TCJA Changes to the Deduction for Mortgage Interest for 2018



How much mortgage interest can I deduct on my schedule A, itemized deductions, under the new tax law, the Tax Cuts and Jobs Act (TCJA)? That is a great question but the TCJA limits the loan size of which you can deduct interest on and not on the interest amount. I know, that is a challenge to wrap your mind around and it raises more questions.

Before we get to those questions we need to address the new standard deduction first as those question may be irrelevant now for many taxpayers.

Standard Deduction

Why is the new standard deduction relevant? Because it is now much higher and as a result a much higher percentage of taxpayers will be better off taking the standard deduction rather than itemizing. The new standard deductions for 2018:

Married Filing Joint and Surviving Spouse filers  $24,000
Head of Household  $18,000
Single and Married Filing Separately  $12,000

Additional Standard Deduction
Elderly (65 or over) or Blind MFJ  $1,300
If Unmarried  $1,600

Taxpayers need only be concerned about the limitations discussed below if their total itemized deductions could exceed their standard deduction. However, if your standard deduction is higher than your itemized deductions you may be still be able to deduct a portion of your mortgage interest if you are able to claim a home office deduction for your business.


Mortgage Interest Deduction Limits Under the TCJA

Loans Taken Out On or After December 17, 2017

For loans taken out on or after December 17, 2017 you are able to deduct interest on loans up to $750,000 of mortgage debt. For those filing Married Filing Separate the loan amount limit is $375,000. According to the IRS, "the limits apply to the combined amount of loans used to buy, build or substantially improve the taxpayer's main home and second home."

Whatif t he combined amount of loans used to buy, build or substantially improve the taxpayer's main home and second home exceeds the loan amount limit? According to an example given by the IRS, "a percentage of the total interest paid is deductible (see Publication 936). As of the time of writing this post, Publication 936 is not yet available for 2018.

The 2017 version of Publication 936 explained the calculation of deductible mortgage interest calculating it as a percentage of the total qualified home mortgage interest paid. So you were not able to take all of interest on the loan with a higher interest rate and a portion of interest from the loan with a lower interest rate.

Loans Taken Out Before December 17, 2017

The limits on loan amounts taken out before December 17, 2017 are $1,000,000 and $500,000 for those using the Married Filing Separate filing status.

Home Equity Loans and HELOCs

The new tax law did away with the mortgage interest deduction for Home Equity Loans and HELOCs unless they were used to improve your property. If you did take out one of these loans to improve your home the deductibility of this interest is still based on the limits discussed above.

Additionally, you will want to keep good records of the use of the proceeds from these loans to improve your home in case of an audit.

Bunching Itemized Deduction Strategy

To increase your itemized deductions and lower your taxes you could make extra payments in 2018 to increase your itemized deductions. You may be able to make your January mortgage payment early and deduct the portion of that payment which is for your interest for December of this year. In addition, if you are over the threshold for deductible medical expenses you could make those doctor visits before year end. Finally, you could also make extra charitable contributions before year end. Realize these strategies are best used if you are close to the standard deduction and use these strategies to take a higher itemized deduction in one year and take the standard deduction the following year. Otherwise with just itemized deductions you are taking a deduction this year that will lower your deductions the following year. Of course you probably want to lower this years taxable income as much as possible but not necessarily, it depends on what you expect next year to be like from a tax standpoint. It is best to discuss this strategy your "tax guy", and I would be happy to be your "tax guy".

You probably noticed that I left out state and local taxes. That is because starting in 2018 that part of your itemized deductions is capped at 10,000 a year. For now at least.

Year End Help

I have regular year end conversations about this topic with many of my clients starting toward the end of their third quarter. Yes I prefer to talk to my clients throughout the year, and not just at tax time. While I charge more for tax planning, it enables me also to provide more value for you rather than merely preparing tax returns. This would enable you to get real value that affects your bottom line. So if you want a CPA that gives you more than tax returns then email me using my contact information below to setup an appointment to discuss your situation.


