Form 1099-MISC – By the Box And More

Posted on November 28, 2018 by Carol

It’s that time of year again when, as a business owner, you have to start thinking about 1099ing folks. There’s a lot to it but we’re going to think about it with you.

REINFORCING THE BASICS.

What is a Form 1099 again? It is a calendar-year information return that reports miscellaneous payments to non-employee individuals. Information returns are meant to encourage people to report all their income or in the words of the IRS, “to increase voluntary compliance and improve collections.” That must be a lot of reportable income going on because there are 20 information returns in 2018. Even though there are 20 of them, we’re just going to talk about the big one you most likely will be giving or getting, FORM 1099-MISC. But first things first.

What should I do first? Why the W-9, of course! Check out our blog from two weeks ago: https://carolmcatee.com/2018/11/14/ask-and-you-bett…w-about-form-w-9/

FORM 1099-MISC.

Did your business pay, by cash/check, anyone to do anything this year? If so, get ready to hammer out Form 1099-MISC, Miscellaneous Income. If you paid royalties to any individual, any rents to an individual, or paid a non-employee or independent contractor or unincorporated business for services, an amount totaling $600 or more, you may have to issue (to recipient) and file (with government) Form 1099-MISC.

1099-MISC BY THE BOXES.

Box 1. Rents. Of $600 or more from real estate, equipment leases/rents, and coin-operated amusements.
Box 2. Royalties. Of $10 or more from oil, gas, and mineral properties AND the intangible stuff like patents, copyrights, trademarks, etc.
Box 3. Other income. Last but not least.
Box 4. Federal income tax withheld. This is where backup federal income tax withholding goes if the payee/recipient doesn’t have a correct TIN. For a bit more info check out our blog from two weeks ago: https://carolmcatee.com/2018/11/14/ask-and-you-bett…w-about-form-w-9/
Box 5. Fishing boat proceeds. Basically, do not report wages that should go on a W-2. This box is for when catches are sold for a boat load of money that is then distributed to fishermen of a crew less than 10. There is also a requirement for per trip cash payments of up to $100 for additional duties like cook and first mate.
Box 6. Medical and health care payments. Of $600 or more to suppliers or providers of medical or health care services and including payments made by insurers under health, accident, and sickness/disability programs. This also includes payments to animal doctors (veterinarians) as well, if you are in the business of breeding, racing, and farming for example. Corporations count here; nonprofits don’t. Prescription payments to pharmacies are not counted.
Box 7. Non-employee compensation. Some of the stuff, $600 or more, that goes here is attorney fees, payments to board members and directors, professional fess for accountants, architects, engineers and so on, fees that one professional pays to another professional, fees paid to legal experts and witnesses, unrepaid commissions to salespersons, and fees/travel reimbursements that were unaccounted for by the payee. Generally, ALL income subject to self-employment tax (Social Security and Medicare) in addition to income tax.
Box 8. Substitute payments in lieu of dividends or interest.
Box 9. Payer made direct sales of $5,000 or more of consumer products to buyer (recipient) for resale.
Box 10. Crop insurance proceeds. Of $600 or more received by farmers from insurance companies, unless there was capitalization of certain expenses.
Box 13. Excess golden parachute payments. If a big whig executive gets the boot and has one heck of a compensation agreement, anything over the average annual salary for the preceding 5 years is excess and goes here.
Box 14. Gross proceeds paid to an attorney. Of $600 or more and primarily for insurance companies who pay settlements to law firms.

Box 3. Other income. We put this last because this is the catch-all box for $600 or more that doesn’t fit in any of the other boxes. Generally, ANY AND ALL income NOT subject to self-employment tax. When you get a prize or an award for something other than services. So, your winnings on Jeopardy or Ellen’s 12 Days of Giveaways. Or a prize or award recognizing past (religious, charitable, artistic, scientific, educational, literary or civic) accomplishments. Or when you win stuff without betting, for example, in a sweepstakes or a raffle. If it’s stuff; the amount 1099’d is the fair market value of the item. If an employee dies and the last owed amounts/paychecks are paid after the year of death, the amount goes here. Most punitive damages and damages for nonphysical injuries or sickness are taxable and reportable in box 3. Here’s a fun one: medical research payments, when you participate in clinical trials for everything from dream studies to ulcers.

WHAT DOES NOT GET 1099’d-MISC?

1. Employee business expense reimbursements. If the reimbursements are under a nonaccountable plan, these are W-2 wages. Accountable plan reimbursements are not W-2 wages EXCEPT FOR some per diem and mileage allowances.
2. Prizes, bonuses, awards paid to employees.
3. Payments for goods, merchandise, or payments by credit card.
4. Corporate entities, both C and S BUT with this exception: You should issue and file, Form 1099-MISC for ALL attorney’s fees, ALL gross proceeds paid to an attorney, and ALL payments to for-profit medical care providers regardless of their business type.

WHERE DO THE 1099S GO AND WHEN DO THEY HAVE TO GET THERE BY?

To recipients. January 31st, except for Boxes 8 and 14 which are due February 15th.

To IRS. February 28th, except for Box 7 which is due January 31st, whether paper or e-filed.

AND WHAT IF I DON’T ISSUE OR FILE?

Punishment by monetary penalty. Your annual strategy should always be to file the information returns, in this case the Form 1099-MISC and accompanying Form-1096, correctly and timely. Penalties may apply when you as the payer:

 ⇒ Report an incorrect TIN;
 ⇒ Don’t report a TIN;
 ⇒ Don’t file paper forms that are machine readable;
 ⇒ File paper returns when you should have e-filed; and,
 ⇒ Don’t file correct returns by the due date and without reasonable cause.

Penalties are per return/each individual 1099-MISC and assessed based upon filing date. Penalties for 2018 are:

Not more than 30 days late: $50 per return/$187,500 maximum;
31 days late through-August 1: $100 per return/$536,000 maximum;
After August 1 OR Not at all: $260 per return/$1,072,500 maximum; and,
Plain old, flat out intentional disregard: $530 per return/$ No maximum.

WHAT ELSE SHOULD I KNOW?

 ⇒ File a 1099-MISC for $600 or more paid, in the course of trade/business, to partnerships.
 ⇒ Summed up: payments to a non-employee go somewhere on a 1099-MISC.
 ⇒ It appears that the IRS stepped up penalty enforcement in 2017 and the enforcement will continue.
 ⇒ (Shameless plug!) If you receive “you’ve been bad” correspondence from the IRS about owing some penalties we are pretty good at identifying or articulating reasonable cause.

If you have some completed W-9s and amounts paid to 1099 vendors in 2018: get both to us by mail, email, or drop it all off and say hi; we’d be more than happy to assist you in the preparation and filing of any 1099s.

[email protected] OR 727-327-1999.

Check back here next week when we talk about who knows what. If there is anything you would like to know more about, leave a comment and we’ll blog it. And be sure to like us on Facebook and follow us on Twitter; for whatever it is we’ll be posting.

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

Posted in Accounting, Business Taxes, Individual Taxes, Taxes | Tagged , , , | 1 Comment

Don’t Talk Trump, Let’s Talk Turkey. Trivia for your Thanksgiving Day.

Posted on November 20, 2018 by Carol

It really is official. The holidays are here. Turkey. Football. Family. Santa Claus. Whoa! Let’s not get ahead of ourselves. Let’s get through Thanksgiving. This week we are not talking accounting, not even talking tax. Welcome to this week’s blog: Don’t Talk Trump, Let’s Talk Turkey. Trivia for your Thanksgiving Day. And if you need to flip any, “Oh no, here we go” conversations we have included several round table discussion topics to help you steer clear.  

1. What meat did Native Americans bring to the First Thanksgiving?

Venison (deer).

2. What state grows the most turkeys?

Minnesota.

3. About how many turkeys go from the farm to the Thanksgiving Dinner table each year?

45 million.

