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Al's column: Tax breaks—What you need to know

April 16/23, 2018: Volume 33, Issue 22

By Bart Basi

 

If you’ve managed to secure an extension to file your 2017 taxes, there are some things you need to know. If you thought the Tax Cuts and Jobs Act (TCJA) signed into law Dec. 22, 2017, was the final determination on tax matters for the future, you were wrong. Earlier this year, Congress approved the Bipartisan Budget Act, which contains a number of tax provisions and extensions of more than 30 expired tax breaks. While the majority of tax relief in the legislation applies only to the 2017 tax year, the retroactive changes will have a large impact on the current filing season.

Additionally, a number of new provisions within the Bipartisan Budget Act modified provisions passed under the TCJA. The modifications include new mandated tax forms for seniors filing taxes as well as excise taxes on investment income regarding private colleges and tuition. The IRS has recognized the extensions and modifications will have a direct impact this filing season.

With more than 30 extensions to previously expired tax breaks, it’s important that business owners as well as individual filers work with a knowledgeable professional to minimize tax liabilities. The TCJA is essentially 500-plus pages of dense tax and accounting material; the Bipartisan Budget Act is another 650-plus pages of legalese. Understanding the material can be confusing. However, it’s vital to take advantage of what is offered by the IRS to maximize your dollars by minimizing your tax liabilities.

New game, new rules
December 2017 marked the beginning of a new tax era. The TCJA, as the Trump Administration has so often stated, is the first major tax reform since the 1980s. Many businesses are aware of major corporate tax changes, but the TCJA may also change the way individuals file their taxes, not only this year but through 2025.

One major aspect of the new tax law is an allowance for pass-through entities to claim a 20% “below-the-line” deduction for the owner’s qualified business income. However, the 20% deduction is subject to limitations that are currently being interpreted as to their application. The TCJA has labeled a “specified service trade or business involving the performance of services in the fields of health, law, consulting, athletics, financial services and brokerage services” as services that don’t qualify for the 20% deduction.

Here are some other examples of how the new TCJA may affect you:

Home mortgage interest. This is a frequently used deduction that allows filers to deduct the amount of interest paid on their mortgage. After the TCJA changes, the deduction is now limited to claiming the home mortgage interest only for interest paid or accrued on the acquisition debt during those years.

Alimony/separate maintenance. Previously, anyone who paid alimony or separate maintenance payments were allowed to claim them on their federal taxes and were allowed a deduction.  This deduction has been repealed.

Moving expenses. Everyone moves at some point in their life, typically many times. For the years 2018-2025, the above-the-line tax deduction for this item has been repealed. However, special rules apply for those in the United States Military.

These are just a few of the changes under the new tax code. Contact the Center for Financial, Legal & Tax Planning at 618.997.3436, or via email at melissa@taxplanning.com, for clarification or to schedule a consultation.

Bart Basi is an attorney, a certified public accountant and the president of the Center for Financial, Legal & Tax Planning. He is an in-demand speaker and writer on financial issues impacting various businesses and industries.

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Financial: How changes in tax law will affect dealers

February 5/12, 2018: Volume 33, Issue 17

By Bart Basi

 

(Second of two parts)

In my previous column, I broached the subject of the passage of the Tax Cuts and Jobs Act—also referred to as the Tax Reform Bill—and what the changes mean for small businesses and retailers in the floor covering space. In this installment, I will delve deeper into the benefits of the law relative to how a business is structured.

One of the biggest changes in the law relate to Subchapter S corporations. (Most of my clients in the flooring space are Subchapter S.) If a business is registered as a Subchapter S corporation or a partnership 20% of an income calculation (not 20% of profits) is not subject to tax.

What that means is, if a large company is a Subchapter S corporation, then its taxes essentially decrease from 35% to approximately 29.7%. (Note: This is the maximum rate—it could actually be lower than 29% but it will never be less than 21%.) It’s still higher than a C corporation (21%), but it does help small businesses that are Subchapter S corporations or partnerships that want to stay as they are.

But what happens if you’re not classified as a Subchapter S corporation or partnership? For example, take limited liability corporations, or LLCs, which, are still very popular with people mainly because there is no tax rate applicable in the U.S. for LLCs. Accountants who advise business owners who operate under this structure ask that owners make a choice between paying taxes as an individual proprietor of a Schedule C, a Subchapter S, partnership or C corporation. In other words, the federal government states that if you are an LLC, the accountant is supposed to check a box that essentially says, ‘We are a limited liability company but we’re going to pay taxes as…” At which point the owner of the business files the appropriate tax return. Remember: There’s no such thing as a tax return for an LLC.

But it’s important that small businesses operating as an LLC remember they cannot use anything other than the letters “LLC” when referring to their company. Also, the letters LLC must appear on every single document in order to enjoy the protection it affords. The law states that if you operate as an LLC, then you must notify every single person you deal with—right down to the stationery, business cards, invoices and even truck signage you use. Otherwise, a third party can sue you personally because you haven’t shown that person—as a customer—that you’re an LLC. Note: A lot of people in the flooring business use a “dba” (or doing business as) designation. Warning: LLCs cannot use dbas; they will lose the legal protection of the LLC if they use the dba. Many flooring retailers who operate under this classification are not aware of the rule.

