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By Stacie Clifford Kitts
The proposed tax plans offered up by President Elect Trump and the House Republican Tax Reform Plan are presenting some unique year-end tax planning challenges.
The most common question that taxpayers are asking is, will tax rates be lower in 2017?
To help answer this question, we should first review how our tax rates work now.
We currently pay federal income taxes at graduated rates ranging from 10% to 39.6%. However, if you are a higher income earner making more than $125,000 (single) or $250,000 (married), you may pay an additional 3.8% tax on your net investment income, making your top federal rate 43.4%.
An analysis of Trump’s current plan, indicates that if your income is over approximately $425,400 (single) and $487,650 (married), you may (depending on your itemized deductions) see a significant reduction in income taxes under his plan.
However, middle class taxpayers may face an increase in tax depending on the size of their family and filing status. This is largely due to the Republican and Trump plans which seek to limit itemized and dependent deductions, expand income tax brackets, and repeal the personal exemption and head of household status.
To help better understand the possible impact on your taxes, here are some of the key proposals affecting higher income earners (AGI over $150K). Because the Trump and Republican plans are not the same, we will most likely see some sort of mix of the two plans:
Individual income tax
- Both Trump, and the House Republican Plan, will drop the number of income tax brackets to just three, at 12%, 25%, and 33%.
- The plan will also eliminate the alternative minimum tax (yay),
- it also eliminates all itemized deductions (boo) except mortgage interest and charitable giving.
- They have further proposed to limit the amount of total itemized deduction to $100,000 (Single) and $200,000 (Married). This proposal will reduce the tax incentive for charitable giving once your itemized deductions reach the allowed limit.
- Significantly for us here in California, state income taxes paid would no longer be deductible on Federal returns.
The top rate for long term capital gains is currently 20% plus the 3.8% investment tax imposed by the Affordable Care Act (for high income earners), for a total top rate of 23.8%. Interest and non-qualified dividend income is taxed at ordinary rates.
Trump proposes to repeal the affordable Care Act including the 3.8% tax which will cap long term capital gains at 20%.
House Republican’s Plan
On the other hand, the House’s plan would apply tax to 50% of interest income, dividends and capital gains at ordinary income tax rates. The remaining 50% would not be subject to tax. This translates to a top rate of 16.5% for investment income.
Estate and gift tax
Under current law, estates are subject to a 40% tax on the estates value over $5.45 million. In addition, beneficiaries of the estate receive a step-up in the basis of the assets value equal to the fair market value at the date of death.
Trump and the House Republican Plan propose a repeal of the estate and gift tax entirely. Trump proposes to repeal the step up in basis provision and replace it with a carryover provision for computing taxable gains on sales for estates in excess of $5 million (single) or $10 million (married). The Republican Plan provides for carryover of basis on all assets.
The top corporate tax rate is currently 35%. Income from pass-through businesses such as partnerships and S-corporations are taxed at individual rates.
- Trump’s plan would reduce top corporate income taxes from 35% to 15% and repeal corporate AMT tax.
- Individuals can elect a tax rate of 15% for business income from pass-through entities (including sole proprietorships).
- Distributions from large pass-through businesses received by owners who elected the 15% flat rate would be taxed as dividends. (included in overall personal taxable income)
- The Trump plan eliminates all tax credits (tax incentives) except the research credit.
- The plan would allow businesses to elect to expense capital equipment, structures and inventories directly rather than over time. However, if direct expense is elected, interest expense deductions would not be allowed.
House Republican’s Plan
- The Republican Plan would reduce the corporate tax to a flat 20%.
- Eliminate the corporate alternative minimum tax.
- Income from pass-through entities would top out at 25%.
- Costs of capital investments are immediately deductible
- Eliminates the deductibility of net interest expenses on future loans.
- Restricts the deduction for net operating losses to 90 percent of net taxable income and allows net operating losses to be carried forward indefinitely, and increased by a factor reflecting inflation and the real return to capital. Does not allow net operating losses to be carried back.
- Eliminates the domestic production activities deduction (section 199) and all other business credits, except for the research and development credit.
- Creates a fully territorial tax system, exempting from U.S. tax 100 percent of dividends from foreign subsidiaries.
- Enacts a deemed repatriation of currently deferred foreign profits, at a tax rate of 8.75 percent for cash and cash-equivalent profits and 3.5 percent on other profits.[Tax Foundation]
An analysis of your personal itemized deductions along with the type of income to be reported on your return, including pass through or investment income, is necessary to determine the actual impact of these proposed tax plans on your 2017 income tax. Higher income earners might consider deferring income into 2017 if possible.
Many Business Tax Filers Can File for 2012 Starting Feb. 4 But many others are Looking at late Feb. Early March before they can file
Many businesses will be able to file their 2012 federal income tax returns starting Monday, Feb. 4. Filers of forms affected by January tax law changes will need to wait until late February or early March.
