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2 tax law changes that may affect your business’s 401(k) plan

When you think about recent tax law changes and your business, you’re probably thinking about the new 20% pass-through deduction for qualified business income or the enhancements to depreciation-related breaks. Or you may be contemplating the reduction or elimination of certain business expense deductions. But there are also a couple of recent tax law changes that you need to be aware of if your business sponsors a 401(k) plan.

1. Plan loan repayment extension

The Tax Cuts and Jobs Act (TCJA) gives a break to 401(k) plan participants with outstanding loan balances when they leave their employers. While plan sponsors aren’t required to allow loans, many do.

Before 2018, if an employee with an outstanding plan loan left the company sponsoring the plan, he or she would have to repay the loan (or contribute the outstanding balance to an IRA or his or her new employer’s plan) within 60 days to avoid having the loan balance deemed a taxable distribution (and be subject to a 10% early distribution penalty if the employee was under age 59-1/2).

Under the TCJA, beginning in 2018, former employees in this situation have until their tax return filing due date — including extensions — to repay the loan (or contribute the outstanding balance to an IRA or qualified retirement plan) and avoid taxes and penalties.

2. Hardship withdrawal limit increase

Beginning in 2019, the Bipartisan Budget Act (BBA) eases restrictions on employee 401(k) hardship withdrawals. Most 401(k) plans permit hardship withdrawals, though plan sponsors aren’t required to allow them. Hardship withdrawals are subject to income tax and the 10% early distribution tax penalty.

Currently, hardship withdrawals are limited to the funds employees contributed to the accounts. (Such withdrawals are allowed only if the employee has first taken a loan from the same account.)

Under the BBA, the withdrawal limit will also include accumulated employer matching contributions plus earnings on contributions. If an employee has been participating in your 401(k) for several years, this modification could add substantially to the amount of funds available for withdrawal.

Nest egg harm

These changes might sound beneficial to employees, but in the long run they could actually hurt those who take advantage of them. Most Americans aren’t saving enough for retirement, and taking longer to pay back a plan loan (and thus missing out on potential tax-deferred growth during that time) or taking larger hardship withdrawals can result in a smaller, perhaps much smaller, nest egg at retirement.

So consider educating your employees on the importance of letting their 401(k) accounts grow undisturbed and the potential negative tax consequences of loans and early withdrawals. Please contact us if you have questions.

© 2018

What businesses need to know about the tax treatment of bitcoin and other virtual currencies

What is cryptocurrency, and will it affect you?

Over the last several years, virtual currency has become increasingly popular. Bitcoin is the most widely recognized form of virtual currency, also commonly referred to as digital, electronic or crypto currency.

While most smaller businesses aren’t yet accepting bitcoin or other virtual currency payments from their customers, more and more larger businesses are. And the trend may trickle down to smaller businesses. Businesses also can pay employees or independent contractors with virtual currency. But what are the tax consequences of these transactions?

Bitcoin 101

Bitcoin has an equivalent value in real currency and can be digitally traded between users. It also can be purchased with real currencies or exchanged for real currencies. Bitcoin is most commonly obtained through virtual currency ATMs or online exchanges.

Goods or services can be paid for using “bitcoin wallet” software. When a purchase is made, the software digitally posts the transaction to a global public ledger. This prevents the same unit of virtual currency from being used multiple times.

Tax impact

Questions about the tax impact of virtual currency abound. And the IRS has yet to offer much guidance.

The IRS did establish in a 2014 ruling that bitcoin and other convertible virtual currency should be treated as property, not currency, for federal income tax purposes. This means that businesses accepting bitcoin payments for goods and services must report gross income based on the fair market value of the virtual currency when it was received, measured in equivalent U.S. dollars.

When a business uses virtual currency to pay wages, the wages are taxable to the employees to the extent any other wage payment would be. You must, for example, report such wages on your employees’ W-2 forms. And they’re subject to federal income tax withholding and payroll taxes, based on the fair market value of the virtual currency on the date received by the employee.

When a business uses virtual currency to pay independent contractors or other service providers, those payments are also taxable to the recipient. The self-employment tax rules generally apply, based on the fair market value of the virtual currency on the date received. Payers generally must issue 1099-MISC forms to recipients.

