from their income. Notice 2018-75 provides guidance on 2018 reimbursements for employees’ 2017 moves. Generally, reimbursements in this situation are not taxed.
Achievement awards. Special rules allow an employee to exclude achievement awards from wages if the awards are tangible personal property. An employer also may deduct awards that are tangible personal property, subject to certain deduction limits. The new law clarifies the definition of tangible personal property.

October 31 2018

The nine basic rules of investing

IRS, Tax Tips investment, OPM, Tax

Image courtesy of http://www.get-rich-and-retire-early.com/real-estate-investing-with-rental-income/investment/

There is no magic to making money by investing. It requires discipline, determination, perseverance, and hard work. In deciding what investments are suitable for you, you must first understand the nine basic rules of investing.

Risk versus return. The greater the risk that you will lose not only the return on your investment but your original investment as well, the greater the potential rate of return. An individual investor should always try to get the highest rate of return without going beyond the risk level that he or she finds comfortable.
Inflation. If inflation is higher than the return on your investments, you are losing future purchasing power. If, for example, you have $1,000 earning 3% after tax, and inflation is 4%, your $1,030 will purchase only $990 of goods one year later.
Liquidity and marketability. A liquid investment can be readily converted to cash; a marketable investment can be readily sold for cash. A savings account, for example, is highly liquid, and blue chip stocks are readily marketable. A piece of real estate, on the other hand, may take time to sell and convert to cash. Often, yields run conversely with liquidity and marketability.
Tax aspects. An investor’s return should always be computed after taxes. Some investments have tax advantages that increase their relative after-tax yield. Tax-exempt bonds, for example, carry a lower return rate than taxable securities. However, your after-tax return may be higher with the tax-free investment than with a taxable one.
Income versus appreciation. Some investments provide current income (such as high-dividend stocks); others have little current income but appreciate over time. The best investments provide both income and appreciation.
Management. Some investors enjoy managing their own portfolios. Others lack either the time or knowledge to be effective managers. Your desired degree of involvement will help determine the kinds of investments best for you.
OPM. Using “other people’s money” and leveraging into investments allows you to get a higher return on your own invested dollars; however, the risk is also higher. Again, you’ll have to decide your own comfort level.
Diversification. Those investors seeking safety count on diversification. Diversification is simply investing in two or more kinds of investments. Then if one investment goes sour, you do not lose everything.
Your goals. In your own investment program, it is your goals that are important, not the goals of your broker or financial advisor. Never invest in anything that you do not understand or with which you are not comfortable. Decide what your objectives are and what your risk-tolerance level is, and go for the highest return within those boundaries.

October 26 2018

No Check! Where’s Your Proof?

Audit, IRS, IRS Rules, Tax Law audit, Bank statements, Checks

Image courtesy of http://www.malit.org.uk/teaching-backwards-looking-proof-learning/

Two things have happened that have greatly reduced the ability to have a canceled check as proof when the auditor comes calling. The first is the advent of online bill paying services. The second is a regulation commonly known as Check 21. With online bill paying, you pay a bill via an online banking service. Your only receipt is often just an entry in your checking account. With Check 21, the law allows banks to digitally capture the check and then destroy the paper copy without returning it to you. So what do you do if you need proof that you paid for a tax deductible item?

Know your bank. Understand what your bank keeps and for how long. This includes digital statements and digital copies of checks (both front and back). Understand if there are any fees charged if you need to request copies of payments.

Retain copies of all bank statements. Review your records to ensure you have copies of all monthly bank statements. This is often the starting point for an IRS agent that wants proof of payment, so it should be yours as well. These copies may be in either paper or digital format. Download online copies of your statements and place them in a password protected file.

Collect copies of tax related proof of payment. Go through your statements and mark the payments that will, in all likelihood, be used as a tax deduction. Make sure you have copies of the front and back of each of these payments. If you do this work now, the copies are often still available online for no fee. Even online bill payments often have a digital copy that can be used.

