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House Republican tax writers have advanced a "Tax Reform 2.0" legislative package. The measure is expected to reach the House floor for a full chamber vote by the end of September.

The House Ways and Means Committee debated the GOP Tax Reform 2.0 three-bill package in a September 13 markup that ran almost seven hours. The package focuses on making permanent individual and small business tax cuts, and creating incentives for retirement savings and business innovation. The following three bills were approved along party lines:

• Protecting Family and Small Business Tax Cuts Act of 2018 ( HR 6760);
• Family Savings Act of 2018 ( HR 6757); and
• American Innovation Act of 2018 ( HR 6756).

Individual, Small Business Tax Cuts

HR 6757 would make permanent the individual and small business tax cuts that were enacted temporarily through 2025 under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). These provisions were made temporary to comply with certain Senate budget rules applicable to the reconciliation process Republicans used to pass tax reform with only a simple GOP majority. Notable TCJA provisions that would be made permanent under HR 6750 include, among others:

• lowered individual income tax rates;
• 20-percent deduction of income for qualifying passthrough entities;
• $12,000 (individual) and $24,000 (married filing jointly) standard deduction; and
• $10,000 annual cap on the state and local tax (SALT) deduction.

Family Savings and Business Innovation

HR 6757 aims to simplify certain rules for employer retirement plans, and eliminates the age limit on IRA contributions, among other things. Additionally, it would create a Universal Savings Account (USA), while also allowing tax-advantaged 529 Plans to be used for expenses related to trade schools, home schooling, and up to $10,000 in total distributions for repayment of student loans.

HR 6756 would improve the tax treatment of certain start-up businesses. The bill would allow new businesses to write off up to $20,000 of start-up and organization expenditures. Additionally, HR 6756 would allow for a change in start-up ownership without triggering limits on certain tax benefits.

JCT

The Joint Committee on Taxation (JCT), a nonpartisan congressional scorekeeper, has estimated that all three bills will cost the federal government revenue. As noted in JCX-71-18, the JCT estimates that making permanent the individual and small business tax cuts under the TCJA, as proposed by HR 6750, would cost the federal government $631 billion in lost revenue over the next 10 years. Additionally, the JCT has estimated that HR 6756 and HR 6757, collectively, would cost approximately $26 billion in lost federal revenue over the next 10 years ( JCX-75-18, JCX-78-18).

Tax Reform 2.0’s Fate Uncertain

Tax Reform 2.0’s fate remains largely uncertain as it makes its way through the legislative process. While the measure is expected to garner enough Republican support in the House, despite certain GOP criticisms of the SALT deduction cap, it is not expected as a whole to fare well in the Senate. There is talk on Capitol Hill that Democrats could potentially support the retirement savings and business innovation bills in some form. However, it is considered unlikely that Democrats will support making permanent certain provisions of a law (the TCJA) for which not a single Democrat voted.

Charles P. "Chuck" Rettig was confirmed as the new IRS Commissioner on September 12. The Senate confirmed the nomination by a 64-to-33 vote. Rettig received both Democratic and Republican support.

Charles P. "Chuck" Rettig was confirmed as the new IRS Commissioner on September 12. The Senate confirmed the nomination by a 64-to-33 vote. Rettig received both Democratic and Republican support.

Senate Finance Committee (SFC) Chairman Orrin G. Hatch, R-Utah, praised Rettig, saying that he is both "qualified and ready" to lead the IRS. Although SFC ranking member Ron Wyden, D-Ore., previously said that Rettig is a "qualified nominee," he urged colleagues to oppose Rettig’s nomination. Wyden previously said he would only support Rettig’s nomination if he promised to reverse recent IRS guidance which limits Schedule B donor reporting for certain tax-exempt organizations ( Rev. Proc. 2018-38).

Rettig will oversee implementation of tax reform enacted last December under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97). His term as IRS Commissioner will expire on November 12, 2022.

New IRS guidance aiming to curb certain state and local tax (SALT) deduction cap "workarounds" is the latest "hot topic" tax debate on Capitol Hill. The IRS released proposed amendments to regulations, REG-112176-18, on August 23. The proposed rules would prevent taxpayers, effective August 27, 2018, from using certain charitable contributions to work around the new cap on SALT deductions.

New IRS guidance aiming to curb certain state and local tax (SALT) deduction cap "workarounds" is the latest "hot topic" tax debate on Capitol Hill. The IRS released proposed amendments to regulations, REG-112176-18, on August 23. The proposed rules would prevent taxpayers, effective August 27, 2018, from using certain charitable contributions to work around the new cap on SALT deductions.

SALT Deduction

The SALT deduction limit is one of the most controversial temporarily enacted provisions of the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) signed into law last December. Under the TCJA, beginning in 2018 and running through 2025, taxpayers may not claim more than $10,000 ($5,000 if married filing separately) for all state and local sales, income and property taxes.

After the tax code overhaul, New York, New Jersey, and Connecticut (considered high-tax states) passed legislation that essentially allows taxpayers to circumvent the SALT deduction cap by making charitable contributions to state-run charitable organizations. Indeed, similar workarounds for private-school tuition already exists in other states.

"Congress limited the deduction for state and local taxes that predominantly benefited high-income earners to help pay for major tax cuts for American families,"Treasury Secretary Steven Mnuchin said in a statement. "The proposed rule will uphold that limitation by preventing attempts to convert tax payments into charitable contributions."

Congressional Republicans and Democrats, as with the TCJA, are mostly divided on the topic. House Ways and Means Committee Chair Kevin Brady, R-Tex., praised the IRS proposal for aiming to prevent tax evasion. "These Treasury regulations rightly close the door on improper tax evasion schemes conjured up by state and local politicians who insist on brutally taxing local families and businesses," Brady said in a statement.

Meanwhile, Democratic lawmakers are criticizing the regulations. "The Trump administration doubled down on its attack on the middle class," Ways and Means ranking member Richard Neal, D-Mass., said in a statement. "The administration’s new regulations block affected states’ attempts to cope with this significant change and protect residents."

Tax Policy Experts Weigh-In

Several tax policy experts have criticized states’ efforts to circumvent the SALT deduction cap. Carl Davis, research director at the Democratic-leaning Institute on Taxation and Economic Policy, has called the workarounds an "abuse" of the charitable giving deduction. "Anyone who wants a fair and transparent tax system should be cautiously optimistic that these rules will put an end…to the workaround provisions enacted by states more recently," Davis wrote in a recent op-ed about the proposed IRS guidance.

Jared Walczak, senior policy analyst at the conservative-leaning Tax Foundation, has said that states’ strategies to re-characterize SALT payments were pursued to primarily help high-income taxpayers. Additionally, the top one percent of the wealthiest households would reap more than half of the benefit if the SALT cap were eliminated, according to an estimate from the Democratic-leaning Tax Policy Center.

The IRS has proposed to remove the Code Sec. 385 documentation regulations provided in Reg. §1.385-2. Although the proposed removal of the documentation rules will apply as of the date the proposed regulations are published as final in the Federal Register, taxpayers can rely on the proposed regulations until the final regulations are published.

The IRS has proposed to remove the Code Sec. 385 documentation regulations provided in Reg. §1.385-2. Although the proposed removal of the documentation rules will apply as of the date the proposed regulations are published as final in the Federal Register, taxpayers can rely on the proposed regulations until the final regulations are published.

The documentation regulations provide minimum documentation requirements that must be satisfied in order for certain related-party instruments to be treated as debt for federal tax purposes. They are part of final and temporary Section 385 regulations adopted with T.D. 9790, I.R.B. 2016-45, 540. In addition to the documentation requirements, the Section 385 regulations also include rules that recharacterize as equity certain debt issued in connection with distributions and acquisitions that do not result in new investment in the operations of the issuer. The Section 385 regulations apply generally to debt instruments issued by a domestic corporations (or its disregarded entity) and held by members of the domestic corporation’s expanded group.

Documentation Regulations

The documentation rules generally require large corporations to document related-party loans just as all businesses do when they borrow from unrelated lenders. Reg. §1.385-2 prescribes the nature of the documentation necessary to substantiate the tax treatment of related-party instruments as debt. Taxpayers must be able to provide written evidence of four indebtedness factors analogous to those found in third-party loans.

