Seven Year-End Tax Tips for 2018

Here are 7 tax moves for you to consider before the end of the year.

1. Defer income to next year. Consider opportunities to defer income to 2019, particularly if you think you may be in a lower tax bracket then. For example, you may be able to defer a year- end bonus or delay the collection of business debts, rents, and payments for services. Doing so may enable you to postpone payment of tax on the income until next year.

2. Accelerate deductions and take capital losses. You might also look for opportunities to accelerate deductions into the current tax year. If you itemize deductions, paying medical expenses, mortgage interest, and charitable deductions before the end of the year, instead of paying them in early 2019, could make a difference on your 2018 return.

3. Harvest Capital Gains and Losses. Any appreciated stocks that you have held for a year and a day you can lock in the lower capital gains rate by selling at year end. You should also consider selling any stocks that can generate capital losses which you can deduct up to $3,000 after netting all your capital losses against all your capital gains. Keep in mind after you sell a stock you can buy it back after 31 days to avoid the wash sale rules.

4. Maximize retirement contributions. Deductible contributions to a traditional IRA, SIMPLE IRA or SEP IRA or pre-tax contributions to an employer-sponsored retirement plan such as a 401(k), can reduce your 2018 taxable income. If you haven’t already contributed up to the maximum amount allowed, consider doing so by year-end.

5. Take any required minimum distributions. Once you reach age 70½, you generally must start taking required minimum distributions (RMDs) from traditional IRAs and employer- sponsored retirement plans. However an exception may apply if you’re still working for the employer sponsoring the plan). Take any distributions by the date required — the end of
the year for most individuals. The penalty for failing to do so is substantial: 50% of any amount that you failed to distribute as required.

6. Beware of the 3.8% net investment income tax. This additional tax may apply to some or all of your net investment income if your modified adjusted gross income (AGI) exceeds
$200,000 ($250,000 if married filing jointly, $125,000 if married filing separately, $200,000 if head of household).

7. Bump up withholding if you expect to owe tax. If it looks as though you’re going to owe federal income tax for the year, especially if you think you may be subject to an estimated tax penalty, consider asking your employer to increase your withholding for the remainder
of the year to cover the shortfall. The biggest advantage in doing so is that withholding is considered as having been paid evenly through the year instead of when the dollars are actually taken from your paycheck. This strategy can also be used to make up for low or missing quarterly estimated tax payments. With all the recent tax changes, it may be especially important to review your withholding for 2018.

If you have any questions or need any help preparing your taxes please call Gregory J. Spadea at 610-521-0604. The Law Offices of Spadea & Associates, LLC prepares tax returns and advises business and individual clients on estate and tax planning year round.

What Services Are Subject to Pennsylvania Sales Tax?

Calculator and the word tax

Most of my clients understand what goods are subject to Pennsylvania sales tax but may not realize there are also some services that are also subject to sales tax in Pennsylvania. Therefore here is a list of services subject to Pennsylvania sales tax:

  1. Printing or imprinting of tangible personal property of another.
  2. Washing, cleaning, waxing, polishing or lubricating of motor vehicles.
  3. Inspecting motor vehicles as required by law.
  4. Repairing, altering, mending, pressing, fitting, dyeing, laundering, dry-cleaning or cleaning tangible personal property other than wearing apparel or shoes.
  5. Applying or installing tangible personal property as a repair or replacement part of
    other tangible personal property.
  6. Lobbying services.
  7. Adjustment services, collection services or credit reporting services.
  8. Secretarial or editing services.
  9. Disinfecting or pest control services.
  10. Building maintenance or cleaning services.
  11. Employment agency services or help supply services.
  12. Lawn care services.
  13. Self-storage services.
  14. Mobile telecommunications services.
  15. Premium cable and video programming services including streaming of videos.
  16. Non-residential electric, steam, and gas services.
  17. Intrastate and interstate telecommunications services billed to PA service addresses except subscriber line charges and basic local residential phone service for residential use and payphone service.

You can also find additional information about Pennsylvania taxable and non-taxable sales tax items by reading the Retailers Information Guide Pennsylvania REV-717 which is on my website resource page. Feel free to contact Gregory J. Spadea at 610-521-0604, if you have any questions or need help with a Pennsylvania Sales Tax Audit.

2018 Tax Cuts and Jobs Act Highlights

Individual Tax Provisions:

Pile of Tax Cuts And Jobs Act Buttons With US Flag

New Tax Rates and Brackets: For tax years 2018-2025, seven tax brackets apply for individuals: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. For tax years 2018-2025, the taxable income of a child attributable to earned income is taxed under the rates for single individuals, and taxable income of a child attributable to net unearned income is taxed according to the brackets applicable to trusts and estates. This rule applies to the child’s ordinary income and his or her income taxed at preferential rates. The new law leaves the preferential rates on capital gains and dividends unchanged.

Personal Exemption Deduction Eliminated: Under pre-act law, the deduction for each personal exemption was $4,150 for 2017, subject to a phaseout for higher earners. For tax years 2018-2025, the deduction for personal exemptions is eliminated.

Standard Deduction Increased: For tax years 2018-2025, the standard deduction is increased to $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers, and $12,000 for all other taxpayers, adjusted for inflation in tax years after 2018. No changes are made to the current-law additional standard deduction for the elderly and blind.