4. Where do the feathers go?

To the farm and to the zoo. Turkey feathers are ground up and used as protein for cattle, sheep, goats and giraffes.

5. In what year or at least what decade did Macy’s Thanksgiving Day Parade and America’s Thanksgiving Parade start?

1924. Did you know back in the 20’s the Macy’s Thanksgiving Day Parade was in Newark, NJ and we pretty much ripped off the America’s Thanksgiving Parade from the Canadians. Giving credit where credit is due. The Eaton’s Santa Claus Parade first marched in Toronto, back in 1905.

6. Which President was the first to officially give a turkey a presidential pardon?

The first unofficial pardon was given by JFK in 1963. But it was Ronald Reagan, in 1987, who first officially pardoned a turkey, as a joke. The turkey trotted off to a petting zoo and in 1989 Bush SR made it an annual tradition. Truly, non-partisan politics at its best!

7. Just like some folks have wattles under their chins, so do turkeys, under their beaks. But what’s the wattle above the beak called?

Snood.

NOT a suggested round table discussion: Who at the table has the biggest wattle?
Suggested round table discussion: Who, not at the table, has the biggest wattle?

8. Who invented that green bean casserole that Grandma makes every Thanksgiving?

Dorcas Reilly in 1955. And Dorcas worked…… at the Campbell Soup Company. Cream of Mushroom soup had been invented some 20 years earlier and people used it a casserole filler. Rest in Power Dorcas, who passed away at the age of 92 last month on October 15th.

Suggested table discussion: What is everyone’s favorite Campbell Soup?

9. Where did the cornucopia come from?

There’s a couple of different rumors or legends in Greek mythology about the horn of plenty. One is Zeus’ mom after giving birth to him gave him to some nymph-nannies to take care of. They in turn hired a wet-nurse goat named Amalthea whose milk helped Zeus grow up to be the head honcho of Pagan Greece; King of Mount Olympus, God of Thunder and all that. When Zeus became boss, he put one horn in the heavens and filled the other horn with the magic of perpetually becoming filled with whatever sustenance the possessor of the horn might want and gave the horn to his nymph-nannies.

Another story is Zeus’ kid, one of them, he had like 92; Hecules got into a fight with the guy that was the River God. Of course, it was over a woman, not just any woman but the daughter of the God Dionysius. The River God guy shapeshifted into a bull. Heracles kicked his butt, tore off a horn, gave it to some water nymphs who filled it with flowers. The Goddess of Plenty liked the flower-filled horn and then made the horn her own and called it… Cornucopia.

Suggested table discussion: What would you fill the cornucopia with?

10. Who won the National Dog Show best in Show last year?

Newton, the Brussels Griffon.

Suggested table discussion: What is everyone’s favorite breed?

BONUS ROUND.

Did you know Ben Franklin wasn’t sold on the idea of the Bald Eagle as our national emblem? He actually thought the eagle was of bad moral character and a coward and too lazy to fish for himself. And he thought the Turkey was a better bird all around. Who knew?!

Suggested table discussion:  Seriously, who knew?

This is the part where we say if you need anything reach out to McAtee & Associates and #CallCarolFirst.  We’re not sure where Carol is going to be Thanksgiving but she told us to help you with this:

https://www.allrecipes.com/recipes/976/holidays-and-events/thanksgiving/side-dishes/stuffing-and-dressing/

And, in case you want to have this handy for tomorrow, save this PDF to your phone or print it out.  And Have A Blessed and Bountiful Thanksgiving.

18.1121 Don’t Talk Trump! Let’s Talk Turkey!

[email protected] OR 727-327-1999.

Check back here next week when we tackle the 1099-MISC. If there is anything you would like to know more about, leave a comment and we’ll blog it. And be sure to like us on Facebook and follow us on Twitter ; for whatever it is we’ll be posting.

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

Posted in General Interest, Holiday, Thanksgiving | Tagged , , , , | Comments Off on Don’t Talk Trump, Let’s Talk Turkey. Trivia for your Thanksgiving Day.

Ask and You Better Receive. What To Know About Form W-9.

Posted on November 14, 2018 by Carol

UPDATED 12/17/2019

It’s that time of year again when, as a business owner, you have to start thinking about 1099ing folks. There’s a lot to it but we’re going to think about it with you.

REINFORCING THE BASICS.

What is a Form 1099 again? It is a calendar-year information return that reports miscellaneous payments to non-employee individuals. Information returns are meant to encourage people to report all their income or in the words of the IRS, “to increase voluntary compliance and improve collections.” That must be why there are 20 of them in 2019. We’ll tackle Form 1099 week after next (11/28). Next week we have decided to hook you up with some Thanksgiving Day trivia.  First things first.

WHAT SHOULD I DO FIRST? Why the W-9, of course!

FORM W-9, Request for Taxpayer Identification Number and Certification. If you are required to issue an information return (Form 1099) to someone, for example: 1099-DIV, 1099-INT, 1099-B, 1099-S, 1099-K, 1099-C, 1099-A, 1099-MISC, or Form 1098, you absolutely should get them to complete and give you a Form W-9.

Form W-9 can be accessed at:      Form W-9

REQUESTING A COMPLETE AND ACCURATE FORM W-9.

It is super important to get your vendor/payee’s Name and Business Name correct. The purpose is for the IRS to follow the flow of the income from your checkbook/income statement to your payee’s Form 1040. So, what you would look for is their own personal name on Line 1 and then their business name or dba on Line 2. It should be the same name if a C Corporation and it could be the same name on both lines if it is an individual/sole proprietor or a single member LLC. Some examples would be: Dr. Dre / Beat Electronics (before selling to Apple for $3B); Donald Obama / All American Draining Swamps Services; George Slate / Bedrock Quarrel & Gravel Company.

If the person you pay didn’t think up a business name for themselves: Joseph Nobusinessname / Joseph Nobusinessname.

Never be quick to assume that a checked Limited liability company in Box 3 is correct. This box is only checked when the payee is an LLC owned by another LLC. The kid LLC (your vendor/payee) should know whether their parent (owner) is a C or S-Corp and accordingly check the appropriate box.

No less important is being sure your payee gives you the right Taxpayer Identification Number (TIN). If they have employees, they will have an Employer Identification Number; if not they will provide you their Social Security Number. The same goes for when your payee is a single-member LLC, disregarded entity, which is basically an incorporated sole proprietorship. If your vendor is in the middle of getting a TIN, they will have written “Applied For” in Part 1, Taxpayer Identification Number. We suggest following up on this as a missing TIN will eventually cost you time and money.

HOW WOULD I EVEN KNOW WHAT’S CORRECT AND WHAT’S NOT?

First, review for completeness and accuracy. You need R & R – request and review. The IRS has a really cool, interactive tool; IRS TIN Matching. This tool matches the W-9 name and TIN to IRS records. First off, you need to have an IRS login and then you have to get yourself on the IRS Payer Account File database. To do this you must be considered an authorized payer, meaning you filed any of the following in one, if not two of the last two tax years: 1099-B, 1099-DIV, 1099-INT, 1099-K, 1099-MISC or the lesser known 1099-OID and 1099-PATR.

This is a link to the IRS Log-in/Sign-up page. If you have an accounts payable department or clerk or inhouse bookkeeping /accounting direct them to log in and sign up for IRS TIN Matching.     TIN Matching

WHY WOULD I WANT TO HELP THE IRS COLLECT MONEY? Short answer you’ll save time and money.

Whether you have a good-to-go W-9 or not, you are required to file Forms 1099 with whatever information you do have. Imagine having to calculate 76% of a vendor’s payment every time you pay them and then being responsible to get the remaining 24% to the IRS because you don’t have their W-9. This brings us to:

What is backup withholding? It’s how the IRS gets their money and what you must do if you have an incomplete or incorrect W-9 on file or you don’t even have one on file. Backup withhold 24% if you do not have the vendor/payee TIN; the TIN is not certified if it should be; the IRS tells you the TIN is incorrect; the vendor is actually subject to backup withholding; or, the vendor/payee didn’t certify to you that they are not subject to backup withholding. There goes time and because time is money; there goes money……whoosh… right out the window.

