tax planning

Tax reform brings changes to fringe benefits that can affect an employer’s bottom line

The IRS reminds employers that several programs have been affected as a result of the Tax Cuts and Jobs Act passed last year. This includes changes to fringe benefits, which can affect an employer's bottom line and its employees' deductions.

Here’s information about some of these changes that will affect employers:

Entertainment Expenses & Deduction for Meals
The new law generally eliminated the deduction for any expenses related to activities generally considered entertainment, amusement or recreation.
 
However, under the new law, taxpayers can continue to deduct 50 percent of the cost of business meals if the taxpayer or an employee of the taxpayer is present, and the food or beverages are not considered lavish or extravagant. The meals may be provided to a current or potential business customer, client, consultant or similar business contact. Food and beverages that are purchased or consumed during entertainment events will not be considered entertainment if either of these apply:

  • they are purchased separately from the entertainment

  • the cost is stated separately from the entertainment on one or more bills, invoices or receipts

Qualified Transportation 
The new law also disallows deductions for expenses associated with qualified transportation fringe benefits or expenses incurred providing transportation for commuting. There is an exception when the transportation expenses are necessary for employee safety.

Bicycle Commuting Reimbursements 
Under the new law, employers can deduct qualified bicycle commuting reimbursements as a business expense. The new tax law suspends the exclusion of qualified bicycle commuting reimbursements from an employee’s income. This means that employers must now include these reimbursements in the employee’s wages.
  
Qualified Moving Expenses Reimbursements 
Employers must now include moving expense reimbursements in employees’ wages. The new tax law suspends the exclusion for qualified moving expense reimbursements.

There is one exception as members of the U.S. Armed Forces can still exclude qualified moving expense reimbursements from their income if they meet certain requirements.

Employee Achievement Award 
Special rules allow an employee to exclude achievement awards from their wages if the awards are tangible personal property. An employer also may deduct awards that are tangible personal property, subject to certain deduction limits. The new law clarifies the definition of tangible personal property.

At Zhong & Sanchez, we provide high-quality tax and financial reporting services to privately-held entities and small business owners. Our expertise ranges from income tax filing and accounting services to international compliance and financial analysis. Located in the Silicon Valley, you can reach us at 510-458-4451 or schedule your first consultation today at https://calendly.com/zhongsanchez

Source: IRS

Picture credt: Jaclyn Morgan, Foodable

5 ways to hone retirement plans under new tax regime

The Tax Cuts and Jobs Act passed by Congress late last year represents the most significant changes to the tax code since 1986. The changes are biggest for corporate taxpayers. C corps will see their statutory tax rate decline from 35 percent to 21 percent, and pass-through corporate entities — partnerships, sole proprietorships and S corps — where income is taxed at the individual level, will also see permanent and dramatic reductions in their tax liabilities.

The decreases in individual tax rates, on the other hand, are smaller and less certain, with rates set to revert back to current levels by 2026. As a matter of fact, the tax plan will help out corporations a lot more than average Americans. Middle-class Americans itemizing their deductions may actually get hurt by tax reform.

The rule changes regarding deductible expenses, exemptions, credits and the tax brackets pose new income-tax planning challenges for all Americans. They also have implications for retirement planning — most prominently for wealthy Americans — but for taxpayers of more modest means, as well.

Here are five strategies worth considering to improve your retirement planning in the new tax environment.

1. Move to a low-tax state. The lure of the Sunbelt for retirees got a little stronger with tax reform. The capping of the so-called SALT (state and local taxes) deductions at $10,000 will hit taxpayers in high-tax (and invariably blue) states such as California and New York particularly hard. New York Gov. Andrew Cuomo has threatened to sue the federal government over the roughly $14 billion his Department of Finance says it will cost New Yorkers annually.

While the standard deduction on federal tax returns was nearly doubled to $12,000 for individuals, the average SALT deduction on federal returns for New Yorkers in 2015 was $22,000, according to the Tax Policy Center. In California — which also has high income-tax rates — an all-in property tax rate of 1.25 percent on a $1 million home would already put taxpayers over the $10,000 cap.

2. Convert your traditional IRA to a Roth IRA. Roth IRAs provide the ultimate benefit in retirement — tax-free income. You can't deduct your contributions to a Roth IRA, but the investment returns in the account are tax-free and so are account withdrawals (optional-not required) as long as you make them after age 59½.

