Posts Tagged ‘TaxReform2017’

IRS Releases New 2018 Withholding Tables

Thursday, January 11th, 2018

The IRS announced today the release of new withholding tables reflecting the new tax law. These will be used for W-2s, and should be used no later than February 15th. The IRS is working on a new W-4 form that will reflect the new law. That will likely be out in February.

Why California’s Attempt to Make State Taxes a Charitable Deduction is Doomed

Monday, January 8th, 2018

When your budget is out of balance there are two ways of getting it in balance: cutting spending or increasing revenue. For California’s Democratic politicians, the only way they want to balance the budget is to increase the revenue. The new tax law puts a crimp on California (and other “Blue” states) by limiting the deduction of state income taxes and property taxes to $10,000. Kevin de Leon, California Senate President Pro Tempore, came up with the idea of having Californians being able to make a charitable donation to the “California Excellence Fund” instead of paying state taxes; that would allow the deduction to be taken on the taxpayer’s tax return and getting around the $10,000 limitation. Senator de Leon’s measure, though, will not pass IRS scrutiny for four reasons.

First, a charitable donation must be voluntary, not mandatory. That the contribution is used for the “California Excellence Fund”–an that fund is used for the general budget–makes this the equivalent of state tax paid. That makes this a mandatory payment, not a voluntary one, and it is, thus, not a charitable donation.

Second, Senator de Leon cites previous state contributions such as in Arizona, where taxpayers made contributions to parochial schools via a state fund as a charitable contribution. There’s a big difference between that and this California proposal: Mr. de Leon’s proposal would be for the general fund, with the money used in normal state revenues. That’s not going to work.

Third, taxpayers cannot obtain any benefit from the contribution. For example, if you donate $100 to a charity and receive (say) a blanket worth $10, your deductible charitable contribution is $90. Since the whole idea of this is to give taxpayers a charitable contribution in return for taxes paid, the amount that is deductible would be a benefit received and not deductible.

Fourth, there’s a doctrine in tax called “Substance Over Form.” This doctrine basically says that the economic substance of a transaction determines how it is treated for tax purposes, even if its labeled as something else. If you label something as a charitable contribution but it’s really a tax payment, under “Substance Over Form” it will be treated as a tax payment.

Thus, I believe that the efforts by Democrats such as Kevin de Leon are doomed to failure. I expect the IRS to rule–if this measure becomes law–that contributions to the California Excellence Fund are only charitable contributions if they exceed the required amounts to be paid for state income tax.

Tax Law Signed; New Year Likely to Bring Lots of New S-Corporations

Friday, December 22nd, 2017

President Trump signed the tax reform legislation into law. While there are many changes for 2018, one of the biggest is the new Section 199a deduction. This allows a 20% writeoff of net income for sole proprietors, owners of S-Corporations, and members of partnerships/LLCs, limited by wages paid (unless income is less than $157,000 (single)). I suspect tax professionals will see lots of S-Corporations in the future.

First, wages paid to owners counts in calculating the Section 199a deduction. Imagine you’re a consultant with income of $300,000 structured as a sole proprietorship. You’re ineligible for the Section 199a deduction (your income is too high). Now, convert to an S-Corp (or an LLC taxed as an S-Corp), pay yourself a reasonable salary (say $80,000), and:
– You get the Section 199a deduction ($44,000); and
– You avoid self-employment tax on a large part of the net income of your business.

Maybe I’m missing something, but for successful businesses there are now two factors leading toward an S-Corporation as the solution. And given the way the deduction is written, reasonable salary likely won’t be an issue—owners have an incentive to pay themselves!

As a reminder, there is no one right form of business entity. Though S-Corporations appear to be an excellent choice based on Section 199a, the choice of type of business entity should always be discussed with your tax professional and attorney prior to selecting it.

Conference Committee Agrees on Details of Tax Legislation; Measure Likely to Pass Next Week

Saturday, December 16th, 2017

The House and Senate conferees did indeed agree on tax ‘reform’ legislation. The bill will make great bedtime reading as it’s only 1,097 pages. The Tax Foundation has a great summary of the legislation. Here are some highlights; note that these provisions are in effect for the 2018 tax year:

– Seven tax brackets for individuals, ranging from 10% to 37%. Mostly, this will result in a decrease in taxes. However, the 35% tax bracket will now begin at $200,000 (single/Head of Household (HOH))/$400,000 Married Filing Jointly (MFJ); the 37% tax bracket begins at $500,000 single/HOH and $600,000 MFJ

– The standard deduction increases to $12,000 single/$18,000 HOH/$24,000 MFJ. However, personal exemptions are eliminated.

– Mortgage interest on home purchases remains deductible, but up to a limit of $750,000 of mortgage debt; however, equity debt is no longer deductible.

– State and local taxes, sales tax, and property tax deduction is limited to $10,000.

– The personal AMT is retained, but the AMT exemption is raised significantly.

– A single corporate tax rate of 21%.

– Pass-through income will be taxed at lower rates via a deduction. This is one area where the specific details matter.

– The corporate AMT is repealed.

– Net Operating Losses can only be carried forward, not backward (limited to 80% of taxable income).

– The individual mandate penalty is repealed, but for 2019 (not 2018). There’s still a penalty, but it’s $0.

– The Mayo decision (allowing the deduction of business expenses for professional gamblers who have losing years) is repealed for tax years 2018 – 2025. There are no other provisions that directly impact gambling in this legislation.

After I read the 1,097 pages (503 pages of legislation and about 500 pages of analysis) I will have more on the legislation.

GOP Tax Proposal Targets Professional Gamblers’ Losing Years

Thursday, November 2nd, 2017

The Joint Committee on Taxation released its new tax proposal, H.R. 1, today. Buried within it is Section 1305:

SEC. 1305. LIMITATION ON WAGERING LOSSES.
(a) IN GENERAL.—Section 165(d) is amended by adding at the end the following: ‘‘For purposes of the preceding sentence, the term ‘losses from wagering transactions’ includes any deduction otherwise allowable under this chapter incurred in carrying on any wagering trans action.’’.

So what does this mean? The Joint Committee on Taxation (JCT) sent out an analysis:

Sec. 1305. Limitation on wagering losses.

Current law: Under current law, a taxpayer may claim an itemized deduction for losses from gambling, but only to the extent of gambling winnings. However, taxpayers may claim other deductions connected to gambling that are deductible regardless of gambling winnings.

Provision: Under the provision, all deductions for expenses incurred in carrying out wagering transactions (not just gambling losses) would be limited to the extent of wagering winnings. The provision would be effective for tax years beginning after 2017.

JCT estimate: According to JCT, the provision would increase revenues by $0.1 billion over 2018-2027.

The JCT analysis is wrong about the current law. Only professional gamblers can take business expenses beyond their gambling winnings to create an overall loss. This is the result of Mayo v Commissioner; Section 1305 would overrule the Mayo decision.

I will have more on this proposal, most likely over the weekend. There’s quite a bit for me to digest. For now, let me state that my first reading of the measure did not leave me feeling good about it.