WHAT ELSE SHOULD I KNOW?

⇒ We strongly advise obtaining a correctly completed Form W-9 from your vendor/payee BEFORE paying them.
 ⇒ We suggest running the info on the W-9 through the On-line Matching tool BEFORE paying them. Talk about increasing compliance! The IRS should be paying you!
 ⇒ You would have to search long and hard for an individual that is exempt from backup withholding.
 ⇒ There are fines and penalties for filing not so perfect Forms 1099. We’ll talk about that in next week’s blog, “Get Those 1099s Ready”.
 ⇒ Real estate transactions are not subject to backup withholding.
 ⇒ If your payee fails to give you a correct TIN, they could be subject to a $50 punishment (penalty).
 ⇒ If the payee out and out gives you fake info, that could be a false statement subject to a $500 punishment.

If you have some completed W-9s and amounts paid to 1099 vendors in 2019: get both to us by mail, email or drop it all off and say hi; we’d be more than happy to assist you in the preparation and filing of any 1099s.

[email protected] OR 727-327-1999.

Check back here next week when we tackle 1099s, the forms themselves. If there is anything you would like to know more about, leave a comment and we’ll blog it. And be sure to like us on Facebook and follow us on Twitter; for whatever it is we’ll be posting.

McAtee and Associates’ Disclaimer:

Our blog is intended for educational and awareness purposes.  The general information provided about taxes, accounting, and business-related topics is by no means intended to provide or constitute professional advice.  Reading our blog does not create a Client/CPA relationship between you and us.  The blog, including all contents posted by the author(s) as well as comments posted by visitors, should not be used as a substitute for professional advice or as a substitute for communicating with a competent, human professional.

Our blog posts are written using current information and current or proposed rules and regulations.  Information becomes old and outdated. Rules and regulations are frequently changed, added, amended, and/or left to expire.  This is extremely true with most things tax and to a lesser and slower extent, most things accounting.  We do not go back and update posted blogs.  Always check with your CPA or accountant regarding not only rules and regulations but available options and how it all applies to your fact pattern and you.

Posted in Business Taxes, Taxes | Comments Off on Ask and You Better Receive. What To Know About Form W-9.

Open Sesame…Open Enrollment!

Posted on November 7, 2018 by Carol

Open enrollment season is here!  And with it the annual confusion and scrambling.  We’re thinking this week’s blog can eliminate some of that.

REINFORCING THE BASICS.

What is open enrollment? Annual Open Enrollment (AOE) is this tightly scheduled period each year in which you sign up for health coverage.  What is super, super HUUUGE about open enrollment – NO UNDERWRITING.  Underwriting is risk assessment by the insurance company.  It is a nosy and invasive process that will determine if you get coverage, how much coverage, and at what cost.  Open enrollment, in most cases, is going to avoid all that.

What does Medicare offer?  Part A = Hospital insurance; Part B = Medical insurance which is healthcare needed to diagnose and treat a medical condition and also preventive services, healthcare needed to prevent or detect an illness; Part C = Medicare Advantage Plans which package Parts A & B and usually D into one plan; and Part D = Prescription drug coverage.

What is Medigap/Medicare Supplement?  You probably have figured out that Medicare Parts A & B don’t pay for everything.  Medigap is supplemental insurance offered by private insurance companies like Blue Cross, Humana, and CIGNA.  We actually saw a TV commercial the other night by Humana advertising their Medicare Supplement plans. It helps pay for copayments, coinsurance, and annual deductibles.  Medigap is a secondary payer that pays some or all costs the primary payer didn’t pony up and pay for.

What is a Qualifying Life Event (QLE)?  For purposes of health insurance, a QLE is not getting your driver’s license or even losing your driver’s license; it’s not graduating from anything; it’s not your birthday; and it’s not even adopting a shelter pet.  For purposes of health insurance, a QLE falls within four categories:

  1. Loss of health coverage – losing existing health coverage; losing eligibility for Medicare, Medicaid, or CHIP; or, turning 26 and falling off parent’s plan.
  2. Changes in household – marriage; divorce; birth; adoption; and, death. And no, not adopting a shelter pet.
  3. Changes in residence – moving to a different zip code/country; student moving to/from school; seasonal workers moving to/from where they live and work; or, moving to/from shelter/transitional housing
  4. Other qualifying events – change in income affecting coverage; becoming a U.S. citizen; starting/finishing AmeriCorps service; getting into a federally recognized tribe; or, getting out of jail/prison.

What is a Special Enrollment Period (SEP)?  SEP is the 60 days you get to sign up for health coverage after a QLE.  Your workplace plan must give you at least 30 days after a QLE.  (If you are interested in the other SEP – Simplified Employee Pension; check out our 10/17/18 blog, “Self-employed Plans”.)

WHEN IS OPEN ENROLLMENT?

Employer-provided Health Coverage.  Most employers schedule the AOE period during the fall, which is now.  Employers have flexibility in scheduling AOE.  So, if you haven’t received a packet or reminder, reach out to HR or who ever it is at your workplace that pays the company’s monthly health insurance bill or who yanks the premium out of your paycheck.

Medicare.  The AOE period for 2019 coverage is October 15, 2018 through December 7, 2018. These dates will stay the same every year for the foreseeable future.  Whatever you do, don’t confuse this with General Enrollment Period which is January 1 to March 1.

Medigap/Medicare Supplement. The absolute surest and best time to get Medigap is during the initial 6-month open enrollment period. This open enrollment period starts the month that you re 65 AND enrolled in Medicare Part B.

The Market Place.  The AOE period for 2019 coverage is November 1, 2018 to December 15, 2018.  You snooze; you lose.

WHAT CAN YOU DO DURING OPEN ENROLLMENT?

Employer-provided Health Coverage.  You can opt in or out of plans.  You can make changes to the plan you have now.

Medicare.  You can do a lot of switching:   From Original Medicare (Parts A & B) to Medicare Advantage.  From Medicare Advantage to Original Medicare.  From one Medicare Advantage Plan to another Medicare Advantage Plan.

Medigap/Medicare Supplement.  An important thing you can do is take advantage of the “guaranteed-issue right”.  This is a legal right to any and all Medigap plans offered by any and all insurance companies in your area.  This is super important if you have pre-existing conditions.

The Market Place.  If you had Marketplace health coverage in 2018 you can renew, change, or update your plan.  You should get two snail mail letters:  one from your insurance company and one from the Marketplace.

WHAT CAN’T YOU DO DURING OPEN ENROLLMENT?

Medicare.  You cannot enroll for the first time.  You should do this during the 7-month Initial Enrollment Period (IEP) (which is three months before, the month of, and three months after your 65th birthday).

Medigap/Medicare Supplement.  “You can’t always get what you want”; federal law doesn’t require insurance companies to sell Medigap policies to people under 65.  You might not be able to even buy yourself some Medigap that you really want if you are under age 65.  Only 32 states offer at least one Medigap policy (Florida is one).

WHAT IS THAT GENERAL ENROLLMENT PERIOD (GEP)?

This period is January 1 through March 31.  If you didn’t sign up during the IEP and have no QLE to get you an SEP this is when you can sign up for Medicate Parts A and/or B.  Coverage will kick in July 1, but don’t be surprised if there is a higher premium for late enrollment.

WHAT ELSE SHOULD I KNOW?

⇒ Where to go for help. You can compare different plans at https://www.medicare.gov/find-a-plan.   And a really cool place is https:/www.shiptacenter.org.  SHIP is State Health Insurance Assistance Programs.  It is local, in-depth, and objective counseling and assistance about all things Medicare.  https://www.mymedicare matters.org is another really cool website that guides you through eligibility, enrollment, plan comparisons, all the extra costs and more.

