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Archives for September 2019

Tax Cuts and Jobs Act Employers

September 2, 2019 by John Sanchez

Tax Cuts and Jobs Act Employers

The Tax Cuts and Jobs Act is the biggest federal tax law change in over 30 years. Below are some significant changes affecting employers. Note: Except where noted, the changes are effective for tax years 2018– 2025.

Certain Fringe Benefits Modified

Prior Law. Generally, a deduction has been allowed for an activity (or facility used in connection with the activity) considered to be entertainment, amusement, or recreation that was directly related to the active conduct of an employer’s business when the expense was included in an employee’s gross income as taxable wages, or otherwise excludable as a fringe benefit.
For example, the cost of employer-provided qualified transportation fringe benefits, such as parking, transit passes, and vanpool benefits was deductible by the employer and excluded from the employee’s W-2 wages.
Another example applies to meals furnished to an employee for the convenience of the employer that are provided on the employer’s business premises. Such costs are deductible by the employer and excluded from the employee’s W-2 income.

Entertainment Expense Deduction
The new law provides that no deduction is allowed with respect to:
• An activity generally considered to be entertainment, amusement or recreation,
• Membership dues with respect to any club organized for business, pleasure, recreation or other social purposes, or
• A facility or portion thereof used in connection with any of the above items.
The new law does not apply to certain exceptions including expenses for recreational, social, or similar activities

primarily for the benefit of employees (other than highlycompensated employees).
Food and beverage expenses related to entertainment may be deductible if the entertainment (e.g. ticket to an event) and the food and beverage expenses are either paid for separately or separately stated on the invoice for the entertainment.

Transportation Benefits
The new law disallows a deduction for expenses associated with providing any qualified transportation fringe benefit to employees of the taxpayer, and except as necessary for ensuring the safety of an employee, any expense incurred for providing transportation (or any payment or reimbursement) for commuting between the employee’s residence and place of employment.

Meals
Employers may still generally deduct 50% of the food and beverage expenses associated with operating their trade or business (e.g., meals consumed by employees on work travel). The new law expands this 50% limitation to expenses of the employer associated with providing food and beverages to employees through an eating facility that meets requirements for de minimis fringes and for the convenience of the employer (such as an in-house cafeteria).

Bicycle Commuting Reimbursement
Prior Law. Qualified bicycle commuting reimbursements of up to $20 per month were excludible from an employee’s gross income.
New Law. The bicycle commuting reimbursement exclusion is repealed. Any reimbursements are taxable to the employee.

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Tax Cuts and Jobs Act Employers

Employee Achievement Awards
Prior Law. Generally, an employer’s deduction for the cost of an employee achievement award was limited and excludible from an employee’s gross income (and for employment tax purposes). An employee achievement award is an item of tangible personal property given to an employee in recognition of either length of service or safety achievement and presented as part of a meaningful presentation.
New Law. The new law clarifies items that may not be deductible as achievement awards. Tangible personal property shall not include cash, cash equivalents, gift cards, gift coupons or gift certificates (other than arrangements conferring only the right to select and receive tangible personal property from a limited array of items pre-selected or pre-approved by the employer), or vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and other similar items.

Other Deductions Modified

Sexual Harassment or Sexual Abuse Settlements
A taxpayer generally is allowed a deduction for ordinary and necessary expenses paid or incurred in carrying on any trade or business. However, certain exceptions apply. No deduction is allowed for:
• Any charitable contribution or gift that would be allowable as a deduction were it not for the percentage limitations, the dollar limitations, or the requirements as to the time of payment,
• Any illegal bribe, illegal kickback, or other illegal payment,
• Certain lobbying and political expenditures,
• Any fine or similar penalty paid to a government for the violation of any law,
• Two-thirds of treble damage payments under the antitrust laws,
• Certain foreign advertising expenses,
• Certain amounts paid or incurred by a corporation in connection with the reacquisition of its stock or of the stock of any related person, or

• Certain applicable employee remuneration.

