IRS Waives Penalty for Many

The IRS has announced that it will be waiving the penalty for the underpayment of estimated tax for many taxpayers whose estimated tax payments and federal income tax withholdings came up short for the 2018 tax year.

The underpayment penalty relief is intended to provide assistance to taxpayers that were unable to properly adjust withholding and estimated payments to reflect the numerous changes made to the income tax law under the Tax Cuts and Jobs Act (TCJA).

Generally, the IRS will be waiving the underpayment penalty for taxpayers who have paid at least 85% of their total tax liability during the year. These payments could have been made through federal income tax withholding, quarterly estimated tax payments or a combination of the two methods.

The typical percentage of current year tax that must be paid to avoid an underpayment penalty is 90%.

If you have any additional questions, please contact Brian Reed at breed@bwtpcpa.com or 314-576-1350.

How the New Tax Law Affects C Corporations

The Tax Cuts and Jobs Act (TCJA) made significant changes to the federal tax law, including a significant decrease in the corporate tax rate.

Beginning in 2018, the tax rate for c-corporations is a flat rate of 21%. This is great for existing corporations, as they were previously taxed at rates up to 38%.

But what if your business is not currently classified as a c-corporation? Does it make sense to switch entity types to take advantage of the new, lower rate? The answer is it depends. Every business is different, and their tax situation should be analyzed carefully before making a decision on an entity change.

However, it is important to note some factors that should go into this decision. One is that c-corporations are still subject to double taxation. This means that the corporation pays income tax at the entity level. Then, if the owners take the profit out of the company, they are then taxed on that distribution as dividend income or compensation. Thus, the profit of the company has now been taxed twice.

In addition, one of the other changes in the TCJA is a new 20% deduction on pass-through business income. If your business is classified as a pass-through (including sole proprietorship, partnerships, and s-corporations), you may be eligible for this deduction which would lower the tax on your business income.

There are other tax and accounting changes that may be required to change to a c-corporation, so it is very important to consult your tax advisor regarding this decision.

If you have any additional questions, please contact Rebecca Bischoff, CPA at 314-576-1350 or rbischoff@bwtpcpa.com.

2018 Itemized Deduction Changes

Due to the recent tax law changes, many more taxpayers will be taking the standard deduction vs itemizing for 2018. The standard deduction  for 2018 is $24,000 for married filing jointly taxpayers (up from $12,700 in 2017). Significant changes to itemized deductions take effect this year. In order to itemize your deductions, the total of those must exceed the allowed $24,000.

  • Medical Expenses – remain deductible to the extent they exceed 7.5% of AGI (must exceed 10% of AGI beginning in 2019).
  • State & Local Taxes (includes state income tax, real estate tax and personal property tax) – limited to $10,000 for both single and married filing jointly taxpayers.
  • Mortgage Interest – interest on loans up to $750,000 of new acquisition debt.
  • Charitable Contributions – the 50% limitation has been increased to 60% for 2018.
  • Miscellaneous – expenses that exceeded 2% of AGI that were deductible have been eliminated. Employee business expenses, investment advisor and tax prep fees are no longer included as itemized deductions.
  • Phase Out – high income taxpayers were subject to phase out limits of itemized deductions previously but the phase out has been eliminated for 2018 – 2025.

 

For further information regarding tax law changes, please contact Jaclyn Ellis, CPA at jellis@bwtpcpa.com or 314-576-1350.

How The New Tax Law May “Drive” Your Decision Making

The Tax Cuts and Jobs Act revamped tax depreciation in several ways, one in particular being the way vehicle depreciation limits are calculated. Below is a summary of the vehicle depreciation limits prior to the new tax law vs. the vehicle depreciation limits under the new tax law. Please note that the new limits apply to vehicles placed in service after December 31, 2017.

TYPE OF VEHICLE LIMITATIONS – FIRST YEAR (OLD LAW) LIMITATIONS – FIRST YEAR (NEW LAW)
Passenger Cars (Under 6,000 lbs) $3,160 (If bonus does not apply)
$11,160 (If bonus does apply)
$10,000 (without bonus)
$18,000 (with bonus)
Passenger Trucks and Vans (Under 6,000 lbs) $3,560 (If bonus does not apply)
$11,560 (If bonus does apply)
$10,000 (without bonus)
$18,000 (with bonus)
Trucks, Vans, and SUV’s (Between 6,000 and 14,000 lbs) Limited to 25,000 Section 179 deduction + 50% Bonus Limited to $25,000 Section 179, however 100% bonus may be taken
Trucks, Vans and SUV’s (Over 14,000 lbs) No Section 179 depreciation limitations No Section 179 depreciation limitations

 

As summarized above, the new tax law has provided greater incentive for the purchase of business use vehicles. These limits apply for vehicles that are 100% business use.

For more information on this topic, please contact Tony Mueller, CPA at tmueller@bwtpcpa.com or 314-576-1350.

GAAP, Federal Tax Changes and How It Will Affect the Construction Industry

For many construction contractors, there are impending changes in laws governing both income taxes and financial reporting that come into affect during the current fiscal year or the upcoming one. These are changes that owners and key accounting personnel of construction contractors should become aware of and begin to plan how it affects their company.

Federal Tax Changes:

Prior to the Tax Cuts and Jobs Act passed in December, the law indicated that construction contractors were required to use the percentage of completion method for calculating taxable income unless they met a “small contractor” test. This test said that if the average gross receipts for the preceding three years was less than $10 million, the completed contract method could be used. Under the new law, this threshold is raised to $25 million. If a contractor is a “small contractor”, they are able to defer taxable income until a project is completed, and they pay taxes on the final profit of the project. This new threshold goes into effect for contracts entered into beginning after December 31, 2017. Keep in mind this is for contracts that are expected to be completed within two years.

Generally Accepted Accounting Principles (GAAP) Changes:

The new Revenue Recognition standard goes into effect for private companies for fiscal years beginning after December 15, 2018. It mandates that a company must 1) identify a contract, 2) identify the performance obligations, 3) determine the price, 4) allocate the price to performance obligations, and 5) recognize revenue as the performance obligation is performed. For contractors that already use percentage of completion method, this coincides with that method, therefore revenue recognition should stay consistent. However, contractors may want to change the way their contracts are worded to ensure it is very clear where all of these thresholds are met.