Category: Newsletters

Randall owns an S corporation and learned that he may be eligible to take a pass-through tax deduction, a new tax feature included in the most recent federal tax legislation. What is it and how might it apply to him?

Owners of some pass-through businesses, such as S corporations and sole proprietorships, or of certain real estate investment trusts (REITs) and publicly traded partnerships, may take a deduction equal to 20% of their qualified business income (QBI) in tax year 2018.

The deduction phases out for single tax filers at $157,500 of taxable income and for married taxpayers filing jointly at $315,000. In 2019, the phase-out for single taxpayers and heads of households with taxable income is $160,700, while couples filing jointly see the deduction phase out at $321,400.

Guidance for determining this new tax break continues to evolve a year after its passage, making it important that Randall consult a tax professional. Because the legal structure of any business should involve considerations beyond taxes, he may also want to consult his attorney to review his situation.

Client Profile is based on a hypothetical situation. The solutions discussed here may or may not be appropriate for you

If your business offers its employees a retirement plan and other benefits, you should be aware of increases to contribution and income limits for tax year 2019 due to an inflation adjustment. Here’s a look at some of them:

RETIREMENT PLANS

Defined contribution plans – 401(k), 403(b) and 457 plans – see their contribution limits rise to $19,000, up $500 from 2018, while the catch-up contribution limit remains at an additional $6,000 for participants at least age 50. Total contributions by an employee and employer rise from $55,000 to $56,000. SEP-IRAs, profit sharing and money purchase plans have the same limit increase to $56,000.

The compensation limit to determine contributions increases $5,000 to $280,000, while the limit to determine discrimination testing also rises $5,000 to $180,000 of key employee compensation.

The elective contribution limit for a Simple IRA rises $500 to $13,000, with employer non-elective contributions capped at 2% of compensation up to $280,000, up from $275,000. The $3,000 catch-up contribution is unchanged. And, finally, the contribution limit for defined benefit pension plans increases to $225,000 from $220,000.

Conner Ash PC ClientLine Newsletter – February 2019 – Know Your Benefits Limits

NUMBERS TO KNOW

In 2019, employees can contribute up to $2,700 into their health flexible spending accounts. The pre-tax transportation benefit is capped at $265 per month. The limit on adoption assistance is $14,080. The salary deduction phases out between $211,160 and $251,160 of taxable income.

If you have employees who earn their income overseas, the foreign earned income exclusion amount is $105,900. Don’t forget to adjust for increased Social Security income limits, if you haven’t already. That’s risen to $132,900, up from $128,400. And, finally, don’t forget to file all of your forms, including tax returns, on time. Failure to do so can be costly. Talk to your tax professional for more information.

Need to save more for retirement? Both traditional and Roth IRAs can help you get there, and both offer tax advantages. Better yet, you have until your tax filing deadline to contribute to a traditional IRA and have it count as a potential deductible contribution for tax year 2018.

BY THE NUMBERS

You may make contributions of up to $5,500 annually, plus another $1,000 if you’re at least age 50, to a traditional IRA for 2018. The limit increased to $6,000 in 2019.

Contributions are tax-deductible for tax year 2019 provided:

• Your spouse has a workplace retirement plan and you don’t, with the deduction phasing out when taxable income is between $193,000 and $203,000; the range was between $189,000 and $199,000 last year;
• You’re married and file your tax jointly, and you have a workplace plan, the deduction disappears between $103,000 and $123,000 in 2019, up from $101,000 and 121,000;
• You’re single or a head of household, have a workplace plan and your income is between $64,000 and $74,000 in 2019, up from $63,000 and $73,000 in 2018;
• You and a spouse don’t have a workplace plan, regardless of income.

TAX-ADVANTAGED

Even if you don’t qualify for deductible contributions, your account balance potentially grows tax-deferred until you take withdrawals. Whether you’re looking for your first retirement account or looking to put away more for the future, a traditional IRA may get you from here to there.

And speaking about tax advantages, a Roth IRA has a few of its own. It is basically the traditional IRA turned upside down, as contributions are not tax-deductible but qualified distributions are tax-free.

In tax year 2019, single taxpayers and heads of household can contribute fully to a Roth IRA if their taxable income is $122,000 or less. The deduction fully phases out at $137,000. Married couples filing jointly will see their ability to contribute phase out from $193,000 to $203,000.

Lighten Your Tax Load And Save More – both traditional and Roth IRAs can help save more for retirement and both offer tax advantages.

Know Your Benefits Limits – increases to contribution and income limits for tax year 2019 due to an inflation adjustment.

Client Profile – what is the new pass-through tax deduction that is a part of the most recent federal tax legislation.

When Disaster Strikes Your Business – if a catastrophic event damages or disrupts your business, lost or destroyed tax records can add to your stress.

Pieces To The Retirement Puzzle – a few surveys show many retirees have a few common needs.

Questions And Answers

Short Bits

Insights And Tips

Depreciate Now Or Later

You will find a major new change for tax year 2018, allowing 100% depreciation of many big business expenses, including computers, tools, vehicles and other assets. This doesn’t mean, however, that you should take the full allowable deduction.

Offset 2018 Income

If 2018 was a very successful year and you also made a qualified large purchase last year, you can reduce your business’ taxable income by depreciating the asset 100% during the year of purchase, if you choose.