⇒ Where to go for Marketplace help?  Heathcare.gov is a great website for all sorts of information on Marketplace insurance and Medicaid and the Children’s Health Insurance Plan (CHIP).

⇒ You can enroll in Medicaid and CHIP any time of year, whether you qualify for a SEP or not.

⇒ If you live in an affected area designated by FEMA as eligible for either individual or public assistance you can apply for more time to sign up for 2019 coverage:  Exceptional Circumstances Special Enrollment Period (SEP) by calling 1-800-318-2596.

⇒ If you live in an affected area designated by FEMA as eligible for either individual or public assistance and you had a QLE in 2018 and missed the deadline, you can apply for Exceptional Circumstances Special Enrollment Period (SEP) by calling 1-800-318-2596.

If you didn’t have health insurance in 2018, we can figure out if there is an exemption that fits your situation.  If you’re not so lucky we can calculate the exact amount of the Obamacare penalty.   We are also awesome at getting you the maximum premium tax credit allowed.  We’re gonna warn you ahead of time; our fee is not as cheap as Lucy’s five cents.  Keep checking out our dope blogs because we intend to talk about more health coverage and health insurance topics.

[email protected]  OR   727-327-1999.

Check back here next week when we tackle another topic. If there is anything you would like to know more about, leave a comment and we’ll blog it.  And be sure to like us on    and follow us on Twitter ; for whatever it is we’ll be posting.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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TCJA and What in the World is Section 199A?

Posted on October 31, 2018 by Carol

The TCJA, (Tax Cuts and Jobs Act) kicked into gear for better or for worse on January 1, 2018. Last week’s blog was about its impact on individuals and 1040s. This week is about business, specifically the Section 199A Qualified Business Deduction. Perhaps the biggest change to your business and individual taxes is the Section 199A.

Since a picture is worth 10,000 words, let’s start with a flow chart.

 

 

 

 

 

 

 

 

 

 

REINFORCING THE BASICS.

The Deduction. The gist of it is you may be able to deduct up to 20% of income your business earned depending on what your business is and how much taxable income you have sitting on your 1040 (thresholds and phaseout amounts). Are you above the amount, below the amount, or are you in between? You could get none, all, or some of that 20%.

Qualified Business (QB). You have a qualified business if you ARE NOT performing services as an employee; there is no 20% deduction off your W-2! And the business IS NOT classified as a specified service trade/business (SSTB).

Qualified Business Income (QBI). This is ordinary, non-investment income. For the most part, revenue – expenses = qualified business income. Do not include items like capital gains and losses whether short or long-term, non-trade or business interest income, and no foreign currency gains. Also, do not include S-Corp shareholder wages.

We thought maybe you could navigate the above flow chart and we’d fill in some details below.

First things first. Each qualified trade or business has its own tentative deductible amount starting at 20% of QBI. So, that means each Schedule C, each Schedule E, and each K-1. Then you either get the whole 20%, some of the 20%, or none of the 20% depending on your taxable income – the threshold/phaseout amount. And then if you get some of the 20% you have to do some math.

Taxpayer Other Than a C-Corp. A business that doesn’t pay tax at the business or entity level but passes it along to owners, partners, shareholders, and beneficiaries. Sole proprietorships, Schedule E rental properties, partnerships, limited liability companies, S-corps, and trusts and estates are all pass-through entities.

Taxable Income. All that money you made this year, whether you actively or passively earned it. Salary, bonus, commission, self-employment, gambling winnings, jury duty, rents, social security, IRA distributions, etc., less the nearly doubled standard deduction or your itemized deduction.

Ordinary Income Tax Rates. That’s that chart with percentages from last week’s blog. https://carolmcatee.com/2018/10/24/the-tcja-you-and-your-1040/

Are you a straight up qualified business or a specified service business? A specified service business has two parts. One or more employees/owners have to have mad skill at what they do and/or the reputation of the business has to be killer. Skill and reputation are the assets the IRS considers more important than buildings and inventory. Your Yelp reviews count more than your cash in the bank.

😭  Who is crying now?

Direct caregivers like doctors, dentists, pharmacists, nurses, dentists, veterinarians, physical therapists, psychologists, psychiatrists, and that whole crowd.

Lawyers, paralegals, arbitrators, mediators, and negotiators.

Accountants/CPAs, enrolled agents, tax return preparers, financial auditors, bookkeepers.

Actuaries and similar braniacs.

Financial services folks. All the financial advisors, investment bankers, and wealth and retirement planners.

Brokers who broker securities.

And pretty much everyone involved with investment and asset management and securities and commodities.

🏀🏈⚾🎾🎮🎬🎼🎸 Guess who else is crying?  You get the idea, right!

😁  Who is Happy like a Boston Red Sox fan this year?

Health club and spa owners. Medical researchers and pharmaceutical sales reps.

Court reporters, stenographers, and couriers.

Not a single job in accounting is happy.

Analysts, economists, math whizzes, and statisticians who do anything but assess financial costs of risk.

Bankers are very happy.

Real estate brokers.

Real estate managers.

SSTBs owners with less than $157,500/$315,000 in taxable income.

🍀   Oh yeah; architects and engineers got really lucky. They are not SSTBs.

🦄🌈    If you own your own business/or are self-employed as a landscaper, painter, roofer, mechanic, photographer; if you own a restaurant, a store, a lemonade stand, just to name a few – You are not an SSTB. Be Happy! Unicorns and rainbows happy.

Partial Deduction. The partial deduction, as you see from the flowchart, comes in to play if you have taxable income BETWEEN $315,000 and $415,000 MFJ and BETWEEN $157,500 and $207,500 All Other Taxpayers (AOT). Between these thresholds it does not matter if you are an SSTB or not.

Calculating the Partial Deduction. Since you’re not gonna get the full 20%: Calculate 50% of the QB’s W-2 wages (including S-corp shareholders), then, calculate 25% of W-2 wages + 2.5% unadjusted basis of Qualified Property. The bigger amount factors into your partial deduction.

Qualified Property (QP). For the most part, think of your fixed assets that you own and depreciate: buildings, improvements, vehicles, computer items, etc.

Subject to Limitation. The subject to limitation, as you see from the flowchart, comes in to play if you have taxable income MORE THAN $415,000 MFJ and MORE THAN $207,500 AOT.

Calculating the Subject to Limitation. Similar to calculating the partial deduction.

WHAT ELSE SHOULD I KNOW?

⇒ This may seem pretty simple; believe us, it is anything but.  Net losses, S-corp officer salaries and reasonable compensation, multiple QBs, among quite a few other things are complications.

⇒ If you’re worried about your skills or your rep being everything you have and disqualifying you from the Section 199A deduction, as long as you’re not famous and you don’t provide “Who’s Crying Now” services you are good to go.

⇒ You may want to reassess payroll strategies and even business formation types.

⇒ The K-1s from your pass-through entity will include QBI and allocable share of W-2 wages & QP to transfer to your 1040.

If you are wondering if you are an SSTB or need to SWAG your taxable income for 2018, reach out to McAtee and Associates for answers and guidance.  Carol McAtee would enjoy navigating Section 199A and tax planning with you.

[email protected]  OR   727-327-1999.

Check back here next week when we tackle another topic.  If there is anything you would like to know more about, leave a comment and we’ll blog it.  And be sure to like us on FaceBook and follow us on Twitter; for whatever it is we’ll be posting.

 

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The TCJA, You, and Your 1040

Posted on October 24, 2018 by Carol

The TCJA, (Tax Cuts and Jobs Act) kicked into gear for better or for worse on January 1, 2018. Most folks and entities will be affected one way or another. This week we are talking about the changes for individuals. Keep in mind most of these changes are scheduled to go away after 2025 and things could quite possibly go back to the way they were. That is why they are called “temporary provisions”.