These delay dates impact the release of your electronically prepared returns. They do not prevent Katherman Kitts from preparing your tax return.
Katherman Kitts wants to remind our clients that there is no push back on the March 15 (business filers) and the April 15 (individual filers) due dates for your tax returns. Therefore, we still need enough time to receive the information and to prepare your returns before the filing deadlines. Please, continue to send the information to prepare your returns as soon as possible.
The Monday opening covers non-1040 series business returns for calendar year 2012, including Form 1120 filed by corporations, Form 1120S filed by S corporations, Form 1065 filed by partnerships, Form 990 filed by exempt organizations and most users of Form 720 , Quarterly Excise Tax Return. This includes both electronic filers and paper filers.
While many businesses will be able to file starting Feb. 4, there are a number of business forms still being updated for 2012. The IRS will announce soon when individual and business taxpayers can begin filing returns that include any of the delayed forms. Processing of these forms were delayed while the IRS completes programming and testing of its processing systems to reflect changes made by the American Taxpayer Relief Act (ATRA) enacted by Congress on Jan. 2.
A full list of the affected forms is available on IRS.gov.
In addition to the forms listed on IRS.gov, filing of two other business forms is affected by the delay, but only for electronic filers. Businesses using Form 720 and filling out lines 13 and 14 cannot file yet electronically, but they can file on paper. Other Forms 720 are being accepted electronically. In addition, Form 8849 Schedule 3, Claim for Refund of Excise Taxes, is not currently being accepted electronically, but it can be filed on paper.
Additional information will be posted soon on IRS.gov.
Are you opening a new business this summer? The IRS has many resources available for individuals that are opening a new business. Here are six tax tips the IRS wants new business owners to know.
- First, you must decide what type of business entity you are going to establish. The type of business entity will determine which tax form you have to file. The most common types of business are the sole proprietorship, partnership, corporation and S corporation.
- The type of business you operate determines what taxes you must pay and how you pay them. The four general types of business taxes are income tax, self-employment tax, employment tax and excise tax.
- An Employer Identification Number is used to identify a business entity. Generally, businesses need an EIN. Visit IRS.gov for more information about whether you will need an EIN. You can also apply for an EIN online at IRS.gov.
- Good records will help you ensure successful operation of your new business. You may choose any recordkeeping system suited to your business that clearly shows your income and expenses. Except in a few cases, the law does not require any special kind of records. However, the business you are in affects the type of records you need to keep for federal tax purposes.
- Every business taxpayer must figure taxable income on an annual accounting period called a tax year. The calendar year and the fiscal year are the most common tax years used.
- Each taxpayer must also use a consistent accounting method, which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the cash method and an accrual method. Under the cash method, you generally report income in the tax year you receive it and deduct expenses in the tax year you pay them. Under an accrual method, you generally report income in the tax year you earn it and deduct expenses in the tax year you incur them.
IRS Publication 583, Starting a Business and Keeping Records, provides basic federal tax information for people who are starting a business. This publication is available on IRS.gov or by calling 800-TAX-FORM (800-829-3676). Visit the Business section of IRS.gov for resources to assist entrepreneurs with starting and operating a new business.
Business start-up and organizational costs are generally capital expenditures. However, you can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs paid or incurred after October 22, 2004. The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized. For information about amortizing start-up and organizational costs, see chapter 8.
Start-up costs include any amounts paid or incurred in connection with creating an active trade or business or investigating the creation or acquisition of an active trade or business. Organizational costs include the costs of creating a corporation. For more information on start-up and organizational costs, see chapter 8 [of publication 535] .
Do you have a profit in the current year, but because of certain economic conditions, or other factors you expect to have a net operating loss next year?
If the answer is yes, you may be able to delay payment of your corporate income taxes.
Yes – Really, you can delay payment of corporate income taxes if the right conditions exist.
Generally, if you request an extension of time to file your tax return, you are extending the due date of the return, but not the due date for paying your income tax. As corporate tax payers know, their income taxes are due in full by the 15th day of the third month following the corporation’s year-end.
However, you may be able to extend the due date for paying your corporate income taxes by filing Form 1138 Extension of Time for Payment of Taxes by a Corporation Expecting A Net Operating Loss Carry back.
In order to take advantage of this extension of time to pay your tax, you must also extend the due date of your corporate income tax return using Form 7004 Application for Automatic Extension of Time to File Certain Business Income Tax. Payment is delayed [and therefore not deposited with Form 7004] because taxes that normally would be deposited will be reduced or possibly eliminated by the carry back of the net operating loss from the following year.
File the Form 1138 after the beginning of the tax year where you expect a net operating loss, but before the original due date of the tax return.
The extension for payment is in effect until the return for which the extension is requested is due to be filed – including extensions.
Note: Not all payments are extended. If you were required to make estimated payments throughout the year, these will most likely not be extended. Only payments that would be due after you file Form 1138 are extended.
