On Saturday, December 1, 2018, we continued our annual tradition of providing a water station as participants in the Generations of Indian Valley Annual Reindeer Run complete the unforgiving hill of Main Street Souderton. Our own Sarah Hughes (who finished in first place in her category) and Brian Erkes participated alongside the rest of the reindeer antlered, ugly sweater-wearing runners and walkers. We even spotted Batman! However, they couldn’t top our water station volunteers; Canon Capital’s Mike Witter was joined by The Grinch and the big man himself, Santa Claus. The Reindeer Run benefits the programs of Generations of Indian Valley, including their Meals on Wheels service.
We recently shared the changes brought to Meals and Entertainment expense deductions as a result of the Tax Cuts and Jobs Act. Since first sharing that information, the IRS has issued additional guidance on these deductions.
Under this interim guidance, issued October 3, 2018, meals for entertaining clients, prospects, and the like remain 50% deductible, meaning taxpayers may deduct 50% of an otherwise allowable business meal expense if:
- The expense is ordinary and necessary.
- The expense is not lavish or extravagant.
- The taxpayer or taxpayer’s employee(s) is/are present at the meal.
- Food and beverage are purchased separately from any entertainment, or the food and beverage cost is separately stated on the invoice.
Taxpayers may rely on this guidance pending the issuance of proposed regulations by the IRS.
If you have questions or would like to set up a tax planning session, contact us online or call 215-723-4881.
The Tax Cuts and Jobs Act was passed by Congress in November of 2017 but did not take effect until the beginning of this tax year (2018). It brings enough significant change to the tax code to prompt the question, “Should I choose a different structure for my business to take full advantage of this new law?” Our answer: “Yes, No, Maybe.”
Fortunately, those are the only three choices. Unfortunately, these otherwise simple choices become more complicated when associated with the tax code. As you can probably imagine, one size does not fit all when it comes to tax planning. It never did. And, with the Tax Cuts and Jobs Act, one size doesn’t even fit one size anymore.
For instance, if you’re a business owner whose company is structured in any way other than a C-corporation, you might be aware of the new “Qualified Business Income Deduction.” With the Qualified Business Income Deduction, you get to deduct 20% of your flow-through business income on your personal tax return and pay tax on 80% of the business income. Sounds simple, right? This section of tax law has more restrictions and limitations – we’ll call them “weeds” – than Round-Up could ever hope to control, but we’ll keep the explanation that simple to gain a general understanding.
If your business is a Sole Proprietorship with no payroll and no assets that nets $200,000 – absent of any “weeds” – you get a whopping $40,000 deduction and pay tax on only $160,000 of your net income. Since a sole proprietorship does not differentiate between the business and the owner, the owner is entitled to take the full $200,000 “out of the business” without any tax consequences.
Ah, but now here comes a “weed.” Corporations are required to pay salaries to the owner for the money they take out of the business. Partnerships must classify the money the owner takes out for services as “guaranteed payments.” Both salaries and guaranteed payments do not qualify for the 20% deduction mentioned above.
Therefore, if the Corporation or Partnership has the same $200,000 net annual income, and they pay a salary (Corporation) or guaranteed payment (Partnership) of $80,000, then what remains eligible for the 20% deduction is the $120,000 bottom line business income. So, a business organized as a Corporation or Partnership, doing the same exchange for services as a Sole Proprietorship, netting the same annual income, will only qualify for a $24,000 deduction. The only difference between the three? Their business entity structure. And so, one size – each one is a business — isn’t truly one size under the Tax Cuts and Jobs Act.
By now you’re probably thinking, the best recommendation would be to structure your business as a Sole Proprietor if your business type allows for that to make sense. Yes, but, what happens when the business is even more profitable than $200,000 per year? Let’s say that in 2019, you net $500,000 (before salaries or guaranteed payments). That’s when the “weeds” really take over, and their explanation would require a dissertation, not a blog post. Take our word for it. With such an increase in income, under the Tax Cuts and Jobs Act, the Sole Proprietor, and Partnership businesses would not qualify for any deduction. And yet, an S-Corporation that is the same business, providing the same services, netting the same income, would qualify for a $62,500 deduction.
So, not only is “one size fits all” a thing of the past. “One size” isn’t even “one size” from year to year. What happens when your Sole Proprietorship profit is low one year and high the next? You can’t switch business entities each year based on projected income. So, based on the current realities of the tax code, what is the wisest move for a business owner? Absent any other information, the recommendation would be to do business as an S-Corp.
This new tax code will affect every business in the United States, regardless of size or entity structure, which is how we arrived at our initial answer to the question, “Should I change my business structure under the Tax Cuts and Jobs Act?” is “Yes. No. Maybe.”
Let’s find out what entity will be right for you. Contact us online or call 215-723-4881 to schedule a consultation.