The new law adds the following to the list of non-deductible expenses:
• No deduction is allowed for any settlement, payout, or attorney fees related to sexual harassment or sexual abuse if such payments are subject to a nondisclosure agreement.

New Credit

Credit for Paid Family and Medical Leave
The new law allows eligible employers to claim a general business credit equal to 12.5% of the amount of wages paid to qualifying employees during any period in which such employees are on family and medical leave if the rate of payment under the program is at least 50% of the wages normally paid to an employee. The credit is increased by 0.25 percentage points (but not above 25%) for each percentage point by which the rate of payment exceeds 50%. The maximum amount of family and medical leave that may be taken into account with respect to any employee for any tax year is 12 weeks.
An eligible employer is one who has in place a written policy that allows all qualifying full-time employees not less than two weeks of annual paid family and medical leave, and who allows all less-than-full-time qualifying employees a commensurate amount of leave on a pro rata basis. For purposes of this requirement, leave paid for by a state or local government is not taken into account.
A qualifying employee means any employee who has been employed by the employer for one year or more, and who for the preceding year, had compensation not in excess of 60% of the compensation threshold for highly compensated employees ($125,000 for 2019 × 60% = $75,000).
If an employer provides paid leave as vacation leave, personal leave, or other medical or sick leave, this paid leave would not be considered to be family and medical leave. The credit does not apply to wages paid in tax years beginning after 2019.

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Filed Under: Business Tagged With: Credit for Paid Family and Medical Leave, Employers, Employers Tax Cuts, Fringe Benefits, Sexual Abuse Settlements

Tax Cuts and Jobs Act Excess Business Loss and Net Operating Loss (NOL)

September 2, 2019 by John Sanchez

Tax Cuts and Jobs Act Excess Business Loss and Net Operating Loss (NOL)

The Tax Cuts and Jobs Act is the biggest federal tax law change in over 30 years. Below are significant changes affecting excess business losses and net operating losses (NOLs) for noncorporate taxpayers. Note: Except where noted, the changes are effective for tax years 2018–2025.

Excess Business Loss Limitation

Your overall business losses may be limited as you cannot deduct an excess business loss in the current year. An excess business loss is the amount by which your total deductions from all of your trades or businesses are more than your gross income or gains from all of your trades or businesses, plus a threshold amount. For 2019, the threshold amount is $255,000 ($510,000 if Married Filing Jointly). Any disallowed excess business loss is treated as a net operating loss (NOL) carryforward, subject to the NOL rules. See How to Use an NOL, later.

Example: George has $500,000 of gross income and $800,000 of deductions from his retail furniture business. His excess business loss is $45,000 [$800,000 – ($500,000 + $255,000)]. George must treat his excess business loss of $45,000 as an NOL carryforward to 2020.

Pass-Through Entities
For pass-through entities (partnerships and S corporations), the excess loss limit applies at the partner and shareholder level. Each partner’s or shareholder’s share of the items of income, gain, deduction, or loss of the partnership or S corporation is taken into account by the partner or shareholder in applying the excess business loss limitation.

Passive Activity Loss Rules
The excess business loss limit is applied after the passive loss rules. Under the passive activity rules, losses and expenses attributable to passive activities may only be deducted from passive activities. Generally, passive activities are those in which a taxpayer may own an interest in the business, but does not materially participate. Some activities are considered passive by default, such as rental activities.

Net Operating Loss (NOL)

A net operating loss (NOL) generally means the amount by which a taxpayer’s business deductions exceed gross income.
An individual, estate, or trust may have an NOL if deductions for the year exceed income. NOLs are caused
by losses from the following:
• Trade or businesses (Schedules C and F losses, or Schedule K-1 losses from partnerships or S corporations),
• Casualty and theft losses (whether personal or business), and
• Rental property (Schedule E).

