Newsletter from
Steve Richardson & Company, Certified Public Accountants

February 24, 2020

Lying is, generally speaking, a bad idea

To our clients and friends,

He should have known better!

To our clients and friends, Recently a law professor at the University of Minnesota was convicted of lying to the IRS. The judge said, Ed Adams “knew more than most” that he broke the law

Lying is, generally speaking, a bad idea. Most people do not know that lying to the IRS can also be a crime.  Ed Adams knew and lied anyway.

Judge Donovan Frank said Adams deserved a harsher sentence than the one year of probation that prosecutors requested because of his role as a tenured professor who should be setting an example for up-and-coming lawyers.

“You clearly knew more than most that what you were doing was illegal and unethical,” said Frank.

Obviously, there is more to this case than one law professor lying to the IRS that led to the sweetheart plea-bargain deal offered by the prosecution. Mr. Adams was indicted in 2017 as a mastermind of a complicated embezzlement scheme that bilked millions of dollars from investors. Adams pleaded guilty to only a misdemeanor offense last October, and prosecutors dropped 17 other counts. A sweetheart deal, indeed!

A “complicated scheme” implies to me compatriots and co-conspirators. I wonder how many of Mr. Adam’s cohorts are facing prison time as a part of this sweetheart deal?

Lying is, generally speaking, a bad idea

Lying to the IRS can be a go-to-jail serious crime.

Don’t lie!

This is not nearly as obvious as it may seem on the surface. Never lie to any federal, state or local official, especially an officer of the law. If someone with a badge wants to ask you questions, the only word from your mouth is “lawyer”. Innocent or not makes “zero” difference!

The 5^th Amendment

We have the 5^th Amendment for our protection. We have a 100% protected legal right to say nothing! If you cannot be 100% truthful and candid with legal officials and authorities, rely upon the 5^th!

The 5^th Amendment is a powerful individual right. It is your job as a citizen to know when, where and how to use this important personal right.

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Newsletter from
Steve Richardson & Company, Certified Public Accountants

October 21, 2019

To Our Clients and Friends:

Stubborn-Super-Steve!

Much to my physician’s consternation, I’m not an “outstanding patient”. I’m well now, but I’ve been sick for ten hard days. My Physician told me that if I didn’t rest, I would “relapse”. Frankly, I didn’t believe him. What should have been a five-day illness turned into a ten-day illness because I failed to follow good professional advice.

I thought that the “rest” part of recovery doesn’t apply to Mr. Stubborn Super-Steve. Boy-Howdy was I wrong! Good professional advice is important. I will try to be a better patient but Mr. Stubborn Super-Steve will very likely show-up again as it has so many times in the past.

It is important to follow good professional advice!

We have a few CPA Firm clients a bit like Mr. Stubborn Super-Steve. Thankfully, not too many. Most of our clients are “outstanding”! That phrase, “outstanding clients” may need to be defined; an “outstanding client” is one who acts upon our advice and pays their bills on time. When our clients follow our advice, it does pay off!

We do more than tax returns. We look at retirement planning, cash flow issues, investment management, employee and personnel, and other issues as they present themselves.

Right now, we (our clients and their CPA Firm) need to do a bit of year-end tax planning.

2019 and 2020 Tax Planning

With year-end approaching, now’s the time to take steps to cut your 2019 tax bill. Here are some relatively foolproof year-end tax planning strategies to consider, assuming next year’s general election doesn’t result in retroactive tax changes that could affect your 2020 tax year.

Year-end Planning Moves for Individuals

Here are some strategies that may lower your individual income tax bill for 2019.

• Game Generous Standard Deduction Allowances. For 2019, the standard deduction amounts are $12,200 for singles and those who use married filing separate status, $24,400 for married joint filing couples, and $18,350 for heads of household. If your total annual itemizable deductions for 2019 will be close to your standard deduction amount, consider making additional expenditures before year-end to exceed your standard deduction. That will lower this year’s tax bill. Next year, you can claim the standard deduction, which will be increased a bit to account for inflation.
  • Charitable Deductions. Deferring and doubling up on charitable donations, in alternating tax years, is actually easy to do with minimal planning. There are venerable well established organizations set up to assist donors. One of my favorites is the National Christian Foundation.
• Carefully Manage Investment Gains and Losses in Taxable Accounts. If you hold investments in taxable brokerage firm accounts, consider the tax advantage of selling appreciated securities that have been held for over 12 months. The maximum federal income tax rate on long-term capital gains recognized in 2019 is only 15% for most folks, although it can reach a maximum of 20% at higher income levels. The 3.8% Net Investment Income Tax (NIIT) also can apply at higher income levels.
  • With the instability of the looming 2020 elections, I recommend accelerating your capital gains into 2019 while we have tax law clarity and favorable tax rates.
• Take Advantage of 0% Tax Rate on Investment Income. For 2019, singles can take advantage of the 0% income tax rate on long-term capital gains and qualified dividends from securities held in taxable brokerage firm accounts if their taxable income is $39,375 or less. For heads of household and joint filers, that limit is increased to $52,750 and $78,750, respectively. While your income may be too high to benefit from the 0% rate, you may have children, grandchildren, or other loved ones who will be in the 0% bracket. If so, consider giving them appreciated stock or mutual fund shares that they can sell and pay 0% tax on the resulting long-term gains. However, if you give securities to someone who is under age 24, the Kiddie Tax rules could potentially cause some of the resulting capital gains and dividends to be taxed at the higher rates that apply to trusts and estates.
• Give away Winner Shares or Sell Loser Shares and Give away the Resulting Cash. Don’t give away loser shares (currently worth less than what you paid for them) to relatives. Instead, you should sell the shares and book the resulting tax-saving capital loss. Then, you can give the sales proceeds to your relative. On the other hand, you should give away winner shares to relatives. These principles also apply to donations to IRS-approved charities.
  • If you gift stock, never gift a stock that is worth less than you paid for it!
  • Gifting stock that has an appreciated in value to charity or to a relative can be a very good tax planning strategy.
• Convert Traditional IRAs into Roth Accounts. The best profile for the Roth conversion strategy is when you expect to be in the same or higher tax bracket during your retirement years. The current tax hit from a conversion done this year may turn out to be a relatively small price to pay for completely avoiding potentially higher future tax rates on the account’s earnings.
  • This is one of my favorite ways to take full advantage of the lower Trump Tax Rates. I have assisted clients in moving a bunch of IRAs into ROTH accounts at minimal tax costs.
• Take Advantage of Principal Residence Gain Exclusion Break. Home prices are on the upswing in many areas. More good news: Gains of up to $500,000 on the sale of a principal residence are completely federal-income-tax-free for qualifying married couples who file joint returns ($250,000 for qualifying unmarried individuals and married individuals who file separate returns). To qualify for the gain exclusion break, you normally must have owned and used the home as your principal residence for a total of at least two years during the five-year period ending on the sale date.
• Don’t Overlook Estate Planning. Thanks to the Tax Cuts and Jobs Act (TCJA), the unified federal estate and gift tax exemption for 2019 is a historically huge $11.4 million, or effectively $22.8 million for married couples. Even though these big exemptions may mean you’re not currently exposed to the federal estate tax, your estate plan may need updating to reflect the current tax rules.
  • I should write an article on estate planning. Way too many people believe that with the estate and gift tax exemptions being $11.4 million (or $22.8 million) for married couples that estate planning is no longer necessary. Not-True!
  • Good estate planning has never been about cutting the estate taxes.
  • Good estate planning has always been about smoothing the transition of even modest wealth and assets over subsequent generations and to insure the survivability of “legacy businesses”.
  • Good estate planning is being a blessing to your children and to your children’s children.
  • People with modest wealth can accomplish a lot with simple estate planning!

