Tax Guru – Ker$tetter Letter

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IRS QBI Proposed Regs

Posted by taxguru on August 8, 2018

As most people know, the most complicated aspect of the TCJA was the brand new Section 199A deduction for 20% of Qualified Business Income (QBI).  In a perfect example of hasty, sloppy, vague, poorly explained legislation, how this new tax break will work in the real world is a big mystery.  In my 43 years in the tax biz, I can’t recall a more poorly defined bit of tax legislation.

Since the TCJA was signed into law in December, there has been an unending stream of articles, books, webinars and seminars on how we tax pros are supposed to calculate and handle this new QBI deduction.  To say that there are huge discrepancies between how people have been interpreting this new IRC Section 199A is a massive understatement.  Many tax analysts have made the correct assumption that the actual real life application of this new deduction won’t be firmed up for several years, after disputes with IRS over real life tax returns have been adjudicated in court.

The IRS has also been studying this issue and has just today published their first draft of proposed regulations on the QBI deduction.  Contrary to popular belief, what IRS thinks about a certain tax matter doesn’t automatically make it indisputable gospel.  It is just their opinion and taxpayers and their advisors are free to exercise their own differing opinions if there is some valid logic behind them.  With a law as vaguely written as TCJA, there are gigantic opportunities for a slew of different interpretations that will make just as much logical sense as what the IRS has come up with and will in the future.   

IRS Press Release: IRS issues proposed regulations on new 20 percent deduction for passthrough businesses

The proposed regulations184 page PDF

IRS FAQ Page on Section 199A

Tony Nitti’s review of the proposed regs in Forbes

Kiplinger’s 3-Page FAQs from 7/12/2018 (before the release of IRS proposed regs)

Review of proposed regs from TaxSpeaker (nee Jennings Seminars)

Posted in IRS, NewTaxLaws, QBI | Comments Off on IRS QBI Proposed Regs

Modifying the 1040 For TCJA

Posted by taxguru on June 30, 2018

This time of year is when IRS routinely starts working on updating the tax forms for next Tax Season.  The draft versions of the forms are posted on the IRS website for people to comment on.  I like to check it every few days for the new releases of forms that I use a lot.

I rarely say this, but this year, with the sloppily written TCJA taking effect, I actually feel sorry for the IRS form designers, as well as the State tax agencies that base their taxes on Federal numbers.  As any tax pro will tell you, our GOP rulers in DC passed a tax law that in many respects resembles a big pile of elephant poop and IRS has the thankless task of trying to bring it to life by modifying existing tax forms and designing new ones. With such aspects of the TCJA as the brand new and extremely convoluted 20% QBI deduction, who knows what the form or schedule for that will look like? 

The first stabs at the 2018 1040 form have hit the IRS’s Draft Forms webpage, along with the following press release.

IRS Working on a New Form 1040 for 2019 Tax Season

Accounting Today posted the following article on the newly revised forms:

IRS and Treasury preview postcard-size Form 1040

Whether this qualifies as actual tax simplification or not is open for interpretation.  As they mention in the news release, they are eliminating the 1040A and 1040EZ forms and forcing everyone to start with the same newly revised basic 1040.  Not having prepared a 1040A or EZ in well over 35 years because they didn’t have a place for paid preparers to sign, I personally have no problems with those forms biting the dust. 

However, the claim that tax returns will now be “postcard sized” is not exactly the entire story.  While it may be true that the basic 1040 form will be half the size physically (8.5” X 5”) as the normal 1040 has always been (8.5” X 11”), it will still be necessary to attach a lot of supplementary forms and schedules to support the numbers being entered onto the 1040 summary pages.  It is no secret that I have never used e-filing with IRS or any State tax agency due to the complexity of the returns I prepare which require a lot of supporting pages.  With double sided copies, we often send out tax returns for clients to file that are one or two inches thick.  With this new tax law, I don’t think we will have any reason to retire the heavy duty staplers we use.

On the IRS’s draft form web-page, they have just released their first public look at the new 1040 for 2018, along with the first six new backup schedules, creatively named Schedules 1 through 6.  These backup Schedules basically consist of the lines that were removed from the 2017 1040 in order to make it half-page size.  Whether that works out well or not remains to be seen.  With all of the other forms and schedules full sized, I think it will be a bit awkward to mix them with half pages.  It doesn’t look like the IRS Service Centers will be having much fun processing paper returns with mixtures of different size pages.

I have downloaded all of them and taken quick looks at them.  You can download them yourselves from the IRS website or from the following direct links. 