Get independent acknowledgements. If you have larger payments you should also make sure you have independent acknowledgement from the merchant or organization to substantiate the deduction. This is true for charitable contributions of $250 or more, and any business or medical expenses.

While having the traditional “proof” of an expenditure is now harder to come by, the IRS understands that approved technologies are changing the type of substantiation available for them to review. By being on top of this documentation at the end of each year, you can save yourself a lot of headaches should you ever need to prove your deductions.

October 19 2018

Private Agencies Now Collecting for IRS

IRS, Tax Law IRS, Past Due, Scam, Tax

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In a recent announcement, the IRS notified all taxpayers that outside collection of past-due tax bills is now beginning in mid-April 2017. This is a direct result of Congressional action in late 2015 requiring the IRS to turn over to outside companies billions in uncollected taxes it is no longer pursuing. This will impact all of us. Here is what you need to know.

Turn up your scam alert. Rest assured the tax-related identity theft epidemic is going to hit a new high as scam artists now will try to impersonate collection agencies. Never pay a collection agency directly for any tax owed. If you do not think you owe money to the IRS, ask for help.

Only four agencies have been authorized. Only four collection agencies have been authorized to collect unpaid taxes for the IRS. They are:

ConServe, of Fairport, New York
Pioneer, of Horseheads, New York
Performant, of Pleasanton, California
CBE Group, of Cedar Falls, Iowa

You will receive written notice…twice. Before an outside agency calls you, the IRS will send two written notices to you and your representative about the transfer of the bill to an outside collection agency. Without these notices, you must assume any contact with a collection agency saying they represent the IRS is a scam.

No payment to the agency. These collection agencies may not receive direct payment. You will be asked to use the IRS online payment system or to send your payment into the IRS. Payment is to be made to the U.S. Treasury and not to the collection agency.

The IRS has announced collection activity will now be starting, so be prepared and ask for help if you are impacted by this change within the IRS.

October 12 2018

They Won’t Fix My 1099!

IRS, Tax Law, Tax Tips 1099, Error, Falls Church, Vendor

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It is late January and you realize the 1099-MISC you receive is in error. In fact, it overstates your income by $2,000. What should you do?

Gather your facts. Put yourself in the shoes of the vendor, bank or investment company representative. Gather evidence they will need to support your claim to correct the tax form. This includes receipts, e-mails, and statements. Have your account number handy as well.

Contact the vendor. Contact the vendor as soon as you discover the error and ask them to reissue the statement if they have not sent in their information to the IRS. If they have already sent their forms to the IRS, you will need to ask for a corrected form. Start with a phone call and then put your evidence in writing and send it to them via certified mail. Give the vendor a reasonable, yet concrete timeframe to correct the error. You do not want to wonder when a correction is coming, so keep control of the timing for correction if at all possible.

Written confirmation. If the vendor agrees with your change, ask for a letter from them that outlines the correction. File this letter with your tax return to help you defend against a potential audit.

Tell the IRS. After a reasonable attempt to correct the error with no progress, contact the IRS to inform them of the failure to correct your information.

File an extension? If you believe a correction is on the way, you may wish to file a tax extension. Remember, you will still need to pay any tax owed by the original due date. If you do not have assurance of a correction, file your tax return with correct information and provide documentation that outlines the reporting error.

October 8 2018

It’s Your (and the IRS’s) Lucky Day!

IRS, Tax Break, Tax Law, Tax Tips charity, Donate, gifts, Plan, Tax

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When you win a prize, there are really two winners: you and the taxing authorities. Should you be fortunate enough to win that trip of a lifetime to the French Riviera in your new yacht, here is what you need to know.

Prizes are taxable. Almost all prizes are taxable income. You report them on your income tax return as other income. This is the case whether your prize is cash, merchandise, or free services.