Year-end Planning Moves for Small Businesses

If you own a business, consider the following strategies to minimize your tax bill for 2019.

• Establish a Tax-favored Retirement Plan. If your business doesn’t already have a retirement plan, now might be the time to take the plunge. Current retirement plan rules allow for significant deductible contributions. Contact us for more information on small business retirement plan alternatives, and be aware that if your business has employees, you may have to cover them too.
• Take Advantage of Generous Depreciation Tax Breaks. 100% first-year bonus depreciation is available for qualified new and used property that is acquired and placed in service in calendar year 2019. That means your business might be able to write off the entire cost of some or all of your 2019 asset additions on this year’s return. So, consider making additional acquisitions between now and year-end.
• Cash in on Generous Section 179 Deduction Rules. For qualifying property placed in service in tax years beginning in 2019, the maximum Section 179 deduction is $1.02 million. The Section 179 deduction phase-out threshold amount is $2.55 million.
• Time Business Income and Deductions for Tax Savings. If your business is conducted via a pass-through entity, the traditional strategy of deferring income into next year while accelerating deductible expenditures into this year makes sense if you expect to be in the same or lower tax bracket next year. On the other hand, if you expect to be in a higher tax bracket in 2020, take the opposite approach. Accelerate income into this year (if possible) and postpone deductible expenditures until 2020.
• Maximize the Deduction for Pass-through Business Income. For 2019, the deduction for Qualified Business Income (QBI) can be up to 20% of a pass-through entity owner’s QBI, subject to restrictions that can apply at higher income levels and another restriction based on the owner’s taxable income. Because of the various limitations on the QBI deduction, tax planning moves (or non-moves) can have the side effect of increasing or decreasing your allowable QBI deduction.
• Watch out for Business Interest Expense Limit. Thanks to an unfavorable TCJA change, a taxpayer’s deduction for business interest expense for the year is limited to the sum of (1) business interest income, (2) 30% of adjusted taxable income, and (3) floor plan financing interest paid by certain vehicle dealers. Fortunately, many businesses are exempt from this limit. We can help you determine if an exemption applies.
• Claim 100% Gain Exclusion for Qualified Small Business Stock. There is a 100% federal income tax gain exclusion privilege for eligible sales of Qualified Small Business Corporation (QSBC) stock that was acquired after 9/27/10. QSBC shares must be held for more than five years to be eligible for the gain exclusion break. Contact us if you think you own stock that could qualify.

This letter only covers some of the year-end tax planning moves that could potentially benefit you, your loved ones, and your business. Please contact us if you have questions, want more information, or would like us to help in designing a year-end planning package that delivers the best tax results for your particular circumstances.

Best regards,

Steve Richardson, CPA

The Kirkwood Letter

Newsletter from
Steve Richardson & Company, Certified Public Accountants

September 30, 2019

The Kirkwood Letter

With permission and for fun reasons, I am titling this letter the “Kirkwood” letter in honor of a client couple that showed good initiative in including me in a family discussion about investment options related to modest and irregular gifts of cash from grandparents to their infant children.  I was honored to be included in that discussion.  The amounts of money involved are “modest” and most young couples would inappropriately jump to the conclusion that there is no good investment option with “modest” and “irregular” funds.  There are in fact a number of excellent investment options that fit this cash flow scenario. 

The investment strategy we discussed and settled on for this family is additional unscheduled mortgage payments.  This strategy fits the Kirkwood family perfectly.  It also fits with my philosophy that parents need to be in a position of financial strength before they try to help their children financially.

With college educations skyrocketing in costs, family financial strength is more important than ever.  The plan is simple but unexpectedly powerful!

This investment strategy builds upon an indisputable financial principal: good financial behavior, over long time horizons, will always pay off.  Few investment are more long-term that a house and a mortgage.

Please take the few minutes necessary to read this short memo.  This investment strategy is deceptively simple but do not under estimate its effectiveness. 

Why Accelerated Mortgage Pay-Down Is a Good Investment Strategy

The notion of paying down one’s home mortgage balance faster than required is not a new idea. However, even those who are well schooled in personal finance may be surprised to discover how powerful this idea can be. This release prepares you to raise the issue and explain it to clients who might be interested. Before getting started, please note the following key points:

•   The accelerated mortgage pay-down idea can only work for clients who have positive cash flow and/or available cash. It is not for folks who are struggling to pay their monthly bills.

•   The idea is only appropriate for clients who are looking for a very conservative, risk-free way to invest some surplus funds. Obviously, clients who want to earn (and believe they can earn) 8% to 10% annually are not going to be very excited about the idea of expending cash to earn 3.5% or 4% (or whatever their exact mortgage interest rate may be) by paying off their home mortgage early.

•   Finally, the idea is far more powerful when the client intends to continue pumping the monthly accelerated mortgage pay-down amount into a retirement account after the mortgage has been paid off.

With these thoughts in mind, here is a more detailed analysis in the form of sample scenarios.

Sample Scenario: Accelerated Pay-down Strategy Makes Good Financial Planning Sense

Phil, your 45-year-old client, is in good financial shape. He has cash on hand and positive monthly cash flow after paying his bills. Even better, he expects to be in the same position for the foreseeable future. Assume Phil has a $400,000 balance on a recently refinanced 30-year first mortgage on his home that charges 4% interest. (We know the current rates are lower for qualified borrowers, but that may not last forever. Plus, we want to keep things simple to illustrate the points we will make in this release.)

Phil’s monthly payment for principal and interest is only $1,910, but he has a whopping 30 years to go before the mortgage will be paid off (if he sticks to the prescribed monthly payment schedule). That means Phil will be a wizened 75 years old when the mortgage is finally extinguished.

Being 75 years old before your mortgage is paid off probably does not sound so great to most folks. Collecting a guaranteed, risk-free 3.5% or 4% (or whatever rate applies) return by paying down one’s mortgage quicker (thus avoiding the interest that would otherwise be charged on the principal that is paid off early) probably sounds like a solid investment idea to many homeowners. After all, the stock market is looking rather frothy, and fixed income investments are currently paying pitiful interest rates.

Impact of Mortgage Interest Deductibility

One argument that may be mounted against the accelerated mortgage pay-down idea is that your client will lose tax deductions because interest charges will go down more rapidly than if he or she sticks to the scheduled monthly payments. This is true, but so what? Consider the following points:

•   The TCJA imposed stricter limitations on home mortgage interest deductions for 2018-2025.

•   The greatly increased standard deduction for 2018-2025 means that many more clients won’t be claiming itemized deductions. Even if they itemize, the larger standard deduction reduces the incremental tax benefit from itemizing.

Impact of Future Inflation or Deflation

While the accelerated mortgage pay-down strategy will yield guaranteed results, it is not foolproof. If we have a period of roaring inflation, paying down a mortgage with a relatively low interest rate earlier than required may no longer make sense. In this situation, it may be better to stop the accelerated pay-down program, allow the mortgage term to stretch out, and pay the remaining balance back with cheaper inflated dollars.

