Jennie Steinmetz, CPA Jennie Steinmetz is the Tax Services Manager at Casey Peterson, LTD, and has been with the firm since 2018. Jennie has over a decade of experience in public and private accounting and specializes in identifying opportunities for efficiencies for organizations. Jennie graduated from Colorado State University with a Bachelor of Science in Accounting and licensed in Colorado and South Dakota. She is the incoming Treasurer for WAVI and graduate of Leadership Rapid City Class of 2019. Lori Larson, CPA Lori Larson has over 18 years of experience in public accounting and specializes in assisting clients with trust and estate strategies. Lori is a Tax Manager and has been with Casey Peterson, LTD, since 2006. Lori received her Bachelor of Science in Professional Accountancy from Black Hills State University and is the Treasurer for the West River Estate Planning Council. Elise Foltz, CPA Elise Foltz is a Senior Tax Associate with Casey Peterson, LTD. With over 6 years of experience in public accounting focused on supporting our Tourism & Hospitality niche, Elise works closely with her clients to understand their unique needs and be just a phone call away. Elise has a Bachelor of Science in Professional Accountancy from Black Hills State University and is an Investment Advisor Representative. Kimberly Robinson, MBA, EA Kimberly is a Tax Associate and interim Accounting Services Manager with Casey Peterson, LTD, since 2017. Kim assists clients with IRS representation as an enrolled agent. Kim received her Masters of Business Administration in Accounting from Colorado Technical University.
TAX UPDATES WHAT YOU NEED TO KNOW IN THIS EVER-CHANGING LANDSCAPE
December 5, 2019 | Law for Lunch
TODAY’S PRESENTERS LORI LARSON
CPA
Tax Manager LoriL@caseypeterson.com
ELISE FOLTZ
KIMBERLY ROBINSON MBA, EA Tax Associate KimR@caseypeterson.com
CPA Senior Tax Associate
JENNIE STEINMETZ
Elise@caseypeterson.com
JennieS@caseypeterson.com
Tax Services Manager
CPA
TODAY’S AGENDA
TRUST AND ESTATE TAX
ENTITY SELECTION
IRS RESOLUTIONS
FEDERAL TAX UPDATES
TRUST AND ESTATE TAX
LORI LARSON Tax Manager
CPA
YEAR END SELECTION FILLING OUT FORM SS-4
• Trusts typically must select a calendar year-end • Estates have the option to choose a fiscal or calendar year end • Reasons to choose calendar: • Multiple Forms 1099 to report • Ease of reporting and recordkeeping • Short year completed by December
• Fiscal year starts the date after decedent passes away – not more than a year of reporting • Example: DOD 2/15/19 – estate runs 2/16/19-1/31/20 • Example: DOD 7/31/19 - estate runs 8/1/19 – 7/31/20
TAXATION OF TRUSTS IRREVOCABLE SIMPLE TRUSTS • Pass out income on Form K-1 to beneficiaries • Based on pro-rata share of distribution • Capital gains paid by trust unless stated otherwise – max 20%
IRREVOCABLE COMPLEX TRUSTS • Trustee has the discretion to distribute income to beneficiaries – income is passed out on Form K-1 to beneficiaries • If the trustee chooses not to distribute, income is taxed at the trust level • Capital gains paid by trust unless stated otherwise – max 20%
REVOCABLE TRUST • Taxed at Form 1040 level of the grantor • Option to do Form 1041 and report on grantor letter or just report on Form 1040
TAXATION OF TRUSTS • Very condensed tax brackets • For 2019, at $12,750 of income the tax rate is 37% • This is where distributions become crucial to analyze • Potential for partial distributions • In theory, beneficiaries will pay less tax at the individual 1040 rates as opposed to the trust rates (unless they are in the 37% tax bracket)
TAXATION OF ESTATES • Two types of estate returns • Form 1041 – The “Small Estate” • Form 706 – The “Big Estate”
• If have income of $600 in estate, must file Form 1041 • Must watch for necessary distributions of income if estate is open longer than one year • In final year of estate, all income, expenses and capital gains or losses pass out on Form K-1 to beneficiaries • Request pre-bill for tax preparation before close • If 706 not required, get step-up in basis to FMV of assets at DOD
TAXATION OF ESTATES • If have assets of more than $11.4 million per person, must file Form 706 and Form 1041 • Why file Form 706: • Portability – using a spouse’s DSUE (deceased spouse’s unused exemption) • Example: Husband dies and uses $10 million of his exemption in 2019. When wife passes away, her exemption will increase to include the $1.4 million from her deceased spouse. • Must file Form 706 to elect this
• Owe money to IRS – 40% tax rate • Assets reported on Form 706 get step-up in basis to FMV at DOD
BEST PRACTICES • Always state the situs of the trust • Complex state tax code is causing states to get a cut of the tax if the trust instrument is silent as to situs • South Dakota has some of the best tax code in the country, which is why we are thriving in the trust arena • No state tax in South Dakota
• If unsure of how to fill out the Form SS-4, contact CPA office for help • Think through distributions to see if it makes sense (If allowed and beneficial) • If you have a client that has questions, CPAs are more than happy to sit in on meetings to discuss taxability and options with clients
QUESTIONS?