Compliance with the documentation rules does not establish that an interest is debt. Instead, it serves only to satisfy the minimum documentation for making the determination under general federal tax principles. If a debt instrument is reclassified as stock due to a failure to meet the documentation requirements, it is treated as stock for all federal tax purposes.

Corporations must document relevant transactions under these rules if they are part of expanded affiliated groups and:

• stock of any member of the group is publicly traded;
• one or more members have total assets that exceed $100 million on any applicable financial statement or combination of statements; or
• one or more members have annual total revenue that exceeds $50 million on any applicable financial statement or combination of statements.

The documentation regulations apply to relevant intercompany debt issued beginning in 2019, and require that the taxpayer’s documentation for a given tax year be prepared by the time the borrower’s return is filed.

Executive Order 13789

Executive Order 13789, issued on April 21, 2017 (E.O. 13789), instructs the Treasury Secretary to identify significant tax regulations issued on or after January 1, 2016, that impose an undue financial burden on U.S. taxpayers, add undue complexity to the federal tax laws, or exceed the statutory authority of the IRS. The Treasury Secretary is instructed to take concrete actions to alleviate these burdens.

Based on E.O. 13789, the Treasury Department identified, among others, the Section 385 regulations adopted with T.D. 9790 as significant tax regulations that impose an undue financial burden on U.S. taxpayers and/or add undue complexity to the federal tax laws ( Notice 2017-38, I.R.B. 2017-30, 147).

In light of further actions in connection with the required review of the Section 385 regulations, and in response to continued taxpayer concern, the IRS has delayed the applicability date of the documentation regulations for 12 months. As a result, the documentation requirements apply to interests issued or deemed issued on or after January 1, 2019. As originally adopted, the final regulations applied to interests issued or deemed issued on or after January 1, 2018 ( Notice 2017-36, I.R.B. 2017-33, 208).

In a later report, the Treasury has proposed to revoke the current documentation rules and replace them with substantially simplified and streamlined documentation rules ( TDNR SM-0172, October 4, 2017; U.S. Department of the Treasury, Second Report to the President on Executive Order 13789, October 2, 2017).

Proposed Removal of Documentation Rules

The IRS has proposed to remove the documentation regulations after considering the comments received in connection with E.O. 13789, including with respect to Notice 2017-36 and Notice 2017-38. However, the IRS will continue to study the issues addressed by the documentation regulations, When the study is complete, the IRS may propose a modified version of the documentation regulations. The revised documentation rules:

• would be substantially simplified and streamlined to reduce the burden on U.S. corporations;
• would still require sufficient documentation and other information for tax administration purposes; and
• would be proposed with a prospective effective date to allow sufficient lead time for taxpayers to design and implement systems to comply with the revised requirements.

Comments

Written or electronic comments and requests for a public hearing must be received by December 23, 2018. Send submissions to: CC:PA:LPD:PR (REG-130244-17), room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-130244-17), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC 20224 or sent electronically via the Federal eRulemaking Portal at http://www.regulations.gov (IRS REG-130244-17).

Last year’s Tax Reform created a new 20-percent deduction of qualified business income for passthrough entities, subject to certain limitations. The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) created the new Code Sec. 199A passthrough deduction for noncorporate taxpayers, effective for tax years beginning after December 31, 2017. However, the provision was enacted only temporarily through 2025. The controversial deduction has remained a buzzing topic of debate among lawmakers, tax policy experts, and stakeholders. In addition to its impermanence, the new passthrough deduction’s ambiguous statutory language has created many questions for taxpayers and practitioners.

Last year’s Tax Reform created a new 20-percent deduction of qualified business income for passthrough entities, subject to certain limitations. The Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) created the new Code Sec. 199A passthrough deduction for noncorporate taxpayers, effective for tax years beginning after December 31, 2017. However, the provision was enacted only temporarily through 2025. The controversial deduction has remained a buzzing topic of debate among lawmakers, tax policy experts, and stakeholders. In addition to its impermanence, the new passthrough deduction’s ambiguous statutory language has created many questions for taxpayers and practitioners.

The IRS released the much-anticipated proposed regulations on the new passthrough deduction, REG-107892-18, on August 8. The guidance has generated a mixed reaction on Capitol Hill, and while significant questions may have been answered, it appears that many remain. Indeed, an IRS spokesperson told Wolters Kluwer Tax & Accounting before the regulations were released that the IRS’s goal was to issue complete regulations but that the guidance "would not cover every question that taxpayers have."

Wolters Kluwer recently spoke with Joshua Wu, member, Clark Hill PLC, about the tax implications of the new passthrough deduction and proposed regulations. That exchange included a discussion of the impact that the new law and IRS guidance, both present and future, may have on taxpayers and tax practitioners.

I. Qualified Business Income and Activities

Wolters Kluwer: What is the effect of the proposed regulations requiring that qualified business activities meet the Code Sec. 162 trade or business standard? And for what industries might this be problematic?

Joshua Wu: The positive aspect of incorporating the Section 162 trade or business standard is that there is an established body of case law and administrative guidance with respect to what activities qualify as a trade or business. However, the test under Section 162 is factually-specific and requires an analysis of each situation. Sometimes courts reach different results with respect to activities constituting a trade or business. For example, gamblers have been denied trade or business status in numerous cases. In Groetzinger, 87-1 ustc ¶9191, 480 U.S. 23 (1987), the Court held that whether professional gambling is a trade or business depends on whether the taxpayer can show he pursued gambling full-time, in good faith, regularly and continuously, and possessed a sincere profit motive. Some courts have held that the gambling activity must be full-time, from 60 to 80 hours per week, while others have questioned whether the full-time inquiry is a mandatory prerequisite or permissive factor to determine whether the taxpayer’s gambling activity is a trade or business. See e.g., Tschetschot , 93 TCM 914, Dec. 56,840(M)(2007). Although Section 162 provides a built-in body of law, plenty of questions remain.

Aside from the gambling industry, the real estate industry will continue to face some uncertainty over what constitutes a trade or business under Code Secs. 162 and 199A. The proposed regulations provide a helpful rule, where the rental or licensing of tangible or intangible property to a related trade or business is treated as a trade or business if the rental or licensing and the other trade or business are commonly controlled. But, that rule does not help taxpayers in the rental industry with no ties to another trade or business. The question remains whether a taxpayer renting out a single-family home or a small group of apartments is engaged in a trade or business for purposes of Code Secs. 162 and 199A. Some case law indicates that just receiving rent with nothing more may not constitute a trade or business. On the other hand, numerous cases have found that managing property and collecting rent can constitute a trade or business. Given the potential tax savings at issue, I suspect there will be additional cases in the real estate industry regarding the level of activity required for the leasing of property to be considered a trade or business.

Qualified Business Income

Wolters Kluwer: How does the IRS define qualified business income (QBI)?

Joshua Wu: QBI is the net amount of effectively connected qualified items of income, gain, deduction, and loss from any qualified trade or business. Certain items are excluded from QBI, such as capital gains/losses, certain dividends, and interest income. Proposed Reg. §1.199A-3(b) provides further clarity on QBI. Most importantly, they provide that a passthrough with multiple trades or businesses must allocate items of QBI to such trades or businesses based on a reasonable and consistent method that clearly reflects income and expenses. The passthrough may use a different reasonable method for different items of income, gain, deduction, and loss, but the overall combination of methods must also be reasonable based on all facts and circumstances. Further, the books and records must be consistent with allocations under the method chosen. The proposed regulations provide no specific guidance or examples of what a reasonable allocation looks like. Thus, taxpayers are left to determine what constitutes a reasonable allocation.

Unadjusted Basis Immediately after Acquisition

Wolters Kluwer: What effect does the unadjusted basis immediately after acquisition (UBIA) of qualified property attributable to a trade or business have on determining QBI?

Joshua Wu: For taxpayers above the taxable income threshold amounts, $157,500 (single or married filing separate) or $315,000 (married filing jointly), the Code limits the taxpayer’s 199A deduction based on (i) the amount of W-2 wages paid with respect to the trade or business, and/or (ii) the unadjusted basis immediately after acquisition (UBIA) of qualified property held for use in the trade or business.