People need to diversify their tax risk. A tax-free retirement account is important over the long haul because higher rates in the future may hurt you in retirement.

The lower marginal income-tax rates that take effect this year make the conversion of a traditional IRA to a Roth IRA significantly less expensive. With those rates potentially reverting back to current levels by 2026, paying the taxes now could be far less expensive than in retirement. 

One major consideration: The tax bill did away with the option to undo a conversion by the tax-return date of the following year. If the market has a big downturn, you will owe tax on the full amount at conversion even if the account value drops by 30 percent before year-end. We suggests waiting until after Thanksgiving to make a conversion. Taxpayers could also consider converting smaller amounts over several years to reduce taxable income and potentially their marginal rates.

3. Give to charity in a smart way. The deduction for charitable donations was preserved in the tax bill, but with the standard deduction raised to $24,000 for a married couple, you'll have to give a lot to warrant itemizing deductions.

One strategy is to front-load your anticipated donations over multiple years into one tax year. People can bundle up their anticipated donations for the next five years in a donor-advised fund. Of course, that means it's likely only a one-year tax-saving strategy.

If you're over 70½ years old, make your charitable donations directly from your IRA — whether you itemize deductions or not. The donation counts against your required minimum distribution from the retirement account but is excluded from taxable income. The qualified charitable distribution enables a taxpayer to claim the standard deduction and still get the charitable deduction. If you qualify, it's the only way you should give to charity.

4. Mind your business and estate. The tax bill doubled the estate-tax exemption to $11.2 million per person ($22.4 million per married couple) and kept it indexed for inflation. In 2026 it will revert back to 2017 levels indexed for inflation. For the vast majority of Americans, the increase is meaningless, but for high-net-worth taxpayers — particularly business owners — it raises new issues.

Individuals with a net worth of close to or more than $11 million ($22 million for couples) can still lower the tax hit to their heirs with the use of trusts and estate-planning strategies. With the estate and gift tax still unified, it may also make sense to gift large amounts of assets tax-free to heirs now given the bigger but potentially temporary exemption.

The downside of gifting assets before you die is that heirs do not get a step up to market value in the cost basis of the assets. If and when they sell them, they will be on the hook for capital gains taxes. In a perfect world, people would pay no estate taxes and get a step up in cost basis at death. That sweet spot, however, may require your dying before the exemption reverts back to a lower level.

We suggests that married couples with an estate valued at less than $20 million take a "wait and see" attitude regarding the value of their business or assets before a potential in life transfer.

5. Talk to a financial advisor or CPA. The numerous changes to the tax code provide a lot of income-tax planning opportunities, which can translate into more retirement savings. But it is complicated. Any decision regarding something like a Roth conversion should be made in conjunction with other issues.

At Zhong & Sanchez, we are dedicated to provide high-quality tax and financial reporting services to privately-held entities and small business owners. Our expertise ranges from income tax filing and accounting services to international compliance and financial analysis. Located in the Silicon Valley, you can reach us at 510-458-4451 or schedule your first free consultation today at https://calendly.com/zhongsanchez

Picture credit: USA Today; Source: CNBC

Tax Reform and U.S. Expats: The Good, the Bad and the Same

Source: CPA Practice Advisor

Here’s what we know. The new tax reform bill called, Tax Cuts and Jobs Act (TCJA), is the first time in 30 years that the tax code has been fully transformed. While it is expected to ease tax filings and processing for Americans, the same can’t be said for American Expats. These are US Citizens who live abroad (whether for personal or professional reasons), and who are also required to file with the IRS annually. For years, this group of tax-paying Americans have raised concerns about changes they would like made but unfortunately, for the most part, their voices were ignored. Below is a look inside the new tax reform bill for US Expats:

What hasn’t changed:

The Foreign Information Reporting Requirements Expats are required to submit, in addition to their tax returns, are largely unchanged. The Foreign Bank Account Report, AKA FBAR or FinCen 114, the FATCA requirements - Form 8938, Form 5471 (Report of Certain Foreign Corporations), Form 3520 (Report of Foreign Trusts), and the Net Investment Income Tax, are still here and unchanged. This means that many Expats will continue having trouble banking abroad and face onerous penalties if they fail to file.

