2018 Q2 Important Tax Deadlines for Businesses

 

During the busy tax-filing season it can be easy to forget about other important tax-related deadlines for your business. It is critical to have either a personal accountant or a designated person that helps manage the business tax payments that are due quarterly through the year.  Staying up-to-date and making those estimated payments will help alleviate your business tax bill at the end of the year.

Q2 TAX DEADLINES

April 2

2017 Forms: 1096, 1098, 1099 (except if an earlier deadline applies) and Form W-2G should be electronically filed.

April 17

For C corporations with a calendar year-end: file a 2017 Form 1120 income tax return or let us know to file a six-month extension (Form 7004) on your behalf. There is a $800 estimated Franchise Tax Board payment due. If you are sending a check, it must be post-marked by 4/17/18 to avoid any penalties.  If you choose to not extend, keep in mind that this is also the last day to make 2017 contributions to your pension and profit-sharing plans.

April 30

Report income tax withholding and FICA taxes for first quarter 2018 (Form 941) and pay any tax due. (There is an exception below for the deadline: May 10.)

May 10

Report income tax withholding and FICA taxes for first quarter 2018 (Form 941), if you deposited on time and in full all of the associated taxes due.

June 15

For C corporations with a calendar year-end, pay the second installment of 2018 estimated income taxes.

Contact us if you have any questions or want to verify that you are meeting all appropriate deadlines and to learn more about these tax requirements.

Casualty losses can provide a 2017 deduction, but rules tighten for 2018

If you suffered damage to your home or personal property last year, you may be able to deduct these “casualty” losses on your 2017 federal income tax return. For 2018 through 2025, however, the Tax Cuts and Jobs Act suspends this deduction except for losses due to an event officially declared a disaster by the President.

What is a casualty? It’s a sudden, unexpected or unusual event, such as a natural disaster (hurricane, tornado, flood, earthquake, etc.), fire, accident, theft or vandalism. A casualty loss doesn’t include losses from normal wear and tear or progressive deterioration from age or termite damage.

Here are some things you should know about deducting casualty losses on your 2017 return:

When to deduct. Generally, you must deduct a casualty loss on your return for the year it occurred. However, if you have a loss from a federally declared disaster area, you may have the option to deduct the loss on an amended return for the immediately preceding tax year.

Amount of loss. Your loss is generally the lesser of 1) your adjusted basis in the property before the casualty (typically, the amount you paid for it), or 2) the decrease in fair market value of the property as a result of the casualty. This amount must be reduced by any insurance or other reimbursement you received or expect to receive. (If the property was insured, you must have filed a timely claim for reimbursement of your loss.)

$100 rule. After you’ve figured your casualty loss on personal-use property, you must reduce that loss by $100. This reduction applies to each casualty loss event during the year. It doesn’t matter how many pieces of property are involved in an event.

10% rule. You must reduce the total of all your casualty losses on personal-use property for the year by 10% of your adjusted gross income (AGI). In other words, you can deduct these losses only to the extent they exceed 10% of your AGI.

Note that special relief has been provided to certain victims of Hurricanes Harvey, Irma and Maria and California wildfires that affects some of these rules. For details on this relief or other questions about casualty losses, please contact us.

Size of charitable deductions depends on many factors

 

Whether you’re claiming charitable deductions on your 2017 return or planning your donations for 2018, be sure you know how much you’re allowed to deduct. Your deduction depends on more than just the actual amount you donate.

Type of gift

One of the biggest factors affecting your deduction is what you give:

Cash. You may deduct 100% gifts made by check, credit card or payroll deduction.

Ordinary-income property. For stocks and bonds held one year or less, inventory, and property subject to depreciation recapture, you generally may deduct only the lesser of fair market value or your tax basis.

Long-term capital gains property. You may deduct the current fair market value of appreciated stocks and bonds held for more than one year.

Tangible personal property. Your deduction depends on the situation:

• If the property isn’t related to the charity’s tax-exempt function (such as a painting donated for a charity auction), your deduction is limited to your basis.
• If the property is related to the charity’s tax-exempt function (such as a painting donated to a museum for its collection), you can deduct the fair market value.