Where a business pays little or no wages, and the taxpayer is above the income thresholds, the best way to maximize the deduction is to look to the UBIA of qualified property. Rather than the 50 percent of W-2 wages limitation, Section 199A provides an alternative limit based on 25 percent of W-2 wages and 2.5 percent of UBIA qualified property. The Code and proposed regulations define UBIA qualified property as tangible, depreciable property which is held by and available for use in the qualified trade or business at the close of the tax year, which is used at any point during the tax year in the production of qualified business income, and the depreciable period for which has not ended before the close of the tax year. The proposed regulations helpfully clarify that UBIA is not reduced for taxpayers who take advantage of the expanded bonus depreciation allowance or any Section 179expensing.

De Minimis Exception

Wolters Kluwer: How is the specified service trade or business (SSTB) limitation clarified under the proposed regulations? And how does the de minimis exception apply?

Joshua Wu: The proposed regulations provide helpful guidance on the definition of a SSTB and avoid what some practitioners feared would be an expansive and amorphous area of section 199A. Under the statute, if a trade or business is an SSTB, its items are not taken into account for the 199A computation. Thus, the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial and brokerage services, investment management, trading, dealing in securities, and any trade or business where the principal asset of such is the reputation or skill of one or more of its employees or owners, do not result in a 199A deduction.

There is a de minimis exception to the general rule for taxpayers with taxable income of less than $157,500 (single or married filing separate) or $315,000 (married filing jointly). Once those thresholds are hit, the 199A deduction phases-out until it is fully eliminated at $207,500 (single) or $415,000 (joint).

The proposed regulations provide guidance for each of the SSTB fields. Importantly, they also limit the "reputation or skill" category. The proposed regulations state that the "reputation or skill" clause was intended to describe a "narrow set of trades or businesses, not otherwise covered by the enumerated specified services." Thus, the proposed regulations limit this definition to cases where the business receives income from endorsing products or services, licensing or receiving income for use of an individual’s image, likeness, name, signature, voice, trademark, etc., or receiving appearance fees. This narrow definition is unlikely to impact most taxpayers.

Wolters Kluwer recently spoke with Joshua Wu, member, Clark Hill PLC, about the tax implications of the new Code Sec. 199A passthrough deduction and its recently-released proposed regulations, REG-107892-18. That exchange included a discussion of the impact that the new law and IRS guidance, both present and future, may have on taxpayers and tax practitioners.

Wolters Kluwer recently spoke with Joshua Wu, member, Clark Hill PLC, about the tax implications of the new Code Sec. 199A passthrough deduction and its recently-released proposed regulations, REG-107892-18. That exchange included a discussion of the impact that the new law and IRS guidance, both present and future, may have on taxpayers and tax practitioners.

II. Aggregation, Winners & Losers

Wolters Kluwer: How do the proposed regulations provide both limitations and flexibility regarding the available election to aggregate trades or businesses?

Joshua Wu: Treasury agreed with various comments that some level of aggregation should be permitted to account for the legal, economic and other non-tax reasons that taxpayers operate a single business across multiple entities. Permissive aggregation allows taxpayers the benefit of combining trades or businesses for applying the W-2 wage limitation, potentially resulting in a higher limit. Under Proposed Reg. §1.199A-4, aggregation is allowed but not required. To use this method, the business must (1) qualify as a trade or business, (2) have common ownership, (3) not be a SSTB, and (4) demonstrate that the businesses are part of a larger, integrated trade or business (for individuals and trusts). The proposed regulations give businesses the benefits of electing aggregation without having to restructure the businesses from a legal standpoint. Businesses failing to qualify under the above test will have to consider whether a legal restructuring would be possible.

Wolters Kluwer: How does Notice 2018-64 Methods for Calculating W-2 Wages for Purposes of Section 199A, which accompanied the release of the proposed regulations, coordinate with aggregation?

Joshua Wu: Notice 2018-64 contains a proposed revenue procedure with guidance on three methods for calculating W-2 wages for purposes of section 199A. The Unmodified Box method uses the lesser of totals in Box 1 of Forms W-2 or Box 5 (Medicare wages). The Modified Box 1 method takes the total amounts in Box 1 of Forms W-2 minus amounts not wages for income withholding purposes, and adding total amounts in Box 12 (deferrals). The Tracking wages method is the most complex and tracks total wages subject to income tax withholding. The calculation method is dependent on the group of Forms W-2 included in the computation and, thus, will vary depending upon whether businesses are aggregated under §1.199A-4 or not. Taxpayers with businesses generating little or no Medicare wages may consider aggregating with businesses that report significant wages in Box 1 that are still subject to income tax withholding. Under the Modified Box 1 method, that may result in a higher wage limitation.

Crack & Pack

Wolters Kluwer: What noteworthy anti-abuse safeguards did the proposed regulations seek to establish? How do the rules address "cracking" or "crack and pack" strategies?

Joshua Wu: Treasury included some anti-abuse provisions in the proposed regulations. One area that Treasury noted was the use of multiple non-grantor trusts to avoid the income threshold limitations on the 199A deduction. Taxpayers could theoretically use multiple non-grantor trusts to increase the 199A deduction by taking advantage of each trust’s separate threshold amount. The proposed regulations, under the authority of 643(f), provide that two or more trusts will be aggregated and treated as a single trust if such trusts have substantially the same grantor(s) and substantially the same primary beneficiary or beneficiaries, and if a principal purpose is to avoid tax. The proposed regulations have a presumption of a principal purpose of avoiding tax if the structure results in a significant tax benefit, unless there is a significant non-tax purpose that could not have been achieved without the creation of the trusts.

Another anti-abuse issue relates to the "crack and pack" strategies. These strategies involve a business that is limited in its 199A deduction because it is an SSTB spinning off some of its business or assets to an entity that is not an SSTB and could claim the 199A deduction. For example, a law firm that owns its building could transfer the building to a separate entity and lease it back. The law firm is an SSTB and, thus, is subject to the 199A limitations. However, the real estate entity is not an SSTB and can generate a 199A deduction (based on the rental income) for the law partners. The proposed regulations provide that a SSTB includes any business with 50 percent common ownership (direct or indirect) that provides 80 percent or more of its property or services to an excluded trade or business. Also, if a trade or business shares 50 percent or more common ownership with an SSTB, to the extent that trade or business provides property or services to the commonly-owned SSTB, the portion of the property or services provided to the SSTB will be treated as an SSTB. The proposed regulations provide an example of a dentist who owns a dental practice and also owns an office building. The dentist rents half the building to the dental practice and half to unrelated persons. Under [Proposed Reg.] §1.199A-5(c)(2), the renting of half of the building to the dental practice will be treated as an SSTB.

Winners & Losers

Wolters Kluwer: Generally, what industries can be seen as "winners" and "losers" in light of the proposed regulations?

Joshua Wu: The most obvious "losers" in the proposed regulations are the specified services businesses (e.g., lawyers, accountants, doctors, etc.) who are further limited by the anti-abuse provisions in arranging their affairs to try and benefit from 199A. On the other hand, certain specific service providers benefit from the proposed regulations. For example, health clubs or spas are exempt from the SSTB limitation. Additionally, broadcasters of performing arts, real estate agents, real estate brokers, loan officers, ticket brokers, and art brokers are all exempt from the SSTB limitation.

Wolters Kluwer: What areas of the Code Sec. 199A provision stand out as most complex when calculating the deduction, and how does this complexity vary among taxpayers?

Joshua Wu: With respect to calculating the deduction, one complex area is planning to maximize the W-2 wages limitation. Because compensation as W-2 wages can reduce QBI, and potentially the 199A deduction, determining the efficient equilibrium point between having enough W-2 wages to limit the impact of the wage limitation, while preserving QBI, will be a fact-driven complex planning issue that must be determined by each taxpayer. Another area of complexity will be how taxpayers track losses which may reduce future QBI and, thus, the 199A deduction. The proposed regulations provide that losses disallowed for taxable years beginning before January 1, 2018, are not taken into account for purposes of computing QBI in a later taxable year. Taxpayers will be left to track pre-2018 and post-2018 losses and determine if a loss in a particular tax year reduces QBI or not.

III. Looking Ahead

Questions Remain

Wolters Kluwer: An IRS spokesperson told Wolters Kluwer that the IRS did not expect the proposed regulations to answer all questions surrounding the deduction. Indeed, Acting IRS Commissioner David Kautter has said that stakeholder feedback would help finalize the regulations. What significant questions remain unanswered for taxpayers and tax practitioners, and has additional uncertainty been created with the release of the IRS guidance?

