Why You Shouldn’t Wait to File Your 2018 Income Tax Return

The IRS opened the 2018 income tax return filing season on January 28. Even if you typically don’t file until much closer to the April 15 deadline, this year consider filing as soon as you can. Why? You can potentially protect yourself from tax identity theft — and reap other benefits, too.

What is tax identity theft?

In a tax identity theft scheme, a thief uses your personal information to file a fraudulent tax return early in the filing season and claim a bogus refund.

You discover the fraud when you file your return and are informed by the IRS that the return has been rejected because one with your Social Security number has already been filed for the same tax year. While you should ultimately be able to prove that your return is the legitimate one, tax identity theft can cause major headaches to straighten out and significantly delay your refund.

Filing early may be your best defense: If you file first, it will be the tax return filed by a would-be thief that will be rejected — not yours.

What if you haven’t received your W-2s and 1099s?

To file your tax return, you must have received all of your W-2s and 1099s. January 31 was the deadline for employers to issue 2018 Form W-2 to employees and, generally, for businesses to issue Form 1099 to recipients of any 2018 interest, dividend or reportable miscellaneous income payments.

If you haven’t received a W-2 or 1099, first contact the entity that should have issued it. If that doesn’t work, you can contact the IRS for help.

What are other benefits of filing early?

Besides protecting yourself from tax identity theft, the most obvious benefit of filing early is that, if you’re getting a refund, you’ll get that refund sooner. The IRS expects more than nine out of ten refunds to be issued within 21 days.

But even if you owe tax, filing early can be beneficial. You still won’t need to pay your tax bill until April 15, but you’ll know sooner how much you owe and can plan accordingly. Keep in mind that some taxpayers who typically have gotten refunds in the past could find themselves owing tax when they file their 2018 return due to tax law changes under the Tax Cuts and Jobs Act (TCJA) and reduced withholding from 2018 paychecks.

Need help?

If you have questions about tax identity theft or would like help filing your 2018 return early, please contact us. While the new Form 1040 essentially does fit on a postcard, many taxpayers will also have to complete multiple schedules along with the form. And the TCJA has changed many tax breaks. We can help you ensure you file an accurate return that takes advantage of all of the breaks available to you.

© 2019

The flat 21% federal income tax rate for C corporations under the Tax Cuts and Jobs Act (TCJA) has been great news for these entities and their owners. But some fundamental tax truths for C corporations largely remain the same:

C corporations are subject to double taxation. Double taxation occurs when corporate income is taxed once at the corporate level and again at the shareholder level as dividends are paid out. The cost of double taxation, however, is now generally less because of the 21% corporate rate.

And double taxation isn’t a problem when a C corporation needs to retain all its earnings to finance growth and capital investments. Because all the earnings stay “inside” the corporation, no dividends are paid to shareholders, and, therefore, there’s no double taxation.

Double taxation also isn’t an issue when a C corporation’s taxable income levels are low. This can often be achieved by paying reasonable salaries and bonuses to shareholder-employees and providing them with tax-favored fringe benefits (deductible by the corporation and tax-free to the recipient shareholder-employees).

C corporation status isn’t generally advisable for ventures with appreciating assets or certain depreciable assets. If assets such as real estate are eventually sold for substantial gains, it may be impossible to extract the profits from the corporation without being subject to double taxation. In contrast, if appreciating assets are held by a pass-through entity (such as an S corporation, partnership or limited liability company treated as a partnership for tax purposes), gains on such sales will be taxed only once, at the owner level.

But assets held by a C corporation don’t necessarily have to appreciate in value for double taxation to occur. Depreciation lowers the tax basis of the property, so a taxable gain results whenever the sale price exceeds the depreciated basis. In effect, appreciation can be caused by depreciation when depreciable assets hold their value.

To avoid this double-taxation issue, you might consider using a pass-through entity to lease to your C corporation appreciating assets or depreciable assets that will hold their value.

C corporation status isn’t generally advisable for ventures that will incur ongoing tax losses. When a venture is set up as a C corporation, losses aren’t passed through to the owners (the shareholders) like they would be in a pass-through entity. Instead, they create corporate net operating losses (NOLs) that can be carried over to future tax years and then used to offset any corporate taxable income.

This was already a potential downside of C corporations, because it can take many years for a start-up to be profitable. Now, under the TCJA, NOLs that arise in tax years beginning after 2017 can’t offset more than 80% of taxable income in the NOL carryover year. So it may take even longer to fully absorb tax losses.

Do you have questions about C corporation tax issues post-TCJA? Contact us.