Individual NOL
An individual may have an NOL if adjusted gross income (AGI) minus the standard deduction or itemized deductions is a negative amount, and the negative amount is due to business deductions exceeding business income.

Estate or Trust NOL
An estate or trust may have an NOL if the taxable income line on Form 1041, U.S. Income Tax Return for Estates and Trusts, is a negative amount, and the negative amount is due to business deductions exceeding business income.

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Tax Cuts and Jobs Act Excess Business Loss and Net Operating Loss (NOL)

How to Use an NOL
Once the NOL has been calculated for the tax year, the NOL deduction is limited to 80% of taxable income and may not be carried back to any previous year. The remaining NOL is carried forward to the following year. If not used up in that year, it continues to be carried forward until it is used up. For farming loss NOLs, the default rule is to carry the NOL back two years, but an  election may be made to waive the carryback period.

NOL Carryback and Carryforward
Default rule. The NOL deduction is limited to 80% of taxable income (taxable income for the year in which it is carried to, determined without regard to the NOL deduction), which means an NOL cannot completely zero out taxable income. This 80% limitation does not apply to a property and casualty insurance company.
Note: When computing a taxpayer’s NOL, the 20% qualified business income deduction is not taken into account.
Carryback. The option to carry back an NOL is disallowed for most taxpayers. Exceptions apply to certain farming losses and NOLs of nonlife insurance companies.
Exception: Farming loss. A farming loss is the smaller of the NOL for the tax year or the NOL computed considering only farming income and deductions, and has a 2-year carryback. An election may be made to waive the carryback period.
Note: NOLs arising in tax year 2019 are limited by the excess business loss limitation rule, so the NOL carryback will not exceed $255,000 ($510,000 for joint returns).
Exception: Property and casualty

insurance companies. Applies to insurance companies other than a life insurance company, and an NOL has a 2-year carryback period. An election may be made to waive the carryback period.

Carryforward. In general, an NOL carryforward is adjusted to take into account the 80% of taxable income limitation and may be carried forward indefinitely (until used up).
Exception: Property and casualty insurance companies. An NOL carryforward is limited to 20 years and the 80% limitation does not apply.

Where to report the NOL in a carryback or carryforward year. The NOL deduction is listed as a negative number as Other Income on Form 1040, with a statement attached that shows how the NOL deduction was computed. If more than one NOL is deducted in the same year, the statement must cover each NOL.

How to Calculate an NOL Carryforward
The NOL that is more than 80% of taxable income for the year is an NOL carryforward. Certain modifications must be made to taxable income to determine how much NOL will be used up in that year and how much may be carried over to the next tax year. The carryforward is the excess of the NOL deduction over modified taxable income for the carryback or carryforward year. If the NOL deduction includes more than one NOL, apply the NOLs against modified taxable income in the same order they were incurred, starting with the earliest.
Additionally, if an NOL consists of both a farming loss and a non-farming loss, the losses should be treated separately and the farming loss is treated as a separate NOL and taken into account only after the non-farming NOL is applied

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Filed Under: Business Tagged With: Business Loss, Net Operating Loss, NOL

Tax Cuts and Jobs Act Qualified Business Income Deduction

September 2, 2019 by John Sanchez

Tax Cuts and Jobs Act Qualified Business Income Deduction

The Tax Cuts and Jobs Act is the biggest federal tax law change in over 30 years. Below is a significant change affecting qualified business income from a partnership, S corporation, LLC, or sole proprietorship. Note: Except where noted, the change is effective for tax years 2018–2025.

Qualified Business Income (QBI) Deduction

An individual taxpayer generally may deduct 20% of qualified business income from a partnership, S corporation, LLC, or sole proprietorship. In the case of a partnership or S corporation, the deduction applies at the partner or shareholder level. The business must be conducted within the United States. Special rules apply to specified agricultural or horticultural cooperatives.
The QBI deduction reduces taxable income, not adjusted gross income (AGI), so the QBI deduction does not affect limitations based on AGI. Also, it does not reduce selfemployment income (or self-employment tax). The deduction is available to both non-itemizers and itemizers.
A limitation based on Form W-2 wages and capital of the business is phased in when the taxpayer’s taxable income (computed without regard to the deduction) exceeds a threshold amount.
When a taxpayer’s taxable income exceeds the top of the threshold amount phase-in range, the QBI deduction is disallowed with respect to specified service trades or businesses.