Vehicle. Unless the vehicle is being used by the charity, you generally may deduct only the amount the charity receives when it sells the vehicle.

Use of property. Examples include use of a vacation home and a loan of artwork. Generally, you receive no deduction because it isn’t considered a completed gift.

Services. You may deduct only your out-of-pocket expenses, not the fair market value of your services. You can deduct 14 cents per charitable mile driven.

Other factors

First, you’ll benefit from the charitable deduction only if you itemize deductions rather than claim the standard deduction. Also, your annual charitable donation deductions may be reduced if they exceed certain income-based limits.

In addition, your deduction generally must be reduced by the value of any benefit received from the charity. Finally, various substantiation requirements apply, and the charity must be eligible to receive tax-deductible contributions.

2018 planning

While December’s Tax Cuts and Jobs Act (TCJA) preserves the charitable deduction, it temporarily makes itemizing less attractive for many taxpayers, reducing the tax benefits of charitable giving for them.

Itemizing saves tax only if itemized deductions exceed the standard deduction. For 2018 through 2025, the TCJA nearly doubles the standard deduction — plus, it limits or eliminates some common itemized deductions. As a result, you may no longer have enough itemized deductions to exceed the standard deduction, in which case your charitable donations won’t save you tax.

You might be able to preserve your charitable deduction by “bunching” donations into alternating years, so that you’ll exceed the standard deduction and can claim a charitable deduction (and other itemized deductions) every other year.

Let us know if you have questions about how much you can deduct on your 2017 return or what your charitable giving strategy should be going forward, in light of the TCJA.

Tax deduction for moving costs: 2017 vs. 2018

If you moved for work-related reasons in 2017, you might be able to deduct some of the costs on your 2017 return — even if you don’t itemize deductions. (Or, if your employer reimbursed you for moving expenses, that reimbursement might be excludable from your income.) The bad news is that, if you move in 2018, the costs likely won’t be deductible, and any employer reimbursements will probably be included in your taxable income.

Suspension for 2018–2025

The Tax Cuts and Jobs Act (TCJA), signed into law this past December, suspends the moving expense deduction for the same period as when lower individual income tax rates generally apply: 2018 through 2025. For this period it also suspends the exclusion from income of qualified employer reimbursements of moving expenses.

The TCJA does provide an exception to both suspensions for active-duty members of the Armed Forces (and their spouses and dependents) who move because of a military order that calls for a permanent change of station.

Tests for 2017

If you moved in 2017 and would like to claim a deduction on your 2017 return, the first requirement is that the move be work-related. You don’t have to be an employee; the self-employed can also be eligible for the moving expense deduction.

The second is a distance test. The new main job location must be at least 50 miles farther from your former home than your former main job location was from that home. So a work-related move from city to suburb or from town to neighboring town probably won’t qualify, even if not moving would have increased your commute significantly.

Finally, there’s a time test. You must work full time at the new job location for at least 39 weeks during the first year. If you’re self-employed, you must meet that test plus work full time for at least 78 weeks during the first 24 months at the new job location. (Certain limited exceptions apply.)

Deductible expenses

The moving expense deduction is an “above-the-line” deduction, which means it’s subtracted from your gross income to determine your adjusted gross income. It’s not an itemized deduction, so you don’t have to itemize to benefit.

Generally, you can deduct:

• Transportation and lodging expenses for yourself and household members while moving,
• The cost of packing and transporting your household goods and other personal property,
• The expense of storing and insuring these items while in transit, and
• Costs related to connecting or disconnecting utilities.

But don’t expect to deduct everything. Meal costs during move-related travel aren’t deductible • nor is any part of the purchase price of a new home or expenses incurred selling your old one. And, if your employer later reimburses you for any of the moving costs you’ve deducted, you may have to include the reimbursement as income on your tax return.

Please contact us if you have questions about whether you can deduct moving expenses on your 2017 return or about what other tax breaks won’t be available for 2018 under

Tax Strategies for Virtual Currency (Bitcoin) in Business and Investments

Virtual currency, such as the Bitcoin, has been increasing in popularity. Virtual currency may be used to pay for goods or services, or held for investment. Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. In some environments, it operates like “real” currency, but it does not have legal tender status in any jurisdiction.