REINFORCING THE BASICS.

There is a pretty wordy blog so let’s just jump right into the TCJA, You, and Your 1040.

NOT QUITE THE SAME OLD SAME OLD.

Child Tax Credit. Doubles from one grand to two (through 2025). Twice as much buck for the bang.   That’s practically another year of diapers or a couple of months of auto insurance for the newly added teen driver.  What if you have a qualifying child (under age 17) but no tax liability? You can still get free money (refundable credit) and even more of it, $1,400 from $1,000.  The phaseout limit more than doubled; it now starts at $200,000 (S) and $400,000 (MFJ). More families with (qualifying) children will WIN.

Estate and Gift Taxes.  Lifetime exemptions have practically doubled (through 2025).

Gift taxes.  For 2018 you can give away $15,000 (finally up from $14,000) each to family members.

Standard deductions.  Increased (through 2025) though not quite doubled as you may have heard.

2018: $12,000 – Single; $18,000 – HOH; and, $24,000-MFJ.

2017: $  6,350 – Single; $  9,350 – HOH; and, $12,700-MFJ.

Tax rates and brackets.  Most of the brackets are wider meaning there’s more $$$ taxed at lower rates.

 

Rate

2017

 Rate

2018 – 2025

 Single

$

 HOH

$

 MFJ

$

 MFS

$
10% 10% 9,525 13,600 19,050 9,025
15% 12% 38,700 51,800 77,400 38,700
25% 22% 82,500 82,500 165,000 82,500
28% 24% 157,500 157,500 315,000 157,500
33% 32% 200,000 200,000 400,000 200,000
35% 35% 500,000 500,000 600,000 300,000
39.6% 37% >500,000 >500,000 >600,000 >300,000

How it works:  If you are MFJ with taxable income of $161,543:

19,050 x 10% =  $ 1,905

58,349 x 12% =  $ 7,002

84,144 x 22% =  $18,512

$161,543            $27,419 Tax liability in 2018.

Trust us on this, verify if you must.  The 2017 tax liability was $31,863. A savings of $4,444 and 14%.  That is definitely more money in the pocket.  Keep in mind that taxable income is next affected by tax brackets making all of us winners.

It this MFJ couple had a $1,000 credit, the benefit would be $1,000 and the tax liability $26,419.

If this MFJ couple had a $1,000 in deductions, the benefit would be $220, and the tax liability $27,199.

IF YOU THINK YOU CAN DANCE…..WE MEAN ITEMIZE.

Charitable Contributions. You can still write off what you give unto others.  Cash is up to 60% (increased from 50%) of your adjusted gross income and stock stays the same at 30%.

Home Equity Interest/Home Equity Line of Credit (HELOC)/2nd Mortgage.   Is still an itemizable deduction, IF the loan was used for buying, building, or substantially improving the residence that secures the loan. These loan amounts are combined with mortgage loans and are collectively called Qualified Residence Loans.

Medical Expenses.  For 2017 and 2018, expenses exceeding 7.5% of income are deductible.  In 2019 this goes up to 10%.

Mortgage Interest.  Interest on up to a million-dollar mortgage entered into prior to December 15, 2017 is grandfathered and still deductible (even if refinanced).  If you buy a house after December 15, 2017 and through December 31, 2025 that cool million is lowered to $750,000 and includes any and all home equity loans and second mortgages.

State & Local Tax Deductions.  In the good old days ALL property and state/local income taxes or sales taxes were deductible unless you were trapped in AMT.  But now the deduction for these taxes is capped at $10,000.  Whew, this was almost a goner!  And no, it doesn’t double if you are married filing joint (MFJ).  High tax states such as CA, NY, NJ, CT, and MD are not too happy.  States look for loopholes too!

KEEPERS.

Adoption Credit.  Nonrefundable tax credit for qualified adoption expenses paid to adopt an eligible child. 

American Opportunity Tax Credit.  For the first four years of higher education. 

Amortizable Bond Premium.  Is a 2 percenter that didn’t get axed.

Assistance – Adoption, Dependent Care, and Education.  All remain.

Elderly OR Disabled Credit. This is a little-known credit that can bring in cash of between $3,750 and $,7500 but you have to be 65 or older OR retired on permanent and total disability.  You must be collecting some taxable disability income and then of course meet defined income limits.

Earned Income Credit.  This credit has been helping working people with low to moderate income for 45 years and probably isn’t going anywhere anytime soon.

Educator Expense Deduction. Remains the same at $250 above the line.  It almost made it to $500, maybe next time.

Gambling Losses.  Casual gamblers can still deduct losses up to amount of winnings as an itemized deduction on Schedule A.  Professional gamblers can still deduct losses AND related expenses up to amount of winnings on Schedule C.  Examples of related expenses are admission/entry fees, ATM fees, handicapping data, subscriptions, telephone and internet, and travel.  See ya at the Hard Rock!

Plug-in Electric Vehicles Credit.  Those cars, Friday night, downtown, you get all excited when you see a parking space and there’s a big old outlet and no car.

Qualified Tuition.  Still an above the line deduction.

Sale of Primary Residence. Gain is still excluded, $250,000 Single, $500,000 MFJ if you have owned and lived in the house 2 of the past 5 years.

Saver’s Credit.  Only 25% of households with income less than $50,000 are aware of this credit.  This non-refundable credit is sort of like Uncle Sam matching your retirement contributions.  

Student Loan Interest.  Remains the same at $2,500 above the line.

GONERS.

Alimony.  Beginning in 2019 alimony has nothing to do with income tax.

Casualty Losses. Deductions for casualty and theft losses are no longer deductible (through 2025) unless in a Federally Declared Disaster Area.

Exemptions. Bye-bye personal and dependent exemptions (through 2025).  For yourself, the other half, the kids and other dependents. These were worth $4,050 a pop in 2017. Figure what would have been an increase of 50 bucks each year after that.  Keep in mind that taxable income is also affected by dependents.  So, the more dependents you have through 2025 the less the increased standard deduction benefits you.

Foreign Real Property Tax.  Property taxes paid in foreign countries (through 2025) are no longer deductible.

Living expense deduction for members of Congress.  Since 1953 Congress has been writing off living expenses while outside their district/state.  Three grand a year!

Moving Expenses.  Moving expenses no longer deductible; unless, you are active duty military.

Recharacterizing ROTH conversions.  If you previously converted a pretax traditional IRA into a ROTH IRA, you are stuck with it.

Shared Responsibility Payment (SRP).  Good bye and good riddance in 2019 to this tax penalty for not having health coverage or a qualified exemption under the Affordable Care Act, known affectionately and not so affectionately as Obamacare.  In 2017, the punishment was the greater of $695 per person or 2.5% of household income.  This year the IRS rejected 2017 returns that did not include evidence of coverage or exemption, or the SRP.  They may do so again for 2018 returns, so be sure to check the box this year or pay the piper. 

The Two Percenters.  These are the Miscellaneous Itemized Deductions, a pretty long list of personal expenses that are no longer deductible (though 2025). 

           Unreimbursed employee expenses.  This is out-of-pocket money spent on ordinary and necessary stuff to do your work.  Say goodbye to:

Work-related travel, transportation, and meal expenses;

Work-related education;

Job search expenses for new job in same profession/occupation;

Union dues;

Dues to professional societies;

Subscriptions to professional and trade publications;

Supplies and tools;

Work clothes and uniforms;

Home office expenses;

Depreciation on employer-required computers and cell phones;

Business liability insurance premiums; and,

Legal fees.

Hobby expenses.   Once again Congress frowns upon fun.  Like gambling losses, you used to be able to deduct hobby expenses up to the amount of hobby income.  Not any more but wait for it… you still have to report hobby income.  If you actually sell your stuff to people, you can deduct cost of goods sold.

