by H2R CPA Team

The passage of the Tax Cuts and Jobs Act (TCJA) in late 2017 brought significant changes to the tax landscape. As the first tax season under the law looms on the horizon, new year-end tax planning strategies are emerging. Meanwhile, some of the old tried-and-true strategies have changed and others remain viable.
​
Fresh opportunities
The TCJA creates several new avenues of potential tax savings for businesses. Some of these, though, may require tough decisions.
For example, the new tax law has prompted some businesses to question whether they should restructure to become a C corporation or a pass-through entity. The former is subject to potential double taxation (at the entity and dividend levels) but now enjoys a corporate tax rate that has fallen from 35% to 21%. The latter faces only an individual tax rate, which can run as high as 37%, but might qualify for a new, full 20% deduction on qualified business income (QBI).

With a full QBI deduction, the maximum effective tax rate for pass-through entities comes out to 29.6%. But there are other factors to consider. For example, the TCJA limits the state and local tax deduction for individual pass-through owners but not for corporations. Further, the new corporate rate is permanent, while the QBI deduction is scheduled to sunset after 2025.

Ultimately, the optimal entity choice depends on each business’s facts and circumstances. A business that goes the pass-through route, though, has several tactics available to maximize its QBI deduction.

The deduction is subject to limits based on W-2 wages paid, the unadjusted basis of a taxpayer’s qualified property, and taxable income. A business, therefore, might increase its wages by converting independent contractors to employees, assuming the benefit isn’t outweighed by higher payroll taxes, employee benefit costs and similar considerations. It could also purchase assets before year end to pump up its unadjusted basis. And individual pass-through owners can maximize their above-the-line and itemized deductions to reduce their taxable income.

The TCJA also establishes a business tax credit for paid family and medical leave — a credit that businesses can claim for 2018 as long as they adopt a retroactive policy before the end of the year. Eligible employers may claim the credit if they have a written policy that provides at least two weeks of annual paid family and medical leave to all employees who meet certain requirements, at a pay rate of at least 50% of normal wages. The maximum credit is 25% of wages paid during leave.

Shifting strategies
Not surprisingly, the TCJA alters several year-end strategies businesses have used in the past to curb liability. It bolsters some strategies, while trimming or ending the advantages of others.
For several years, for example, asset acquisitions have offered a smart way to cut taxes through bonus depreciation and Section 179 depreciation deductions. The TCJA expands both types of deductions, potentially making investments in equipment and other assets even more advisable.

Businesses could immediately write off 50% bonus depreciation on qualified new property purchased in 2017. Before the TCJA, eligible property included new computers, software, vehicles, machinery, equipment, office furniture and qualified improvement property (QIP, generally defined as interior improvements to nonresidential real property).

The TCJA extends and modifies bonus depreciation for qualified property purchased after September 27, 2017, and before January 1, 2023. Businesses can expense the entire cost of such property (both new and used, subject to certain conditions) in the year the property is placed in service. The amount of the allowable deduction will begin to phase out in 2023, dropping off 20% each year for four years until it disappears in 2027, absent congressional action. Be aware that certain property with a longer production period will be eligible for the bonus depreciation for an extra year, as the phaseout doesn’t start until 2024.

Be aware that Congress removed QIP from the definition of qualified property eligible for bonus depreciation, intending that it would nonetheless remain eligible because its recovery period would be reduced to 15 years. (Qualified property must have a recovery period of 20 years or less.) Due to a drafting error, though, the TCJA didn’t define QIP as 15-year property, so it defaults to a 39-year recovery period. Without a technical correction or regulatory guidance, QIP won’t qualify for bonus depreciation in 2018.

QIP placed in service after December 31, 2017, is eligible for immediate expensing (deducting the entire cost) under Sec. 179. The TCJA expands this depreciation to several improvements to nonresidential real property — roofs, HVAC, fire protection systems, alarm systems and security systems, too. It also almost doubles the maximum deduction for qualifying property to $1 million from $510,000 in 2017. (The maximum deduction remains limited to the amount of income from business activity.) The TCJA increases the phaseout threshold to $2.5 million from $2.03 million in 2017.