ENTITY SELECTION
ELISE FOLTZ
CPA Senior Tax Associate
TYPES OF LEGAL ENTITIES • Sole Proprietorship (d/b/a) • Partnership • Limited Liability Partnership (LLP) • C-Corporation • S-Corporation • Limited Liability Company (LLC)
SOLE PROPRIETORSHIP (D/B/A) ADVANTAGES
DISADVANTAGES
• Easiest and least expensive
• Unlimited liability
form of ownership • Generated income goes to owner to keep or reinvest • Easy to dissolve if needed
• Funding difficulties • Less attractive to prospective employees • No difference between owner and the business
SOLE PROPRIETORSHIP (D/B/A) TAX CONSEQUENCES • Business income is reported on Form 1040 Schedule C • Rental income is reported on Form 1040 Schedule E • Farm and ranch income is reported on Schedule F • Farm Rental is reported on Form 4835 • Net income from a Schedule C or Schedule F is SE taxable •
Owner receives an above the line deduction for ½ of SE tax, which reduces taxable income, but then pays the full S/E tax
PARTNERSHIP ADVANTAGES
DISADVANTAGES
• Easy and inexpensive to set up
• Joint and individual liability
• Shared financial commitment
• Shared financial commitment
• Potential partnership incentive
• Disagreements among
for future employees
partners • Shared profits
ALL PARTNERSHIPS SHOULD HAVE A PARTNERSHIP AGREEMENT
PARTNERSHIP TAX CONSEQUENCES • Pass through entity • Partners share of profits and losses are passed through on a schedule K-1 which shows up on their personal Form 1040 Schedule E
• Can be SE Taxable • Business Income will be SE Taxable where rental income will most likely not be SE taxable depending on the type of rental it is. • Owner receives an above the line deduction for ½ of SE tax, which reduces taxable income, but then pays the full S/E tax
LIMITED PARTNERSHIP (LP) SIMILAR TO PARTNERSHIP WITH THE FOLLOWING EXCEPTIONS: • Has general and limited partners • General partners: • have control • have joint and individual liability • the business income will be SE taxable
• Limited partners • Cannot have direct control • The business income is not SE taxable
• Easier to attract investors because limited partners have limited liability to the business debts and they can share in the profits and losses without having to participate in the business itself.
LIMITED LIABILITY PARTNERSHIP (LLP) SIMILAR TO PARTNERSHIP WITH THE FOLLOWING EXCEPTIONS: • Similar to a general partnership except that all partners have limited liability protection: • Managed by all members of LLP • Partners are only liable up to the amount that they invested
C-CORPORATION ADVANTAGES
DISADVANTAGES
• Limited personal exposure for shareholders-can only lose the amount of their investment
• Time-Consuming
• Can generate capital by selling stock
• Additional paperwork and record-keeping because of regulations
• Independent entity that is liable for its debts and actions
• Costly • Double Taxation
C-CORPORATION • Corporation pay federal tax as well as local and state tax if applicable • 2018-21% tax rate
• Double taxation • The corporation pays tax on the income and the shareholders pay tax on the dividends that they receive.
