The Tax Cuts and Jobs Act of 2017 increased the child tax credit for all eligible children to $2,000. The Act also increased the refundable portion to $1,400. This means that even if you pay no income tax you still can take the benefit of the credit. Another good change was they increased the phase-out limitation from $110,000 of Adjusted Gross Income to $400,000 of Adjusted Gross income for Married Filing Joint returns. This means more taxpayers will be able to get the benefit of the credit in 2018 and forward.
As always, consult with your tax professional at Ketel Thorstenson about these or other tax matters because each situation is different. Don’t navigate the difficult and ever changing tax codes and legislation on your own. Ketel Thorstenson CPAs and tax professionals receive advanced training and continuing education all year long to keep our service on the forefront of the tax industry. Call us today for guidance on tax planning, tax return preparation, and/or Tax Reform (the Tax Cuts and Jobs Act) affects or questions.
The new law has greatly changed the way you will itemize deductions in 2018 compared to 2017. First, the Act increased the standard deduction to $24,000 for married couples, this means you need at least this amount in itemized deductions to itemize. Second, the Act has capped the amount of state and local taxes that you can deduct to $10,000 per year. Here in South Dakota this would primarily be sales tax and real estate taxes. (Business real estate taxes are not affected) Third, for new mortgages, the Act has lowered the amount of mortgage debt eligible for the home interest deduction, and interest on home equity loans is no longer deductible, even on legacy loans. When we take these three items into account, many more individuals will now be taking the standard deduction and it is more important than ever to look at opportunities to bunch your deductions every other year.
As always, consult with your tax professional at Ketel Thorstenson about these or other tax matters because each situation is different. Don’t navigate the difficult and ever changing tax codes and legislation on your own. Ketel Thorstenson CPAs and tax professionals receive advanced training and continuing education all year long to keep our service on the forefront of the tax industry. Call us today for guidance on tax planning, tax return preparation, and/or Tax Reform (the Tax Cuts and Jobs Act) affects or questions.
The Tax Cuts and Jobs Act (TCJA) of 2017 did not repeal the penalty for individuals not having health insurance nor the requirements for businesses to issue you forms related to your health insurance coverage. If you have health insurance through the exchange, you will receive a Form 1095-A. If you have group health insurance through your employer, you will receive a Form 1095-B. If you are employed by a company that has 50 or more full-time equivalent employees, you will receive a Form 1095-C. The IRS recently provided an extension for these forms, you may not receive them until early March. However, the IRS has stated that you can file your 2018 tax return without these forms as long as you provide accurate information about your health insurance coverage. For 2019, there is not a penalty for individuals whom do not have health insurance but the businesses are still required to issue forms related to your health insurance coverage and you are still required to tell the IRS if you have insurance.
As always, consult with your tax professional at Ketel Thorstenson about these or other tax matters because each situation is different. Don’t navigate the difficult and ever changing tax codes and legislation on your own. Ketel Thorstenson CPAs and tax professionals receive advanced training and continuing education all year long to keep our service on the forefront of the tax industry. Call us today for guidance on tax planning, tax return preparation, and/or Tax Reform (the Tax Cuts and Jobs Act) affects or questions.
Tax Cuts and Jobs Act: What is the Qualified Business Income (QBI) Deduction and Do You Qualify for it?
On December 22nd, 2017, President Trump signed into law the Tax Cuts and Jobs Act (TCJA). The biggest tax overhaul since the Tax Reform Act of 1986, the TCJA created more than a hundred tax provisions, with QBI being one of the most anticipated and talked about features of the Act.
What is the QBI?
In April this year, the QBI tax deduction for partnerships, LLCs, S-Corporations, and sole proprietorships was added to the TCJA. A 20% deduction, the QBI is one of the biggest changes for pass-through entities under tax reform.
What are pass-through entities?
“A special business structure that is used to reduce the effects of double taxation. Pass-through entities don’t pay income taxes at the entity level. Instead, entity income is allocated among the owners, and income taxes are only levied at the individual owners’ level.”*
With the introduction of the QBI, taxpayers can now deduct up to 20% of domestic business income attributable to the aforementioned entity structures.
How do I qualify for the QBI deduction?
First and foremost, you must be an owner of a pass-through business/entity. The second and probably the most important requirement is for you to have Qualified Business Income. This is the net income (profit) your pass-through business generates during the year. You can calculate this by subtracting all your regular tax deductions from your total business income. If the net amount of QBI is less than zero, then the loss is carried over and will lower your QBI in the succeeding year.