Jeff Haywood, CPA
The CPA Superhero
jeff.jhtaxes@gmail.com
217-923-8007
twitter.com/thecpasuperhero




References:

What the New Tax Law Will Do To Your Mortgage Interest Deduction - MarketWatch

Interest on Home Equity Loans Often Still Deductible Under New Tax Law - IRS

Mortgage Tax Deduction Calculator - Bankrate 

How the New Tax Law Will Impact Your Housing Costs - Forbes





Be careful when reading about tax law and its application, including my articles, because the wording and definitions are such a challenge and are influenced by writers perspective, specifically his own clients situations that he is mindful of and other situations the writer is not thinking of. The point is talk to your CPA about your situation and circumstances and don't rely on or make conclusions based on articles you read, including articles form irs.gov, because concepts and definitions are not very clear, and of course, they are subject to change. Now is the time to be having discussions about your situation and developing strategies for you and your business. Again, contact me using my information above to discuss your situation. I help business owners all over the U.S. and in foreign countries with their tax returns.

Should I Pay My Real Estate Taxes Before the End of the Year? The TCJA Implications


My clients are asking if they should pay their real estate taxes this year or would it benefit them to wait until next year to pay two years of real estate taxes in one calendar year. It is a great question and the answer has really changed this year based on the new tax law, Tax Cuts and Jobs Act (TCJA).

New Limit of $10,000 Per Year for the Deduction of State and Local Taxes

The question is should I double dip by paying for two years of my real estate taxes in one year? Unless your real estate taxes are relatively low the answer will like be no, now that we have the new TCJA. This new tax law limits the deduction for state and local taxes to $10,000 annually starting with the 2018 calendar year.

The Deduction for State and Local Taxes

For the deduction on schedule A of state and local taxes, the taxpayer chooses between state sales tax and state income taxes. In addition to those taxes, taxpayers can deduct other state and local taxes like property taxes. But again, the new limit for this deduction is now $10,000 per year.

So unless your real estate taxes were less than $5,000 a year it is probably not worth paying for two years worth of taxes in one year. There are additional factors that you will also need to take into consideration, like the changes to the standard deduction amounts.

Impact of a Higher Standard Deduction

Beginning in 2018 there will be no deductions for exemptions and the standard deduction amount will be significantly higher. For 2018 the standard deduction for a single person and those filing married filing separate will be $12,000. For Head of Household the deduction will be $18,000 and for those filing Married Filing Jointly and for Surviving Spouse the deduction will be $24,000. The additional standard deduction for the aged or blind will be $1,300 and $1,600 for unmarried taxpayers.

The higher standard deduction will mean that fewer taxpayers will itemize their deductions on schedule A so real estate taxes will not be relevant for many taxpayers now.

What This Means For You

Of course, you want to know if there is a way around this, especially if you live in a state with higher taxes. Because there is not the same kind of limit on charitable contributions (for now) some have tried to find a way to make their real estate or other state taxes be classified as charitable contributions. However, the IRS has addressed this issue stating:

an entity eligible to receive tax deductible contributions must reduce their charitable deduction by the amount of any state or local tax credit the taxpayer receives or expects to receive.

However, there is an exception:

The proposed regulations provide exceptions for dollar-for-dollar state tax deductions and for tax credits of no more than 15 percent of the payment amount or of the fair market value of the property transferred. 

So basically there is no realistic way around the new limit on this deduction on your personal return.

This Limitation Does Not Apply for Business Deductions

There is no such limitation for businesses deducting real estate taxes. However, keep in mind that business deductions must be ordinary and necessary for the business to operate. So there are some discussions that you should be having with your CPA about the new tax law.

Strategy

As mentioned above there is no limit for charitable contributions, so you might want to consider the bunching strategy for charitable contributions instead of for state and local taxes. How would this work? Let's say you are close to the standard deduction in a typical year for you but you make significant charitable contributions. In this case, from a tax standpoint, you might consider bunching your charitable contributions into every other year if they take your deductions  over the standard deduction. For example if you are single and typically make more than $6,000 a year in charitable contributions but you are not over the standard deduction, then you could double up your charitable contributions in one year and not make any contributions the next and then alternate between taking the standard deduction one year and taking itemized deductions the next year. This example would work for married taxpayers but the deduction amount would need to doubled.

