berkowitz pollack brant advisors and accountants

Businesses Must Use New Withholding Rates beginning in February by Cherry Laufenberg, CPA

Posted on January 31, 2018 by Cherry Laufenberg

The IRS on Jan. 11, 2018, released new guidelines to help businesses and payroll-service providers adjust employees’ withholding calculations to reflect the new income tax rates and provisions of the Tax Cuts and Jobs Act. Businesses must apply the new withholding tables to workers’ paychecks by Feb. 15, 2018.

The new tables rely on the information that workers have already provided to their employers in existing Forms W-4, including the number of withholding allowance they claims. As a result, employees will not be required to complete new W-4s in 2018. However, it is recommended that workers check their withholding status on paychecks they receive after February 15 to ensure that the appropriate amount of income taxes are taken out of their pay each pay period.

While the payroll withholding adjustments under the new tax law will result in an increase in workers’ take-home pay, it does not mean that workers will owe less in taxes at the end of 2018. It is advisable that businesses and individual taxpayers meet with experienced accountants to guide them through the provisions of the new tax law.

The advisors and accountants with Berkowitz Pollack Brant work closely with businesses of all sizes and across virtually all industries to implement strategies intended to minimize tax liabilities, maintain regulatory compliance, improve efficiencies and achieve long-term growth goals.

 

About the Author: Cherry Laufenberg, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where she works with corporations, pass-through entities, trusts and foreign entities.  She can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.

Tax Reform Seminar Materials

Posted on January 25, 2018 by Joseph Saka

On January 18, 2018, several of our tax and consulting leaders presented an overview of the Tax Cuts and Job Act and offered thoughts on strategies for high-net-worth individuals, families, entrepreneurs and businesses. More than 300 clients and friends attended the programs and many have requested copies of the slides used by our presenters.

For convenience, we broke them into segments.

Tax Reform – Domestic High-Net-Worth Jan. 18, 2018

Tax Reform – Real Estate Companies Jan 18, 2018

Tax Reform- Pass-Thru Entities Jan 18, 2018

Tax Reform – Corporate and Business Deductions Jan 18, 2018

Tax Reform – International Outbound – Jan 18, 2018

Tax Reform – International Inbound Jan 18 2018

 

 

(C) Berkowitz Pollack Brant.

Information in the presentations is subject to change based on further interpretation of the law and guidance issued by the Internal Revenue Service.

 

 

 

 

Tax Reform Brings Favorable but Complicated Treatment of Pass-Through Business Income by Thomas L. Smitha, JD, CPA

Posted on January 21, 2018 by Thomas Smitha

While the Tax Cuts and Jobs Act (TCJA) reduces the corporate tax rate significantly from 35 percent to a flat 21 percent, the tax rate on income earned by many pass-through entities organized as LLCs, partnerships, S corporations, or sole proprietorships is also reduced albeit in a more complicated manner.  According to the Brookings Institute, approximately 95 percent of small businesses are organized as pass-through entities, so the impact of the new pass-through tax rate reduction is important.

Under the TCJA, for tax years beginning on Jan. 1, 2018, and before Jan. 1, 2026, owners of qualifying pass-through entities may, subject to certain limitations, deduct at the individual owner level, up to 20 percent of the U.S.-source qualified business income (QBI) that passes from their businesses through to their personal income tax returns. QBI is a new tax term defined as ordinary passive or active income earned from a trade or business less ordinary deductions. QBI also includes qualified dividends received from REITs, qualified cooperative dividends, qualified income from publicly traded partnerships, and income generated from rental property or from trusts and estates with interests in qualifying pass-through entities. Excluded from the QBI deduction is foreign income, investment income, and wages that owners/partners earn as employees of those businesses.

When individual taxpayers qualify to claim the full 20 percent deduction on QBI, the remaining pass-through income they report on their individual income tax returns will be subject to a top effective tax rate of 29.6 percent. This cap is based on the TCJA’s new top individual income tax rate of 37 percent applied to 80 percent of an entity’s QBI. While this is quite an improvement from the top rate of 39.6 percent that was in effect prior to the TCJA, the new reduced rate for pass-through income is subject to a myriad of complex calculations and phase-out rules that taxpayers must plan for carefully.

Limitations Based on Income and Wage Thresholds

To qualify for the full 20 percent QBI deduction, business owners’ total taxable income (before the QBI deduction) must be at or below $157,500 for individual taxpayers or $315,000 for married taxpayers filing joint returns. When a business owner’s taxable income exceeds these thresholds and the pass-through entity is not a specified service business, the QBI deduction will be limited, based on the business’s W-2 wages and capital investments.

More specifically, the QBI deduction for individuals with taxable incomes above these thresholds is limited to:

  • The lesser of 20 percent of QBI, or
  • The greater of:
  • 50 percent of the business’s W-2 wages; or
  • 25% percent of W-2 wages plus an additional 2.5 percent of the unadjusted basis (purchase price) of qualifying tangible depreciable property that generates trade or business income, including buildings, furniture, fixtures and equipment.

