News & Publications
Tax Reform - Employer Fringe Benefits (January 2019)
The Tax Cuts and Jobs Act (TCJA) made significant changes to the tax deductibility of certain fringe benefits provided to employees that may affect the way employers deliver them. Because the tax impact of these changes will be felt immediately, it’s important for companies to consider if they’re going to make changes to their benefit programs, and, if they do, how to communicate those changes to their employees. This may include reviewing current reimbursement policies and accountable plan strategies as well as outstanding employment offer letters for any possible negative tax impacts to individual employees, the company, or both.
Effective for amounts paid or incurred on or after January 1, 2018, the TCJA changes the tax treatment of the following fringe benefits:
Transportation - Employers will no longer be able to deduct commuting benefits provided to employees, such as parking reimbursements or transit passes. However, the exclusion from income for these benefits received by an employee is retained.
The TCJA also repeals the qualified bicycle commuting reimbursement, which allows employees to exclude from their income bicycle commuting reimbursements of up to $20 per qualifying bicycle each month. The qualified bicycle commuting reimbursement exclusion sunsets December 31, 2025.
Some local laws require companies to offer certain transportation benefits to their employees. Careful consideration should be given to these local laws before any changes are made to the commuting benefits companies offer their employees.
Moving Expenses - The TCJA suspends through 2025 the exclusion from employees’ taxable income of a business’s reimbursements of employees’ qualified moving expenses. However, businesses generally will still be able to deduct such reimbursements. And to make matters worse, individuals can no longer take a federal deduction for moving expenses (barring rare exceptions).
Employee Achievement Awards - The TCJA eliminates the business tax deduction and corresponding employee tax exclusion for employee achievement awards that are provided in the form of cash, gift coupons or certificates, vacations, meals, lodging, tickets to sporting or theater events, securities and “other similar items.” However, the tax breaks are still available for gift certificates that allow the recipient to select tangible property from a limited range of items preselected by the employer. The deduction/exclusion limits remain at up to $400 of the value of achievement awards for length of service or safety and $1,600 for awards under a written nondiscriminatory achievement plan.
On-Premises Meals - The TCJA reduces to 50% a business’s deduction for providing certain meals to employees on the business premises, such as when employees work late or if served in a company cafeteria. (The deduction is scheduled for elimination in 2025.) For employees, the value of these benefits continues to be tax-free.
Family & Medical Leave - For 2018 and 2019, the TCJA creates a tax credit for wages paid to qualifying employees on family and medical leave. To qualify, a business must offer at least two weeks of annual paid family and medical leave, as described by the Family and Medical Leave Act (FMLA), to qualified employees. The paid leave must provide at least 50% of the employee’s wages. Leave required by state or local law or that was already part of the business’s employee benefits program generally doesn’t qualify.
The credit equals a minimum of 12.5% of the amount of wages paid during a leave period. The credit is increased gradually for payments above 50% of wages paid and tops out at 25%. No double-dipping: Employers can’t also deduct wages claimed for the credit.
Fighting Tax Reform - Pending Legislation in California (July 2018)
California Senate Bill 227 has become an increasingly hot topic in the tax community over the last couple of months. The legislation would enact a “California Excellence Fund Tax Credit” allowing California taxpayers a credit against their personal income tax equal to 85% of a contribution to the California Excellence Fund. Furthermore, it is expected that contributions to the fund would also be allowed in full on the Federal tax return as a charitable contribution.
This bill was intended to mitigate the effects of the recent tax form enacted late in 2017, which severely limits state tax deductions on Federal tax returns. Currently, the bill is “In Assembly” with the last reading on January 30th 2018. In order to pass the bill, the Assembly will need to pass the bill in Committee hearings before sending it to the Governor for final approval. We will continue to monitor the status as the bill moves through California legislature and keep you updated.
IRS Warning - Inflated & Fabricated Tax Deductions (April 2018)
Proactive and innovate tax planning is a great way to reduce tax liabilities and minimize audit risk. However, fabricating or artificially enhancing deductions isn’t a comparable recipe for success. Indeed, the IRS this year has specifically cautioned taxpayers about padding deductions.
Falsely claiming deductions, expenses, or credits on tax returns is serious, regardless of their type. The IRS notes that the majority of false claims tend to be associated with business expenses and charitable contributions. Consequently, they have put great resources into developing automated systems that are increasingly efficient in detecting abnormalities and generating audits. The IRS can normally audit returns within only the last three years, but additional years are not exempt from scrutiny if there are large errors or associated fraud. Significant penalties may apply for taxpayers who file incorrect returns including:
20% of the disallowed amount for filing an erroneous claim for a refund or credit.