Medical Expense Deduction Threshold Temporarily Reduced: For tax years 2017-2018, the threshold for medical expense deductions is reduced from 10%-of-AGI to 7.5%-of-AGI for all taxpayers. In addition, the rule limiting the medical expense deduction for Alternative Minimum Tax (AMT) purposes to the excess of such expenses over 10%-of-AGI doesn’t apply to those tax years.

State and Local Tax and Property Deduction Limited to $10,000: For tax years 2018-2025, a taxpayer’s itemized deduction for state and local taxes is limited to $10,000 ($5,000 for a married taxpayer filing a separate return) of the aggregate of (1) state and local property taxes and (2) state and local income, war profits, and excess profits taxes (or sales taxes in lieu of income, etc. taxes) paid or accrued in the tax year. Warning: The provision also includes a rule stating that an individual may not claim an itemized deduction in 2017 on a pre-payment of income tax for a future tax year in order to avoid the dollar limitation applicable for tax years beginning after 2017. It’s interesting to note that on December 22nd New York’s Governor Cuomo signed an emergency Executive Order that allows New Yorkers to prepay next year’s property taxes this year, before the new tax law takes effect. Payments must be postmarked by December 31, 2017. The order authorizes localities to issue warrants for the collection of early property tax payments and to accept partial payment— allowing New Yorkers to pay a portion or all of their 2018 property taxes before the end of the year to keep the deductibility.

Mortgage and Home Equity Indebtedness Interest Deduction Limited: For tax years 2018- 2025, the deduction for interest on home equity indebtedness is eliminated and the deduction for mortgage interest is limited to underlying indebtedness of up to $750,000 ($375,000 for married taxpayers filing separately).

Charitable Contribution Deduction Limitation Increased: For contributions made in tax years after 2017, the 50% limitation for cash contributions to public charities and certain private foundations is increased to 60%. Contributions exceeding the 60% limitation are generally allowed to be carried forward and deducted for up to five years, subject to the later year’s ceiling. Charitable Contribution Deduction for College Athletic Seating Rights Eliminated. For tax years after 2017, no charitable deduction will be allowed for any payment to an institution of higher education in exchange for the right to purchase tickets or seating at an athletic event.

Casualty and Theft Loss Deduction Eliminated: For tax years 2018-2025, the personal casualty and theft loss deduction is eliminated, except for personal casualty losses incurred in a federally declared disaster. However, where a taxpayer has personal casualty gains, the loss suspension doesn’t apply to the extent that such loss doesn’t exceed gain. Note: The ACT includes special relief provisions for tax years 2018-2025 for taxpayers who incurred losses from certain 2016 major disasters.

Gambling Loss Limitation Modified: For tax years 2018-2025, the limitation on wagering losses is modified to provide that all deductions for expenses incurred in carrying out wagering transactions, and not just gambling losses, are limited to the extent of gambling winnings.

Miscellaneous Itemized Deductions Eliminated: For tax years 2018-2025, the deduction for miscellaneous itemized deductions that are subject to the 2% floor is eliminated.

“Pease” Limitation on Itemized Deductions Eliminated: Under pre-act law, higher-income taxpayers who itemized their deductions were subject to a limitation on these deductions (commonly known as the “Pease limitation”). For tax years 2018-2025, the “Pease limitation” on itemized deductions is eliminated.

Income and Losses New Deduction for Business Income from Pass-through Entities and Sole Proprietorships: This gets tricky but here goes. For tax years 2018-2025, an individual generally may deduct 20% of qualified business income from a partnership, S corporation, or sole proprietorship. The 20% deduction is not allowed in computing Adjusted Gross Income (AGI), but rather is allowed as a deduction reducing taxable income. Alas, the deduction comes with numerous restrictions:

  • For the most part, this deduction cannot exceed 50% of your share of the W-2 wages paid by the business. Alternatively, the limitation can be computed as 25% of your share of the W-2 wages paid by the business, plus 2.5% of the unadjusted basis (the original purchase price) of property used in the production of income.
  • The W-2 limitations do not apply if you earn less than $157,500 (if single; $315,000 if married filing jointly).
  • Certain personal service businesses are not eligible for the deduction, unless their taxable income is less than $157,500 for singles and $315,000 if married. In this regard, a “specified service trade or business” means any trade or business involving the performance of services in the fields of health, law, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners, or which involves the performance of services that consist of investing and investment management trading, or dealing in securities, partnership interests, or commodities.

The exception to the W-2 limit and the general dis-allowance of the deduction to personal service businesses is phased out over a range of $50,000 of income for single taxpayers and $100,000 for married taxpayers filing jointly. Thus, by the time income for a single taxpayer reaches $207,500 or $415,000 for a married-filing-jointly taxpayer, the W-2 limitation will apply in full (i.e. personal service professionals get no deduction).

Alimony Deduction by Payor and Income Inclusion by Payee Repealed: For any divorce or separation agreement executed after 2018, or executed before that date but modified after it (if the modification expressly provides that the new amendments apply), alimony and separate maintenance payments are not deductible by the payor spouse and are not included in the income of the payee spouse.

Moving Expense Deduction and Reimbursements Eliminated: For tax years 2018-2025, the deduction for moving expenses and the income exclusion for qualified moving expense reimbursements is eliminated, except for members of the Armed Forces on Active duty (and their spouses and dependents) who move pursuant to a military order and incident to a permanent change of station.