Threshold Amount

Qualified business income is subject to

limitations for individuals with taxable income exceeding the threshold amount. Taxpayers above the threshold amount must apply a limitation, which reduces the QBI deduction. A taxpayer under the threshold amount does not apply any limitation.

Form W-2 Wages/Property Limitation

If taxable income is at least $50,000 above the threshold ($100,000 for MFJ), the 20% qualified business income deduction cannot exceed the Form W-2 wages/qualifying property limit.
The Form W-2 wages/qualifying property limit is the greater of:
• 50% of the Form W-2 wages paid by the business, or
• The sum of 25% of the Form W-2 wages paid by the business, plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property of the business.

Example: Mike operates a sole proprietorship that makes beef jerky. His qualified business income for 2019 was $180,000 and his taxable income is $225,000. The business bought a new high-tech dehydrator for $100,000 and placed the dehydrator in service in 2019. Mike has one employee and paid total wages of $20,000 for the year.

Tax Cuts and Jobs Act Qualified Business Income Deduction

Mike’s business income deduction is $10,000, which is the lesser of:
• 20% of his business income ($36,000), or
• W-2 wages/property limit ($10,000), which is the greater of:
– 50% of W-2 wages ($20,000 × 50% = $10,000), or
– Sum of 25% of W-2 wages ($5,000) plus 2.5% of the basis of the dehydrator ($100,000 × 2.5% = $2,500), which equals $7,500.

Qualified Trade or Business

A qualified trade or business means any trade or business other than a specified service trade or business, and other than the trade or business of being an employee. However, the specified service trade or business exclusion from the definition of a qualified trade or business is phased-in for taxpayers that exceed the threshold amount. It does not apply to taxpayers below the threshold amount.

Specified service trade or business. A specified service trade or business means any trade or business involving the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners, or which involves the performance of services that consist of investing and investment management trading, or dealing in securities, partnership interests, or commodities.
The law specifically excludes engineering and architecture services from the definition of a specified service trade or business.
If taxable income is at least $50,000 above the threshold ($207,500), all of the net income from a specified service trade or business is excluded from qualified business income.
If taxable income is between $157,500 and $207,500, the amount excluded is

computed by determining a percentage that reflects the excess of taxable income over $157,500 ($315,000 MFJ) in a fraction over $50,000 ($100,000 MFJ).

Example: June is an attorney with taxable income of $178,200. Her qualified business income is $150,000. Her business is a specified service business and her taxable income is over the threshold amount ($160,700), therefore her qualified business income deduction is limited. Her phase-in reduction is computed:
$178,200 – $160,700 = $17,500/$50,000 = 35%
Qualified business income of $150,000 is reduced by $62,370 ($178,200 × 35%) which equals $87,630.
June’s qualified business deduction is $17,526 ($87,630 × 20%).

Qualified Business Income

Qualified business income is determined separately for each qualified trade or business of the taxpayer. Qualified business income means the net amount of qualified items of income, gain, deduction, and loss with respect to a domestic qualified trade or business of the taxpayer. It also includes gain from the sale of a partnership interest to the extent the gain is treated as gain from a sale of property other than a capital asset.
Qualified business income does not include:
• Specified investment-related items of income, deductions, or loss (dividends, interest, long-term capital gains and losses, annuities).
• Any amount paid by an S corporation that is treated as reasonable compensation of the taxpayer.
• A reasonable amount of guaranteed payments for services rendered by a partner.
• Wage income.
If the net amount of qualified business income from all qualified trades or businesses during the taxable year is a loss, it is carried forward. Any deduction allowed in a subsequent year is reduced (but not below zero) by 20% of any carryover qualified business loss.

