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Preface: Featuring Nevin Beiler, Esquire this week, a PA-licensed attorney who practices primarily in the areas of estate planning, business law, and nonprofit law. In a three segment series, you have the opportunity to learn how competent legal counsel can lead to more rewarding decision making, e.g. applied to estate planning counsel.

Seven Common Mistakes in Estate Planning—And How You Can Avoid Them (Segment II)

By Nevin Beiler

“You must learn from the mistakes of others. You can’t possibly live long enough to make them all yourself.” – Samuel Levenson.

#3. Not Organizing Records Prior to Passing Away

We all live with varying levels of organization in our lives. Some people can live quite happily in a rather disorganized state. They can mostly remember what things are stored where, and can usually find a bank statement or deed without too much paper shuffling. The problem arises when a completely new person suddenly has to manage all the affairs of a disorganized person. This is essentially what happens in many cases for executors. A disorganized estate can be a major headache for an executor, and can significantly increase legal fees if an attorney is needed to assist with more of the administration. Even if organizing your records does not seem worth it to you personally, consider those who are coming after you.

As you get older, consider consolidating your financial accounts. Do you have multiple bank accounts, investment accounts, or IRA accounts with different companies? Consider consolidating them. If there is the possibility of adverse tax or management issues, consult with tax or legal counsel prior to the consolidations. Leave written instructions for your executor explaining where all your financial accounts are held and where your important records are located.

Ensure that your executor has access to important your records. If you have financial records on a computer that is password protected, make sure your executor can obtain the password. The same goes for online accounts. Make sure your executor knows about any safe deposit box you might have, and how to access it. If you have made private loans to other individuals, make sure there is adequate documentation for all those loans, including the current balance. If you want any of those loans to be forgiven upon your death, ensure the loan documentation or your will specifies this (don’t relay on just verbal agreements!). Taking a few hours to organize your records will likely save your executor many times that amount of time, and perhaps hundreds or thousands in legal fees.

#4. Not Coordinating Non-Probate Assets with the Overall Estate Plan

Many people believe that a will is to be carried out exactly as written, but wills have limitations when it comes to controlling the distribution of assets. For example, a will can only direct who gets assets that go through the probate process. Examples of assets that typically do not go through the probate process include the following:

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1. Real estate that is held in joint tenancy with a right of survivorship (with anyone), or as tenants by the entirety (with a spouse).
2. Assets that have a valid “payable on death” or “transfer on death” designation.
3. Financial accounts such as IRAs, 401(k)s, or life insurance policies, that have a valid beneficiary designation.
4. Jointly owned bank accounts.
5. Property held in a revocable living trust.If a will tries to direct that an asset from the list above be given to a certain person, that attempted gift will usually fail. Instead, the asset will go to the joint owner or designated beneficiary. For example, consider a married man who owns a rental property jointly with his brother, with a right of survivorship (meaning the property will avoid the probate process and go directly to the joint owner). If the man dies first, his brother will automatically become the sole owner of the rental property, even if the man’s will directs that his share of the rental property should go to his wife. This is also a common problem with IRA or other retirement accounts, where the will might try to divide the account equally among certain heirs, but a beneficiary designation on the account leaves it all to one person (such as the oldest child or a sibling who is the executor). This would defeat the intent of the will, causing the named beneficiary to end up with an unintended share of the inheritance. Some IRA accounts contain hundreds of thousands, even millions, of dollars. Even if the beneficiary decided to “do the right thing” and voluntarily shared the account with the intended heirs as stated in the will, the tax consequences could be unpleasant. To avoid this problem, review your estate plan to ensure that your property ownership and beneficiary designations are all consistent with your overall estate plan, and that your non-probate property will end up where you want it upon your death.

Nevin Beiler is a PA-licensed attorney who practices primarily in the areas of estate planning, business law, and nonprofit law. Nevin is part of the conservative Anabaptist community and is passionate about practicing law in a way that builds the Kingdom of God and is consistent with the Anabaptist faith. He lives and works in Lancaster County, PA, and can be contacted by email at nevin@beilerlegalservices.com or by phone at 717-287-1688.