How is the QBI tax deduction calculated?
The primary factor affecting the calculation of a taxpayer’s QBI deduction is whether their taxable income is:
Below a lower taxable income threshold ($157,500 single, HOH, MFS or $315,000 joint).
Above a higher taxable income threshold ($207,500 single, HOH, MFS or $415,000 joint).
Case A – Below the Lower Taxable Income Threshold
Calculation of the taxpayer’s QBI deduction when they fall below the lower taxable income threshold is straightforward. The taxpayer first calculates the deductible QBI amount for each qualified business, and then combines these values into a combined QBI amount. If the taxpayer has only one qualified business, the combined QBI amount is the deductible QBI amount for that business.
The taxpayer then applies the overall taxable income limitation to the combined QBI. Thus, the taxpayers QBI deduction is equal to the lesser of:
The combined QBI amount, and
The overall limitation (20% of the taxpayer’s taxable income in excess of any net capital gain).
Example
Taxpayers A and B file a joint tax return. They report taxable income of $256,000, of which $5,000 is net capital gain and $200,000 is ordinary net income from taxpayer A’s interest in an S corporation. Taxpayer A and taxpayer B’s combined QBI is $40,000 (20% * $200,000). This is below the overall limitation of $50,200 (20% * [$256,000 taxable income – $5,000 net capital gain]), so taxpayers A and B’s QBI deduction for 2018 will be the $40,000.
Case B – Above the Higher Taxable Income Threshold
If the taxpayer has taxable income above the higher threshold amount, two issues arise in the calculation of the QBI deduction. First, a business of the taxpayer will not be treated as a qualified business – and the income of the business of the taxpayer will not be included in the QBI – if the business meets the definition of a specified service trade or business.
A specified service trade or business is any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal assets of such trade or business consist of the reputation or skill of 1 or more of its employees or owners. The QBI deduction will be denied in full for these specified services trades or businesses.
Second, if a business is a qualified business, the deductible QBI amount for the business is subject to a W-2 wage and capital limitation.
Example
Taxpayers A and B file a joint tax return. They report taxable income of $550,000 of which $350,000 is ordinary income from taxpayer A’s interest in an S corporation. The S corporation is a specified service trade or business, and thus they will not receive the QBI deduction.
Example
Taxpayers A and B file a joint return in which they report taxable income of $450,000, of which $300,000 is ordinary income from taxpayer A’s interest in an S corporation that is not a specified service trade or business. Taxpayer A’s allocable share of the business’s W-2 wages is $80,000, and her share of the business’s unadjusted basis in its qualified property is $600,000.
Taxpayers A and B’s wages and capital limitation is the greater of:
50% of W-2 wages, which is $40,000, and
The sum of 25% of the W-2 wages ($20,000), plus 2.5% of the unadjusted basis of the qualified property immediately after its acquisition ($600,000 * 2.5% = $15,000) for a total of $35,000.
The amount of the wage and capital limitation is therefore $40,000.
A and B’s combined QBI is the lesser of:
20% of QBI ($60,000) or
The wage and capital limitation of $40,000.
The Combined QBI is $40,000 before applying the overall limitation of $90,000 (20% of $450,000). Thus, taxpayers A and B’s QBI deduction for 2018 is $40,000.
How do I get help with my QBI tax deduction?
Calculating QBI is a complex task, as there are a range of different ways it is calculated depending on a taxpayer’s circumstances. This article only describes a brief overview of what QBI is and what it means for you, as well as the basic factors affecting its calculation.
It is important to have a professional prepare your tax return to ensure that you are receiving all the benefits and deductions to which you are entitled. At Ketel Thorstenson, LLC, we are here to help! We have the expertise and experience in tax planning and tax preparation to help you take full advantage of the QBI tax deduction. Get in touch with us today!
Do you have a digital footprint? If so, what provisions have you made in your estate documents for the recovery and use after you are no longer here? Our world is becoming more and more based on our electronic use. We can access accounts and handle transactions electronically with our banks, credit card companies, and even our health care providers. You can order almost anything from online companies around the world, including ordering groceries for pickup or delivery. But, have you given thought as to what happens to these accounts when you pass away? Who and how will your digital executor access these accounts?
Michael Kitces (financial planner, author, speaker, and former practitioner editor of the Journal of Financial Planning) describes digital assets as anything which is stored in electronic form (but separate from the physical hardware on which the electronic data lives). So, this includes things like cryptocurrencies (i.e. Bitcoin), to your login credentials to your bank, credit cards, social media, music or email accounts.