Offset Future Income

If, however, your business earns a predictable profit each year or you expect subpar profits in the near term, you might consider straightline depreciation, which depreciates an asset over its expected useful life. For example, if you buy a delivery vehicle you expect to swap out in five years, depreciate it 20% per year over that time. Talk to your tax professional to learn more.

SMALL BUSINESS CONFIDENCE IS HIGH.

During the third quarter of 2018, the CNBC | SurveyMonkey Small Business Confidence Survey registered a 62, an all-time record. The survey found that 58% of small business owners say current conditions for their businesses are good, while a record 33% expect to hire additional fulltime workers.

COLLEGE PAYS.

You probably know that college graduates typically average significantly more earnings over a lifetime, but they benefit in another way, too: They are more likely to keep their jobs. The unemployment rate in August 2018 was 2.1% for people age 25 and older with a bachelor’s degree or more. This compares (for the same period and age group) to 3.9% for those with some college and 5.7% for those with no college but a high school diploma. The overall national unemployment rate (age 16 and older) was 3.9% in August 2018. In every category, the jobless rate dropped over the past year.

SMALL BUSINESS NOT PREPARED.

Half of small business leaders believe their businesses are not a target for cybercriminals, according to a report by IT leader Switchfast. Many do not have policies to help stem cyberattacks such as breaches or the actions of negligent employees.

FUTURE INFLATION?

In its August 2018 report, the Bureau of Labor Statistics found that prices for U.S. imports rose 3.7% during the past year. There has not been a 12-month decline since October 2016. Could this August report on import prices be a harbinger of inflation to come?

Question:

I just signed up for Medicare Part D, the prescription drug benefit, and I’m confused about the “donut hole,” the coverage gap. Can you explain?

Answer:

The donut hole, or coverage gap, occurs once you reach Medicare Part D’s initial coverage limit of $3,820 in 2019 and ends when you reach $5,100 in out-of-pocket costs. Patient costs in this gap used to be more than half the cost of prescriptions, but those costs are reduced in 2019. You still have deductibles and co-pays, and Part D plan costs differ widely, so talk to your health insurance professional and go to www.medicare.gov for more information.

Question:

I’d like to start a non-profit organization, to which contributions would be tax-deductible, to feed families in financial stress. How do I go about starting a 501(c)(3) organization?

Answer:

First, you should meet with an experienced attorney and your tax professional to create a plan describing the goals of your organization. Creating a 501(c)(3) non-profit involves filing for a business name and incorporating with the appropriate agency in your state. Once these are established, you’ll need to pay a fee and file a 501(c)(3) application with the IRS to gain tax-exempt status. Other items to attend to include naming officers and a board of directors, drafting bylaws, and establishing written rules and procedures for running your non-profit.

If you own a business, why not consider the following off-the-beaten-path ideas?

WHEN DISASTER STRIKES

As cybercrimes increase, you need to have a disaster recovery plan. You may be a single-person business that needs only to back up files to tape or the cloud, but you need to have virus and malware software to protect your customers, whose information you have. Doing without can cost you big time. Protecting yourself can save you on insurance and other costs.

LESS IS MORE

If your business tends to keep its employees plugged in 24-7, consider the benefits of unplugging. Have employees unplug from all their work technology (including the Internet and their business cell phone) a couple of hours each day. Down time can help refresh your employees, lower stress, increase productivity and potentially lead to lower healthcare costs.

ACKNOWLEDGE EXCELLENCE

The best way to keep top employees happy and shrink hiring costs is to acknowledge them through word and deed, the latter including total compensation costs.

Save more for retirement. Make sure you have enough life insurance. Put money into a college savings account. This is all good advice most people should heed, but old news.

This year, why not consider the unexpected financial benefits for individuals who make the following New Year’s resolutions:

INCREASE YOUR STEPS

More people are wearing smart watches to monitor their heart rate, exercise and steps. Studies show increasing steps and, for that matter, standing more often may help people lose weight, lower blood pressure and reduce diabetes risk. Investing in — and using — this technology can help lower your healthcare and insurance bills and may even get you a discount on your employer’s plan, depending on your company and its insurer.

SHOP FOR EXPERTISE

Learn more about your current job and increase your marketability — and financial prospects — by shopping the Internet for courses that can help you learn more about everything from business writing to public speaking. Some courses, including from namebrand universities, may be free when not for credit.

CREATE AN EMERGENCY FUND

If you don’t have at least six months’ cushion via an emergency fund, consider the costs of not having one. If you have major car or home repairs, for instance, paying for repairs with a loan or credit card will cost you interest on top of principal. And interest rates have risen over the past few months.

Melissa runs a home kitchen-based business making fruit preserves and other sweets, selling them online and via mail order. She has no employees yet, but wonders about other types of insurance coverage her business might need.

Melissa should start with health insurance and a retirement account, two benefits she can buy for herself even if she doesn’t have other employees.
She might explore a high-deductible health insurance policy and pair it with a triple tax-free Health Savings Account (HSA). She can also contribute to a Simplified Employee Pension (SEP) or 401(k) plan, which offer tax-deferred growth.

Depending on her business structure, Melissa could deduct a variety of benefits’ costs, from company-paid premiums to administrative expenses. Other risks may include product liability and cyberthreats, from which insurance can protect her financially.

Melissa can learn more about leveraging business dollars to purchase employee benefits and insurance by talking with her tax and insurance professionals.

Client Profile is based on a hypothetical situation. The solutions discussed here may or may not be appropriate for you.