We’re a little over halfway through 2018, the first tax year affected by the Tax Cuts and Jobs Act. Earlier this year, we recommended doing a “Paycheck Check-up” and making any necessary adjustments to your Form W-4 (Employee’s Withholding Allowance Certificate) to avoid withholding too little Federal tax from each paycheck, which could lead to an unwelcome tax bill or penalties in April 2019. All that requires is updating the Form W-4 on file with your employer.
The IRS provides an online Withholding Calculator to help you determine the right type of withholding for your situation. But even with this calculator, completing a Form W-4 can be confusing. Let’s break it down:
Fields 1 through 4
These are straightforward, requesting your name, Social Security number, address, marital/filing status, and whether or not your name matches your Social Security Card.
Fields 5 and 6
This is where it can become confusing. Field 5 requests the “total number of allowances you’re claiming.” Calculate the number of allowances using the worksheets provided on the Form W-4. Field 6 asks how much, if any, additional funds you would like withheld from each paycheck. This is where the online Withholding Calculator is helpful.
In the event you meet both of the outlined conditions for exemption, indicate “Exempt” in this field.
Fields 8 through 10
These fields are to be completed by your employer.
You may adjust your withholding amounts via an updated Form W-4 as often as necessary for your situation. Outside of changes in your income or tax law, you will also need to complete an updated Form W-4 with these life events:
- Change of address (especially if you move to a new town/township/city/state)
- Change in marital status/marital filing status
- Name change
If you have any questions, we’re here to help. Contact us online or call 215-723-4881.
July 1, 2018 marks the beginning of the new fiscal year for the City of Philadelphia and with it a reduction in the Wage Tax.
The Wage Tax affects all businesses that operate within the city as well as businesses outside of the city who hire Philadelphia residents.
Any paycheck issued with a pay date after June 30, 2018 must withhold the Philadelphia City Wage Tax at these new rates:
- 3.8809% (.038809) for Philadelphia residents
- 3.4567% (.034567) for non-residents
If you are a Philadelphia-based business who does not collect the Wage Tax on behalf of your employees, or if you work for a business in Philadelphia and do not have the Wage Tax collected on your behalf, you – the employee – are responsible to pay an Earnings Tax directly to the City of Philadelphia. These rates will also be lower as of July 1, 2018:
- 3.8809% (.038809) for Philadelphia residents
- 3.4567% (.034567) for non-residents
We are happy to answer any questions you might have regarding this or any issue related to your payroll. Call 215-723-4881 or contact us online.
On Saturday, June 16, 2018, Team Canon Capital joined the many participants in Indian Creek Foundation’s annual Roll, Stroll & Run, an event including opportunities to raise funds by running, walking, or cycling.
Canon Capital Payroll processer/tax preparer Linda Covel brought some family members along for the 5K walk while Canon Capital Wealth Management project coordinator, Brian Erkes, his wife, Janice, and son, Frank, ran in the timed 5K portion of the event, where they placed within the top 15 participants.
In addition to sending a team, we served as the event’s Volunteer Shirt Sponsor.
We are proud to support the efforts of Indian Creek Foundation, whose mission is “to provide opportunities for people with intellectual and developmental disabilities to live in and enrich the community throughout their lives.”
We are excited to inform you that later this year, we are looking forward to moving from our Souderton and Hatfield offices to combine under one roof at our newly-acquired Harleysville location.
We’ll keep you posted on our progress with the building renovations as we work to make it our own before settling in. Until then, we are happy to continue to serve you at our Souderton and Hatfield locations.
One Source. Many Services. The Right Decision. This is our motto, which we strive to embody each and every day as our four business units work to serve your Accounting, Computer Solutions, Payroll, and Wealth Management needs.
Many are wondering how the new tax laws will affect them in the short and long-term. Our Wealth Management unit dedicated the first Financial Literacy seminar of the year to the topic, with our managing director of Wealth Management, Dr. Peter Roland, providing an overview of what to expect and how best to prepare.
The official name for the bill that passed in December 2017 is “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.” Not very catchy, Congress has dubbed it the “Tax Cuts and Jobs Act.” No matter the name, what this bill was designed to do is lower general tax rates, while also making changes to the deductions and exemptions many have grown accustomed to. With that, this bill creates “winners,” “losers,” and considerations and opportunities for both short and long-term wealth management.
Changes in Tax Rates and Deductions/Exemptions
With this new plan, individual tax rates have dropped, meaning many are seeing more money in their paychecks. At the same time, the standard deduction amounts have nearly doubled. However, this can lead to an issue at tax time for taxpayers with large itemized deductions and personal exemptions. Their tax liability may go up even though the rate at which they are being taxed is lower. To make sure you’re not headed for a surprise when your 2018 taxes are being prepared, do what we call a “Paycheck Check-up”. Use the withholding calculator provided by the IRS to make sure enough money is being withheld from your pay.