This is a strategy that charitable organizations may not like but it may be better than you making smaller donations because of the lack of a tax benefit.

Year End Help

I have regular year end conversations about this topic with many of my clients starting toward the end of their third quarter. Yes I prefer to talk to my clients throughout the year, and not just at tax time. While I charge more for tax planning, it enables me also to provide more value for you rather than merely preparing tax returns. This would enable you to get real value that affects your bottom line. So if you want a CPA that gives you more than tax returns then email me using my contact information below to setup an appointment to discuss your situation.


Jeff Haywood, CPA
The CPA Superhero
jeff.jhtaxes@gmail.com
217-923-8007
twitter.com/thecpasuperhero




References:


The State Income Tax Deduction on Your Federal Return - The Balance

The IRS Throws Salt into the SALT - Deduction - Limit Wound - Forbes

Be careful when reading about tax law and its application, including my articles, because the wording and definitions are such a challenge and are influenced by writers perspective, specifically his own clients situations that he is mindful of and other situations the writer is not thinking of. The point is talk to your CPA about your situation and circumstances and don't rely on or make conclusions based on articles you read, including articles form irs.gov, because concepts and definitions are not very clear, and of course, they are subject to change. Now is the time to be having discussions about your situation and developing strategies for you and your business. Again, contact me using my information above to discuss your situation. I help business owners all over the U.S. and in foreign countries with their tax returns.

Cryptocurrency - Wash Sale


Like most CPA's (NOT), I found myself wondering this morning, over coffee, if the sale of Cryptocurrencies are subject to the wash sale rules. There can be great implications to the wash sale rules.

What is a Wash Sale?

According to the Internal Revenue Code section 1091:
Section 1091(a) provides that in the case of any loss claimed to have been sustained from any sale or other disposition of shares of stock or securities where it appears that, within a period beginning 30 days before the date of such sale or disposition and ending 30 days after such date, the taxpayer has acquired (by purchase or by an exchange on which the entire amount of gain or loss was recognized by law), or has entered into a contract or option so to acquire, substantially identical stock or securities, then no deduction shall be allowed under § 165 unless the taxpayer is a dealer in stock or securities and the loss is sustained in a transaction made in the ordinary course of such business. 
So selling stock or securities for a loss can be deemed a wash sale and disallowed if they are repurchased shortly (within 30 days before or after the sale) before or after the sale. Note that wash sale rules apply to stocks and securities. Cryptocurrencies are considered property and not stocks, or securities, and in fact not currency either. As such it is believed they are not subject to the wash sale rules. However, note that not everyone is sure that this is true. Some note that the IRS has not specifically stated cryptocurrencies are not subject to the rule. However, they are considered property and not securities which are subject to the wash sale rules. All of this is subject to change at any time.

Note too that there can be different rules for traders and dealers of cryptocurrencies versus those who are investors. I know, many too are wondering what they are considered if they simply use cryptocurrencies to buy and sell products and services, or use cryptocurrencies like actual currency. I know it is not clear. For now cryptocurrencies are not currency even if you use them just like currency.

For purposes of this post I am concerned about those who are investors or those who just use cryptocurrencies to buy, sell, or trade.

Implications

In my previous post, I considered how people who use cryptocurrencies have an obligation to track their activity with them and report the activity on their tax return. Now it occurs to me that someone who sold or used cryptocurrencies early in 2018 for a gain could now possibly use or sell their crytocurrencies at a loss to offset those earlier gains and reduce their taxes. This assumes that they have cryptocurrencies that are now trading at loss compared to when they acquired them and this allows for a significant tax planning opportunity at the end of the year.

Since cryptocurrencies are considered property, for now, any losses can be used to offset gains and also up to $3,000 a year in net losses. Any net losses in excess of $3,000 can be carried forward to future years. So if you are "in" cryptocurrencies you should be having a discussion with your "tax guy" to take advantage of current opportunities and make sure you aren't surprised by the tax consequences of your activities with your cryptocurrencies.

For more information check out my previous post on cryptocurrencies:

Cryptocurrency and U.S. Income Taxes

Caution

Below you will see disclaimers about my posts and I mention being careful with information written with certain situations in mind. That is certainly the case with this post and others on cryptocurrency. I noticed some articles look at the rules and regulations for traders and dealers, others focus on the political aspects of the subject. I was surprised to find an article in favor of the wash rules for cryptocurrency to protect smaller investors. This article is great because it addresses what could be hidden dangers for those of you with cryptocurrencies aside from the political aspects of this issue. Here is a link to that article:

Opinion: The wash rule should be applied to Crypto - Crytocurrency Facts

So, if you have cryptocurrencies make sure you understand the tax implications of your activity in this market. I would be happy to help you out and be your "tax guy". Simply use my contact information below to send me an email to setup a time for a phone conversation.


Jeff Haywood, CPA
The CPA Superhero
jeff.jhtaxes@gmail.com
217-923-8007
twitter.com/thecpasuperhero




References:

Cryptocurrency and U.S. Income Taxes

Opinion: The wash rule should be applied to Crypto - Cryptocurrency Facts

The Wash Sale Rule and Cryptocurrency - IRS Medic

Hope for Active Crypto Traders With Massive Losses - Forbes 


Be careful when reading about tax law and its application, including my articles, because the wording and definitions are such a challenge and are influenced by writers perspective, specifically his own clients situations that he is mindful of and other situations the writer is not thinking of. The point is talk to your CPA about your situation and circumstances and don't rely on or make conclusions based on articles you read, including articles form irs.gov, because concepts and definitions are not very clear, and of course, they are subject to change. Now is the time to be having discussions about your situation and developing strategies for you and your business. Again, contact me using my information above to discuss your situation. I help business owners all over the U.S. and in foreign countries with their tax returns.

Can I deduct an expense this year and pay for it next year?



I would really like to reduce the taxable income from my business for this year but I would rather delay the payments for expenses until January. Can I deduct the expenses this year even if I don't pay them in the current year? Yes, you may be able to do just that. There are a couple of scenarios where this could be possible.

According to general accounting principles your expenses should be reflected on your books in the time period that you receive value for them. So it is a matching principle. However, there are some provisions that allow you to deduct expenditures that you will receive value from in the future.

Accrual Based Taxpayer - Accruing the Expense

If your business uses the accrual basis for tax purposes you may be able to enter a bill for an expense in the current year and pay for it next year. From my research it looks like you can do this with bills that you will pay off and receive the benefit from the expense within the next eight and a half months. This is a generalization and there is really more to it, but I mention this because it is a possibility.

Accrual Based Taxpayer - Allowance If You Actually Pay For the Expense

We considered how we deduct something this year that we won't pay for until after the year end. Another issue is actually paying for something and being able to deduct it this year even though it is for next year. In this case, if you have paid for it, there is a provision that you can deduct the expense as long the receipt of the value of the services does not extend beyond twelve months or the end of the next tax year.

Using a Credit Card - Cash or Accrual Based Taxpayers

Even if you are a cash basis taxpayer there is a way to take a deduction that you have not yet paid cash, or a digital equivalent, for yet. This can be done by using a credit card. Understand that using a credit card to pay for something is like borrowing money and using that money to pay for it. Using a credit card does not affect your cash balances just as borrowing and using that money to purchase something also does not affect your cash balance when it is all completed. However, in both cases, while you don't reduce cash balances as a result this year you will eventually and maybe incur some interest expense also. So if your business purchases something using a credit card that is a deductible expense you can take that expense even though you have not paid cash to pay off the credit card bill yet. By doing this you can take expenses without reducing your cash balances this year.

But is it of value to the business this year? In general you can only take the expense when your business receives the value for it. For items you use in your day to day business you can deduct them just the same as if you paid cash for them. The question really comes up when paying for things like insurance that are providing value for your business for next year. So since using a credit card to pay for it is no different that paying cash for it, as long as the benefit of the expenditure does not extend beyond the next twelve months or the end of the next tax year you are able to take the deduction this year.