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Filed Under: Business Tagged With: QBI, Qualified Business Income

Tax Cuts and Jobs Act Corporations

September 1, 2019 by John Sanchez

Tax Cuts and Jobs Act Corporations

The Tax Cuts and Jobs Act is the biggest federal tax law change in over 30 years. Below are some significant changes affecting corporations. Note: Except where noted, the changes are effective for tax years 2018–2025.

Corporation Tax Rates

Changes have been made to the corporation tax rates, which under prior law contained several graduated tax brackets. For tax years beginning after 2017:
• All taxable income of a C corporation is taxed at a flat tax rate of 21%.
• There is no longer a separate tax rate for a personal service corporation (PSC). Previously, a PSC paid a flat 35% tax rate on all taxable income.
• There is no longer a separate maximum tax rate on net long-term capital gains. All corporation income is taxed at 21%.
• The allowable deduction for dividends received from other taxable domestic corporations has been reduced from 70% to 50% of the dividends received, and for a 20% owned corporation the percentage has been reduced from 80% to 65%. Shareholders of surrogate foreign corporation are not eligible for the reduced rate on dividends.

Alternative Minimum Tax (AMT)

Prior Law. AMT was imposed on a C corporation to the extent the corporation’s tentative minimum tax exceeded its regular tax. This tentative minimum tax was computed at the rate of 20% on alternative minimum taxable income (AMTI) in excess of a $40,000 exemption amount that phased out. A corporation with average gross receipts of less than $7.5 million for the prior three tax years was exempt from the corporate AMT.

The $7.5 million threshold was reduced to $5 million for the corporation’s first three-taxable year period.
If a corporation was subject to AMT in any year, the amount of AMT was allowed as an AMT credit in any subsequent tax year to the extent the taxpayer’s regular tax liability exceeded its tentative minimum tax in the subsequent year. Corporations were allowed to claim a limited amount of AMT credits in lieu of bonus depreciation.
New Law. Effective for tax years after 2017, the AMT for corporations is repealed.
AMT credits are allowed to offset the regular tax liability for any tax year. In addition, the AMT credit is refundable for any tax year 2018 through 2020 in an amount equal to 50% of the excess of the minimum tax credit for the tax year over the amount of the credit allowable for the year against regular tax liability. For tax year 2021, the 50% refundable amount is increased to 100%. So, the full amount of any minimum tax credit remaining will be allowed in full for a tax year beginning in 2021.

Accounting Methods

Prior Law. Under the general rule, the accrual method of accounting was required for purchases and sales if it was necessary to keep an inventory in order to clearly reflect income. An exception applied if average annual gross receipts were $1 million or less and the cash method was allowed even if inventories were kept. However, a deduction for inventory costs was not allowed until the inventory item was sold or paid for, whichever was later. If average annual gross receipts were $10 million or less, service type industries could use the cash method even if inventories were kept.

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Tax Cuts and Jobs Act Corporations

Farming C corporations and farming partnerships with C corporation partners (except family farming C corporations) were required to use the accrual method if average annual gross receipts were over $1 million. Family farming C corporations and family farming partnerships with C corporation partners were not required to use the accrual method until average annual gross receipts exceeded $25 million.

New Law. Effective beginning in 2018, the new law expands the number of taxpayers that may use the cash
method of accounting.
The cash method of accounting may be used by taxpayers, other than tax shelters, that satisfy the gross receipts test (average annual gross receipts that do not exceed a threshold amout for the three prior tax-year period), regardless of whether the purchase, production, or sale of merchandise is an income-producing factor. The threshold amount is indexed for inflation for tax years beginning after 2018.
For taxable years beginning in 2019, a corporation or partnership meets the gross receipts test if the average annual gross receipts of the entity for the three prior tax-year period do not exceed $26 million.
The new law retains the exceptions from the required use of the accrual method for qualified personal service corporations (PSCs) and taxpayers other than C corporations. PSCs, partnerships without C corporation partners, S corporations, and other pass-through entities are allowed to use the cash method without regard to whether they meet the gross receipts test, as long as the use of such method clearly reflects income. C corporations, in contrast, that do not meet the gross receipts test are required to use the accrual method.