Alternative Minimum Tax (AMT) Retained with Increased Exemption Amounts: The act retains the individual AMT but with increased exemption amounts and phase-out thresholds for years 2018-2025 (indexed for inflation). There are now higher exemption amounts ($109,400 for married taxpayers as compared to $84,500 under current law). In addition, with the deduction for state and local income taxes largely eliminated, as well as the deductions for unreimbursed employee expenses and personal exemptions, the AMT should catch in its web fewer taxpayers then it does under current law.

Child Tax Credit Increased: For tax years 2018-2025, the child tax credit is increased from $1,000 to $2,000 per qualifying child under the age of 17, and other changes are made to phase-outs and refund ability during this same period. Under the act, the income level at which the credit phases out are increased to $400,000 for married taxpayers filing jointly ($200,000 for all other taxpayers).

Education Incentives: Under current law, a taxpayer who pays tuition to a college or university may be eligible for a Lifetime Learning Credit, a Hope Credit, or an American Opportunity Tax Credit, depending on the facts and circumstances. In addition, employers may pay up to $5,250 on behalf of an employee to obtain work-related education without the payment being included in the taxable income of the employee, PhD candidates may receive tax-free tuition waivers, dependents of college or university employees may also receive tax-free tuition waivers, a deduction is permitted for student loan interest of up to $2,500 and K-12 teachers may deduct up to $250 of their out-of-pocket supplies.

529 Accounts: These plans can now be used to pay for private elementary and secondary school expenses, whether the schooling is public, private (not including homeschooling) or religious. However, the tax-free treatment of such 529 withdrawals will be limited to $10,000 per student, per year.

Exclusion on Sale of Primary Residence Despite heated discussion on changes, the new law continues the law that a taxpayer who sells his or her home may exclude up to $250,000 of gain ($500,000 if married filing jointly), provided the taxpayer has owned and used the home as his or her primary residence for two of the previous five years.

Affordable Care Act Individual Mandate Repealed: Under pre-act law, the Affordable Care Act required individuals, who were not covered by a health plan that provided at least minimum essential coverage, to pay a “shared responsibility payment” (also referred to as a penalty) with their federal tax return ($695 for 2018). Unless an exception applied, the tax was imposed for any month that an individual did not have minimum essential coverage. For months beginning after 2018, the amount of the individual shared responsibility payment is permanently reduced to zero.

Re-characterization of Roth Conversions Eliminated: For Roth conversions in tax years beginning after 2017, the act repeals the special rule that allows IRA contributions to one type of IRA (either traditional or Roth) to be re-characterized as a contribution to the other type of IRA. Thus, re-characterization cannot be used to unwind a Roth conversion, but is still permitted with respect to other contributions.

Estate and Gift Tax Retained with Increased Exemption Amount For estates of decedents dying and gifts made after 2017 and before 2026, the act doubles the base estate and gift tax exemption amount from $5 million to $10 million. The $10 million amount is indexed for inflation occurring after 2011 and is expected to be approximately $11.2 million in 2018 ($22.4 million per married couple). Many of our wealthier clients have been postponing certain lifetime estate planning initiatives due to the legislative uncertainty and the act now provides some clarity. However, many of the new law’s provisions expire at the end of 2025. Remember the “fiscal cliff” situation at the end of 2012 where estate tax exemptions were scheduled to revert back to lower figures. The prospect of this sunset will unfortunately cause there to be some continued level of uncertainty as it relates to gifting for federal estate tax planning purposes after 2025.

Business Corporate and Nonprofit organizations Tax Provisions: C Corporation Tax Rates lowered. For tax years beginning after 12/31/17, the act lowers the corporate tax rate to a flat 21%. This applies to personal service corporations as well. According to the GOP, a significantly lower corporate tax rate is needed to promote economic growth and global competitiveness.

Dividends Received Deduction Corporations are generally permitted a special deduction for dividends received. If the corporation owns at least 20% of another corporation, an 80% dividend received deduction is permitted. Otherwise, the deduction is limited to 70%. If the payor and recipient corporations are members of the same affiliated group, a 100% dividend received deduction is allowed. Under the act, the 80% dividends received deduction is reduced to 65%, and the 70% deduction is reduced to 50%. This applies to tax years beginning after 12/31/17.

Alternative Minimum Tax (AMT): The act repeals the corporate AMT for tax years beginning after 12/31/17. For tax years beginning after 2017 and before 2022, the AMT credit is refundable and can offset regular tax liability in an amount equal to 50% (100% for tax years beginning in 2021) of the excess of the minimum tax credit for the year over the amount of the credit allowable for the year against regular tax liability. This means the full amount of the minimum tax credit will be allowed in tax years beginning before 2022.

Expensing and Depreciating Property (Section 179): Under pre-act law, the maximum Section 179 deduction was scheduled to be $520,000 for 2018. In addition, the qualifying property phase-out threshold was scheduled to be $2,070,000. The act increases the maximum Section 179 deduction and phase-out threshold to $1 million and $2.5 million, respectively, for property placed in service in tax years beginning after 12/31/17. The act also expands the definition of Section 179 property to include certain tangible personal property used predominantly to furnish lodging and certain improvements to nonresidential real property such as roofs, HVAC, fire protection, alarm and security systems.