Form 1040 – U.S. Individual Income Tax Return

Form 1040 (Schedule 1) – Additional Income and Adjustments to Income

Form 1040 (Schedule 2) – Tax

Form 1040 (Schedule 3) – Non-refundable Credits

Form 1040 (Schedule 4) – Other Taxes

Form 1040 (Schedule 5) – Other Payments and Refundable Credits

Form 1040 (Schedule 6) – Foreign Address and Third Party Designee

Quick Observations:
Totals from Schedules C, E & F will go onto the new Schedule 1

Schedule 5 includes a lot of lines called “Reserved” showing how confused IRS is with the new tax law, as we all are.

 

I also feel sorry for the tax preparation software engineers, who will be up to their eyeballs with all of the form changes.  The 2019 Tax Season will be messy, to say the least.

Update 7-11-2018:
IRS has just posted its first draft of the 2018 Schedule A on its website.

Posted in Tax Forms, TCJA | Comments Off on Modifying the 1040 For TCJA

Tax Season Down Under

Posted by taxguru on June 30, 2018

Most people know that, being on the other end of the planet, Australia’s weather seasons are backwards from ours here in the USA.  When we are in the Summer heat, they are in Winter’s cold, and vice versa. 

What I didn’t know until recently is that their Tax Season is also opposite ours.  While we report our personal income tax data on a January 1 – December 31 calendar year basis, the Aussies are required to keep their books on a tax year from July 1, 2017 through June 30, 2018.  They even have a special name for June 30, EOFY (End Of Financial Year). Their tax return “lodging” time for that tax year is from July 1, 2018 through October 31, 2018.

Their equivalent to our IRS is the ATO, the Australian Taxation Office.

I actually learned about this from this bit from this week’s episode of “Weekly With Charlie Pickering,” which I have recently become a big fan of.

 

Click here for a lengthy discussion by the Gruen panelists on how many products are advertised for June 30 EOFY sales, including the fact that last minute purchases of business items are tax deductible. It’s very similar to our December 31 year-end sales here in the US.

Posted in Australia, tax season | Comments Off on Tax Season Down Under

Estate Planning Mistakes

Posted by taxguru on June 10, 2018

It’s not just income tax laws that are constantly changing and requiring strategic modifications.  Estate planning is also a moving target that requires constant course corrections, especially with the recent big tax law changes.  

Just as I have always considered it extremely dangerous for people to attempt to prepare their own tax returns, it is at least ten times riskier to try to handle estate planning without the assistance of an experienced estate attorney.  The books and software that are available at places such as Nolo Press are great for learning about the estate planning process and preparing for your meeting with the attorney who will be doing the actual paperwork, but trying to do everything on your own is insane.

I came across this excellent Kiplinger article by New Jersey CFP Eric Reich, on the Jewish World Review website

10 Surprising (or Surprisingly Common) Estate Planning Mistakes

I have seen examples of many of the scenarios mentioned in this very informative article.  I could even add some to this list, which I will do when I have more time.

Posted in Estates | Comments Off on Estate Planning Mistakes

Toying With IRS Phone Scammers…

Posted by taxguru on June 2, 2018

Funny and educational story arc in this week’s Sally Forth comics, illustrating how widespread these scam calls have become. 

Click on pic to get full size version.

SallyForth-IRSScamCall(5-28-18)

SallyForth-IRSScamCall(5-29-18)

SallyForth-IRSScamCall(5-30-18)

SallyForth-IRSScamCall(5-31-18)

SallyForth-IRSScamCall(6-1-18)

SallyForth-IRSScamCall(6-2-18)

Hopefully, this will help prevent more people from falling victim to the scumbags. Not everyone has gotten the message from conventional sources, such as these recent IRS news releases.

IRS continues warning on impersonation scams; Reminds people to remain alert to other scams, schemes this summer

Taxpayers should stay alert because scammers don’t take a summer vacation

Posted in scams | Comments Off on Toying With IRS Phone Scammers…

Parent Payback Scheme

Posted by taxguru on May 26, 2018

I recently discovered Gruen, a very interesting TV show from Australia about advertising and marketing topics.  A feature of each week’s show is to have two ad agencies each create a commercial for an off the wall topic.  This week’s Pitch had to do with teaching kids the value of the money their parents have to shell out for them

Posted in Gruen, parody, video | Comments Off on Parent Payback Scheme

Home Office is not an audit Red Flag

Posted by taxguru on May 5, 2018

One of the most common myths I have been hearing and reading for decades is that claiming a deduction for an office in the home is going to cause IRS to audit your tax returns.  Kiplinger even made this idiotic claim in a January 2018 article on IRS audit red flags

Nothing could be further from the truth and it’s a shame that so many people have essentially forfeited the tax savings this deduction would produce based on such erroneous info. 