Among the changes in itemized deductions in the Tax Cuts and Jobs Act:
- Medical expenses for 2018 and 2019 are now deductible in excess of 7.5% of adjusted gross income (AGI). Before it was in excess of 10% of your AGI.
- Deduction for State, Local, and Real Estate taxes (SALT) is limited to $10,000.
- Deduction for Mortgage Interest Qualified Acquisition Debt reduced from $1,000,000 to $750,000 for first or one second home.
- Home Equity Loans other than the amount used to acquire or improve the home are no longer deductible.
- Charitable contributions can now offset 60% of AGI (was 50%).
- Casualty losses eliminated except for federally-declared disaster areas.
- Miscellaneous Itemized Deductions eliminated (unreimbursed employee business expenses, investment fees, tax prep fees).
- Personal Exemptions have been eliminated (was $4,050 per Exemption in 2017).
- Higher exemptions for Alternative Minimum Tax.
- Alimony is not taxable by recipient (or deductible by payor) for new agreements after 12/31/2018.
- Homeowners gain exclusion ($250,000/$500,000) now requires that the homeowner must live in the residence five of the prior eight years as opposed to two of the prior five years.
This new law has also affected credits and deductions related to child care and college savings:
- Child Care Credit increased from $1,000 to $2,000.
- Section 529 Education Plans allowed to distribute up to $10,000 for elementary, secondary, and certain home school expenses.
- Investment income of child now taxed at higher trust tax rates vs. individual tax rates.
Estate & Gift Taxation as changed as follows:
- Federal exemption of estate tax is now $11.2 million per person (to be adjusted for inflation).
- Higher Annual Gift Tax exemption amount of $15,000 (raised from $14,000).
Business owners will see a reduction in tax rates as well:
- Regular “C” Corporation: highest tax rate reduced from 35% to 21%
- Higher Section 179 depreciation deduction limits
- New deductions for 20% of qualified business net income from passthrough entities (S Corporations, Partnerships, LLC’s, Sole Proprietorships).
- Income limits for 20% benefit – $157,500 and $315,000 taxpayer income.
- 20% deduction of income from REIT dividends, Master Limited Partnership dividends, and Co-ops.
- Real Estate now counts as a qualified business.
A “Truc” is not some advanced financial term. It’s the word our local Pennsylvania Dutch use for “trick.” Under this new tax law, even though for many the tax rate will go down, the amount of tax owed will increase. In addition:
- These reduced tax rates and standard deduction changes for individuals will sunset, aka disappear, in 2025.
- Those beneficial provisions will be disappearing on a now-expanded income base.
- The new IRS inflation factor calculation for brackets modified are now using “Chained CPI,” resulting in higher taxes over time as a result of “taxflation.”
How can you make the best of the advantages and disadvantages of this new tax law? In addition to the “Paycheck Check-up” we recommended earlier, you might also consider:
- Take advantage of “Tax Arbitrage” when possible.
- Use donor-advised funds to “bunch” charitable contributions, using appreciated assets when possible.
- Look at your “bucket list,” the funds you choose to be taxed now, taxed later, and never taxed (i.e., Roth IRA).
- Review Roth IRA opportunities
- Consider real estate investments to enjoy the 20% deduction of net income from investment real estate activity. This is especially key as many will opt to rent over buying a home with the loss of the itemized deduction benefit.
- Evaluate your personal debt and consider paying off non-deductible home equity loans more quickly that are no longer subject to interest deductibility.
- Plan for and use the 20% deduction against “Qualified Business Income” and evaluate your business structure for new rules.
- Make optimal use of “portability” election in estates to maximize the exemption available to surviving spouse, not forgetting about step up in tax basis for assets flowing through estates. Also consider State inheritance taxes in your planning.
We’ve included a lot of information in this blog post. Take about 45 minutes of your time, watch the webinar, and please let us know if we can help with any questions you might have regarding this or any other financial services matter. Contact us online or call 215-723-4881.
With the passage of the Tax Cuts and Jobs Act, you might be receiving a higher net amount of money in your paycheck. To ensure you’re having the right amount of funds withheld in order to avoid a surprise during next year’s tax season, please follow the recommended steps in this message from the IRS:
“The Tax Cuts and Jobs Act made changes to the tax law, including increasing the standard deduction, removing personal exemptions, increasing the child tax credit, limiting or discontinuing certain deductions and changing the tax rates and brackets.
If changes to withholding should be made, the Withholding Calculator gives employees the information they need to fill out a new Form W-4, Employee’s Withholding Allowance Certificate. Employees will submit the completed W-4 to their employer.
The withholding changes do not affect 2017 tax returns due this April. However, having a completed 2017 tax return can help taxpayers work with the Withholding Calculator to determine their proper withholding for 2018 and avoid issues when they file next year.