Immediate Expensing of Qualifying Business Assets: The act establishes a 100% first-year deduction for qualified property acquired and placed in service after 9/27/17 and before 1/1/23 (1/1/24 for certain property with longer production periods). This applies to new and used property. In later years, this first-year deduction phases down as follows: • 80% for property placed in service in 2023. • 60% for property placed in service in 2024. • 40% for property placed in service in 2025. • 20% for property placed in service in 2026. Note: For qualifying property placed in service after 9/27/17, business owners can take advantage of this provision on their 2017 tax returns. Or, under a first-year transition rule, they can stick with current law and claim 50% bonus depreciation.

Increased Luxury Automobile Depreciation Limits: There are limits for the annual amount of depreciation that can be claimed for passenger autos. For passenger autos placed in service after 12/31/17 for which bonus depreciation is not claimed, the maximum amount of allowable depreciation is increased to $10,000 for the placed-in-service year, $16,000 for the second year, $9,600 for the third year, and $5,760 for the fourth and later years. For passenger autos eligible for bonus first-year depreciation, the increase to the first-year depreciation limit remains $8,000.

Shortened Recovery Period for Real Property: For property placed in service after 12/31/17, the separate definitions of qualified leasehold improvement, qualified restaurant, and qualified retail improvement property are eliminated. The act requires any real property trade or business that elects to be excluded from the interest deductibility limitations must utilize the alternative depreciation system (ADS) with respect to its depreciable real property. The act imposes a general 15-year recovery period (20 years for ADS) for qualified improvement property.
In addition, the ADS recovery period for residential rental property is shortened from 40 to 30 years.

Interest Expense Limited: Regardless of its form, every business will be subject to a net interest expense disallowance. For tax years beginning after 12/31/17, net interest expense in excess of 30% of the company’s adjusted taxable income will be disallowed. However, taxpayers (other than tax shelters) with average annual gross receipts for the prior three years of $25 million or less are exempt from this limitation. The amount of any business interest not allowed as a deduction for any taxable year may be carried forward indefinitely and utilized in future years, subject to this and other applicable interest deductibility limitations and to certain restrictions applicable to partnerships.

Net Operating Loss (NOL) The act generally repeals the two-year carryback rule for NOLs. For losses arising in tax years beginning after 12/31/17, the NOL deduction is limited to 80% of taxable income. NOLs can be carried forward indefinitely.

Domestic Manufacturing Deduction Repealed: Section 199 allows a deduction equal to a percentage of the income earned from certain manufacturing and other production activities conducted within the U.S. For tax years beginning after 12/31/17, the Section 199 deduction is repealed.

Like-kind Exchanges Limited to Real Property (Section 1031): The act limits the like-kind exchange rules so they apply only to real property that is not held primarily for sale.

Research and Experimental Expenses: For amounts paid or incurred in tax years beginning after 12/31/21, the act requires specified research and experimental (R&E) expenses to be capitalized and amortized ratably over five years or 15 years if R&E is conducted outside of the U.S. Specified R&E expenses include costs for software development.

Deduction for Fringe Benefits: The act makes the following adjustments to the fringe benefit rules (for amounts paid or incurred after 12/31/17): • Disallows deductions for entertainment, amusement, or recreation activities expenses. The denied deductions would also include any membership dues, fringe benefits provided to employees in the form of an on-premises gym, and other athletic facilities. It also expands the current 50% limit on the deductibility of business meals to those provided in an in-house cafeteria or otherwise on the employer’s premises. For amounts paid or incurred after 12/31/25, the act disallows an employer’s deduction for expenses associated with meals provided for the convenience of the employer on its business premises, or provided on or near the employer’s business premises through an employer-operated facility that meets certain requirements.

Denies a deduction for employee transportation fringe benefits: However, the act retains the exclusion from income for such benefits received by an employee. Eliminates a deduction for transportation expenses that are the equivalent of commuting for employees, except as provided for the safety of the employee.

New Credit for Employer-paid Family and Medical Leave For tax years beginning after 12/31/17 and before 1/1/20, the act allows businesses to claim a general business credit equal to 12.5% of the amount of wages paid to qualifying employees during any period in which such employees are on family and medical leave if the rate of payment is 50% of the wages normally paid to an employee. The credit is increased by 0.25 percentage points (but not above 25%) for each percentage point by which the rate of payment exceeds 50%. All qualifying full-time employees have to be given at least two weeks of annual paid family and medical leave.

Expansion of Cash Method of Accounting: For tax years beginning after 12/31/17, the cash method may be used by taxpayers (other than tax shelters) that satisfy a $25 million gross receipts test, regardless of whether the purchase, production, or sale of merchandise is an income producing factor. In addition, such taxpayers are not required to account for inventories. Instead, they may treat inventories as non-incidental materials and supplies or conform to their financial accounting treatment of inventories.

Long-term Construction Contracts: Generally, construction companies with average annual gross receipts of $10 million or less in the prior three years are exempt from the Percentage of Completion Method (PCM). The act expands this exemption to contracts for the construction or improvement of real property if the contract (1) is expected to be completed within two years and (2) is performed by a taxpayer that meets the $25 million gross receipts test discussed earlier. This change is effective for contracts entered into after 12/31/17.