For federal tax purposes, virtual currency is treated as property. As such, it can be classified as business property, investment property, or personal property. General tax principals applicable to property transactions apply to transactions using virtual currency.

Basis in virtual currency is the Fair Market Value (or FMV) of the currency on the date the currency is received. If received as payment for services, it is considered taxable income and will be subject to both income and social security taxes.

Using the virtual currency to obtain cash or purchase goods is a recognizable transaction. If the FMV of property received for the virtual currency exceeds the taxpayer’s adjusted basis in the currency, the taxpayer has a taxable gain. A loss will occur if the FMV is less than the taxpayer’s basis. The character of the gain or loss depends on whether the virtual currency is a capital asset for that particular taxpayer.

Example: Use of virtual currency in business

Abigail, a sole proprietor, accepts 10 Bitcoins from Fred in payment for services. At the time the services were performed, Bitcoins were worth $400 each. Therefore, Abigail recognizes $4,000 ($400 × 10) of business income. A month later when Bitcoins are worth $425 each, she uses 2 Bitcoins to purchase supplies for her business. At that time, she will recognize $850 in business expense ($425 × 2) and $50 of gain on the Bitcoins [($425 − $400) × 2]. Since Abigail in not in the trade or business of selling Bitcoins, the $50 gain is capital. Variation 1: The Bitcoins are worth $380 each at the time the supplies are purchased. Abigail will now have $760 in business expense ($380 × 2) and $40 of loss on the Bitcoins [($380 − $400) × 2]. The loss is a business capital loss.

Variation 2: Abigail uses the 2 Bitcoins worth $380 each to purchase a new TV for her personal use. Since the Bitcoins were not used in her trade or business and were not held for investment purposes, the loss is considered a personal capital loss and is not eligible for deduction.

Observation: If Fred was using Abigail’s services in his trade or business, he is subject to the Form 1099-MISC reporting requirements since the value of the Bitcoins is $600 or more.

Note: The market values in these examples may not reflect current prices.

Example: Use of virtual currency for investments

Arnold believes the Bitcoin will increase in value. He purchases 15 Bitcoins on March 15, 2017, for $400 each and 20 Bitcoins on May 19, 2017, for $460 each. On April 3, 2018, he sells 10 Bitcoins for $425 each. Since Arnold held the Bitcoins for investment purposes, any gain or loss will be capital in nature. If he sells 10 Bitcoins from his March 15 batch, he will recognize a $250 [($425 − $400) × 10] long-term capital gain. If he sells 10 Bitcoins from the May 19 batch, he will recognize a $350 [($425 − $460) × 10] short-term capital loss. Since the Bitcoins were held for investment purposes, the short-term capital loss may be included on Arnold’s Form 8949 for 2018.

Observation: When Bitcoins are purchased, they are placed in the taxpayer’s virtual “wallet.” For purposes of tracking basis and identifying which Bitcoins were sold, it is best that wallets be kept separately and not combined.

A 2016 report from the Treasury Inspector General for Tax Administration recommends the IRS do more to ensure that taxpayers are not using virtual currency to avoid taxes. Soon after, the IRS sought a court order to obtain customer records from a California virtual currency exchanger in order to crack down on possible tax evasion. Bitcoin transactions can be difficult to trace because the entire network of users, including their identities, is encrypted with no central authority keeping track of users. The IRS fears that taxpayers may use Bitcoins and other forms of virtual currency to hide income.

If you are currently using virtual currency for your business or making investments with it, please contact our office. We would love to talk about the best way to tax strategize for this coming up tax season. Contact us: 949-364-0334 or info@capatacpa.com .

The TCJA temporarily expands bonus depreciation

The Tax Cuts and Jobs Act (TCJA) enhances some tax breaks for businesses while reducing or eliminating others. One break it enhances — temporarily — is bonus depreciation. While most TCJA provisions go into effect for the 2018 tax year, you might be able to benefit from the bonus depreciation enhancements when you file your 2017 tax return.