Preface: Featuring Nevin Beiler, Esquire this week, a a PA-licensed attorney who practices primarily in the areas of estate planning, business law, and nonprofit law. In a three segment series, you have the opportunity to learn how competent legal counsel can lead to more rewarding decision making, e.g. applied to estate planning counsel.

Seven Common Mistakes in Estate Planning—And How You Can Avoid Them (Segment I)

By Nevin Beiler, Esquire

“You must learn from the mistakes of others. You can’t possibly live long enough to make them all yourself.” – Samuel Levenson.

We all appreciate when we can learn from the mistakes of others, because avoiding those same mistakes can save us a great deal of money and heartache. It is no different when it comes to estate planning. It pays to learn from those who have gone before us.

To help you get started on your estate planning journey, or to assist with your current plans, let’s look at some of the common mistakes people make when it comes to estate planning, and what you can do to avoid these mistakes.

#1. Failing to Plan

Doing nothing is probably the most common mistake people make when it comes to estate planning. Everyone should have a plan, not just the old or wealthy. Doing nothing is easy and cheap—until you are gone and your heirs are left with a mess to sort out. If a person dies without a will, the law provides a court-supervised process to distribute assets, and a judge appoints someone to administer the estate and someone to be a guardian for minor children, but what a judge chooses is not always what the deceased would have chosen.

Consider the following scenario: A middle-aged man dies and leaves a wife and three young children. He did not have a will, but he always told his wife that if he died she could sell his business and live off of the proceeds of the sale until she finds a way to make a living. The business eventually sells for a liquidation price of $400,000, but the widow discovers that under the laws of Pennsylvania she is entitled to only $215,000. The children equally split the remaining $185,000, and a guardianship is established to manage the children’s inheritance until they turn 18. Also, the husband had purchased the family home before they were married, and the wife’s name had never been added to the deed. This means that the children are also entitled to own a portion of the home, rather than the widow owning it outright. A simple estate plan can avoid this complicated result, and ensure that the husband’s wishes are carried out.

Even if a married couple owns all assets jointly, and therefore the surviving spouse can receive everything, some simple planning is still important. In the event both parents pass away, a plan can ensure their children will be cared for by trusted caregivers, not whomever a judge decides to appoint as guardian. Also, a plan can reduce the chance of siblings, children, or in-laws fighting in court about what should happen to children or assets. Furthermore, having a plan in place usually means that administering an estate after death requires less work and is less expensive.

Discussing your goals with a trusted estate planning attorney can help you think through the unique challenges of your situation and adopt a plan that will be a blessing both to your heirs and to your peace of mind. And then, don’t forget to periodically review and update your plan as necessary. Remember, failing to plan is planning to fail.

#2. Not Communicating About Plans While Living

Adopting an estate plan early in life, and then updating that plan throughout life as circumstances change, is a great first step. But don’t forget to communicate your plan to your heirs and key people like executors and guardians. This can avoid surprises and hurt feelings later on.

Prior to naming someone to serve as guardian of your minor children, it is important to discuss this appointment with them to ensure they are able and willing to serve. Also, talk to your executors to ensure they feel comfortable in that role, and that they know where to get help if they need it. If the people you name are not able or willing to serve, then naming them in your will is useless.

Also, consider having a family meeting with all your heirs to discuss your plans for your estate. If you are not comfortable sharing all the details, you do not need to, but be as open and detailed as you can. Discussing your plans with your heirs can avoid unpleasant surprises and conflict down the road. It can help reduce misunderstandings that can arise after you are gone, and might raise some issues that you missed in your plans that can then be addressed before you pass away.

Many people are raised in a setting where estate plans, and money matters in general, are not often discussed and perhaps take on an air of secrecy. However, this can be harmful to relationships if it results in disagreements or unmet expectations later on. Make the effort to communicate.