With this in mind, owners of pass-through businesses that pay large sums of employee W-2 wages may be able to take a larger QBI deduction than owners of businesses that pay less wages or have fewer W-2 employees. The same is true for owners of businesses with significant investment in tangible assets, such as real estate and equipment, who may be in a better position to maximize their QBI deduction than entities that are not as capital intensive.

As a result of these new rules, qualifying pass-through businesses should plan and project their future taxable incomes at both the entity and individual owner levels while considering the pros and cons of their entity choice. In some instances, it may make sense for a pass-through business to convert to a C corporation and take advantage of the new 21 percent corporate tax rate. Alternatively, business owners may maximize their QBI deductions when they increase their capital investments and buy depreciable property that they previously leased, or when they hire more employees to increase their W-2 wage base, rather than relying on independent contractors.

Treatment of Professional Service Businesses

The law limits the preferential treatment of pass-through business income when it is earned through 1) a “specified service trade or business” in which the principal business assets are the skills and/or reputation of one or more of the owners or employees, or 2) the trade or business of performing services as an employee.  More specifically, the law references businesses that involve the delivery of services in the fields of medical care (i.e., physicians, dentists, nurses), legal counsel, accounting and tax counsel, actuarial sciences, performing arts, consulting, athletics, financial services, and financial brokerage services. Due to some last-minute law changes, architectural and engineering services were eliminated from the “specified service trade or business” treatment.

In general, the full 20 percent QBI deduction is available when an owner’s taxable income, including specified service business income but excluding the QBI deduction, is less than $157,500 for individuals or less than $315,000 for married couples filing joint tax returns. When the owner’s taxable income exceeds these ceilings, the 20 percent deduction is gradually phased out, and the owner may receive a reduced QBI deduction. Once taxable income reaches $207,000 for single filers, or $415,000 for joint filers, the QBI deduction for specified service business pass-through income is fully phased out, and the business owner receives no QBI deduction for that pass-through business. To the extent the QBI deduction is limited or eliminated, pass-through business owners will be taxed at their individual rates on their pass-through income, which the TCJA maxes out at 37 percent for individual taxpayers with taxable income of $500,000 or more, or $600,000 or more for married couples filing jointly.

As a result of these specified service businesses restrictions, medical and dental practices, law firms, accounting firms, and other entities whose services include “consulting” or whose primary assets are the skills and reputation of one or more owners or employees, should carefully consider their current structures and project future tax liabilities and potential savings they may yield by restructuring as C corporations. For some entities, such as those that reinvest profits back into the businesses rather than paying dividends to their owners, a timely conversion to a C corporation may allow them to take advantage of the preferable 21 percent tax rate on corporate profits.

Alternatively, specified service business owners may consider separating out each income-generating aspect of their business operations under different structures. For example, a doctor may form a separate legal entity to hold his or her ownership of an office building or surgical center. This will effectively remove revenue generated from real estate assets from the physician’s service income and keep service income below the legislative limits. In addition, owners of specified service business who file joint tax returns with their spouses may instead consider whether electing married filing separately status might increase their QBI deduction.

Other Considerations

The new flow-through deduction rules and QBI calculations incorporate other less common income and loss sources, such as the carryover of qualified business losses, income from qualified REIT dividends, publicly traded partnerships income and losses, and capital gains.  While not addressed in this article, taxpayers with flow-through businesses should comprehensively address all QBI factors to ensure an accurate QBI deduction.

Unlike many of the business-related provisions contained in the Tax Cuts and Jobs Act, the deduction of pass-through business income is temporary.  Moreover, the future political climate, including the 2020 elections, may shift the power in Washington, D.C., away from the Republicans and result in a repeal of all or some parts of the TCJA before the Dec. 31, 2025 expiration date.

In light of these facts and the complexity of interpreting the QBI rules for pass-through businesses, it is critical that entrepreneurs meet with their accountants and tax advisors during the first half of 2018 to properly plan for these new laws and optimize their tax savings without incurring undue risks or derailing their business and financial goals. The best course of action will depend on each taxpayer’s unique facts and circumstances.

About the Author: Thomas L. Smitha, JD, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where he provides accounting and consulting services, as well as tax planning and tax structuring counsel to private and publicly held companies. He can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.

 

What Does Tax Reform Mean for Individual Taxpayers? by Tony Gutierrez, CPA

Posted on January 20, 2018 by Anthony Gutierrez

According to the Tax Policy Center, the Tax Cuts and Jobs Act (TCJA) will result in reduced tax liabilities for 95 percent of all taxpayers across all income levels in 2018. High-income earners may have the most to gain temporarily with a larger average tax cut as a percentage of their after-tax income, at least for the next eight years. In its current state, the law calls for many of the provisions affecting individuals to sunset at the end of 2025. However, it is important for individuals to recognize that the entirety of the legislation is subject to modification as the winds of political power change during a period of time in which there will be two presidential election cycles.

With these factors in mind, families must tread carefully. Under the guidance of experienced advisors, families will find opportunities to maximize the law’s temporary benefits while keeping an eye on the future and preparing their wealth and estate plans for a broad range of possibilities.

