Deferral of employment tax deposits and payments through December 31, 2020
The Coronavirus, Aid, Relief and Economic Security Act (CARES Act) allows employers to defer the deposit and payment of the employer’s share of Social Security taxes and self-employed individuals to defer payment of certain self-employment taxes. These FAQs address specific issues related to the deferral of deposit and payment of these employment taxes. These FAQs will be updated to address additional questions as they arise.
1. What deposits and payments of employment taxes are employers entitled to defer?
Section 2302 of the CARES Act provides that employers may defer the deposit and payment of the employer’s portion of Social Security taxes and certain railroad retirement taxes. These are the taxes imposed under section 3111(a) of the Internal Revenue Code (the “Code”) and, for Railroad employers, so much of the taxes imposed under section 3221(a) of the Code as are attributable to the rate in effect under section 3111(a) of the Code (collectively referred to as the “employer’s share of Social Security tax”). Employers that received a Paycheck Protection Program loan may not defer the deposit and payment of the employer’s share of Social Security tax that is otherwise due after the employer receives a decision from the lender that the loan was forgiven. (See FAQ 4).
2. When can employers begin deferring deposit and payment of the employer’s share of Social Security tax without incurring failure to deposit and failure to pay penalties?
The deferral applies to deposits and payments of the employer’s share of Social Security tax that would otherwise be required to be made during the period beginning on March 27, 2020, and ending December 31, 2020. (Section 2302 of the CARES Act calls this period the “payroll tax deferral period.”)
The Form 941, Employer’s QUARTERLY Federal Tax Return, will be revised for the second calendar quarter of 2020 (April – June, 2020). Information will be provided in the near future to instruct employers how to reflect the deferred deposits and payments otherwise due on or after March 27, 2020 for the first quarter of 2020 (January – March 2020). In no case will Employers be required to make a special election to be able to defer deposits and payments of these employment taxes.
3. Which employers may defer deposit and payment of the employer’s share of Social Security tax without incurring failure to deposit and failure to pay penalties?
All employers may defer the deposit and payment of the employer’s share of Social Security tax. However, employers that receive a loan under the Small Business Administration Act, as provided in section 1102 of the CARES Act (the Paycheck Protection Program (PPP)), may not defer the deposit and payment of the employer’s share of Social Security tax due after the employer receives a decision from the lender that the PPP loan is forgiven under the CARES Act. See FAQ 4.
4. Can an employer that has applied for and received a PPP loan that is not yet forgiven defer deposit and payment of the employer’s share of Social Security tax without incurring failure to deposit and failure to pay penalties?
Yes. Employers who have received a PPP loan may defer deposit and payment of the employer’s share of Social Security tax that otherwise would be required to be made beginning on March 27, 2020, through the date the lender issues a decision to forgive the loan in accordance with paragraph (g) of section 1106 of the CARES Act, without incurring failure to deposit and failure to pay penalties. Once an employer receives a decision from its lender that its PPP loan is forgiven, the employer is no longer eligible to defer deposit and payment of the employer’s share of Social Security tax due after that date. However, the amount of the deposit and payment of the employer’s share of Social Security tax that was deferred through the date that the PPP loan is forgiven continues to be deferred and will be due on the “applicable dates,” as described in FAQs 7 and 8.
5. Is this ability to defer deposits of the employer’s share of Social Security tax in addition to the relief provided in Notice 2020-22 for deposit of employment taxes in anticipation of the Families First Coronavirus Relief Act (FFCRA) paid leave credits and the CARES Act employee retention credit?
Yes. Notice 2020-22 provides relief from the failure to deposit penalty under section 6656 of the Code for not making deposits of employment taxes, including taxes withheld from employees, in anticipation of the FFCRA paid leave credits and the CARES Act employee retention credit. The ability to defer deposit and payment of the employer’s share of Social Security tax under section 2302 of the CARES Act applies to all employers, not just employers entitled to paid leave credits and employee retention credits. (But see the limit described in FAQ 4 for employers that have a PPP loan forgiven.)
6. Can an employer that is eligible to claim refundable paid leave tax credits or the employee retention credit defer its deposit and payment of the employer’s share of Social Security tax prior to determining the amount of employment tax deposits that it may retain in anticipation of these credits, the amount of any advance payments of these credits, or the amount of any refunds with respect to these credits?
Yes. An employer is entitled to defer deposit and payment of the employer’s share of Social Security tax prior to determining whether the employer is entitled to the paid leave credits under sections 7001 or 7003 of FFCRA or the employee retention credit under section 2301 of the CARES Act, and prior to determining the amount of employment tax deposits that it may retain in anticipation of these credits, the amount of any advance payments of these credits, or the amount of any refunds with respect to these credits.
7. What are the applicable dates by which deferred deposits of the employer’s share of Social Security tax must be deposited to be treated as timely (and avoid a failure to deposit penalty)?
The deferred deposits of the employer’s share of Social Security tax must be deposited by the following dates (referred to as the “applicable dates”) to be treated as timely (and avoid a failure to deposit penalty):
On December 31, 2021, 50 percent of the deferred amount; and
On December 31, 2022, the remaining amount.
8. What are the applicable dates when deferred payment of the employer’s share of Social Security tax must be paid (to avoid a failure to pay penalty under section 6651 of the Code)?
The deferred payment of the employer’s share of Social Security tax is due on the “applicable dates” as described in FAQ 7.
9. Are self-employed individuals eligible to defer payment of self-employment tax on net earnings from self-employment income?
Yes. Self-employed individuals may defer the payment of 50 percent of the Social Security tax on net earnings from self-employment income imposed under section 1401(a) of the Code for the period beginning on March 27, 2020, and ending December 31, 2020. (Section 2302 of the CARES Act calls this period the “payroll tax deferral period.”)
10. Is there a penalty for failure to make estimated tax payments for 50 percent of Social Security tax on net earnings from self-employment income during the payroll tax deferral period?
No. For any taxable year that includes any part of the payroll tax deferral period, 50 percent of the Social Security tax imposed on net earnings from self-employment income during that payroll tax deferral period is not used to calculate the installments of estimated tax due under section 6654 of the Code.
11. What are the applicable dates when deferred payment amounts of 50 percent of the Social Security tax imposed on self-employment income must be paid?
The deferred payment amounts are due on the “applicable dates” as described in FAQ 7.
Payment Deadline Extended to July 15, 2020
The Treasury Department and the Internal Revenue Service are providing special payment relief to individuals and businesses in response to the COVID-19 Outbreak. The filing deadline for tax returns remains April 15, 2020. The IRS urges taxpayers who are owed a refund to file as quickly as possible. For those who can’t file by the April 15, 2020 deadline, the IRS reminds individual taxpayers that everyone is eligible to request a six-month extension to file their return.
Individuals: Income tax payment deadlines for individual returns, with a due date of April 15, 2020, are being automatically extended until July 15, 2020, for up to $1 million of their 2019 tax due. This payment relief applies to all individual returns, including self-employed individuals, and all entities other than C-Corporations, such as trusts or estates. IRS will automatically provide this relief to taxpayers. Taxpayers do not need to file any additional forms or call the IRS to qualify for this relief.
Corporations: For C Corporations, income tax payment deadlines are being automatically extended until July 15, 2020, for up to $10 million of their 2019 tax due.
This relief also includes estimated tax payments for tax year 2020 that are due on April 15, 2020.
Penalties and interest will begin to accrue on any remaining unpaid balances as of July 16, 2020. If you file your tax return or request an extension of time to file by April 15, 2020, you will automatically avoid interest and penalties on the taxes paid by July 15.
The IRS reminds individual taxpayers the easiest and fastest way to request a filing extension is to electronically file Form 4868 through their tax professional, tax software or using the Free File link on IRS.gov. Businesses must file Form 7004.
This relief only applies to federal income tax (including tax on self-employment income) payments otherwise due April 15, 2020, not state tax payments or deposits or payments of any other type of federal tax. Taxpayers also will need to file income tax returns in 42 states plus the District of Columbia. State filing and payment deadlines vary and are not always the same as the federal filing deadline. The IRS urges taxpayers to check with their state tax agencies for those details. More information is available at https://www.taxadmin.org/state-tax-agencies.
Work Sharing Program
Employers can apply for the Unemployment Insurance (UI) Work Sharing Program if reduced production, services, or other conditions cause them to seek an alternative to layoffs.
The Work Sharing Program helps employees whose hours and wages have been reduced:
Receive UI benefits.
Keep their current job.
Avoid financial hardships.
The Work Sharing Program helps employers:
Minimize or eliminate the need for layoffs.
Keep trained employees and quickly prepare when business conditions improve.
Avoid the cost of recruiting, hiring, and training new employees.
To participate, employers must meet all of the following requirements:
Be a legally registered business in California.
Have an active California State Employer Account Number.
At least 10 percent of the employer’s regular workforce or a unit of the workforce, and a minimum of two employees, must be affected by a reduction in hours and wages.
Hours and wages must be reduced by at least 10 percent and not exceed 60 percent.
Health benefits must remain the same as before, or they must meet the same standards as other employees who are not participating in Work Sharing.
Retirement benefits must meet the same terms and conditions as before, or they must meet the same as other employees not participating in Work Sharing.
The collective bargaining agent of employees in a bargaining unit must agree to voluntarily participate and sign the application for Work Sharing.
Identify the affected work units to be covered by the Work Sharing plan and identify each participating employee by their full name and Social Security number.
Notify employees in advance of the intent to participate in the Work Sharing program.
Identify how many layoffs will be avoided by participating in the Work Sharing program.
Provide the EDD with any necessary reports or documents relating to the Work Sharing plan.
Leased, intermittent, seasonal, or temporary service employees cannot participate in the Work Sharing Program.
Corporate officers or major stock holders with investment in the company cannot participate in the Work Sharing Program.
The Work Sharing Program cannot be used as a transition to a layoff.
Note: Your plan application will only renew if it is submitted no more than 10 days after your previous plan has expired. Otherwise, your plan will become effective the Sunday before the date we receive your application.
If you need additional information on the Work Sharing Program, contact the EDD Special Claims Office at 916-464-3343.
If you are approved by your employer to participate in the Work Sharing Program and have questions regarding your claim, contact the EDD Special Claims office at 916-464-3300.
More time to file, pay for California taxpayers affected by the COVID-19 pandemic
Sacramento – The Franchise Tax Board (FTB) today announced special tax relief for California taxpayers affected by the COVID-19 pandemic. Affected taxpayers are granted an extension to file 2019 California tax returns and make certain payments until June 15, 2020, in line with Governor Newsom’s March 12 Executive Order.
“During this public health emergency, every Californian should be free to focus on their health and wellbeing,” said State Controller Betty T. Yee, who serves as chair of FTB. “Having extra time to file their taxes helps allows people to do this, as the experts work to control the spread of coronavirus.”
This relief includes moving the various tax filing and payment deadlines that occur on March 15, 2020, through June 15, 2020, to June 15, 2020. This includes:
Partnerships and LLCs who are taxed as partnerships whose tax returns are due on March 15 now have a 90-day extension to file and pay by June 15.
Individual filers whose tax returns are due on April 15 now have a 60-day extension to file and pay by June 15.
Quarterly estimated tax payments due on April 15 now have a 60-day extension to pay by June 15.
The FTB’s June 15 extended due date may be pushed back even further if the Internal Revenue Service grants a longer relief period.
Taxpayers claiming the special COVID-19 relief should write the name of the state of emergency (for example, COVID-19) in black ink at the top of the tax return to alert FTB of the special extension period. If taxpayers are e-filing, they should follow the software instructions to enter disaster information.
The FTB will also waive interest and any late filing or late payment penalties that would otherwise apply.
FTB administers two of California’s major tax programs: Personal Income Tax and the Corporation Tax. FTB also administers other non tax programs and delinquent debt collection functions, including delinquent vehicle registration debt collections on behalf of the Department of Motor Vehicles, and court–ordered debt. Annually, FTB’s tax programs collect more than 70 percent of the state’s general fund. For more information on other taxes and fees in California, visit: taxes.ca.gov.
Coronavirus 2019 (COVID-19)
An outbreak of respiratory illness caused by a new coronavirus (COVID-19) has been identified starting in Wuhan, China. There is no evidence of widespread transmission of COVID-19 in California at this time. While investigations to learn more about the virus are ongoing, workers and employers should review their health and safety procedures to help prevent exposure to the virus.
Frequently Asked Questions
Visit Coronavirus 2019 FAQs for answers to specific questions you may have about COVID-19 and what programs and benefits may be available to you.
The EDD provides a variety of support services to individuals affected by COVID-19 in California. For faster and more convenient access to those services, we encourage the use of our online options.
Sick or Quarantined
If you’re unable to work due to having or being exposed to COVID-19 (certified by a medical professional), you can file a Disability Insurance (DI) claim. DI provides short-term benefit payments to eligible workers who have a full or partial loss of wages due to a non-work-related illness, injury, or pregnancy. Benefit amounts are approximately 60-70 percent of wages (depending on income) and range from $50-$1,300 a week.
The Governor’s Executive Order waives the one-week unpaid waiting period, so you can collect DI benefits for the first week you are out of work. If you are eligible, the EDD processes and issues payments within a few weeks of receiving a claim.
If you’re unable to work because you are caring for an ill or quarantined family member with COVID-19 (certified by a medical professional), you can file a Paid Family Leave (PFL) claim. PFL provides up to six weeks of benefit payments to eligible workers who have a full or partial loss of wages because they need time off work to care for a seriously ill family member or to bond with a new child. Benefit amounts are approximately 60-70 percent of wages (depending on income) and range from $50-$1,300 a week. If you are eligible, the EDD processes and issues payments within a few weeks of receiving a claim.
If your child’s school is closed, and you have to miss work to be there for them, you may be eligible for Unemployment Insurance benefits. Eligibility considerations include if you have no other care options and if you are unable to continue working your normal hours remotely. File an Unemployment Insurance claim and our EDD representatives will decide if you are eligible.
Reduced Work Hours
If your employer has reduced your hours or shut down operations due to COVID-19, you can file an Unemployment Insurance (UI) claim. UI provides partial wage replacement benefit payments to workers who lose their job or have their hours reduced, through no fault of their own. Workers who are temporarily unemployed due to COVID-19 and expected to return to work with their employer within a few weeks are not required to actively seek work each week. However, they must remain able and available and ready to work during their unemployment for each week of benefits claimed and meet all other eligibility criteria. Eligible individuals can receive benefits that range from $40-$450 per week.
The Governor’s Executive Order waives the one-week unpaid waiting period, so you can collect UI benefits for the first week you are out of work. If you are eligible, the EDD processes and issues payments within a few weeks of receiving a claim.
The available benefits are insurance programs. To be eligible, either you or an employer had to make contributions in the past 5 to 18 months. It is possible these contributions were made at a prior job, or if you were misclassified as an independent contractor instead of an employee. We encourage you to apply for the benefit program that is most appropriate for your situation. Visit Self-Employed/Independent Contractor to learn more.
Employers experiencing a slowdown in their businesses or services as a result of the coronavirus impact on the economy may apply for the UI Work Sharing Program. This program allows employers to seek an alternative to layoffs — retaining their trained employees by reducing their hours and wages that can be partially offset with UI benefits. Workers of employers who are approved to participate in the Work Sharing Program receive the percentage of their weekly UI benefit amount based on the percentage of hours and wages reduced, not to exceed 60 percent.
Visit Work Sharing Program to learn more about its benefits for employers and employees, and how to apply.
Employers experiencing a hardship as a result of COVID-19 may request up to a 60-day extension of time from the EDD to file their state payroll reports and/or deposit state payroll taxes without penalty or interest. A written request for extension must be received within 60 days from the original delinquent date of the payment or return.
For questions, employers may call the EDD Taxpayer Assistance Center.
IRS issues proposed regulations on new business interest expense deduction limit
The Internal Revenue Service issued proposed regulations today for a provision of the Tax Cuts and Jobs Act, which limits the business interest expense deduction for certain taxpayers. Certain small businesses whose gross receipts are $25 million or less and certain trades or businesses are not subject to the limits under this provision.
For tax years beginning after Dec. 31, 2017, the deduction for business interest expense is generally limited to the sum of a taxpayer’s business interest income, 30 percent of adjusted taxable income and floor plan financing interest. Taxpayers will use new Form 8990, Limitation on Business Interest Expense Under Section 163(j), to calculate and report their deduction and the amount of disallowed business interest expense to carry forward to the next tax year.
Small business exemption
This limit does not apply to taxpayers whose average annual gross receipts are $25 million or less for the three prior tax years. This amount will be adjusted annually for inflation starting in 2019.
Other exclusions from the limit are certain trades or businesses, including performing services as an employee, electing real property trades or businesses, electing farming businesses and certain regulated public utilities. Taxpayers must elect to exempt a real property trade or business or a farming business from this limit.
Taxpayers may rely on the rules in these proposed regulations until final regulations are published in the Federal Register. Written or electronic comments and requests for a public hearing on these proposed regulations must be received within 60 days of publication in the Federal Register.
Disallowed business interest carryover in year gross receipts fall below threshold
Business interest expense that is disallowed under IRC §163(j) is carried over to subsequent years. If a taxpayer’s average gross receipts fall below the gross receipts threshold in a future year, then all previously disallowed business interest expense becomes immediately deductible. (Prop. Treas. Regs. §1.163(j)-2(c)(2))
CALSAVERS: What Employers Need to Know
CalSavers Retirement Savings Program (CalSavers) is a state-run retirement savings program for private-sector employees whose employers do not offer a retirement program. CalSavers brings a retirement savings option to employees who don’t currently have one; it is designed as a simple way for employees to save with minimal action and no fees for employers. Employee participation is voluntary and they can opt in or out at any time. CalSavers is administered by a private-sector financial services firm and overseen by a public board chaired by the State Treasurer.
Any employer with at least five employees that doesn’t already offer a qualified workplace retirement savings plan will be required by California Law to facilitate employee access to CalSavers. The rule applies to both non-profit and for- profit employers.
CalSavers is officially open for registration as of July 1, 2019.
The three-year phased rollout will include staggered deadlines for registration based on employer size. Eligible employers can register for CalSavers at any time and must register by the following deadlines based on employee count.
Size of business
Over 100 employees
June 30, 2020
Over 50 employees
June 30, 2021
Five or more employees
June 30, 2022
If you have less than five employees or you already offer a qualified retirement savings plan, your employee’s cannot participate and you are not required to register.
For all others, an employer’s general obligation is limited to registering for CalSavers, creating a payroll list to add employees to CalSavers, and submitting contributions.
Register for the CalSavers program in compliance with the above Employers can register through the CalSavers website, by phone, by overnight mail or by regular mail. You will need to get an access code from the website.
Set up a payroll list and add employees. Within 30 days of registering, provide the CalSavers program administrator with a collection of personal information about each individual employee. This information includes: the name, Social Security number, date of birth and contact information for each eligible From beginning to end, this process generally takes about 30 minutes; many employers complete it in 15 minutes or less. CalSavers uses this information to contact employees directly to make them aware of the Program and provide the opt-out or customization methods.
Ensure that each employee receives a packet of information from CalSavers. Employers can satisfy this obligation by providing the CalSavers program administrator with the contact information for eligible employees. This packet will include information on the program and also opt-out
Calculate the appropriate rate of deduction for each The percentage for deduction will be shown on the employer’s account page.
Deduct each employee’s contributions to the CalSavers program from their salary.
Remit the employee’s contributions to the program administrator within seven business days of deduction.
On-going maintenance by adding new employees or removing employees who have left your company.
If you have someone at your business, such as an HR manager or an external payroll vendor to help you facilitate CalSavers, they can be added as a delegate or payroll representative. You can assign your associates to various roles that give them different levels of responsibility and authorization within the program.
Limited Employer Role
CalSavers does not have any employer fees. It also does not require any employer contributions- employers only send in the employee contribution. Employers are not fiduciaries of the program. Employers are to remain neutral about the program.
Employers are expressly prohibited from:
Encouraging or discouraging employees from participating in the CalSavers program,
Providing any investment decision or contribution advice
Remitting contributions for an employee who has opted out.
Employers are also NOT responsible for:
Enrolling employees, disseminating information, or answering questions about the program.
Managing investment options, including choice of investment funds and processing employee investment change requests.
Answering questions about investment options and you should not give investment or tax advice.
Managing employee changes or account maintenance, which include but are not limited to Contact information and Beneficiary information.
Your employees is responsible for maintaining their account information once it is established.
AB 5 – Employment Status: Employee vs. Independent Contractor
Assembly Bill (AB) 5, recently signed into law, replaces the common law test with the ABC test to determine whether a worker is an employee or independent contractor in California. Effective January 1, 2020, hiring entities are required to classify workers as employees unless they meet all conditions of the ABC test:
The person is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact.
The person performs work that is outside the usual course of the hiring entity’s business.
The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
Note: After January 1, 2020, workers will be considered employees unless proven otherwise. The hiring entity must show that workers meet all conditions of the ABC test in order to classify them as independent contractors, unless there is a statutory exclusion or determination of employment. AB 5 does not change how out-of-state workers are classified.
California enacts new individual health care mandate
California will impose an individual health care mandate penalty if the federal government doesn’t.
The Legislature has enacted SB 78 (Ch. 19-38), which requires California residents to maintain monthly health care insurance coverage or be subject to penalties.
California’s new mandate is similar to the federal program adopted under the original Affordable Care Act, ensuring that plans maintain certain baseline coverage and subjecting individuals to penalties if they fail to obtain health insurance. The bill also provides subsidies to keep the insurance “affordable.”
Unlike the ACA, there are no employer penalties for failure to provide health insurance.
The program is being jointly administered by the California Health Benefit Exchange (the agency that runs Covered California) and the Franchise Tax Board.
Because the bill was enacted on June 27, 2019, there are still a lot of details to be worked out. This article provides a broad overview of the new law and discusses some of the questions that still need to be answered.
California residents must maintain monthly minimum essential health care coverage for themselves and/or their dependents, as defined under R&TC §17056, unless they are exempt from the mandate.1 The following individuals are exempt:
• Individuals who have received a certificate of exemption from the Exchange for hardship or religious conscience (the exact process and procedure to obtain this certificate has not yet been determined);
• A member of a health care sharing ministry (as defined by IRC §5000A(d)(2)(B));
• Incarcerated individuals (other than those awaiting trial);
• Non-U.S. citizens or nationals who are not lawfully present in the U.S.;
• Members of an Indian tribe;
• U.S. citizens who have a tax home outside the U.S;
• Bona fide residents of another state or U.S. possession; and
• Individuals enrolled in limited or restricted scope coverage under the Medi-Cal program or similar state program.
Similar to the ACA, California’s program will provide financial assistance to taxpayers below specified income levels to help them obtain affordable health care coverage through the Exchange.3 California’s subsidy program is more expansive, however, in that federal law provides assistance to individuals and families with incomes at or below 400% of the federal poverty level, whereas California will be providing subsidies to California residents at or below 600% of the federal poverty level (see chart). The subsidies may be paid in advance and will be paid directly to the health insurance plan.
The subsidies are not included in the individual’s gross income for California income tax purposes.• However, it does not appear there is any exclusion that would apply for federal purposes.
The Exchange must adopt an annual program design to set the exact amount of subsidies available, based on funds appropriated by the Legislature for the year. Only those individuals eligible for the federal premium tax credit under !RC §36B (using California income restrictions) are eligible for the subsidies. The subsidies are scheduled to be repealed beginning in 2023.
Advanced premium assistance is available, and like the federal advanced premium tax credit, the advance is based on “projected income.”s How much will be provided will be set by the Health Care Exchange in its annual program design.
A “responsible individual,” the person required to obtain insurance for themselves and/or their dependents, must reconcile the advanced premium assistance subsidies received with the amount they were actually entitled to receive based on actual household income, family size, and other factors for the coverage year.
How this will be done has yet to be spelled out, but it will likely be similar to the premium tax credit reconciliation process.
The reconciled amount must be reported on the responsible individual’s tax return
for the covered year.6 A return must be filed even if the individual is below the filing thresholds.
If the amount of the year’s allowable subsidies exceeds the amount advanced, the responsible individual will receive a “premium assistance subsidy reconciliation refund” from the FTB (less any taxes, fees, and penalties owed by the participant to the state). If the advanced subsidies exceed the amount the participant was actually entitled to, the participant must pay the liability, up to a limit (yet to be determined) along with their California tax return.
SB 78 imposes an individual shared responsibility penalty against California residents who fail to obtain minimum essential health care coverage.7 The penalty is equal to the lesser of either of the following amounts:
1. The sum of the monthly penalty amounts for the months in the taxable year during which the failure occurred; or
2. An amount equal to the monthly premium for a Bronze plan offered over the Exchange for the household size involved multiplied by the number of months in which the failure occurred.
For purposes of computing (1 ), the monthly penalty amount is equal to one-twelfth of the greater of the following amounts:
• An amount equal to the lesser of the following:
o $695 for each adult household member ($347.50 for all individuals under 18 years of age at the beginning of the month) who failed to enroll and maintain coverage
(the amounts are adjusted annually for inflation) for the month, unless the lapse in coverage did not exceed three months; or
o $2,085 (adjusted annually for inflation); or
• An amount equal to 2.5% of the excess of the responsible individual’s applicable household income (see “Key definitions”) for the taxable year over the amount of gross income that would trigger the responsible individual’s requirement to file a state income tax return based on the applicable filing threshold for the taxable year. (This amount is based on household size and the age of the taxpayer. For the 2018 tax year, the thresholds range from $17,693 for a single taxpayer under age 65 to $63,703 for an MF J household with two dependents, and both spouses are age 65 and older. 2019 tax year figures have not yet been released.)
The penalty must be reported on and paid with the responsible individual’s tax return for the year that includes the month(s) of no coverage.
The bill provides an “unaffordable coverage exception” from the penalty.10 No penalty will be imposed for a month if the responsible individual’s:
• Required contribution for the month exceeds 8.3% of the responsible individual’s applicable household income for the taxable year;
• Applicable household income for the taxable year is less than the income tax return minimum filing threshold requirement based on AGI. (This amount is based on household size and the age of the taxpayer. For the 2018 tax year, the thresholds range from $14,154 for a single taxpayer under age 65 to $56,627 for an MFJ household with two dependents, and both spouses are age 65 and older. 2019 tax year figures have not yet been released); or
• Gross income for the taxable year is less than the income tax return filing threshold requirement based on gross income (see previous figures under “Penalty”).
Also, like federal law, no penalty will be imposed if the individual’s lapse in coverage did not exceed three consecutive months.
IRS provides tax inflation adjustments for tax year 2019
The Internal Revenue Service today announced the tax year 2019 annual inflation adjustments for more than 60 tax provisions, including the tax rate schedules and other tax changes. Revenue Procedure 2018-57 provides details about these annual adjustments. The tax year 2019 adjustments generally are used on tax returns filed in 2020.
The tax items for tax year 2019 of greatest interest to most taxpayers include the following dollar amounts:
The standard deduction for married filing jointly rises to $24,400 for tax year 2019, up $400 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $12,200 for 2019, up $200, and for heads of households, the standard deduction will be $18,350 for tax year 2019, up $350.
The personal exemption for tax year 2019 remains at 0, as it was for 2018, this elimination of the personal exemption was a provision in the Tax Cuts and Jobs Act.
For 2019, as in 2018, there is no limitation on itemized deductions, as that limitation was eliminated by the Tax Cuts and Jobs Act.
The Alternative Minimum Tax exemption amount for tax year 2019 is $71,700 and begins to phase out at $510,300 ($111,700, for married couples filing jointly for whom the exemption begins to phase out at $1,020,600). The 2018 exemption amount was $70,300 and began to phase out at $500,000 ($109,400 for married couples filing jointly and began to phase out at $1 million).
The tax year 2019 maximum Earned Income Credit amount is $6,557 for taxpayers filing jointly who have three or more qualifying children, up from a total of $6,431 for tax year 2018. The revenue procedure has a table providing maximum credit amounts for other categories, income thresholds and phase-outs.
For tax year 2019, the monthly limitation for the qualified transportation fringe benefit is $265, as is the monthly limitation for qualified parking, up from $260 for tax year 2018.
For calendar year 2019, the dollar amount used to determine the penalty for not maintaining minimum essential health coverage is 0, per the Tax Cuts and Jobs act; for 2018 the amount was $695.
For the taxable years beginning in 2019, the dollar limitation for employee salary reductions for contributions to health flexible spending arrangements is $2,700, up $50 from the limit for 2018.
For tax year 2019, participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,350, an increase of $50 from tax year 2018; but not more than $3,500, an increase of $50 from tax year 2018. For self-only coverage, the maximum out-of-pocket expense amount is $4,650, up $100 from 2018. For tax year 2019, participants with family coverage, the floor for the annual deductible is $4,650, up from $4,550 in 2018; however, the deductible cannot be more than $7,000, up $150 from the limit for tax year 2018. For family coverage, the out-of-pocket expense limit is $8,550 for tax year 2019, an increase of $150 from tax year 2018.
For tax year 2019, the adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit is $116,000, up from $114,000 for tax year 2018.
For tax year 2019, the foreign earned income exclusion is $105,900 up from $103,900 for tax year 2018.
Estates of decedents who die during 2019 have a basic exclusion amount of $11,400,000, up from a total of $11,180,000 for estates of decedents who died in 2018.
The annual exclusion for gifts is $15,000 for calendar year 2019, as it was for calendar year 2018.
The maximum credit allowed for adoptions is the amount of qualified adoption expenses up to $14,080, up from $13,810 for 2018.
Legislature passes individual health care mandate penalty and subsidies (06-27-19)
The California Legislature has passed SB 78, which would require most California residents and their dependents to obtain minimum health care coverage by January 1, 2020, or pay a penalty similar to the penalty previously imposed by the federal government under the Affordable Care Act. The Governor is expected to sign the bill.
The bill also provides for California tax-exempt subsidies to assist residents in obtaining health insurance if their income is below 600% of the federal poverty level ($74,940 for an individual; $154,500 for a household of four). The FTB will impose a penalty of up to $695 annually against individuals who fail to comply with the mandate. Employers must annually provide health care coverage information to the FTB by March 31 and will be subject to penalties for failure to comply.
IRS guidance on SALT limitation and taxability of refunds
The taxability of refunds from 2018 tax returns will be based on the tax benefit rule, not the proportional amount of state income tax versus property and other deductible taxes entered. (Rev. Rul. 2019-11) This issue has been a concern for many practitioners because some software products have been generating worksheets showing that their clients’ refunds will be taxed based on the proportional amount.
The IRS guidance clarifies that taxpayers who are impacted by the SALT limitation will determine the taxability of their state or local tax refund by recalculating their 2018 itemized deductions, and reducing the income tax deduction by the amount of their refund. They will only be subject to tax if that reduction reduces their overall itemized deductions.
For example, assume that a taxpayer deducts $15,000 in property taxes and $20,000 in state income taxes, and then receives at $1,500 state tax refund. You would reduce the state income tax deduction on the 2018 Schedule A to $18,500 ($20,000 – $1,500). The refund would not be taxable because the property taxes alone exceed the $10,000 SALT limitation.
Even taxpayers with less than $10,000 in property taxes might not be subject to tax on their refunds. Assume a taxpayer deducts $5,000 in property taxes and $8,000 in state income taxes, and then receives a $500 refund. That taxpayer would now deduct only $7,500 in state income taxes, but their overall SALT deduction is still $10,000.
IRS estimated tax penalty threshold lowered to 80%
The IRS is lowering to 80 percent the threshold required to qualify for estimated tax penalty relief for taxpayers whose 2018 federal income tax withholding and estimated tax payments fell short of their total tax liability for the year. Under the relief announced earlier this year, the threshold was 85 percent.
Taxpayers who have not yet filed their 2018 tax return may request waiver of the estimated tax penalty by filing Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, with their tax return and following the directions in the just-released revision of the Instructions for Form 2210. To qualify for the waiver, they must have paid, through federal income tax withholding and estimated tax payments, at least 80 percent of their total tax liability for the 2018 tax year.
Taxpayers who have already filed and paid the estimated tax penalty for tax year 2018 but who would have qualified for the waiver on Form 2210 may claim a refund of estimated tax penalties paid by filing Form 843, Claim for Refund and Request for Abatement, and including the statement “80% Waiver of estimated tax penalty” on line 7. They should leave lines 5a and 5b of the form blank. Form 843 can’t be filed electronically.