Pre-TCJA bonus depreciation

Under pre-TCJA law, for qualified new assets that your business placed in service in 2017, you can claim a 50% first-year bonus depreciation deduction. Used assets don’t qualify. This tax break is available for the cost of new computer systems, purchased software, vehicles, machinery, equipment, office furniture, etc.

In addition, 50% bonus depreciation can be claimed for qualified improvement property, which means any qualified improvement to the interior portion of a nonresidential building if the improvement is placed in service after the date the building is placed in service. But qualified improvement costs don’t include expenditures for the enlargement of a building, an elevator or escalator, or the internal structural framework of a building.

TCJA expansion

The TCJA significantly expands bonus depreciation: For qualified property placed in service between September 28, 2017, and December 31, 2022 (or by December 31, 2023, for certain property with longer production periods), the first-year bonus depreciation percentage increases to 100%. In addition, the 100% deduction is allowed for not just new but also used qualifying property.

The new law also allows 100% bonus depreciation for qualified film, television and live theatrical productions placed in service on or after September 28, 2017. Productions are considered placed in service at the time of the initial release, broadcast or live commercial performance.

Beginning in 2023, bonus depreciation is scheduled to be reduced 20 percentage points each year. So, for example, it would be 80% for property placed in service in 2023, 60% in 2024, etc., until it would be fully eliminated in 2027.

For certain property with longer production periods, the reductions are delayed by one year. For example, 80% bonus depreciation would apply to long-production-period property placed in service in 2024.

Bonus depreciation is only one of the business tax breaks that have changed under the TCJA. Contact us for more information on this and other changes that will impact your business.

How to benefit from the 0% long-term capital gains rate

We’re entering the giving season, and if making financial gifts to your loved ones is part of your plans — or if you’d simply like to reduce your capital gains tax — consider giving appreciated stock instead of cash this year. Doing so might allow you to eliminate all federal tax liability on the appreciation, or at least significantly reduce it.

Leveraging lower rates

Investors generally are subject to a 15% tax rate on their long-term capital gains (20% if they’re in the top ordinary income tax bracket of 39.6%). But the long-term capital gains rate is 0% for gain that would be taxed at 10% or 15% based on the taxpayer’s ordinary-income rate.
In addition, taxpayers with modified adjusted gross income (MAGI) over $200,000 per year ($250,000 for joint filers and $125,000 for married filing separately) may owe the net investment income tax (NIIT). The NIIT equals 3.8% of the lesser of your net investment income or the amount by which your MAGI exceeds the applicable threshold.
If you have loved ones in the 0% bracket, you may be able to take advantage of it by transferring appreciated assets to them. The recipients can then sell the assets at no or a low federal tax cost.

The strategy in action

Faced with a long-term capital gains tax rate of 23.8% (20% for the top tax bracket, plus the 3.8% NIIT), Rick and Sara decide to transfer some appreciated stock to their adult daughter, Maia. Just out of college and making only enough from her entry-level job to leave her with $25,000 in taxable income, Maia falls into the 15% income tax bracket. Therefore, she qualifies for the 0% long-term capital gains rate.
However, the 0% rate applies only to the extent that capital gains “fill up” the gap between Maia’s taxable income and the top end of the 15% bracket. In 2017, the 15% bracket for singles tops out at $37,950.
When Maia sells the stock her parents transferred to her, her capital gains are $20,000. Of that amount $12,950 qualifies for the 0% rate and the remaining $7,050 is taxed at 15%. Maia pays only $1,057.50 of federal tax on the sale vs. the $4,760 her parents would have owed had they sold the stock themselves.

Additional considerations

Before acting, make sure the recipients won’t be subject to the “kiddie tax.” Also consider any gift and generation-skipping transfer (GST) tax consequences.
For more information on transfer taxes, the kiddie tax or capital gains planning, please contact us. We can help you find the strategies that will best achieve your goals.

