News & Publications
COVID-19 Relief Bill (January 2021)
The Consolidated Appropriations Act of 2021 (referred to as the “COVID-19 Relief Bill”) signed into law by the president on December 27, 2020, is the latest round of stimulus legislation. With more than 5,000 pages, the Act may be the largest piece of legislation ever passed. As such, it will take considerable time to sort through the legislation’s provisions and relief measures.
While there are many key provisions under this omnibus legislation that are designed to provide much-needed relief to small businesses, many of them are in fact legislative efforts to revamp the Paycheck Protection Program (“PPP”). The COVID-19 Relief Bill provides $284 billion to the U.S. Small Business Administration for both first and second-draw PPP forgivable small business loans. It also allocates $20 billion to provide Economic Injury Disaster Loan (“EIDL”) grants to businesses in low-income communities.
A borrower is generally eligible for a Second Draw PPP Loan if the borrower:
Previously received a First Draw PPP Loan and will or has used the full amount only for authorized uses;
Has no more than 300 employees; and
Can demonstrate at least a 25% reduction in gross receipts between comparable quarters in 2019 and 2020.
It’s worth noting, a significant provision is the clarification that business expenses paid with forgiven PPP loans are tax-deductible for federal tax purposes. This supersedes the November 2020 guidance in Revenue Ruling 2020-27, in which the IRS had concluded that expenses paid with PPP loan proceeds were not deductible if the loan was forgiven or if at the end of the tax year the taxpayer had a reasonable expectation that the loan would be forgiven. The COVID-19 Relief Bill brings the tax-deductibility issue in line with Congress’s intent when it created the original PPP as part of the $2 trillion Coronavirus Aid, Relief, and Economic Security (CARES) Act.
While this is good news overall, taxpayers need to tread carefully as state conformity issues remain. For example, California does not conform to this federal law and taxpayers will still need to reduce their deductions on their California returns.
Paycheck Protection Program Flexibility Act (May 2020)
The President officially signed the Paycheck Protection Program (PPP) Flexibility Act of 2020 on June 5, 2020. The new act eases rules and provides much needed flexibility to small businesses on how they can spend their PPP funds and still qualify for forgiveness of the loans. Some of the highlights of the Flexibility Act are as follows:
Current PPP borrowers can choose to extend the loan forgiveness covered period from 8 weeks (56 days) to 24 weeks (168 days) from the loan origination date, as long as the covered period does not extend beyond December 31, 2020, or they can keep the original 8-week window. New PPP borrowers will have a 24-week covered period, as long as the covered period does not extend beyond December 31, 2020.
Reduces the required amount for payroll expenditure from 75% to 60%.
Provides two "new" exceptions allowing PPP borrowers to achieve full loan forgiveness even if they are unable to restore their workforce.
New PPP borrowers now have a five-year rather than a two-year maturity date for all loans made on or after the bill’s date of enactment. For loans made prior to that date, both the lender and the borrower must mutually agree to modification of the maturity date term to five years. Regardless of the maturity term, the interest rate will remain at 1%. (PPP loan borrowers should obtain documentation from their lender if the maturity date is changed and the PPP loan is extended to a five-year term).
Allows businesses to qualify for the employer payroll tax deferral provided in the CARES Act even if they have received PPP loan forgiveness.
Bay Area Tax Group recommends that companies visit the Small Business Administration ("SBA") website for the latest guidance, resources, and access to the PPP loan forgiveness applications and instructions at https://www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program.
The full application (Form 3508) has also been revised. It is now a five-page application and includes changes for the new 24-week covered period and the safe harbors added for the FTE and wage reductions. Additionally, the SBA released a new EZ version of the forgiveness application (Form 3508EZ). The EZ application requires fewer calculations and less documentation and will ease the paperwork for small business owners. However, not all borrowers are eligible, applicants should first review the rules and obtain confirmation from their lenders in advance.
COVID-19 Taxpayer Relief (April 2020)
The President of the United States issued an emergency declaration under the Robert T. Strafford Disaster Relief and Emergency Assistance Act in response to the ongoing Coronavirus Disease 2019 (COVID-19) pandemic. The declaration is "to provide relief from tax deadlines to Americans who have been adversely affected by the COVID-19 emergency, as appropriate, pursuant to 26 U.S.C. 7508A(a)."
On March 20th, the Treasury Department and the Internal Revenue Service announced that the individual federal income tax filing due date is automatically extended 90 days, from April 15th to July 15th 2020. No additional penalties or interest will accrue during these 3 months. Most states conform to Federal, including California, but not all. The following deadlines have also been extended:
Businesses with an April 15th filing deadline for the 2019 tax year will be given an additional 90 days to file returns and pay taxes without penalties and interest.
2020 1st and 2nd quarter estimated income tax payments are due on July 15th, instead of April 15th or June 15th.
2019 employer contributions to retirement plans that were due April 15th.
2019 individual IRA deposits.
This is an ever-evolving situation that will remain fluid for a number of months. We will be providing updates as the IRS and FTB make further announcements. If you have any questions regarding this information or how it applies to you, please reach out directly.
The SECURE Act (March 2020)
The Setting Every Community Up for Retirement Enhancement Act, better know as the Secure Act, was signed into law on December 20th. One of the most dynamic changes to retirement legislation since the Pension Protection Act of 2006, addressing a wide variety of retirement planning topics. Some of the most impactful changes are summarized below:
Retirement Minimum Distributions (RMDs) will start at age 72, not age 70 1/2.
Age limitation on IRA contributions lifted.
Larger tax credits offered to small employers that establish retirement plans.
Penalty-free withdrawals from IRAs allowed for up to $5,000 of qualified birth or adoption expenses.
Non-spouses inheriting IRAs in 2020 or later must take distributions that end up emptying the account within 10 years. There are not RMDs during that period; a taxpayer could take no action for 9 years and then distribute everything in year 10. In addition to spouses, others that may be exempt to this rule include minor children, disabled individuals, and beneficiaries that are less than 10 years yougner than the owner of the IRA.
Tax-free withdrawals from 529 Plans allowed for repayment of student loans up to $10,000.
Limited Liability Company or Insurance? (January 2020)
Many people feel they need to form an LLC to protect themselves and their assets. But often, these concerns can be more easily addressed with insurance. You should be aware that the liability protection provided by an LLC is limited, and there are annual taxes and fees that must be considered. It's also worth noting that the state of California has been aggressively pursuing nonresident LLC members, which may deter out-of-state investors.
Generally, members of an LLC are not personally liable for the debts of the LLC. A member’s acts may bind the LLC, but they generally do not subject individual members to personal liability. However, like the corporate shareholder, the LLC member is personally responsible for his or her tortious or malpractice acts. An LLC member's non-LLC assets may be attached if:
The member caused the event;
The member was negligent in hiring the person who caused the problem
The member was responsible for supervising the activity
So what about insurance? For LLCs that hold property, most lenders will require the owner of the property to carry insurance on the property. Depending on your needs, you may be able to purchase an additional $1 million of insurance for in the neighborhood of $250 per year. Cost of insurance is based on a number of factors, including who the carrier is and what other coverage the carrier provides. $250 for $1M of additional coverage can look like a steal if you compare to the alternative - $800 LLC annual tax plus the cost to prepare an additional LLC tax return.
Be aware that, at a minimum, the LLC is liable for an $800 annual tax, and that obligation is indefinite until the LLC formally dissolves. LLCs that have gross receipts attributable to California of $250,000 or more must also pay an LLC fee. The LLC fee starts at $900 and can be has high as $11,790 per year.
The bottom line is that while LLCs are an excellent structure for many businesses, they aren't necessarily the right choice for everyone. If you are considering forming an LLC, be sure to reach out to our firm in advance so we can discuss the relevant financial and tax planning considerations.
AB 5 - Employees and Independent Contractors (September 2019)
In 2019, the Governor signed AB 5. Under AB 5, most workers are presumed to be employees for purposes of the Labor Code, the Unemployment Insurance Code, and for most wage orders of the Industrial Welfare Commission unless a hiring entity satisfies a three-factor test, referred to as the ABC test. This means that many workers previously classified as independent contractors are now employees under California law and you must withhold California income and payroll taxes, and meet California’s minimum wage and overtime requirements.
The ABC test - Under the ABC test, all three of these conditions must be met in order to treat the worker as an independent contractor:
The worker 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, commonly known as the Borello “control test” (S.G. Borello & Sons, Inc. v. Dept. of Ind. Rel. (1989) 48 Cal.3rd 342);
The worker performs work that is outside the usual course of the hiring entity’s business; and
The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.
The ABC test means, for example, that a hospital who hires nurses to work in specialized areas, such as an anesthesia nurse or neonatal nurse, may not treat the nurse as an independent contractor if those nurses are filling in for employee-nurses and don’t work for multiple hospitals. While physicians have their own specific exemption from AB 5, the same treatment would apply to other medical services, as well as consulting services, the entertainment industry, truck drivers and most notably, rideshare and delivery service workers.
While applying the ABC test to workers will result in many more workers being classified as employees, the legislation provides for numerous exemptions to the application of the ABC test. The exemptions are complicated, and very specific. However, the exemptions do not mean workers are automatically independent contractors.
Be aware that California law includes severe financial penalties for willfully treating an employee as an independent contractor. The penalties, which are in addition to other assessments, penalties, or fines, are:
$5,000 to $15,000 for each violation (a single misclassified individual); and
$10,000 to $25,000 for each violation if the Labor Commissioner, or a court, determines there is a “pattern and practice” of these violations.
(Labor Code §226.8)
Tax Reform - Employer Fringe Benefits (February 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 comparison of the rules before and after tax reform.
Office holiday parties: Old rules, 100% deductible. New rules, 100% deductible.
Entertaining clients: Old rules, 50% deductible. New rules, 50% deductible for meals only, not entertainment.
Event tickets with clients: Old rules, 50% deductible for the face value of the ticket. New rules, no deduction for entertainment expenses
Charity event tickets with clients: Old rules, tickets to qualified charitable events 100% deductible. New rules, no deduction for entertainment expenses, but any donation in excess of the FMV of the ticket may qualify as a charitable write-off.
Employee travel meals: Old rules, 50% deductible. New rules, 50% deductible.
Meals provided at convenience of employer: Old rules, 100% deductible provided they are excludible from employees' gross income as de minimis fringe benefits; otherwise 50% deductible. New rules, 50% deductible and after 2025 completely nondeductible.
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.
For joint filers, 10% applies to $0 - $19,050, 12% up to $77,400, 22% up to $165,400, 24% up to $315,000, 32% up to $400,000, 35% up to $600,000, and 37% on any income over $600,000.
For individual filers, 10% applies to $0 - $9,525, 12% up to $38,700, 22% up to $82,500, 24% up to $157,500, 32% up to $200,000, 35% up to $500,000, and 37% on any income over $500,000.
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 www.irs.gov 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)
Partnerships: March 15th (extended due date September 15th)
S Corporations: March 15th (extended due date September 15th)
C Corporations: April 15th (extended due date October 15th)
Trusts: April 15th (extended due date September 30th)
Individuals: April 15th (extended due date October 15th)
FinCen 114: April 15th (extended due date October 15th - separate extension from 1040)