Joshua Wu: On the whole, the proposed regulations did a good job addressing the most important areas of Section 199A. However, there are many areas where additional guidance would be helpful. Such guidance may be in the form of additional regulations or other administrative pathways. For example, the proposed regulations did not address the differing treatment between a taxpayer operating as a sole proprietor versus an S corporation. Wages paid to an S corporation shareholder boosts the W-2 limitation but are not considered QBI. Thus, with the same underlying facts, the 199Adeduction may vary between taxpayers operating as a sole proprietor versus those operating as an S corporation.

Possible Changes to Proposed Regulations

Wolters Kluwer: In what ways do you see the passthrough deduction rules changing when the final regulations are released?

Joshua Wu: I suspect that the core components of the proposed regulations will not change significantly. However, I would not be surprised if Treasury were to include more specific examples with respect to real estate and whether certain types of activity constitute a trade or business. Additionally, the proposed regulations will likely generate comments and questions from various industry groups related to the SSTB definitions and specific types of services (e.g., do trustees and executors fall under the legal services definition). Treasury may change the definitions of SSTBs in response to comments and clarify definitions for industry groups.

Tax Reform 2.0

Wolters Kluwer: The White House and congressional Republicans are currently moving forward on legislative efforts known as "Tax Reform 2.0." The legislative package proposes making permanent the passthrough deduction. How does the impermanence of this deduction currently impact taxpayers? (Note: On September 13, the House Ways and Means Committee marked up a three-bill Tax Reform 2.0 package. The measure is expected to reach the House floor for a full chamber vote by the end of September.)

Joshua Wu: The 199A deduction has a significant impact on the choice of entity question for businesses. With the 21 percent corporate rate, we have seen many taxpayers considering restructuring away from passthrough entities to a C corporation structure. The 199A deduction is a large consideration in whether to restructure or not, but its limited effective time does raise questions about the cost effectiveness of planning to obtain the 199A deduction where the benefit will sunset in eight years.

Key Takeways

Wolters Kluwer: Aside from advice on specific taxpayer situations, what key takeaways should tax practitioners generally alert clients to ahead of the 2019 tax filing season?

Wolters Kluwer: Aside from advice on specific taxpayer situations, what key takeaways should tax practitioners generally alert clients to ahead of the 2019 tax filing season?

Joshua Wu: Practitioners should remind clients who may benefit from the 199A deduction to keep detailed records of any losses for each line of business, as this may impact the calculation of QBI in the future. Practitioners should also help clients examine the whole of their activity to define their "trades or businesses." This will be essential to calculating the 199A deduction and planning to maximize any such deduction. Finally, practitioners should remember that some of the information that may be necessary to determine a 199A deduction may not be in their client’s possession. Practitioners need to plan in advance with their clients regarding how information about each trade or business will be obtained (e.g., how will a limited partner in a partnership obtain information regarding the partnership’s W-2 wages and/or UBIA of qualified property).

Wolters Kluwer: Any closing thoughts or comments?

Joshua Wu: Practitioners and taxpayers should remember that the regulations are only proposed and may change before they become final. Any planning undertaken this year should carefully weigh the economic costs and be rooted in the statutory language of 199A. It will be some time before case law helps clarify the nuances of Section 199A, and claiming the deduction allows the IRS to more easily impose the substantial understatement penalty if a taxpayer gets it wrong.

Wolters Kluwer has projected annual inflation-adjusted amounts for tax year 2019. The projected amounts include 2019 tax brackets, the standard deduction, and alternative minimum tax amounts, among others. The projected amounts are based on Consumer Price Index figures released by the U.S. Department of Labor on September 12, 2018.

Wolters Kluwer has projected annual inflation-adjusted amounts for tax year 2019. The projected amounts include 2019 tax brackets, the standard deduction, and alternative minimum tax amounts, among others. The projected amounts are based on Consumer Price Index figures released by the U.S. Department of Labor on September 12, 2018.

The Tax Cuts and Jobs Act of 2017 (TCJA) ( P.L. 115-97) mandated a change from the Consumer Price Index for All Urban Consumers (CPI-U) to the Chained Consumer Price Index for All Urban Consumers (C-CPI-U). Official amounts for 2019 should be released by the IRS later in 2018.

Individual Tax Brackets

The projected bracket ranges for individuals in 2019 are as follows.

For married taxpayers filing jointly:

The 10 percent bracket applies to taxable incomes up to $19,400
The 12 percent bracket applies to taxable incomes over $19,400 and up to $78,900
The 22 percent bracket applies to taxable incomes over $78,900 and up to $168,400
The 24 percent bracket applies to taxable incomes over $168,400 and up to $321,450
The 32 percent bracket applies to taxable incomes over $321,450 and up to $408,200
The 35 percent bracket applies to taxable incomes over $408,200 and up to $612,350
The 37 percent bracket applies to taxable incomes over $612,350

For heads of households:

The 10 percent bracket applies to taxable incomes up to $13,850
The 12 percent bracket applies to taxable incomes over $13,850 and up to $52,850
The 22 percent bracket applies to taxable incomes over $52,850 and up to $84,200
The 24 percent bracket applies to taxable incomes over $84,200 and up to $160,700
The 32 percent bracket applies to taxable incomes over $160,700 and up to $204,100
The 35 percent bracket applies to taxable incomes over $204,100 and up to $510,300
The 37 percent bracket applies to taxable incomes over $510,300

For unmarried taxpayers:

The 10 percent bracket applies to taxable incomes up to $9,700
The 12 percent bracket applies to taxable incomes over $9,700 and up to $39,450
The 22 percent bracket applies to taxable incomes over $39,450 and up to $84,200
The 24 percent bracket applies to taxable incomes over $84,200 and up to $160,700
The 32 percent bracket applies to taxable incomes over $160,700 and up to $204,100
The 35 percent bracket applies to taxable incomes over $204,100 and up to $510,300
The 37 percent bracket applies to taxable incomes over $510,300

For married taxpayers filing separately:

The 10 percent bracket applies to taxable incomes up to $9,700
The 12 percent bracket applies to taxable incomes over $9,700 and up to $39,450
The 22 percent bracket applies to taxable incomes over $39,450 and up to $84,200
The 24 percent bracket applies to taxable incomes over $84,200 and up to $160,725
The 32 percent bracket applies to taxable incomes over $160,725 and up to $204,100
The 35 percent bracket applies to taxable incomes over $204,100 and up to $306,175
The 37 percent bracket applies to taxable incomes over $306,175

For estates and trusts:

The 10 percent bracket applies to taxable incomes up to $2,600
The 24 percent bracket applies to taxable incomes over $2,600 and up to $9,300
The 35 percent bracket applies to taxable incomes over $9,300 and up to $12,750
The 37 percent bracket applies to taxable incomes over $12,750

Standard Deduction

TCJA also roughly doubled the amount of the standard deduction. For 2019, the following standard deduction amounts are projected:

For married taxpayers filing jointly, $24,400
For heads of households, $18,350
For unmarried taxpayers and well as married taxpayers filing separately, $12,200

AMT Exemptions

TCJA eliminated the AMT for corporations, and increased the exemption amounts, and the exemption phaseouts, for individuals. For 2019, the AMT exemption amounts are projected to be:

For married taxpayers filing jointly, $111,700
For unmarried individuals and heads of households, $71,700
For married taxpayers filing separately, $55,850

Estate and Gift Tax

The following amounts related to transfer taxes (estate, generation-skipping, and gift taxes) are projected for 2019:

The gift tax annual exemption is projected to be $15,000 in 2019

The estate and gift tax applicable exclusion (increased under TCJA) is projected to be $11,400,000 for decedents dying in 2019

The exclusion for gifts made in 2019 to a spouse who is not a U.S. citizen is projected to be $155,000 for 2019

Other Amounts

The following other amounts are also projected for 2019:

The adoption credit for 2019 is projected to be $14,080 for 2019.

For 2019, the allowed Roth IRA contribution amount is projected to phase out for married taxpayers filing jointly with income between $193,000 and $203,000 For heads of household and unmarried filers, the projected phaseout range is between $122,000 to $137,000.