S-CORPORATION ADVANTAGES • Taxed only once at the personal level • Income that is passed through is not SE taxable, only the compensation has FICA taxes on it
• Business-expense tax credits • Corporation is independent from shareholders
DISADVANTAGES • Stricter operational processes • Corporate formalities • Requirements on shareholders compensation/distributions • Must have reasonable compensation
• Ownership limits • Must be US citizens or residents • No more than 100 shareholders • Only one class of stock
LIMITED LIABILITY COMPANY (LLC) • Tends to be most popular form for start-ups • A hybrid between a sole proprietorship/partnership and a C-Corp • Some professional vocations in some states are not allowed to be an LLC • In South Dakota will need to file with the state and likely has a filing requirements for most states • There needs to be a written operating agreement (Articles of Incorporation) • Limited personal Liability for ‘members’
LIMITED LIABILITY COMPANY (LLC) • Can be different types of entities for tax purposes: • Disregarded entity-reported on Schedule C, E, F or Form 4835 on personal 1040 • Partnership • S-Corporation • When doing a LLC for a husband and wife consider if you want just one owning the LLC to reduce the number of tax returns needing to be done.
QUESTIONS?
IRS RESOLUTIONS
KIMBERLY ROBINSON Tax Associate
MBA, EA
IRS RESOLUTION
TAX PROBLEMS CAN STEM FROM… • Government Errors
• Oversight or Neglect
• Divorce
• Situations diverting attention:
• Business Reversal • Loss of Employment • Health Problems
• Natural disasters • Substance Abuse
REMEDY OPTIONS
Pay what they want… NOW!
Offer in Compromise
Financing Assistance
Penalty Abatement
Bankruptcy
Installment Agreement
Currently Not Collectible
STATUES TO WATCH ASED – Assessment Statute Expiration Date • 3 years
CSED – Collection Statute Expiration Date • 10 years
OFFER IN COMPROMISE • Pay what can afford, regardless of amount owed • They investigate: County Assessor’s Office, DMV, Credit Reporting Agencies, Real Estate Transactions, Bank Statements…
• If accepted, the offer satisfies the entire tax debt, penalties, & interest. • Requirements for Acceptance… • Average time frame 9 months • Case Study Example
INSTALLMENT AGREEMENT • When can’t pay all at once but will pay with time • Payment time based on amount owed • Partial Installments (PPIA) *Interest rates are long term AFR + 3% , and is adjusted quarterly
CURRENTLY NOT COLLECTIBLE • Not a permanent solution • Taxpayer is reviewed annually • The IRS may come back in full force with levies • Interest and penalties still accrue • The collection statute (period that the IRS can collect) is temporarily halted
OTHER REMEDY OPTIONS • First time Penalty Abatement • Partial Installment Payment • Levy Reversal • Business Changes & Advice
• Lien Release • Still reported to credit bureaus
• Lien Withdrawal • Never Happened!
TIPS & BEST PRACTICES WATCH YOUR CLIENTS! 1 IN 6 WILL OR IS HAVING ISSUES!
• Put an 8821/ POA in place • Verify with the IRS • Halt liens & levies while process options • Gather current financial information • Business and Individual
• File current & any/all delinquent returns • Begin making estimated payments • Generally, do OIC prior to deciding on bankruptcy • Automatic withdrawal on payment
** MUST REMAIN IN COMPLIANCE WITH ALL PAYMENTS & REQUIREMENTS OR WILL DEFAULT**
POWER OF ATTORNEY • Separate form for each SSN or EIN • Add “updated on..” at top of future POA’s (i.e. expand to include other years/taxes)
UPDATED ON 11/30/2019
POWER OF ATTORNEY OUR STANDARD • Next year & 3 prior years • Certain instances require 10 years (collection statute) • Check the box for Intermediate Service Provider
POWER OF ATTORNEY • Typically want to remove prior representation • Check the box to keep prior, type “Updated on x/x/xx” at top of first page, attach POA want to keep
POWER OF ATTORNEY BUSINESSES
Must enter the Title of person signing
INDIVIDUALS
Leave title and “if other than individual” blank
POWER OF ATTORNEY FAQS • New one supersedes existing – know if want to keep prior one • Allows Preparer to Step in the shoes of the taxpayer: talk and make decisions on their behalf • Must Know Taxpayer- Take the deal the IRS is offering right NOW?
