Tax Reform and Section 199A Deductions Overview

A key portion of the new Tax Cuts and Jobs Act (TCJA) is Section 199A and its deduction of qualified business income. Section 199A allows taxpayers other than corporations a deduction of 20 percent of qualified business income that is earned in a qualified trade or business, though this has some limitations. There are both positive and negative aspects to the changes depending on your situation.

Tax Adviser outlines the following crucial points about Section 199A:

• The deduction is limited to the greater of

(1)   50% of the W-2 wages with respect to the trade or business or

(2)   the sum of 25% of the W-2 wages, plus 2.5% of the unadjusted basis immediately after acquisition of all qualified property (generally, tangible property subject to depreciation under Sec. 167). In addition, the deduction also may not exceed (1) taxable income for the year over (2) net capital gain plus aggregate qualified cooperative dividends.

• The deduction does not include the trade or business of performing services as an employee and "specified service" trades or businesses: those involving the performance of services in law, accounting, financial services, and several other enumerated fields, or where the business's principal asset is the reputation or skill of one or more owners or employees.
• Qualified business income is the net amount of qualified items of income, gain, deduction, and loss with respect to a qualified trade or business that are effectively connected with the conduct of a business in the United States.

However, some types of income, including certain investment-related income, reasonable compensation paid to the taxpayer for services to the trade or business, and guaranteed payments, are excluded from qualified business income.Tax Services in Northern Arizona

In addition:

• The W-2 wage limitation does not apply to taxpayers with taxable income of less than $157,500 for the year ($315,000 for married filing jointly) and is phased in for taxpayers with taxable income above those thresholds. Income from specified service businesses is not excluded from qualified business income for taxpayers with taxable income under the same threshold amounts.
• The new law also reduces the threshold at which an understatement of tax is substantial for purposes of the accuracy-related penalty under Sec. 6662 for any return claiming the deduction, from the generally applicable lesser of 10% of tax required to be shown on the return or $5,000 before the new law, to 5% of tax required to be shown on the return or $5,000.

Quick Read Buzz notes the following key takeaways about Section 199A and notes that the TCJA places a weightier importance on wages:

1. Wages will become more important, specifically:
2. Proper classification of employees versus independent contractors.
3. Remember, the IRS requires S corporations to pay reasonable compensation to shareholders who provide substantial services. Expect more IRS scrutiny on reasonable compensation; for example, if officers’ compensation decreased from say, $300,000 historically, to $200,000, it may draw IRS scrutiny.  Currently, sole proprietorships and single member LLCs are not subject to reasonable compensation.  This may change upon further issuance of IRS guidance.
4. W-2 wages are wages paid by the business or a separate company set up by the shareholders to pay wages (company paymaster); and, it most likely will include W-2 wages via professional employer organization (PEO) arrangements (in other words, outsourced staffing Accounting services Northern Arizona

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Ten Things You Need to Know About Passport Restrictions on Delinquent Taxpayers​

Since 2015, when the Fixing American’s Surface Transportation Act was passed by Congress, world travelers who owe the IRS money have found that it’s no fun to owe a tax debt. In fact, it can ground any and all international travel plans indefinitely.


As noted by Jim Buttonow of Accounting Today:

…FAST Act is Section 7345 of the Internal Revenue Code, which requires the IRS to provide information to the U.S. State Department about people who owe “seriously delinquent tax debt.” Then, the State Department can deny, revoke or limit the ability of these individuals to use their passports – until they are back in good standing with the IRS.

The following 10 Q & A points about the FAST Act, also from Buttonow’s report linked above, are quoted and summarized in a more abbreviated form so that you can quickly digest the main points of how the FAST Act could affect you if you owe taxes:

1. What is the new passport-restriction program (IRC Section 7345)?

IRC Section 7345 requires the IRS to identify and “certify” individuals who have “seriously delinquent tax debt,” and provide this certification to the State Department. In turn, the State Department can essentially limit or completely stop the individual’s travel plans outside the US until the would-be traveler gets into good standing with the IRS.

2. Why did Congress create passport restrictions?

In 2011, the Government Accountability Office issued a report that examined the potential for using passports to increase tax-debt collection. The report found that 224,000 people who owed collectively more $5.8 billion in unpaid federal taxes received passports in 2008.
The report recommended that Congress enable a more coordinated effort between the IRS and State Department to go after these unpaid taxes, using passports as leverage. The report received a lot of national press, and the link between federal tax debt collection and passports became law in 2015.

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3. Who is Affected?

The passport restriction will affect people who travel internationally and owe seriously delinquent tax debt. This includes people with passports and those applying for or renewing passports.

Who is an individual with seriously delinquent tax debt? Section 7345 defines this person as owing a legally enforceable tax liability of more than $50,000 (unpaid taxes, penalties and interest combined), with:

• A lien filed, and all administrative remedies for lien relief have lapsed or been denied;
• or, a levy issued.

There are certain exceptions. The IRS won’t consider people in the following situations to be individuals with seriously delinquent tax debt, because these people are in good standing with the IRS:

• People who are in an IRS installment agreement to pay their taxes.
• People who have settled their debt through an offer in compromise or Justice Department agreement. 
• People who appeal a levy through an IRS collection due process hearing. 
• People who request innocent spouse relief (Form 8857). 

Based on this list of exceptions, the way to avoid being certified by the IRS as an individual with seriously delinquent tax debt is to get into an agreement with the IRS to pay the balance.

4. What will happen to the person who owes seriously delinquent tax debt?

Before the State Department revokes a passport, the State Department may limit the passport so that the individual can only travel back to the United States. It’s unclear how the State Department will use its discretion on limiting and revoking passports.