Finally, payments made with virtual currency are subject to information reporting to the same extent as any other payment made in property.

Deciding whether to go virtual

Accepting bitcoin can be beneficial because it may avoid transaction fees charged by credit card companies and online payment providers (such as PayPal) and attract customers who want to use virtual currency. But the IRS is targeting virtual currency transactions in an effort to raise tax revenue, and it hasn’t issued much guidance on the tax treatment or reporting requirements. So bitcoin can also be a bit risky from a tax perspective.

To learn more about tax considerations when deciding whether your business should accept bitcoin or other virtual currencies — or use them to pay employees, independent contractors or other service providers — contact one of the P&R accounting team at Office@CPAsite.com or 904-396-5400.

© 2018

Putting your child on your business’s payroll for the summer may make more tax sense than ever

If you own a business and have a child in high school or college, hiring him or her for the summer can provide a multitude of benefits, including tax savings. And hiring can make more sense than ever due to changes under the Tax Cuts and Jobs Act (TCJA).

How it works

By shifting some of your business earnings to a child as wages for services performed, you can turn some of your high-taxed income into tax-free or low-taxed income. For your business to deduct the wages as a business expense, the work done must be legitimate and the child’s wages must be reasonable.

Here’s an example: A sole proprietor is in the 37% tax bracket. He hires his 20-year-old daughter, who’s majoring in marketing, to work as a marketing coordinator full-time during the summer. She earns $12,000 and doesn’t have any other earnings.

The father saves $4,440 (37% of $12,000) in income taxes at no tax cost to his daughter, who can use her $12,000 standard deduction (for 2018) to completely shelter her earnings. This is nearly twice as much as would have been sheltered last year, pre-TCJA, when the standard deduction was only $6,350.

The father can save an additional $2,035 in taxes if he keeps his daughter on the payroll as a part-time employee into the fall and pays her an additional $5,500. She can shelter the additional income from tax by making a tax-deductible contribution to her own traditional IRA.

Family taxes will be cut even if an employee-child’s earnings exceed his or her standard deduction and IRA deduction. Why? The unsheltered earnings will be taxed to the child beginning at a rate of 10% instead of being taxed at the parent’s higher rate.

Avoiding the “kiddie tax”

TCJA changes to the “kiddie tax” also make income-shifting through hiring your child (rather than, say, giving him or her income-producing investments) more appealing. The kiddie tax generally applies to children under age 19 and to full-time students under age 24. Before 2018, the unearned income of a child subject to the kiddie tax was generally taxed at the parents’ tax rate.

The TCJA makes the kiddie tax harsher. For 2018-2025, a child’s unearned income will be taxed according to the tax brackets used for trusts and estates, which for 2018 are taxed at the highest rate of 37% once taxable income reaches $12,500. In contrast, for a married couple filing jointly, the 37% rate doesn’t kick in until their taxable income tops $600,000. In other words, children’s unearned income often will be taxed at higher rates than their parents’ income.

But the kiddie tax doesn’t apply to earned income.

Other tax considerations

If your business isn’t incorporated or a partnership that includes nonparent partners, you might also save some employment tax dollars. Contact the P&R team to learn more about the tax rules surrounding hiring your child, how the kiddie tax works or other family-related tax-saving strategies. You can reach us at Office@CPAsite.com or 904-396-5400.

© 2018

Clergy, Exec. Directors Now Need Accountable Business Reimbursement Plans… and Nonprofits Must Budget Differently

If you’re a community-minded businessperson, you likely serve on at least one nonprofit or church board of directors. Your work helps ensure the nonprofit’s leader focuses on the mission rather than personal financial issues, such as his or her next income tax return.

The new tax law, the Tax Cuts and Jobs Act (TCJA), just complicated your achieving that objective with more budget planning now required.

Effective January 2018, TCJA eliminated one of the primary ways clergy and nonprofit staff received compensation for unreimbursed business expenses, such as travel, meals, education and clothing, when it cut the “unreimbursed business expenses subject to two percent of adjusted gross income” deduction from the 1040 Schedule A.