The maximum amount of deductible contributions that can be made to an IRA is projected to be $6,000 for 2019. The increased contribution amount for taxpayers age 50 and over will, therefore, be $7,000.

The deduction for traditional IRA contributions is projected to begin to phase out for married joint filers whose income is greater than $103,000 if both spouses are covered by a retirement plan at work. If only one spouse is covered by a retirement plan at work, the phaseout is projected to begin when modified adjusted gross income reaches $193,000. For heads of household and unmarried filers who are covered by a retirement plan at work, the 2019 income phaseout range for deductible IRA contributions is projected to begin at $64,000.

For 2019, the $2,500 student loan interest deduction is projected to begin to phase out for married joint filers with modified adjusted gross income (MAGI) above $140,000. For single taxpayers, the 2019 deduction is projected to begin to phase out at a MAGI level of over $70,000.

The amount of the 2019 foreign earned income exclusion under Code Sec. 911 is projected to be $105,900.

Many federal income taxes are paid from amounts that are withheld from payments to the taxpayer. For instance, amounts roughly equal to an employee's estimated tax liability are generally withheld from the employee's wages and paid over to the government by the employer. In contrast, estimated taxes are taxes that are paid throughout the year on income that is not subject to withholding. Individuals must make estimated tax payments if they are self-employed or their income derives from interest, dividends, investment gains, rents, alimony, or other funds that are not subject to withholding.

Many federal income taxes are paid from amounts that are withheld from payments to the taxpayer. For instance, amounts roughly equal to an employee's estimated tax liability are generally withheld from the employee's wages and paid over to the government by the employer. In contrast, estimated taxes are taxes that are paid throughout the year on income that is not subject to withholding. Individuals must make estimated tax payments if they are self-employed or their income derives from interest, dividends, investment gains, rents, alimony, or other funds that are not subject to withholding.

Estimated income tax payments are required from taxpayers who:

1. expect to owe at least $1,000 in tax for the year, after subtracting taxes that were paid through withholding and tax credits; and
2. expect that the amount of taxes to be paid during the year through other means will be less than the smaller of—
• 90% of the tax shown on the current year's tax return, or
• 100% of the tax shown on the previous year's return (the previous year's return must cover all 12 months). This 100-percent test increases to 110 percent if the taxpayer's AGI for the previous year exceeds $150,000.

U.S. citizens who have no tax liability for the current year are not required to make estimated tax payments.

Form 1040-ES. Taxpayers use Form 1040-ES to calculate, report and pay their estimated tax. The annual liability may be paid in quarterly installments that are due based upon the taxpayer's tax year. However, no payments are required until the taxpayer has income upon which tax will be owed. Taxpayers may also credit their overpayments from one year against the next year's estimated tax liability, rather than having them refunded.

Generally, the required installment is 25 percent of the required annual payment. However, a taxpayer who receives taxable income unevenly throughout the year can elect to pay either the required installment or an annualized income installment. The use of the annualized income installment method, provided on a worksheet contained in the instructions to Form 2210, Underpayment of Estimated Tax by Individuals and Fiduciaries, may reduce or eliminate any penalty for underpaid taxes.

Due Dates. For most individual taxpayers, the quarterly due dates for estimated tax payments are:

Penalties. A penalty generally applies when a taxpayer fails to make estimated tax payments, pays less than the required installment amount, or makes late payments. However, the IRS may waive the penalty if the underpayment was due to casualty, disaster or other unusual circumstances.

Q. Last year I underwent a number of elective surgical procedures and would like to deduct the cost of these expensive procedures on my personal tax return. What are the criteria for medical expenses to be deductible? Do they have to exceed a certain dollar amount?

Q. Last year I underwent a number of elective surgical procedures and would like to deduct the cost of these expensive procedures on my personal tax return. What are the criteria for medical expenses to be deductible? Do they have to exceed a certain dollar amount?

A. While many medical expenses are clearly deductible, such as amounts paid for doctors/dentists, insurance premiums, prescription drugs, etc.., there are certain medical expenses that are not so easily identifiable as deductible and may require certain conditions be present to be considered deductible. Here are some examples of medical expenses that you should make sure you don't miss on this year's tax return:

Cosmetic Surgery. In general, you cannot include in medical expenses the amount you pay for unnecessary cosmetic surgery. "Unnecessary cosmetic surgery" is defined as any procedure that is directed at improving the patient's appearance and does not meaningfully promote the proper function of the body or prevent or treat illness or disease. Examples of these types of procedures include face-lifts, hair transplants, hair removal and liposuction. However, you can include in medical expenses the amount you pay for cosmetic surgery if it is necessary to improve a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or a disfiguring disease.

Stop Smoking Treatments. A new law change in 1999 means that you can now include in medical expenses amounts you paid for a program to stop smoking. Keep in mind, however, that you cannot include in medical expenses amounts you paid for drugs that do not require a prescription, such as nicotine gum or patches, that are designed to help stop smoking.

Alcoholism treatment. Medical expenses incurred in connection with an inpatient's treatment at a therapeutic center for alcohol addiction (including meals and lodging provided by the center during treatment) are deductible medical expenses. In addition, if you receive medical advice that states that you should attend meetings of an Alcoholics Anonymous Club for the treatment of a disease involving the excessive use of alcoholic liquors, you are entitled to deduct medical transportation expenses (at 10 cents per mile) for travel to the meetings.

Capital expenditures. Certain expenses you paid for special equipment installed in your home, or for improvements, may be deductible as medical expenses. To qualify, the main purpose of the expense is medical care for you, your spouse, or a dependent. The costs of permanent improvements that increase the value of the property may be partly included as a medical expense. These costs are deductible medical expenses to the extent that they exceed the increase in the value of the property. If the value of the property is not increased by the improvement, the entire cost is included as a medical expense.

Limit on deductibility. Unfortunately, the IRS has imposed a rather steep threshold for the deduction of medical expenses. Taxpayers can deduct only the amount of their medical and dental expenses that exceed 7.5% of their adjusted gross income.

If, as you are gathering your tax information, you have any questions about the potential deductibility of a medical expenditure, please contact our office and we will be happy to assist you.

Please contact the office for more information on this subject and how it pertains to your specific tax or financial situation.

Q. Our daughter is entering college and we're considering seeking financial aid to help with tuition expenses. My spouse and I have always made the maximum contributions to our IRA accounts. Will our IRA accounts effect our child's ability to get financial aid for college costs? Should we hold off on this year's IRA contributions?

Q. Our daughter is entering college and we're considering seeking financial aid to help with tuition expenses. My spouse and I have always made the maximum contributions to our IRA accounts. Will our IRA accounts effect our child's ability to get financial aid for college costs? Should we hold off on this year's IRA contributions?

A. Go ahead and make the contributions. The child's parents' retirement assets are not taken into consideration when determining eligibility for many forms of financial aid. Therefore, neither of your regular or Roth IRA accounts should affect your child's ability to obtain federal financial aid. Please note, though, that an educational IRA established for your child would be considered an asset of your child for these purposes. Since the parents' taxable income is a main consideration when applying for financial aid, you should plan to keep your taxable income at a minimum in those years when your child is just about to enter college if you would like to obtain federal aid. Contact the college's financial aid center for more details and guidelines.

In addition, Taxpayer Relief Act of 1997 added a provision that provides penalty-free treatment for all IRA distributions made after December 31, 1997 if the taxpayer uses the amounts to pay qualified higher education expenses (including graduate level courses). This special treatment applies to all qualified expenses of the taxpayer, the taxpayer's spouse, or any child, or grandchild of the individual or the individual's spouse. "Qualified expenses" include tuition, fees, books, supplies, equipment required for enrollment or attendance, and room and board at a post-secondary educational institution.

When your business' bottom line is not as healthy as it should be, laying people off eventually may become your only option. However, before you cut people from your business, consider implementing these cost-cutting measures for a healthier bottom line and greater peace of mind.

When your business' bottom line is not as healthy as it should be, laying people off eventually may become your only option. However, before you cut people from your business, consider implementing these cost-cutting measures for a healthier bottom line and greater peace of mind.

Revisit your budget. Most budgets have some fat in them. Take a good look at your existing budget: are there some areas of excess that you may not have previously noticed? Evaluate viable alternatives for expenses that could result in cost savings. For example, check your printing costs. Are you photocopying something that should actually be printed? If you make many copies of a document, you are not only racking up charges in paper and labor, you are also adding to the wear and tear on the machine. Consider having local printers bid on a few of these jobs. You should be able to save money.