S Corporation Conversion to C Corporation

IRC section 481 prescribes the rules in computing taxable income when a different accounting method was used in a prior year. For example, if an S corporation that was permitted to use the cash method of accounting converts to a C corporation that is required to use the accrual method of accounting, the conversion would result in a change of accounting method which could trigger the IRC section 481 rules.
In computing taxable income for the year of change, an adjustment is made to prevent items of income or expense from being duplicated or omitted. The year of change is the tax year for which the taxable income of the taxpayer is computed under a different method than the prior year.

Prior Law. Net adjustments that decreased taxable income generally were taken into account entirely in the year of change, and net adjustments that increased taxable income generally were taken into account ratably during the four-taxable-year period beginning with the year of change.

New Law. Effective December 22, 2017, any IRC section 481(a) adjustment of an eligible terminated S corporation attributable to the revocation of its S corporation election (i.e., a change from the cash method to an accrual method) is taken into account ratably during the six-taxable-year period beginning with the year of change. An eligible terminated S corporation is any C corporation which:
• Is an S corporation on December 21, 2017,
• During the 2-year period beginning on December 22, 2017, revokes its S corporation election under IRC section 1362(a), and
• All of the owners on the date the S corporation election is revoked are the same owners (and in identical proportions) as the owners on December 22, 2017.

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Filed Under: Business Tagged With: Accounting Methods, Alternative Minimum Tax (AMT), C Corporation, Corporation Tax Rates, S Corporation, Tax Cuts

Real Estate Professionals

September 1, 2019 by John Sanchez

Newlyweds Tax Tips

Tax Benefits
A taxpayer who spends significant time in activities related to real estate may qualify as a “real estate professional,” which can provide tax benefits.

Passive Loss Limits
A passive activity is generally defined as a business activity without a minimum amount of “material participation” by the taxpayer. A taxpayer is not allowed to deduct losses from passive activities in excess of income from passive activities. Any unused losses from passive activities must be carried forward until there are gains from passive activities, or until the passive activities that generated the losses are disposed of.

Special Rules for Real Estate Activities
Under passive loss rules, rental real estate activities are considered passive activities regardless of whether the taxpayer met the definition of “material participation.” In other words, for most rental real estate activities, losses in excess of income are not deductible in the year incurred.
Exception for real estate professionals. If a taxpayer qualifies as a real estate professional, passive activity loss limits do not apply to the losses from the taxpayer’s rental activities. For a real estate professional, losses
may be deducted in the year incurred even if the losses are greater than income.
Qualifying as a real estate professional. A taxpayer will qualify as a real estate professional if the following requirements are met

1) More than half the personal services the taxpayer performed in all trades or businesses during the tax year were performed in real property trades or businesses in which the taxpayer materially participated, and
2) The taxpayer performed more than 750 hours of services during the tax year in real property trades or businesses in which the taxpayer materially participated.
Personal services performed as an employee do not count unless the taxpayer was a 5% or greater owner of the employer.
Real property trades or businesses include development, construction, acquisition, conversion, rental, operation, management, or brokerage of real property.

