For Your Information
Your New Life as a Pass-Through Entity Owner
If you are a small business owner, your planning probably got a lot trickier after the passage of the Tax Cuts and Jobs Act (TCJA). That's because most small businesses have legal structures that are treated as pass-through entities for tax purposes, meaning they "pass-through" income to the owners or investors, which they record on their Form 1040 individual tax returns. These entities include S corporations, partnerships and sole proprietorships.
On one hand, these kinds of businesses will benefit from the TCJA's 20 percent reduction to the taxation of business income. On the other, the rules used to determine how much of that reduction each business gets are complex. Here are some tips to help find out where your business falls in the new structure:
1. Know your business’s QBI
QBI stands for "qualified business income," which is generally your business net income other than income in the way of compensation. QBI is the basic figure you need to determine how much of the 20 percent reduction you get. It excludes business losses, as well as factoring in amortization and capitalized expenditures. QBI is determined separately for each business activity, not per taxpayer.
The first simple threshold rule is:
If your taxable income is less than $157,500 as an individual filer, or $315,000 as a married couple filing jointly, you can take the full 20 percent deduction from your QBI.
If your taxable income is higher than those levels, several other factors come into play. Buckle up and hold on, here is where it gets complex:
2. Know whether your profession matters
Several "specified service professions" are treated differently under the new rules. The list includes health, law consulting, athletics, financial services, brokerage services, accounting firms or "any trade or business where the principal asset … is the reputation or skill of one or more of its employees or owners." If your business is in one of these professional areas, the 20 percent reduction to your QBI starts to phase out to zero once your taxable income passes $157,500 as an individual filer or $315,000 as a married joint filer. The phase-out range before the reduction reaches zero is $50,000 for individual filers and $100,000 for married filers. The phase-out range also determines how much of the next factor matters:
3. Know whether wage and capital limits matter
Once you go above the threshold, special wage and capital limits start to reduce your deduction. The formula for calculating the wage and capital limits is based on the greater of 50 percent of the W-2 wages paid by your business, OR 25 percent of the W-2 wages, plus 2.5 percent of the unadjusted basis of all qualified property acquired by your business over the year. These wage and capital limits are phased in over the threshold and apply in full after passing the $50,000 range for individual filers or $100,000 for married filers.
Bottom line: Get help
As you can see, the 20 percent pass-through reduction can be a great benefit, but taking it can get complex very quickly. If you are a small business owner, don't try to do it yourself. The new rules apply for the 2018 tax year, so after you've wrapped up 2017 taxes under the old rules, contact us for a consultation to determine how to position your business under the new laws. In the meantime, please be patient. The IRS has yet to publish guidance on the new rules.
Reduce Your Property Taxes
With the passage of the Tax Cuts and Jobs Act, deductions of state, local and property taxes are not worth as much as they used to be. Beginning in 2018, taxpayers are limited to a total of $10,000 in combined state income, sales and property taxes as an itemized deduction. One way you can try to adapt is by lowering your property tax bill. Believe it or not, there is a way.
Why you may need a property tax reassessment
Property taxes are the revenue lifeblood of cities, counties, school districts and states, and they fluctuate along with house prices. Because local governments are eager to collect more tax revenue, they are quick to get property values assessed higher when times are good. But they aren't as quick to get values lowered again when the economy falters. As a result, over time your property value tends to creep up without downward corrections. When added to increased property tax rates, your bill today can be much higher than in the past.
What you can do about it
If you dread the annual letter informing you that your property tax is going to go up again, one thing you can try is to approach your local assessor and ask for a property revaluation. Here are some ideas to successfully reduce your home's appraised value:
• Understand process and due dates. Do some homework to understand the approved process to get your property revalued. It is typically outlined on your property tax statement. Understand the deadlines and adhere to them.
• Assess your property. Do some homework before you call your assessor. Talk to neighbors and honestly assess the amount of disrepair your property may be in versus other comparable properties in your neighborhood.
