RUNNING YOUR BUSINESS – Page 4

Business Strategies, business taxes, General Information, REAL ESTATE, RUNNING YOUR BUSINESS, Self Employed, TAX DEBT RELIEF, Tax Reduction, TAXES

TCJA Tax Reform Sticks It to Business Start-Ups That Lose Money

February 11, 2019 Howard Tax Prep LLC

The Tax Cuts and Jobs Act (TCJA) tax reform added an amazing limit on larger business losses that can attack you where it hurts—right in your cash flow.

And this new law works in some unusual ways that can tax you even when you have no real income for the year. When you know how this ugly new rule works, you have some planning opportunities to dodge the problem.

Over the years, lawmakers have implemented rules that limit your ability to use your business or rental losses against other income sources. The big three are:

The “at risk” limitation, which limits your losses to amounts that you have at risk in the activity
The partnership and S corporation basis limitations, which limit your losses to the extent of your basis in your partnership interest or S corporation stock
The passive loss limitation, which limits your passive losses to the extent of your passive income unless an exception applies

The TCJA tax reform added Section 461(l) to the tax code, and it applies to individuals (not corporations) for tax years 2018 through 2025.

The big picture under this new provision: You can’t use the portion of your business losses deemed by the new law to be an “excess business loss” in the current year. Instead, you’ll treat the excess business loss as if it were a net operating loss (NOL) carryover to the next taxable year.

To determine your excess business loss, follow these three steps:

Add the net income or loss from all your trade or business activities.
If step 1 is an overall loss, then compare it to the maximum allowed loss amount: $250,000 (or $500,000 on a joint return).
The amount by which your overall loss exceeds the maximum allowed loss amount is your new tax law–defined “excess business loss.”

Example. Paul invested $850,000 in a start-up business in 2018, and the business passed through a $750,000 loss to Paul. He has sufficient basis to use the entire loss, and it is not a passive activity. Paul’s wife had 2018 wages of $50,000, and they had other 2018 non-business income of $600,000.

Under prior law, Paul’s loss would offset all other income on the tax return and they’d owe no federal income tax. Under the TCJA tax reform that applies to years 2018 through 2025 (assuming the wages are trade or business income):

Their overall business loss is $700,000 ($750,000 – $50,000).
The excess business loss is $200,000 ($700,000 overall loss less $500,000).
$150,000 of income ($600,000 + $50,000 – $500,000) flows through the rest of their tax return.
They’ll have a $200,000 NOL to carry forward to 2019.

To avoid this ugly rule, you’ll need to keep your overall business loss to no more than $250,000 (or $500,000 joint). Your two big-picture strategies to make this happen are

accelerating business income, and
delaying business deductions.

Although we’ve given you the basics, this is not an all-inclusive article. Should you have tax debt help questions, need Chicago business tax preparation, business entity creation, business insurance, or business compliance assistance please contact us online, or call our office toll free at 1-855-743-5765 or locally in Chicago or Indiana at 1-708-529-6604. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth.

Never miss another tip again! Join our newsletter, to receive tax reduction/wealth building tips delivered right to your inbox!

Business Strategies, business taxes, General Information, RUNNING YOUR BUSINESS, Self Employed, Tax Reduction, TAXES

Answers to Common Section 199A Questions

February 8, 2019February 8, 2019 Howard Tax Prep LLC

man standing near of wall — #smallbiztaxlady

I’ve been providing tax preparation for small business owners in Chicago’s south loop for quite awhile, and the new tax laws are benefiting business owners like never before! For many small businesses and the self-employed, the 20 percent tax deduction from new tax code Section 199A is the most valuable deduction to come out of the Tax Cuts and Jobs Act.

The Section 199A tax deduction is complicated, and many questions remain unanswered even after the IRS issued its proposed regulations on the provision. And to further complicate matters, there’s also a lot of misinformation out there about Section 199A.

Below are answers to six common questions about this new 199A tax deduction.

Question 1. Are real estate agents and brokers in an out-of-favor specified service trade or business for purposes of Section 199A?

Answer 1. No.

Question 2. Do my S corporation shareholder wages count as wages paid by the S corporation for purposes of the 50 percent Section 199A wage limitation?

Answer 2. Yes.

Question 3. Will my allowable SEP/SIMPLE/401(k) contribution as a Schedule C taxpayer be based only on Schedule C net earnings, or do I first subtract the Section 199A deduction?

Answer 3. You’ll continue to use Schedule C net earnings with no adjustment for Section 199A.

Question 4. Is my qualified business income for the Section 199A deduction reduced by either bonus depreciation or Section 179 expensing?

Answer 4. Yes, to both.

Question 5. I took out a loan to buy S corporation stock. The interest is deductible on my Schedule E. Does the interest reduce my Section 199A qualified business income?

Answer 5. Yes, in most circumstances.

Question 6. The out-of-favor specified service trade or business does not qualify for the Section 199A deduction, correct?

Answer 6. Incorrect.