Access to the right funding is key to the survival of many small businesses. Therefore, if you don’t know What Lenders Are Looking For in Business Loan Requests click on over to hear Linda Keith CPA give the right answers to the right questions.
Michelle Baca over at ConvergenceCoaching LLC provides Inspired Ideas for CPA’s and IT professionals. Michelle’s latest post The Top 3 Business Uses for Twitter, is certainly inspired. If you are interested in learning more about social networking – why wait – join the throng. Michelle indicates that one of her most popular training courses this year has been “Embracing Social Networking in Your Firm.” If you would like to learn more, click on over to ConvergenceCoaching LLC.
Where to begin?
Until recently, I was happily posting little tidbits of tax stuff, mostly gleaned from the IRS’s tax tip releases and some original posts written when I could get time away from the tax practice.
Then an old friend, who is also a writer, publisher, editor, and internet-marketing expert, pointed out that I should use my blog posts to boost my internet presence and market myself online. [Frankly, I always thought people just stumbled onto blogs by accident or found you by some miracle. I really didn’t think much about it. However, that is another blog on another day.]
In addition to following some of her great tips, I also began looking for other tax blogs and quickly realized that there was a whole tax blogging community. They appeared to be a supportive group too, re-tweeting posts, linking to each other’s blog pages, writing flattering posts about each other, generally a very pleasant blogging experience.
That is, until I read a post by June Walker. Now, to be fair, June did not strike first. No, she was set off by a couple of bloggers, The Wondering Tax Pro, aka “Sammy Segar, CPA” and The Tax Lawyer’s Blog aka “Attila Attorney” to be specific. Each of these bloggers disagreed with her post, You Do Not Need a Business Checking Account.
Now, if you have ever thought that accountants were docile number crunchers, you were wrong, at least as it applies to Ms. Walker. You can check out her retaliation here.
In addition, as this saga drags on, it appears that I am soon to be the target of Ms. Walkers rants as I might have been a bit harsh in my comments to her retaliation post. I am not going to go into the whole thing here since you can click on the link and page down to my post. Mine starts “OMG -I can’t believe what I am reading. Is this how tax bloggers behave?”
Although I risk being the target of her mean spirited rants, I stand by my “chick think” statement. I believe some of her comments were snide, belittling, unprofessional, and unnecessary – In the same way a bunch of women might stand around the water cooler and gossip about the pretty girl in the office next door. . However, that’s just my opinion.
So here you go Ms. Walker, rip me apart. It certainly won’t take a genius to find flaws in my blog posts. I definitely need an editor. LOL. However, it will be interesting to see how many mistakes she was able to find in my comment posted on her blog…kind of like a Where’s Waldo exercise.
Oh…do I get a “composite figure?” How exciting. I cannot wait to find out. 🙂
Now off to take care of the important things in life, like putting my granddaughter to bed.
Oh and yes, that’s me and the grandbaby right after we finished this evenings bath.
Wowser – A Tax Blog Throw Down – Why Keeping a Separate Business Checking Account Can Save Your Clients Money.
I must say, the business life of a tax accountant isn’t exactly a mardi gras. Moreover, it’s no wonder that we don’t see movies of the week about the accountant who couldn’t balance his or her ledger – borrrrring.
Therefore, I certainly look forward to the occasional lively debate, something stimulating and thought provoking, you know to spice it up a bit . But gees, I sure was stunned to read the comments made by June Walker over at her blog post There’s no shortage of bad advice out there. I suppose I don’t need to go into the details, since you can head over to her blog and read it yourself. But suffice it to say, she was a little miffed when a fellow blogger seamed to diss her blog post You Do Not Need A Business Checking Account.
But, hello, what do you expect to happen when you give that type of advice? Come on -you do not need a business checking account? What? Are you serious?
Regardless of all the important reasons to have a separate business account, you can check those out here at The Wondering Tax Pro’s blog, the extra cost that would be incurred by many clients to have an accountant or bookkeeper wade through business and personal expenses to pick out the proper deductions is not something I would readily advise to any client. And I know this from personal experience. Thank you.
I want my clients to focus on the important aspect of managing their businesses – you know – the revenue generating part, not the “Oh crap, I forgot to pull that business expense out of my co-mingled account” part.
So if you want to save your clients some frustration and some accounting fees, please advice them to open a separate banking account for their self-employed business.
In my opinion, advising a client NOT to open a separate business account would undoubtedly increase the accounting fees for those clients. So unless that is your intention, better stay away from that type of advice.
Here’s the latest More Tax Tip – Read about the small business bail out
Since June 15, lenders across the country have provided millions of dollars in capital to small businesses through the America’s Recovery Capital (ARC) loan program. Created under the Recovery Act, the temporary ARC program offers interest-free loans to viable small businesses, which carry a 100 percent guaranty from the SBA to the lender and require no fees paid to SBA. Loan proceeds are provided over a six-month period and repayment of the ARC loan principal is deferred for 12 months after the last disbursement of the proceeds. Repayment can extend up to five years.