Get new bids on jobs. As easy as it is to stay with the same vendors year after year, this practice can be costly. One of the best suggestions to lower your overall costs is to collect invoices of everything purchased in the last year and separate the 20 percent that represent 80 percent of all purchases. Send those out for new bids and you may find you can cut your costs significantly.

Turn to your employees. Consider having them take responsibility for the costs associated with their positions. Ask them for suggestions on ways to cut costs. Most of them will be able to give you at least a few suggestions or point out some areas of waste. Once you have evaluated their suggestions, put the good ideas to work.

With a little work and a lot of persistence, you may be able to avoid the unpleasant task of laying off employees in a business downturn by simply tightening your business's belt. Please feel free to contact the office for additional suggestions and information.

Q. My company recently downsized its workforce and eliminated my position. I thought this would be a good opportunity to start my own consulting business in the same industry. What are some of the things I should consider before my last day on the job?

Q. My company recently downsized its workforce and eliminated my position. I thought this would be a good opportunity to start my own consulting business in the same industry. What are some of the things I should consider before my last day on the job?

A. Corporate downsizing and restructuring has swelled the ranks of the self-employed in recent years as those employees with an entrepreneurial spirit venture out on their own. Planning ahead for your career change while you are still on the job is a wise move and one that will most likely improve your chances for success.

Know your rights as a former employee. If you plan on bringing any of your current customers/clients with you, make sure you are familiar with the terms of any existing noncompete agreement with your employer. Violating such an agreement can put you out of business before you even get started. Consult an attorney if you are unclear on any of the details. Also confirm what your rights are to unemployment benefits and whether earnings from your new business will reduce or eliminate those rights.

Save for a rainy day. It may take a while to adjust to living without a paycheck while building your new business so make sure you have a decent cash reserve set aside before you leave your job. Many small businesses can take a year or more to become profitable so it pays to be prepared. Restrict expenditures to only items that are absolutely necessary. Consider using credit cards and/or lines-of-credit to buy furniture, inventory and other essentials for your business to conserve cash. The use of credit should, of course, be monitored closely to ensure that you don't get in over your head. Note: arrange for adequate credit before you quit, as the same credit may be difficult to get once you lose your employee status and become self-employed.

Keep your health insurance. Finding the right health insurance as a self-employed individual can take time. If your spouse has insurance through his/her employer, you may be able to be added to that policy. However, if you would like to continue with your current insurance, consider making a COBRA election with your employer to get coverage for up to 18 months following the end of your employment with the company. Contact the benefits department of your company for more information about terms and pricing.

Note. The American Recovery and Reinvestment Tax Act of 2009 alters COBRA coverage for individuals who are involuntarily separated from their employment between September 1, 2008 and January 1, 2010. Eligible individuals may elect to pay 35 percent of his or her COBRA coverage, with the former employer required to pay the remaining 65 percent under a reimbursement arrangement with the federal government.

The decision to go out on your own can be exciting and unsettling at the same time, but if you prepare well before you leave your job, your chances of a smooth transition should greatly increase. Please let us know if you need any assistance or support in this area.

The rise of paperless processing and remote access to computer systems has made increased computer security imperative. Establishing an effective password system can help keep your data secure while allowing you greater control over the access to your company's vital information.

The rise of paperless processing and remote access to computer systems has made increased computer security imperative. Establishing an effective password system can help keep your data secure while allowing you greater control over the access to your company's vital information.

Your best weapon to combat illegal access is a password system. Once it is installed, take the following steps to support it and ensure its effectiveness:

Create password guidelines. Clearly worded and easily accessible password guidelines can nip a computer security problem in the bud. Keep in mind that an outside hacker does only 15 percent of computer break-ins - 85% of such security breaches comes from inside, usually from disgruntled employees.

• Make and enforce rules about not using easy-to-guess passwords. Experts suggest passwords be a minimum length of six characters, using numbers (or symbols) as well as letters to make guessing nearly impossible. Try to avoid easily obtainable information such as birthdays, anniversaries, initials or mother's maiden name.
• In the office, don't allow passwords to be written down. Instead, have your employees memorize them or use a special computerized password program to keep track of them.
• Suggest that employees change passwords regularly - many businesses do this every 90 days.
• Erase default passwords and carefully monitor guest passwords or stations. Remember to promptly delete former employees' passwords.

Create a clear access rights policy and be sure everyone knows what it is. Certain levels and certain positions will have rights to specified parts of the system. Review log-in registers to see if a change in pattern pops up. Investigate anything suspicious immediately.

Control remote access. An off-the-shelf program, such as a firewall or encryption program, will add the security you need. A firewall system will allow access only to specific programs from the outside. Unfortunately, it's often the protected information your workers need. Encryption programs use codes to "scramble" data. Although persistent hackers can crack codes, these programs can make your information relatively safe.

If you take these steps to better your company's data security, you can be certain that the investment will pay off in the end. If you have any further questions, please feel free to contact our office.

You're 57 years old and as part of an early retirement package, you've just been offered a large cash bonus and salary continuation, along with a lump sum payment from the company retirement plan and continuing medical benefits. Is this a dream come true or a potential financial nightmare?

You're 57 years old and as part of an early retirement package, you've just been offered a large cash bonus and salary continuation, along with a lump sum payment from the company retirement plan and continuing medical benefits. Is this a dream come true or a potential financial nightmare?

Corporate downsizing is a fact of life for America's workforce. As companies look to reduce their payroll, many older employees are offered early retirement packages. When faced with the possibility of early retirement, many factors must be considered in order to make an informed decision.

If your retirement package is offered to you 10 years before you had planned to retire, you may have to find another job or start your own business in order to make ends meet. In general, you will need between 70 and 80 percent of your pre-retirement salary to maintain your present standard of living once you retire. This can be achieved through a combination of your company pension, Social Security benefits and any other sources of continuing income that you may have. If your health is good and you would like to continue to work elsewhere, maintaining your current lifestyle after early retirement may be possible. You would need to have other sufficient financial resources to draw upon.

In many cases, accepting an early retirement package can mean sacrificing some pension benefits. This is because these benefits are usually based on a formula that considers how many years on the job you have and your salary in the last few years of employment. To make your early retirement package more appealing, some employers add years to your age or time on the job when making the calculation. It's important to get educated on how your employer deals with this potentially costly issue.

What is the reason behind the company offering you an early retirement package? Is it possible that you may get a larger payoff or more benefits if you were to wait six months or a year? Or do you risk losing your job as part of a larger layoff? Is your company hiring or downsizing? Evaluate the company's motivation for offering you an early retirement plan as part of your decision process to avoid regrets later.

For some people, going to the office every day gives them a sense of purpose and structure in their life. Once you retire, your familiar daily routine is gone and you must find ways to fill your days. Some people flourish with the extra time now available to pursue their other interests and hobbies such as travel, exercise, or charitable work. For others, though, the loss of routine and structure in their lives can be devastating. If you do not plan to continue working, make sure that you are prepared to change your daily routine when considering early retirement.

Before you decide whether or not to accept an early retirement package, please feel free to contact our office. We would be happy to assist you as you explore your options.

Limited liability companies (LLCs) remain one of the most popular choice of business forms in the U.S. today. This form of business entity is a hybrid that features the best characteristics of other forms of business entities, making it a good choice for both new and existing businesses and their owners.

Limited liability companies (LLCs) remain one of the most popular choice of business forms in the U.S. today. This form of business entity is a hybrid that features the best characteristics of other forms of business entities, making it a good choice for both new and existing businesses and their owners.

An LLC is a legal entity existing separately from its owners that has certain characteristics of both a corporation (limited liability) and a partnership (pass-through taxation). An LLC is created when articles of organization (or the equivalent under each state rules) are filed with the proper state authority, and all fees are paid. An operating agreement detailing the terms agreed to by the members usually accompanies the articles of organization.

Choosing the LLC as a Business Entity

Choosing the form of business entity for a new company is one of the first decisions that a new business owner will have to make. Here's how LLCs compare to other forms of entities:

C Corporation: Both C corporations and LLCs share the favorable limited liability feature and lack of restrictions on number of shareholders. Unlike LLCs, C corporations are subject to double taxation for federal tax purposes - once at the corporate level and the again at the shareholder level. C corporations do not have the ability to make special allocations amongst the shareholders like LLCs.