Businesses traditionally have used employee benefits to shrink their tax liability, too, but the TCJA narrows the benefits-related opportunities. For example, it eliminates or tightens tax breaks for transportation benefits, on-premises meals, moving expenses reimbursement and achievement awards. (Some of these changes are only temporary.) Businesses might, however, reap tax benefits from Health Savings Accounts, Flexible Spending Accounts, Health Reimbursement Accounts, health insurance and group term-life insurance. Moreover, a business could have nontax-related reasons, such as employee recruitment and retention, to offer certain benefits.

Old favorites
Although many tax credits were in the crosshairs as the TCJA was drafted, several of the most popular survived, including the Work Opportunity tax credit, Small Business Health Care tax credit, the New Markets tax credit and the research credit.

The TCJA even boosts the value of the research credit. That’s because taxpayers generally must either reduce their business deductions by the amount of their research credit or take a reduced research credit to preempt a double tax benefit. The reduced credit is computed based on the maximum corporate tax rate. By cutting that rate from 35% to 21%, the TCJA increases the net benefit of the research credit to 79%, vs. 65% in previous years.

Businesses looking to trim their tax bills also can continue to turn to the trusty standby strategy of deferring income into 2019 and accelerating deductions into 2018. For example, a business that uses cash-basis accounting might “slow roll” its invoices to push the receivables into the new year or prepay expenses. Notably, the TCJA has greatly expanded eligibility for cash-basis accounting, making it generally available to businesses with three-year average annual gross receipts of $25 million or less.

There’s still time
Whether your business operates on a calendar- or fiscal-year basis, your 2018 tax bill isn’t yet written in stone. It’s not too late to execute some strategies that reduce your business’s tax liabilities and improve its bottom line.

Contact H2R CPA at 412-391-2920 or team@h2rcpa.com if you have questions about your individual or business tax planning.

by H2R CPA Team

​The Tax Cuts and Jobs Act (TCJA) was packed with goodies for businesses, but it also seemed to eliminate the popular meal expense deduction in some situations. Now, the IRS has issued transitional guidance — while it works on proposed regulations — that confirms the deduction remains allowable in certain circumstances and clarifies when businesses can claim it.

The need for guidance
Before the TCJA, Section 274 of the Internal Revenue Code generally prohibited deductions for expenses related to entertainment, amusement or recreation (commonly referred to as entertainment expenses). It provided exceptions, though, for entertainment expenses “directly related” to or “associated” with conducting business.

Sec. 274(k) further limited deductions for food and beverage expenses that satisfied one of the exceptions. A deduction was allowed only if 1) the expense wasn’t lavish or extravagant under the circumstances, and 2) the taxpayer (or an employee of the taxpayer) was present when the food or beverages were furnished. Section 274(n)(1) limited the amount of the deduction to 50% of the expense.

The TCJA amends Sec. 274 to disallow a deduction for expenses related to entertainment expenses, regardless of whether they’re directly related to or associated with conducting business. Some taxpayers interpreted the amendment to ban deductions for business meal expenses as though they were deemed to be entertainment expenses. According to the new guidance, though, the law doesn’t specifically eliminate all of these expenses.

Rather, the law merely repeals the two exceptions and amends the 50% limitation to remove the reference to entertainment expenses. The TCJA doesn’t address the circumstances in which providing food and beverages might constitute nondeductible entertainment, the IRS says, but its legislative history “clarifies that taxpayers generally may continue to deduct 50% of the food and beverage expenses associated with operating their trade or business.”

Deductibility requirements
Until the IRS publishes its proposed regulations explaining when business meal expenses are nondeductible entertainment expenses and when they’re 50% deductible expenses, businesses may deduct 50% of business meal amounts if:

1. The expenses are ordinary and necessary expenditures paid or incurred to carry on business
2. The expenses aren’t lavish or extravagant under the circumstances
3. The taxpayer (or an employee of the taxpayer) is present at the furnishing of the food or beverages
4. The food and beverages are provided to current or potential customers, clients, consultants or similar business contacts
5. For food and beverages provided during or at an entertainment activity, the entertainment is purchased separately from the food and beverages or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices or receipts

The IRS recognized that the fifth criterion above could create some confusion. The guidance, therefore, includes illustrative examples.

In the first example, a taxpayer invites a business contact to a baseball game, paying for both tickets. While at the game, the taxpayer also pays for hot dogs and drinks. The game is entertainment, so the cost of the tickets is a nondeductible entertainment expense. However, the cost of the hot dogs and drinks, purchased separately from the tickets, isn’t an entertainment expense. Therefore, the taxpayer can deduct 50% of the cost as a meal expense.