Material Participation

Material participation is defined as the taxpayer being involved in the activity on a basis that is “regular, continuous, and substantial.” The taxpayer will be considered to materially participate in an activity if:
1) The individual worked in the activity for more than 500 hours during the year,
2) The individual’s participation in the activity constitutes substantially all of the participation in the activity of all individuals for the tax year, including the participation of individuals who did not own any interest in the activity,
3) The individual participated in the activity for more than 100 hours during the tax year, and the individual’s participation was at least as much as any other individual for the year,
4) The activity is a “significant participation activity” for the year (more than 100 hours participation per activity with aggregate of 500 hours),

Real Estate Professionals

5) The individual materially participated in the activity for any five (whether or not consecutive) of the ten immediately preceding tax years,
6) The activity is a personal service activity and the individual materially participated in the activity for any three preceding tax years, or
7) Based on all the facts and circumstances, the individual participated in the activity on a regular, continuous, and substantial basis during the year. This test is not met if the individual participated in the activity for 100 hours or less during the year. Managing the activity does not count for this purpose if any person other than the individual received compensation for managing the activity, or any individual spent more hours during the year managing the activity.

Election to combine rental activities. For purposes of qualifying as a real estate professional, each of the taxpayer’s rental activities are treated as separate activities unless the taxpayer elects to treat all interests in rental real estate as a single activity. Failure to make the election can trigger passive loss limits for real estate professionals. To make the election, the taxpayer must file a statement with the original income tax return declaring that he or she is a qualified taxpayer for the taxable year and is making the election to treat all interest in rental real estate as a single rental real estate activity. The election is binding for the taxable year it is made and for all future years whether or not the taxpayer continues to be a qualifying taxpayer. A taxpayer may revoke the election only in the taxable year in which a material change in facts and circumstances occurs.

Example: Leo is a real estate agent who spends more than
750 hours and more than 50% of his time selling real estate.
He also owns several rental properties. As a real estate professional, in order for Leo to treat his rental properties as nonpassive activities, he would either have to pass the material participation rules for each separate rental property or elect to combine all rentals into one activity and meet the material participation rules as a group

Court Case: For over 20 years, the taxpayer had been involved in real estate properties. For the years at issue the taxpayer aggregated all rental income and expenses as a single activity on his tax return, but did not attach an election to treat the activities as a single activity. The Tax Court stated that a taxpayer must clearly notify the IRS of the intent to make the election. Without treating the rental properties as one activity, the taxpayer was not able to meet material participation requirements. Net losses were treated as passive losses, and the deductions were not allowed under passive loss rules.
(May, T.C. Summary 2005-146)

Special $25,000 Loss Allowance for Rental Real Estate

Regardless of passive loss rules, a taxpayer is allowed to deduct up to $25,000 in losses from rental real estate if the taxpayer actively participated in the activity. The special loss allowance begins to phase out at incomes above $100,000.

Married Filing Separately. The phaseout begins at $50,000 for taxpayers using the filing status of Married Filing Separately. Additional limits apply.

Active participation. Active participation is not the same as material participation. Active participation standards are met if the taxpayer (or taxpayer’s spouse) participates in the rental activity in a significant and bona fide sense.
The taxpayer (and/or spouse) must hold at least 10% by value of all interests in the activity during the year.

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Filed Under: Business Tagged With: Real Estate Professionals, Tax Benefits for Real Estate

Newlyweds Tax Tips

September 1, 2019 by John Sanchez

Newlyweds Tax Tips

Tips for Newlyweds

Updating your status from single to married may bring about some unanticipated changes, including changes relating to your taxes. While wedding planners don’t typically use an IRS checklist, here are a few things to keep in mind when filing your first tax return as a married couple.
As with any tax issue, contact your tax professional to help you navigate your own unique situation.

Notify the Social Security Administration (SSA)

If one of you has taken on a new name, report the change to the SSA. File Form SS-5, Application for a Social Security Card.
It is important that your name and Social Security Number match on your tax return. The IRS will match your information with records provided by the SSA and, if the records don’t match, any electronically filed return will be rejected and any paper filed return will be delayed until the error is corrected.
Avoid making a name change too close to tax season. While the SSA can process a name change in about two weeks, the delay in data-sharing between the SSA and the IRS can make any change near the end of the year problematic. In such situations, it may be advisable to file the tax return using your maiden name and change your name with the SSA after the return has been filed.
Form SS-5 is available on the SSAs website at www.ssa. gov, by calling 800-772-1213, or by visiting a local SSA office. A copy of your marriage certificate and driver’s license or passport will be required.