Nevin Beiler is a PA-licensed attorney who practices primarily in the areas of estate planning, business law, and nonprofit law. Nevin is part of the conservative Anabaptist community and is passionate about practicing law in a way that builds the Kingdom of God and is consistent with the Anabaptist faith. He lives and works in Lancaster County, PA, and can be contacted by email at nevin@beilerlegalservices.com or by phone at 717-287-1688.

 

Preface: Cash basis accounting is applicable to certain construction businesses and other qualifying enterprises. When applicable, cash basis tax accounting can provide certain tax benefits. While retail and wholesale business are required to account for inventory with accrual accounting, cash basis is simple and taxes only income on cash received.

Cash Basis

Credit: Jacob M Dietz, CPA

The cash basis of accounting is an accounting method that determines when a taxpayer should report income and expenses. Correctly using the cash method can avoid trouble in an audit. Cash basis taxpayers generally report income when received and report expenses when paid. There are various exceptions and rules, however, and this blog explores some of them.

Income

Cash basis taxpayers report income when it is received, even if the income was only constructively received. The IRS states that “Income is constructively received when an amount is credited to your account or made available to you without restriction.” What are some examples of cash receipts?

1. Cash is handed to you or your employee
2. A check arrives in the mail on December 28th
3. A check is handed to your employee
4. A customer pays with a credit card, and the amount is electronically deposited into your bank account
5. A customer writes you a check on December 31, and tries to hand it you as payment for their purchase

In all these examples, and there would be more we could list, the cash basis taxpayer received the income and should report it on the tax return. It doesn’t matter if the money made it to the bank or not. What if the taxpayer refused to take the check offered by the customer in example 5 and told the customer to mail it next week? It should still be reported as income for the year because the taxpayer had full control of it.

The cash basis taxpayer reports income received even if the taxpayer didn’t completely earn it yet. For example, suppose you are working on a construction project, and are almost finished at the end of the year. You plan to come back for one day in January to finish. The homeowner happens to see you, and hands you a check for the final payment on December 31. That check should be reported as income, even though you still have some more work to do in January to fully earn it.

Deposits

There is an exception to reporting income for certain payments, such as a security deposit. Suppose a tenant gives you a security deposit. According to the contract you signed with the tenant, you will hold that deposit in an escrow account and return it to them at the end of the lease. In that situation, a cash basis taxpayer would not need to recognize the deposit as income.

Expenses

Taxpayers generally deduct expenses when paid under the cash method. Assume a taxpayer receives a bill in the mail for utilities in December, but doesn’t pay it until January. The taxpayer takes the deduction in January.

If a taxpayer uses debt, such as a line of credit or bank credit card to pay an expense, the expense is deductible when paid, not when the debt is repaid. For example, suppose a taxpayer uses a bank credit card to pay the utilities bill in December. The taxpayer then pays off the credit card in January. The utilities would be deductible in December when they were paid with the credit card.

Can a taxpayer prepay 5 years of expenses in one year, and deduct them immediately? No, the IRS has a 12-month rule that limits a deduction to amounts “that do not extend beyond the earlier of the following.

• 12 months after the right or benefit begins, or
• The end of the tax year after the tax year in which payment is made.”

Another notable exception is inventoriable products. Some expenditures are inventoriable, and cannot be deducted until the year sold, even if they are purchased in the year before sale. Inventoriable items are items that will be sold to customers.

The cash basis method is generally simpler than other methods of accounting. As you can see, however, even the cash basis has its quirks and exceptions. Understanding the cash basis helps taxpayers comply with the law while possibly still deferring some income tax.

This article is general in nature, and does not contain legal advice. Please contact your accountant to see what applies in your specific situation.