The two most important tax code provisions for Expats, the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit have also not been substantially changed. Expats can use the FEIE to exclude over $100,000 in earned income, from their US taxes each year and can use the FTC to reduce their US taxes dollar for dollar by the amount they have paid to a foreign government. This allows individuals to try to avoid double taxation and this has been largely unchanged in the Tax Cuts and Jobs Act. However, the way the FEIE will increase going forward has been changed, which brings us to what has changed.

What’s New:

The new tax reform changes the way inflation is calculated and will affect a number of tax-related issues. Inflation calculations had previously been calculated using the “regular consumer price index,” but going forward the IRS will use the “chained consumer price index.” The end result is a lower rate of inflation will be used to calculate the increase to the FEIE, which will increase taxes over time.

Modifications were made in tax brackets, exemptions, and deductions. Tax brackets are now larger, meaning you may now be in a lower bracket than you were previously, and the standard deduction has been nearly doubled. For those considering a move to or from the US, two new issues should be considered: 1) the moving deduction has been completely eliminated; 2) the individual mandate, as part of the Affordable Care Act has been eliminated. Unfortunately, the Net Investment Income Tax was not eliminated and will still impact Expats.

The corporate tax has been the most talked about change. This tax reform bill has transitioned the US to a territorial system of corporate taxation. Before, the US operated using worldwide taxation, meaning that corporations had to pay taxes on the income they earned abroad. This change will affect Expats who own corporations outside of the US, because they will face a one-time deemed repatriation tax of 15.5% of any previously untaxed overseas profits as the US transitions to a more territorial system for corporations instead of a worldwide system.

For US Expats, the new tax bill is pretty much the same tax bill with disappointments and frustrations for the nearly 9 million Americans living away from the United States. And, those who own small businesses abroad may actually find their situation is worse under the TCJA than under the old system! We at Zhong and Sanchez will help you sort through TCJA and advise on your international exposure under TCJA. We are dedicated to provide high-quality tax and financial reporting services to privately-held entities and small business owners. Our expertise ranges from income tax filing and accounting services to international compliance and financial analysis. Located in the Silicon Valley, you can reach us at 510-458-4451 or schedule your first free consultation today at https://calendly.com/zhongsanchez

Capital Gains Tax on a House Sold From a Trust

Source: The Motley Fool

Figuring your tax liability is more complicated when you don't own a home in your own name. Most people don't think much about capital gains tax on the sale of a home, because the tax laws offer a capital gains exclusion of $250,000 to single filers and $500,000 to joint filers when they sell their main home. However, some people use estate planning strategies involving trusts to own their homes, and understanding the effect of having a home within a trust is crucial to make sure that you don't miss out on this key tax break. Below, we'll go into more detail about how to calculate capital gains tax on a house sold from a trust.

The key question: What kind of trust owns the home?

The tax laws treat various types of trusts differently. One key distinction is between revocable trusts and irrevocable trusts. If you have a revocable trust, then the tax laws treat that trust as what is known as a grantor trust. What that means is that even though the trust owns legal title to property contributed to the trust, including real estate, the trust assets are treated for tax purposes as if they still belong to the grantor, or the person who put the assets into the trust in the first place.

As a result, if you meet the tests for the capital gains exclusion, then you can claim the exclusion even if you own the home through a revocable trust. In general, to get the benefits of the exclusion, you need to have owned your home for at least two out of the five years prior to the date of sale, and you have to have lived in the property as your main home for at least two out of the past five years.

By contrast, the rules are much different for an irrevocable trust. Irrevocable trusts are separate legal entities, and so transferring your home to an irrevocable trust makes it impossible for you to claim the exclusion on capital gains. The proceeds from the sale of a home within an irrevocable trust typically stay within the trust, and the trust itself owes the resulting capital gains tax on the profit. Because tax brackets covering trusts are much smaller than those for individuals, you can quickly rise to the maximum 20% long-term capital gains rate with even modest profits on the sale of a home.

However, there is one aspect of an irrevocable trust that you should keep in mind. Often, revocable trusts become irrevocable after the person who created the trust dies. If the home was included in the estate of the deceased owner, then the property will get a step-up in tax basis. That means that even if the trust becomes irrevocable after the deceased owner's death, the trust won't have capital gain if it immediately sells the home. Only if the trust holds onto the property for a time after death will new gains have a chance to start accruing.