Notify the IRS If You Move
The IRS will automatically update your new address upon filing your next tax return, but any notices the IRS sends in the meantime may not get to you. The U.S. Postal Service does not forward certain types of federal and certified IRS mail. IRS Form 8822, Change of Address, is the official way to update the IRS of your address change. Download Form 8822 from www.irs.gov or order it by calling 800-TAX-FORM (800-829-3676).

Notify the U.S. Postal Service
To ensure your mail, including mail from the IRS, is forwarded to your new address, you’ll need to notify the U.S. Postal Service. Submit a forwarding request online at www.usps.com or visit your local post office.
Most post offices will not forward refund checks so be sure the IRS has your correct address. Using electronic direct deposit for refunds can prevent them from being delayed due to address mix-ups.

Notify Your Employer
Report your name and/or address change to your employer(s) to make sure you receive your Form W-2, Wage and Tax Statement, after the end of the year.

Notify Financial Institutions
Financial institutions with which you do business need to be notified to ensure that any Forms 1099 are sent to the proper address. This would include banks and brokerage firms, as well as employer-sponsored retirement plans.

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Newlyweds Tax Tips

Check Your Withholding
If you both work, keep in mind that you and your spouse’s combined income may move you into a higher tax bracket. The IRS Withholding Calculator, available at www.irs.gov, can help you determine whether you need to give your employer(s) a new Form W-4, Employee’s Withholding Allowance Certificate. Use the results to fill out and print Form W-4 online and give it to your employer(s).

Select the Right Tax Form
Choose your individual income tax form wisely because it can help save you money. Newlywed taxpayers may find that they now have enough deductions to itemize on their tax returns, rather than taking the standard deduction. Itemized deductions must be claimed on Schedule A (Form 1040). Note that beginning in tax year 2018, Forms 1040A and 1040EZ are no longer available.

Choose the Best Filing Status
Your marital status on December 31 determines whether you are considered married for that entire year for tax purposes. The law generally allows married couples to choose to file their federal income tax return either jointly or separately in any given year. Figuring the tax both ways can determine which filing status will result in the lowest tax.
For most married couples, filing jointly will result in a
lower tax liability. This is especially true if there is a significant difference in your incomes. The so-called “marriage penalty” only applies to couples who both earn relatively high salaries.
Certain situations may make it more advisable for married taxpayers to file separately.
• If both spouses have their own itemized deductions, such as medical deductions,

they may be able to claim higher overall deductions because of the percentage limitations on Schedule A (Form 1040).
• If one spouse has past due debt with the IRS or another government agency, such as child support obligations or student loans, filing separately will prevent the other spouse’s share of any refund from being used to offset debts for which he or she is not liable.
• If one spouse has messy or missing records, or is thinking of taking a risky tax position, the other may want to file separately to avoid becoming liable for potential additional taxes or penalties.

Planning for your wedding may be over, but don’t forget about planning for the tax-related changes that marriage brings. More information about changing your name, address, and income tax withholding is available on www.irs.gov, or contact your tax professional.

Simple Projections
Based on your tax information from last year, you can prepare a dummy return to show what your tax situation would be if you had been married. You can print out Form 1040, other tax forms, and tax tables from www. irs.gov. On the blank forms, combine tax information from last year’s returns. For example, combine the wage amounts from both returns and enter the total on Form 1040, line 1, of the blank form. Do the same for items such as interest, other income, and include deductions if either person itemized.
Use filing status, deductions, and any credits as if you had been married. The resulting tax and refund or amount due will give you an indication of whether your current withholding is sufficient to cover your tax liability when incomes are combined and will also help identify any problems that may need to be addressed when you file as married taxpayers.

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Filed Under: Business Tagged With: Newlyweds Tax Tips, tax return

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