BHB Advisors LLC, CPAs and Consultants

January 21st, 2018
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Based in Minnesota, BHB Advisors, LLC is a full service tax and accounting practice, offering the following services:

  1. Tax – planning and compliance work for individuals, corporations and partnerships
  2. Accounting Services and Financial Statements
  3. Consulting and Management Advisory Services

Our mission is to communicate, collaborate and cooperate with our clients to help get them where they want to be financially.

Our specialty is working with individuals and small to midsize companies in the Minneapolis and St. Paul area.

We hope that our website will offer you a glimpse of our expertise and help answer tax and accounting questions you may have.

Accounting & Bookkeeping, Tax News & Info, The Happy Accountant

1099 Filing Requirements

January 8th, 2020
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Businesses that pay independent contractors, royalties, or other non-employee workers must file 1099 forms with the IRS and issue copies to the contractor. These forms are due as early as January 31 (or the next business day) to both the IRS and recipient.

Beginning in 2020, non-employee compensation of $600 or more is reportable on form 1099-NEC. These payments had been reported in box 7 of the 1099-MISC in prior years. While form 1099-NEC presents an additional filing, the underlying rules concerning who should be issued a 1099 has not changed.

Include fees, commissions, prizes and awards for services performed as a non-employee, and other forms of compensation for services performed for your trade or business by an individual who is not your employee.

Businesses are generally not required to file 1099s for payments made to an entity taxed as a corporation, but this exemption from reporting payments made to corporations does not apply to payments for legal services.

What is non-employee compensation?  If the following four conditions are met, you must generally report a payment as non-employee compensation.

  1. You made the payment to someone who is not your employee;
  2. You made the payment for services in the course of your trade or business
    1. (including government agencies and nonprofit organizations);
  3. You made the payment to an individual, partnership, estate, or, in some cases, a corporation; and
  4. You made payments to the payee of at least $600 during the year.

Additionally, businesses should be aware that payments for rent should be reported on form 1099-MISC box 1, and interest payments to individuals or non-corporate entities need to be reported on form 1099-INT.

Penalties can be as high as $560 per 1099 filed late, incorrect, or missed.

Tax News & Info

2018 Tax Planning – Individuals

December 3rd, 2018
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As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next.

Year-end planning for 2018 takes place against the backdrop of a new tax law—the Tax Cuts and Jobs Act—that make major changes in the tax rules for individuals and businesses. For individuals, there are new, lower income tax rates, a substantially increased standard deduction, severely limited itemized deductions and no personal exemptions, an increased child tax credit, and a watered-down alternative minimum tax (AMT), among many other changes.

We have compiled a list of actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) may benefit from many of them.