Trusts can be complicated, so it's important to know exactly what trust you're working with in a home-sale situation. With the right planning, you can often reach a tax result that will be advantageous to you.

When in doubt, consult a trustworthy CPA! Zhong and Sanchez is dedicated to provide high-quality tax and financial reporting services to privately-held entities and small business owners. Our expertise ranges from income tax filing and accounting services to international compliance and financial analysis. Located in the Silicon Valley, you can reach us at 510-458-4451 or schedule your first free consultation today at https://calendly.com/zhongsanchez

IRS closer to obtaining virtual currency records

U.S. taxpayers who have traded in virtual currencies such as bitcoin, but have not reported and paid tax on the income or gains from those transactions, may face the heat as the IRS continues to press for greater tax compliance in the virtual currency arena.

Some taxpayers may evade their tax obligations by concealing or otherwise failing to report their proper amount of taxable income and thus underpay their taxes, according to the IRS, and the Service has identified several tax-compliance risks associated with virtual currencies, including a lack of third-party reporting.

Tax practitioners should understand how virtual currency transactions work because their clients may already be trading in virtual currency or will be in the near future.

Documents requested by the IRS

The government has been investigating the use of virtual currency that can be converted into traditional currency for the past several years. After the IRS issued Notice 2014-21, which took the position that transactions in virtual currency were property transactions that could result in gain or loss, it then served a John Doe summons on Coinbase Inc., a San Francisco-based virtual currency exchange company, in November 2016. (A John Doe summons, which is issued under Sec. 7609(f), does not name a taxpayer because the IRS does not know the person's name.) 

Most recently, on Nov. 30, 2017, after a lengthy summons enforcement proceeding, a federal district court issued an order granting in part and denying in part the IRS's petition to enforce the summons. The court's order (Coinbase, Inc., No.17-cv-01431-JSC (N.D. Cal. 11/28/17) (order re: petition to enforce summons) requires Coinbase to produce the following documents for accounts with at least the equivalent of $20,000 in any one transaction type (buy, sell, send, or receive) in any one year during the 2013 to 2015 period:

  1. The taxpayer identification number;
  2. Name;
  3. Birthdate;
  4. Address;
  5. Records of account activity; and
  6. All periodic statements.

Once the documents are produced, the IRS will begin sifting through a vast amount of information to identify U.S. taxpayers who the IRS believes are not complying with their tax obligations. Those taxpayers may be subject to civil examinations and potentially owe tax, interest, and civil penalties. Other taxpayers with more serious issues could become subject to criminal investigation — if, for example, they have large amounts of unreported income over several years.

All of this is yet to be determined as the Coinbase case plays out. Taxpayers who think they may have exposure would be wise to take steps to comply, such as participating in the IRS domestic or offshore voluntary disclosure programs, as opposed to waiting for the IRS to catch them.

Notice 2014-21

The IRS laid the groundwork for enforcement in the virtual currency world by issuing Notice 2014-21, which provides answers to frequently asked questions (FAQs) on virtual currency, such as bitcoin. The 16 FAQs in the notice discuss the U.S. federal tax implications of transactions in, or transactions that use, virtual currency. For taxpayers trading in virtual currency, the notice is an important document to understand, and for tax professionals, the notice is a must-read. The IRS also updated its website in March 2014 to include a landing page specifically dedicated to virtual currency and providing an overview of the rules and a link to Notice 2014-21. 

The IRS's position is that virtual currency is treated as property for federal tax purposes and that general tax principles that apply to property also apply to transactions using virtual currency (Notice 2014-21, FAQ No. 1). This means that a taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value (FMV) of the virtual currency, measured in U.S. dollars, as of the date that the virtual currency was received (FAQ No. 3).

Taxable income from buying goods or services

Suppose a U.S. taxpayer, J, located in Mountain View, Calif., performs software contracting services in 2015 for a client, M, located in the Netherlands. J emails M an $8,500 invoice for the work. Instead of sending a check from the Netherlands, M pays J for his consulting services by electronically transferring bitcoin to J's virtual currency account.  