© 2019

Commercial buildings and improvements generally are depreciated over 39 years, which essentially means you can deduct a portion of the cost every year over the depreciation period. (Land isn’t depreciable.) But special tax breaks that allow deductions to be taken more quickly are available for certain real estate investments.

Some of these were enhanced by the Tax Cuts and Jobs Act (TCJA) and may provide a bigger benefit when you file your 2018 tax return. But there’s one break you might not be able to enjoy due to a drafting error in the TCJA.

Section 179 expensing

This allows you to deduct (rather than depreciate over a number of years) qualified improvement property — a definition expanded by the TCJA from qualified leasehold-improvement, restaurant and retail-improvement property. The TCJA also allows Sec. 179 expensing for certain depreciable tangible personal property used predominantly to furnish lodging and for the following improvements to nonresidential real property: roofs, HVAC equipment, fire protection and alarm systems, and security systems.

Under the TCJA, for qualifying property placed in service in tax years starting in 2018, the expensing limit increases to $1 million (from $510,000 for 2017), subject to a phaseout if your qualified asset purchases for the year exceed $2.5 million (compared to $2.03 million for 2017). These amounts will be adjusted annually for inflation, and for 2019 they’re $1.02 million and $2.55 million, respectively.

Accelerated depreciation

This break allows a shortened recovery period of 15 years for qualified improvement property. Before the TCJA, the break was available only for qualified leasehold-improvement, restaurant and retail-improvement property.

Bonus depreciation

This additional first-year depreciation allowance is available for qualified assets, which before the TCJA included qualified improvement property. But due to a drafting error in the new law, qualified improvement property will be eligible for bonus depreciation only if a technical correction is issued.

When available, bonus depreciation is increased to 100% (up from 50%) for qualified property placed in service after Sept. 27, 2017, but before Jan. 1, 2023. For 2023 through 2026, bonus depreciation is scheduled to be gradually reduced. Warning: Under the TCJA, real estate businesses that elect to deduct 100% of their business interest will be ineligible for bonus depreciation starting in 2018.

Can you benefit?

Although the enhanced depreciation-related breaks may offer substantial savings on your 2018 tax bill, it’s possible they won’t prove beneficial over the long term. Taking these deductions now means forgoing deductions that could otherwise be taken later, over a period of years under normal depreciation schedules. In some situations — such as if in the future your business could be in a higher tax bracket or tax rates go up — the normal depreciation deductions could be more valuable long-term.

For more information on these breaks or advice on whether you should take advantage of them, please contact us.

© 2019

The results of the third annual Leading Edge Alliance (LEA Global) National Manufacturing Outlook Survey have been released and manufacturers are optimistic.

Eight out of ten U.S. manufacturers expect to grow sales this year, buoyed by their optimism about the strength of regional, national and global economies, according to the 2019 National Manufacturing Survey Report prepared by the Leading Edge Alliance, a global association of 220 accounting and consulting firms.

“Across the board, manufacturers are optimistic about the regional economy, sector growth, and increasing revenue expectations in 2019,” the report states. “Looking ahead, manufacturers expect raw materials, labor costs, lack of available talent, and competition to be significant hurdles in 2019. The tariffs implemented by President Trump provide productivity issues; however, an increase in spending on Big Data and business intelligence are delivering innovative technology for minimizing productivity concerns.”

More than 350 manufacturing executives across the United States and Canada participated in the survey, which includes respondents who produce industrial/machining; transportation/automotive; construction; food and beverage; and other products.

2019 Survey Highlights

• Growth: 81% of manufacturers expect their revenue to increase in 2019, and 61% expect their overall sector to expand in 2019.
• Economy: Optimism for the regional, national and global economies has increased by more than 12 percentage points over the last two years.
• Priorities: Manufacturers’ top three priorities are growing sales, improving profitability and addressing the workforce shortage.
• Challenges: Most manufacturers (52%) cited labor/talent as their greatest barrier to growth, followed by competition (34%) and profitability (25%).

The survey identifies three key growth strategies manufacturers will use to keep their companies on a growth track: technology, mergers and acquisitions, and talent management. 

• Technology: Manufacturers plan to leverage technology as a key to solving productivity concerns; 76% said that they would investigate/prioritize cybersecurity in 2019, and 43% said they would prioritize Big Data/erp solution/IoT.
• M&A: More manufacturers are considering a merger/sale or acquisition in 2019; 21% expect to acquire another business in 2019, and 16% are in the pre-planning stage of a merger or acquisition.
• Talent: Faced with a growing labor shortage, manufacturers have turned to a range of tools to improve hiring and retention with 62% increasing compensation, 39% implementing retention strategies and 35% using internal training programs.