You may have addressed this challenge by simply writing down all of your usernames and passwords and made them available to a trusted family member or advisor. However, the legal profession identifies a hacker as anyone who knowingly accesses a computer or account without proper authorization. Accordingly, the Computer Fraud and Abuse Act and the Electronic Communications Privacy Act provides punishment by law for hacking. So, if someone other than yourself accesses your account, they are technically hacking and punishable by law.
The current law regarding protection of digital assets, the Revised Uniform Fiduciary Access to Digital Assets (RUFADDA) has had a rocky road since 2014. However, currently, almost 40 states have adopted RUFADDA, with another five jurisdictions introducing consideration of the digital assets legislation. South Dakota adopted RUFADDA July 1, 2017, Wyoming enacted legislation on July 1, 2016; however, neither North Dakota nor Montana have been able to enact any such legislation.
Are you aware, if your estate documents do not address and grant post-death authority to your digital executor, access to your digital accounts may be lost. For example, each of the internet browsers (Google, Microsoft, Yahoo) all have Service Agreements or Terms of Service which most of us have not read, but all marked “agreed” when we set up the account. These agreements have different positions of what happens to the account when a user passes away, and limitations on who may access the account. Google’s Inactive Account Manager will allow a “trusted contact” to be named and if desired, to share information with this contact. Or, the user can direct Google to delete certain information. Facebook’s Legacy Contact contains similar features.
Be aware, if you use these online tools, referred to above, and name someone other than your digital executor identified in your estate documents, account access will be granted to the named individual contained in the online tool, and not your digital executor. Under RUFADDA, use of the custodian’s online tool will render all other instructions (including the estate documents) irrelevant. However, if the online tool is not available or not utilized, RUFADDA will then look to the estate documents granting access to the deceased account by the digital executor.
It is imperative we correctly manage and ensure continuing access to our digital accounts at our passing. Accordingly, estate documents should contain identification and access to our digital assets and consider the appointment of a digital executor. Our individual digital footprint will continue to expand. How we and our trusted advisors plan for this inevitable outcome is definitely a conversation which must be undertaken now. The trusted advisors at Ketel Thorstenson are always available to assist you with these and other estate planning challenges.
Do you know the various project types offered by the Business Valuation Team at Ketel Thorstenson, LLP?
Traditionally, the Team has offered business appraisals for various industries and various purposes including gift, estate, marital dissolution, buying and selling, shareholder dissolution, etc. However, the Team is so much more than the traditional business appraisal! We also offer the following:
Fractional Interest Discounts– When real estate is owned equally by two or three partners, no one partner has unilateral control to force the liquidation of such property. Consequently, we calculate a reasonable discount to apply to such fractional interest.
Damage Calculations– We calculate damages of lost revenues for businesses who have had business interruption due to fire, flood, etc. We also calculate the loss of future earnings and lack of household responsibility support due to wrongful death or injury.
Life Estate Calculations– Sometimes an individual will sell his/her property to someone (oftentimes an adult child) but retain the right to live or use the property until his/her death. This is referred to as a life estate. The value of the life estate is often needed for insurance or Medicaid purposes. As such, we provide calculations of the estate value.
Start-Up Business Investor Packets– Founders of start-up businesses contact us to assist them in projecting financial statements not only for their own use but also to provide to potential investors in such businesses. We also assist with creating a well-organized packet for investors to digest to fully understand all aspects of the project. We work closely with local attorneys for the necessary legal documents.
Buy-Sell/Operating Agreement Assistance– We work with clients and their attorneys to ensure the language is appropriate from a business valuation analyst’s perspective in both creation and revision of such agreements.
Expert Witness Testimony/Trial Consultation- Whether an attorney needs someone to testify as an expert witness in business valuation matters or simply someone to consult for trial preparation, we fill the need. With our knowledge and experience, we assist attorneys in writing and reviewing expert witness direct and cross examination. Moreover, we assist attorneys and clients with settlement negotiations and opposing expert report review.
Fraud Examination– Nina Braun is an Audit Partner at KTLLP. She is also a CPA and a certified fraud examiner (CFE) who has assisted many clients and attorneys with examining financial records for fraud, or lack thereof.
With more than 40 combined years of experience in Business Valuation and wide array of services offered, we are here to serve your needs. Call today to see how we can help you.
Should We File Married Filing Jointly or Married Filing Separately?