The prize may be reported to the IRS. Prizes valued at $600 or more must be reported to the IRS. However, prize values below this reporting threshold may also be reported at the discretion of the sponsor of the prize. As the winner, you should look to receive the proper Form 1099-MISC.

Employee awards are a different animal. When you receive a prize or something of value from your employer, different rules apply. These fall under business expense, fringe benefits, and award rules. Things like a holiday gift of a turkey or occasional service award are often (but not always) a non-taxable award. On the other hand, a bonus or prize points for merchandise as a sales award usually need to be claimed as income.

Gifts and prizes have different tax rules. A different part of the tax code applies to gifts. In short, gifts received from someone that are less than the annual gift threshold ($15,000 in 2018) are not deemed prizes.

Other considerations and tips

Should you receive a prize during the year, here are some tips to consider:

Donate to charity. If you wish to avoid paying tax on the prize you can refuse the prize or opt to donate the prize to a charity. It is best to sign appropriate paperwork to assign ownership of the prize to the charity and have the prize sent directly to them as you cannot use the prize before donating it.

Establish fair market value. Should you win property, like a car or vacation trip, establish the fair market value (FMV) of what you won. Hosts of prize contests often over-value the prize to aid in marketing their contest. You do not want to pay tax on an over-inflated value. So if you win merchandise, get copies of advertisements for the item. If it is a trip, document hotel rates, transportation costs and cost of meals to build a case for a lower FMV. If there is a discrepancy with the value received, show your documentation to the provider of the prize and get your 1099 value corrected.

Keep good records. When you win a prize, fill out a sheet outlining the details of the event. Record the identity of the sponsor, the date, a detailed description of what was won, copies of documentation, photos of the items won, and the approximate retail value (ARV) assigned to the prize by the sponsor.

Plan for the tax. Using the ARV provided to you by the sponsor, determine if you will be able to pay the tax for the prize. You may need to plan to make an estimated tax payment to avoid any surprises when you file your tax return.

Remember should you be lucky enough to win a prize, ask for help to determine whether this “other income” could create a tax problem.

October 5 2018

Receive Copies of Fraudulent Tax Returns

IRS, Tax Tips Falls Church, IRS, Tax Fraud

Image courtesy of https://www.cpapracticeadvisor.com/news/12157917/filing-taxes-early-can-help-prevent-income-tax-refund-fraud

What did thieves try to steal?

Along with tax season comes the season of tax identification theft. Those who have become victims know how frustrating the experience can be.

The frustration

Until now, if you were a victim of tax identity theft, you would be unable to receive information from the IRS about the depth of the fraud. Many frustrated taxpayers have tried to get copies of the fraudulently filed tax returns. The IRS has repeatedly refused freedom of information requests to get these copies.

What’s new?

In a recent announcement, the IRS has changed course on requests to get copies of fraudulently filed tax returns. As long as you follow their instructions, you are now able to get copies of what thieves attempted to do with your tax information. But be forewarned. The IRS may black out information on the requested return that does not pertain to you. They will try to present you with enough of the falsely filed tax return to allow you to determine the depth of the data that has been stolen.

Why the theft information may be important

You can see what personal information the thieves have. What has been compromised? Name, address, and Social Security Number? Do they have your dependent’s or spouse’s information? Perhaps they also have your income and withholding data. Knowing this will help you plan the extent of data protection you will need.
There may be clues as to where the identity theft occurred. Of the information stolen, who had access to it? Did the data breach of your identity happen through the IRS or somewhere else?
There may be more tax years impacted than you thought. Request information from the year you first became aware of the identity theft at the IRS. But you may wish to request information in a prior year and in the year following the theft. The IRS has access to up to six years of tax returns. Try to determine whether the theft is ongoing is a one-time occurrence.

The request requires specific information. Here is a link to the IRS announcement: Instructions for Requesting Copy of Fraudulent Returns

Thankfully, the IRS’ recent decision to share this fraudulent information is allowing victims to take some action to protect themselves.