Investment expenses.  Fees for personal investing are not deductible.  This would be all your investment advisory, management fees, and trustee fees as well as fees for investment-related tax and legal advice. Also, all expenses incurred to manage investments such as rents, administrative help, computers and electronics, and home office deduction.  If you get a K-1, the investment expense is no longer a miscellaneous itemized deduction.

Other.  No more writing off the safety deposit box, the amount we charge to expertly prepare your tax return, or any monies you spend to do battle with the IRS.

NEWBIES.

529 Savings Plans. Qualified education expenses now include primary and secondary school expenses.

 Non-child Dependent Credit.  Brand spanking new, never before seen $500 not refundable credit (through 2025):  This credit provides cash for your elderly or disabled dependents and children over 17.  Before you even hope – you can’t claim the credit for yourself or your spouse.    There are a few rules: 1. You must provide more than 50% of their support, 2. They must have less than $4,050 in income, and 3. They must be closely related or have lived with you all year.

WHAT ELSE SHOULD I KNOW?

⇒ If you don’t want to use up the annual $15,000 gift tax exclusion, remember that generally these gifts don’t count when given to your spouse or a qualified charitable group or when paid straight to a health care provider or educational institution.

⇒ If you do have unreimbursed employee expenses we suggest properly documenting these expenses and asking your boss to pay you back.  The reimbursement would be tax free to you.

⇒ If you prepaid 2018 property taxes in 2017, it more than likely didn’t count.  The IRS clarified that in order for property taxes to be deducted they had to have been assessed.

If you are wondering how all this new tax stuff affects you, reach out to McAtee and Associates for answers and guidance.  #CallCarolFirst!  Carol would enjoy doing some tax planning and advising with you.

[email protected]  OR   727-327-1999.

Check back here next week when we tackle the TCJA impact on entities and business taxes.  And be sure to like us on FaceBook and follow us on Twitter; for whatever it is we’ll be posting.

 

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Series. Part 3 of 3. Self-employed Plans: SEP IRA and SIMPLE. From The Offices Of Carol McAtee & Associates, CPAS, St Petersburg, Florida

Posted on October 17, 2018 by Carol

We have talked about retirement vehicles: Traditional & Roth IRAs.  Last week we talked about a garage they can be parked in:  Employer-provided retirement plans.  In this last part of three we talk about another garage: Self-employed plans. In self-employed plans, self-employed people (sole proprietorships and partnerships), small business owners, independent contractors and gig workers park their vehicles:  SEP IRAs, and SIMPLE.  We hope that you #SetItUp & #MaxItOut.

REINFORCING THE BASICS

What is a SEP IRA?  Simplified Employee Pension. SEPs are traditional IRAs for self-employed or small business owners who set up individual accounts for themselves and their employees. Contributions are tax-deductible and grow tax-deferred until distributed.  There are a couple of simple criteria for plan participation:  a defined minimum compensation for the last two years; worked for the company any three of the last five years, and must be 21-years old.

What is a SIMPLE?  Savings Incentive Match Plan for Employees. This vehicle is for small businesses with 100 employees at most and offering no other retirement savings vehicle.  For employees to be eligible there must have been expected compensation of $5,000.

SEPs and SIMPLEs are in addition to Traditional and Roth IRAs.

HOW LONG HAVE THESE BEEN AROUND?

The SEP debuted in 1978.  Remember, the 401K first appeared that year too.  Disco was the rage and Elton John had no Billboard hits that year.

The SIMPLE’s first public appearance was 1997.  Millennials were growing up. Elton John had the number one Billboard hit that year and the Spice Girls ruled the world.

HOW MUCH CAN BE CONTRIBUTED IN 2018?

SEP IRA. SEPs are not salary-deferred and there is no catch-up, meaning employees contribute $0 through work.  Only the employer contributes, making this a profit-sharing plan.  But keep in mind an employee may be able to make traditional contributions in 2018 of $5,500/$6,500 on their own to the SEP or open up their own IRA in addition to the SEP established on their behalf by their employer.  If you are self-employed total contributions are limited to $55,000 in 2018.

Now, if you have a 401K and a SEP from your employer OR an employer 401K and a self-employed SEP #CallCarolFirst!

SIMPLE.  The employee #MaxItOut amount is $12,500 plus the catch-up amount of $3,000.   Like the SEP, if you want to save even more for retirement you can also open a separate Traditional or Roth IRA so #SetItUp & #MaxItOut. We’ll be sure to let you know the employee #MaxItOut 2019 amounts.

IS THERE AN INCOME LIMIT FOR CONTRIBUTING?

 SEP IRAs. Employers can contribute 25% of employee compensation and 20% of self-employed net income up to a 2018 maximum of $55,000.  Minimum compensation is $600 and maximum is $275,000 in 2018.  We’ll be sure to let you know the 2019 amounts.

SIMPLE.  The income limit is $275,000 in 2018 and we’ll be sure to update you with the 2019 amount.

HOW MUCH OF MY 2018 CONTRIBUTION IS TAX DEDUCTIBLE?

SEP IRAs.   Remember employees cannot contribute to a SEP through salary deferral or pretax contributions.

SIMPLE. Employee contributions are salary reductions and therefore considered pre-tax and not technically tax-deductible.

HOW MUCH IS THAT MATCHING AMOUNT IN 2018?

SEP IRAs.  No matching amount.

SIMPLE.  The employer typically must match the salary reduction $ for $ up to 3% of entire calendar-year compensation, not limited by annual compensation of $275,000 in 2018 OR make non-elective contributions of 2% of employee compensation up to the annual compensation.  These non-elective contributions MUST be given to ALL eligible employees whether they contribute or not.

CAN I CONTRIBUTE AFTER I RETIRE?

SEP IRAs.  No.  But as long as an employee is an eligible participant by meeting the criteria, the employer must keep contributing, even after 70 ½ and while the employee is taking RMDs.    

SIMPLE.  No.

WHEN CAN I GET MY MONEY?

SEPs & SIMPLEs.  After age 59 ½: If you were hoping to hang onto it and leave it untouched for a while, you can. Until you are 70 ½.  SEP AND SIMPLE IRAs are subject to RMD, the government makes you start taking your money out annually as a Required Minimum Distribution (RMD).  You can take out more than the RMD but not less.  And if you don’t take out the minimum, the punishment can be pretty hefty as that RMD amount not withdrawn is taxed at a whopping 50%.  You have to take it out but you don’t have to spend it, you can put in into a Roth IRA or even a bank certificate of deposit.  RMDs come into play with ALL pre-tax retirement accounts.

Just like being responsible for the accuracy of your tax returns, you are responsible for the accuracy of the RMD. There are folks who will help you though, namely the IRA custodian or plan administrator.

WHAT IF I NEED SOME CASH BEFORE I’M 59 1/2?

If you only need a few bucks for a month or two you can take it out of any of these plans but you MUST put it back in 60 days.  And be sure to tell whomever to not withhold taxes or else that check could be 20% light.  But if you have no intent to pay it back then the answer to this is mostly the same as last week too.

Sure, you can withdraw from the SEP & SIMPLE IRAs.  Remember the withdrawn amount will increase your income and possibly put you in a higher tax bracket AND THEN there is the punishment.  There are times when you can take your money out without being punished (the 10% penalty).

These are times of:

  1. Paying for health insurance premiums when unemployed for at least 12 consecutive weeks;
  2. Paying for medical expenses which total more than 7.5% of your adjusted gross income;
  3. Paying for college for yourself, your spouse, your kids, and even your grandkids;
  4. Disability as defined by the IRS and backed up by a doctor’s verification;
  5. Inheriting an IRA from your spouse and even folks you aren’t or were never married to;
  6. Buying, building, or rebuilding a house for the first time for yourself, your spouse, both sets of parents and grandparents and all the kids and grandkids BUT only up to $10,000;
  7. Serving your Country (Reserve and National Guard) for more than 179 days;
  8. Withdrawing on a specific schedule (SEPP – Substantially Equal Periodic Payments); and,
  9. Levying by the IRS themselves.