On the other hand, the accelerated pay-down strategy will work great during a period of deflation because the mortgage is being paid down sooner when dollars are cheaper rather than later when dollars are more expensive.

Big Advantage to “Continuing” the Program
after
Mortgage Is Paid Off

The accelerated mortgage pay-down strategy can clearly be beneficial in and of itself because interest charges are avoided, and debt is eliminated from the client’s personal balance sheet. Another advantage is your client can stop and restart the program anytime he or she wants (for example, when inflation or deflation strikes). However, the biggest payoff from following the strategy will probably be reaped by folks who have the cash flow and self-discipline to continue the program even after the mortgage is extinguished. This involves taking the monthly amount that was previously dedicated to the accelerated mortgage pay-down strategy and stuffing it into a retirement savings account (whether taxable or tax-advantaged).

In our sample scenario, let’s say Phil pays $3,500 per month under the accelerated mortgage pay-down program instead of making the scheduled monthly payment of $1,910. He will pay off his $400,000 mortgage balance in about 12 years, at age 57, instead of paying it off in 30 years, at age 75. He will earn a guaranteed 4% rate of return because that is the interest rate he avoids on the accelerated principal payments.

If Phil continues the program after the mortgage is paid off by putting $3,500 a month into a retirement savings account that earns 4% annually for another eight years, he will have accumulated about $395,000 at age 65. This seems like a much better plan than sticking with the status quo and making mortgage payments until age 75.

More Sample Scenarios

Here are some additional illustrations of how the accelerated mortgage pay-down strategy can work.

Faster Pay-Down. Now say 45-year-old Phil pays $4,500 per month under the accelerated mortgage pay-down program instead of making the scheduled monthly payment of $1,910. He will pay off his $400,000 mortgage balance in eight years and ten months, at age 54, instead of paying it off in 30 years, at age 75. He will earn a guaranteed 4% rate of return because that is the interest rate he avoids on the accelerated principal payments.

If Phil continues the program after the mortgage is paid off by putting $4,500 a month into a retirement savings account that earns 4% for another 11 years, he will accumulate about $745,000 by age 65. Sweet! Once again, this seems like a much better plan than sticking with the status quo and making mortgage payments until age 75.

Really Fast Pay-Down. Now say 45-year-old Phil pays $5,000 per month under the accelerated mortgage pay-down program instead of making the scheduled monthly payment of $1,910. He will pay off his $400,000 mortgage balance in about seven years and ten months, at age 53, instead of paying it off in 30 years, at age 75. He will earn a guaranteed 4% rate of return because that is the interest rate he avoids on the accelerated principal payments.

If Phil continues the program after the mortgage is paid off by putting $5,000 a month into a retirement savings account that earns 4% for another 12 years, he will accumulate a little over $920,000 by age 65. Wow! That would be great!

Slower Pay-Down. Let’s now be a bit less ambitious and assume that 45-year-old Phil pays $2,500 per month under the accelerated mortgage pay-down program instead of making the scheduled monthly payment of $1,910. This only requires an additional payment of $590 per month. Under our basic assumptions, Phil should have absolutely no problem doing this. Paying $2,500 per month will allow Phil to pay off his $400,000 mortgage balance in about 19 years and two months, at age 64, instead of paying it off in 30 years, at age 75. He will earn a guaranteed 4% rate of return because that is the interest rate he avoids on the accelerated principal payments.

Older Individual. Finally, let’s now assume Phil is 55 instead of 45. Say Phil pays $4,000 per month under the accelerated mortgage pay-down program instead of making the scheduled monthly payment of $1,910. He will pay off his $400,000 mortgage balance in about ten years and two months, at age 66, instead of paying it off in 30 years, at age 85. He will earn a guaranteed 4% rate of return because that is the interest rate he avoids on the accelerated principal payments. This seems like a much better plan than sticking with the status quo and making mortgage payments until age 85.

Conclusion

You get the idea. With financial software, you can put together sample scenarios for clients who are interested in the accelerated mortgage pay-down concept. It often makes good sense from an overall financial planning perspective, and it delivers a guaranteed, risk-free rate of return. You can’t say that about too many other investment strategies.

Very truly yours,

Steve Richardson, CPA

Steve Richardson & Company, Certified Public Accountants

QBI Tax Planning Summary

May 21, 2019

To Our Clients and Friends:

This past tax season was a bit more challenging than most for several reasons.

• Congress initiated a massive tax overhaul that caused a number of unexpected changes in tax practice.
• The IRS was ‘out of work’ for 35 days at the beginning of tax season. Tax season got off to a slow and cranky start.
• The tax withholdings tables issued by the IRS and third party vendors such as QuickBooks and ADP were wrong!

I’m going to try and draft a series of letters about the actual day-to-day impact of the new tax law on our clients. Some of these letters will be simple, short and to the point. Others will be equally as important but a bit more complex.

Qualified Business Income Deduction (QBI)

This year we were surprised by how complex the “qualified business income deduction” would prove to be in practice. The QBI sounds simple. A business may get up to a 20% tax deduction for domestic business operations. It’s not that simple!

LLCs and S-Corps

Most small business entities are now organized as “pass-through” entities such as LLCs and S-Corps. The QBI is one step more difficult when a “pass-through” entity is involved.

Specified service trade or business

Small businesses face complex QBI rules. If a small business is a “specified service trade or business”, then if faces a daunting additional layer of rules.

A “specified service trade or business” is, according to the IRS,

“any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of professionals.”

The additional of rules applied to “specified service trade or businesses” will cause a “phase-out” of the QBI deduction based on income, which is $157,500 for individuals and $315,000 for married couples. Splitting income from a “specified service trade or businesses” to a non-“specified service trade or businesses” is subject to tight rules. Also, self-rentals tied to “specified service trade or businesses” are treated as if they too are “specified service trade or businesses”.

There are planning opportunities. These planning opportunities are narrow and require substantial lead time.

Rental Real Estate

Under the proposed safe harbor, a “rental real estate enterprise” would be treated as a trade or business for purposes of Sec. 199A if at least 250 hours of services are performed each tax year with respect to the enterprise.

Under limited circumstances, rental activities can be treated as subject to the Section 199A QBI Deduction.

But should your rental property be treated as Section 199A property?

There are a few problems with treating rental real estate as subject to the QBI rules.

1. If the properties lose money (not uncommon in rental real estate) one can have a “Negative QBI”. A negative QBI does nothing good. It is a direct reduction in the amount of available QBI deduction. If you have a pass-through entity making a profit (as LLC or S-Corp) a negative QBI adjustment reduces the value of the QBI deduction.
   1. This “negative QBI through some of our younger staff people a curve ball this past tax season.
2. The record keeping requirements for the 250-hours of personal services are onerous.

The QBI only helps a taxpayer if they are profitable.

Some rental properties are automatically subject to the 199A rules.

If you have an active trade or business that is not a -“specified service trade or businesses” and this active trade or business is engaged in a self-rental activity, then the rental property is subject to the 199A rules. Tax Planning: if you rent your own property for your business, make sure that the rents paid are high enough to show a rental profit.