The second example employs a similar scenario, with the taxpayer inviting a contact to a basketball game. This time, though, the taxpayer buys tickets to watch the game from a suite, with access to food and beverages included. The game again represents entertainment, and the cost of the tickets is nondeductible. The cost of the food and beverages isn’t stated separately on the invoice, rendering it a disallowed entertainment expense, as well.

The final example uses the scenario above, except that the cost of the food and beverages is stated separately on the invoice for the basketball game tickets. The cost of the tickets remains nondeductible, but the taxpayer can deduct 50% of the cost of the food and beverages.

Nondeductible entertainment
The TCJA doesn’t change the definition of “entertainment.” Under the applicable regulations, the term continues to include, for example, entertaining at:

• Night clubs
• Cocktail lounges
• Theaters
• Country clubs
• Golf and athletic clubs
• Sporting events

Entertainment also includes hunting, fishing, vacation and similar trips. It may include providing food and beverages, a hotel suite or an automobile to a customer or the customer’s family.

Be aware that the determination of whether an activity is entertainment considers the taxpayer’s business. For example, a ticket to a play normally would be deemed entertainment. If the taxpayer is a theater critic, however, it wouldn’t. Similarly, a fashion show wouldn’t be considered entertainment if conducted by an apparel manufacturer to introduce its new clothing line to a group of store buyers.

Request for comments
The IRS has requested comments on future guidance clarifying the treatment of business meal expenses and entertainment expenses, including input on whether and what additional guidance is required and the definition of “entertainment.” Businesses should submit comments to the IRS by December 2, 2018.

​Contact H2R CPA at 412-391-2920 or team@h2rcpa.com if you have questions about your individual or business tax planning.

by H2R CPA Team

The Tax Cuts and Jobs Act (TCJA) created a new general business tax credit for certain businesses that grant their qualifying employees paid family and medical leave in 2018 and 2019. The IRS now has released Notice 2018-71, which addresses several related issues, including eligibility, types of leave covered and calculation of the credit amount. Notably, the guidance allows employers currently without a paid family and medical leave policy to adopt a retroactive policy before year end and claim the credit for 2018.

The IRS also has clarified the TCJA’s suspension of the deduction for moving expenses that may affect employers and employees. Specifically, it explains the treatment of moving expenses incurred in 2017 but reimbursed in 2018.

Credit eligibility requirements
IRS Notice 2018-71 explains that an eligible employer must have a written policy that:

• Covers all qualifying employees
• Provides at least two weeks of annual paid family and medical leave for each full-time qualifying employee and at least a proportionate amount of leave for each part-time qualifying employee (qualifying employees who customarily work fewer than 30 hours per week)
• Provides leave pay at a rate of at least 50% of the qualifying employee’s wages
• If the employer has any qualifying employees who aren’t covered by the federal Family and Medical Leave Act (FMLA) (for example, because they don’t work 1,250 hours per year), includes language providing “noninterference” protections.

Noninterference language generally must ensure that the employer won’t 1) interfere with the exercise of any right provided by the policy, or 2) fire or otherwise discriminate against individuals who oppose any practice prohibited by the policy. The notice also makes clear that an employer that isn’t subject to the FMLA — because none of its employees is covered by the law — still can be eligible for the credit if it includes the noninterference language.

An employer can set up the policy in a single document or multiple documents. The written policy also may be included in the same document that governs the employer’s other leave policies.

The written policy must be “in place” before the leave is taken to qualify for the credit. A policy is considered in place on the later of its adoption date or effective date. But the guidance provides a transition rule for 2018. The IRS will deem a written leave policy or amendment to be in place as of the effective date, rather than a subsequent adoption date, as long as it’s adopted on or before December 31, 2018, and the employer applies it retroactively for the entire period the policy or amendment covers.

For example, let’s say an employer adopts a written policy on October 15, 2018, retroactive to January 1, 2018. If the employer retroactively pays an employee who took unpaid family and medical leave in February at the appropriate rate, it can claim the credit for that pay.

An employer isn’t required to provide notice to employees that it has a written policy providing paid family and medical leave in place. If it does give notice, though, it must notify all qualifying employees (for example, by email, employee handbook or workplace posting).