October 1 2018

Large retirement account balances can cause Social Security tax problems

Individual Taxes, IRS, IRS Rules, Retirement, Tax Break, Tax Law, Tax Planning, Tax Tips IRAs, Retirement, RMD Rules, Roth, Social Security Income, Tax-deferred savings accounts

Image courtesy of Matthew Allen at https://www.weisseducation.com/how-to-avoid-the-social-security-tax-torpedo-6753

When you reach age 70 ½, the trigger requiring distributions from qualified retirement accounts is pulled. This annual Required Minimum Distribution (RMD) applies to Traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k), 403(b) and other defined contribution plans. Amounts not distributed on a timely basis could be subject to a 50% penalty. Thankfully, the RMD rules do not apply to Roth IRAs.

The RMD rules are established to ensure the deferred tax benefit for certain retirement accounts does not go indefinitely into the future. In other words, the IRS now wants their cut of your tax-deferred savings accounts. The amount you must take out each year is based upon your age, your spouse’s age and your filing status.

The Tax Torpedo

The Tax Torpedo refers to the surprising event of having your Social Security Income taxed. Depending on your income and filing status, up to 85% of your Social Security Benefit could be subject to income tax.

RMD causes Tax Torpedo

If you continue to wait to start taking money out of your retirement accounts, the balance in your accounts may be very high when you reach age 70 ½. These higher balances mean a higher annual RMD amount. If your required retirement plan distribution is large enough it may put you into a higher marginal tax rate as well as trigger taxes on your Social Security.

Some Tips

Plan withdrawals. Once you hit age 59 ½ you may withdraw money from qualified tax-deferred retirement accounts without experiencing an early withdrawal penalty. To reduce the tax risk on your Social Security, manage annual disbursements from your retirement account(s) to be more tax efficient when you reach age 70½.
Starting Social Security. You may begin full Social Security Benefits after you reach your minimum retirement age. However, your benefit amount can increase if you delay your start date up until age 70. Consider this as part of your plan to manage a potential Tax Torpedo.
See an advisor. There are many moving parts in planning for retirement. These include Social Security Benefits, pension plans, savings, and retirement accounts. Ask for help to create the proper plan for you and your family. One element of the plan should include being tax efficient.

September 28 2018

I Need a Copy of My Tax Return

Individual Taxes, IRS, IRS Rules, Tax Tips 1040, 4503-T, Copies of tax returns, tax return, Transcripts

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Retaining copies of your federal tax return is important. Not only will you need the return in case of audit, but the tax return is often used to secure student aid, obtain loans, purchase a home or business, plus much more. What can you do if you cannot find a copy of your tax return?

• E-filed tax returns have their data stored in software. One of the benefits of e-filed tax returns means there is a digital copy of your tax information. If necessary another digital copy could be produced.

• IRS requested transcript. The IRS can provide you with a transcript of your current tax return or transcripts from the prior three years. To request a transcript from the IRS using their online tool go to www.irs.gov and search for their order a transcript tool. Information will be provided to you within approximately 5 to 10 business days.

• Request an actual copy. If you require an actual copy of your tax return, one can be provided for $50 by filling out Form 4506. But plan accordingly, as it can take up to 75 days to process your request.

• Copies of informational returns. If you are missing a W-2 or 1099 you can also contact the company that originally issued the tax form. They will have these forms on record for their own audit purposes.

• Copies sent to third parties. Your request for transcript can also be sent to a third party with your authorization. If you wish to take this route, please note that you may lose some control as to who has this personal information.

• Understand the different transcripts. When making a request for a transcript from the IRS you need to understand what you are requesting.

• Return transcript. This includes most of the lines of your tax return as originally filed.

• Account transcript. This is the status of your tax account. It includes the balance owed on your account, any record of any payments, and adjustments after the return was filed.

• Record of account. This is a combination of the return transcript and the account transcript.

If need be, you can also request a verification of non-filing of a tax return.