S Corporation: Both S corporations and LLCs permit pass-through taxation. However, unlike an S corporation, an LLC is not limited to the number or kind of members it can have, potentially giving it greater access to capital. LLCs are also not restricted to a single class of stock, resulting in greater flexibility in the allocation of gains, losses, deductions and credits. And for estate planning purposes, LLCs are a much more flexible tool than S corporations

Partnership: Partnerships, like LLCs, are "pass-through" entities that avoid double taxation. The greatest difference between a partnership and an LLC is that members of LLCs can participate in management without being subject to personal liability, unlike general partners in a partnership.

Sole Proprietorship: Companies that operate as sole proprietors report their income and expenses on Schedule C of Form 1040. Unlike LLCs, sole proprietors' personal liability is unlimited and ownership is limited to one owner. And while generally all of the earnings of a sole proprietorship are subject to self-employment taxes, some LLC members may avoid self-employment taxes under certain circumstances

Tax Consequences of Conversion to an LLC

In most cases, changing your company's form of business to an LLC will be a tax-free transaction. However, there are a few cases where careful consideration of the tax consequences should be analyzed prior to conversion. Here are some general guidelines regarding the tax effects of converting an existing entity to an LLC:

C Corporation to an LLC: Unfortunately, this transaction most likely will be considered a liquidation of the corporation and the formation of a new LLC for federal tax purposes. This type of conversion can result in major tax consequences for the corporation as well as the shareholders and should be considered very carefully.

S Corporation to an LLC: If the corporation was never a C corporation, or wasn't a C corporation within the last 10 years, in most cases, this conversion should be tax-free at the corporate level. However, the tax consequences of such a conversion may be different for the S corporation's shareholders. Since the S corporation is a flow-through entity, and has only one level of tax at the shareholder level, any gain incurred at the corporate level passes through to the shareholders. If, at the time of conversion, the fair market value of the S corporation's assets exceeds their tax basis, the corporation's shareholders may be liable for individual income taxes. Thus, any gain incurred at the corporate level from the appreciation of assets passes through to the S corporation's shareholders when the S corporation transfers assets to the LLC.

Partnership to LLC: This conversion should be tax-free and the new LLC would be treated as a continuation of the partnership.

Sole proprietorship to an LLC: This conversion is another example of a tax-free conversion to an LLC.

While considering the potential tax consequences of conversion is important, keep in mind how your change in entity will also affect the non-tax elements of your business operations. How will a conversion to an LLC effect existing agreements with suppliers, creditors, and financial institutions?

Taxation of LLCs and "Check-the-Box" Regulations

Before federal "check-the-box" regulations were enacted at the end of 1996, it wasn't easy for LLCs to be classified as a partnership for tax purposes. However, the "check-the-box" regulations eliminated many of the difficulties of obtaining partnership tax treatment for an LLC. Under the check-the-box rules, most LLCs with two or more members would receive partnership status, thus avoiding taxation at the entity level as an "association taxed as a corporation."

If an LLC has more than 2 members, it will automatically be classified as a partnership for federal tax purposes. If the LLC has only one member, it will automatically be classified as a sole proprietor and would report all income and expenses on Form 1040, Schedule C. LLCs wishing to change the automatic classification must file Form 8832, Entity Classification Election.

Keep in mind that state tax laws related to LLCs may differ from federal tax laws and should be addressed when considering the LLC as the form of business entity for your business.

Since the information provided is general in nature and may not apply to your specific circumstances, please contact the office for more information or further clarification.

Maintaining good financial records is an important part of running a successful business. Not only will good records help you identify strengths and weaknesses in your business' operations, but they will also help out tremendously if the IRS comes knocking on your door.

Maintaining good financial records is an important part of running a successful business. Not only will good records help you identify strengths and weaknesses in your business' operations, but they will also help out tremendously if the IRS comes knocking on your door.

The IRS requires that business owners keep adequate books and records and that they be available when needed for the administration of any provision of the Internal Revenue Code (i.e., an audit). Here are some basic guidelines:

Copies of tax returns. You must keep records that support each item of income or deduction on a business return until the statute of limitations for that return expires. In general, the statute of limitations is three years after the date on which the return was filed. Because the IRS may go back as far as six years to audit a tax return when a substantial understatement of income is suspected, it may be prudent to keep records for at least six years. In cases of suspected tax fraud or if a return is never filed, the statute of limitations never expires.

Employment taxes. Chances are that if you have employees, you've accumulated a great deal of paperwork over the years. The IRS isn't looking to give you a break either: you are required to keep all employment tax records for at least 4 years after the date the tax becomes due or is paid, whichever is later. These records include payroll tax returns and employee time documentation.

Business assets. Records relating to business assets should be kept until the statute of limitations expires for the year in which you dispose of the asset in a taxable disposition. Original acquisition documentation, (e.g. receipts, escrow statements) should be kept to compute any depreciation, amortization, or depletion deduction, and to later determine your cost basis for computing gain or loss when you sell or otherwise dispose of the asset. If your business has leased property that qualifies as a capital lease, you should retain the underlying lease agreement in case the IRS ever questions the nature of the lease.

For property received in a nontaxable exchange, additional documentation must be kept. With this type of transaction, your cost basis in the new property is the same as the cost basis of the property you disposed of, increased by the money you paid. You must keep the records on the old property, as well as on the new property, until the statute of limitations expires for the year in which you dispose of the new property in a taxable disposition.

Inventories. If your business maintains inventory, your recordkeeping requirements are even more arduous. The use of special inventory valuation methods (e.g. LIFO and UNICAP) may prolong the record retention period. For example, if you use the last-in, first-out (LIFO) method of accounting for inventory, you will need to maintain the records necessary to substantiate all costs since the first year you used LIFO.

Specific Computerized Systems Requirements

If your company has modified, or is considering modifying its computer, recordkeeping and/or imaging systems, it is essential that you take the IRS's recently updated recordkeeping requirements into consideration.

If you use a computerized system, you must be able to produce sufficient legible records to support and verify amounts shown on your business tax return and determine your correct tax liability. To meet this qualification, the machine-sensible records must reconcile with your books and business tax return. These records must provide enough detail to identify the underlying source documents. You must also keep all machine-sensible records and a complete description of the computerized portion of your recordkeeping system.

Some additional advice: when your records are no longer needed for tax purposes, think twice before discarding them; they may still be needed for other nontax purposes. Besides the wealth of information good records provide for business planning purposes, insurance companies and/or creditors may have different record retention requirements than the IRS.

After your tax returns have been filed, several questions arise: What do you do with the stack of paperwork? What should you keep? What should you throw away? Will you ever need any of these documents again? Fortunately, recent tax provisions have made it easier for you to part with some of your tax-related clutter.

After your tax returns have been filed, several questions arise: What do you do with the stack of paperwork? What should you keep? What should you throw away? Will you ever need any of these documents again? Fortunately, recent tax provisions have made it easier for you to part with some of your tax-related clutter.

The IRS Restructuring and Reform Act of 1998 created quite a stir when it shifted the "burden of proof" from the taxpayer to the IRS. Although it would appear that this would translate into less of a headache for taxpayers (from a recordkeeping standpoint at least), it doesn't let us off of the hook entirely. Keeping good records is still the best defense against any future questions that the IRS may bring up. Here are some basic guidelines for you to follow as you sift through your tax and financial records:

Copies of returns. Your returns (and all supporting documentation) should be kept until the expiration of the statute of limitations for that tax year, which in most cases is three years after the date on which the return was filed. It's recommended that you keep your tax records for six years, since in some cases where a substantial understatement of income exists, the IRS may go back as far as six years to audit a tax return. In cases of suspected tax fraud or if you never file a return at all, the statute of limitations never expires.