As you can see, the act is going to bring a lot of changes to individual and business taxpayers. On the plus side, this means more planning opportunities for many as we all try to navigate through uncertain territory. This blog only touches the surface of one of the biggest tax overhauls in the nation’s history. If you need help with your taxes or have any questions please call Gregory J. Spadea at 610-521-0604. The Law Offices of Spadea & Associates, LLC prepares tax returns year round and is conveniently located in Ridley Park, Pennsylvania.

11 Exceptions Where the IRS May Waive the 60 Day Deadline for IRA Rollovers

Internal Revenue Service sign.

The IRS gives you 60 days to rollover an Individual Retirement Account (IRA) into another IRA or qualified plan. However, if you fail to rollover the IRA in 60 days or fail to qualify for the waiver, the entire distribution will be taxable and you may be subject to an additional 10% penalty if you are under 59½ years old. Fortunately, there are 11 exceptions where the IRS will waive the 60 day rule and give you additional time to make the Rollover contribution. To qualify for the waiver the IRS must not have previously denied a waiver request with respect to a rollover of all or part of the distribution to which the contribution relates. In addition you must submit written certification to a plan administrator or IRA trustee within 30 days after being able to make the rollover contribution. If you miss the 60 day deadline because of one of the 11 reasons listed below the IRS will issue a waiver and allow you to make the rollover contribution beyond the 60 days.

To qualify you must have missed the 60-day deadline because of your inability to complete a rollover due to one or more of the following 11 reasons:

  1. An error was committed by the financial institution making the distribution or receiving the contribution.
  2. The distribution was in the form of a check and the check was misplaced and never cashed.
  3. The distribution was deposited into and remained in an account that you mistakenly thought was a retirement plan or IRA.
  4. Your principal residence was severely damaged.
  5. One of your family members died.
  6. You or one of my family members was seriously ill.
  7. You were incarcerated.
  8. Restrictions were imposed by a foreign country.
  9. A postal error occurred.
  10. The distribution was made on account of an IRS levy and the proceeds of the levy
    have been returned to you.
  11. The party making the distribution delayed providing information that the receiving plan or IRA required to complete the rollover despite your reasonable efforts to obtain the information.

If you missed the 60 day deadline on your IRA rollover and think you qualify under any of the 11 exceptions listed please call Gregory J. Spadea at 610-521-0604.

How Much Can I Deduct For a Business Car or Truck in 2017 under IRC Section 179

A row of shiny new trucks parked at a car dealership.

To encourage businesses to buy equipment as well as cars and trucks Congress passed Internal Revenue Code (IRC) Section 179. For passenger vehicles, trucks, and vans with a gross weight of less than 6,000 pounds that are used more than 50% in a qualified business use, the total deduction for depreciation including both the Section 179 expense deduction as well as 50% Bonus Depreciation is limited to $11,160 for cars and $11,560 for trucks and vans. Keep in mind you only get bonus depreciation on new vehicle purchases.

For example if the car cost $30,000 and is used 100% for business, the business would get an IRC Section 179 deduction of $11,160 and a regular depreciation deduction of $3,768 (20% of the $18,840.00 difference). Therefore, you can deduct up to $14,928 if you buy a new car and use it 100% for business. If the vehicle is used less than 100% for business both the Section 179 deduction and regular depreciation deduction are reduced proportionately based on the actual business use percentage.

SUV’s, trucks and vans with a gross vehicle weight rating above 6,000 pounds but no more than 14,000 pounds qualify for expensing up to $25,000 if the vehicle is financed and placed in service prior to December 31. In addition, the business can deduct 50% of the remaining cost over $25,000 as bonus depreciation, but that only applies to new vehicle purchases.

For example, a new heavy SUV used 100% for business that costs $52,000 and qualifies for Section 179 could be written-off in 2017 as follows:

  • First Year Section 179 Deduction: $ 25,000
  • Bonus Depreciation (50% of remaining balance): $13,500
  • Regular Depreciation (20% of remaining balance): $2,700
  • Total First-Year Write-Off: $ 41,200

Keep in mind that businesses that experience net operating losses cannot claim an IRC Section 179 deduction that would create or increase an overall business tax loss. However they may take the 50% bonus depreciation deduction, and carry the remaining net operating loss forward where it can be used in future years.

Note that under the Protecting Americans from Tax Hikes Act of 2015, bonus depreciation is scheduled to be reduced to 40% in 2018 and 30% in 2019 before it expires on December 31, 2019.

Here’s a list of 2016 model cars with a gross weight over 6,000 lbs. Usually a vehicle will have its weight listed on the side door. If you’re unsure, just ask the dealer.

  • Audi Q7 3.0L TDI
  • BMW X5 XDRIVE35I and X6 XDRIVE35I
  • BMW Buick ENCLAVE
  • Cadillac ESCALADE AWD
  • Chevrolet Truck AVALANCHE 4WD
  • Chevrolet Truck SILVERADO
  • Chevrolet Truck SUBURBAN
  • Chevrolet Truck TAHOE 4WD, TRAVERSE 4WD
  • Dodge Truck DURANGO 4WD
  • Ford Truck EXPEDITION 4WD, EXPLORER 4WD
  • Ford Truck F-150 4WD and FLEX AWD
  • GMC ACADIA 4WD, SIERRA and YUKON 4WD and XL
  • Infiniti QX56 4WD
  • Jeep GRAND CHEROKEE
  • Land Rover RANGE ROVER 4WD and SPT and LR4
  • Lexus GX460 and LX570
  • Lincoln MKT AWD
  • Mercedes Benz G550 and GL500
  • Nissan ARMADA 4WD and NV 1500 S V6 and NVP 3500 S V6
  • Nissan TITAN 2WD S
  • Porsche CAYENNE
  • Toyota 4RUNNER 4WD, LANDCRUISER, SEQUOIA 4WD LTD and TUNDRA 4WD
  • Volkswagen TOUAREG HYBRID

If you have any questions or need help with your taxes or business deductions call Gregory J. Spadea at 610-521-0604. The Law Offices of Spadea & Associates, LLC is located in Ridley Park and prepares business and individual tax returns year round.