Manufacturing owners and managers should have ongoing conversations with all of their advisors, including their accounting and tax provider, about how to overcome these challenges and achieve their business goals.

“Despite the improved outlook, hurdles remain. Increasing material and labor costs, labor shortages, implementing new technologies, cybersecurity and tax reform are growing concerns of manufacturers going into 2019. Especially now – when manufacturers are considering mergers and acquisitions and developing strategies for growth – having a team of industry-experienced advisors providing manufacturers insight and answers is critically important,” says Yeo & Yeo Principal and Manufacturing Services Group leader Amy Buben.

Read the entire survey report, 2019 National Manufacturing Survey Report.

Each year, thousands of taxpayers are tricked into revealing their personal information online and lose millions of dollars. A recent phishing attempt targeted Michigan business taxpayer W-2 forms.

The IRS compiles annually its “Dirty Dozen,” a list of common scams that taxpayers may encounter at any time of year, but peak during filing season. Phishing schemes are just one of the many types of scams the IRS warns against. Some of the types of tax scams to be on the lookout for include:

• Pop-up tax preparer fraud
• Social Security identity theft
• Aggressive phone calls from the “IRS”
• Bogus IRS agent visits
• Unexpected refund fraud
• Fake charities
• Targeting employees for W-2 and personal information
• Tax transcript documents containing malware

Follow the IRS Newsroom for information about scams that are circulating and to learn more about how the IRS initiates contact.The IRS does not initiate contact with taxpayers by email, text message 100cs or social media channels to request personal or financial information. Please be wary of individuals who contact you, claiming to be IRS agents or collection agents working for the IRS.

Taxpayers who have received a call or an email from a scammer should report the case to the IRS at www.irs.gov or call 800-366-4484.

Additional Resources

10 Practices to Protect Against Cyberattacks and Phishing Scams

File Early to Avoid Identity Theft

Security Awareness Training – Educate Your Employees (Yeo & Yeo Technology)

How to Know It’s Really the IRS Calling or Knocking on Your Door (IRS Resource)

IRS Warns of Scam — Falsely Filed Returns with Refunds Deposited into Taxpayer’s Account

Treasury Warns of Collections Scam

A variety of tax-related limits affecting businesses are annually indexed for inflation, and many have gone up for 2019. Here’s a look at some that may affect you and your business.

Deductions

Section 179 expensing:

• Limit: $1.02 million (up from $1 million)
• Phaseout: $2.55 million (up from $2.5 million)

Income-based phase-ins for certain limits on the Sec. 199A qualified business income deduction:

• Married filing jointly: $321,400-$421,400 (up from $315,000-$415,000)
• Married filing separately: $160,725-$210,725 (up from $157,500-$207,500)
• Other filers: $160,700-$210,700 (up from $157,500-$207,500)

Retirement plans

• Employee contributions to 401(k) plans: $19,000 (up from $18,500)
• Catch-up contributions to 401(k) plans: $6,000 (no change)
• Employee contributions to SIMPLEs: $13,000 (up from $12,500)
• Catch-up contributions to SIMPLEs: $3,000 (no change)
• Combined employer/employee contributions to defined contribution plans (not including catch-ups): $56,000 (up from $55,000)
• Maximum compensation used to determine contributions: $280,000 (up from $275,000)
• Annual benefit for defined benefit plans: $225,000 (up from $220,000)
• Compensation defining “highly compensated employee”: $125,000 (up from $120,000)
• Compensation defining “key employee”: $180,000 (up from $175,000)

Other employee benefits

Qualified transportation fringe-benefits employee income exclusion: $265 per month (up from $260)

Health Savings Account contributions:

• Individual coverage: $3,500 (up from $3,450)
• Family coverage: $7,000 (up from $6,900)
• Catch-up contribution: $1,000 (no change)

Flexible Spending Account contributions:

• healthcare: $2,700 (up from $2,650)
• Dependent care: $5,000 (no change)

Additional rules apply to these limits, and they are only some of the limits that may affect your business. Please contact us for more information.

© 2019

The Internal Revenue Service issued a new warning for taxpayers to be alert for a quickly growing scam involving erroneous tax refunds being deposited into taxpayers’ bank accounts. Criminals have put a new twist on an old scam: They file fraudulent tax returns and use taxpayers’ real bank accounts for the deposit of the fraudulent refunds. Then they use various tactics to reclaim the refund from the taxpayers. Here is what you need to be wary of:

• In one version of the scam, criminals pose as debt collection agency officials acting on behalf of the IRS. The criminal contacts the taxpayer to resolve a refund deposited in error and requests that the taxpayer return the refund to them, the fraudulent collection agency.
• In another version, the taxpayer who received the erroneous refund gets an automated call with a recorded voice saying he is from the IRS and threatens the taxpayer with criminal fraud charges, an arrest warrant and a “blacklisting” of their Social Security Number. The recorded voice gives the taxpayer a case number and a telephone number to call to return the refund.