Trust-Based Selling – An Abbreviated Book Report for At-Work Entrepreneur’s

 Preface: Trust-based selling is far beyond common processes and laws of selling; it is in a fundamental fashion, the human spirit of selling. Trust-based selling is a people process; it’s about living and working [selling] with a set of core beliefs, values, and principles, gilding trusted behavior.

Trust-Based Selling – Segment II

Report Credit: Donald J. Sauder, CPA

Why should buyers easily trust sellers? Sellers objectives have one purpose often — to get a sale. Therefore, sellers most often do not have the buyers interest at heart. Trust-based selling is built on a foundation of true customer focus, collaboration, transparency, and a far sighted perspective. You cannot use trust as selling tactic, solely. Your customers are smart; they can see rather quickly whether sellers are wearing self-centered shades in the conversation, and they know intuitively, even if they can’t point to what’s wrong – that a seller usually cannot be trusted.

Trust is no easy matter because it based on beliefs and principles, not on techniques or processes. Trusted based selling is behavioral selling. Trust-based selling is matter of living your beliefs, values, and principles to behave in trustworthy manner. This requires consistent principled behavior, not a fabricated façade. [The behavioral selling principle rests well with certain groups of sellers, e.g. Amish business owners intuitively approach selling while living their personal beliefs, values and gilding principles – each day  {authors report note}.]

Collaborative approaches to selling are necessary to be successful with trusted based selling. Trusted seller need to pick-up the phone and ask what the buyer wants, and how you can help the buyer. Some sellers fear collaboration, they have too much ego, and can’t share the pie; or they fear lack of knowledge; fear collaboration will help competitors, or result in lower prices. These fears are only in the sellers mind, and not objective marketplace conditions.

A far-sighted perspective makes you willing to make certain investment in relationships, and obtain better data for a higher return on investment. Fear that there will not be an opportunity tomorrow or next year; or that they [the seller] could be taken advantage, i.e. how will I benefit; or fear of not getting the reward right here, right now, because it might not come up again; these are the results of a lack of trust. A lack of trust results in fear.

Transparency builds trust. Secrets breakdown trust. Being transparent and letting buyers into your business, and into your thinking — builds trust. Transparency removes doubt about motives, helps your clients know you’re telling the truth, builds your reputation; and since your flaws and strengths are evident in transparency, people can make sensible judgement about you. Clients reciprocate by being open and above board as you gain credibility.

It is not surprise that not everyone practices transparency. Yet, this is how you build a trusted-based selling relationship. After all, is it prudent to show all your selling cards to those on the other side of the table? Again, this transparency resistance is a result of fear. The courageous seller who doesn’t fear rejection, doesn’t fear losing control of a sale, or doesn’t fear helping competitors, will be perceived as an honest and trustworthy seller – and that my friend, is trust-based selling.

Buyers will trust you not solely on your ability to get things done; because trust-based selling it is not a business process or a business system. It business neutral. Trust-based selling is far beyond common laws of selling, it is essentially the human spirit of selling. Trust-based selling is a people process; it’s about living and working [and selling] with beliefs, values and principles gilding trusted behavior.

Trust-Based Selling – An Abbreviated Book Report for At-Work Entrepreneur’s

Using Customer Focus and Collaboration to Build Long-term Relationships, Charles H. Green, Copyright 2006

Preface: At last, a sales book based on how adult, intelligent people actually buy. An Important contribution that challenges the effectiveness of much of the current sales practice, and shows how to do it better. David Maister, Retired Harvard Business School Professor

Trust-Based Selling – Book Report Segment I

Book Report Credit: Donald J. Sauder, CPA

In order for successful customer relationships to work, sellers have to care – honestly and deeply – about customers. Successful, flourishing salespersons know the trick is easy – you have to care – honestly and deeply. The solution, simple to state, is hard to live.

Three pillar questions in great sales are 1. What do buyers really want? 2. Why don’t they say so? 3. Why, if selling expertise isn’t the best approach, is it the dominant one? Customers and clients make decisions based upon trust. The best businesses gain sales from the trust they develop with customers. What buyers really want is to buy from someone they trust. Trust is developed with understanding the customer needs, asking the right questions, and demonstrating expertise – rather than talking about it.