• Call a few real estate professionals. Tell them you would like a market review of your property. Try to choose a professional that will not overstate the value of your home hoping to get a listing, but will show you comparable sales for your area.
• Check the classification. Look at your property classification in the detailed description of your home. Oftentimes errors in this code can overstate the value of your home. For instance, if you live in a condo that was converted from an apartment, the property value could still be based on a non-owner occupied rental basis.
• Understand first, then clarify your position. Armed with the information you've collected, approach the assessor seeking first to understand the basis of their appraisal. Then position your request for a review based on the facts. Do not fall into the trap of defending your review request without first having all the information on your property.
• Estimate a reasonable value. Suggest a reasonable valuation to the assessor. Assessors are so used to irrational arguments, that they may readily accept a reasonable approach.
• Get an appraisal, if necessary. If all else fails and you still believe your home is overvalued, consider spending the money for an independent appraisal. This option could be expensive, but can provide a fairly decent defense of your position. You should be able to recoup the cost of the appraisal with many years of lower property taxes.While going through this process, remember to be aware of the pressure that these local tax authorities are under to raise revenue. This understanding can help temper your position and hopefully put you in a better position to have your case heard.
Does Your Business Need Cyber Insurance?
It's a nightmare scenario few small businesses consider: hackers breach your computer system, steal your customer lists and threaten to exploit sensitive data. Data breaches by malicious individuals don't just pose a financial risk. They threaten your reputation and can trigger litigation if your customers blame you for the exposure of their data.
So far, many of the victims of these high-profile attacks are large corporations. A poster child for this is the massive 2017 cyber breach of the credit reporting agency Equifax, which affected more than 143 million Americans. Equifax's financial loss was estimated at $125 million, equal to more than a quarter of their net income during 2016. Equifax also reportedly faces more than 50 class action lawsuits, which also may be covered by the company's insurers.
Here are some things to consider regarding the management of your cyber risk with potential insurance coverage:
• Do you have coverage? Your insurance policy may already cover some of the risks of cyber-attacks. A good place to start is to review your policy and understand what is covered, if anything. Also spend time evaluating your potential risk to determine how it correlates to your insurance coverage.
• Comprehensive or partial? Depending upon how you assess your risk, you may consider either comprehensive cyber insurance or partial coverage in the form of a rider or endorsement on an existing policy. Talk to your current insurance firm to determine your alternatives. Because cyber insurance is still a new service, your provider's options may be limited. The cyber insurance market is currently dominated by four major insurers that offer comprehensive insurance, according to Business Insurance magazine: American International Group, Beazley, Chubb and Zurich Insurance Group. Partial coverage may include riders covering errors and omissions, and the cost of business interruption caused by cyber-attacks.
• Unique elements of a cyber insurance policy. Most comprehensive cyber insurance policies cover breach-response and forensic costs. This covers the cost of finding the cause of a data breach, fixing it and limiting the damage. Comprehensive policies should provide liability coverage in case you are sued by customers as a result of their data being exposed during the attack.
• Know the exclusions. Some cyber insurance policies do not cover breaches caused by infrastructure failure, or attacks by state-sanctioned hackers, according to ThinkAdvisor. There have been many high-profile cyber-attacks allegedly attributed to hackers affiliated with the Russian and Chinese governments in recent years, so know how your policy covers this situation.
5 tips for smarter banking
Banks are a necessary tool to navigate our daily financial lives. Unfortunately, there are aggravating practices at many banks that drive us crazy or cost us money. Here are five tips to get more out of your bank and pay less.
Tip #1: Remove cash from the right place. Never use an ATM machine that is not in your bank's network. In-network cash withdrawals cost nothing at most banks, but withdrawals from someone else's machine may come with a $3 to $5 fee.
Action: Turn over your ATM or debit card and note the networks on the back of the card; or ask your bank about their network coverage. Only use ATMs within the network. Test a transaction to ensure no fee is included on your statement.