QBI is complicated

These rules are complicated and frankly, I’m still learning the rules.  The IRS has been slow to provide guidance for the same reasons; the IRS is still trying to understand the QBI rules and the implications of the QBI rules.  We will be hearing more on this topic.

Conclusion

As always, we deeply appreciate all of our clients and friends.

Sincerely,

Steve Richardson, CPA

To Our Clients and Friends:

For a variety of reasons both personal, financial and political, medical insurance companies and Big Pharm are not on my happy list.  On a good day, I find them annoying.  On a bad day, I find them … very annoying!

In this short article, I am going to deal with managing the financial costs of medical insurance and Big Pharm as it relates to prescriptions. 

Most of you will not care about my political views on the topics of medical insurance and Big Pharm so I will leave that discussion at the end of this article. It will be easy for you to skip over.

The problem

Last week I discovered that my Medicare Supplemental Drug Policy will not cover a medication that I need.  The medication is expensive, without insurance, it is $300 a month; with a 20% co-pay under my old policy it would have been $60.  Remember that number: $60; it will become important a bit later on.

A bit of related personal information and background

The advantages of having a long-term relationship with an outstanding primary care physician cannot be overstated.  For the past three or four years I have been developing a collection of minor symptoms that are collectively getting a bit more pronounced. My doctor said, ‘I think you are suffering from this medical condition and I am going to prescribe this medication to see if it is effective.’

Two things about this meeting surprised me:

1. The doctor’s diagnosis was 100% understandable; I had heard of the condition among my peers and it is not unusual in my age group.  I understand my condition; I can even pronounce its name!
2. The medication was immediately and remarkably effective!

So yea! Good diagnosis and good medication.

The problem

The problem, as I said, my supplemental drug policy will not pay for the drug.  A $300 a month payment for a necessary medication is more money than many of my peers can comfortably afford.  This is a problem!

My physician’s nurse, who called to give me the bad news, was as frustrated as I was. 

The propaganda and the exclusion

I mentioned to the nurse the possibility of having a local pharmacist compound the medication.  The nurse said,

“O-no; that’s not a good option. Compounding medication will be twice as expensive as the drug companies.  It will cost $600 or more to get this medication compounded and the insurance companies never pay for compounded medication.” 

It is a fact that medical insurance companies only pay for manufactured medications, i.e., Big Pharm!  They systematically exclude compounding pharmacies from any reimbursement whatsoever.

The propaganda (or marketing if you will) that is pervasive is that compounded medication is more expensive than Big Pharm manufactured medication.  This is 100% untrue.

My Compounding Pharmacist

CPAs are trained to be skeptical.  When someone presents me with an unsupported fact such as, “compounded medications are twice as expensive as manufactured drugs”, I want to verify the accuracy of that statement.  So; I called a compounding pharmacist and did a bit of price shopping.

My new pharmacist said this,

“Sure, I compound that medication every day. A monthly supply will be about $50, but, I have to tell you, your insurance company will not reimburse a compounded medication so you will have to pay full price.”

The exact same medication for $50 instead of $300!  The compounded medication will cost me $50; with full insurance coverage, the co-pay alone would cost me $60.  This is a serious pricing mismatch!

How to fight back against Medical Insurance and Big Pharm!

I asked my new pharmacist to call my primary care physician and discuss my case; the result is that prescription has now been transferred to my new pharmacist. 

Is this a massive blow against the machinations and machinery of the medical insurance industry and Big Pharm? No; it doesn’t even qualify as a little bitty blow.

But –

I accomplished two things:

1. I took care of my family’s finances
2. I sent my business to a compounding pharmacist.

It’s those professionals, the compounding pharmacist, who can strike a significant blow against Big Pharm. 

My recommendation is this: if the medical insurance industry and Big Pharm give you problems concerning your medication, investigate your local compounding pharmacist.

Skip the politics

Two things have influenced my politics on the topic of medical insurance and Big Pharm; one is an event that occurred 30-years ago, the other is a recent article written by an esteemed physician, Adam S. Richardson, Dermatology.   Esteemed in my eyes anyway, he is my son!

Thirty-years ago I was out of the country when I discovered that I left home without my high blood pressure medication.  Even with my insurance coverage, this medication was $160 a month.  I called back to my primary care physician (the same physician I still use) and ask him to call a local pharmacist in Jamaica.  A 30-day supply of my prescription was delivered to my guest house with a $7 bill (which included delivery).  Wow! Same drug; same packaging, same inserts, exactly the same.  $7 (not insured) verses $160 (with full insurance coverage).  I am delighted and also annoyed!

The policy of Big Pharm to overcharge US customers and undercharge non-US customers is a political issue for me.

Dr. Adam Richardson wrote an article for a respected dermatology journal one of the conclusions was that dermatology patients could be better served by more judicious use of local compounded medications because of the significant cost savings. 

One reason that I have a high level of respect for the medical profession is their commitment to a central unwavering concept; in the final analysis, it is the “Quality of Patient Care” that matters! 

Adam’s article points out an important issue: the cost of medication can compromise the quality of patient care. To any physician, that is an unacceptable outcome.

Employee Parking and the Rumored Tax on Churches!

The Rumored Tax on Churched (and other non-profits) for employee parking!

I’m getting a large number of inquiries from churches and other Section 501(c)(3) organizations about the new tax on employee parking and other transportation fringe benefits.

The Tax on Employee Parking:

Yes; it’s true, there is an odd-duck new tax policy, lurking in the new tax law, that will cause many churches and other Section 501(c)(3) organizations to pay taxes on employer provided parking.

Not to Worry!

It is highly unlikely that this new tax law will have any appreciable impact on churches and other not-for-profit organization here, in the Deep South.

How does being in the Deep South change a tax law?

This new tax, on employer provided parking, will primarily impact high cost urban areas where parking is a difficult and expensive issue.  Here, in the Deep South, parking, especially parking at churches, is generally free (as in without a charge or parking fee).  Free is good!  Parking to get into my office is free.  I like free.

Fair Market Value

The tax on free parking provided to employees is based on the fair market value of the parking benefit.  The fair market value of parking is determined by ‘how much do you charge non-employees’ to park at the same or similar location.  In the Deep South, churches do not charge for parking.  It’s free! If it’s free, the value taxed to the employee for the same or similar parking is zero!

Background (background is important)

In the early 1990s, Congress wanted to provide incentives to use mass transit and limit the exclusion for employer-provided parking to a specified dollar amount, and enacted an exclusion for qualified transportation fringe benefits.  Ok; let me say that again in plain English: Congress wanted to use tax law to modify people’s behavior.  The congressional policy was to encourage them to use more mass transit and less automobiles for commuter traffic.

That rule changed for tax years beginning after 1997 when Congress provided that an employee could choose to reduce their compensation and then receive a nontaxable qualified transportation fringe benefit.  This policy shift lowered the income taxes on employees thereby saving them a tiny bit of money.

Nationwide, the use of employer-provided parking “exploded” as a tax-free fringe benefit.

This is an excellent example of how changes in tax policy can have a significant effect on personal and corporate behavior.

[One of my hobbies is reading ‘behavioral economics’; that is the economics of what causes the behavior of people to change.  It’s interesting. The “explosion” of employer provided parking as a tax-free fringe benefit is very much out of proportion to the actual economic value of the tax benefit.  The “explosion” of behavioral change is not a value based economic decisions; the decision is the perception of a “loop-hole” in the tax law.  I call it the “beat the system” economic response.]