5. How can taxpayers get their passport restrictions lifted?

To get out of the passport restriction, individuals must get back into good standing with the IRS. For most taxpayers, that will mean paying the entire tax bill or, more likely, setting up an installment agreement with the IRS.

6. Can taxpayers just pay the balance to under $50,000 to remove the certification and passport restrictions?

The short answer from the IRS is no. Just reducing the amount under $50,000 will not decertify the taxpayer. 

7. Can taxpayers appeal their seriously delinquent tax debt certification?

Under Section 7345(e), taxpayers can appeal their status in federal district court or U.S. Tax Court. But the taxpayers’ passports will remain restricted while they appeal. For taxpayers who are surprised by their passport restrictions when they try to travel, the best way to expedite travel is to obtain a quick installment agreement.

8. What if taxpayers don’t think they owe the tax?

To get immediate relief, the only quick option is for taxpayers to pay the balance, or more likely, set up an installment agreement, and contest the tax later with the IRS.

9. Is there an expedited process to remove passport restrictions?

Right now, there’s no provision to expedite removal of passport restrictions after a taxpayer gets in good standing with the IRS. As the law is implemented, look for the IRS and the State Department to develop expedited procedures to relieve taxpayer burden.

10. What can a seriously delinquent tax debtor do to avoid passport restrictions?

Basically, taxpayers can avoid passport restrictions by meeting an exception outlined above – all of which mean getting into good standing with the IRS.

As Buttonow makes clear in his report: don’t assume it’s safe to make travel plans if you owe taxes. There are problematic ramifications of not being in good standing with the IRS when you intend to use your passport to travel outside the country.

For this reason, we highly recommend you meet with your CPA as part of your pre-trip planning process to put in place payment arrangements with the IRS sufficiently in advance of taking your trip.


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Money Management Tips For Couples

Having to manage personal finances is one of the stressful realities that makes up a part of normal daily living. As a single person managing his or her finances, he or she doesn’t have to be concerned with coordinating financial management efforts with anyone else. However, if the scenario involves a couple, such as a husband and wife, an entirely new dynamic is introduced. In theory, at least, there should be some sense of coordination between both members of the couple. What affects one member of the couple affects the other member of the couple, right?

If you and your partner are like most couples, chances are, you fight about money. Numerous studies have shown that money is the No. 1 reason why couples argue — and many of the recently divorced say those battles were the main reason why they untied the knot.

We’ll begin with the following quick points, as noted by Key, that address a number of financial mistakes that partners can make that create serious angst in their relationship:

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1 - Merging The Finances

The Wrong Approach: United we stand, divided we bank (i.e. separate bank accounts).

The Right Approach: It's yours, mine and ours (i.e. share the bank account).

2 - Dealing With Debt

The Wrong Approach: Your debt will ruin us; you must find a way to pay it off.

The Right Approach: It's our debt: Let's decide how to pay it off together.

3 - Keeping Spending In Check

The Wrong Approach: I'm a saver and you're a spender. That's the problem.

The Right Approach: We both spend, but on different things. Let's budget.

4 - Investing Wisely

The Wrong Approach: You're a risk-taker, I'm risk-averse. Hands off our retirement savings.

The Right Approach: Let's think in time frames and take as much risk as our goals allow.

5 - Keeping Money Secrets

The Wrong Approach: What my spouse doesn't know will never hurt him/her.

The Right Approach: Big financial secrets can ruin a marriage.

6 - Emergency Planning

The Wrong Approach: We're fine. We don't need to worry about money.

The Right Approach: Anything could happen. Let's plan for emergencies.

Examples of Financial Fights All Couples Have

In a piece by CNBC on the topic, the following examples of conflicts provide more insight about problems to avoid:

1 - Risk Taker vs Risk Avoider

One of you is more comfortable with the ups and downs of the stock market. If your spouse is intent on taking more risk than you're comfortable with - by putting more money into stocks, or investing in start-ups or buying Bitcoin - agree on a small percentage of your money that can be used in that way (no more than 5 to 10 percent) and a similar amount that you can save or invest as you wish. Then stick to your plan with the rest.

2 - Lending or Giving Money to Family and Friends

Forget about loaning money to friends and family in the majority of cases. If you can't afford to do it as a gift, don't do it at all - it won't end well. If you've already done it and you want to preserve the relationship, tell the recipient you're forgiving the debt, but that you don't want to be asked for more in the future.

In conclusion, the above points make it clear that good communication and teamwork is the real key to conflict-free financial partnership in marriage. A health dose of humility, patience, and selflessness will go a long way too because, after all, no one is perfect.

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Tax Advisory Services Arizona

Tax law is complicated and constantly changing. Through continuous professional education and participation in industry briefings we stay current with the tax laws and regulations that can benefit you. This enables us to offer a full range of tax services and for you to minimize your tax liabilities.

Tax Planning

Proactive planning is the key to minimizing your tax liability. We work with individuals and businesses to help you pay the least amount of tax required by law. Your unique circumstances will determine the strategies that we can employ to maximize the amount of money you keep in your pocket.

Tax Preparation

Even simple tax returns require multiple forms, schedules, and worksheets. The instructions and guidance from the tax authorities can be confusing and often generate more questions than answers. While a computer software program may help, there is no substitute for the personalized quality of service and advice you will receive from our experienced tax professionals.Tax And Accounting Services Arizona

Tax Problems

If you are currently dealing with the tax authorities, we can help you assess the situation, advise you of your options, and resolve the issue at the lowest possible cost. We will also work with you to review your prior tax years to make sure that all of your tax filings have been submitted accurately and that you have taken full advantage of the tax laws. Then we will help you set up an easy system to keep your records current going forward.

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