Since the virtual currency is convertible, J cashes out and electronically transfers the funds to his personal bank account. Under Notice 2014-21, J has taxable income equal to the bitcoin's FMV on the date that J received the virtual currency from M (i.e., $8,500). The income is also probably self-employment income subject to self-employment tax (FAQ No. 10).

Taxable gain from buying, selling, or trading

In addition, other transactions using virtual currency trigger a reporting requirement. A taxpayer can have gain or loss upon an exchange of virtual currency for other property just as if a taxpayer sold property and in exchange received cash. Below is a quick summary of the rules:  

  • If the FMV of property received in exchange for virtual currency exceeds the taxpayer's adjusted basis of the virtual currency (the taxpayer's cost to purchase the virtual currency), the taxpayer has taxable gain.
  • A taxpayer has a loss if the FMV of the property received is less than the adjusted basis of the virtual currency (FAQ No. 6).

Capital gain or loss for property transactions, including those from virtual currency, is reported on Form 4797, Sales of Business Property, which is attached to Schedule D, Capital Gains or Losses, of a federal income tax return.

Adjusted basis of virtual currency

A critical aspect in dealing in virtual currency, and an important step that tax practitioners can assist their clients with, is maintaining adequate books and records to establish a taxpayer's adjusted basis of the virtual currency. A taxpayer's adjusted basis (or cost to purchase the virtual currency) determines the amount of taxable gain or loss.

If a taxpayer becomes the subject of a civil examination, the taxpayer, not the IRS, has the burden of proving cost basis, which normally is accomplished through contemporary documentary evidence. Without credible evidence, the IRS can take the position that the property received in the exchange is fully taxable because it has no basis.  

John Doe summons

On Nov. 17, 2016, the government filed an ex parte petition under Sec. 7609(h)(2) for an order permitting the IRS to serve a John Doe administrative summons on Coinbase, the San Francisco virtual currency exchange company, for information related to transactions conducted in convertible virtual currency (In re the Tax Liabilities of John Does, No. 3:16-cv-06658-JSC (N.D. Cal. 11/17/16)). The IRS sought the identity of U.S. persons who had not properly reported income from their use of virtual currency. 

A John Doe summons is a powerful tool for the government to discover the identity of individuals who may have failed to disclose all of their income (see Bisceglia, 420 U.S. 141 (1975)). Unlike a normal summons seeking information about a specific taxpayer whose identity is known, a John Doe summons seeks information about a group of taxpayers (Secs. 7609 (c)(3) and 7609(f); see also Internal Revenue Manual (IRM) §25.5.7, "Special Procedures for John Doe Summonses"). The IRS may issue a John Doe summons only after a court proceeding in which the government meets three requirements:

  1. The summons relates to the investigation of a particular person or ascertainable group or class of persons;
  2. There is a reasonable basis for believing that the person or group or class of persons may fail or may have failed to comply with any provision of any internal revenue law; and
  3. The information sought is not readily available to the IRS from other sources (Sec. 7609(f)).

Unlike a normal court hearing, where both sides submit briefs and participate in the hearing, the court decides the case based only upon a review of the government's petition and supporting documents (Sec. 7609(h)(2)). Coinbase was not permitted to appear in court or to file briefs. An important takeaway is that the government only needs to establish a reasonable basis for believing that a group or class of persons has failed or may have failed to comply with any provision of any internal revenue laws. No further showing is required.

In the Coinbase case, the government pointed to the following evidence, set forth in its pleadings, in support of its petition to enforce the summons:

  1. A report issued by the U.S. Government Accountability Office (GAO) regarding tax compliance issues relating to virtual currency;
  2. Notice 2014-21, where the IRS set forth its position that virtual currencies that can be converted into traditional currency are property for tax purposes;
  3. A second GAO report issued in May 2014 focusing on public policy challenges posed by the use of virtual currencies; and
  4. A signed declaration by an IRS senior Revenue Agent, who had gathered information regarding tax compliance issues posed by the use of virtual currency (In re the Tax Liabilities of John Does, No. 3:16-cv-06658-JSC (N.D. Cal. 11/17/16) (memorandum in support of ex parte petition for leave to serve John Doe summons)).