By its nature, a benefit related to employer-provided parking, is enjoyed primarily by employees working in urban areas, where parking is expensive.  This change in tax policy will have minimal effect on churches and other Section 501(c) (3) organizations in the Deep South were parking is, generally speaking, cheap!

Politics or Economic?

The Trump tax law’s proposal to tax this benefit is the administrations belief that qualified transportation fringes (including employee parking) are primarily personal benefits and not directly related to a trade or business.  From a value based economic point of view, the administration is not wrong; but, tax law has never been, nor will it ever be, based on any coherent economic theory or policy.

The tax law is, and always will be, based on political policy with little, if any, lip service to value based economics.

Ok; its politics!

Notice the politics of this change in tax policy.  The policy is directed to employers and specifically a new target, non-for-profit employers such as churches and other Section 501(c) (3) organizations.  It is not targeted to individuals! Not wanting to eliminate an individual income tax exclusion, Congress decided to leave the exclusion in place and eliminate the employer’s expense deductions associated with this benefit. This, hypothetically, will not increase tax on individuals, who enjoy free employer parking, but, it will increase taxes on businesses who provide that parking.  I say “hypothetical” because no one expects free employer provided parking to survive for long if it is being taxed.

But; this is a tax on Churches!

Including churches, other tax-exempt and governmental organizations in this policy shift, where elimination of a tax deduction is not meaningful, Congress made the value of employer provided parking subject to unrelated business income tax.

A political faux pas

This is new policy; it is also invasive.  I suspect that there will be political push-back from the not-for-profit sector on this tax policy issue.  I do not expect this tax policy issue will remain in the law for long.  I suspect that no one in the Washington DC ivory tower realized that this was going to be a tax on the Church! Oops!

It’s complicated; the way tax law is structured, there is no neat way to simply exclude churches from this new tax policy. Churches, according to tax law, are Section 501(c)(3) entities. Churches have a few tax breaks that other, non-church, 501(c)(3) entities do not have, but, basically, churches and 501(c)(3) organization have the same set of laws with which they must comply. Because of churches are defined in tax law, carving out or otherwise excluding churches from the tax on employer provided parking will be difficult.

Limited Tax Planning

Basically, there is no easy way to mitigate the impact of this new tax on employer provided parking.

Some commentators suggest that the salary reduction provisions of qualified transportation fringes provide an opportunity to avoid the disallowed deduction rule, because it appears that the employee is funding the benefit. That will not work.

If an employee reduces future compensation on a pre-tax basis in exchange for the employer providing parking, the parking benefit is a provision of a qualified transportation fringe benefit, the costs of which would be disallowed.

Value of parking benefit

Because the employee exclusion amount is the fair market value (FMV) of the parking benefit provided, and the disallowed employer deduction is the cost of providing that parking benefit, questions arise regarding whether a value of $0 for qualified parking might eliminate the existence of the qualified transportation fringe benefit as the provision of the benefit by the employer is not a provision of anything of value.

IRS Notice 94-3 provides helpful info.  You can find it online is you want to study this issue in depth.  But why? This is boring stuff!!

Dear Clients and Friends of our CPA Firm:

Experimental Newsletter Format

There have been a number of important tax developments in the second quarter of 2018. I do not want to give you a barrage of boring tax information so I have left references lines in the body of this letter; if you want more details of a particular item, simply cut and past the reference and email me a request for more information. The supporting detailed reference memos are ready to email.

Introduction

The following is a summary of important tax developments that have occurred in April, May, and June of 2018 that may affect you, your family, your investments, and your livelihood. Please email us for more information about any of these developments and what steps you should implement to take advantage of favorable developments and to minimize the impact of those that are unfavorable.

…Postcard tax form. The IRS released a new draft version of the 2018 Form 1040, U.S. Individual Income Tax Return. The new Form is markedly different from the 2017 version of the form and would replace the current Form 1040, as well as the Form 1040A and the Form 1040EZ. In addition to reflecting a number of changes made by the Tax Cuts and Jobs Act (TCJA; P.L. 115-97, 12/22/2017), the “postcard” draft form is about half the size of the current version and contains far fewer lines than its predecessor. However, this reduction in length is countered by the fact that the draft form has six new accompanying schedules.

For more information, copy the following reference and email it back to me:  “2018 draft Form 1040 reduced to “postcard” size but requires more schedules.”

…States in in bid to tax online/internet sales. The U.S. Supreme Court ruled that the correct standard in determining the constitutionality of a state tax law is whether the tax applies to an activity that has “substantial nexus” with the taxing state. The case (South Dakota v. Wayfair) involved South Dakota’s imposition of tax collection and remittance duties on out-of-state sellers meeting certain gross sales and transaction volume thresholds. With the rise of the digital economy, states have lost significant sales tax revenues because they have been unable to tax online/internet sales under the old physical presence nexus standards. Overturning its prior precedents, the Court held that the prior physical presence rule was an “unsound and incorrect” interpretation of the Commerce Clause that has created unfair and unjust marketplace distortions favoring remote sellers and causing states to lose out on enormous amounts of tax revenue. The Court held that the State had established that the vendor had substantial nexus in this case through “extensive virtual presence.”

For more information, copy the following reference and email it back to me:  “Supreme Court Abandons Physical Presence Standard: An In-Depth Look at South Dakota v. Wayfair .”

…The IRS advises a “payroll checkup. The IRS has encouraged taxpayers who have typically itemized their deductions to use the withholding calculator on the IRS’s website to perform a “payroll checkup,” noting that changes made by the Tax Cuts and Jobs Act (TCJA, P.L. 115-97, 12/22/2017) may warrant an adjustment. TCJA made a number of law changes, effective for tax years beginning after 2017 and before 2026, which affect the amount of itemized deductions that can be claimed and whether taxpayers choose to itemize or claim the standard deduction. They include: nearly doubling standard deductions; limiting the deductions for state and local taxes; limiting the deduction for home mortgage interest in certain cases; and eliminating deductions for employee business expenses, tax preparation fees and investment expenses (including investment management fees, safe deposit box fees and investment expenses from pass-through entities). In light of these changes, some individuals who formerly itemized may now find it more beneficial to take the standard deduction, which could affect how much a taxpayer needs to have their employer withhold from their pay. Also, even those who continue to itemize deductions should check their withholding because of TCJA changes. The IRS warned that having too little tax withheld could result in an unexpected tax bill or penalty at tax time in 2019, and also noted that taxpayers who have too much tax withheld may prefer to receive more in their paychecks instead of in the form of a tax refund.

For more information, copy the following reference and email it back to me:  “Itemizers encouraged to check withholding in light of TCJA changes.”