An appreciation for what is best for the client or customer, and putting their needs first, always leads to more benefit to you and your business than putting your needs or your business needs first, e.g. Is your solution the ultimate for the need of the customer, or simply your month’s sales quota?

Studies show that to achieve duplicative sales successes you do not even have to deliver on all the wants and aspirations; after all, customers don’t expect you to perform miracles. Yet, you must understand and appreciate them for who they are. You need to connect, understand and care. Customer care is the key phrase. Care includes paying attention, showing interest, exhibiting curiosity about things important to the customers, e.g. seat warmers for car shoppers, complaining about cold winter temperature.

Trusted based selling is about doing business in such a way that you’re worthy of the customer’s trust. You must be personable, and genuine; and let the customer experience or sample what it’s like to buy your goods or services.

What buyers really want – even when they don’t say so – is a seller they can trust.

Trust based selling require solid competence, credibility, and reliability; and most important a sense that the seller cares about what is best for the buyer. Trust based selling is built on helping the buyer make the best decision or the purchase.

Buyers are people. They have fears of missing something, fears of being ignorant, fears of making a bad decision, fears of being taken advantage of. Trust based selling, eliminates fear, and replaces it with the confidence; the confidence of having made a good decision, long after the decision occurs.

Here the benefits of building trust:

1. Reduces challenges to competitor purchases
2. Minimized challenges on pricing
3. Minimized being second guessed, or double checking of facts
4. Increases customer willingness to listen
5. Helps customers share information that is useful to the seller
6. Improves chances your phone calls will be answered
7. More forgiving attitude when mistakes are made
8. Customers will seek you out take your advice when buying
9. Help with exceptions to the rule as appropriate
10. Give you preferential status

Trust is no longer a commodity in business. Trust is becoming an invaluable resource.

Pressures from a competitive, seller centric marketplace, with a greater gain attitude, and the risks incorporated when working to build trust, all hinder successful sales.

Good salespeople overcome these obstacles and the reap benefits for their customers, and ultimately themselves too.

Trusted salespeople have always been valuable, and will become more valuable in the future.

Preface: Optimal levels of equity in business, are the result of fiscal discipline. High debt to equity ratio enterprises are subject the to credit risks outlined in the following blog.

Looking Into 2018 — Credit Slopes

Credit: Donald J. Sauder, CPA

Business history data provides a clear cyclical history. That history yet differs in the timeframes of the effective expansion and contractions in the economic forces of supply and demand, fueled with credit driven consumption and credit driven business investments. Looking at the fundamental driver of business strategy, e.g. increased revenue, increased profitability, standard revenue increases are the result of greater assets investment, and greater asset output. While output can increase, e.g. manufacturers produce more skis, the demand for skis must be sufficient to sustain the increase in the levels of production. During business expansion cycles, demand outpaces supply, encouraging the growth of production, i.e. more skis sold, and more income.

The business cycle of skis is a small sub-segment of the greater business environment, but easily comprehensible. For ski manufacturers to succeed, several market catalysts must be in place, 1. Snow 2. Interest in recreational winter activities, 3. Consumer capacity to enjoy. If alpine ski businesses powered the stock market, the higher the lift, the more exciting the black run.

David Stockman, former Reagan White House Budget Director and former Congressman, thinks the current business cycle will experience a fiscal calamity of Biblical proportions, a financial reset in future years. To quote Stockman, “The Central Banks realize they cannot keep printing money at these crazy rates, and by that I mean bond buying. Now they are going to have to normalize and shrink their balance sheet….by the end of 2018 it will $600 billion a year.

