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.
   2019. To reduce 2018 taxable income, consider deferring a debt-cancellation event until 2019.
   2020. 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.
   2018. 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.
   2019. 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.

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.

The rise of easy to use apps have allowed more and more people to take advantage of the sharing economy.  Countless people supplement their current income and a few even leave their steady paychecks behind and work for themselves, on their own schedule, by driving for Uber or renting their home through Airbnb.  This is referred to as the sharing economy, or gig economy.  While this can be liberating for some, there are important tax consequences that are often overlooked or misunderstood.

When you start participating in the sharing economy, you have started your own business and are an independent contractor of the app developer (Uber/Airbnb).  With that comes additional filing requirements and often additional taxes.  The most important, or largest new tax obligation, will likely be self-employment taxes.  Self-employment tax is currently 15.3% of your net self-employment income up to $127,500.  For a more in depth look at self-employment taxes please see our article “Self-Employment Taxes Explained.”  Keep in mind that this 15.3% tax is in addition to the regular income tax.

The income that you receive from the shared economy is taxable.  This is the case even if you do not receive a 1099-MISC, or 1099-K for electronic payments, or only accept cash.  You are also able to deduct from your taxable income, ordinary and necessary business expenses to arrive at net income.  This is the amount that you pay taxes on.

Ordinary and necessary business expenses will be different for the type of work you are doing.  Each segment of the sharing economy has its own attributes.  For example, depreciation, or the reduction in the value of an asset, will be very important to someone utilizing Airbnb.  Not so much for somebody driving for Uber.  The exact opposite will be true of the mileage deduction.  It is important to be aware of which tax deductions you can, and should, take advantage of.  It is equally important to understand the record keeping requirements to document those expenses.

If you are profitable in your gig economy venture, you may be required to make estimated tax payments throughout the year.  When you receive a paycheck, federal and state taxes are withheld from each check.  When participating in the gig economy you do not receive a paycheck, and therefore must send in your estimated tax payments separately.  These payments are due quarterly.

It may seem like you are responsible for all for all of the same things as an ordinary business.  That's because you are!  The IRS does not see your gig economy business any different than a property management company or taxi service provider.  It is important to be aware of each businesses characteristics and requirements to make sure there are no surprises when it is time to file your taxes.  For more information please contact your trusted tax advisor.

If you are thinking of joining Airbnb, please see our article on short term rentals.

The Twin Cities has been and continues to be a popular site for National events, mostly in the sports genre.  The next event that the Twin Cities is buzzing about hosting is the 2018 Super Bowl.  With this kind of national exposure, Minnesota residents are searching for opportunities to take advantage of the increase in tourism.

With the current media exposure for sites like Airbnb, short term rentals are gaining in popularity for their simplicity and tax benefits.

However, these short term rentals may not be quite as easy as they may seem.  Depending on the location and type of home you hope to rent out, you may have issues with zoning codes, specific license compliance, and association rules.  The fines for violating any one of these could outweigh any income you may hope to earn. Additionally, should any of your guests get injured, you could have a whole host of issues that you did not plan for.  And don't forget the cost of sales tax compliance.

Even with the risks, there are tax benefits to these short term rentals.  Income earned from renting out your main home for two weeks or less is not taxable and does not need to be reported on your income tax return.  The downside is that any expenses you incur to rent out your home are also nondeductible for tax purposes.  Therefore, if the expenses you incur such as license fees, additional insurance, cleaning and any repairs exceed the income received in the activity, there is no tax benefit.

In the end, short term rentals can be a great money making strategy as long as the risks don't outweigh the reward. Make sure that you do the research to stay in compliance and contact your insurance and tax advisors with any questions.

Do you have employees or independent contractors?  This is an important question with potentially large tax implications. Employees are paid through payroll and wages are subject to FICA and unemployment taxes.  Independent Contractors are not subject to payroll taxes, however there are additional reporting requirements for payments of services. This is also an area in which governments are beginning to crack down.  The IRS offers Form SS-8, which can be submitted by either the business or the worker to help determine the correct treatment in uncertain cases.  To help determine into which category your workers fall the IRS has some common law control rules that fall into three categories; behavioral, financial, and type of relationship.

The first category is behavioral control.  This refers to the degree of the right the company has to control the workers job.  An example of this is the type and degree of instructions given.  Generally, an employee is instructed about when, where, and how to work.  An independent contractor (IC) is hired to complete a job and given minimal instruction.  How the worker is evaluated is also a factor.  A contractor is usually only evaluated on the end result, rather than the parts of the process.  Training also factors in.  Training the worker on how to do the job it is strong evidence that the worker is an employee.  It is important to note that actually controlling these aspects of the worker are not important.  What's important is having the right to this control.

The second category of control is financial.  ICs often have significant investment in their equipment, whereas employees typically use the company's equipment.  ICs are usually not reimbursed for their expenses and will have ongoing expenses even if no work is being performed.  Whether the worker is offering their services to the market and not just to the company is strong factor for independent contractors.

The last category is the type of relationship.  This includes contracts, benefits, and length of the relationship.  Independent contractor agreements are always a good idea.  However, the existence of a contract is not sufficient to classify a worker as an IC.  Benefits such as insurance, paid time off, and retirement plans are indicators of an employee relationship, as these are generally not offered to ICs.  A company typically hires an IC with the expectation that the work will be for a specific job, or period.  If there is an expectation that the relationship will continue forever, it is evident of an employer-employee relationship.