Personal residence. With tax provisions allowing couples to generally take the first $500,000 of profits from the sale of their home tax-free, some people may think this is a good time to purge all of those escrow documents and improvement records. And for most people it is true that you only need to keep papers that document how much you paid for the house, the cost of any major improvements, and any depreciation taken over the years. But before you light a match to the rest of the heap, you need to consider the possibility of the following scenarios:

• Your gain is more than $500,000 when you eventually sell your house. It could happen. If you couple past deferred gains from prior home sales with future appreciation and inflation, you could be looking at a substantial gain when you sell your house 15+ years from now. It's also possible that tax laws will change in that time, meaning you'll want every scrap of documentation that will support a larger cost basis in the home sold.
• You did not use the home as a principal residence for a period. A relatively new income inclusion rule applies to home sales after December 31, 2008. Under the Housing and Economic Recovery Act of 2008, gain from the sale of a principal residence will no longer be excluded from gross income for periods that the home was not used as the principal residence. These periods of time are referred to as "non-qualifying use." The rule applies to sales occurring after December 31, 2008, but is based only on non-qualified use periods beginning on or after January 1, 2009. The amount of gain attributed to periods of non-qualified use is the amount of gain multiplied by a fraction, the numerator of which is the aggregate period of non-qualified use during which the property was owned by the taxpayer and the denominator of which is the period the taxpayer owned the property. Remember, however, that "non-qualified" use does not include any use prior to 2009.

• You may divorce or become widowed. While realizing more than a $500,000 gain on the sale of a home seems unattainable for most people, the gain exclusion for single people is only $250,000, definitely a more realistic number. While a widow(er) will most likely get some relief due to a step-up in basis upon the death of a spouse, an individual may find themselves with a taxable gain if they receive the house in a property settlement pursuant to a divorce. Here again, sufficient documentation to prove a larger cost basis is desirable.

Individual Retirement Accounts. Roth IRA and education IRAs require varying degrees of recordkeeping:

• Traditional IRAs. Distributions from traditional IRAs are taxable to the extent that the distributions exceed the holder's cost basis in the IRA. If you have made any nondeductible IRA contributions, then you may have basis in your IRAs. Records of IRA contributions and distributions must be kept until all funds have been withdrawn. Form 8606, Nondeductible IRAs, is used to keep track of the cost basis of your IRAs on an ongoing basis.

• Roth IRAs. Earnings from Roth IRAs are not taxable except in certain cases where there is a premature distribution prior to reaching age 59 1/2. Therefore, recordkeeping for this type of IRA is the fairly simple. Statements from your IRA trustee may be worth keeping in order to document contributions that were made should you ever need to take a withdrawal before age 59 1/2.
• Education IRAs. Because the proceeds from this type of an IRA must be used for a particular purpose (qualified tuition expenses), you should keep records of all expenditures made until the account is depleted (prior to the holder's 30th birthday). Any expenditures not deemed by the IRS to be qualified expenses will be taxable to the holder.

Investments. Brokerage firm statements, stock purchase and sales confirmations, and dividend reinvestment statements are examples of documents you should keep to verify the cost basis in your securities. If you have securities that you acquired from an inheritance or a gift, it is important to keep documentation of your cost basis. For gifts, this would include any records that support the cost basis of the securities when they were held by the person who gave you the gift. For inherited securities, you will want a copy of any estate or trust returns that were filed.

Keep in mind that there are also many nontax reasons to keep tax and financial records, such as for insurance, home/personal loan, or financial planning purposes. The decision to keep financial records should be made after all factors, including nontax factors, have been considered.

What do amounts paid for new swimming pools, Lamaze classes, lunches with friends, massages, and America Online fees have in common? All of these costs have been found to be legitimate tax deductions under certain circumstances. As you gather your information for the preparation of your tax return, it may pay to take a closer look at the items you spent money on during the year.

What do amounts paid for new swimming pools, Lamaze classes, lunches with friends, massages, and America Online fees have in common? All of these costs have been found to be legitimate tax deductions under certain circumstances. As you gather your information for the preparation of your tax return, it may pay to take a closer look at the items you spent money on during the year.

Medical Expenses

Medical expenses that you pay during the tax year for yourself, your spouse, and your dependents are deductible to the extent the total exceeds 7.5% of your adjusted gross income. This limitation can be hard to reach if you claim only medical insurance premiums and the co-pay on your kid's doctors' visits. Keep these potential deductions in mind as you tally up this year's medical expenses:

• For your home: capital expenditures for home improvements and additions (such as swimming pools, saunas, Jacuzzis, elevators) that are added primarily for medical care qualify for the medical expense deduction to the extent that the cost exceeds any increase in the value of your property due to the improvement.

• For your children: orthodontia; remedial reading and language training classes; lead paint removal.

• For you and your spouse: Lamaze or other childbirth preparation classes (mother only); contacts and eyeglasses; prescription contraceptives & permanent sterilization; health club dues (if prescribed by a physician for medical purposes); massages (if prescribed by a physician); mileage for trips to medical appointments.

• For your aging parents: If your or your spouse has a parent that qualifies as a dependent, you can deduct: hearing aids; domestic aid (provided by a nurse); prepaid lifetime medical care paid to a retirement home; special mattresses (prescribed by a physician); certain nursing home costs.

To maximize your deduction, try to bunch your medical expenses into one year to exceed the 7.5% limit. For example, schedule costly elective medical and dental treatments to be performed and billed in the same tax year.

Taxes Paid

Many of the taxes that you pay such as real estate taxes for your home, state and local taxes, and auto registration fees are deductible as itemized deductions on your return. Don't forget these:

• Property taxes paid on boats, motor homes, trailers, and other personal property.

• Real estate taxes paid on investment property and vacation homes.
• Real estate taxes paid through escrow in association with the purchase or sale of your residence or investment property.
• Employee contributions to a state disability fund.
• Foreign income taxes paid not taken as a credit.

Interest Expense

Although in recent years Congress has made the tax laws regarding interest deductions more strict, much of the interest that you pay during the year is still deductible. For interest paid to be deductible, you must be legally responsible for the underlying debt and the debt must result from a valid debtor-creditor relationship. While gathering your home mortgage interest numbers, dig a little deeper to get this inf

• Interest paid on margin loans.
• Prepayment penalties and late fees related to your mortgage.
• "Points" (prepaid interest) on home purchases and refinances.
• Seller-paid points on the purchase of a home.

Since personal interest paid on credit cards and other unsecured loans is not deductible, it may be wise to make that interest deductible by paying off that debt with a home-equity loan. Interest on home-equity loans of up to $100,000 is generally deductible on your return.

Miscellaneous Expenses

Miscellaneous itemized deductions such as unreimbursed employee business expenses and tax preparation fees are deductible to the extent that the total of all of these expenses is more than 2% of your adjusted gross income. Here's a few more to add to the list:

• Education expenses: You may be able to deduct expenses that you paid in connection with getting an education. These expenses are generally deductible to the extent required by law or your employer or needed to maintain or improve your skills. Examples of deductible education expenses are tuition; books; lab fees; supplies; and dues paid to professional societies. Certain travel & transportation costs may also be deductible.

• Job-hunting costs: You can deduct certain expenses you incur while looking for a new job in your present occupation, even if you do not get a new job. Consider some of these job-hunting expenses: resumes, phone calls, travel & transportation costs, lunches with others regarding possible job referrals; office supplies; and employment and outplacement agency fees.

• Investment expenses: Investment expenses are any expenses that you incur as you manage your investments. These expenses include professional fees paid related to investment activities; subscriptions to investment-oriented publications; fees paid to your Internet service provider related to tracking your investments; and IRA custodian fees (if billed separately).

• Protective clothing used on the job.

• Appraisal fees for certain charitable contributions & casualty losses.
• Safe deposit box fees.

Take the time this year to evaluate all of your expenditures made last year; you may be pleasantly surprised by what you find.

A. When you contribute an auto to a charitable organization, you must determine its fair market value at the time of the contribution to determine the amount of the charitable deduction on your tax return. For a contribution valued at over $5,000, a written appraisal is required and must be attached to the return.

While guides like the Kelly Blue Books are helpful and can provide a good estimate of the value of your auto, the values shown are not "official" and do not qualify as an appraisal of any specific donated property. Once a qualified appraisal of the property has been secured, you must complete Section B of Form 8283 for each item or group of items for which you claim a deduction of over $5,000. The organization that received the property must complete and sign Part IV of Section B. Failure to properly report the contribution on Form 8283 or attach the appraisal report can result in the IRS disallowing your deduction for your noncash charitable contribution. Please note that appraisal fees do not increase your charitable deduction but are miscellaneous itemized deductions on Schedule A of Form 1040.