It’s also important to note some of the laws regarding LLCs are changing; specifically, a proprietor of an LLC can longer have an individual listed as an owner. There must be two people on file as owning the company, or else the government will claim it’s a de facto company and therefore defaults the company to a Schedule C on the tax return. This means everything will be taxed, including social security.

LLCs are good as long as people understand three things: 1) make sure the accountant knows which tax return you intend to file, i.e., “check the box”; 2) do not use a dba; and 3) make sure the state in which you are incorporated allows one person to own an LLC and still be a legitimate company.

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Financial: Tax reform: Information dealers need to know

January 22/29, 2018: Volume 33, Issue 16

By Bart Basi

 

(First of two parts)

The passage of the Tax Cuts and Jobs Act, a.k.a the Tax Reform Bill, has a lot of flooring dealers scratching their heads. The document itself is more than 600 pages, all single spaces, and some of the words you can’t even decipher. The most important thing for retailers to consider regarding the new changes in the law is the type of business—or entity structure—under which they operate. Is the business an LLC or Subchapter S? A partnership or individual proprietorship? Or is it a “C” corporation? There are different forms of business; as such, the tax law changes depending upon how the retailer set up the business.

First off, the worst thing for a business is to not be incorporated, meaning the owner lists the business on a schedule C on his or her personal income tax return. Under this structure, all of the profits from the business will be subject to the highest personal rate applicable. Right now, that could be as high as 70%, depending on the owner’s other sources of income and how much money he’s making. Second, when he files a business on his personal income tax return as an un-incorporated company, the entire profit is subject to social security tax. So in addition to paying income tax on all of the income, the owner must pay an additional 15.3% on social security.

For those who don’t understand the nuances of this tax reform bill, it might seem, in some respects, that it could be a burden on business. The truth is it can be a benefit, but it depends on how a business is structured. For example, if a dealer is making more than $50,000 a year in profit, the best thing the owner can do is form a “C” corporation. Under this structure, the profits are taxed at a flat rate of 21%, and the social security taxes are all deducted. In this case, the owner has no personal liability.

Through the Tax Cuts and Jobs Act, the government is encouraging companies to become C corporations. As a result of the changes, all C corporations in the U.S. will pay lower taxes than any other form of business.

A new threshold
The ultimate tax benefit for retailers is not only contingent upon the specific classification but also the estimated net income. For example, if the business makes more than $50,000 (assuming, of course, the business did not report a loss for the year), the 21% tax rate is the lowest rate it can pay. That’s lower than the capital gains rate (23.8%).

If you’re a small business, and you’re making less than $50,000 in profit, the C corporation taxes have gone up 6% (it used to be 15%). Now everything is taxed at 21%. So if you’re a small company, and you’re making less than $50,000 a year profit—or if you’re showing a loss—then you want to be registered as a Subchapter S corporation. This means the losses can be deducted on the owner’s personal income tax return.

Another important point to remember: If a business is registered as a Subchapter S corporation or a partnership, and is making money, then 20% of an “income calculation” (not 20% of profits) is not subject to tax. For simplicity’s sake: If a company makes $100 of income allocable to the 20% calculation, then that means the owner will only pay taxes on $80, not $100.

 

Bart Basi is an attorney, a certified public accountant and the president of the Center for Financial, Legal & Tax Planning. He is and in-demand speaker and writer on financial issues impacting various businesses and industries.

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Financial: The Family Limited Partnership made easy

January 19/26, 2015; Volume 28/Number 15

By Bart Basi

Screen Shot 2015-01-19 at 4.14.08 PMMany people want to enrich their families with wealth and possessions, but face losing control of the assets once given and running into estate tax issues when assets are appreciated. The Family Limited Partnership (FLP) is a solution to this problem.

An FLP is a device that allows the grantor to fund the device, transfer value to heirs, keep control over the assets and reduce gift and estate taxes. In practice, an FLP is similar to a trust in that assets are transferred for the current and future benefit of another while allowing the grantor to keep control. The FLP differs from a trust in that it provides for additional tax and nontax advantages while offering potential unlimited life, operating after the grantor’s death.

An FLP is simply a Limited Partnership formed under state statute, owned by family members. The parent retains 1% to 2% interest as the General Partner. The children are then granted up to 98% interest as Limited Partners.

While a typical partnership can be formed with no written agreement, the Limited Partnership requires that it be formed according to state statute, otherwise the IRS is free to scrutinize the FLP as a tax avoidance device.

Nontax benefits

Consolidation of management is a benefit of the FLP structure. Instead of setting up separate trusts, bank accounts and brokerage accounts, the FLP uses one central account. Unifying the investment provides longevity as long as it can be operated post death by a family member.

The FLP also provides the benefit of creditor protection. Assets involved in businesses, especially a closely held business owned by a minority non-voting shareholder, are often not attractive to creditors or potential ex-spouses.