If you are married, you more than likely file your income tax return as married filing jointly. However, you also have the option to file as married filing separately. In most cases married filing jointly will yield the lower tax and provides more tax credits. However, sometimes filing separately can reduce your tax bill. Let’s go over some items to help determine which filing status might suit your personal situation.
Married filing separately is most often used when each spouse wants to be responsible for only their respective taxes, even though it usually yields a higher tax bill. This usually occurs during situations of marital separation. When filing separately you need to be aware of these negative IRS parameters:
Cannot take the American Opportunity and Lifetime Learning education credits, student loan interest deductions
No exclusion on interest income form U.S. bond interest for education expenses
Cannot take the Child and Dependent Care Expenses in most cases
No exclusion or credit for adoption expenses in most cases
No earned income tax credit
Limits the contribution to a Roth IRA or deduction for a traditional IRA contribution
May need to include more income with Social Security benefits
May not be able to claim the elderly or the disabled credit
Retirement savings contribution and child tax credits may be reduced
Capital is limited to $1,500 instead of $3,000 if you were to file jointly
If one spouse takes the standard deduction, the other spouse can’t itemize, you both have to itemize or take the standard deduction
When taking the standard deduction, $12,000 is taken separately; if filing jointly the standard deduction is $24,000
Now that’s a long list, and you may be thinking you’re going to file jointly, but there are some situations where married filing separately can result in tax savings and here are a few items that might benefit you.
If you and your spouse itemize on separate returns and have high AGI, with large out of pocket medical expenses, you might be able to deduct medical cost that exceeds5% of your AGI in 2018. In 2019, the percentage changes to 10%
Charitable contributions
Personal casualty losses that exceed 10% of AGI in a federally-declared disaster area
Taking advantage of the new 20% QBI deduction for professionals
Married taxpayers automatically think filing separately will relieve them from the tax liability of their spouse. If you are worried or concerned with decreasing your tax liability by filing jointly and getting your share of the refund here are two ways that might help:
Form 8379 is used to relieve you from your spouse tax liability. This form is for the injured spouse to get back your share of the jointly filed refund when an overpayment is to be applied to a past-due amount of the other spouse.
Form 8857 is the Request for Innocent Spouse Relief when filing a joint tax return both you and your spouse are both jointly and severally liable for the tax liability, interest, and penalties that are due. If within 2 years of becoming aware that your spouse or former spouse should be held liable for the tax on a jointly filed return, you may be able to file this form to request relief if you meet all of these IRS conditions:
Your spouse omitted income or claimed false deductions or credits
A fraudulent scheme to defraud the IRS or another third party, creditor, ex-spouse or business partner
Divorced, separated or no longer living together
If taking into account all the facts and circumstances, it would be unfair to hold you liable for the understatement of tax
Your tax advisor here at Ketel Thorstenson is available to go over your unique situation to see which filing status is best for you. Call today for assistance and to go over any questions.
Trouble Shooting Issues in QuickBooks Bill Pay Window
QuickBooks tries to make things easy or intuitive – but that is not always the result. For instance, entering invoices and then paying the bill later. It sounds easy and, theoretically, it should be easy. There are a lot of things that can and do go wrong – even with the experienced user. See below for some of the more common issues, errors, and situations.
There is an outstanding bill from last year. It has already been paid, needs to be removed from the bill pay window, but you are not sure what to do. Most likely when your accountant prepared the prior year’s tax return, the outstanding bill was accounted for in some way – so now it would be unwise to delete the bill. The recommended way to clear out the outstanding bill is to go to VendorEnter Bills and then create a CREDIT with the same information as the original invoice (vendor, amount, and account) using the current date. The next step is to go into VendorsPay Bills, and then select the old invoice to be paid. The credit should then be applied to the stale bill and the transaction recorded. This process clears the outstanding bill, so you don’t have to keep looking at it every time you go to pay bills, and it keeps the prior year balances true.
That’s all well and good, but what if you don’t know how to set a discount or a credit? If, as in the above example, you are clearing a transaction out or you returned items you have an invoice for, then you’d create the credit as advised above. Once you go to “Pay Bills” you select the bill you want to pay and then click the “Set Credits” button below. This will bring up all applicable credits for this vendor. From there you choose what you want and set the credits. If there isn’t a credit available, but you are paying a bill within a designated trade discount period, then you can set the discount in the “Pay Vendors” window as well. Begin by selecting the vendor to be paid, and then click “Set Discount” below. Enter the discount allowed and then choose the account to offset with this discount. Some options may include: Other Income, creating a “Trade Discount” income account, or crediting the expense account to reduce the overall expense line item, (example: Cost of Goods Sold).