The IRS has urged taxpayers to follow established procedures (outlined below) for returning an erroneous refund to the agency. The IRS also encouraged taxpayers to contact their tax preparers immediately and to discuss the issue with their financial institutions because there may be a need to close bank accounts.

Here are the official ways to return an erroneous (fraudulent) refund to the IRS:

 If the erroneous refund was a direct deposit:

1. Contact the Automated Clearing House (ACH) department of the bank or financial institution where the direct deposit was received and have them return the refund to the IRS.
2. Call the IRS toll-free at 800-829-1040 (individual) or 800-829-4933 (business) to explain why the direct deposit is being returned.

 
 If the erroneous refund was a paper check and hasn’t been cashed:

1. Write “Void” in the endorsement section on the back of the check.
2. Submit the check immediately to the appropriate IRS location listed below.
3. Do not staple, bend, or paper clip the check.
4. Include a note stating, “Return of erroneous refund check because (and give a brief explanation of the reason for returning the refund check).” 

 If the erroneous refund was a paper check and you cashed it: 

Submit a personal check, money order, etc., immediately to the appropriate IRS location listed below.

If you no longer have access to a copy of the check, call the IRS toll-free at 800-829-1040 (individual) or 800-829-4933 (business) and explain to the IRS assistor that you need information to repay a cashed refund check.

Write on the check/money order: Payment of Erroneous Refund, the tax period for which the refund was issued, and your taxpayer identification number (social security number, employer identification number, or individual taxpayer identification number).

Include a brief explanation of the reason for returning the refund.

Repaying an erroneous refund in this manner may result in interest due the IRS.

IRS mailing addresses for returning paper checks

For your paper refund check, following are the IRS mailing addresses to use based on the city (possibly abbreviated). These cities are located on the check’s bottom text line in front of the words TAX REFUND:

• ANDOVER – Internal Revenue Service, 310 Lowell Street, Andover MA 01810
• ATLANTA – Internal Revenue Service, 4800 Buford Highway, Chamblee GA 30341
• AUSTIN – Internal Revenue Service, 3651 South Interregional Highway 35, Austin TX 78741
• BRKHAVN – Internal Revenue Service, 5000 Corporate Ct., Holtsville NY 11742
• CNCNATI – Internal Revenue Service, 201 West River Center Blvd., Covington KY 41011
• FRESNO – Internal Revenue Service, 5045 East Butler Avenue, Fresno CA 93727
• KANS CY – Internal Revenue Service, 333 W. Pershing Road, Kansas City MO 64108-4302
• MEMPHIS – Internal Revenue Service, 5333 Getwell Road, Memphis TN 38118
• OGDEN – Internal Revenue Service, 1973 Rulon White Blvd., Ogden UT 84201
• PHILA – Internal Revenue Service, 2970 Market St., Philadelphia PA 19104

Please be wary of calls from individuals claiming to be IRS agents or collection agents working for the IRS, or if you receive an unexpected refund. Contact your Yeo & Yeo tax professional if you have questions or need assistance.

Taxpayers around the area continue to receive calls from alleged IRS representatives stating that “This is a final notice from IRS that we are filing a lawsuit against you.” The callers are often rude and belligerent. If you are not home they will leave a message 100c and tell you to call a phone number.

This is a scam and is intended to steal information and, if possible, funds from unwary victims. The calls often originate from outside the U.S. and can be computer-generated.

The IRS will not act in this manner and will not call a taxpayer on the telephone without having had some real contact with that taxpayer. If you receive such a call, hang up. You may report the call using the IRS Report Phishing website.

Contact your Yeo & Yeo tax professional for assistance.

There are two common standards of value that are used by valuation analysts that you may be aware of, Fair Market Value and Fair Value. However, when you and your client have determined the need for a valuation, it is important to understand the other standards of value so that you are best able to apply the most appropriate standard for your situation.

Depending on the purpose of a valuation, a number of standards of value can be applied. Each of the five widely used standards of value discussed below have specific purposes, and selecting one over another can make a difference in the valuation conclusion. Becoming familiar with each of the standards of value will better equip you to make decisions based on the type of valuation needed and the purpose for the valuation – which could benefit both you and your client throughout the process. 