  1. 3.8% Surtax – Higher-income earners must be wary of the 3.8% surtax on certain unearned income. The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). As year-end nears, a taxpayer's approach to minimizing or eliminating the 3.8% surtax will depend on his estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than NII, and other individuals will need to consider ways to minimize both NII and other types of MAGI.
  2. 0.9% Medicare Tax – The 0.9% additional Medicare tax also may require higher-income earners to take year-end actions. It applies to individuals for whom the sum of their wages received with respect to employment and their self-employment income is in excess of an unindexed threshold amount ($250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in any other case).  Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. For example, if an individual earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year, he or she would owe the additional   Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don't exceed $200,000.
  3. Long-Term Capital Gains – Long-term capital gain from sales of assets held for over one year is taxed at 0%, 15% or 20%, depending on the taxpayer's taxable income. The 0% rate generally applies to the excess of long-term capital gain over any short-term capital loss to the extent that it, when added to regular taxable income, is not more than the "maximum zero rate amount" (e.g., $77,200 for a married couple). If the 0% rate applies to long-term capital gains you took earlier this year—for example, you are a  joint filer who made a profit of $5,000 on the sale  of stock  bought in 2009, and other taxable income for 2018 is $70,000; then before year-end, try not to sell assets yielding a capital loss because the first $5,000 of such losses won't yield a benefit this year.  And if you hold long-term appreciated-in-value assets, consider selling enough of them to generate long-term capital gains sheltered by the 0% rate.
  4. Reduce current year income – Postpone income until 2019 and accelerate deductions into 2018 if doing so will enable you to claim larger deductions, credits, and other tax breaks for 2018 that are phased out over varying levels of adjusted gross income (AGI). These include deductible IRA contributions, child tax credits, higher education tax credits, and deductions for student loan interest. Postponing income also is desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances.  Note, however, that in some cases, it may pay to accelerate income into 2018. For example, that may be the case where a person will have a more favorable filing status this year than next (e.g., head of household versus individual filing status), or expects to be in a higher tax bracket next year.
    1. Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2018 deductions even if you don't pay your credit card bill until after the end of the year.
  5. Roth IRA Conversion – If you believe a Roth IRA is better than a traditional IRA, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your AGI for 2018, and possibly reduce tax breaks geared to AGI (or modified AGI).
  6. Employer Deferrals – It may be advantageous to try to arrange with your employer to defer, until early 2019, a bonus that may be coming your way. This could cut as well as defer your tax.
  7. Itemized Deductions – Beginning in 2018, many taxpayers who claimed itemized deductions year after year will no longer be able to do so. That's because the basic standard deduction has been increased (to $24,000 for joint filers, $12,000 for singles, $18,000 for heads of household, and $12,000 for marrieds filing separately), and many itemized deductions have been cut back or abolished. No more than $10,000 of state and local taxes may be deducted; miscellaneous itemized deductions (e.g., tax preparation fees) and unreimbursed employee expenses are no longer deductible; and personal casualty and theft losses are deductible only if they're attributable to a federally declared disaster and only to the extent the $100-per-casualty and 10%-of-AGI limits are met. You can still itemize medical expenses to the extent they exceed 7.5% of your adjusted gross income, state and local taxes up to $10,000, your charitable contributions, plus interest deductions on a restricted amount of qualifying residence debt, but payments of those items won't save taxes if they don't cumulatively exceed the new, higher standard deduction.
    1. Some taxpayers may be able to work around the new reality by applying a "bunching strategy" to pull or push discretionary medical expenses and charitable contributions into the year where they will do some tax good. For example, if a taxpayer knows he or she will be able to itemize deductions this year but not next year, the taxpayer may be able to make two years' worth of charitable contributions this year, instead of spreading out donations over 2018 and 2019.
    2. If you expect to owe state and local income taxes when you file your return next year and you will be itemizing in 2018, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2018. But remember that state and local tax deductions are limited to $10,000 per year, so this strategy is not a good one if to the extent it causes your 2018 state and local tax payments to exceed $10,000.
  8. Taxpayers 70-1/2 or older:
    1. Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan). RMDs from IRAs must begin by April 1 of the year following the year you reach age 70-½ (That start date also applies to company plans, but non-5% company owners who continue working may defer RMDs until April 1 following the year they retire.)  Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn.  Thus, if you turn age 70-½ in 2018, you can delay the first required distribution to 2019, but if you do, you will have to take a double distribution in 2019; the amount required for 2018 plus the amount required for 2019. Think twice before delaying 2018 distributions to 2019, as bunching income into 2019 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2019 if you will be in a substantially lower bracket that year.
    2. If you are age 70-½ or older by the end of 2018, have traditional IRAs, and particularly if you can't itemize your deductions, consider making 2018 charitable donations via qualified charitable distributions from your IRAs. Such distributions are made directly to charities from your IRAs, and the amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040. But the amount of the qualified charitable distribution reduces the amount of your required minimum distribution, resulting in tax savings.
    3. If you were younger than age 70-½ at the end of 2018, you anticipate that in the year that you turn 70-½ and/or in later years you will not itemize your deductions, and you don't have any traditional IRAs, establish and contribute as much as you can to one or more traditional IRAs in 2018. If the immediately previous sentence applies to you, except that you already have one or more traditional IRAs, make maximum contributions to one or more traditional IRAs in 2018. Then, when you reach age 70-½ do the steps in the immediately preceding bullet point. Doing all of this will allow you to, in effect, convert nondeductible charitable contributions that you make in the year you turn 70-½ and later years, into deductible-in-2018 IRA contributions and reductions of gross income from age 70-½ and later year distributions from the IRAs.
  9. Rollover Distributions – Take an eligible rollover distribution from a qualified retirement plan before the end of 2018 if you are facing a penalty for underpayment of estimated tax and having your employer increase your withholding is unavailable or won't sufficiently address the problem. Income tax will be withheld from the distribution and will be applied toward the taxes owed for 2018. You can then timely roll over the gross amount of the distribution, i.e., the net amount you received plus the amount of withheld tax, to a traditional IRA. No part of the distribution will be includible in income for 2018, but the withheld tax will be applied pro rata over the full 2018 tax year to reduce previous underpayments of estimated tax.
  10. FSA – Consider increasing the amount you set aside for next year in your employer's health flexible spending account (FSA) if you set aside too little for this year.
  11. H.S.A. Contributions – If you become eligible in December of 2018 to make health savings account (HSA) contributions, you can make a full year's worth of deductible HSA contributions for 2018.
  12. Gifts – Make gifts sheltered by the annual gift tax exclusion before the end of the year and thereby save gift and estate taxes. The exclusion applies to gifts of up to $15,000 made in 2018 to each of an unlimited number of individuals. You can't carry over unused exclusions from one year to the next. Such transfers may save family income taxes where income-earning property is given to family members in lower income tax brackets who are not subject to the kiddie tax.