It is important to look at the entire relationship between a company and the worker.  It is possible that some factors point to IC status while others point to employee.  You must consider all the factors and document the ones used to make the determination.  For help in making the determination or guidance on how to document it, please contact your trusted tax advisor.

If you have recently started your own small business you may have heard the term "Self-Employment Tax" crop up in conversations with your advisors.  Self-employment tax is not a new additional tax that you are required to pay because you started a business, but rather the government's way to collect Social Security and Medicare taxes for self-employed individuals.

Social Security and Medicare taxes are due on wages, tips, and net earnings from certain businesses. Self-employed individuals who report earnings on Schedule C of their individual tax return or Partners in partnerships with self-employment earnings are subject to self-employment tax.  Self-employment tax is made up of the following:

1. Social Security tax 12.4% up to $127,200 of wages, tips, or net earnings in 2017.
2. Medicare tax 2.9%
3. Additional Medicare tax .9% this tax is only calculated for taxpayers whose wages, tips, and net earnings (including spouses) exceed certain thresholds depending on filing status. Currently the threshold is $200,000 for Single filers and $250,000 for Married Filing Joint filers.

Net earnings under $400 are not subject to self-employment tax.

As an employee who receives a Form W-2 wage reporting statement you may have noticed that Social Security and Medicare are withheld from your wages to get to your net check and are reported on your W-2.  The amount that is deducted from your pay is only half of the total tax due, your employer pays the other half.  When you are self-employed, the entire burden resides with you.  However, there is a deduction from the total income on your individual tax return that is equal to the employer equivalent or about half of the total self-employment tax. This deduction only affects your income tax and does not affect either your net earnings from self-employment or self-employment tax.

Most self-employed individuals are required to pay estimates throughout the year to pay the self-employment and income tax due on their earnings.  For a full discussion on estimates see our article. It is important to remember self-employment tax when saving for your overall tax liability as the numbers can change dramatically if not considered.  There are different ways of limiting your self-employment tax liability based on entity structure, retirement options, and expense planning.  For guidance on how to reduce your liability based on your individual situation please contact your tax advisor.

Welcome to 2017. The rates and phase-out ranges for tax deductions are subject to change and cost-of-living adjustments on an annual basis.  Some of the new changes to 2017 include:

Mileage Rates

Business – 53.5 cents per mile

Medical or moving – 17 cents per mile

Charitable – 14 cents per mile

HSA Contribution

Self-Only – $3,400 (plus an additional $1,000 if 55 or older)

Family – $6,750 (plus an additional $1,000 if 55 or older)

Retirement Plan Contribution Limits

Traditional IRA –  The contribution limit remains the same, $5,500 or $6,500 if 50 or older, but the phase out limits have changed.

Single and Head of Household: phase-out begins at $62,000

Married Filing Joint (both spouses covered by employer plans): phase-out begins at $99,000

Married Filing Joint (only one spouse covered by employer plan): phase-out begins at $186,000

Roth IRA – The contribution limit remains the same, $5,500 or $6,500 if 50 or older, but the phase out limits have changed.

Single and Head of Household: phase-out begins at $118,000

Married Filing Joint: phase-out begins at $186,000

 401K and 403b Plans – the contribution limit for employees that participate in these plans remains the same at $18,000 or $24,000 if 50 or older.

Defined Benefit Plans – limited to $54,000 in 2017

If you have questions about your individual tax situation, contact your tax advisor.

In December of 2016 President Obama signed the 21^st Century Cures Act into law.  Included in this law was a provision to allow small employers to establish health reimbursement arrangements (HRAs) for their employees.  Previously, with the passage of the Affordable Care Act, these arrangements were subject to very high penalties as they did not satisfy the minimum essential coverage requirements.  There was relief from these penalties that expired in June of 2015.  The Cures Act now makes that relief effective for all plan years beginning before the end of 2016. Moving forward, a new type of reimbursement arrangement can be implemented.

A qualified small employer health reimbursement arrangement (QSEHRA) can be established.  A few guidelines regarding QSEHRAs:

1. The definition of a "small employer" is the same as defined in the Affordable Care Act – less than 50 full time equivalent employees
2. The company does not offer a group health plan
3. The plan must cover all employees with very limited exceptions
4. There is a cap to how much each employee can be paid – $4,950 per year for single employees and $10,000 per year for family coverage. Benefits generally must be offered at the same level to all employees
5. The reimbursement arrangement can pay for medical expenses including health insurance premiums
6. The amounts paid are deductible by the company but not income to the employee if the employee provides annual proof of minimum essential coverage for them and their family members
7. Companies must provide an annual notice to eligible employees. The notice states the benefit amount and informs the employee to disclose the benefit to the health insurance exchange if they are receiving advance premium tax credits.

It has been a struggle recently for small employers to offer any assistance with employee health insurance.  The passage of the 21^st Century Cures Act provides a valuable option that many small businesses can use to their advantage.  It is likely that in the coming months further guidance will emerge to help with the implementation and administration of QSEHRAs.  For additional information, or to discuss how this could benefit you, please contact your trusted tax advisor.