Tip #2: Notify your credit card issuer when traveling. Most credit card-issuing banks now automatically freeze your cards when a suspicious transaction occurs out of state. This freeze often includes foreign website transactions.
Action: Call your credit card issuer when you are going to be traveling. Also notify them if you wish to order an item from a foreign website. This can alleviate numerous headaches. While some banks may not block out-of-state transactions, you do not want to have a transaction rejected while purchasing something on a trip.
Tip #3: Know your bank's overdraft rules. Non-sufficient funds (NSF) checks are not only embarrassing, they are expensive. Banks make millions on their overdraft fees and automatic loan features when you overdraw your account. Understand your bank's fees and how they apply to your accounts.
Action: Look for a bank that will allow you to link another account to your checking account without charging a fee. For instance, as a courtesy many credit unions allow you to link a savings account to your core checking account. This link comes into play should you inadvertently overdraw your checking account.
Tip #4: Always negotiate fees. If you are a long-standing customer with your bank or credit card company, call them to reduce or waive fees. Good examples of this are over-the-limit credit card fees or late payment fees. If you have multiple checking overdraft fees, negotiate to eliminate as many as possible.
Action: If you are late in paying your credit card or have an overdraft, fix the problem as soon as possible. Only after fixing the problem should you call to negotiate the fees. The bank customer service representative will see your quick action and will be more likely to help reduce the fees.
Tip #5: Be willing to shop. Banks understand the power of inertia. They know it's a pain to change banks. But if you are willing to do so, you might be surprised to find better alternatives for less.
Action: Even interest on savings accounts varies widely from bank to bank. Use the internet to quickly see who is paying what in interest. Do the same for any loans, especially car loans, which vary widely.
6 must-dos when you donate to charity
Donations are a great way to give to a deserving charity, and they also give back in the form of a tax deduction. Unfortunately, charitable donations are under scrutiny by the IRS, and many donations without adequate documentation are being rejected. Here are six things you need to do to ensure your charitable donation will be tax-deductible:
1. Make sure your charity is eligible. Only donations to qualified charitable organizations registered with the IRS are tax-deductible. You can confirm an organization qualifies by calling the IRS at (877) 829-5500 or visiting the IRS website.
2. Itemize. You must itemize your deductions using Schedule A in order to take a deduction for a contribution. If you're going to itemize your return to take advantage of charitable deductions, it also makes sense to look for other itemized deductions. These include state and local taxes, real estate taxes, home mortgage interest and eligible medical expenses over a certain threshold.
3. Get receipts. Get receipts for your deductible contributions. Receipts are not filed with your tax return but must be kept with your tax records. You must get the receipt at the time of the donation or the IRS may not allow the deduction.
4. Pay attention to the calendar. Contributions are deductible in the year they are made. To be deductible in 2017, contributions must be made by Dec. 31, although there is an exception. Contributions made by credit card are deductible even if you don't pay off the charge until the following year, as long as the contribution is reported on your credit card statement by Dec. 31. Similarly, contribution checks written before Dec. 31 are deductible in the year written, even if the check is not cashed until the following year.
5. Take extra steps for noncash donations. You can make a contribution of clothing or items around the home you no longer use. If you decide to make one of these noncash contributions, it is up to you to determine the value of the contribution. However, many charities provide a donation value guide to help you determine the value of your contribution. Your donated items must be in good or better condition and you should receive a receipt from the charitable organization for your donations. If your noncash contributions are greater than $500, you must file a Form 8283 to provide additional information to the IRS about your contribution. For noncash donations greater than $5,000, you must also get an independent appraisal to certify the worth of the items.
6. Keep track of mileage. If you drive for charitable purposes, this mileage can be deductible as well. For example, miles driven to deliver meals to the elderly, to be a volunteer coach or to transport others to and from a charitable event can be deducted at 14 cents per mile. A log of the mileage must be maintained to substantiate your charitable driving.
Remember, charitable giving can be a valuable tax deduction – but only if you take the right steps.