Steps to Help Taxpayers: Do a ‘Paycheck Checkup’
The IRS encourages employees to use the Withholding Calculator to perform a quick ‘paycheck checkup.’ An employee checking their withholding can help protect against having too little tax withheld and facing an unexpected tax bill or penalty at tax time in 2019. It can also prevent employees from having too much tax withheld; with the average refund topping $2,800, some taxpayers might prefer to have less tax withheld up front and receive more in their paychecks.
The Withholding Calculator can be used by taxpayers who want to update their withholding in response to the new law or who start a new job or have other changes in their personal circumstances in 2018.
As a first step to reflect the tax law changes, the IRS released new withholding tables in January. These tables were designed to produce the correct amount of tax withholding — avoiding under- and over-withholding of tax — for those with simple tax situations. This means that people with simple situations might not need to make any changes. Simple situations include singles and married couples with only one job, who have no dependents, and who have not claimed itemized deductions, adjustments to income or tax credits.
People with more complicated financial situations might need to revise their W-4. With the new tax law changes, it’s especially important for these people to use the Withholding Calculator on IRS.gov to make sure they have the right amount of withholding.
Among the groups who should check their withholding are:
- Two-income families.
- People with two or more jobs at the same time or who only work for part of the year.
- People with children who claim credits such as the Child Tax Credit.
- People who itemized deductions in 2017.
- People with high incomes and more complex tax returns.
Taxpayers with more complex situations might need to use Publication 505, Tax Withholding and Estimated Tax, expected to be available on IRS.gov in early spring, instead of the Withholding Calculator. This includes those who owe self-employment tax, the alternative minimum tax, or tax on unearned income from dependents, and people who have capital gains and dividends.
Plan Ahead: Tips for Using the Withholding Calculator
The Withholding Calculator asks taxpayers to estimate their 2018 income and other items that affect their taxes, including the number of children claimed for the Child Tax Credit, Earned Income Tax Credit and other items.
Take a few minutes and plan ahead to make using the calculator on IRS.gov as easy as possible. Here are some tips:
- Gather your most recent pay stub from work. Check to make sure it reflects the amount of Federal income tax that you have had withheld so far in 2018.
- Have a completed copy of your 2017 (or possibly 2016) tax return handy. Information on that return can help you estimate income and other items for 2018. However, note that the new tax law made significant changes to itemized deductions.
- Keep in mind the Withholding Calculator results are only as accurate as the information entered. If your circumstances change during the year, come back to the calculator to make sure your withholding is still correct.
- The Withholding Calculator does not request personally-identifiable information such as name, Social Security number, address or bank account numbers. The IRS does not save or record the information entered on the calculator. As always, watch out for tax scams, especially via email or phone calls and be especially alert to cybercriminals impersonating the IRS. The IRS does not send emails related to the calculator or the information entered.
- Use the results from the Withholding Calculator to determine if you should complete a new Form W-4 and, if so, what information to put on a new Form W-4. There is no need to complete the worksheets that accompany Form W-4 if the calculator is used.
- As a general rule, the fewer withholding allowances you enter on the Form W-4 the higher your tax withholding will be. Entering “0” or “1” on line 5 of the W-4 means more tax will be withheld. Entering a bigger number means less tax withholding, resulting in a smaller tax refund or potentially a tax bill or penalty.
- If you complete a new Form W-4, you should submit it to your employer as soon as possible. With withholding occurring throughout the year, it’s better to take this step early on.”
If you have any questions about your specific situation, please consult with your tax advisor. If you do not currently have a tax advisor, we welcome the opportunity to serve you. Please call 215-723-4881 or contact us online.
For tax years 2018-2025, the Tax Cuts and Jobs Act (TCJA) eliminated the deduction for interest on home equity debt and limited the mortgage interest deduction to qualified residence debt of up to $750,000 ($375,000 for married taxpayers filing separately).
In a recent news release, the IRS advised taxpayers that interest paid on home equity loans and lines of credit is still deductible if the funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan. For example, interest on a home equity loan used to build an addition to an existing home is generally deductible (subject to the new dollar limit on qualified residence debt). However, interest on a home equity loan used to pay personal living expenses, such as credit card debt, is not deductible. Also, interest on a home equity loan on a taxpayer’s main home to purchase a vacation home is not deductible.
If you have any questions regarding how the TCJA affects your specific situation, please contact us online or call 215-723-4881. We also invite you to join us at our Hatfield location on Thursday, March 15 for a Financial Literacy Seminar: Personal Wealth Opportunities under the New Tax Law, where we’ll identify personal wealth opportunities and discuss some recommended tax savings strategies resulting from the new tax law that may benefit you. Should you wish to join us, please RSVP by Monday, March 12, to Jen Norman via email, or by phone at 215-723-4881, ext. 207.