• Stay in force until withdrawn (by Taxpayer or Preparer) • Withdraw when disengage or will deal with issues “forever”
TRUST FUND PENALTY • Responsible and Willfull • Can be assessed against owners, bookkeepers, and others
QUESTIONS?
FEDERAL TAX UPDATES
JENNIE STEINMETZ Tax Services Manager
CPA
2019 TAX BRACKETS SINGLE
HEAD OF HOUSEHOLD
TAXABLE INCOME
MARGINAL TAX RATE
TAXABLE INCOME
MARGINAL TAX RATE
$0 - $9,700
10%
$0 - $13,850
10%
$9,701 - $39,475
12%
$13,851 - $52,850
12%
$39,476 - $84,200
22%
$52,851 - $84,200
22%
$84,201 - $160,725
24%
$84,201 - $160,725
24%
$160,726 - $204,100
32%
$160,726 - $204,100
32%
$204,101 - $510,300
35%
$204,101 - $510,300
35%
Over $510,301
37%
Over $510,301
37%
2019 TAX BRACKETS MARRIED FILING JOINT
MARRIED FILING SEPARATE
TAXABLE INCOME
MARGINAL TAX RATE
TAXABLE INCOME
MARGINAL TAX RATE
$0 - $19,450
10%
$0 - $9,700
10%
$19,451 - $78,950
12%
$9,701 - $39,475
12%
$78,951 - $168,400
22%
$39,476 - $84,200
22%
$168,401 - $321,450
24%
$84,201 - $160,725
24%
$321,451 - $408,200
32%
$160,726 - $204,100
32%
$408,201 - $612,350
35%
$204,101 - $306,175
35%
Over $612,351
37%
Over $306,176
37%
MARRIAGE PENALTY • A single person does not reach the top marginal tax rate until $510,301 taxable income. • A married couple reaches the top marginal tax bracket at $612,351. • Married filing separately reaches the top marginal tax bracket at $306,176. • Two single persons with substantial income could have $1,020,602 in income before they reach the top tax bracket, but if they file married joint or married separately, they could have an extra $408,251 taxed at the highest tax rate.
STANDARD DEDUCTIONS 2018
2019
MFJ
$24,000
$24,400
Single
$12,000
$12,200
Head of Household
$18,000
$18,350
The additional standard deduction for the elderly and the blind is unchanged.
AUTOMATIC COST OF LIVING ADJUSTMENTS 2018
2019
IRA Contributions
$5,500
$6,000
IRA Catch-up Age 50+
$1,000
$1,000
401K Elective Deferral
$18,500
$19,000
401K Catch-up Age 50+
$6,000
$6,000
Standard Mileage Rate Per Mile
$0.545
$0.58
Standard Deduction – Single
$12,000
$12,200
Standard Deduction – Married
$24,000
$24,400
Section 179 Write-off
$1,000,000
$1,020,000
Bonus Depreciation
100%
100%
Health Savings Account Contribution - Single
$3,450
$3,500
Health Savings Account Contribution – Married
$6,900
$7,000
H.S.A Extra Age 55+
$1,000
$1,000
FICA Wage Earning Limit
$128,400
$132,900
2019 CHANGES NEW FORM 1040-SR • Shorter version of form 1040 for taxpayers age 65+. • It is similar to the old 1040-A. Note that in 2018 forms 1040-A and 1040-EZ were eliminated. The 1040-SR is for persons age 65 and over who have no self-employment income that would be reported on schedules C, F, or E and not partnership or S-corporation income. FORM 1040 SCHEDULES 4, 5, AND 6 HAVE BEEN ELIMINATED • Schedule 4 – Other taxes has been incorporated into schedule 2. • Schedule 5 -other payments and credits has been moved to schedule 3. • Schedule 6 – foreign address has been eliminated.