If you think you qualify for an exception #CallCarolFirst!

WHAT OTHER THINGS SHOULD I KNOW ABOUT SELF-EMPLOYED PLANS?

  1. There are time frames and deadlines in which these retirement accounts must be established.  So, #CallCarolFirst!
  2. When compared to “qualified” employer-provided plans, qualified meaning complex and complicated, these plans are easier and cheaper to set up.
  3. You can rollover other retirement accounts into a SEP IRA.  SIMPLE IRAs can be rolled over but not rolled into (except by another SIMPLE).
  4. With SIMPLEs there is no employed-on December 31st rule meaning employer contributes as long as employee is eligible whether they quit or kick the bucket.
  5. Also, with SIMPLEs if you withdraw before age 59 1/2 and within the first two years of the SIMPLE, the penalty is not 10% BUT 25%

There are exceptions to most rules and more than one way to cook an egg so if you are considering establishing a self-employed plan for yourself and/or employees, contributing or withdrawing funds, changing your contribution strategy, rolling over or transferring, converting or recharacterizing existing retirement accounts, or have recently inherited an IRA it is super important to reach out to McAtee and Associates for answers and guidance.  #CallCarolFirst!

[email protected]  OR   727-327-1999.

Be sure to check back here next week for some info on the TCJA and its effect on individual taxpayers.  And like us on  FaceBook  and follow us on Twitter ; for whatever it is we’ll be posting.  And remember # SetItUp! & #MaxItOut!

 

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Series. Part 2 of 3. Employer-provided Plans: 401Ks, 403Bs, and 457Bs.

Posted on October 10, 2018 by Carol

In this second part of three, we are talking about various tax advantageous retirement and savings vehicles and their maximum contribution amounts. We hope that you check on your progress towards #MaxItOut.

Last week we talked about the vehicles: Traditional & Roth IRAs. This week we continue with a garage they can be parked in: Employer-provided retirement plans: The 401K, 403B, and 457B. An employer-provided plan is the big parking garage that you and all your co-workers park your cars in.

REINFORCING THE BASICS!

What is a 401K? A 401K is a retirement plan offered by private employers. Some employers might even pitch in towards your golden years as well by matching, basically giving you some money that you can spend decades from now. Putting money in IS ALWAYS tax deductible. Taking money out IS ALWAYS taxable as ordinary income and unless you have an IRS approved good excuse there is a whopping punishment if you take it out before you are 59 ½ years old. Remember from last week the whopping punishment is a 10% penalty blasted onto your tax return.

What is a 403B? A 403B is a 401K for public schools, not for profit hospitals, charities, (mostly the ones you would donate to) and clergy that work for themselves.

457Bs are 401Ks for state and local government workers. That would be the DMV employee who took that not so attractive picture of you and the police officer you hope didn’t clock you on the way to work this morning.

HOW LONG HAVE THESE BEEN AROUND?

The 401K’s first public appearance was way back in 1978 when disco was popular and the initial #MaxItOut employee contribution was $45,475.

The 403B’s first public appearance was way, way back in 1957 when Elvis Presley was All Shook Up and the initial #MaxItOut contribution was who can remember?

Let’s just say the 457B has been around for a minute.

Congress invented the catchup contribution for people over 50 back in 2001. In practice, when you get a snail mail postcard promising you a free tote bag when you sign up for AARP, you will know you can now play catch up in your retirement accounts if you so desire.

HOW MUCH CAN I CONTRIBUTE IN 2018?

For 401Ks, 403Bs, and 457Bs, the employee #MaxItOut amount is the lower of your salary X the maximum percentage limit OR $ amount as spelled out in the employer plan OR $18,500 and add $6,000 if you’re over age 50 and want to catch-up. This is the tax deductible, pre-tax, tax-free contribution amount. The Employer #MaxItOut is $36,500.

If employer-offered, these plans also have an after-tax contribution feature that allows for up to $55,000 in contributions and works like this: $55,000 – $18,500 – Employer contributions = can be contributed by you after-tax.

The amounts increase for inflation every couple of years, usually by $500 or so. We’ll be sure to let you know the employee #MaxItOut 2019 amounts.

IS THERE AN INCOME LIMIT FOR CONTRIBUTING?

It depends if your 401K, 403B, or 457B is Traditional or Roth. There is no limit if it’s Traditional. Roth IRA contributions are limited by Modified Adjusted Gross Income (MAGI). If you are single: you can #MaxItOut if MAGI is less than $120,000; contribute some if between $120,000 and $135,000; and, NO contributions at all if MAGI is more than $135,000. For married folks those amounts are: $189,000 and $199,000. We’ll be sure to let you know the 2019 amounts.

HOW MUCH OF MY 2018 CONTRIBUTION IS TAX DEDUCTIBLE?

Traditional 401Ks, 403Bs, and 457Bs are the same as Traditional IRAs and we blogged that last week: Series. Part 1 of 3. Individual Retirement Accounts: Traditional & Roth.

Roth 401K, 403B, and 457B contributions are never tax deductible.

HOW MUCH IS THAT MATCHING AMOUNT IN 2018?

For 401Ks, 403Bs, and 457Bs, most employers will generally match 3% to 6% of what you contribute with a #MaxItOut amount of $36,500.

CAN I CONTRIBUTE AFTER I RETIRE?

You are no longer working for this employer, so…no. But if you have a Traditional IRA you can contribute until you turn 70 ½. And if you have a Roth IRA you can contribute no matter how old you become, so #MaxItOut.

WHEN CAN I GET MY MONEY?

Short answer is 59 ½. If this next part sounds familiar, it is because you read it last week. Proceed to next section.

After age 59 ½: Traditional AND Roth. If you were hoping to hang onto it and leave it untouched for a while you can. Until you are 70 ½, then if you have Traditional IRAs the government makes you start taking your money out annually as a Required Minimum Distribution (RMD). You can take out more than the RMD but not less. And if you don’t take out the minimum, the punishment can be HUUUGE!, as that RMD amount not withdrawn is taxed at a whopping 50%. Take it out and spend it or not spend it, or put it in a Roth IRA. Take it out it even if it means sacrificing more earnings. Just Do It.

Just like being responsible for the accuracy of your tax returns, you are responsible for the accuracy of the RMD. There are folks who will help you though, namely the IRA custodian or plan administrator.

There is no RMD with a Roth IRA. You are not forced to start withdrawing, not at 70 ½, not at 80 ½, not at 90 ½, not even after you die because there is no RMD for your beneficiary either.

WHAT IF I NEED SOME CASH BEFORE I’M 59 1/2?

The answer to this is the same as last week too – You can skip this part.

Sure, you can withdraw from the Traditional IRA. Remember the withdrawn amount will increase your income and possibly put you in a higher tax bracket AND THEN there is the punishment. There are times when you can take your money out of Traditional IRAs without being punished.

These are times of:

 ⇒ Paying for health insurance premiums when unemployed for at least 12 consecutive weeks;
 ⇒ Paying for medical expenses which total more than 7.5% of your adjusted gross income;
 ⇒ Paying for college for yourself, your spouse, your kids, and even your grandkids;
 ⇒ Disability as defined by the IRS and backed up by a doctor’s verification;
 ⇒ Inheriting an IRA from your spouse and even folks you aren’t or were never married to;
 ⇒ Buying, building, or rebuilding a house for the first time for yourself, your spouse, both sets of parents and grandparents and all the kids and grandkids;
 ⇒ Serving your Country (Reserve and National Guard) for more than 179 days; and,
 ⇒ Withdrawing on a specific schedule (SEPP – Substantially Equal Periodic Payments).