Five of the most widely used standards of value are:

1. Fair Market Value – The IRS defines fair market value as, “the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy, and the latter is not under any compulsion to sell, both parties having reasonable knowledge of the relevant facts.” This standard if most appropriate for estate taxes, gifting, buy-sell agreements with minority shareholders, and other instances where discounts for minority interest or lack of marketability may apply.
   
   
2. Fair Value – Not clearly defined by statute or valuation doctrine. Generally speaking, it may constitute fair market value without the application of discounts or premiums. This standard of value takes into account the economic principles of free and open market activity. Used more to determine the pro-rata price per share of an enterprise. Most appropriate with shareholder disputes, buy-sell agreements with equal partners, or lost profits or other damage calculations.
   
   
3. Liquidation Value – This is the net proceeds that the company would receive, after paying off all outstanding debt, if they ceased business operations and sold all company assets in an orderly fashion. This would represent the minimum value for the business and concludes that the business is worth more dead than alive. This method is used in bankruptcy scenarios or in the event of a business breakup where the owners cannot agree to an equitable dissolution of their relationship.
   
   
4. Enterprise Value – This value represents the gross value of the business operations from the eyes of a potential purchaser. It generally will look at the business on a cash-free, debt-free basis. This method is used in looking at the value of a business from a merger or acquisition standpoint for the potential purchase or sale of the business.
   
   
5. Holder’s Interest Value – Differing from fair market value, which assumes a hypothetical buyer and seller, holder’s interest approach values the business in the hands of its current owner and does not anticipate a sale of the business. This method is generally used in the valuation of professional practices for divorce purposes, where the personal service and goodwill of the owner is a significant factor in the success of the practice.

Depending upon the purpose of the valuation, the operations of the company, and the parties involved, the standard of value, and thus the conclusion of value, could be substantially different. Be sure that all stakeholders to the valuation fully understand the standard of value chosen and the significance it may have in the overall value. Contact a business valuation analyst at Yeo & Yeo if you have questions about standards of value, which one is most appropriate for your situation, and how selecting one over another can make a difference in the conclusion of the valuation. Yeo & Yeo’s Business Valuation and Litigation Support Services professionals can guide you in determining the fairest and appropriate course of action for you and your client.

If you’re like many Americans, you may not start thinking about filing your tax return until the deadline. Filing as close to the start date as possible could protect you from tax identity theft.

How filing early helps

In this increasingly common scam, thieves use victims’ personal information to file fraudulent tax returns electronically and claim bogus refunds. When the real taxpayers file, they’re notified that they’re attempting to file duplicate returns.

Tax identity theft can cause major headaches to straighten out and significantly delay legitimate refunds. But if you file first, it will be the thief who’s filing the duplicate return, not you.

Another key date

Of course you need to have your W-2s and 1099s to file. So another key date to be aware of is January 31 — the deadline for employers to issue 2018 W-2s to employees and, generally, for businesses to issue 1099s to recipients of any 2018 interest, dividend or reportable miscellaneous income payments.

An added bonus

Let us know if you have questions about tax identity theft or would like help filing your return early. An added bonus of filing early, if you’ll be getting a refund, is enjoying that refund sooner.

© 2019

Intuit has implemented five major technologies within QuickBooks to keep customers’ data secure while conducting business through QuickBooks Online (QBO).

Data backup

• Each night, Intuit performs backups, and the data is copied to tapes. Periodically, the tapes are moved offsite to a secure location.
• Each time data is added or edited, it is written to two hard drives. Then data is copied to a third hard drive, just in case the first two hard drives fail.

Viruses

• Intuit keeps data on a server in Intuit’s Data Center, which is guarded both physically and electronically against viruses and other forms of intrusion.

Firewall protection

• The firewall used by Intuit acts as a barrier to prevent unauthorized individuals and programs from accessing customers’ data. QBO’s data servers are not directly connected to the internet, so private information is available only to authorized users and computers. QBO also employs the same technology used for credit card transactions (SSL technology) over the internet to protect customers’ data.

ID and password protection

• Having a strong password will help keep QBO data secure. Professionals recommend users create passwords that include alternating capital letters, numbers, and special characters (such as @*!^, etc.).

Audit trails

• Keeping close track of who is entering and viewing data is important for data security within QBO. The Audit Logs allow users to see each action that takes place within their QBO company file and who performed each particular action. Contact a Yeo & Yeo QB ProAdvisor today if you need help accessing this report.

For more information about QuickBooks Online or cybersecurity measures to defend your network, contact a member of Yeo & Yeo’s Client Accounting Software Team.

