Tax reform expands availability of cash accounting

Under the Tax Cuts and Jobs Act (TCJA), many more businesses are now eligible to use the cash method of accounting for federal tax purposes. The cash method offers greater tax-planning flexibility, allowing some businesses to defer taxable income. Newly eligible businesses should determine whether the cash method would be advantageous and, if so, consider switching methods.

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Close-up on the new QBI deduction’s wage limit

The Tax Cuts and Jobs Act (TCJA) provides a valuable new tax break to noncorporate owners of pass-through entities: a deduction for a portion of qualified business income (QBI). The deduction generally applies to income from sole proprietorships, partnerships, S corporations and, typically, limited liability companies (LLCs). It can equal as much as 20% of QBI. But once taxable income exceeds $315,000 for married couples filing jointly or $157,500 for other filers, a wage limit begins to phase in.

Full vs. partial phase-in

When the wage limit is fully phased in, at $415,000 for joint filers and $207,500 for other filers, the QBI deduction generally can’t exceed the greater of the owner’s share of:

  • 50% of the amount of W-2 wages paid to employees during the tax year, or
  • The sum of 25% of W-2 wages plus 2.5% of the cost of qualified business property (QBP).

When the wage limit applies but isn’t yet fully phased in, the amount of the limit is reduced and the final deduction is calculated as follows:

  1. The difference between taxable income and the applicable threshold is divided by $100,000 for joint filers or $50,000 for other filers.
  2. The resulting percentage is multiplied by the difference between the gross deduction and the fully wage-limited deduction.
  3. The result is subtracted from the gross deduction to determine the final deduction.

Some examples

Let’s say Chris and Leslie have taxable income of $600,000. This includes $300,000 of QBI from Chris’s pass-through business, which pays $100,000 in wages and has $200,000 of QBP. The gross deduction would be $60,000 (20% of $300,000), but the wage limit applies in full because the married couple’s taxable income exceeds the $415,000 top of the phase-in range for joint filers. Computing the deduction is fairly straightforward in this situation.

The first option for the wage limit calculation is $50,000 (50% of $100,000). The second option is $30,000 (25% of $100,000 + 2.5% of $200,000). So the wage limit — and the deduction — is $50,000.

What if Chris and Leslie’s taxable income falls within the phase-in range? The calculation is a bit more complicated. Let’s say their taxable income is $400,000. The full wage limit is still $50,000, but only 85% of the full limit applies:

($400,000 taxable income – $315,000 threshold)/$100,000 = 85%

To calculate the amount of their deduction, the couple must first calculate 85% of the difference between the gross deduction of $60,000 and the fully wage-limited deduction of $50,000:

($60,000 – $50,000) × 85% = $8,500

That amount is subtracted from the $60,000 gross deduction for a final deduction of $51,500.

That’s not all

Be aware that another restriction may apply: For income from “specified service businesses,” the QBI deduction is reduced if an owner’s taxable income falls within the applicable income range and eliminated if income exceeds it. Please contact us to learn whether your business is a specified service business or if you have other questions about the QBI deduction.

Three Tips for Starting a Business

When starting a business, understanding your tax obligation is one key to business success. With the internet and the wealth of information found on the web, it’s easy to be misinformed. Hopefully this post will clear up any questions or concerns you may have when starting your business.

  1. Business Structure. One of the first decisions you will make when starting a business is deciding on a business structure. Business structures can have a huge impact on the tax liability of your operations, therefore it is always best to seek council from a CPA or lawyer. The most common forms of businesses are:
    • Sole Proprietorships
    • Partnerships
    • Corporations
    • S-Corporations
    • Limited Liability Company (LLC)
      • There are many misconceptions surrounding the LLC as a business structure.
      • Here are the facts: An LLC is a business structure that is allowed by state statute. Each state has it’s own statutes regarding the requirements for ownership. An LLC has default treatments for federal taxation that may only be changed by timely filing the correct elections. The default treatments are as follows:
        • An LLC with one member (whether individual or another business) is disregarded for federal tax purposes (but still a separate entity for employment taxes and excise taxes)
        • An LLC with two or more members is by default a partnership
      • If an LLC would like to elect a treatment other than the default, it can do so by filing Form 8832 or Form 2553. An LLC can elect to be treated as a Corporation or S-Corporation. An LLC is NOT by default, either of these entities.
  2. Business Taxes. There are four general types of taxes that businesses pay:
    • Income Tax – All business except partnerships must file an annual income tax return. Partnerships, however, file an information return.
    • Self-Employment Taxes -these are social security and medicare taxes primarily levied on individuals who work for themselves (examples would include sole proprietors, single member LLC’s where an individual is the sole owner, and in some cases, partnerships)
    • Employment Taxes – businesses with employees have a responsibility to pay and file forms related to social security taxes, medicare taxes, federal income taxes, and federal unemployment (FUTA) taxes.
    • Excise Taxes – some businesses may be required to pay excise taxes, more information on these taxes can be found on the IRS website.
  3. Employer ID Number (EIN). An EIN or Federal Tax Identification Number is used to identify a business entity. Most businesses can apply for an EIN on the IRS website free of charge. An EIN is recommended, even for sole-proprietors, to obtain a bank account and provide to vendors who may request tax information.

If you have any questions about entity selection or getting your business Launched!, feel free to contact our office or schedule a consulting meeting.

How-To Travel for Pleasure Tax-Free

We live in a global society. As a CPA I am constantly traveling to meet clients or attend tax conferences. If your trip is set up properly, you can reap the tax benefits of travel while still making time for pleasure. I’ve assembled this short blog with some of the highlights every business owner should know.

The regulations on travel can be quite complex and dry, so I will try to make this post as digestible as possible.  The IRS travel rules can be beneficial for every business, but are especially important for small business owners and those who are self-employed.

The most important rule to remember is that a business can deduct 100% of the round-trip transportation costs for a trip undertaken primarily for business. This means if John flies from Austin to Denver for a 5-day business conference and spends 2 days exploring Denver for pleasure, he may still deduct the entire round-trip airfare, giving him a tax-subsidized mini-vaca. Its important to note that the rules vary slightly for individuals employed by a corporation.

If the trip is undertaken primarily for personal reasons, but there is some business being done during the trip, only business related meals and lodging are deductible as travel expenses.

One of my favorite rules in the code I like to refer to as the “sandwich rule”. If you are traveling out of town for a meeting that straddles or “sandwiches” the weekend, you may be entitled to business deductions on Saturday and Sunday, even though you are not satisfying any business purpose. As a small business owner, let’s say you have meetings on Thurday, Friday, and Monday. You fly to Austin Wednesday night, and stay until Monday night, because flying back and forth out of Austin would not be cost efficient under the “common sense test”.  You spend the weekend in Austin rockin’ out at ACL, and get to deduct Saturday and Sunday lodging and 50% of meal expenses as well! Not bad.

Okay, now lets say you want to take your spouse with you. While the expenses your spouse incurs are not deductible (unless they are an employee and serve a bona fide business purpose), a tax benefit still exists. The travel deduction isn’t limited to 50% of the trip expenses, but rather what the trip would have cost if the taxpayer decided to travel alone. To illustrate this concept, lets say that you need a rental car while in Austin for business; 100% of the rental vehicle would still be deductible because its the same price if you were traveling alone.

The best part about these rules is that travel outside the U.S. is generally treated the same as travel within the U.S.

Be on the lookout for a follow up blog on business travel in the next few days where I will show you even more ways to deduct travel for pleasure!

For more information on travel tax benefits available to companies and self-employed individuals, feel free to contact me at paul@launchconsultinginc.com