For additional details related to this lower 80 percent threshold go to:
The Tax Cuts and Jobs Act (TCJA) established additional limitations on the deductibility of certain business meals and entertainment expenses. Under the act, entertainment expenses incurred or paid after December 31, 2017 are nondeductible unless they fall under the specific exemptions in Code Section 274(e). For your convenience, we have provided a comprehensive chart to summarize proper treatment for many types of meals and entertainment expenditures, under the law applicable both before and after the act. To review the recent IRS guidance on Meals and Entertainment business expense deduction, see Notice 2018-76.
New 2018 Expenses
Client Business Meals
50% deductible if taxpayer is present, and not lavish or extravagant
50% deductible if business is conducted, taxpayer is present, and not lavish or extravagant
Transportation to/from Restaurant for Client Business Meal
Sporting Event Tickets
50% Deductible for face value of ticket (anything above face value is non-deductible
50% deductible for skybox expenses to the extent of non-luxury seat ticket face value in such box
100% deductible for charitable sports events
Contributions for the right to purchase tickets to an educational institution’s athletic events 80% deductible
50% for transportation to/from and parking at sporting events
No deduction for club dues; however, 50% deduction for expenses incurred at a club organized for business, pleasure, recreation, or other social purposes if related to an active trade or business.
Meals Provided for the Convenience of the Employer
100% deductible provided they are excludible from employees’ gross income as de minimis fringe benefits; otherwise 50% deductible
50% deductible (nondeductible after 2025)
Meals Provided to Employees Occasionally and Overtime Employee Meals
100% deductible provided they are excludible from employees’ gross income as de minimis fringe benefits
50% deductible (nondeductible after 2025)
Water, Coffee, and Snacks at the Office
100% deductible provided they are excludible from employees’ gross income as de minimis fringe benefits
50% deductible (nondeductible after 2025)
Meals in Office During Meetings of Employees, Stockholders, Agents, or Directors
Meals During Business Travel
Meals at a Seminar or Conference, or at a Business League Event
Meals included in Charitable Sports Package
Meals Included as Taxable Compensation to Employee or Independent Contractor
Meals Expenses Sold to a Client or Customer (or Reimbursed)
Food Offered to the Public for Free (e.g., at a Seminar)
Office Holiday Party or Picnic
Expenses for Business Meals Under § 274 of the Internal Revenue Code
This notice provides transitional guidance on the deductibility of expenses for certain business meals under § 274 of the Internal Revenue Code. Section 274 was amended by the Tax Cuts and Jobs Act, Pub. L. No. 115-97, § 13304, 131 Stat. 2054, 2123 (2017) (the Act). As amended by the Act, § 274 generally disallows a deduction for expenses with respect to entertainment, amusement, or recreation. However, the Act does not specifically address the deductibility of expenses for business meals.
This notice also announces that the Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) intend to publish proposed regulations under § 274, which will include guidance on the deductibility of expenses for certain business meals. Until the proposed regulations are effective, taxpayers may rely on the guidance in this notice for the treatment under § 274 of expenses for certain business meals.
INTERIM GUIDANCE FOR BUSINESS MEALS
The Act did not change the definition of entertainment under § 274(a)(1); therefore, the regulations under § 274(a)(1) that define entertainment continue to apply. The Act did not address the circumstances in which the provision of food and beverages might constitute entertainment. However, the legislative history of the Act clarifies that taxpayers generally may continue to deduct 50 percent of the food and beverage expenses associated with operating their trade or business. See H.R. Rep. No. 115- 466, at 407 (2017) (Conf. Rep.).
The Treasury Department and the IRS intend to publish proposed regulations under § 274 clarifying when business meal expenses are nondeductible entertainment expenses and when they are 50 percent deductible expenses. Until the proposed regulations are effective, taxpayers may rely on the guidance in this notice for the treatment under § 274 of expenses for certain business meals.
Under this notice, taxpayers may deduct 50 percent of an otherwise allowable business meal expense if:
The expense is an ordinary and necessary expense under § 162(a) paid or incurred during the taxable year in carrying on any trade or business;
The expense is not lavish or extravagant under the circumstances;
The taxpayer, or an employee of the taxpayer, is present at the furnishing of the food or beverages;
The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
In the case of food and beverages provided during or at an entertainment activity, the food and beverages are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts. The entertainment disallowance rule may not be circumvented through inflating the amount charged for food and beverages.
For each example, assume that the food and beverage expenses are ordinary and necessary expenses under § 162(a) paid or incurred during the taxable year in carrying on a trade or business and are not lavish or extravagant under the circumstances. Also, assume that the taxpayer and the business contacts are not engaged in a trade or business that has any relation to the entertainment activity.
Example 1. (i) Taxpayer A invites B, a business contact, to a baseball game. A purchases tickets for A and B to attend the game. While at the game, A buys hot dogs and drinks for A and B.
(ii) The baseball game is entertainment as defined in § 1.274-2(b)(1)(i) and, thus, the cost of the game tickets is an entertainment expense and is not deductible by A. The cost of the hot dogs and drinks, which are purchased separately from the game tickets, is not an entertainment expense and is not subject to the § 274(a)(1) disallowance. Therefore, A may deduct 50 percent of the expenses associated with the hot dogs and drinks purchased at the game.
Example 2. (i) Taxpayer C invites D, a business contact, to a basketball game. C purchases tickets for C and D to attend the game in a suite, where they have access to food and beverages. The cost of the basketball game tickets, as stated on the invoice, includes the food and beverages.
(ii) The basketball game is entertainment as defined in § 1.274-2(b)(1)(i) and, thus, the cost of the game tickets is an entertainment expense and is not deductible by C. The cost of the food and beverages, which are not purchased separately from the game tickets, is not stated separately on the invoice. Thus, the cost of the food and beverages also is an entertainment expense that is subject to the § 274(a)(1) disallowance. Therefore, C may not deduct any of the expenses associated with the basketball game.
Example 3. (i) Assume the same facts as in Example 2, except that the invoice for the basketball game tickets separately states the cost of the food and beverages.
(ii) As in Example 2, the basketball game is entertainment as defined in § 1.274-2(b)(1)(i) and, thus, the cost of the game tickets, other than the cost of the food and beverages, is an entertainment expense and is not deductible by C. However, the cost of the food and beverages, which is stated separately on the invoice for the game tickets, is not an entertainment expense and is not subject to the § 274(a)(1) disallowance. Therefore, C may deduct 50 percent of the expenses associated with the food and beverages provided at the game.
Governor signs two important tax bills (09-24-18)
Governor Brown has signed AB 2503, which makes a domestic corporation and a limited liability company subject to voluntary or involuntary administrative dissolution or administrative cancellation if:
The entity either never did business or filed returns/paid tax when it was operating and has no remaining business assets; or
The entity’s powers are, and have been, suspended by the FTB for a specified period of time.