This year, the optional standard mileage rate used to calculate the deductible costs of operating an automobile for business increased by 3.5 cents, to the highest level since 2008. As a result, you might be able to claim a larger deduction for vehicle-related expense for 2019 than you can for 2018.

Actual costs vs. mileage rate

Businesses can generally deduct the actual expenses attributable to business use of vehicles. This includes gas, oil, tires, insurance, repairs, licenses and vehicle registration fees. In addition, you can claim a depreciation allowance for the vehicle. However, in many cases depreciation write-offs on vehicles are subject to certain limits that don’t apply to other types of business assets.

The mileage rate comes into play when taxpayers don’t want to keep track of actual vehicle-related expenses. With this approach, you don’t have to account for all your actual expenses, although you still must record certain information, such as the mileage for each business trip, the date and the destination.

The mileage rate approach also is popular with businesses that reimburse employees for business use of their personal automobiles. Such reimbursements can help attract and retain employees who are expected to drive their personal vehicle extensively for business purposes. Why? Under the Tax Cuts and Jobs Act, employees can no longer deduct unreimbursed employee business expenses, such as business mileage, on their individual income tax returns.

But be aware that you must comply with various rules. If you don’t, you risk having the reimbursements considered taxable wages to the employees.

The 2019 rate

Beginning on January 1, 2019, the standard mileage rate for the business use of a car (van, pickup or panel truck) is 58 cents per mile. For 2018, the rate was 54.5 cents per mile.

The business cents-per-mile rate is adjusted annually. It is based on an annual study commissioned by the IRS about the fixed and variable costs of operating a vehicle, such as gas, maintenance, repair and depreciation. Occasionally, if there is a substantial change in average gas prices, the IRS will change the mileage rate midyear.

More considerations

There are certain situations where you can’t use the cents-per-mile rate. It depends in part on how you’ve claimed deductions for the same vehicle in the past or, if the vehicle is new to your business this year, whether you want to take advantage of certain first-year depreciation breaks on it.

As you can see, there are many variables to consider in determining whether to use the mileage rate to deduct vehicle expenses. Contact us if you have questions about tracking and claiming such expenses in 2019 — or claiming them on your 2018 income tax return.

© 2019

Tax planning should be on the minds of all farmers. Due to the new tax laws that took effect in 2018, tax planning for 2018 – and this coming year – is more important than ever. Farmers should be ready to spend some extra time with their tax advisors to take full advantage of the new rules.

Here are some of the main issues that will need to be considered.

Section 199A

Section 199A is a new deduction for all pass-through businesses in 2018, such as partnerships, S-Corporations or LLCs. However, there are many subtle nuisances in the 199A deduction that need to be considered to make sure taxpayers are getting the full benefit of the deduction.

Farmers with incomes over $157,500 (single) or $315,000 (joint) face certain limits on the deduction. The final deduction may be limited by the rules to 50% of W-2 wages or 25% of W-2 wages plus 2.5% of qualified property. While this could be bad news for some entities with no wages, the new law also allows taxpayers to aggregate entities under common control and that have a commonality to the aggregation, such as the land being rented to the farm or the trucks being used on the farm. This could allow entities who might not be allowed a deduction on their own to get a benefit. However, the taxpayer has to make a formal election on their tax return in order to take this aggregation, so care should be taken to make sure the return is properly filed.

The most recent guidance from the IRS does not qualify cash rent as business income, and the 20% Section 199A deduction is only for qualified business income. To qualify, the income must be tied together with a farm operation. This means the entity must be a common group, which means at least 50% of the ownership in each is held by the same people.

Bonus depreciation

For purchases made during 2018 through December 31, 2022, 100% bonus depreciation applies to certain farm property, including used property. However, taxpayers should remember that bonus depreciation is a tax deferral, not an extra deduction. Therefore, if they later sell the assets, they would have to pay income tax on the proceeds. Depending on their income and the type of assets, farmers may want to consider opting out of bonus depreciation in certain situations.

Net operating losses

The new tax law allows farmers to carry back their net operating losses only two years or elect to carry it forward. The maximum loss a farmer can recognize is $250,000 (single) or $500,000 (joint), so the new rules make planning important for clients who are facing a loss this year.

Change in tax rates and brackets

Overall, tax rates will be lower for most taxpayers in 2018 as the rates and brackets have changed. Therefore, it will be important for farmers to do as much planning as possible to try and determine where their net income will end up for the year to take advantage of these new rates.  

Itemized deductions

The new tax laws eliminated the deduction for personal exemptions but also increased the standard deduction to $24,000 (joint filers) and $12,000 (single). Therefore, many taxpayers will no longer need to itemize deductions because of the larger standard deduction amount. This law change may also affect how taxpayers structure their charitable giving, so this is another area they should discuss with their tax preparers.