In understandable terms the artificial snow creation on at the Federal Reserve’s economic resort cannot last all year. They skiing has been great, and sooner or later, the slopes will vacate for summer. This is to say that the again, a credit driven economy, resulting from Federal Reserve balance sheet expansion, same as artificial snow creation, is perpetually unsustainable in most US States. The Federal Reserve has been printed money and purchasing bonds on an overtime schedule since 2008, thereby financing investments and taking the bond markets up the lift. This market effect is an interest rate to decline upto the present time.

What happens if that trend is sustained? Inflation occurs, and a decline of the currency value from the dilution of the aggregate Federal Reserve notes, causing imported purchase to increase in cost in a global marketplace.

Stockman’s concern is how the US will balance its budget, with a decrease in revenues, e.g. The Tax Cuts and Jobs Act, recently approved by Congress. “Were talking 2019…..You’re facing not in the distance future, and not in the by and by way down the road…in 2019 the next fiscal year….a 1.2 trillion dollar deficit”. Stockman says in the next recession, the US budget deficit will really increase. “The stock market operation on the illusion of permanently low, ultra-low interest rates,” Stockman continues.

When interest rates rise, will the business environment be sustainable, or will stock market and bond markets will collapse with a massive debt reset. Maybe not in 2018, but ski slopes will eventually vacate again with the typical seasonality of the business cycle. Start preparing for a return to business as usual if you’re skiing on credit at the Feds resort. That’s the gist of Stockman’s advice. It will require a longer time than anticipated for most businesses to get to bottom of slopes.

This blog is not to be construed as investment, legal or accounting advice. It is for informational purposes only. Please talk with your trusted advisors before making any decisions.

Dear Clients:

Each year, the IRS requires businesses to file Form 1099 on various vendor payments made during the year, to verify the business expense for tax purposes. If you made certain qualifying vendor payments during the calendar year as a business or self-employed taxpayers, you may be required to file an information return Form 1099 with the IRS.

We are happy to provide you with assistance with your tax services, or filings of your Form 1099s.

You should approach 1099 filing compliance seriously. In fact, two questions are asked on every tax return for every business regarding the 1099 filings. 1) Are 1099 filings required? [see following subject payments] 2) Did you file the 1099s? Your response is required for an accurate tax filing each year. Penalties for non-filing are expensive. The filing deadline for 1099-MISC is January 31.

In preparation for preparing 1099s, here are the filing requirements for businesses and self-employed taxpayers:

 Payments subject to 1099 Filing:

If you made any of the following types of payments, then you may be required to file an informational 1099 return.

1. Form 1099-MISC is required for each person to whom you have paid during the year:

• at least $10 in royalties
• at least $600 in rents, services, prizes and awards, other income payments, medical and health care payments, crop insurance proceeds; or, generally, the cash paid from a notional principal contract to an individual, partnership, or estate;
• gross proceeds of $600 or more paid to an attorney during the year.

1. Interest on a business debt paid; filed on Form 1099-INT for interest payments of $10 or more.
2. Dividends or other distributions to a company shareholder; filed on Form 1099-DIV for dividend payments of $10 or more.

__________________________________________

You are not required to file information return(s) if any of the following situations apply:

1. You are not engaged in a trade or business.

1. You are engaged in a trade or business and

• the payment was made to another business that is incorporated, or
• the sum of all payments made to the person or unincorporated business is less than $600 in one tax year.

3. Wages paid on Form W-2
4. Employee expense reimbursements

_________________________________________

Thank you for complying with IRS required 1099 filings.

To simplify the preparation of your Form 1099 filings or associated tax questions, please contact our office and speak with Anthony Martin: 717-701-5368, extension 1.

Happy New Year!

A Sum-Up of the Tax Cuts and Jobs Act Applicable to Individuals and Businesses

 Donald J. Sauder, CPA

With President Trump’s signature, the week before Christmas, the Tax Cuts and Jobs Act has legislated major changes to US tax laws. Most notably, lower tax rates for both individual taxpayers and businesses. The new tax rates for individuals remain effective until 2025, when they revert again to the 2017 rates.