…Tax reform’s effect on vehicle and unreimbursed employee expenses. The IRS has provided updated information to taxpayers and employers about changes from the Tax Cuts and Jobs Act (TCJA, P.L. 115-97, 12/22/2017) affecting vehicle and unreimbursed employee expenses. Shortly before the enactment of the TCJA, the IRS released optional standard mileage rates for 2018, as well as the maximum standard automobile cost that may be used in computing the allowance under a fixed and variable rate (FAVR) plan. However, TCJA made many tax law changes, including those affecting move-related vehicle expenses, unreimbursed employee expenses, and vehicle expensing. The IRS advised taxpayers that TCJA generally suspended the deduction for moving expenses for tax years beginning after 2017 and before 2026, with an exception for certain members of the Armed Forces. Accordingly, no deduction is allowed for use of an automobile as part of a move using the pre-TCJA 18¢ mileage rate. For the same period, TCJA also suspended all miscellaneous itemized deductions that are subject to the 2%-of-adjusted gross income (AGI) floor, including unreimbursed employee travel expenses. Thus, the 54.5¢ business standard mileage rate generally can’t be used to claim an itemized deduction for unreimbursed employee travel expenses (but the 54.5¢ rate still applies for expenses that are deductible in determining AGI, such as for unreimbursed employee travel expenses claimed by reservists and certain state or local government officials). And, for purposes of computing the allowance under a FAVR plan, the maximum standard automobile cost may not exceed $50,000 for passenger automobiles, trucks and vans placed in service after 2017 (up from the pre-TCJA $27,300 for passenger automobiles and $31,000 for trucks and vans).

For more information, copy the following reference and email it back to me: “ IRS updates pre-TCJA guidance on vehicle and unreimbursed employee expenses.”

…Family and medical leave credit. The IRS has provided guidance on the new family and medical leave credit, which was added by the Tax Cuts and Jobs Act (TCJA, P.L. 115-97, 12/22/2017). Under new Code Sec. 45S , for wages paid in tax years beginning in 2018 and 2019, eligible employers can claim a general business credit equal to the applicable percentage (between 12.5% and 25%) of the amount of wages paid to qualifying employees for up to 12 weeks per tax year while the employees are on family and medical leave, if certain requirements are met. For purpose of the credit, family and medical leave includes leave for: the birth of an employee’s child and to care for the child; placement of a child with the employee for adoption or foster care; care for the employee’s spouse, child, or parent who has a serious health condition; a serious health condition that makes the employee unable to perform the functions of his or her position; any qualifying exigency due to an employee’s spouse, child, or parent being on covered active duty (or having been notified of an impending call or order to covered active duty) in the Armed Forces; and care for a service member who is the employee’s spouse, child, parent, or next of kin.

For more information, copy the following reference and email it back to me: “ FAQs provide guidance on employer-paid family and medical leave credit. ”

…Million dollar FBAR penalty. The Supreme Court declined to review a Ninth Circuit decision (U.S. v. Bussell), which, on finding that a taxpayer willfully failed to file a Report of Foreign Bank and Foreign Accounts (FBAR) with regard to her foreign account, let stand a million dollar FBAR penalty. Each U.S. person who has a financial interest in or signature or other authority over any foreign financial accounts, including bank, securities, or other types of financial accounts in a foreign country, if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year, must report that relationship tor that calendar year by filing an FBAR with the Department of the Treasury. Those who willfully fail to file their FBARs on a timely basis can be assessed a penalty of up to the greater of $100,000 (as adjusted for inflation) or 50% of the balance in the unreported bank account for each year they fail to file a required FBAR. The Ninth Circuit rejected a variety of the taxpayer’s arguments, including that the imposition of the penalty violated the U.S. Constitution because the fine was excessive under the Eighth Amendment. The taxpayer argued that the penalty was a punitive forfeiture, grossly disproportional to the gravity of the offense, but the Court held that the assessment was proper because the taxpayer defrauded the government and reduced public revenues.

For more information, copy the following reference and email it back to me:  “Supreme Court lets million dollar FBAR penalty stand.”

…Inflation-adjusted HSA amounts for 2019. The IRS has released the annual inflation-adjusted contribution, deductible, and out-of-pocket expense limits for 2019 for health savings accounts (HSAs). Eligible individuals may, subject to statutory limits, make deductible contributions to an HSA. Employers, as well as other persons (e.g., family members), also may contribute on behalf of an eligible individual. A person is an “eligible individual” if he is covered under a high deductible health plan (HDHP) and is not covered under any other health plan that is not a HDHP, unless the other coverage is permitted insurance (e.g., for worker’s compensation, a specified disease or illness, or providing a fixed payment for hospitalization). For calendar year 2019, the limitation on deductions for an individual with self-only coverage under an HDHP is $3,500 (up from $3,450 for 2018). For calendar year 2019, the limitation on deductions for an individual with family coverage under an HDHP is $7,000 (up from $6,900 for 2018). For calendar year 2019, an HDHP is defined as a health plan with an annual deductible that is not less than $1,350 (same as for 2018) for self-only coverage or $2,700 (same as for 2018) for family coverage, and with respect to which the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,750 (up from $6,650 for 2018) for self-only coverage or $13,500 (up from $13,300 for 2018) for family coverage.

For more information, copy the following reference and email it back to me: “ IRS issues inflation-adjusted health savings account figures for 2019.”

…More returns to be filed electronically. The IRS has issued proposed regulations that would require all information returns, regardless of type, to be taken into account in determining whether a person met the 250-return threshold and thus was required to file the returns electronically. The proposed Regs would also require any person required to file information returns electronically to file corrected information returns electronically, regardless of the number of corrected information returns being filed. Existing Regs provide that the 250-return threshold applies separately to each type of information return and each type of corrected information return filed. Accordingly, under the existing rules, different types of forms are not aggregated for purposes of determining whether the 250-return threshold is satisfied, with the result that fewer taxpayers are required to file electronically. The proposed Regs are proposed to go into effect for returns filed after Dec. 31, 2018.

For more information, copy the following reference and email it back to me:  “Prop regs: all info returns count towards 250-return e-file threshold.”

Conclusion

Careful planning will be an important part of the 2018, 2019 and 2020 Tax Years; it is these transitional years that will allow us to learn the ins and outs of working with the “Tax Cuts and Jobs Act”; it is the most significant tax overhaul since 1988.

Don’t delay you tax planning. The longer you wait, the less likely it is that you’ll be able to achieve the maximum tax benefits afforded by the new law.

Please don’t hesitate to call us with questions or for additional strategies on reducing your tax bill. We’d be glad to set up a planning meeting or assist you in any other way that we can.  As always, I enjoy visiting with my clients and friends!

Very truly yours,

Steve Richardson, CPA

Newsletter from
Steve Richardson & Company, Certified Public Accountants

July 3, 2018

Legal challenges to the Housing Allowance

To Our Clients and Friends:

A Hot Topic

We get questions about Ministerial Housing Allowance multiple times every day.  The Ministerial or Clergy Housing Allowance is authorized by §107 of the Internal Revenue Code (Code).  This allowance has been a part of the Code from the beginning of Income Tax Law in 1913.  The first Rules and Regulations related to the Housing Allowance date to 1916! This is old law.

Important law

It’s important law because it has an impact on a large number of people subject to US Taxation; these people can be working inside the USA or anywhere in the world.  It has an impact on more than the people actually in receipt of a Housing Allowance; employers, church members, board members and contributors to churches and other §501(c)(3) organizations.

Interesting!

Here is one interesting bit of tax law.  A minister who is employed as a minister by a non-church §501(c)(3) not-for-profit organization can have a housing allowance.  Here is another even more interesting bit of tax law: a minister (who is employed as a minister) by a for-profit corporation can also have a housing allowance! Surprised? Most people are surprised to learn that Ford Motor Company actually employs chaplains on its staff and compensate them as ministers. Other company that employ ministers on their staff include General Motors, Coca-Cola, Tyson Foods and literally hundreds of other commercial enterprises of all sizes.