2019 CHANGES NEW FORM 8995 TO CALCULATE QBI DEDUCTION • 8995 if net income is below $321,400 married or $160,700 single and form 8995A for returns with higher income. PENALTIES FOR NOT FILING 1099 FORMS KEEP GOING UP • $110 per 1099 if not more than 30 days late, and $270 per form if filed after August 1
IF YOU ITEMIZE RATHER THAN TAKE THE STANDARD DEDUCTION
STATE AND LOCAL TAXES • This includes income tax, property tax and sales tax. Limited to $10,000. Several states including NY and NJ passed state laws allowing taxpayers to make a charitable contribution to the state and receive an offsetting state income tax credit. • IRS regulation 1.170A(1)(h)(3) disallows charitable contribution where there is an offset to state income tax. • Property taxes paid for a trade or business are still fully deductible for rentals, farms, and other business activities.
ALIMONY • For settled decrees after 12-31-2018 alimony not deductible to payor or taxable to recipient. • Decrees in effect at or before 12-31-2018 alimony is deductible to payor and taxable to recipient. • For decrees modified after 12-31-2018 the new rules apply if the decree expressly so provides. • New form 1040 asks when divorce decree was entered as date affects taxability/deductibility.
COMMUNITY PROPERTY • Spouses domiciled in a community property state must report ½ of total community property income even if filing separately for Federal income tax purposes. IRS publication 555 January 2019.
• Community property states include AZ, CA, ID, LA, NV, NM, TX WA and WI.
SALE OF A RESIDENCE • Sale of residence owned by a disregarded entity is eligible for $250k single $500K married sale of principle residence exclusion. IRS reg. 1.121-1(c)(3). • A disregarded entity is generally a single member LLC or a revocable grantor trust.
NOL CARRYBACK • NOL carryback has been eliminated for all except for farm and ranch income. • Farm and ranch income can be carried back 2 years and all NOL’s can be carried forward indefinitely. • NOL deduction is limited to 80% of taxable income. IRC section 172(a).
FARM DEPRECIATION • Farm Machinery now 5-year property, was previously 7 years. • Now use 200% declining balance was previously 150% db method. • Farm buildings other than single use buildings are 20 Year and eligible for 100% bonus depreciation. 20 Yr. property not eligible for 179. • Single use structures are 10-year property, grain bins and calving sheds, hog sheds are eligible for 179 write off.
FARM DEPRECIATION • Section 179 depreciation can be dialed in to whatever amount desired up to dollar limit. • Bonus depreciation is all or nothing by class life such as 5 yr., 7 yr. etc. • Ordering rules are; take section 179 first, then Bonus on remaining property, then regular depreciation on any balance.
BONUS DEPRECIATION • Bonus depreciation is 100% write off for new or used property with a class life of 20 years or less • This includes most farm buildings except tenant houses. • Bonus depreciation is automatic unless elected out. • Cannot elect out of Bonus depreciation on a late filed return. • Bonus depreciation is not allowed for Leasehold improvements, but these items qualify for section 179. • Bonus depreciation is phased out 100% through 2022, 80% for 2023, 60% for 2024, 40% for 2025, 20% for 2026 and zero thereafter.
SECTION 179 | 100% WRITE-OFF • Section 179 depreciation is allowed in any amount up to $1,020,000 for 2019, as long as qualified purchases don’t exceed $2,550,000. • Section 179 is allowed for first year write-off of purchases • For Farm & Ranch - eligible property includes machinery, breeding livestock, Fences, bins and Calving sheds.
QBI DEDUCTION • 20% QBI deduction, eligible income: Most business income is eligible. • Specified service business income only if taxable income is less than • $160,700 single or $321,400 married. • If taxable income exceeds $160,700 single or $321,400 married there is also a 50% of payroll limitation, or a 2.5% business asset limitation. • In all cases there is also a 20% of taxable income limitation.
• Many rental activities qualify for the QBI deduction, it is apparent that triple net lease does not qualify.
QUESTIONS?