Looking at your taxable income is the first step to see whether you qualify for the Section 199A tax deduction. If your taxable income on IRS Form 1040 is $157,500 or less (single) or $315,000 or less (married, filing jointly) and you have a pass-through business such as a proprietorship, partnership, or S corporation, you qualify for the Section 199A deduction.

With taxable income equal to or below the thresholds above, your type of pass-through business makes no difference. Retail store owners and medical doctors with income equal to or below the thresholds qualify in the same exact manner.

Never miss another tip again! Join our newsletter, to receive tax reduction/wealth building tips delivered right to your inbox!

business taxes, General Information, RUNNING YOUR BUSINESS, Self Employed, TAX DEBT RELIEF

Do You Make This Big Mistake with Your Independent Contractors?

January 22, 2019January 22, 2019 Howard Tax Prep LLC

I often deal with Chicago small business owners taxes, and the one thing that I see is a big mistake being made with independent contractors. Do you hire 1099 contractors? Are they really 1099 contractors? If so, have you done the one thing you need to do to protect their 1099 status so you don’t get hit with payroll taxes and penalties?

If you failed this one thing, the IRS can reclassify your 1099 contractors as W-2 employees even when you have a good case for their 1099 contractor status. This should scare you. Let’s review the Kurek tax court case (UNITED STATES TAX COURT MIECZYSLAW KUREK, Petitioner v. COMMISSIONER OF INTERNAL REVENUE)to see why.

Mieczyslaw Kurek operated a construction business that made improvements to the interiors of homes, including kitchens, bathrooms, and floors, where he and his workers installed tile, sheetrock, doors, and windows and did carpentry and painting. During the year before the court, Mr. Kurek had 29 contractors, of which only seven did some work in all four quarters of the calendar year.

Relationship with Workers

Mr. Kurek had the following relationships with the workers:

He told the workers what work needed to be done and set deadlines for the jobs.
The workers worked on projects. No one worked full time for Mr. Kurek.
Mr. Kurek negotiated a flat fee and timeline with each worker for the work to be done on the project.
He paid each worker every week according to the percentage of the work the worker completed.
He paid the workers by checks made out to them personally.

How the Work Was Done

The workers set their own hours and work schedules.
Mr. Kurek came to the worksite every day or two.
Mr. Kurek did not tell the workers how to do their jobs, but he replaced workers who missed deadlines.
If he thought a worker was doing the work improperly, he would order the worker to repair the problem or redo the work.
Mr. Kurek allowed the workers to work simultaneously on other projects with him or with other independent construction groups.
The workers brought their own sets of small tools to the work-sites, worth around $1,000.
Mr. Kurek bought or rented the larger tools and he left them at the work sites for use by the workers.

No Office or Benefits

Mr. Kurek did not provide an office or any other facility for the workers. He did not:

Train the workers.
Offer them any employee benefits such as sick or vacation pay, medical insurance, or pension plans.
Carry unemployment insurance, severance pay, or workers’ compensation insurance on the workers.
Require the workers to have any type of insurance or license.

Your Opinion

Based on what you know from what you have read above, are the workers 1099 independent contractors or W-2 employees?

What Did You Pick: Employee or Contractor?

Interestingly, you could be right with either choice. Because Mr. Kurek failed the one test that could have saved independent contractor status for his workers, the court used the seven common-law factors to evaluate employee status and it ruled that the workers were W-2 employees.

The IRS has a 20-factor test to determine if a worker is a 1099 independent contractor or a W-2 employee. But if Mr. Kurek does this one thing, he does not have to face the 20 factors, just as he doesn’t have to suffer the court’s seven-factor test.

Escape
IRS Publication 1976, Do You Qualify for Relief under Section 530, says that Mr. Kurek could have treated his workers as 1099 independent contractors if he had:

A reasonable basis for treating the workers as independent contractors, such as showing that a significant segment of home improvement businesses treated their workers as independent contractors or relying on the advice of a lawyer or accountant who knew the facts about his business.
Consistently treated the workers and all similar workers as independent contractors.
Filed the 1099s for those independent contractor workers to whom he had paid $600 or more.

Failure
Mr. Kurek failed to file the 1099s. With this failure, he simply said

Hello IRS,
Goodbye Section 530 statutory relief,
Goodbye 1099 worker status, and
Hello payroll taxes and penalties.

Because Mr. Kurek failed to file the required 1099s, the court could not grant relief under Section 530 and had no choice but to examine the seven common-law factors. Sadly, the court’s application of the seven factors to Mr. Kurek’s workers caused the court to reclassify the workers from independent contractor status to W-2 employees.

What You Need to Do
Make your life easy. Avoid the big hurdles of the tax court’s seven-factor common-law tests or the IRS’s 20-factor common-law tests. You want to qualify for Section 530 relief. To ensure that relief: File the 1099s—period.

Never miss another tip again! Join our newsletter, to receive tax reduction/wealth building tips delivered right to your inbox!

Fact check me: T.C. Memo. 2013-64 UNITED STATES TAX COURT MIECZYSLAW KUREK, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket No. 5459-11. Filed February 28, 2013.

Section 530 Tax Relief: IRS publication 1976 Section 530.

Share this:

Share this:

Share this: