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Less than five months ago, Republican leaders put the finishing touches on the Tax Cuts and Jobs Act, the most comprehensive overhaul of the tax law in 31 years. The legislation bestowed nearly $1.5 trillion in tax cuts upon corporations, small business owners, and workers over the next decade, and represents what is, to date, the signature victory of President Trump’s administration.

With mid-term elections just around the corner and rumblings of a potential “blue wave” growing louder, however, Republicans aren’t resting on their laurels. Just last week, Kevin Brady, Chairman of the House Ways and Means Committee, told reporters that the House is itching to have a go at “Tax Reform Phase 2,” with the aim of making the recently-enacted individual tax cuts permanent and the tax law, as a whole, more “family friendly.”

Wait…I’m an individual! I’m part of a family! This sounds wonderful!

Well, I’m not getting particularly excited about Brady’s promise, and neither should you, because unfortunately, it is nothing more than political posturing. Neither Brady nor anyone else in Congress, for that matter, really believes it will happen. Why not?

Continue reading on, Forbes.com

Authored by Tony Nitti, Withum Partner and writer for Forbes.com.

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As part of the recently-enacted Tax Cuts and Jobs Act (TCJA), a new provision of the Internal Revenue Code was born: Section 199A, which provides a deduction to owners of sole proprietorships, partnerships and S corporations equal to 20% of the income earned by the business. Republican leaders who designed the TCJA hailed the provision as a field leveler; after all, the foundation of the tax bill was a reduction in the tax rate of so-called “C corporations” from 35% to 21%. And, the logic went, if owners of C corporations were going to enjoy that type of windfall, then something needed to be done for the Mom-and-Pop store down on Main Street as well.

Because, you see, in all likelihood, that sweet couple down at Al’s Hardware doesn’t run their business as a C corporation. Instead, Al’s is either a sole proprietorship, partnership, or S corporation. Why? Because if you operate a business as a C corporation, your business income is taxed twice: once at the corporate level when it is earned (now at the new, lower 21% rate), and again at the individual level when the corporation distributes the income to you as a dividend. That stings.

To the contrary, if you operate your business as a sole proprietorship, partnership, or S corporation (so-called “pass through businesses”), you only pay tax on the income of the business once; at the individual level at individual rates. And since Mom and Pop generally don’t want to pay tax twice, most small businesses avoid operating as a C corporation and opt instead to be taxed as a pass through business.

Continue reading on, Forbes.com

Authored by Tony Nitti, Withum Partner and writer for Forbes.com.

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If you make your living in the tax world, you know David Kirk, even if you don’t think you know David Kirk.

If you’ve ever applied for a late S corporation election, you know David Kirk. If you’ve ever computed a client’s liability for the net investment income tax, you know David Kirk. And if you’ve ever been wowed by the acting chops on the guy who played Captain Kirk in that Star Trek-themed training video the IRS put out, well then, you know David Kirk.

OK, I made that last one up. But David Kirk is still one impressive dude.

After earning his undergraduate degree at Syracuse, Kirk added a law degree (University of Pittsburgh) and LLM (Georgetown) to his resume before joining the IRS as an attorney with the Office of the Chief Counsel. Within Chief Counsel, Kirk landed with the Passthroughs and Special Industries division, where he specialized in the treatment of partnerships, S corporations, estates and trusts.

While with the IRS, Kirk worked tirelessly to make our lives easier. He authored Revenue Procedure 2013-30 – which offers late relief from a missed S corporation, QSub, or entity classification election — sparing advisors from many a rough conversation with clients.

Continue reading on, Forbes.com

Authored by Tony Nitti, Withum Partner and writer for Forbes.com.

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If you tuned in to the President’s State of the Union address last week, you surely noticed that the recently enacted Tax Cuts and Jobs Act has been earmarked as the elixir for all that ails America. Soon enough, assembly line workers and supermarket cashiers will be lighting cigars with $100 bills — all because $1.5 trillion in corporate and individual tax cuts have been placed on the ol’ national credit card.

And while that may come to pass, it is important to remember that in any tax bill, while the good news gets the headlines, there is always more to the story.

For example: there are over $4 trillion in tax cuts contained within the Act. But remember: because Republicans chose to use the streamlined budget reconciliation process to pass the bill without a single vote from a Democrat, their hands were tied from a fiscal perspective: the net tax cuts could not exceed $1.5 trillion over the next ten years.

So how did Republicans get $4 trillion in tax cuts to fit within a $1.5 trillion-sized box? By offsetting some of the cuts with tax increases.