Estimated tax payment

Although many farmers are conditioned to file by March 1 to avoid paying any estimated taxes before that date, they may want to consider making an estimated tax payment by January 15. This will enable them not to have to file their returns until April 15. This will give their tax preparers sufficient time to gather all the information necessary to file a complete and accurate return, especially for higher income taxpayers.

Medical deductions

If a taxpayer had large medical expenses in 2018 or is paying for long-term care, they should consider taking the deduction on the 2018 tax return. The medical deduction changes in 2019, so they would receive a bigger deduction for those medical expenses paid in 2018 versus 2019.

Contact your Yeo & Yeo tax professional for assistance in planning the best strategy for your situation.

Yeo & Yeo CPAs & Business Consultants is pleased to announce the promotion of two associates to senior manager.

Marisa Ahrens, CPA, provides Audit & Assurance services for schools, retirement plans, healthcare organizations, for-profit companies and Non-Profit organizations. She is a member of the firm’s Retirement Plan Audit Services Group and the Healthcare Services Group and has ten years of audit experience. Ahrens is a member of the Michigan Association of Certified Public Accountants and the American Institute of Certified Public Accountants. She is the treasurer for the Saginaw County Business & Education Partnership and the Mid-Michigan Children’s Museum. She also coaches youth soccer in the Frankenmuth community. Ahrens is based in the firm’s Saginaw office and is the business development leader for that office.

Jesse Marenger, CPA, works in the firm’s Assurance Service Line, specializing in retirement plan audit services. Marenger joined Yeo & Yeo in 2009 and is the leader of the firm’s Retirement Plan Audit Services Group and has streamlined and developed a unique approach to its retirement plan audits. Marenger is a member of the American Institute of Certified Public Accountants and the Michigan Association of Certified Public Accountants. In the community, he is an auditor for the Miss Saginaw County and Outstanding Teen Scholarship Pageant, and the Miss Great Lakes Bay Pageant. He is also treasurer for Freeland Cooperative Preschool, and a member of the Fordney Club of Saginaw County. Marenger is based in the firm’s Saginaw office. 

Yeo & Yeo CPAs & Business Consultants is pleased to announce the promotion of Kelly J. Smith to Director of Human Resources.

“Kelly’s commitment and leadership continues to be instrumental in the growth of our Human Resources department,” said President & CEO Thomas E. Hollerback. “Kelly has proven to be immeasurably dedicated to Yeo & Yeo and puts the needs of the employees before her own every day.”

Smith is based in the firm’s Saginaw headquarters and leads the Human Resources department. She has been with Yeo & Yeo for 16 years and has been instrumental in implementing the firm’s automated employee performance appraisal process and paperless personnel files. Smith is responsible for the firm’s payroll administration system and manages the firm’s healthcare plan, employee benefits, and human resource policies and procedures. She is a member of the Great Lakes Bay Chapter of the American Payroll Association.

Yeo & Yeo CPAs & Business Consultants is pleased to announce that Ali N. Barnes, CPA, Bradley M. DeVries, CPA, CAE, and Kristi Krafft-Bellsky, CPA, have been promoted to the position of principal.

Thomas E. Hollerback, president & CEO, says, “Our three new principals are talented professionals who are committed to helping Yeo & Yeo’s clients succeed. They are strong leaders in serving clients in their respective industries with energy and enthusiasm. We are proud to welcome Ali, Brad and Kristi to the principal/ownership group.”

DeVries specializes in audit, consulting and tax services for nonprofit organizations, affordable housing, trade associations and real estate entities. He is a member of the firm’s Nonprofit, Audit and Real Estate Services Groups. As a Certified Association Executive, DeVries provides clients with in-depth expertise in nonprofit and association management. He also holds a Non-Profit Certificate 1 from the American Institute of Certified Public Accountants. He is a member of the Michigan Society of Association Executives and the Michigan Nonprofit Association.

DeVries joined Yeo & Yeo in 2005 and is based in the firm’s Lansing office. In the community, he is the treasurer of a condo association and a graduate of Leadership Lansing.

Barnes is based in Yeo & Yeo’s Alma office and provides audit services, with an emphasis on government entities, schools, nonprofit organizations and employee retirement benefit plans. She joined Yeo & Yeo in 2007 and is a member of the firm’s Audit Services Group, Pension Services Group and Government Services Group.

In the community, Barnes serves on the board of directors and finance committee for the Gratiot County Community Foundation. She is also board treasurer for the Alma Police Athletic League and serves on the finance committee for Girls on the Run.