This kind of ignorance might be expected from non tax pros; but it turns my stomach when I hear someone say that their tax advisor told them to not claim a home office deduction in order to avoid IRS problems.  That borders on malpractice.  Any tax pro with that opinion needs to be avoided.

Having prepared countless amended returns to pick up missed home office deductions for new clients over the years, there has almost always been a larger related benefit; much larger deductions for business vehicle mileage.  When it is established that your business day begins at your home office, additional trips to any outside business locations, such as another office several miles away, are considered to be deductible business miles instead of nondeductible commuting miles.  On several amended returns, the tax savings from the home office deduction was in the hundreds of dollars, while the tax savings from the increased business mileage was in the thousands.

My motivation for this update is a recent IRS news release, where they are actually encouraging small business owners to claim the home office deduction. 

For Small Business Week, IRS offers tips to small business owners about the overlooked home office deduction

Unless you believe that this is some kind of dastardly entrapment scheme to lure in unsuspecting future audit victims, I would say that this should lay to rest the fallacy that claiming a home office deduction is an Audit Red Flag.

Posted in home office | Comments Off on Home Office is not an audit Red Flag

New Rules For Deducting Meals & Entertainment

Posted by taxguru on April 25, 2018

As I mentioned earlier, the big “Tax Reform” law, aka the Tax Cuts and Jobs Act (TCJA), that was passed and signed into law in late December 2017, was so hastily and sloppily written that it contains several areas that are so vague and contradictory that they have everyone puzzled as to how they should be applied in real life.  One of these is the matter of deducting the costs of business meals and entertainment.  While it will most likely take several years to arrive at a firm and definitive interpretation of the law, we who do reside in the real world don’t have the luxury of waiting that long.  We need to know right now how to advise our clients. 

To that end, the fine folks at TaxCoach have assembled a handy chart comparing the rules for deducting various types of meals and entertainment expenses under the old 2017 tax law versus the new 2018 law.  They shared it with us during today’s weekly online strategy meeting.  Theirs was a PowerPoint file, which I have converted to its basic graphic and text components for this blog post.  The following chart and explanation are the creations of TaxCoach

Click on the chart below for a more legible full size version.

TC-M E(17v18)

Here are some changes you probably won’t like. Like a kitchen food processor, the new law slices, dices, and purees some of the most popular deductions for meal & entertainment expenses. The chart summarizes deductions under the old and new law.

For starters, there’s real speculation that the law may have unintentionally eliminated deductions for the classic “three martini” lunch entirely. Under the old rules, meals with prospects, clients, and referral sources were deductible under the same rules governing entertainment expenses. The new law repeals the umbrella deduction for entertainment expenses , which would appear to include business meals. However, the Senate explanation to their version of the bill, which ultimately made it into law, states that “Taxpayers may still generally deduct 50% of the food and beverage expenses associated with operating their trade or business (e.g., meals consumed by employees on work travel).”

So, which is it? Are traditional business meals still deductible or not? Well, we just don’t know. So until we get some guidance, prudence suggests you should continue to document those expenses, including the business purpose of the meal, to protect your deductions if we get clarification on the question. Better to have your ducks in a row and not need them than to need them and not have them!

Transportation expenses to and from business meals are still deductible, as they’re governed by a different section of the code that remains good today.

Unfortunately, there’s no doubt at all that the old “entertainment” deduction is gone. Under the old rules, you could deduct 50% of the cost of any entertainment expenses that took place directly before or after a a substantial, bona fide discussion directly related to the active conduct of your business. Deductions included the face value of tickets to sporting and theatrical events, food and beverages, parking, taxes, and tips. The new law repeals that deduction, regardless of how much business you discuss at the event or what business entity you operate. Now, none of those expenses are deductible – not even transportation to and from the venue.

The new law also tightens rules for deducting the cost of providing food and beverages to your employees under the “convenience of the employer” or “de minimis” fringe benefit rules. The new law cuts those deductions to just 50%, and eliminates them entirely after 2025.

Posted in meals, NewTaxLaws | Comments Off on New Rules For Deducting Meals & Entertainment

Tax Related Items in Omnibus Spending Bill

Posted by taxguru on March 31, 2018

As has long been common practice by our rulers in DC, they once again voted on and passed legislation that consisted of over 2,000 pages without giving anyone time to read it beforehand, including themselves.  They have been following the advice of their former leader, Nancy Pelosi, that  “We have to pass the bill so that you can find out what is in it.” 