2015 Estates and Trusts Income Tax Rates

House, money, calculator and forms
The applicable table set forth below shows the 2015 Income tax rates on estates and trusts:

Tax Rate Limit
15% on Taxable Income to: $2,500
25% on next Taxable Income to: $5,900
28% on next Taxable Income to: $9,050
33% on next Taxable Income to: $12,300
39.6% on next Taxable Income above: $12,300

Trusts and estates are also subject to the increase in capital gains tax rates from 15 to 20 percent as well as the 3.8 percent surtax on investment income. Note, however, that the new rates apply only to non-grantor trusts and estates that accumulate income. Trusts and estates are allowed a deduction for income distributed to beneficiaries, who are then taxed in the year of distribution. Grantor trusts, by definition, do not pay income taxes since all income of a grantor trust is reportable by the grantor on his individual 1040 income tax return.

The challenge posed by the new tax law is how much of and when to distribute income to beneficiaries of non-grantor, complex trusts which are trusts that are not required by their terms to annually distribute all income to their beneficiaries. Distributing income today lowers trust taxation, and may, depending on the income enjoyed by beneficiaries, reduce the overall tax burden.

Given that trust income in excess of only $12,300 is taxed at the maximum rate of 39.6 percent, while much larger amounts of income are required ($464,850 for a married couple filing jointly, $413,200 for a single filer) before the maximum rate kicks on individuals, trustees may need to reallocate and rebalance trust portfolios to obtain an overall better tax result. Trustees will also need to pay close attention to the varying needs of beneficiaries and their individual tax rates. Given the wide disparity in rates and bracket amounts between individuals and trusts, trustees must consider not only the needs of current beneficiaries, but also those of future generations of beneficiaries. If you have any questions about trust taxation contact Gregory J. Spadea at 610-521-0604 of the Law Offices of Spadea & Associates, LLC in Ridley Park, Pennsylvania.

The 2015 Protecting Americans From Tax Hikes Act

The 2015 Protecting Americans from Tax Hikes (PATH) Act

A picture of a tax return form
The Protecting Americans from Tax Hikes (PATH) Act – the extenders component of H.R. 2029 makes permanent several lapsed business, individual, and charitable giving incentives, such as the research credit, the subpart F exception for active financing income, and tax-free IRA distributions for charitable contributions by individuals age 70-1/2 and older. It also renews a handful of provisions such as bonus depreciation, the work opportunity and new markets credits, and production and investment tax credits for wind and solar energy for five years.

1. BUSINESS EXTENDERS

1. Permanent extensions: The PATH Act permanently extends several business provisions retroactive to the end of 2014. It also modifies certain provisions prospectively.
1. Research and experimentation credit – The research credit is made permanent. For taxable years beginning after 2015, the credit is modified to allow an eligible small business to claim the credit against both its regular tax and alternative minimum tax (AMT) liabilities. Beginning in 2016, certain small businesses also may claim the credit against the employer portion of their payroll tax liability, rather than against their income tax liability.
2. Increased expensing limits under section 179 – The bill makes permanent the increased expensing limit and phase-out threshold under section 179 – $500,000 and $2 million, respectively – which most recently lapsed at the end of 2014. (Under current law, those amounts have fallen to $25,000 and $200,000, respectively). Additionally, the extenders bill permanently allows taxpayers to expense off-the-shelf computer software and qualified real property (i.e., qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property) under section 179provisions that also lapsed at the end of 2014. For taxable years beginning after 2015, the bill (1) indexes the expensing limits to inflation, (2) repeals the limitation on the amount of section 179 property that can be attributable to qualified real property, and (3) adds air conditioning and heating units to the definition of qualifying property.
3. Other business provisions made permanent – The legislation also makes permanent a handful of other business incentives, including the:

  1. Reduced recognition period (i.e., five years rather than 10) after which S corporations can avoid built-in gains tax following conversion from C corporation status;
  2. 100 percent gain exclusion for Qualified Small Business Stock, including the elimination of the exclusion as an AMT preference item;
  3. 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements.

2. Long-term extensions: A handful of other business provisions receive longer-term, but not permanent, extensions. These include:

  1. Bonus depreciation – The PATH Act extends bonus depreciation for qualified property placed in service over the next five years (i.e., through 2019), subject to a phase-out schedule: 50 percent bonus depreciation continues for 2015, 2016, and 2017, with the percentage falling to 40 percent in 2018, and 30 percent in 2019. After 2015, the bill also allows bonus depreciation to be claimed on qualified improvement property regardless of whether the property is subject to a lease, and removes the requirement that an improvement be placed in service more than three years after the building was placed in service.
  2. Work opportunity tax credit – Under the PATH Act, the work opportunity tax credit (WOTC) is extended through 2019 and expanded beginning in 2016 to include as a targeted group certain long-term unemployed individuals (i.e., those certified as having been unemployed at least 27 weeks). Employers who hire individuals from this new targeted group would be eligible to receive a credit of 40 percent of the first $6,000 in wages paid.