Cautions

There are a couple of things you need to be cautious about when using the strategies mentioned above. First with the use of credit cards, as in the use of a checking account or digital account, make sure you don't commingle your business and personal expenditures. That means using separate accounts for business purchases, separate from your personal accounts. Commingling your personal and business accounts is messy and it could cause an IRS auditor to expand the scope of an audit for your business to include your personal and when they have a doubt they may deny expenses because of the commingling of funds.

The other caution is the use of credit cards can cause additional expenses if not paid in time or if not paid off entirely. You need to be really disciplined to control this issue.

The other concept to grasp is this strategy is in affect just moving your expenses up from next year to this year. That means that you get to reduce income this year but to go along with that eventually this will mean more income next year. You may delay it again another year by doing the same thing at the end of next year but eventually you will have a year where you have to reduce your cash balances for something you previously deducted and you won't get the tax benefit of that deduction because you took it in a previous year. So this strategy delays income and can be beneficial if you expect less income in a coming year. If not eventually you things even out and the delay will get caught up.

With the new TCJA tax law, you may want to consider just letting the expense go into next year. The TCJA provides for a new 20% of qualified income from qualified businesses. For more information about this provision see these other articles I have written:

Qualified Business Income Deduction

Qualified Business Income Deduction - Different Entity Types - Which One is Best For You

Year End Help

I have regular year end conversations about this topic with many of my clients starting toward the end of their third quarter. Yes I prefer to talk to my clients throughout the year, and not just at tax time. While I charge more for tax planning, it enables me also to provide more value for you rather than merely preparing tax returns. This would enable you to get real value that affects your bottom line. So if you want a CPA that gives you more than tax returns then email me using my contact information below to setup an appointment to discuss your situation.



Jeff Haywood, CPA
The CPA Superhero
jeff.jhtaxes@gmail.com
217-923-8007
twitter.com/thecpasuperhero




References:

Tax Geek Tuesday: When Can a Business Deduct Prepaid Expenses - Forbes

How Do I Time Income and Expenses At The End of The Tax Year - The Balance

Tax Geek Tuesday Demystifying The Deduction Rules for Accrued Liabilities - Forbes


Be careful when reading about tax law and its application, including my articles, because the wording and definitions are such a challenge and are influenced by writers perspective, specifically his own clients situations that he is mindful of and other situations the writer is not thinking of. The point is talk to your CPA about your situation and circumstances and don't rely on or make conclusions based on articles you read, including articles form irs.gov, because concepts and definitions are not very clear, and of course, they are subject to change. Now is the time to be having discussions about your situation and developing strategies for you and your business. Again, contact me using my information above to discuss your situation. I help business owners all over the U.S. and in foreign countries with their tax returns.

Qualified Business Income Deduction - Different Entity Types - Which One is Best For You?


Should we reclassify from a partnership to an S Corporation?


This was the text I recently received from a client. You may be asking what type of entity would be best from your business from a tax perspective now that the tax law has changed.  The answer, of course, depends on your facts and circumstances, but let me give you something to think about.

The Qualified Business Income Deduction

To make this point I will limit this discussion to the Qualified Business Income (QBI) Deduction for taxpayers who qualify to take the full 20% deduction on their personal returns. For this situation I looked at the scenarios for a Partnership, an S Corporation, and a C Corporation. And I will also address the situation for a Sole Proprietor.

All other things being equal, profit and payments to owners, partners, and shareholders, the issue comes down to how the payments to owners, partners, and shareholders are treated for the QBI deduction.

Sole Proprietor

For a Sole Proprietor the QBI deduction is 20% of his Qualified Business Income in this comparison. The amount of money he takes out of the business generally does not affect the deduction or his taxes.

Partnership

For a Partnership the money taken out of the business by the partners can affect the deduction if they are considered Guaranteed Payments (GPs). This is really the heart of the tax situation for the partners on their personal tax returns. Guaranteed Payments are not included in Qualified Business Income on which a partner can receive a deduction based on his share of the QBI. Therefore, the larger your Guaranteed Payments are the lower your deduction will likely be.