Tax Rates

Under the TCJA, almost all taxpayers will receive a reduction in their marginal income tax rate, which maxes out in 2018 at 37 percent on taxable income over $500,000 for individual filers and $600,000 for married couples filing jointly. In 2017, the top rate was 39.6 percent on taxable income exceeding $418,400 for single filers and $470,700 for married couples filing jointly.

Income Tax Deductions

On paper, it appears that the new tax code is unfavorable in terms of deductions and credits it allows taxpayers to claim to reduce their taxable income. For example, between 2018 through 2025, taxpayers may no longer claim deductions for interest on home equity loans or miscellaneous itemized expenses for fees paid to lawyers, accountants and investment advisors. The law also eliminates deductions for alimony paid to a former spouse when a separation agreement or final divorce decree is entered into after Dec. 31, 2018, and it limits the deductibility of personal casualty losses to only property located in a presidentially declared disaster area.

Additional deduction limitations that have been receiving a lot of media attention include the $10,000 cap on state and local tax payments and the limit on mortgage interest deductions for new mortgages beginning in 2018.

On the positive front, the new law nearly doubles the standard deduction to $12,000 for individuals and $24,000 for married couples filing joint returns. In addition, taxpayers who elect to itemize deductions will no longer be restricted to a 3 percent of adjusted gross income (AGI) limitation.  In fact, the new law also increases to 60 percent of AGI the amount of deductible cash contributions taxpayers may give to charity. This provides high-net-worth families with the ability to leave behind a lasting legacy and give substantial sums to charitable organizations.

Estate and Gift Tax

Congressional republicans who called for eliminating the estate tax lost their battle during the very brief negotiations over tax reform. However, under the final legislation, only a small percentage of ultra-high-net-worth Americans will have to worry about the estate tax for the next eight years. Beginning in 2018, the estate and gift tax exemptions double and allow individuals to avoid taxes on assets of $11.2 million or less for individuals or $22.4 million or less for married couples filing joint tax returns. Estates valued above these thresholds will be subject to a 40 percent tax. The exemption is indexed with inflation but will revert to its pre-TCJA levels in 2026.

Even with the significant increase in the estate and gift tax exemption, it is critical that families plan carefully under the guidance of advisors who are well-versed in the tax code and the tools and strategies available to preserve wealth for multiple generations.

Other Provisions Affecting Families with Children

The TCJA introduces a new use for 529 college savings plans, for which families who fund these vehicles may take annual tax-free distributions of up to $10,000 through 2025 to pay for their children’s K through 12 private or religious school tuition. When individuals contribute $15,000 or less per year, per beneficiary, to a 529 plan, they can avoid federal gift tax on those amounts. For married couples, the exclusion is as high as $30,000 per year, per beneficiary. However, donors with the financial means may take advantage of existing laws to superfund 529 plans for college and private school tuition for as many children as they wish by contributing five years of tax-free dollars in one single year. For single taxpayers, the maximum lump-sum contribution is $75,000 per beneficiary; married couples who file joint tax returns may set aside $150,000 free of gift taxes and allow those dollars to grow free of capital gains taxes in a 529 plan for each of their children and/or grandchildren. Any gifts above these amounts will count against a taxpayer’s lifetime gift tax exclusion, which the TCJA doubled from the previous level to $11.2 million for individual filers or $22.4 million for married taxpayers filing joint returns.

Because the TCJA represents the most significant change to the tax code in more than 30 years, individuals will need to take the time to understand the law and change the way they typically plan for tax efficiency and wealth preservation. Advance planning is key under the direction of professional advisors who are keeping a watchful eye on the IRS and the technical guidance the agency will issue to apply the new law and who have the knowledge to develop appropriate strategies to meet taxpayers’ unique circumstances, needs and goals.

About the Author: Tony Gutierrez, CPA, is a director with Berkowitz Pollack Brant’s International Tax Services practice, where he focuses on tax and estate planning for high-net-worth individuals, family offices, and closely held businesses conducting business in the U.S. and abroad. He can be reached at the CPA firm’s Miami office at 305-379-7000 or via email at info@bpbcpa.com.

IRS Asks Businesses to Wait for Payroll Guidance when Applying Tax Reform Measures in 2018 by Cherry Laufenberg, CPA

Posted on January 09, 2018 by Cherry Laufenberg

Due to the passage of the Tax Cuts and Jobs Act that President Trump signed into law in late 2017, business and payroll service providers will need to adjust employees withholding calculations for the 2018 tax year. However, as the IRS works to apply the new law, it asks businesses to continue to use the existing 2017 withholding tables during the month of January. The agency expects to issue guidance on this matter in the coming weeks to enable businesses to make payroll changes based on employees’ existing W-4 information.

Workers should expect to see an increase in their take-home pay, with less taxes withheld from their paychecks, beginning in February 2018.

The advisors and accountants with Berkowitz Pollack Brant work closely with businesses of all sizes and across virtually all industries to implement strategies intended to minimize tax liabilities, maintain regulatory compliance, improve efficiencies and achieve long-term growth goals.

About the Author: Cherry Laufenberg, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where she works with corporations, pass-through entities, trusts and foreign entities.  She can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.

 

 

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