Who can employ a minister?

To recount: churches, non-church §501(c)(3) organization and even commercial companies can employ members of the clergy on their staff and allow them to receive a ministerial housing allowance.  Interesting indeed!

The Ministerial Housing Allowance is under constant legal challenge

One of the more recent challenges to the ministerial housing allowance was on November 22, 2013.

The Legal Challenge

Federal district court judge Barbara Crabb of the District Court for the Western District of Wisconsin struck down the ministerial housing allowance as an unconstitutional preference for religion. [Freedom from Religion Foundation, Inc., v. Lew, 983F. Supp.2d 1051 (W.D.Wis.2013)]. The ruling was in response to a lawsuit brought by the Freedom from Religion Foundation (FFRF) and two of its officers challenging the constitutionality of the housing allowance and the parsonage exclusion.

A Narrow Defense Strategy

The federal government, which defended the housing allowance because it is a federal statute, asked the court to dismiss the lawsuit on the ground that the plaintiffs lacked standing to pursue their claim in federal court.

Judge Crabb ruled in favor of the FFRF saying that the plaintiff (FFRF) did have standing because ‘they would have been denied a housing allowance exclusion had they claimed one on their tax return’.  The government appealed to the US Court of Appeals for the Seventh Circuit in Chicago.

A Narrow Appeal

On November 13, 2014, the appeals court issued its ruling reversing the Wisconsin court’s decision. It concluded that a ‘hypothetical’ situation did not establish any reasonable standing to pursue their challenge to the housing allowance.

The FFRF Response

The FFRF responded to the appeals court’s ruling by designating a housing allowance for two of its officers. The officers reported their allowances as taxable income on their tax returns and thereafter filed amended tax returns seeking a refund of the income taxes paid on the amounts of their designated housing allowances. The FFRF claims that in 2015, the IRS denied the refunds sought by its officers.

Having endeavored to correct the standing problem, the FFRF renewed its legal challenge to the housing allowance in the federal district court in Wisconsin. Agreeing that the FFRF had standing, Judge Crabb struck down the ministerial housing allowance again as an unconstitutional preference for religion. The federal court’s decision regarding the housing allowance is currently being appealed to the Seventh Circuit, which is expected to deliver a decision sometime this year.

How Will the Seventh Circuit Rule?

That is entirely up to the Judges of the Seventh Circuit; we will need to wait and see.

This case is not going away

If the Seventh Circuit again overturns Judge Crabb, which I expect to happen, the FFRF and other groups opposed to the ministerial housing allowance will find time and venue to launch a renewed attack.

If the Seventh Circuit agrees with Judge Crabb’s and determines that the ministerial housing allowance is unconstitutional, legal responses and challenges could put this issue into the hands of the US Supreme Court.  [Note: the US Supreme Court accepts less than 1% of all cases appealed to that level.]

Which way it goes, no one knows.

My only complaint is that The Department of Justice has, again, chosen another narrow basis on which to appeal.  To me, it looks like legal nit-picking.  I would prefer a much more robust appeal where we put the real issues before the court and let them rule; is the ministerial housing allowance constitutional or not.

Be Aware

The ministerial housing allowance is under attack; this will not change or end soon.  The tax implications of losing the housing allowance are significant.

Tax Planning!

Win, lose or draw, there are always tax planning options.  One thing we are considering is a Home Equity Allowance.  Not a perfect solution but a good thought.

Newsletter from
Steve Richardson & Company, Certified Public Accountants

June 27, 2018

Tax Cuts and Jobs Act Planning Letter for Business Clients

To Our Clients and Friends:

Over the past six months, we have been trying to digest the many tax law changes brought by the Tax Cuts and Jobs Act (TCJA). From a significantly lower corporate tax rate to a new deduction for qualified business income, the TCJA brings a host of planning opportunities for your business. This letter presents some tax planning ideas under the TCJA for you to think about this summer while there’s sufficient time left in 2018 to take tax-saving actions.

The Obvious Requirement to have any Tax Planning Strategy

Unless you are making profit in business, or have excellent prospect to make a business profit in the future, there is no Tax Planning Strategy appropriate for you!  Losing money is not tax planning!  Making a profit opens many doors; one of these doors is the ability to develop a tax planning strategy.

Maximize Your Qualified Business Income Deduction

You may have heard a lot of talk in the news about a new deduction for “pass-through” income, but it’s actually available for qualified business income from a sole proprietorship (including a farm), as well as from pass-through entities such as partnerships, LLCs, and S corporations. Under the TCJA, business owners may deduct up to 20% of their qualified business income; however, the deduction is subject to various rules and limitations.

Although official guidance is lacking on this new deduction, there are some planning strategies that can be considered now. For example, there are ways to adjust your business’s W-2 wages to maximize your qualified business income deduction. Also, it may be helpful to convert your independent contractors to employees, assuming the benefit of the deduction outweighs the increased payroll tax burden. Other planning strategies include investing in short-lived depreciable assets, restructuring the business, and leasing or selling property between businesses. We will work with you to determine which strategies produce the best outcome.

Rethink Entity Choice

The TCJA makes major changes to the choice of entity decision. Because C corporations are now taxed at a flat rate of 21% (as opposed to a top rate of 35% under prior law), many business owners wonder whether they should structure or restructure their business operations as a C corporation.

Generally speaking, for most small businesses, I recommend against C corporations.

For one thing, the top individual tax rate also fell, from 39.6% to 37%. Also, the new qualified business income deduction isn’t available for C corporations or their shareholders. There are other factors to consider as well, such as self-employment and state taxes.

It’s also important to note that C corporations are subject to double taxation, meaning that corporate income is taxed once at the entity level and again when it’s distributed to shareholders as dividends. This can be avoided if the corporation retains all profits to finance growth. However, this opens the door to the accumulated earnings tax (or personal holding company tax) if profits accumulate beyond the reasonable needs of the business.

Although C corporations are now more attractive thanks to the lower rate, it may make more sense to continue operating as a pass-through entity. This is particularly true if (1) you can claim the full 20% deduction for qualified business income and (2) you plan to exit the business in a relatively short period of time. Generally, it’s risky to hold significant assets that are likely to go up in value (like real estate) in a C corporation. If the assets are sold for substantial gains, it may be impossible to get the profits out of the corporation without double taxation.

As you can see, the choice of entity decision is complicated, but we’re here to help. We would be happy to analyze your particular circumstances to see if a C corporation is right for you.

Acquire Assets

Thanks to the TCJA, this is a great time to acquire business assets. Your business may be able to take advantage of very generous Section 179 deduction rules. Under these rules, businesses can elect to write off the entire cost of qualifying property rather than recovering it through depreciation. The maximum amount that can be expensed this year is $1 million (up from $510,000 for 2017). This amount is reduced (but not below zero) by the amount by which the cost of qualifying property exceeds $2.5 million (up from $2.03 million for 2017).

There’s more good news: the Section 179 deduction is now available for certain tangible personal property used predominantly to furnish lodging and certain improvements to nonresidential real property (roofs, HVAC, fire protection systems, alarm systems, and security systems).  This is new!