The Tax Cuts and Jobs Act Individual Taxes

The new individual tax rates are as follows:

Rate	Married Filing Jointly	Individual Filing
10%	$0 -$19,050	$0 – $9,525
12%	$19,050 – $77,440	$9,525 – $38,700
22%	$77,400 – $165,000	$38,700 – $82,500
24%	$165,000 – $315,000	$82,500 – $157,500
32%	$315,000 – $400,000	$157,500 – $200,000
35%	$400,000 – $600,000	$200,000 – $500,000
37%	Over $600,000	Over $500,000

 

Personal exemptions have been omitted from the calculation of individual taxes until 2025; along with this reduction in deductions to taxable income, the standard deduction has been increased from $12,000 to $24,000 for joint filers, and from $6,000 to $12,000 for individual filers. This increase has reduced the benefit of itemized deduction for 2018 to an increasing number of taxpayers. Filing requirements will now be subject to applicable new deduction thresholds.

The bill also prevents prepayment of state and local income taxes in 2017, and allows only $10,000 of property taxes to be deducted on Schedule A. The new law repeals all miscellaneous itemized deductions subject to the two percent floor, e.g. portfolio deductions, unreimbursed employee expenses, etc. Medical expenses have a lower threshold to deduction of 7.5% of adjusted gross income.

Although the increased standard deduction will trim the balance of taxpayers itemizing on Schedule A, charitable contributions deduction threshold will increase from 50% to 60% of income. Therefore, more charitably favoring taxpayers will obtain greater opportunity to reduce taxes. If you maximize the 50% rule every year, this is in the new bill just for you.

The child tax credit increases from $1,000 to $2,000 with a $1,400 refundable feature per child. Families who will forfeit tax dollars on the standard exemption, will now be rewarded from the family friendly higher child tax credits.

The federal estate and gift tax threshold increases from the $5.49m 2017 exemption to $10m; the new exclusion will permit married couples to exempt up to $22m for 2018. Heirs will continue to receive a “stepped up, date of death” basis for inherited assets on costs basis for following transactions. This exclusion will help families retain more of what they’ve accumulated, and pass it to the next generation. The generation skipping transfer exemption has also doubled.

The student loan interest deduction is retained in the bill, and the American Opportunity Tax Credit is not overhauled, supporting students and the incentive to higher levels of education.

 The Tax Cuts and Jobs Act Business Taxes

The new tax bill features a 21% corporate tax rate in 2018, and a 20% deduction on taxes for small business, e.g. pass-through ownership of say a partnership or S-Corporation. Therefore, partnership income tax rates will be 80% of the calculation from the prior table, after applicable thresholds. This pro-business tax atmosphere is designed to stimulate business activity, and support entrepreneurial ventures.

Businesses also benefit from a 100% bonus depreciation allowance for new assets placed in service after September 27, 2017, and before January 1, 2023. All new equipment placed in service before December 31, 2017 qualifies for the 100% bonus addends. The new law places a $10,000 cap on first year vehicles for business. Section 179 expensing, a well-regarded business tax planning feature, has been increased to $1,000,000 for 2018, from prior year $500,000.

The “free expense” know as Section 199 domestic production activities deductions is eliminated in 2018; the research and development credit stays in place.

Net operating losses are limited to 80% of taxable income from losses after December 31, 2017, and carrbacks are denied in most cases, with indefinite carryforwards, subject to certain limits. The new law keeps the “Johnson Amendment” in place, generally restricting 501(c)(3) organizations from political activities.

The law repeals the Affordable Care Act (ACA) individual shared responsibility requirement, making the payment $0, a change effective for penalties after 2018. The IRS has cautioned that full-year coverage compliance is required for 2017, or applicable exemption. If absent, a shared responsibility payment will be assessed.

The historic tax legislation is the largest in the US in at least 30 years, and to quote:

According to the Tax Foundation’s Taxes and Growth Model, the plan …….. would lead to a 1.7 percent increase in GDP over the long term, 1.5 percent higher wages, and an additional 339,000 full-time equivalent jobs.