The IRS is still developing guidelines for the new law, and opinion in professional journals and websites remains just that—opinion—until the IRS finalizes its interpretation of TCJA. So clergy members and their houses of worship along with nonprofit staff and their boards should establish accountable, documented reimbursement plans until further guidance is codified.

Since in the past these expenses may have been truly “unreimbursed,” the nonprofit didn’t pay—or budget for—these expenses, and you and your board colleagues should now consider a new expense line item on its financial statements.

In short, the religious and nonprofit boards need to work with their clergy and paid staff to decide exactly what expenses will now be funded.

An important item specifically for clergy that didn’t change in the new law: the clergy housing allowance, at least not yet. It’s the greatest tax benefit available to clergy members. IRS guidelines require your employing house of worship to officially designate your home as a portion of your compensation in advance of the qualified costs being paid. However, be aware a federal appeals case on this benefit, which could threaten this legacy tax exclusion, is being considered this year.

Of course, we’ll monitor developments and IRS updates and bring you more information as it’s decided and published.

At Patrick & Raines CPAs, our experienced, committed team prides itself on its work with nonprofits, including many houses of worship. We build long-lasting, trusted relationships with our nonprofit clients to help them reach their management and financial goals.

Contact us when you need help with your tax or financial planning questions: Office@CPAsite.com or 904-396-5400.

You Owe the IRS? No Worries – You have Options

Next to public speaking and the proverbial IRS audit, owing individual or business income taxes is one of our biggest fears. When filing your last income tax return, did you show a balance due to Uncle Sam you still can’t pay?

Worse yet, did you fail to file your tax return because you owed a balance?

What should you do now? If you owed money with your tax return, don’t ignore it! Your debt won’t go away and will only compound your money owed.

Thankfully, the IRS offers several options, one likely to suit your needs:

  • File your income tax return as soon as possible. If your return is more than 60 days past the due date or requested extension period, you’ll owe a penalty of $135 or 100% of your unpaid tax.
  • Pay as much as you can now. If you have funds available to pay even a portion of your tax bill, pay it. The IRS charges interest on overdue taxes, so reducing your debt also decreases your interest.
  • Request a payment plan. Simply apply online or request advice from your accountant (or from P&R, of course!). A short-term payment plan gives you up to 120 days to pay the balance. If you require more time, enter into an installment agreement.
    • Installment agreements for businesses offer up to 24 monthly payments on balances of $25,000 or less (including penalties and interest), for current and prior year obligations only.
    • Installment agreements for individuals allow up to 72 monthly payments on balances of $50,000 or less (including penalties and interest).
  • Apply for an offer-in-compromise. If you owe more than you can pay in full, with or without a payment agreement, you may need to resort to an offer-in-compromise. This option isn’t for everyone; use the pre-qualifier tool as a guide to determine if a potential offer might be accepted.
  • Consider your best payment options:
    • Check or money order. Make sure you make it payable to United States Treasury, and put the primary taxpayer’s Social Security number and tax year in the memo section.
    • Electronic Federal Tax Payment System (EFTPS). Both business owners and individuals may authorize the IRS to withdraw the payment directly from a savings or checking account (business owners should provide two separate accounts if they want to use EFTPS to pay both business and personal taxes). Register at least one week prior to transferring your first payment. Afterwards, you will have the option to schedule payments up to one year in advance.
    • Direct Pay. This option is offered to individuals only, with no requirement for pre-enrollment. Again, funds are withdrawn from your bank account and you can schedule payments up to 30 days in advance.
    • Credit or debit card. Be prepared to pay additional service fees charged by your financial institution or card processor. The IRS requires the full balance due and will not pay the transaction fees!

If you owed money this year, and especially with the new tax reform law, use the IRS’ Withholding Calculator to ensure your paycheck withholding amount is appropriate, or you’re paying enough in estimated taxes to avoid this situation next year.

Owing the IRS can be a costly matter, but less so—and more manageable—if you don’t ignore it. If you’re not one of the lucky refund taxpayers but owe a balance instead, make the effort to pay what you can and consider one of the IRS alternatives to satisfy the balance.

If your tax preparation is too complex for you to manage alone, the experienced accounting staff at Patrick & Raines CPAs will be happy to talk with you…and could very likely relieve some of your stress!

Contact us at Office@CPAsite.com or 904-396-5400.

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