Note: Watch out if your business is already expected to have a tax loss for the year (or close) before considering any Section 179 deduction. This is because:

You can’t claim a Section 179 write-off that would create or increase an overall business tax loss.

Above and beyond the Section 179 deduction, your business also can claim first-year bonus depreciation. The TCJA establishes a 100% first-year deduction for qualified property acquired and placed in service after 9/27/17 and before 1/1/23 (1/1/24 for certain property with longer production periods).

Unlike under prior law, this provision applies to new and used property.

The bonus percentage will phase down for years 2023 through 2026. Note that 100% bonus depreciation deductions can create or increase a Net Operating Loss (NOL) for your business’s 2018 tax year.

NOLs

NOL is a common tax acronym that means a Net Operating Loss. Under the TCJA, the NOL generally can’t be carried back to an earlier tax year. However, it can be carried forward indefinitely. Unfortunately, NOLs arising in tax years beginning after 2017 can’t reduce taxable income by more than 80%.

Given these generous provisions, your asset acquisition plan is more important than ever. If you’re planning on acquiring a business, we suggest you pursue an asset acquisition rather than a stock deal. Also, there may be reasons to elect out of bonus deprecation or use different expensing techniques in individual tax years. We can help with that.

Adopt a More Favorable Accounting Method

The cash method of accounting, which allows you to recognize sales when cash is received, is attractive to many small businesses due to its simplicity. For tax years beginning after 2017, the ability to use the cash method is greatly expanded. Any entity (other than a tax shelter) with three-year average annual gross receipts of $25 million or less can use the cash method regardless of whether the purchase, production, or sale of merchandise is an income-producing factor. Likewise, C corporations and partnerships with C corporation partners can use the cash method if they meet the $25 million gross receipts test.

Under pre-TCJA law, the cash method of tax accounting was not allowed to many taxpayers.  That has changed dramatically!

Now that the rules have changed, your business may be eligible to adopt the cash method of accounting. Since the $25 million gross receipts test is made on a year-by-year basis, we can monitor whether your average annual gross receipts fall below the threshold. If they do, we can discuss the pros and cons of changing your accounting method. Assuming a change would be beneficial, we can file the appropriate paperwork with the IRS to change your method of accounting.

Personally, as a CPA, I like the cash method of accounting.

Determine Eligibility for Credit for Employer-paid Family and Medical Leave

The TCJA establishes a new credit for employer-paid family and medical leave. The credit is for tax years beginning in 2018 and 2019 and is equal to 12.5% of the amount of wages paid to qualifying employees on family and medical leave. However, the employer must pay at least 50% of the wages normally paid to the employee. The credit is increased by 0.25 percentage points (but not above 25%) for each percent by which the payment rate exceeds 50%. This could be a valuable incentive for your business, so let’s discuss at your earliest convenience.

Watch out for New Business Interest Expense Limit

Regardless of its form, every business will be subject to a net interest expense disallowance. Starting in 2018, net interest expense in excess of 30% of your business’s adjusted taxable income will be disallowed. However, your business won’t be subject to this rule if its average annual gross receipts for the prior three years is $25 million or less. Also, real property trades or businesses can choose to have the rule not apply if they elect the Alternative Depreciation System (ADS) for real property used in their trade or business. Since ADS is a slower way to depreciate property, real property trades or businesses will need to look at the trade-off between currently deducting their business interest expense and deferring depreciation expense. If you find yourself in this predicament, we can model out both scenarios to determine the best course of action.

Consider Qualified Equity Grants

The TCJA provides a new tax election for equity-based compensation from private employers. Specifically, the election covers stock received in connection with the exercise of an option or in settlement of a Restricted Stock Unit (RSU). From a tax perspective, many employees struggle with these forms of compensation because they don’t have the ability to liquidate their shares to pay their tax bill. This new election provides some relief.

Starting with options exercised or RSUs settled after 2017, qualified employees of eligible private companies may elect to defer income from those instruments for up to five years. To take advantage of this election, various requirements must be met. This includes having a written plan under which at least 80% of full-time employees are granted stock options or RSUs.

If you’re interested in offering qualified equity grants to your employees, we can determine if you’re an eligible corporation under this new provision. We can also assist you and your legal counsel in preparing the necessary documentation. Please contact us if you have questions or want more information.

I’m still exploring how qualified equity grants may impact professional organizations such as attorneys, physicians, engineers, architects and others.

Monitor State Response to Tax Reform

Our CPA Firm has active clients in 35 states; state tax issues are a daily reality in our office!

States react differently to changes to federal tax law. For example, some states automatically conform to federal tax law as soon as legislation is passed. Other states require their legislatures to adopt federal tax law as of a fixed date. This generally occurs on an annual basis. There are some states, however, that pick and choose which federal provisions to adopt. Because of this, your state income tax rules may be drastically different than the federal income tax rules. For example, some states may not adopt the new 100% bonus depreciation rules or the NOL rules. We have monitored your state’s response to the TCJA and will help you minimize your state income tax bill.

Set up a Qualified Small Business Corporation

As we mentioned earlier, the TCJA establishes a flat 21% federal income tax rate for C corporations, including Qualified Small Business Corporations (QSBCs). A QSBC is generally a domestic C corporation whose assets don’t exceed $50 million. In addition, 80% or more of the corporation’s assets must be used in the active conduct of a qualified business. There are other requirements as well, but we can fill in the details if you decide a QSBC is right for you.

By far, the biggest benefit of owning QSBC stock is the ability to shelter 100% of the gain from a stock sale. A more-than-five-year holding period requirement must be met to claim this exclusion. Another major benefit of owning QSBC stock is the ability to roll over (defer) the gain on a stock sale to the extent you acquire replacement QSBC stock within 60 days of the original sale. You must have held the QSBC stock for more than six months to take advantage of this break. Once the gain is rolled over, you must reduce the tax basis of the replacement stock by the amount of gain deferred. However, if the replacement stock is QSBC stock when it’s sold, the applicable gain exclusion break is available if the more-than-five-year holding period requirement is met.

The 100% gain exclusion and rollover breaks combined with the flat 21% corporate tax rate can make operating a newly formed business as a QSBC more tax-efficient than operating it as a pass-through entity (sole proprietorship, partnership, LLC, or S corporation). That is big news because pass-through entities have traditionally been the first choice for most small and medium-sized businesses. However, not all start-up businesses will qualify for QSBC status.

A Qualified Small Business Corporations (QSBCs) is not out of the questions for some small businesses.  Essentially, a corporation can elect to become a QSBC if it is in a business other than one involving personal services; banking, insurance, financing, leasing, or investing; farming; mining; or operating a hotel, motel, or restaurant. Essentially, then, permissible businesses include manufacturing, retailing, technology, and wholesaling.  There are circumstances among our clients where a QSBC election may make sense.

Conclusion

As we said at the beginning, this letter is to get you thinking about tax planning moves for the rest of the year. This year is definitely unique given the numerous tax law changes brought by the TCJA. Even with uncertainty about some of the TCJA’s provisions, there are things you can do to improve your business’s situation. Please don’t hesitate to contact us if you want more details or would like to schedule a tax planning session.

I love my job! Thanks to all of my clients and friends who have allowed me to make a good living by doing what I love to do!

Thanks You!

Steve Richardson, CPA