The enormity and speed of the tax legislation is no less surprising than the pro-business environment that it supports.

If you have questions regarding the newly passed tax laws from the Tax Cuts and Jobs Act, please contact our office.

This blog is not to be construed as advice for tax or accounting, or any other purposes; it is for informational purposes only. Please consult with your advisors before making any decision applicable to this information.

As the Holiday Season is here again, we find ourselves reflecting on the past year and on those who have helped to shape our business in a most significant way.

Thank you!

We value our relationship with you and look forward to working with you in the year to come.

We wish you a very Merry Christmas and Happy New Year, filled with peace and prosperity for you and yours!

Merry Christmas and Happy New Year!

Sauder & Stoltzfus

Preface: Optimizing the tax code is in a few instances effortlessly simple. The domestic production activity, remaining for the 2017 tax year, is one tax attribute that can save some clients thousands + in tax dollars. The Tax Cuts and Job Act did not continue this “free” tax deduction, but for this years tax filing– here’s how it works. 

The Free Expense for Domestic Production Activities

Credit: Jacob Dietz, CPA

The domestic production activities deduction (DPAD) is a taxpayer-friendly part of the tax law that allows taxpayers to deduct an expense that cost them zero additional cash. It is a “free” expense! The DPAD is going away with the passage of tax reform, but it is still available for open years before the tax reform takes effect. The American Jobs Creation Act of 2004 created this deduction, which allows certain taxpayers to deduct up to 9% of qualifying income as a DPAD, subject to certain limitations.

What types of activities and industries qualify for the DPAD? Generally, agriculture, real property construction, and manufacturing qualify, as well as some other industries. Qualifying activities can include dairy farming, crop farming, metal fabrication, furniture making, general construction contracting, construction subcontracting, and the list could go on.

Since the DPAD is 9% of qualifying income, it only applies if a taxpayer earns a profit. If the taxpayer shows a loss, then the DPAD is zero. Guaranteed payments paid to the owners are subtracted from income. The taxpayer cannot include them as income when calculating the DPAD, even though it is money earned from the company.

Another qualification for the DPAD is that it cannot exceed 50% of W-2 wages. If a company only reports guaranteed payments to partners on a K-1, and files no W-2s, then their W-2 wages are zero, and therefore the DPAD is zero as well. The DPAD is also zero for a company that subcontracts everything, or has all the work done by a sole proprietor who does not receive a W-2.

Let’s give an example of how the DPAD could save money for an entrepreneur. Suppose ABCDEF Construction, LLC is a single-member LLC owned by Abner C. Deffler. It earned a profit of $100,000 and paid W-2 wages to its construction employees of $90,000. The company constructs real property, such as barns, so the activities qualify for the DPAD. Secondly, the company earned a $100,000 profit, so there is income available to take the DPAD. The DPAD should be $9,000, which is 9% of the $100,000 profit. Thirdly, $9,000 is less than 50% of W-2 wages, so the 50% W-2 wage limitation does not reduce the DPAD. Abner will deduct the full $9,000 DPAD based on the activity of ABCDEF Construction, LLC. If Abner’s top federal tax rate is 25%, then that DPAD could save him $2,250 in federal income taxes. If Abner had the same numbers three years in a row, then the DPAD could potentially save him $6,750 over those three years.

If you own a profitable business that pays W-2 wages in the construction, agriculture, or manufacturing industry, check if your tax return includes the DPAD. If it doesn’t, ask an accountant who is familiar with the DPAD why it is not there. Did your business income fail to qualify, or was it perhaps missed on your tax return? If it was missed, and your company has been profitable in recent years, it is possible that amending previous returns to include the DPAD could save you thousands of dollars. The DPAD gives certain entrepreneurs the opportunity to be good stewards of their money by saving on taxes using a “free” expense.