You may need to add RMDs to your year-end to-do list

As the end of the year approaches, most of us have a lot of things on our to-do lists, from gift shopping to donating to our favorite charities to making New Year’s Eve plans. For taxpayers “of a certain age” with a tax-advantaged retirement account, as well as younger taxpayers who’ve inherited such an account, there may be one more thing that’s critical to check off the to-do list before year end: Take required minimum distributions (RMDs).

A huge penalty

After you reach age 70½, you generally must take annual RMDs from your:

• IRAs (except Roth IRAs), and
• Defined contribution plans, such as 401(k) plans (unless you’re still an employee and not a 5%-or-greater shareholder of the employer sponsoring the plan).

An RMD deferral is available in the initial year, but then you’ll have to take two RMDs the next year. The RMD rule can be avoided for Roth 401(k) accounts by rolling the balance into a Roth IRA.

For taxpayers who inherit a retirement plan, the RMD rules generally apply to defined-contribution plans and both traditional and Roth IRAs. (Special rules apply when the account is inherited from a spouse.)

RMDs usually must be taken by December 31. If you don’t comply, you can owe a penalty equal to 50% of the amount you should have withdrawn but didn’t.

Should you withdraw more than the RMD?

Taking only RMDs generally is advantageous because of tax-deferred compounding. But a larger distribution in a year your tax bracket is low may save tax.

Be sure, however, to consider the lost future tax-deferred growth and, if applicable, whether the distribution could: 1) cause Social Security payments to become taxable, 2) increase income-based Medicare premiums and prescription drug charges, or 3) affect other tax breaks with income-based limits.

Also keep in mind that, while retirement plan distributions aren’t subject to the additional 0.9% Medicare tax or 3.8% net investment income tax (NIIT), they are included in your modified adjusted gross income (MAGI). That means they could trigger or increase the NIIT, because the thresholds for that tax are based on MAGI.

For more information on RMDs or tax-savings strategies for your retirement plan distributions, please contact us.

The ins and outs of tax on “income investments”

Many investors, especially more risk-averse ones, hold much of their portfolios in “income investments” — those that pay interest or dividends, with less emphasis on growth in value. But all income investments aren’t alike when it comes to taxes. So it’s important to be aware of the different tax treatments when managing your income investments.

Varying tax treatment

 

The tax treatment of investment income varies partly based on whether the income is in the form of dividends or interest. Qualified dividends are taxed at your favorable long-term capital gains tax rate (currently 0%, 15% or 20%, depending on your tax bracket) rather than at your ordinary-income tax rate (which might be as high as 39.6%). Interest income generally is taxed at ordinary-income rates. So stocks that pay dividends might be more attractive tax-wise than interest-paying income investments, such as CDs and bonds.

But there are exceptions. For example, some dividends aren’t qualified and therefore are subject to ordinary-income rates, such as certain dividends from:

• Real estate investment trusts (REITs),
• Regulated investment companies (RICs),
• Money market mutual funds, and
• Certain foreign investments.

Also, the tax treatment of bond interest varies. For example:

• Interest on U.S. government bonds is taxable on federal returns but exempt on state and local returns.
• Interest on state and local government bonds is excludable on federal returns. If the bonds were issued in your home state, interest also might be excludable on your state return.
• Corporate bond interest is fully taxable for federal and state purposes.

One of many factors

Keep in mind that tax reform legislation could affect the tax considerations for income investments. For example, if your ordinary rate goes down under tax reform, there could be less of a difference between the tax rate you’d pay on qualified vs. nonqualified dividends.

While tax treatment shouldn’t drive investment decisions, it’s one factor to consider — especially when it comes to income investments. For help factoring taxes into your investment strategy, contact us.

Retirement savings opportunity for the self-employed

Did you know that if you’re self-employed you may be able to set up a retirement plan that allows you to contribute much more than you can contribute to an IRA or even an employer-sponsored 401(k)? There’s still time to set up such a plan for 2017, and it generally isn’t hard to do. So whether you’re a “full-time” independent contractor or you’re employed but earn some self-employment income on the side, consider setting up one of the following types of retirement plans this year.

Profit-sharing plan

This is a defined contribution plan that allows discretionary employer contributions and flexibility in plan design. (As a self-employed person, you’re both the employer and the employee.) You can make deductible 2017 contributions as late as the due date of your 2017 tax return, including extensions — provided your plan exists on Dec. 31, 2017.