This means that a taxpayer doesn’t need to wait for years for the FTB to try to come after them, and the shareholders/members won’t have to go through the Ralite process.
Governor Brown also signed SB 274, which generally conforms to the new federal centralized partnership audit regime. The new regime allows the IRS to conduct audits, make adjustments and assessments, and collect tax at the partnership level (rather than at the partner level), and generally applies to returns filed for partnership taxable years beginning after 2017.
Under SB 274, partnerships must report each partnership item change or correction to the FTB within six months of the date of each final federal determination if the partnership is issued an adjustment under IRC §6225 or makes a push-out election as part of an IRS partnership level audit.
The TCJA allows tax-free distributions from IRC §529 accounts in connection with qualified expenses for K–12 education, up to $10,000 per year. (TCJA §11032) This provision applies to distributions made after December 31, 2017.
For purposes of the IRC §529 plan rules, the TCJA provides that qualified higher education expenses now include expenses for tuition at an elementary or secondary public, private, or religious school. (IRC §529(c)(7)) The $10,000 per-year limit is per tax year and per student rather than per account. A student who has multiple IRC §529 plan accounts may receive distributions from any of those accounts, up to the $10,000 dollar limit from all plans. (IRC §529(e)(3)(A))
IRC §529 Distributions
Limited to $10,000 annually
Fees, books, supplies, and equipment required for enrollment or attendance
Not eligible expenses (IRC §529 distributions used for these purposes are taxable)
Expenses for special needs services of beneficiary in connection with enrollment or attendance
Not eligible expenses
Expenses for the purchase of computer or peripheral equipment, software, internet access and related services, if used during enrollment at education institution
Eligible expenses (but not for software designed for sports, games, or hobbies unless it is predominantly educational in nature; for example, if student is studying video game development)
Unless California legislation is enacted, which is highly unlikely, qualified tuition plan earnings withdrawn to cover such expenses will be subject to California tax. (R&TC §§17024.5, 17140.3) If parents withdraw money out of an IRC §529 qualified tuition plan to pay for their child’s elementary or secondary school tuition, it will be treated as a nonqualified distribution for California purposes. So taxpayers must determine what portion of a distribution is from contributions, which are nontaxable, and what portion is from earnings.
Under IRC §529(c)(3), to which California generally conforms, distributions used to pay for nonqualified education expenses are treated in the same manner as annuities under IRC §72. A nonqualified distribution is therefore comprised of a proportional share of nontaxable contributions and taxable earnings. In addition, the taxable portion of any nonqualified distribution is subject to California’s 2.5% premature withdrawal penalty.
If a §529 college savings plan has declined in value, it may be possible to claim a loss on the beneficiary’s federal income tax return. To claim the loss, the plan must be fully liquidated. California conforms and would allow the loss. However, the loss is taken as a miscellaneous itemized deduction subject to 2% of AGI. Under the TCJA, these deductions are no longer allowed on the federal return, so there would be no deduction. California does not conform to the elimination of these deductions, so they would still be allowed on the state return.
Deduction for qualified business income of “passthrough” entities — IRC §199A
Under the TCJA, individual taxpayers generally may deduct up to 20% of their domestic “qualified business income” beginning in the tax year 2018. (TCJA §11011; new IRC §199A)
Qualified business income may include all kinds of business income, including income from services and income from a rental real estate. However, it does not include W-2 income (even if the W-2 income is a pass-through entity owned in whole or in part by the taxpayer) or partner guaranteed payments.
The deduction applies to sole proprietorships and passthrough income received by individuals from partnerships (including publicly traded partnerships), S corporations, trusts, and estates, as well as real estate investment trusts and qualified cooperatives.
There is one major exception: The deduction is not available to C corporations.
Income from LLCs qualifies if the LLC is treated as a sole proprietorship, partnership, or S corporation (that is, income from LLCs qualifies if the LLC is not taxed as a C corporation).
The deduction only applies for income tax purposes and not for self-employment tax purposes.
Taxable income limitation
The deduction is limited to 20% of the lesser of:
Net qualified business income; or
Taxable income before the deduction and after reduction for any net capital gains.
The deduction may be phased down based on taxable income computed without regard to the IRC §199A deduction (but without reduction for capital gains).
The effect of the phaseout depends on whether the business income is:
From a “specified” service business; or
From any other kind of business.
Although the effect of the phaseout is different for service businesses and other businesses, the phaseout ranges for both are the same:
Married filing joint: $315,000–$415,000; and
All other filing statuses: $157,500–$207,500.
Phaseouts for specified service businesses
The TCJA generally provides that a qualified trade or business generally means any trade or business other than “a specified service trade or business.” (IRC §199A(c)(1)) However, it then carves out an exception for taxpayers whose taxable income is below the above phaseout ranges.
Thus, owners of services businesses can take the deduction if their income is below the top of the phase-out ranges.
Taxpayers with taxable incomes above the upper ranges lose the deduction entirely. Taxpayers within the range lose the deduction in proportion to the excess of the taxable income over the initial phaseout amount to the total phaseout range.
However, this provision specifically exempts engineering and architecture from those trades or businesses included in IRC §1202(e)(3)(A).
Services included in IRC §1202(e)(3)(A) include:
Healthcare services performed by doctors, nurses, and dentists (but not services not directly related, such as the operation of spas);
Law, accounting, and actuarial services (including anyone preparing taxes);
In addition, the services include the catch-all, “any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees.” For further guidance on the types of activities that qualify as services in the fields of health, the performing arts, and consulting, the Conference Committee referred to guidance in the rules found in Temp. Treas. Regs. §1.448-1T(e)(4).
Phaseouts for all other businesses
Exceeding the phaseout levels for business income other than service businesses will not necessarily cause the taxpayer to lose the deduction. Instead, it will allow a deduction subject to other limitations.
Specifically, if the taxpayer’s taxable income exceeds the phaseout thresholds, the IRC §199A deduction looks at W-2 wages paid to employees and to the unadjusted basis of depreciable property held by the business.
For these high-income taxpayers, the deduction is limited to the greater of:
50% of the W-2 wages paid by the business; or
The sum of:
25% of the W-2 wages paid by the business; plus
2.5% of the unadjusted basis immediately after acquisition of depreciable property.
NEW IRS PARTNERSHIP AUDIT PROCEDURES
The Bipartisan Budget Act of 2015 (BBA) eliminates the unified partnership audit rules enacted by the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) and the electing large partnership (ELP) rules. The BBA replaces IRC §6223, Notice to Partners of Proceedings, with new IRC §6223, Partners Bound by Actions of Partnership, effective January 1, 2018.