2. CHARITABLE GIVING EXTENDERS

The PATH Act makes permanent several incentives to promote charitable giving by businesses and individuals.
1. Charitable contributions of food inventory: The legislation permanently extends the deduction for charitable contributions of food inventory and expands it by:

  1. Increasing the contribution limit for C corporations to 15 percent (from 10 percent) of the taxpayer’s net income for the taxable year, and increasing the limit for a taxpayer that is not a C corporation to 15 percent of the taxpayer’s aggregate net income for the taxable year from all trades or businesses from which such contributions were made for the taxable year;
  2. Providing a five-year carryforward for qualifying food inventory contributions that exceed the 15 percent limit; and
  3. Adding presumptions that certain taxpayers may use in determining the tax basis and the fair market value of donated food inventory.
  4. The extension generally is effective for contributions made after December 31, 2014. The expanded incentives apply for tax years beginning after December 31, 2015.

2. Other charitable giving provisions: Several other charitable giving incentives are made permanent without additional modifications. These include:

  1. Tax-free treatment of distributions from individual retirement plans by individuals age 70-1/2 and older for charitable purposes;
  2. The special rules for contributions of capital gain real property made for conservation purposes;
  3. The basis adjustment to stock of S corps making charitable contributions of property.

3. INDIVIDUAL EXTENDERS

  1. Among the items in the PATH Act targeted at individual taxpayers is a provision that permanently extends the deduction for state and local sales taxes in lieu of a deduction for state and local income taxes. This is of particular interest to itemizers in states that do not impose an income tax.
  2. The PATH Act also makes permanent enhancements to the earned income tax credit and child tax credit that were enacted in the American Recovery and Reinvestment Act of 2009 and scheduled to expire in 2017.
  3. Notable among the items extended for 2015 and 2016 is one provision that allows individuals to exclude from income for tax purposes the debt forgiven by a bank on the short sale or foreclosure of a home and another that treats private mortgage insurance premiums as deductible interest payments.

Changes to implementation of PPACA taxes
Both the PATH Act and the omnibus appropriations components of H.R. 2029 include provisions that suspend or delay implementation of certain PPACA taxes:

  1. Medical device excise tax – The medical device excise tax is suspended for sales in 2016 and 2017 (included in the PATH Act).
  2. Cadillac tax – Implementation of the so-called “Cadillac” tax on high-cost employer provided health insurance plans is delayed for two years, until 2020 (included in the omnibus appropriations section).
  3. Annual fee on health insurance providers – This fee is suspended for 2017 (also included in the omnibus appropriations section).

Section 529 plan changes

The PATH Act includes a non-extender provision that liberalizes the rules for section 529 education savings plans by:

  1. Expanding the definition of qualified higher education expenses to include computer equipment and technology;
  2. Simplifying the treatment of distributions for individuals with multiple section 529 accounts; and
  3. Treating as a qualified expense any recontribution of tuition refunds if the recontribution is made within 60 days.
  4. These changes generally take effect for distributions made or refunds after December 31, 2014.

If you need help with preparing your business or personal taxes please contact Gregory J. Spadea at 610-521-0604.

3 Advantages for Converting a Sole Proprietorship to LLC

Stop, pay your taxes!
There are 3 main advantages for converting your proprietorship into a Limited Liability Company (LLC). The main advantage of operating as a limited liability company is that there is limited liability for the sole proprietor which means the owner’s personal assets are not exposed to the risks and liabilities of their business operations. The concept of the LLC statute is that the owner (technically referred to as a “member”) does not have any personal liability for business debts solely by reason of being a member. This liability protection could be particularly advantageous if you have employees working in the business, as their actions could potentially expose the owner’s personal assets. Of course, this does not relieve the owner of responsibility for personal actions nor for any debts personally guaranteed.

The second advantage of forming an LLC is the flexibility of choosing to be taxed as either a partnership, S-Corporation or as a sole proprietor, despite forming a separate LLC entity under state law. This becomes important because you can start off electing to be taxed as a sole proprietor, and as your business grows and when your annual net income exceeds $20,000 you can elect your LLC to be taxed as an S-Corporation. You can pay yourself a reasonable salary and then set up and contribute up to $15,500 to a Simple IRA, as well as up to $6,500 to a Roth IRA to maximize your retirement savings.

The third advantage is minimizing your taxes, because you do not pay the 15.3% social security tax on your S corporation net income just on the wages you pay yourself. In addition by contributing to a Simple IRA you reduce your federal income tax on the amount you contribute.

For example, in 2015, a 51 year old owner forms a single member LLC that makes an election and grosses $125,000 and nets $45,000 after expenses and after his LLC pays him $30,000 in wages. Assume the member makes the maximum $15,500 employee contribution to a Simple IRA. He would pay regular income tax at 20% on the $45,000 net income from the LLC. He would also pay self-employment tax and income tax on the $30,000 in wages.