After reviewing the government's petition and supporting documents, on Nov. 30, 2016, the federal district court issued an order granting the ex parte petition for leave to serve a John Doe summons on Coinbase (In re the Tax Liabilities of John Does, No. 3:16-cv-06658-JSC (N.D. Cal. 11/30/16) (order granting ex parte petition for leave to serve "John Doe" summons)).

Summons enforcement proceedings

When the IRS served the John Doe summons on Coinbase, the company refused to comply, so the government filed a petition in federal district court to enforce it. On Nov. 28, 2017, after briefing and an oral hearing, the court issued an order enforcing the summons. A few observations are worth noting about the summons enforcement proceeding in federal district court:

  • The court found that the IRS summons served a legitimate purpose of investigating the reporting gap between the number of virtual currency and bitcoin users reporting gains or losses to the IRS. The court relied, in part, on the IRS's assertion that only 800 to 900 taxpayers reported bitcoin gains to the IRS during each of the relevant years.
  • However, the court ruled that the summons went beyond seeking relevant information and narrowed the scope to a limited category of documents.
  • The court's opinion provides insight into the scope and type of documents the government can obtain in a summons enforcement proceeding dealing with a virtual currency exchange company.

What to expect

The next step is for the IRS to begin sifting through the Coinbase data and identifying U.S. taxpayers who the IRS believes are not complying with their tax obligations by comparing the information received from Coinbase with information reported by taxpayers on their returns. Some U.S. taxpayers may be selected for audit.

The IRS will be looking for unreported income (e.g., gain from the sale or exchange of virtual currency based upon a review of a taxpayer's periodic account statements), and taxpayers may face, at a minimum, the civil accuracy-related penalty (a 20% penalty under Sec. 6662) and possibly the civil fraud penalty (a 75% penalty under Sec. 6663). In cases with larger amounts of unreported income over a number of years, the IRS could refer the case to IRS criminal investigation (see Fink, 1 Tax Controversies: Audits, Investigations, Trials §5.01 (2017)). 

Looking forward

The best course of action now for U.S. taxpayers who have used virtual currencies is to take steps to comply and minimize their exposure through, for example, the IRS voluntary disclosure process. Cases are harder to resolve, and the civil penalties can be greater, after the IRS contacts a taxpayer. Expect the IRS to be most interested in U.S. taxpayers who have traded in virtual currency. If a taxpayer is contacted, however, the following points are worth considering for tax professionals representing a client during a tax audit:

  1. Although the government has issued its position in Notice 2014-21 that virtual currency transactions are taxable as property, it is uncertain whether certain virtual currency transactions are actually subject to U.S. taxation. Tax professionals should carefully review the virtual currency exchange transactions, get a handle on the facts early on, and develop a defensible strategy as to the amount of unreported income.
  2. Notice 2014-21 recognizes that penalty relief may be available to taxpayers who are able to establish that the underpayment of tax is due to reasonable cause.
  3. Where the law is vague or unsettled on whether a transaction has generated taxable income, courts have found that the defendant lacked willfulness, which is a defense to tax evasion or the civil fraud penalty (Office of Chief Counsel, Criminal Tax Division, IRS Tax Crimes Handbook, p.  10 (2009), citing Harris, 942 F.2d 1125, 1131 (7th Cir. 1991) (involving payments by wealthy widower to mistresses where civil tax cases had held such payments were gifts); Garber, 607 F.2d 92, 100 (5th Cir. 1979) (novel issue of tax treatment of money received from sale of rare blood)). There is no question that taxation of virtual currency transaction is a relatively new and complex area of tax law.
  4. A good-faith misunderstanding of the law or a good-faith belief that one is not violating the law is a defense to willfulness (e.g., tax evasion or civil fraud penalty); a taxpayer simply may not have known that he or she had to report and pay tax on certain virtual currency transactions that the taxpayer had not converted into traditional currency (Cheek, 498 U.S. 192 (1991); Stadtmauer, 620 F.3d 238 (3d Cir. 2010)).

Compliance is key

Virtual currency tax cases are a new and evolving area of the law, and further developments are expected as cases begin to be worked by IRS agents and eventually wind their way through the agency and the courts. U.S. taxpayers who have traded in virtual currency would be wise to seek the advice of competent tax counsel, who can evaluate the case, explain the options, and develop a defensible strategy.  

Source: https://www.thetaxadviser.com