You may have heard buzz about qualified opportunity zones (QOZs), an investment opportunity that allows you to defer taxes on reinvested capital gains and to exclude some of those gains permanently from taxation. What are these QOZs, and how do they work? We address the most common questions in this post.
In our last post, we discussed ways to grow an income stream
into a business for tax purposes so that you can deduct your expenses. One of
the strategies is to register with the state as an LLC or partnership. Another
is to follow the state’s rules about licensing and taxation. This post will look
more closely at these topics.
While we might view the growth of a hobby into a business as a natural, gradual process, the IRS considers the two to be distinct and has different rules regarding the expenses associated with them.
One of the business-favorable provisions of the 2017 Tax
Cuts & Jobs Act (TCJA) allows pass-through entities to deduct up to 20% of
their qualified business income (QBI) from their taxable income. Since few
people want to read that for themselves, we are summarizing it here in a
question-answer format.
Insteadof the wing and a prayer method when it comes to filing your taxes, use a
certified public accountant.
2018 TAX CUTS AND JOB ACT (TCJA) INDIVIDUALS TCJA will lower tax rates (top rate reduced from 39.6% to 37%) at many levels but impact to individuals/families will depend on a variety of other changes made by the Act Most provisions begin 1/1/2018 and end 12/31/2025 Increase in Standard Deductions to $24,000 for joint filers, $18,000 for Head of Households, and $12,000 for Single and Married Filing Separately Loss of Personal and Dependency exemptions Change in Itemized Deductions: State and Local Taxes - $10,000 limit on aggregate property, state and local taxes as an itemized deduction Medical Expenses - will revert back to the 7.5% AGI reduction for 2017 and 2018 and then 10% for 2019 and forward Interest you pay – Home Equity Loan Interest no longer deductible Charitable Contributions – Total Cash contributions deductible up to 60% AGI. No deductions for seating rights for college sporting events Casualty and Theft Losses – deductible only if due to federally declared disaster Employee Reimbursed Job Expenses and Miscellaneous Deductions will no longer be deductible including safe deposit boxes, tax preparation fees, investment fees, gambling losses Moving Expenses – no deduction except for certain military personnel Alimony – for post 2018 divorce degrees and separation agreements, alimony will not be deductible by the paying spouse and will not be taxable to the receiving spouse. 529 Plans – may now be used for educational expenses at an elementary or secondary public, private or religious school Kiddie Tax – unearned income of a child now taxed at the capital gains and ordinary tax rates for trusts and estates Child and Family Tax Credit – Credit increased to $2000 for qualifying children under 17 and refundable portion of credit to $1400. New $500 credit for dependents who are not qualifying children. Credits now phased out at $400,000 for joint filers. Health Care “Individual Mandate” – Beginning 2019, there is no longer a penalty for individuals who fail to obtain minimum essential health coverage. There is no change to the large employer mandate to provide insurance BUSINESSES Tax Rates for C Corporations – beginning 2018 tax year – 21% flat tax rate and eliminates the corporate AMT New 20% Deduction for Qualified Business Income from a Pass-through entity such as Partnership, S Corporation or Sole Proprietorship reduces taxable income but not adjusted gross income and will phase out for income from certain services For taxpayers with income above $315,000 joint and $157,500 single, limitation on W-2 wages and value of depreciable fixed assets is phased in deduction phased out for income from certain service related businesses Deduction is not available to: businesses which provide services in the fields of accounting, actuarial science, athletics, brokerage services, investing, consulting, financial services, health, law or the performing arts or whose principal asset is the reputation or skill of one or more of its employees or owner Bonus Depreciation – Property placed in service after 9/27/17, 100% deduction – New or used property 100% begins decreasing inn year 2023 to 80% and down to 0% by 2027 Section 179 Expensing – increased to $1 Million in 2018 and expands the definition of qualified property Health Care Coverage for Employees - There is no change to the large employer mandate to provide insurance Entertainment Expense and Club Dues: No deduction is allowable with an activity generally considered entertainment, amusement or recreation No deduction for membership in clubs organized for business, pleasure, recreation or other social purpose Net Operating Losses – beginning 2018, carryback provision is eliminated and NOLs can be carried forward indefinitely Like Kind Exchanges – will limit tax-free exchanges to exchange of real property that is not held primarily for sale, thus, personal property like autos and intangible property cannot qualify for tax-free like kind exchanges. Withholding on Employee Wages – because of new tax rates for 2018, tax withholding tables will change. IRS indicates it will release these tables in January for employers to begin using in February 2018 ESTATES Tax exemptions for estates doubled to $10 million per person beginning 1/1/2018 and indexing to approximately $11.2 million by 2018 Marilyn L. Miller, CPA 123 W. Washington Ave. Athens, TN 37303 (423)745-6680 Jason G. McPhail, CPA 345 Frazier Avenue, Suite 207 Chattanooga, TN 37405 (423)756-7002