LLC Taxed as an S-CORP Sole Proprietorship
Gross Receipts $125,000 $125,000
Less Operating Expenses 50,000 50,000
Less Salary 30,000 —–
Net Income 45,000 75,000
Income tax 9,000 18,500
Self-Employment (FICA) tax —- 6,100
FICA Tax on W-2 wages 4,600 —–
Income tax on wages 6,000 —–
Total Income tax 19,600 24,600

In the above example, the member saved $5,000 in FICA tax by making an S election and contributing $15,500 into a Simple IRA. If the member contributes the maximum employee contribution to his Simple IRA of $15,500, then the Member will save an additional $3,100 in federal income tax on top of the $5,000 in savings in FICA tax savings indicated above. The member could also contribute $6,500 to a ROTH IRA but would receive no current year tax dedduction.

It is important to keep in mind that once the owner begins conducting business as an LLC, it will be necessary to consistently use the LLC designation on the business letterhead, the business checking account, business licenses, and the like. The owner would need to go through the process of adding the LLC designation to the various contracts, leases and documents under which business is conducted. The owner should never pay personal expenses out of the LLC bank accounts and should ensure the LLC has proper liability insurance. If you have any questions about forming an LLC, please contact Gregory J. Spadea at 610-521-0604 from the Law Offices of Spadea & Associates, LLC.

Requesting Abatment of Interest Due to IRS Error or Delay

Requesting Abatement of Interest Due to IRS Error or Delay

Stop, pay your taxes!

Clients will typically ask me if interest can be abated after I successfully abated all the IRS tax penalties. Unfortunately, interest cannot be abated for reasonable cause like penalties can. However, the interest charged on a penalty will be reduced or removed when that penalty is reduced or removed. If an unpaid balance remains on your account, interest will continue to accrue until the account is fully paid.

The IRS can abate interest if the interest is caused by IRS errors or delays. The IRS will abate the interest only if there was an unreasonable error or delay in performing a managerial or ministerial act. The term “managerial act” means an administrative act that occurs during the processing of your case involving the temporary or permanent loss of records or the exercise of judgment or discretion relating to management of personnel. An example would be if the auditor was assigned to a three month detail in the middle of handling your case and your case was not reassigned and just sat for three months until the auditor returned.

The term “ministerial act” means a procedural or mechanical act that does not involve the exercise of judgment or discretion and occurs during the processing of your case after all prerequisites of the act, such as an appeal conference and review by supervisors have taken place. For example if the IRS never sends you a final exam report or a statutory notice of deficiency at the conclusion of your conference with Appeals that would constitute IRS delay.

Remember that you cannot have caused any significant aspect of the error or delay. In addition, the interest can be abated only if it relates to taxes for which a notice of deficiency is required. This includes income taxes, generation-skipping transfer taxes, estate and gift taxes, and certain excise taxes. Interest related to employment taxes or other excise taxes cannot be abated.

You would have to file Form 843 to formally request an abatement of interest on your federal liability and indicate the dates of any payment of interest on the tax liability. If you need help filing the Form 843 call Gregory J. Spadea at 610-521-0604 of the Law Offices of Spadea & Associates, LLC located in Ridley Park, Pennsylvania.

5 Ways You Can Take Control of a Pennsylvania Sales Tax Audit

5 Ways You Can Take Control of a Pennsylvania Sales Tax Audit

Audit

Undergoing any type of an audit can be scary, but just because your company is being audited, doesn’t mean that you can’t take control of the audit to help ensure a positive outcome.   One of the first steps in a sales tax audit is the opening conference with the auditor.  This is one of your first and best opportunities to take control of the audit and set the tone for how it will progress.  Here are five ways that you can set the tone for a sales tax audit during this opening conference.

  • 1. Have the audit at your attorney’s office. The reason is you do not want the sales tax auditor disrupting your company’s operations. You will have to give a tour of the business to the auditor at some point but the records can be reviewed at your attorney’s office.   If the auditor is working in a windowless conference room they will stay focused on the job at hand and be on their way.  This also has the added benefit of not having the auditor work near your accounting department so they don’t accidentally overhear any sensitive information.
  • 2. Have your Tax Attorney as the only contact person.  You should have your tax attorney deal directly with the auditor.   This ensures that potentially sensitive information won’t be leaked accidentally to the auditor by other employees. It also ensures you do not provide any information that could expand the scope of the audit./li>
  • 3. Request the specific information needed to track a transaction. The auditor will ask for your gross receipts journal and your sales journal to determine you filed the monthly sales tax returns correctly. Then the auditor will select a specific transaction to examine, It is important that you only provide the auditor with the specific information they need and not any additional records that may expose a vulnerability or expand the scope of the audit.
  • 4. Request the statute or rule that supports the auditor’s taxation.  Notify the auditor up front that you would like them to provide the statute or rule to back up their determination of taxation for any items that may be in question.
  • 5. Request a supervisor’s involvement if there is a disagreement.  If you are encountering any issues during the audit, it’s best to deal with those issues while the auditor is on premises.  If you are unable to resolve an issue request a supervisor’s involvement. In addition you can always appeal a final assessment to the Pennsylvania Board of Appeals within 90 days if all else fails.

If you receive an audit letter please call Gregory J. Spadea at 610-521-0604 in Ridley Park, Pennsylvania.

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