$5,000 if the IRS determines a taxpayer has filed a frivolous tax return, defined as one that does not include enough information to figure the correct tax, or that contains information clearly showing that the tax reported is substantially incorrect.
In addition to the full amount of tax owed, a taxpayer could be assessed a penalty of 75% of the amount owed if the underpayment on the return resulted from fraud.
Generally, an understatement is defined as the difference between the correct amount of tax and the tax reported on the return, reduced by any rebate. “Substantial understatements” are considered to be those where the understated tax exceeds the greater of $5,000 or 10% of the tax required to have been shown on the return. These accuracy-related “substantial underpayments” are what leads to some of the most severe penalties (IRC 6662(b)(1) and (2)). And if the costs are not enough of a deterrent, the IRS reminds taxpayers that they could even be subject to criminal prosecution. The range of potential offenses include:
Willful failure to file a return, supply information, or pay any outstanding tax due
Fraud and false statements
Preparing and filing a fraudulent return
Criminal prosecution could lead to additional penalties and on rare occasions prison time. Innocent, even stupid mistakes can be forgiven. However ignorance of the law is no excuse and not something to be relied upon. The burden is placed on the taxpayer, and should be taken extremely seriously.
Meals and Entertainment - Changes Under Tax Reform (January 2018)
In general, the new tax law provides for stricter limits on the deductibility of business meals and entertainment expenses. Entertainment expenses paid or incurred or paid after December 31, 2017 are nondeductible unless they fall under the specific exceptions in Code Section 274(e). One of those exceptions is for "expenses for recreation, social, or similar activities primarily for the benefit of the taxpayer's employees, other than highly compensated employees" (i.e. office holiday parties are still deductible). Business meals provided for the convenience of the employer are now only 50% deductible whereas before tax reform they were fully deductible. Barring further action by Congress those meals will be nondeductible after 2025.
Businesses should keep the new rules in mind as they plan their 2018 meals and entertainment budgets. See below for a chart comparing the rules before and after tax reform.
Tax Reform - The Tax Cuts and Jobs Act (December 2017)
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act of 2017 (TCJA). The TCJA represents the Republican Party’s plan for tax reform and is the most significant tax overhaul in more than 30 years.
The bill makes small reductions to income tax rates for most individual tax brackets, significantly reduces the income tax rate for corporations, and eliminates the corporate alternative minimum tax (AMT). It also provides a large new tax deduction for owners of pass-through entities and significantly increases individual AMT and estate tax exemptions. The TCJA also eliminates or limits many tax breaks, and much of the aforementioned tax relief is only temporary.
The majority of these proposed changes would apply to tax years beginning January 1, 2018. We are currently in the process of reviewing this bill for changes that may impact you. In the meantime, a summary of the most significant changes affecting individual and business taxpayers can be read below.
Tax Rates - H.R. 1 carries temporary tax rates of 10, 12, 22, 24, 32, 35, and 37 percent after 2017.
Standard Deduction - H.R. 1 nearly doubles the standard deduction. It increases the standard deduction to $24,000 for married individuals filing a joint return, $18,000 for head-of-household filers, and $12,000 for all other individuals, indexed for inflation (using chained CPI) for tax years beginning after 2018. All increases are temporary, starting in 2018 but ending after December 31, 2025. Under prior law, the standard deduction for 2018 had been set at $13,000 for joint filers, $9,550 for heads of households, and $6,500 for all other filers.
Mortgage Interest Deduction - The new law limits the mortgage interest deduction to interest on $750,000 of acquisition indebtedness ($375,000 in the case of married taxpayers filing separately), in the case of tax years beginning after December 15, 2017. For acquisition indebtedness incurred prior to 2018, the new law allows current homeowners to keep the current limitation of $1 million ($500,000 in the case of married taxpayers filing separately). The new law also allows taxpayers to continue to include mortgage interest on second homes, but within those lower dollar caps. However, no interest deduction will be allowed for interest on home equity indebtedness. Lastly, CA doesn't conform; interest may still be deducted on a full $1,100,000 of debt.
State and Local Taxes - The new law limits annual itemized deductions for all nonbusiness state and local taxes deductions, including property taxes, to $10,000 ($5,000 for married taxpayers filing separately). Sales taxes may be included as an alternative to claiming state and local income taxes.
Miscellaneous Itemized Deductions - The new law temporarily repeals all miscellaneous itemized deductions that are subject to the two-percent floor under current law.
Personal Exemption - H.R. 1 repeals the personal exemption.
Medical Expenses - The new law temporarily enhances the medical expense deduction. It lowers the threshold for the deduction to 7.5 percent of adjusted gross income (AGI) for tax years 2017 and 2018.
Child Tax Credit - The new law temporarily increases the current child tax credit from $1,000 to $2,000 per qualifying child. Up to $1,400 of that amount would be refundable. It also raises the adjusted gross income phaseout thresholds, starting at adjusted gross income of $400,000 for joint filers ($200,000 for all others).
Education - The new law retains the student loan interest deduction. It also modifies section 529 plans and ABLE accounts. It does not overhaul the American Opportunity Tax Credit, as proposed in the original House bill. The new law also does not repeal the exclusion for interest on U.S. savings bonds used for higher education, as proposed in the House bill.
Alimony - The new law repeals the deduction for alimony payments and their inclusion in the income of the recipient. However, it's important to note that CA does not conform.
Retirement - The new law generally retains the current rules for 401(k) and other retirement plans. However, it repeals the rule allowing taxpayers to recharacterize Roth IRA contributions as traditional IRA contributions to unwind a Roth conversion. Rules for hardship distributions are modified, among other changes.
Federal Estate Tax - The new law follows the original Senate bill in not repealing the estate tax, but rather doubling the estate and gift tax exclusion amount for estates of decedents dying and gifts made after December 31, 2017, and before January 1, 2026. The generation-skipping transfer (GST) tax exemption is also doubled.
Alternative Minimum Tax - The new law retains the alternative minimum tax (AMT) for individuals with modifications. It temporarily increases (through 2025) the exemption amount to $109,400 for joint filers ($70,300 for others, except trusts and estates). The new law also raises the exemption phase-out levels so that the AMT will apply to an income level of $1 million for joint filers ($500,000 for others). These amounts are all subject to annual inflation adjustment.
Affordable Care Act - Repealed so that there is no longer a requirement that Americans need to buy health insurance or pay a penalty. This does not take effect until 2019.
Corporate Taxes - H.R. 1 calls for a 21 percent corporate tax rate beginning in 2018. The new law makes the new rate permanent. The maximum corporate tax rate previously topped out at 35 percent.
Passthrough Businesses - A 20% deduction for qualified business income earned by certain pass-through entities. Certain service industries are excluded from this deduction. However, for joint filers the first $315,000, and single filers the first $157,500, can fully claim this deduction on certain service industry income. If the owner or partner in a pass-through also draws a salary from the business they will be subject to ordinary income tax rates.
Bonus Depreciation - H.R. 1 increases the 50-percent “bonus depreciation” allowance to 100 percent for property placed in service after September 27, 2017, and before January 1, 2023 (January 1, 2024, for longer production period property and certain aircraft). A 20-percent phase-down schedule would then kick in. It also removes the requirement that the original use of qualified property must commence with the taxpayer, thus allowing bonus depreciation on the purchase of used property. The Section 179 limit is increased to $1 million.
Vehicle Depreciation - The new law raises the cap placed on depreciation write-offs of business-use vehicles. The new caps will be $10,000 for the first year a vehicle is placed in service (up from a current level of $3,160); $16,000 for the second year (up from $5,100); $9,600 for the third year (up from $3,050); and $5,760 for each subsequent year (up from $1,875) until costs are fully recovered. The provision is effective for property placed in service after December 31, 2017, in taxable years ending after such date.
1031 Exchanges - Only real property qualifies, personal property assets are no longer allowable. However, the old law still applies is if one leg of an exchange has been completed as of December 31, 2017.
Research & Development Credit - The new law leaves the research and development credit in place, but starting with taxable years after 12/31/21, the TCJA requires five-year amortization of research and development expenditures (previous tax law generally allowed for full deductions in the current tax year). For R&D performed outside of the U.S. the amortization period if 15 years. Lastly, the new law also creates a temporary credit for employers paying employees who are on family and medical leave.
Meals & Entertainment - Under the TCJA, for amounts paid or incurred after Dec. 31, 2017, deductions for business-related entertainment expenses are completely disallowed. Meals expenses incurred while traveling on business are still 50% deductible. The TCJA disallows employer deductions for the cost of providing commuting transportation to an employee (such as hiring a car service), unless the transportation is necessary for the employee’s safety. Lastly, the new law eliminates employer deductions for the cost of providing qualified employee transportation fringe benefits (e.g., parking, mass transit passes, and van pooling), but those benefits are still tax-free to recipient employees.
Net Operating Losses - Generally, NOLs will be limited to 80 percent of taxable income for losses arising in tax years beginning after December 31, 2017. It also denies the carryback for NOLs in most cases while providing for an indefinite carryforward, subject to the percentage limitation.
Energy - The new law retains the credit for plug-in electric vehicles and did not adopt any of the other repeals of or modifications to energy credits from the House bill.
Midway Through 2017, Minimal Tax Reform Details (July 2017)
For the better part of 2017, the Big Six has held countless closed-door meetings discussing the details of possible tax reform. Little progress has been made, primarily due to the White House’s prior stated goals regarding border adjustments leading to pushback from large retail and other import-heavy industries. The proposed plan for border adjustments would have made U.S. exports exempt from taxes, while increasing taxes on imports. With this element of tax reform being indefinitely put on hold, the focus is finally shifting back to discussions on tax code simplification and tax rate adjustments.
The most recent statement from the Big Six calls for these tax rate adjustments to revolve around breaks for individuals and small businesses. The stated goals are to stimulate the economy and put American companies in a better position to compete with foreign ones. In April, the White House specifically suggested lowering corporate tax rates from 35% to 15%, but most recent Big Six proposals are suggesting a compromise at 25% is much more realistic. As far as individual tax rates go, there appears to be a consensus that rates would be ideal in the mid to low 30’s, a small break from where they stand now at 39.6%.
Planning wise, one of the main takeaways should be the importance of taxpayers taking advantage of opportunities to defer income and accelerate expense recognition. The ideal scenario is for taxable income to be reduced in years where tax rates are highest, and shifted to years where tax rates are lowest. Accounting method changes, depreciation related elections, installment sales, and the timing of charitable contributions are just some aspects of planning that should be considered. More details pertaining to tax reform from the Big Six are expected to emerge in September and October.
Election Outcome and Tax Law Changes (November 2016)
The election of Donald Trump as President of the United States, along with Republicans retaining control of both chambers of Congress, will likely result in an overhaul of the tax code. President-elect Trump has made tax reduction a centerpiece of his economic plans during his campaign, saying he would propose lower and consolidated individual tax rates, expand tax breaks for families, and repeal or significantly amend the Affordable Care Act. As the next few weeks and months unfold, taxpayers will learn more about Trump's tax plans. For now, the following should be considered as possible changes during the 2017 tax year:
Reducing the number of income tax brackets from seven to three, with rates on ordinary income of 12%, 25%, and 33%, and adapting the current rates on long-term capital gains and qualified dividends for the new brackets
Eliminating the head of household filing status
Abolishing the net investment income tax
Eliminating the personal exemption (though expanding child-related tax breaks)
More than doubling the standard deduction, to $15,000 for singles and $30,000 for married couples filing jointly
Abolishing the alternative minimum tax
Abolishing the federal gift and estate tax, but disallowing the step-up in basis for estates worth more than $10 million
Reducing the top corporate income tax rate from 35% to 15%
Allowing owners of flow-through entities to pay tax on business income at the proposed 15% corporate tax rate rather than their own individual income tax rate (although there is currently a significant amount of ambiguity on the specifics of how this provision would work)
Be Cautious of Fraudulent CP2000 Notices (October 2016)
The IRS has issued an alert regarding an ongoing tax scam. Fraudulent CP2000 notices are being emailed in an attempt to defraud taxpayers. These fraudulent notices indicate a small balance is due and request payment be made to the "I.R.S." (rather than to the "United States Treasury") or by a "payment" link within the email. However, the IRS does not initiate contact by unsolicited email (or phone calls) and taxpayers should be suspicious of such correspondence. If you would like to determine whether or not your CP2000 notice is authentic, visit and locate the web page Understanding Your CP2000 Notice.
For returns with tax years ending after December 31, 2015, the tax return due dates have been changed as follows (February 2016)
(extended due date September 15th)
(extended due date September 15th)
(extended due date October 15th)
(extended due date September 30th)
(extended due date October 15th)
(extended due date October 15th - separate extension from 1040)