These are just some of the year-end steps that can be taken to save taxes.  Please contact your tax advisor with questions.

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Tax News & Info

Tax Planning 2018 – Businesses

December 3rd, 2018
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As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next.

Year-end planning for 2018 takes place against the backdrop of a new tax law—the Tax Cuts and Jobs Act—that make major changes in the tax rules for individuals and businesses. For businesses, the corporate tax rate is cut to 21%, the corporate AMT is gone, there are new limits on business interest deductions, and significantly liberalized expensing and depreciation rules. And there's a new deduction for non-corporate taxpayers with qualified business income from pass-through entities.

We have compiled a list of actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you may benefit from many of them.

  1. 20% Deduction – For tax years beginning after 2017, taxpayers other than corporations may be entitled to a deduction of up to 20% of their qualified business income. For 2018, if taxable income exceeds $315,000 for a married couple filing jointly, or $157,500 for all other taxpayers, the deduction may be limited  based on whether the taxpayer is engaged in a  service-type trade or business (such as law, accounting, health, or consulting), the amount of W-2 wages paid by the trade or business, and/or the unadjusted basis of qualified property (such as machinery and  equipment) held by the trade or business. The limitations are phased in for joint filers with taxable income between $315,000 and $415,000 and for all other taxpayers with taxable income between $157,500 and $207,500.
  2. Reduce Income – Taxpayers may be able to achieve significant savings by deferring income or accelerating deductions to come under the dollar thresholds (or be subject to a smaller phaseout of the deduction) for 2018. Depending on their business model, taxpayers also may be able increase the new deduction by increasing W-2 wages before year-end. The rules are quite complex, so don't make a move in this area without consulting your tax adviser.
    1. To reduce 2018 taxable income, consider deferring a debt-cancellation event until 2019.
    2. To reduce 2018 taxable income, consider disposing of a passive activity in 2018 if doing so will allow you to deduct suspended passive activity losses.
  3. Accounting Method – More "small businesses" can use the cash (as opposed to accrual) method of accounting in 2018 and later years than could do so in earlier years. To qualify as a "small business" a taxpayer must, among other things, satisfy a gross receipts test.  Effective for tax years beginning after Dec. 31, 2017, the gross-receipts test is satisfied if, during a three-year testing period, average annual gross receipts don't exceed $25 million (the dollar amount used to be $5 million). Cash method taxpayers may find it a lot easier to shift income, for example by holding off billings till next year or by accelerating expenses, for example, paying bills early or by making certain prepayments.
  4. Business Property – Businesses should consider making expenditures that qualify for the liberalized business property expensing option. For tax years beginning in 2018, the expensing limit is $1,000,000, and the investment ceiling limit is $2,500,000. Expensing is generally available for most depreciable property (other than buildings), and off-the-shelf computer software. For property placed in service in tax years beginning after Dec.  31, 2017, expensing also is available for qualified improvement property (generally, any interior improvement to a building's interior, but not for enlargement of a building, elevators or escalators, or the internal structural framework), for roofs, and for HVAC, fire protection, alarm, and security systems. The generous dollar ceilings that apply this year mean that many small and medium sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment.  What's more, the expensing deduction is not prorated for the time that the asset is in service during the year. The fact that the expensing deduction may be claimed in full (if you are otherwise eligible to take it) regardless of how long the property is held during the year can be a potent tool for year-end tax planning. Thus, property acquired and placed in service in the last days of 2018, rather than at the beginning of 2019, can result in a full expensing deduction for 2018.
    1. Businesses also can claim a 100% bonus first year depreciation deduction for machinery and equipment—bought used (with some exceptions) or new—if purchased and placed in service this year. The 100% write-off is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 100% bonus first-year write-off is available even if qualifying assets are in service for only a few days in 2018.
    2. Businesses may be able to take advantage of the de minimis safe harbor election (also known as the book-tax conformity election) to expense the costs of lower-cost assets and materials and supplies, assuming the costs don't have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit of property can't exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA's report). If there's no AFS, the cost of a unit of property can't exceed $2,500. Where the UNICAP rules aren't an issue, consider purchasing such qualifying items before the end of 2018.
  5. Estimated Taxes – A corporation (other than a "large" corporation) that anticipates a small net operating loss (NOL) for 2018 (and substantial net income in 2019) may find it worthwhile to accelerate just enough of its 2019 income (or to defer just enough of its 2018 deductions) to create a small amount of net income for 2018. This will permit the corporation to base its 2019 estimated tax installments on the relatively small amount of income shown on its 2018 return, rather than having to pay estimated taxes based on 100% of its much larger 2019 taxable income.