Finally, what if you need to make the payment using a different checking account or credit card? Most companies will use one account exclusively to pay bills while others may have multiple checking accounts – even paying some invoices with credit cards to increase their cash flow. If there are multiple bank accounts from which you pay bills you will need to verify the account in the drop-down list titled “Account”, and then choose the correct account for the selected payments. When using a credit card to pay the invoice, use the drop-down list under “Method” to select credit card. Once the change has been made to use credit card, then go back to the “Account” drop-down and choose from one of the previously set up credit cards.
As a quick mention, it will also be necessary to select whether to print the checks or to assign numbers for hand-written checks.
For more information, give the KTLLP QuickBooks Team a call today. We would love to help you with the above or any other QuickBooks processing issues.
As many people are aware, ride sharing services like Lyft are now available across the state of South Dakota. It is tempting to want to participate as a driver to make some extra income, but what should you know first before starting your new job?
As a driver for a ride sharing company, the drivers are not employees but instead are independent contractors who are self-employed. This means that at the end of the year they will receive possibly two 1099s from the company.
1099-K and tax Summary: This will show the Gross amount earned, and a breakdown of all the items that reduced the Gross amount down to the Net amount collected.
1099-MISC: If earnings are more than $600.00 in non-driving related income, like bonuses, then it will be reported here.
As an independent contractor it is the driver’s responsibility to keep up with business expenses and taxes, to include Social Security (6.5%), Medicare (1.45%) and Federal Income Taxes.
At the end of the year, drivers will complete two additional forms with their tax return:
Schedule C – “Profit or Loss from Business (Sole Proprietorship)”
Schedule SE – “Self-Employment Tax” (only if net income is greater than $400)
Some wonder what expenses can be deducted when driving for ride-sharing companies. Some key examples of expenses can be:
Auto Expenses: (Schedule C – Line 9)
Keep track of these one of two ways:
Actual expenses – keeping receipts for gas, oil, repairs, insurance, maintenance, and depreciation or
Standard IRS mileage Deduction – Standard rate is 58 cents per mile for 2019. (Mileage log recommended)
Water or snacks for passengers (Schedule C – Line 22)
Tolls and Parking Fees (Schedule C – Line 10)
Business Cell Phone (Schedule C – Line 25)
Commissions paid to Ride-sharing company (Schedule C-Line 10)
Driving for ride-sharing companies can be a great way to bring in additional income. The most important part is to keep records! And remember, if anything is used for both work and personal, only the work expenses can be deducted on Schedule C at the end of the year. If you find that it is too much for you to calculate on your own, Ketel Thorstenson will be glad to assist you with your return.
Is the traditional benefits package enough? Should we be offering pet insurance or maybe free lunches? If you’ve found yourself asking these questions you are not alone. Organizations of all shapes and sizes are asking them as well. And they are finding out that the standard health, vision, dental, and life insurance aren’t working anymore.
In a tight labor market one way to differentiate yourself from the competition is to offer a variety of benefits and perks. According to a 2017 survey conducted by Glassdoor 57% of candidates reported that perks and benefits are among their top considerations when accepting a job. So what should organizations be offering?
Based on a recent survey conducted by WorldatWork, a total rewards association, here are some of the top new benefits offered in 2018.
Telemedicine Services
Elder Care Resources
Paid Parental Leave
Disaster Relief Funds
Unpaid Sabbaticals
Student-Loan Repayment Assistance
Not all of these benefits will work for every organization. For most non-profits adding some of the above benefits aren’t possible due to increased costs or administrative restraints. So what are non-profits to do? Don’t get discouraged, there are plenty of perks and benefits you can add that cost little to no money. Considering adding the following:
Flexible Work Arrangements
Work-From-Home Options
Organization Branded Swag
Voluntary Benefits like:
Pet Insurance
Identity-Theft Insurance
Supplemental Insurances
Fun Team Events
A Peer-to-Peer Recognition Program
Employee Discounts for Your Services
The list of perks and benefits can go on and on, but the most important thing to consider when putting together your benefits package is to know what is meaningful to your staff. So don’t do this alone, survey your staff or have a small committee that you run ideas by. Tie them to your mission, vision, and core values; this way you’ll enhance your culture, add value to what you do, and retain good employees.
Remember, it’s not always about the salary. Having a great benefits and perks package can be the deciding factor for a potential new staff to join your team or for a current staff to remain on your team.