Krafft-Bellsky is the firm’s Director of Quality Control, overseeing the development and implementation of policies and processes to comply with professional standards and regulatory requirements. She joined Yeo & Yeo in 2003 and led the development of the firm’s award-winning YeoLEAN Audit Process that continues to significantly benefit the firm, the professional staff and the firm’s clients. Krafft-Bellsky is a member of the firm’s Audit Services Group and Education Services Group and is based in the firm’s Saginaw headquarters.

In the community, Krafft-Bellsky is treasurer of the Frankenmuth Jaycees’ $1 million spray park project and treasurer of the Frankenmuth Community Foundation’s Legacy Ball Committee. She is a graduate of the Saginaw County 1000 Leaders initiative and Leadership Saginaw County. She is a member of 100+ Women Who Care Mid-Michigan and serves as an AYSO 5U soccer coach.

The IRS has confirmed that it will begin accepting and processing 2018 tax returns on January 28, 2019, and that it will pay tax refunds despite the partial shutdown of the federal government. The IRS said Congress has directed the payment of all tax refunds through a permanent, indefinite appropriation.

There aren’t too many things businesses can do after a year ends to reduce tax liability for that year. However, you might be able to pay employee bonuses for 2018 in 2019 and still deduct them on your 2018 tax return. In certain circumstances, businesses can deduct bonuses employees have earned during a tax year if the bonuses are paid within 2½ months after the end of that year (by March 15 for a calendar-year company).

Basic requirements

First, only accrual-basis taxpayers can take advantage of the 2½ month rule. Cash-basis taxpayers must deduct bonuses in the year they’re paid, regardless of when they’re earned.

Second, even for accrual-basis taxpayers, the 2½ month rule isn’t automatic. The bonuses can be deducted on the tax return for the year they’re earned only if the business’s bonus liability was fixed by the end of the year.

Passing the test

For accrual-basis taxpayers, a liability (such as a bonus) is deductible when it is incurred. To determine this, the IRS applies the “all-events test.” Under this test, a liability is incurred when:

• All events have occurred that establish the taxpayer’s liability,
• The amount of the liability can be determined with reasonable accuracy, and
• Economic performance has occurred.

Generally, the last requirement isn’t an issue; it’s satisfied when an employee performs the services required to earn a bonus. But the first two requirements can delay your tax deduction until the year of payment, depending on how your bonus plan is designed.

For example, many bonus plans require an employee to still be an employee on the payment date to receive the bonus. Even when the amount of each employee’s bonus is fixed at the end of the tax year, if employees who leave the company before the payment date forfeit their bonuses, the all-events test isn’t satisfied until the payment date. Why? The business’s liability for bonuses isn’t fixed until then.

Diving into a bonus pool

Fortunately, it’s possible to accelerate deductions with a carefully designed bonus pool arrangement. According to the IRS, employers may deduct bonuses in the year they’re earned — even if there’s a risk of forfeiture — as long as any forfeited bonuses are reallocated among the remaining employees in the bonus pool rather than retained by the employer.

Under such a plan, an employer satisfies the all-events test because the aggregate bonus amount is fixed at the end of the year. It doesn’t matter that amounts allocated to specific employees aren’t determined until the payment date.

When you can deduct bonuses

So does your current bonus plan allow you to take 2018 deductions for bonuses paid in early 2019? If you’re not sure, contact us. We can review your situation and determine when you can deduct your bonus payments.

If you’re an accrual taxpayer but don’t qualify to accelerate your bonus deductions this time, we can help you design a bonus plan for 2019 that will allow you to accelerate deductions when you file your 2019 return next year.

© 2019

Retirement plan contribution limits are indexed for inflation, and many have gone up for 2019, giving you opportunities to increase your retirement savings:

• Elective deferrals to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans: $19,000 (up from $18,500)
• Contributions to defined contribution plans: $56,000 (up from $55,000)
• Contributions to SIMPLEs: $13,000 (up from $12,500)
• Contributions to IRAs: $6,000 (up from $5,500)

One exception is catch-up contributions for taxpayers age 50 or older, which remain at the same levels as for 2018:

• Catch-up contributions to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans: $6,000
• Catch-up contributions to SIMPLEs: $3,000
• Catch-up contributions to IRAs: $1,000

Keep in mind that additional factors may affect how much you’re allowed to contribute (or how much your employer can contribute on your behalf). For example, income-based limits may reduce or eliminate your ability to make Roth IRA contributions or to make deductible traditional IRA contributions.

For more on how to make the most of your tax-advantaged retirement-saving opportunities in 2019, please contact us.

© 2018