There are two kinds of money in Roth IRAs. 1. Principal – The money you put in/contributions and 2. Earnings – Interest, dividends, capital gains, and the like. Remember withdrawals are tax-free but if the money taken out is earnings, a 10% penalty will be blasted on your tax return.

WHAT OTHER THINGS SHOULD I KNOW ABOUT EMPLOYER-PROVIDED PLANS?

 ⇒ If your employer offers a 401K/403B and a 457B plan you can contribute to both. #MaxItOut.
 ⇒ Some 457Bs offer a turbo catch-up three years before retirement age, turbo being twice the annual pre-tax contribution limit. In 2018 the turbo amount is $37,000.
 ⇒ Even if you have a 401K at work, if you can swing it, start an IRA. Potentially tax deductible and potentially better return than interest earned on a savings account.
 ⇒ Starting 1/1/2018 new tax code has eliminated the do-over of IRAs – recharacterization. You used to have to the tax-filing deadline plus six months to change your mind. So, no more switching up contributions, rollovers, or conversions. There is, however, the proverbial grace period. Roth IRAs converted in 2017 can be switched to a Traditional IRA BEFORE 10/15/18.

There are exceptions to most rules and more than one way to cook an egg. So, if you are considering contributing or withdrawing funds, changing your contribution strategy, rolling over or transferring, converting or recharacterizing existing retirement accounts, or recently inherited an IRA it is super important to reach out to McAtee and Associates for answers and guidance. #CallCarolFirst!

[email protected] OR 727-327-1999.

Check back here next week when we visit another garage: self-employed retirement plans and be sure to check us out on and ; for whatever it is we’ll be posting. And remember #MaxItOut.

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

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Meals & Entertainment – 2018 & Beyond: From The Offices Of Carol McAtee & Associates, CPAS, St Petersburg, Florida

Posted on September 26, 2018 by Carol

This week we are talking about two of our favorite things:  Meals and Entertainment.  Who doesn’t love good food and good fun?  We certainly do!                                                             

The new tax law, Tax Cuts & Jobs Act (TCJA) has made a few changes to how we are used to accounting for various types of meals and entertainment and the deductibility of the money we spend.

Starting in 2018, it is absolutely necessary to account for meals, entertainment, and travel separately.  It will go a long way towards better expense analysis, easier tax prep, and reaching the most allowed, favorable tax outcome.  

REINFORCING THE BASICS!

Recordkeeping.  There are two parts to recordkeeping: establishing the cost and proving the expense.  We’ll soon have a #Carol’sBlog for you on recordkeeping that will provide much more insight and specifics.  In the meantime: receipts, canceled checks/bank statements and bills/invoices/statements work to establish cost – but not prove the expense.  Proving the expense additionally requires who was present, to include yourself or an employee, and business purpose.  And the expense must be BOTH ordinary and necessary.  And no showing off:  The IRS does not allow you to be lavish OR extravagant.  Lavishness and extravagance will be “disallowed”.

It is crucial for 2018 and beyond to separate Meals and Entertainment. One Account “Meals” and one account “Entertainment”.  If you have Travel, separate it as well. Good descriptions and memo lines are extremely helpful to determine proper classification.  Proper classification generates relevant financial statements you can use to successfully manage and grow your business and profits.  Good description and proper classification when used together go a long way towards reaching the most allowed, favorable tax outcome.  Well-documented receipts are still required so the IRS doesn’t disallow (take away) deductions.

MEALS.

Within meals it would beneficial from a tax perspective to distinguish between 100% deductible, 50% deductible, and 0% deductible or from a management perspective have an account for each of these meal types:

⇒ 100% deductible.    Office parties (holidays, birthdays, and the like).  #FillTheFridge. No change. 

⇒ 100% deductible.  Meals included in employee W-2 as compensation. No change.

⇒ 50% deductible.  Meals provided for employer convenience: company cafeteria, catered lunch, food at staff meetings, or food for overtime work.  And office snacks and beverages: this even includes water and coffee.  This is dismal!  Down from 100%.

⇒ 50% deductible.  Business and employee travel meals.  Travel means overnight and outside city limits or outside the general area your business is located.  No change. 

⇒ 50% deductible.  Meals with clients.  No change.

⇒ 0% deductible.  Meals having nothing to do with business nor employees.  Taking your significant other out for a nice dinner, Chuck-E-Cheese for a birthday party, or that drive through burger on your way home from the office.  No change.

ENTERTAINMENT.

Think of entertainment as Events and Experiences you pay for.  Entertainment of current clients, prospective clients, suppliers, and vendors is no longer deductible.  Goodbye to writing off half of it.  No theater, no museums, no club dues, and no more -Comic-Con.  No more football games or baseball games.  No hockey, no basketball, no soccer.  This includes season tickets, skyboxes and stadium and box seats.  No tennis, cricket, or polo.  And no more writing off golf afternoons – so many people are saddened by this.

To sum this up, no more tax-deductible fun with people who don’t work for or with you.  But you can still have tax deductible fun with employees and independent contractors – So take them out to the ballgame!

And if you think you can take clients or business associates to a fundraiser – no, no, no!  Fundraisers are usually events, events are usually fun, and fun is no longer a write off.  Tickets to charitable events are no longer deductible as entertainment.  No more (golf) tournaments, no more benefit concerts, no galas. So, put away the black tie and gorgeous gown for the next wedding.

Not all was taken away.  Entertaining employees recreationally or socially is still deductible. The annual Christmas/Holiday party, summer cookouts, and field trips.  Having fun with your employees and independent contractors is still tax deductible but be forewarned this is known as “Mandatory Fun” and in some cases can be made less mandatory with alcohol.

MEALS AND ENTERTAINMENT.

What about food and fun together?   The cost of meals before, during, or after an event or experience can be deductible provided:

⇒ The business owner or an employer is dining with the current or prospective client/customer, business associate;

⇒ There is no lavishness or extravagance; and,

⇒ You must reasonably expect that the meal will result in making money or gaining some specific benefit.

TRAVEL

⇒ 100%. Hotel rooms and conference rooms.  No change.

⇒ 100%. Travel to get the above, typically Planes, Trains, and Automobiles.  No change.

TRANSPORTATION.

⇒ 0% deductible. Providing commuting transportation to an employee – unless for safety.  So, no car service, taxi, Uber, or Lyft.

⇒ 0% deductible. Transportation fringe benefits. No longer deductible for employers but still tax free to employees are perks such as parking allowances and mass-transit passes.

WHAT OTHER THINGS SHOULD I KNOW?

⇒ Since the changes are for fun and food had AFTER December 31st, 2017, the corporate fiscal year-end is irrelevant. 

⇒ Reread your current sponsorship arrangements.  The cost of the seats and tickets are no longer deductible but that remaining amount is possibly a deductible advertising expense.

⇒ If you do attend charitable events:  Check the registration form.  The ticket cost may be separated into (non-deductible) event cost and (deductible) charitable contribution.  If not, ask the organization to do so.

⇒ Charitable contributions made by your business may wind up itemizable on the Form 1040; you may consider bunching business donations.

⇒ If you provide food for events that are offered to the community or have a charitable cause, the cost of the meals could be considered advertising which is – you guessed it – 100% deductible. 

⇒ Be sure that mandatory fun cannot be interpreted as primarily for the fun of the highly paid employees, company officers, or shareholders. 

⇒ Keep in mind that business expenses not reimbursed by employers are NO LONGER deductible by employees as unreimbursed employee expenses.

There are exceptions to most rules and more than one way to cook an egg. So, if you are considering bunching donations, establishing an accountable plan, determining what is “highly paid” and especially if you offer employees meals more often than not or have any questions about this topic it is super important to reach out to McAtee and Associates for answers and guidance.  #CallCarolFirst!

[email protected]  OR   727-327-1999.

Be sure to check back here next week for anther fun-filled and jam-packed blog and check us out on   and   ; for whatever it is we’ll be posting.  And remember #FillTheFridge!

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

 

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