Tax benefits

When valuing an FLP, houses, cars and antiques must be valued by a qualified appraiser who will appraise the business using a variety of methods that may be advantageous to your estate tax position.

Along with an appraisal, the professional appraiser can assign discounts for lack of marketability and lack of control. For an FLP, combined discounts for lack of control and marketability can total from 20% to 40%.

Discounts

The first potential discount that can be taken when the FLP is appraised is the control discount. Since the limited partners have largely abbreviated rights to begin with and lack of any control, their interest in the FLP is discounted to reflect the lack of control that they do not possess. The second discount that can be taken is one for lack of marketability.

FLP guidelines

  • List a legitimate business purpose such as consolidation of family asset management or lowering administrative costs of family assets.
  • Do not transfer the donor’s home into the FLP, unless the home is vacated and treated as a rental property.
  • Operate the FLP in accordance with legal requirements.
  • Do not commingle assets between the partnership and personal assets. First, bank accounts should be in the name of the FLP. Business records, financial and nonfinancial, should be kept separately from personal assets.
  • Transfers should conform to a business plan over time, not in contemplation of death.
  • Make sure the donor has sufficient personal assets to make a living separate from the FLP.
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Financial: Why you should get your business valued

December 22/29, 2014; Volume 28/Number 13

By Bart Basi

Screen Shot 2015-01-16 at 11.01.45 AMKnowing the value of a business is important to anyone who has an ownership interest in a company. Valuing a business is often overlooked until the last minute. At this point, the business owner realizes how vital a valuation is for making important business decisions. Following are some of the major reasons for getting your business appraised.

1. Determine gift and estate taxes

When the owner of a business transfers an interest in a company, either as a gift or at death, the IRS requires a valuation to be done in order to access the proper estate and gift taxes. The objective in the valuation process is to minimize the tax burden.

2. Fair and enforceable buy-sell agreements

Buy-sell agreements are used in businesses to provide for liquidating the interest of a withdrawing or deceased shareholder. Under this type of an agreement, it is important for both parties to receive a fair and equitable value for their interest in the business.

3. Buying and selling shares in a company

Many times the company or a stockholder may wish to buy or sell some shares. A sound valuation can ensure a semblance of fairness to all parties involved.

 4. Implementing an Employee Stock Ownership Plan (ESOP)

An ESOP is a form of retirement plan that enables employees to own an interest in a company. This type of ownership is usually established through investing the company’s stock into an Employee Stock Ownership Trust (ESOT). When an employee retires or dies, that person’s interest is either paid or transferred to his or her descendants. The value of the stock must be determined annually for these purposes.

5. When a shareholder wants to dissolve shares in the company

When a shareholder wants to leave or “disassociate” themselves from the company, the ability to arrive at an equitable price is vital in resolving the issue.

6. When a divorce occurs

In the event of a divorce, the value of the business itself is required for a property settlement. Sometimes both parties will agree to an independent appraiser. More commonly, however, the parties will each hire their own experts and the matter will either be settled or decided in a court of law.

7. Mergers or acquisitions

When a company merges with another, the shareholders of the merged company must be paid either cash or stock of the acquiring company. In this situation it is essential for both companies to be valued.

8. Compensatory damages cases

In lawsuits involving breach of contract, loss of business opportunity, antitrust, condemnations or other legal issues, the business appraiser must provide expert testimony to aid the court in reaching a reasonable value to justify any damage awards.

 

If you wait to determine the worth of a business interest, you put yourself at a major disadvantage. Knowing the worth of your company can facilitate business decisions, minimize tax burdens and establish a fair value for many purposes, such as a divorce settlement or buyout.

 

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Financial: S corporation or LLC? Think about it

Nov. 4/11 2013; Volume 27/number 14

By Bart Basi

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Bart Basi

Today the choice of business structure is not so easy. Generally, the use of sole proprietorships and general partnerships is very limited to home-based businesses. Most businesspeople have the choice between operating as a limited liability company (LLC) or as an S corporation. When deciding which entity to operate under, the business owner must take a lot into consideration. Continue reading Financial: S corporation or LLC? Think about it

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Financial: Disaster planning

Sept. 16/23 2013; Volume 27/number 11

By Bart Basi

Basi,-BartColorUnfortunately, businesses in this country and all over the world face a gauntlet of peril. From rising fuel and commodity prices to clients filing bankruptcy on their payables to those not paying due to adverse credit climates, maintaining a business is a challenging endeavor for any line of work. However, there are threats even beyond the day-to-day and year-to-year challenges. Continue reading Financial: Disaster planning

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Financial: Retroactive tax laws

By Bart Basi

Volume 26/Number 26; May 13/20, 2013

In January, Congress enacted the Taxpayer Relief Act of 2012. Within the law, over 100 changes were made to the Internal Revenue Code. Many of the laws were made retroactive to January 2012.

Here is a partial discussion of the more commonly used credits and deductions that have been made retroactive to Jan. 1, 2012. Continue reading Financial: Retroactive tax laws