For 2017, the maximum contribution is 25% of your net earnings from self-employment, up to a $54,000 contribution. If you include a 401(k) arrangement in the plan, you might be able to contribute a higher percentage of your income. If you include such an arrangement and are age 50 or older, you may be able to contribute as much as $60,000.

Simplified Employee Pension (SEP)

This is a defined contribution plan that provides benefits similar to those of a profit-sharing plan. But you can establish a SEP in 2018 and still make deductible 2017 contributions as late as the due date of your 2017 income tax return, including extensions. In addition, a SEP is easy to administer.

For 2017, the maximum SEP contribution is 25% of your net earnings from self-employment, up to a $54,000 contribution.

Defined benefit plan

This plan sets a future pension benefit and then actuarially calculates the contributions needed to attain that benefit. The maximum annual benefit for 2017 is generally $215,000 or 100% of average earned income for the highest three consecutive years, if less.

Because it’s actuarially driven, the contribution needed to attain the projected future annual benefit may exceed the maximum contributions allowed by other plans, depending on your age and the desired benefit. You can make deductible 2017 defined benefit plan contributions until your return due date, provided your plan exists on Dec. 31, 2017.

More to think about

Additional rules and limits apply to these plans, and other types of plans are available. Also, keep in mind that things get more complicated — and more expensive — if you have employees. Why? Generally, they must be allowed to participate in the plan, provided they meet the qualification requirements. To learn more about retirement plans for the self-employed, contact us.

Accelerate your retirement savings with a cash balance plan

Business owners may not be able to set aside as much as they’d like in tax-advantaged retirement plans. Typically, they’re older and more highly compensated than their employees, but restrictions on contributions to 401(k) and profit-sharing plans can hamper retirement-planning efforts. One solution may be a cash balance plan.

Defined benefit plan with a twist

The two most popular qualified retirement plans — 401(k) and profit-sharing plans — are defined contribution plans. These plans specify the amount that goes into an employee’s retirement account today, typically a percentage of compensation or a specific dollar amount.

In contrast, a cash balance plan is a defined benefit plan, which specifies the amount a participant will receive in retirement. But unlike traditional defined benefit plans, such as pensions, cash balance plans express those benefits in the form of a 401(k)-style account balance, rather than a formula tied to years of service and salary history.

The plan allocates annual “pay credits” and “interest credits” to hypothetical employee accounts. This allows participants to earn benefits more uniformly over their careers, and provides a clearer picture of benefits than a traditional pension plan.

Greater savings for owners

A cash balance plan offers significant advantages for business owners — particularly those who are behind on their retirement saving and whose employees are younger and lower-paid. In 2017, the IRS limits employer contributions and employee deferrals to defined contribution plans to $54,000 ($60,000 for employees age 50 or older). And nondiscrimination rules, which prevent a plan from unfairly favoring highly compensated employees (HCEs), can reduce an owner’s contributions even further.

But cash balance plans aren’t bound by these limits. Instead, as defined benefit plans, they’re subject to a cap on annual benefit payouts in retirement (currently, $215,000), and the nondiscrimination rules require that only benefits for HCEs and non-HCEs be comparable.

Contributions may be as high as necessary to fund those benefits. Therefore, a company may make sizable contributions on behalf of owner/employees approaching retirement (often as much as three or four times defined contribution limits), and relatively smaller contributions on behalf of younger, lower-paid employees.

There are some potential risks. The most notable one is that, unlike with profit-sharing plans, you can’t reduce or suspend contributions during difficult years. So, before implementing a cash balance plan, it’s critical to ensure that your company’s cash flow will be steady enough to meet its funding obligations.

Right for you?

Although cash balance plans can be more expensive than defined contribution plans, they’re a great way to turbocharge your retirement savings. We can help you decide whether one might be right for you.

Investors: Beware of the wash sale rule

A tried-and-true tax-saving strategy for investors is to sell assets at a loss to offset gains that have been realized during the year. So if you’ve cashed in some big gains this year, consider looking for unrealized losses in your portfolio and selling those investments before year end to offset your gains. This can reduce your 2017 tax liability.