Think about the business side of the Act: The corporate rate was reduced from 35% to 21%, a move that ALONE would amount to a $1.3 trillion tax cut over the next decade. That’s right: the tax break resulting from the corporate rate reduction, in isolation, nearly matched the total cuts permitted by the budget reconciliation process.

Continue reading on, Forbes.com

Authored by Tony Nitti, Withum Partner and writer for Forbes.com.

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At first blush, you might think I’m a little late to the game with my annual “New Year’s Resolution” post. But my delay was actually a stroke of strategic genius. By waiting a few days to publish, I was allowing ample time for all of your original goals for 2018 to fail miserably. And look at you now: It’s only January 5th, and you’re already back on gluten. You’ve giving Jim a second chance. And you told the guy at the gym that you needed a full refund because you tore a muscle that, according to the latest medical research, does not actually exist.

But you can still salvage 2018. You can still leave the year a better person than the one who entered. Now, I can’t whip you into shape, or get you to put down the pizza, or convince you that Jim is the worst (and he is), but I can make you a better tax professional. All you need to do are these five things:

Embrace the Moment

No, no…I’m not suggesting that we put down our phone and spend more time with our kids. That never works, and for good reason. After all, the stuff on Twitter is far more interesting than anything Junior has to say.

What I am suggesting, however, is that as tax professionals, we look at the recent overhaul of the tax law not as a burden, but as an opportunity. Allow me to explain what I mean with a little story:

A few months ago, my 8 year old boy was invited to a birthday party at the local bowling alley. It wasn’t one of those “drop off and bail” parties, so I had to stick around for the duration. I didn’t know any of the other parents, so the prospect of killing two hours with 10 total strangers quickly grew uncomfortable, made only more so by the fact that like any tried-and-true tax guy, I’m inherently anti-social to being with.

Eventually, the conversation among the adults turned where it always does when no one knows what else to say: discussing what we do for a living. When it was my turn, I fessed up: I was a CPA who made my living in the tax law.

Continue reading on, Forbes.com

Authored by Tony Nitti, Withum Partner and writer for Forbes.com.

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Two short weeks ago, we dissected perhaps the most widely-anticipated but least-understood aspect of the Tax Cuts and Jobs Act: the new deduction available to business owners. As a reminder, under the new law, after January 1, 2018, the owner of a:

  • sole proprietorship reported directly on Schedule C
  • rental activity reported directly on Schedule E
  • S corporation, or
  • partnership…

…is entitled to take a deduction equal to 20% of the “qualified business income” earned from the business.

Qualified business income is best thought of as the ordinary, non-investment income of the business. Stated in another way, this is the revenue the business was designed to generate, less the applicable expenses. So we ignore things like interest or dividend income or capital gains from the sale of property.

The deduction, however, is limited to the LESSER OF:

  • 20% of qualified business income, or
  • 50% of the total W-2 wages paid by the business.

There is also an alternative limitation based on the owner’s allocable share of 2.5% of the unadjusted basis of certain business assets, but let’s cast that aside for today.

Continue reading on, Forbes.com

Authored by Tony Nitti, Withum Partner and writer for Forbes.com.

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When you arose from your Titos-induced slumber on the morning of January 1st, it was more than just your pants and dignity that had gone missing. While you were ringing in the New Year, the Internal Revenue Code you’d come to know and love had disappeared, replaced by the Tax Cuts and Jobs Act, the most comprehensive overhaul of the tax law in 31 years.

Fortunately for you, with enough money, both trousers and self-respect are easily recouped. An understanding of the tax law, however? That can’t be bought. As a result, you’ve got to start over, diving into the wholesale changes that took effect on New Year’s Day in hopes of regaining the same level of comfort you enjoyed with the previous version. And that’s not going to be a quick process, because as we’re quickly learning, for every straightforward tweak to the law– the doubling of the standard deduction, the elimination of personal exemptions — there is a corresponding influx of complexity that requires you to pop on the ol’ thinking cap.

In last week’s Tax Geek Tuesday, we took on perhaps the most intimidating and impactful provision of the new law: the “20% of qualified business income” deduction available to sole proprietors and owners of pass-through entities. It was a productive endeavor, but our work is far from over.

Today, we’ll move on to the next big challenge posed by the new law: understanding the changes that have been made to the way we depreciate assets purchased for use in a business.

Continue reading on, Forbes.com

Authored by Tony Nitti, Withum Partner and writer for Forbes.com.

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