Types of covered leave
The credit generally is available only if the leave is specifically designated for an FMLA purpose and can’t be used for any other reason. What if a policy permits leave that would otherwise be for an FMLA purpose but is taken to care for a non-FMLA-qualifying individual (for example, a grandchild with a serious health condition)? The IRS will view it as leave specifically designated for an FMLA purpose, but the employer can’t claim the credit for any leave taken to care for anyone other than FMLA-qualifying individuals, meaning an employee’s spouse, child or parent.
Paid leave provided under the employer’s short-term disability program can be characterized as family and medical leave if it otherwise meets the requirements to be such leave. It can qualify as covered leave whether self-insured or provided through a short-term disability insurance policy.

Requirements for the leave
The leave must be available to all qualifying employees who have worked at the company for at least one year and whose compensation for the preceding year doesn’t exceed 60% of the “amount applicable” for that year. For 2017, the amount applicable is $120,000, so a qualifying employee in 2018 may have earned no more than $72,000 in 2017. For a part-time qualifying employee, the paid leave ratio must be at least equal to the ratio of the employee’s expected weekly hours to the expected weekly hours of a non-part-time qualifying employee.

Until the IRS provides further guidance, employers may use any reasonable method to determine whether an employee has been employed for one year or more. Notice 2018-71 specifically declares, though, that requiring an employee to work 12 consecutive months or a minimum number of hours per year wouldn’t be considered reasonable.

The notice also explains how to determine an employee’s normal wages to ensure the employee is, as required, paid at least 50% of those wages while on leave. Overtime (other than regularly scheduled overtime) and discretionary bonuses aren’t included in wages. Any leave paid by a state or local government, or required by state or local law, doesn’t count toward the amount of paid family and medical leave provided by the employer, the rate of pay or, in turn, the credit. Pending further IRS guidance, employers with employees who are paid on a basis other than a salary or hourly rate must use the Fair Labor Standards Act rules for determining the regular pay rate to calculate normal wages.
Employers aren’t required to use the same pay rate or leave period for every qualifying employee or FMLA purpose. For example, an employer could provide six weeks of leave at 100% pay for childbirth or adoption or to care for the child but only two weeks at 75% pay for all other purposes. Similarly, an employer could provide two weeks of leave to every qualifying employee, with an extra two weeks for qualifying employees with at least 10 years of service. The policy cannot, however, exclude any class of qualifying employees, such as unionized employees, from paid leave.

Credit amount
The amount of the credit begins at 12.5% of wages paid for up to 12 weeks per tax year. The percentage rises incrementally as the rate of leave payment exceeds 50% of the normal wages, with a maximum credit of 25% when full wages are paid for the leave. The term “wages” generally encompasses all remuneration for employment.

Be aware that wages don’t include any amounts taken into account for other general business credits. It does, however, include wages paid by a third-party payer (for example, an insurance company or professional employer organization) or through an employer’s short-term disability program for leave taken into account for the leave credit. And employers that claim the leave credit must reduce their wage/salary deduction by the credit amount.

The credit for any specific employee is limited to the employee’s normal hourly wage rate multiplied by the number of hours of leave taken. If an employee isn’t paid an hourly wage, an employer can, pending additional IRS guidance, use any reasonable method to convert the normal wages to an hourly rate.

The moving expense guidance
A few days before it issued its guidance on the family and medical leave credit, the IRS published an advance version of its impending guidance on the tax treatment of employer reimbursements of “qualified moving expenses.” The TCJA suspended the exclusion of such reimbursements from an employee’s gross income and from wages for employment tax periods for the years 2018 through 2025.

Some employers may reimburse their employees in 2018 for expenses related to a work-related move that actually occurred in 2017, raising questions about the applicability of the exclusion. According to Notice 2018-75, these expenses are indeed tax-free if 1) they would have been deductible by the employee had the employee directly paid the expenses before January 1, 2018, and 2) the employee didn’t deduct the expenses in 2017. The guidance explains how employers that have already withheld federal employment taxes on the reimbursement of a 2017 move can seek an adjustment or refund for overpayment.

Next steps
The IRS’s guidance on the family and medical leave credit is published in a question-and-answer format, and the contents will be incorporated into proposed regulations. The IRS will accept comments on the regs through November 23, 2018, but the guidance took effect on September 24, 2018.

​Contact H2R CPA at 412-391-2920 or team@h2rcpa.com if you have questions about your individual or business tax planning.