But what if you expect an investment that would produce a loss if sold now to not only recover but thrive in the future? Or perhaps you simply want to minimize the impact on your asset allocation. You might think you can simply sell the investment at a loss and then immediately buy it back. Not so fast: You need to beware of the wash sale rule.

The rule up close

The wash sale rule prevents you from taking a loss on a security if you buy a substantially identical security (or an option to buy such a security) within 30 days before or after you sell the security that created the loss. You can recognize the loss only when you sell the replacement security.

Keep in mind that the rule applies even if you repurchase the security in a tax-advantaged retirement account, such as a traditional or Roth IRA.

Achieving your goals

Fortunately, there are ways to avoid the wash sale rule and still achieve your goals:

• Sell the security and immediately buy shares of a security of a different company in the same industry or shares in a mutual fund that holds securities much like the ones you sold.
• Sell the security and wait 31 days to repurchase the same security.
• Before selling the security, purchase additional shares of that security equal to the number you want to sell at a loss. Then wait 31 days to sell the original portion.

If you have a bond that would generate a loss if sold, you can do a bond swap, where you sell a bond, take a loss and then immediately buy another bond of similar quality and duration from a different issuer. Generally, the wash sale rule doesn’t apply because the bonds aren’t considered substantially identical. Thus, you can achieve a tax loss with virtually no change in economic position.

For more ideas on saving taxes on your investments, please contact us.

2017 Q4 tax calendar: Key deadlines for businesses and other employers

 

Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2017. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

October 16

If a calendar-year C corporation that filed an automatic six-month extension:

• File a 2016 income tax return (Form 1120) and pay any tax, interest and penalties due.
• Make contributions for 2016 to certain employer-sponsored retirement plans.

October 31

• Report income tax withholding and FICA taxes for third quarter 2017 (Form 941) and pay any tax due. (See exception below.)

November 13

• Report income tax withholding and FICA taxes for third quarter 2017 (Form 941), if you deposited on time and in full all of the associated taxes due.

December 15

• If a calendar-year C corporation, pay the fourth installment of 2017 estimated income taxes.

The ABCs of the tax deduction for educator expenses

At back-to-school time, much of the focus is on the students returning to the classroom — and on their parents buying them school supplies, backpacks, clothes, etc., for the new school year. But let’s not forget about the teachers. It’s common for teachers to pay for some classroom supplies out of pocket, and the tax code provides a special break that makes it a little easier for these educators to deduct some of their expenses.

The miscellaneous itemized deduction

Generally, your employee expenses are deductible if they’re unreimbursed by your employer and ordinary and necessary to your business of being an employee. An expense is ordinary if it is common and accepted in your business. An expense is necessary if it is appropriate and helpful to your business.

These expenses must be claimed as a miscellaneous itemized deduction and are subject to a 2% of adjusted gross income (AGI) floor. This means you’ll enjoy a tax benefit only if all your deductions subject to the floor, combined, exceed 2% of your AGI. For many taxpayers, including teachers, this can be a difficult threshold to meet.

The educator expense deduction

Congress created the educator expense deduction to allow more teachers and other educators to receive a tax benefit from some of their unreimbursed out-of-pocket classroom expenses. The break was made permanent under the Protecting Americans from Tax Hikes (PATH) Act of 2015. Since 2016, the deduction has been annually indexed for inflation (though because of low inflation it hasn’t increased yet) and has included professional development expenses.

Qualifying elementary and secondary school teachers and other eligible educators (such as counselors and principals) can deduct up to $250 of qualified expenses. (If you’re married filing jointly and both you and your spouse are educators, you can deduct up to $500 of unreimbursed expenses — but not more than $250 each.)

Qualified expenses include amounts paid or incurred during the tax year for books, supplies, computer equipment (including related software and services), other equipment and supplementary materials that you use in the classroom. For courses in health and physical education, the costs for supplies are qualified expenses only if related to athletics.