Proposed regulations for new IRC §6223 were issued on June 13, 2017.
Generally, under the BBA, the IRS is no longer required to determine each partner’s share of the adjustments made to partnership items followed by a separate computational adjustment for each partner to assess the correct tax due as a result of the partnership audit. Instead, under the default rules of IRC §6225, the partnership is liable for an imputed underpayment based on the adjustments made at the partnership level. The taxed is assessed to the partnership in the year of adjustment, regardless of the tax year that was examined.
Electing out of centralized partnership audits
A qualifying partnership may elect out of the centralized audit regime. Several conditions must be present to make the election.
100 or fewer partners
A partnership has 100 or fewer partners when it is required to furnish 100 or fewer K-1s. (IRC §6221 (b)(1)(B))
Each S corporation shareholder counts as a partner. If an S corporation issues 20 K-1s to its partners, then that S corporation accounts for a total of 21 K-1s issued by the partnership (the one K-1 the partnership issues the S corporation plus the 20 K-1s the S corporation issues to its shareholders).
A partnership must have only eligible partners in order to elect out of the centralized audit regime.
Eligible partners are individuals, C corporations, S corporations and estates of deceased partners.
Ineligible partners are partnerships, trusts, foreign entities, disregarded entities, nominees, estates that are not estates of a deceased partner. (Prop. Treas. Regs. §301.6221(b)-1(b)(3)(ii))
Timely filed return
A partnership can elect out only on a timely filed return (including extensions). (Prop. Treas. Regs. §301.6221(b)-1(c))
The election must be made for each taxable year; that is, it is an annual election. An election out made by a partnership may only be revoked with the consent of the IRS. (Prop. Treas. Regs. §301.6221(b)-1(c)(1))
Must disclose name and TIN of each partner
The disclosure must include name and TIN of each shareholder or S corporation partner. (Prop. Treas. Regs. §301.6221(b)-1(c)(2))
Partnership must notify each partner of election out
A partnership that elects out of the centralized partnership audit regime must notify each of its partners that the partnership made the election. This notification must be made within 30 days of making the election. (Prop. Treas. Regs. §301.6221(b)-1(c)(3))
LIMITATION ON BUSINESS INTEREST
30% of business “adjusted taxable income”
Small Businesses (Gross Receipts ≤ $25 million) are exempt from the limitation.
Under this limitation, the deduction allowed for business interest for any tax year cannot exceed the sum of:
The taxpayer’s business interest income for the tax year; plus
30% of the taxpayer’s adjusted taxable income for the tax year; plus
The taxpayer’s “floor plan financing” interest for the tax year. (IRC §163(j)(1))
Carryforward of disallowed interest-indefinitely
The trade or business of performing services as an employee isn’t a “trade or business” for purposes of the business interest limitation. (IRC §163(j)(7)(A)(i)) Thus, an employee’s wages aren’t counted in the taxpayer’s adjusted taxable income for purposes of determining the limitation.
Floor plan financing
Interest on “floor plan financing indebtedness” is fully deductible. (IRC §163(j)(9)(A))
“Floor plan financing indebtedness” means indebtedness:
Used to finance the acquisition of motor vehicles held for sale or lease; and
Secured by the inventory so acquired. (IRC §163(j)(9)(B))
The term “MOTOR VEHICLE” means a motor vehicle that is any of the following:
Any self-propelled vehicle designed for transporting persons or property on a public street, highway, or road;
A boat; or
Farm machinery or equipment.
Real Property trade of
INCREASED BONUS DEPRECIATION
The TCJA provides for full and immediate expensing of 100% of the cost of qualified property acquired and placed in service after September 27, 2017, and before January 1, 2023, as bonus depreciation, and reduced amounts after that. (TCJA §13101, amending IRC §168(k))
The TCJA removes the requirement that made bonus depreciation available only for a new property. Thus, the TCJA allows bonus depreciation for new and used equipment. See the following chart for bonus depreciation rates under the TCJA.
New Bonus Depreciation Rules
New Bonus Depreciation Rules
Date placed in service
Bonus depreciation percentage
Qualified property in general/specified plants
Longer production period property and certain aircraft
2028 and thereafter
2018 Tax Reform Update
The President has signed the biggest tax reform law in over 30 years. When you file your 2018 tax returns — about a year from now — your tax return will look very different. And because most changes don’t happen until then, we have some time to learn about the changes and plan for next year. Here are a few of the biggest changes that may affect you.
Tax rate changes
Both individual and corporate rates have changed. The maximum individual rate is reduced to 37% and the corporate rate is now a flat 21%. The rate change could benefit you — or in some cases cause your tax liability to go up.
Standard deduction increases
However, there are no more personal exemption deductions allowed. So this may help you — or hurt you.
Increased Child Tax Credit and new Dependent Credit
The credit is increased for each child to $2,000 (up to $1,400 of which is refundable for each child) and each non-child dependent can now receive a new credit of $500. But you will have no exemption credit or deduction for yourself, your spouse, or your dependents.
The phaseout thresholds for these credits are drastically increased. Married taxpayers filing a joint return can claim the full credits if their adjusted gross income is $400,000 or less ($200,000 for all others). The credits are fully phased out for married taxpayers filing a joint return when their adjusted gross income reaches $440,000 ($240,000 for all others). This means that many more taxpayers will be able to claim these credits in 2018 and beyond.
Beginning with the 2018 tax year, you will no longer be able to deduct:
State income tax and property taxes above $10,000 per year in total;
Moving expenses (with an exception for certain military);
Employee business expenses such as mileage, travel, entertainment, home office expenses, union dues, tax preparation fees, and investment fees, among others;
Mortgage interest beyond interest on $750,000 of acquisition debt, if you purchase a new home; and
Mortgage interest paid on equity debt (this is no longer deductible for any taxpayers).
Some new benefits for individuals
These new benefits include:
The medical expense AGI threshold will temporarily drop to 7.5% of AGI for 2017 and 2018;
The AMT threshold is increased, so fewer middle-income taxpayers will be subject to AMT;
The estate tax exclusion has nearly doubled, to $10 million (adjusted for inflation); and
The annual gift tax exclusion remains the same ($14,000 for 2017 and $15,000 for 2018), but the maximum rate on gifts is 35%.
Small business benefit
Beginning in 2018, there will be up to a 20% deduction from net business income for a sole proprietorship, LLC (excluding those taxed as a C corporation), partnership, S corporation, and rental activity. The rules are incredibly complex but there is a lot of planning that we can do to maximize this deduction for you.
These are the most common changes, and at your tax interview this year we will discuss any other changes that might affect you. As these changes are not simple, we suggest a separate appointment to go over the changes that apply to your situation and to talk about how to maximize your tax benefit.