This kind of reckless behavior has long been one of my many pet peeves about how business is conducted in DC and also in State capitols.  My dream is that there could one day be a law forbidding any public official from voting on any legislation until s/he has signed a sworn affidavit, under penalties of perjury just like we have to do on our tax returns (read the fine print above the signature line on your 1040), before they are allowed to cast a vote.  Only then, will they have a real incentive to reduce the length of their legislation to CliffsNotes size instead of matching the combined lengths of War and Peace and Moby Dick

Who among us would want to hire an attorney who advises his/her clients to just sign every document presented to them and then figure out what those documents mean later on down the road?  Those attorneys would be disbarred and sued out of existence for malpractice.  However, as we know all too well, our elected officials are held to completely different (lower) standards than those of us who work and live in the real world.  Just one of the many perks of elected royalty that our founding fathers definitely didn’t intend.

Back to the monstrous spending bill that Trump begrudgingly signed.  I don’t know anyone who has time to wade through it, looking for the tax related items included in its 2,200 pages.  Staying up to date on new tax laws is even tougher than normal at this time of year, as we are in the home stretch towards the April 17 Tax Day deadline.

Luckily, there are dedicated people at the tax publishing companies who have done that research for us and have boiled those 2,200 pages down to the tax related essentials.  Because I use their WebLibrary frequently, once again, the first of these special reports that I have come across is a 13 page PDF from TheTaxBook.  I have posted a copy in one of my online storage drives for your downloading and viewing pleasure.

This may just be the first analysis of the omnibus spending bill by TheTaxBook folks because the very last words on the very last page of this summary are:

Technical Corrections
The new law also amends a number of prior law provisions for technical errors that produced unintended results.

I hope they are planning to give us the specific details on those corrections so that we don’t have to pore over those 2,200 pages ourselves. 

Posted in NewTaxLaws | Comments Off on Tax Related Items in Omnibus Spending Bill

New Tax Law–Informational Brochures

Posted by taxguru on March 19, 2018

As everyone knows who has tried to understand the big Tax Reform law, the Tax Cuts & Jobs Act (TCJA) that was rushed through near the end of December, it is a bit of a mess, to put it mildly.  As is too typical for our rulers of both establishment parties, they were extremely reckless in their writing of the actual legislation.  Last minute modifications in the margins in pen, pencil, and crayon just heightened the absurdity of this process, which has long been compared to the production of sausages.

Conan O’Brien did some parodies of these handwritten tax law details.

Handwritten Additions To The GOP Tax Bill

More Handwritten Additions To The GOP Tax Bill

Even the typed portions of the law were not properly proofread before the law was passed and signed by Trump. New mistakes and ambiguities as to the intentions of our rulers are popping up on almost a daily basis. Supposedly the GOP rulers are trying to pass a technical corrections bill to fix their drafting mistakes, and the Dims are taking their standard obstructionist approach of simply opposing anything the GOP wants; so it’s anyone’s guess whether the mistakes will ever be corrected.  

In the meantime, we in the real world outside of the fantasyland of DC have to do out best to try and comply with the various confusing aspects of the new law.  All of this confusion could be considered as bad or as an opportunity to game the system even more. 

Some of the big areas of confusion that will affect a lot of business owners include:

Whether or not the deduction for all business meals has been killed, or just certain kinds of meals and entertainment.  There are tax experts taking both sides on this.

 

The new deduction for up to 20% of Qualified Business Income (QBI) has been receiving a lot of press and is probably the messiest and hardest to understand part of this entire tax bill.  The attendance at webinars I have been taking on this topic has been huge, compared to presentations on other facets of the new law, illustrating how widespread the confusion is among tax practitioners.  Many tax pros are predicting that ironing out the actual real world application of this portion of the tax law may take several years, as cases make their way to the Tax Court.  Of course, by that time, there could be an entirely new “Tax Reform” law in place, depending on who is in power in DC.

So as of right now, we are all in a learning and adjusting phase.  Rather than try to dig through the entire TCJA in one sitting, some tax publishers have broken it down into more reasonable bite-size pieces.  My favorite tax reference source, TheTaxBook, has taken this approach and has published eight different informational brochures on some of the topics in the TCJA, which I have uploaded to one of my online document storage locations for your downloading and viewing pleasure. 

New Tax Law – This is the first brochure they produced, giving a quick summary of the entire bill.

Individuals

Corporations

Depreciation

Employers

Excess Business Loss & Net Operating Loss

New Business Income Deduction – Covering the new QBI deduction

Retirement & Other Savings Accounts

Posted in NewTaxLaws, taxbook | Comments Off on New Tax Law–Informational Brochures