 

These are just some of the year-end steps that can be taken to save taxes.  Please contact your tax advisor with questions.

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Business Consulting, Tax News & Info

20% Business Deduction

December 3rd, 2018
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There is a federal 20% deduction on qualified business income available in 2018.  Qualifying for this deduction will depend on the type of business you have and your individual taxable income before the deduction.  Taxpayers with taxable income over $157,500 ($315,000 married filing jointly) are subject to additional limitations on this deduction. Businesses in the service industry where the principal asset is the reputation or skill of one or more of its employees will have even greater limitations on this deduction.

Here are some basic examples to see if you qualify:

Specified Service Businesses

Fact: Individual taxable income under $157,500 single or $315,000 Married Filing Joint (MFJ)

Result: Deduction equal to lower of 20% of qualified business income (QBI) or 20% of individual taxable income.

Fact: Individual taxable income between $157,501-$207,500 ($315,001-$415,000 MFJ)

Result: Deduction limited

Fact: Individual taxable income over $207,500 ($415,000 MFJ)

Result: No Deduction

Non-Specified Service Businesses

Fact: Individual taxable income under $157,500 single or $315,000 Married Filing Joint (MFJ)

Result: Deduction equal to lower of 20% of qualified business income (QBI) or 20% of individual taxable income.

Fact: Individual taxable income between $157,501-$207,500 ($315,001-$415,000 MFJ)

Result: Deduction equal to lower of 20% of qualified business income (QBI) or 20% of individual taxable income. Subject to wages and assets limitations.

Fact: Individual taxable income over $207,500 ($415,000 MFJ)

Result: Deduction equal to lower of 20% of qualified business income (QBI) or 20% of individual taxable income. Subject to wages and assets limitations.

 

Qualifying for this deduction could change your federal tax liability dramatically and there is a delicate balance between qualified business income and taxable income that must be considered.  If you are a taxpayer that expects taxable income near the phaseout range ($157,500 single or $315,000 MFJ) it might be time to contact your tax advisor to determine how best to take advantage of this deduction.

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Accounting & Bookkeeping, Business Consulting, Tax News & Info

Deducting Business Meals in 2018 and Beyond

December 3rd, 2018
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Under the new tax law enacted in late 2017, the deductibility for meals and entertainment was limited.

Entertainment

Even for business purposes, entertainment is now 0% deductible.  You can still take your clients to a game or out for a round of golf, you just won't qualify for a tax benefit.  Entertainment expenses as part of a company party for your staff are still deductible.