Business disaster recovery plan essentials
Irish writer Oscar Wilde advised us to "expect the unexpected." He would have made a good disaster planner. Small businesses are the most impacted because they do not usually have a formal disaster recovery plan. As a result, 40 to 60 percent of small businesses close permanently after a disaster, according to Liberty Mutual Insurance.
Don't be a part of that statistic. Now is a great time to review your business' disaster recovery plan, or to make one if you don't have one. By focusing on some of the most critical elements of a disaster plan, you can avoid being overwhelmed by the challenge.
Set your roster
The first step in your disaster plan should be to determine what skill sets you will need in a disaster, and who should be part of the team. The size of your team will vary, but could include IT, HR and operations personnel. Determine who your backups are and what outside resources and personnel you can use.
Assess your risk
You need to understand your risks before you address them. Consider your physical locations and determine the hazards unique to your region – floods, hurricanes, tornados, earthquakes, etc. Focus on the events most likely to occur, but also save some time to consider outside possibilities.
Create your plan
Determine and rank the most critical functions and processes for your business. Next, determine how these could be affected by the risks you've identified. You should end up with two lists: your most important business factors, and those most at risk. Now you are ready to create a recovery plan that focuses on critical business functions and applies them to the various types of possible business interruption. Your plan should:
- Consider offsite backups and vendors to help assist with implementing a data storage backup plan. Assess where you store the critical information upon which each of your business functions rely.
- Establish alternative or remote work arrangements for employees, including their physical, logistical and data needs.
- Create an annual review of your insurance policies. Evaluate the worth of business interruption coverage within your property and casualty insurance. You may wish to offset some of the potential loss of both business income and recovery expenses within these policies.
- Consider any opportunities for tax relief from losses sustained as a result of a disaster. Have a plan to keep detailed records and build the appropriate supplier team to help determine the best approach for your business.
- Make sure you plan for a variety of losses. This can be loss of electricity, a fatal crash of your business systems or material damage to inventory and production capacity.
Document your plan so it is clear, accessible and easy to implement. Share it with everyone on your disaster roster so they know who is responsible for what and how they should act. Review and test your plan at least annually with your roster, and distribute any changes to keep everyone informed.
With luck, you will never need to use your business disaster recovery plan. Although we can never prevent disasters, we can do our best to reduce the impact they have on business operations.
The Equifax breach and you: be proactive
Earlier this year, hackers were able to breach the security of Equifax, one of the three national credit reporting agencies. More than 143 million Americans – nearly half the entire country – were exposed to the attack, and may have had their personal information stolen (including names and birthdates, and Social Security and driver's license numbers).
Equifax is still determining exactly whose data has been exposed. While you wait to find out, it's worth taking a few proactive steps to make sure your info isn't misused by hackers.
1. Start checking. Visit Equifax's website at www.equifaxsecurity2017.com and enter your last name and last six digits of your Social Security number. The site will tell you whether it's likely or not your data has been exposed, and put you on a list to get more information. You can also sign up for a year's worth of free credit monitoring.
2. Watch your statements. Start checking your credit card statements, and pay special attention to cards you don't use often. The initial reports from the breach were that hackers may have been making charges on underused cards.
3. Check your credit reports. You can look for suspicious items on your reports, such as new accounts being opened in your name, at all three credit report agencies: Equifax, Experian and TransUnion. Free annual reports are available at www.annualcreditreport.com. You may want to stagger your use of the reports to one from each agency every four months. More frequent checks will cost you a small fee.
4. Freeze your credit. If you suspect you may become a victim of identity theft, you can place a credit freeze on your profile at each of the three credit reporting agencies. This stops new accounts from being opened in your name. Note that you'll have to unfreeze your accounts if you want to apply for new loans or make your credit accessible for things such as job applications.
5. File your taxes early. One of the most common ways identity thieves use your information is to try to claim a tax refund with your data. This was the most common scam in 2016, according to the Better Business Bureau. If you file your tax return as early as possible, you shut down this opportunity for any would-be thieves.