An added benefit

The educator expense deduction is an “above-the-line” deduction, which means you don’t have to itemize and it reduces your AGI, which has an added benefit: Because AGI-based limits affect a variety of tax breaks (such as the previously mentioned miscellaneous itemized deductions), lowering your AGI might help you maximize your tax breaks overall.

Contact us for more details about the educator expense deduction or tax breaks available for other work-related expenses.

2017 Q3 tax calendar: Key deadlines for businesses and other employers

 

Here are some of the key tax-related deadlines affecting businesses and other employers during the second quarter of 2017. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

July 31

• Report income tax withholding and FICA taxes for second quarter 2017 (Form 941), and pay any tax due. (See exception below.)
• File a 2016 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension.

August 10

• Report income tax withholding and FICA taxes for second quarter 2017 (Form 941), if you deposited on time and in full all of the associated taxes due.

September 15

• If a calendar-year C corporation, pay the third installment of 2017 estimated income taxes.
• If a calendar-year S corporation or partnership that filed an automatic six-month extension:
• File a 2016 income tax return (Form 1120S, Form 1065 or Form 1065-B) and pay any tax, interest and penalties due.
• Make contributions for 2016 to certain employer-sponsored retirement plans.

Pay attention to the details when selling investments

The tax consequences of the sale of an investment, as well as your net return, can be affected by a variety of factors. You’re probably focused on factors such as how much you paid for the investment vs. how much you’re selling it for, whether you held the investment long-term (more than one year) and the tax rate that will apply.

But there are additional details you should pay attention to. If you don’t, the tax consequences of a sale may be different from what you expect. Here are a few details to consider when selling an investment:

Which shares you’re selling. If you bought the same security at different times and prices and want to sell high-tax-basis shares to reduce gain or increase a loss to offset other gains, be sure to specifically identify which block of shares is being sold.

Trade date vs. settlement date. When it gets close to year end, keep in mind that the trade date, not the settlement date, of publicly traded securities determines the year in which you recognize the gain or loss.

Transaction costs. While transaction costs, such as broker fees, aren’t taxes, like taxes they can have a significant impact on your net returns, especially over time, because they also reduce the amount of money you have available to invest.

If you have questions about the potential tax impact of an investment sale you’re considering — or all of the details you should keep in mind to minimize it — please contact us.

Coverdell ESAs: The tax-advantaged way to fund elementary and secondary school costs

 

With school letting out you might be focused on summer plans for your children (or grandchildren). But the end of the school year is also a good time to think about Coverdell Education Savings Accounts (ESAs) — especially if the children are in grade school or younger.

One major advantage of ESAs over another popular education saving tool, the Section 529 plan, is that tax-free ESA distributions aren’t limited to college expenses; they also can fund elementary and secondary school costs. That means you can use ESA funds to pay for such qualified expenses as tutoring and private school tuition.

Other benefits

Here are some other key ESA benefits:

• Although contributions aren’t deductible, plan assets can grow tax-deferred.
• You remain in control of the account — even after the child is of legal age.
• You can make rollovers to another qualifying family member.

A sibling or first cousin is a typical example of a qualifying family member, if he or she is eligible to be an ESA beneficiary (that is, under age 18 or has special needs).

Limitations

The ESA annual contribution limit is $2,000 per beneficiary. The total contributions for a particular ESA beneficiary cannot be more than $2,000 in any year, no matter how many accounts have been established or how many people are contributing.

However, the ability to contribute is phased out based on income. The phaseout range is modified adjusted gross income (MAGI) of $190,000–$220,000 for married couples filing jointly and $95,000–$110,000 for other filers. You can make a partial contribution if your MAGI falls within the applicable range, and no contribution if it exceeds the top of the range.

If there is a balance in the ESA when the beneficiary reaches age 30 (unless the beneficiary is a special needs individual), it must generally be distributed within 30 days. The portion representing earnings on the account will be taxable and subject to a 10% penalty. But these taxes can be avoided by rolling over the full balance to another ESA for a qualifying family member.

Would you like more information about ESAs or other tax-advantaged ways to fund your child’s — or grandchild’s — education expenses? Contact us!