Meals

Meals with clients will still be 50% deductible if they qualify for the following test:

  1. Ordinary and Necessary – this is a standard and broad term for business expenses in general. If it's reasonable to take clients or other business associates to lunch, then you should be able to pass this test.
  2. Directly Related – the meal must be directly related to business and should involve an active business discussion directed at gaining immediate revenue. A concrete business benefit is expected and must be the principal purpose for the meal.
  3. Substantiation – You must be able to provide the amount, time, place, business purpose, and relationship of the individuals present to qualify for the deduction.
  4. Limitations – your deduction will be limited if the meal provided is considered either lavish or extravagant. This test does not impose any fixed limits and is generally under the reasonableness test.

Meals for your staff so they can continue working over a break or for holiday parties are still generally considered fully deductible.

 

Please contact your tax advisor for questions on your specific circumstances.

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Business Consulting, Tax News & Info

Changes to the Kiddie Tax

December 3rd, 2018
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Taxpayers often use a common strategy called “shifting” to move income earning assets from their higher tax bracket to their children, who are typically in a lower tax bracket. While some tax savings are available, moving these assets could trigger what is called the “kiddie tax.”

The kiddie tax will impose limitations on the tax savings if any of the following are true:

  1. The child is under the age of 18 by the last day of the tax year
  2. The child’s earned income (through wages etc.) is less than half their annual support and the child is 18 or 19-23 and a full-time student.

And unearned or investment income is greater than $2,100.

Children who are subject to the kiddie tax are allowed to itemize their deductions, however most will use the standard deduction which is either $1,050 or the child’s earned wages plus $350 up to the basic standard deduction of $12,000.

Calculating the income subject to the kiddie tax became more complex due to a new concept of “earned taxable income” or ETI. ETI is calculated by taking taxable income less net unearned Income (unearned income less the standard deduction and the greater of $1,050 or the child’s itemized deductions related to unearned income.)

Earned taxable income must be computed before applying the correct tax brackets, which in 2018 match those used for estates and trusts.

Rate for capital gains and qualified dividends:  Add the individual’s ETI to the rates below to determine tax bracket.  For example, if your ETI is $2,000 then your taxable income can be $4,599 and still qualify for the 0% bracket.

 

$0-$2,599                            0%

$2,600 – $12,699               15%

$12,700 – over                  20%

 

Rate for ordinary income (includes wages and interest income), Add the individual’s ETI to the rates below to determine tax bracket.  For example, if your ETI is $2,000 then your taxable income can be $4,550 and still qualify for the 10% bracket.

$0 – $2,550                          10%

$2,551 – $9,150                  24%

$9,151 – $12,500                35%

Over $12,500                      37%

Although some of the new provision add complexity, the tax is no longer computed based on the parent’s income, therefore preparers won’t need to wait on the parents completed return to finish the child’s return.

 

For more information on how the kiddie tax may affect your family, contact your tax advisor.
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Tax News & Info

Individual Mandate under the Affordable Care Act – UPDATE

December 3rd, 2018
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Under the affordable care act (ACA), U.S. citizens are required to maintain basic health coverage for yourself or any of your dependents. If you do not have this minimum essential coverage there are certain exemptions allowed or you are subject to a penalty known as a shared responsibility payment. The requirement to maintain coverage or pay a penalty is known as the "individual mandate". The individual mandate was repealed starting in 2019, therefore 2018 is the last year taxpayers will be subject to these rules.

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Tax News & Info

Tax Reform – Qualified Business Deduction

January 31st, 2018
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Interested in knowing more about the new 20% deduction for qualified businesses under the Tax Cuts and Jobs Act?  See our client letter: Client Letter – Qualified Business Deduction

Tax News & Info

Tax Reform – Business Overview

January 31st, 2018
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Interested in knowing how the Tax Cuts and Jobs Act impacted businesses?  See our client letter: Client Letter – Business Highlights of Tax Cuts and Jobs Act

Tax News & Info

Tax Reform – Changes to Individual and Corporate Rates

January 31st, 2018
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Have questions about how the Tax Cuts and Jobs Act changed individual and corporate income tax rates?  See our client letter: Client Letter – Tax Cuts and Jobs Act

Tax News & Info
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