Here is a CPA Journal article about Guaranteed Payments to Partners that may help you to understand the technical definition and the practical application as well as the lack of clarity about the definition for tax purposes.

The key here (for now) is the definition that GPs are amounts paid to partners for services that are without regard to income. It is advisable for a partnership to have a written agreement as to how much  the partners will receive in Guaranteed Payments and how they are determined. Be careful to word the agreement in a way that you can maximize the QBI deduction but also provide for the needs of the partners in the event of a loss for the year.

In the past it was possible that Guaranteed Payments were simply taxable to the partners and, like regular income to partners who are active in the business, it was and still is subject to Self Employment Taxes in most cases. Now that the tax law has changed, and because of the QBI deduction, the GPs do matter from a tax standpoint so it is important to understand what GPs are and how they are reported on the partnership return.

S Corporation

When it comes to the QBI deduction based on QBI from an S Corporation there are no GPs but there are required reasonable salaries to the shareholders that are active in the operations of the business. These salaries, like Guaranteed Payments, are not included in Qualified Business Income upon which the deduction is calculated.

What is a reasonable salary is not defined. However, they could be determined based on what you would reasonably pay someone else to do the same work and that could depend on the profitability of of the business as well. As you can see from the above referenced article, Guaranteed Payments are not defined with the same reasonable amount standard.

S Corporation Versus Partnership QBI Deduction Implications

Our discussion assumes equal payments to owners, partners, and shareholders. However, payments to partners can be Guaranteed Payments or Partner Distributions while payments to shareholders of S Corporations can be Salaries (W-2 income) or Shareholder Distributions. All of the active partners income and GPs are generally considered Self Employment Income and are subject to Self Employment Taxes while Shareholder Distributions generally are not subject to employment taxes. The other important point is that both Guaranteed Payments and salaries to active shareholders are not included in QBI while Partner Distributions and Shareholder Withdrawals do no affect QBI.

 What does this mean from an income tax perspective? For a sole proprietor, assuming all of his net income is QBI, then he could get a QBI deduction based on all of his net income. For a partnership in the same situation the partners QBI deduction could be less than the sole proprietor because of their Guaranteed Payments. For the shareholders of an S Corporation their QBI deduction could be less because of the salaries paid to shareholders. The deduction for shareholders of an S Corporation could also be less than the deduction for partners of a partnership if they receive more in salaries than the partners received in Guaranteed Payments. So because of the different standards for payments to Partners and Shareholders the QBI deduction available to Partners and Shareholders could be different.

C Corporation

When it comes to a C Corporation the new tax law provides for a new 21% flat tax rate for C corporations. There is no QBI deduction for dividends paid to stockholders of a C Corporation. These dividends are also taxable to the stockholders on their personal returns.

A Comparison

To figure out which structure now gives you the best tax advantage you would need to look at income taxes on income from different entity types, payroll taxes on W-2 income, Self Employment Taxes on self employment income, and Corporate Taxes and taxes on dividends received from C Corporations. It is complicated and will depend on your individual facts and circumstances.

For my client that sent me the text, I ran a comparison for these different entity types and overall taxes would be lower for a a partnership than for an S Corporation, and if he were a sole proprietor it would have been even lower.

Summary

To clarify, as things currently stand a partnership could benefit from a tax standpoint by having GPs as small as possible. It is probably advisable for the partnership to have a written agreement that details how much the partners guaranteed payments will be and how they are calculated. You should discuss this with your CPA to develop a plan to address this issue.

What should you do when the tax law is not clear?

What should you do when the tax law is not clear? Document, document, and document again your position and your argument for it. On a few occasions I have spoken with IRS agents about situations that were not clearly addressed in the tax law and each time they mentioned to make sure to document your decision and for me to keep a copy in my file.

Your Situation

The type of entity with which you do business will likely make a difference from a tax standpoint. The illustration above is simplified and the QBI deduction has many limitations and thresholds that could affect your situation. It is complicated and has gotten more complicated with the new tax law.

For my client, I developed a comparison for different entity types to determine which would provide the best result from an income tax standpoint. I would be happy to become your CPA and discuss your situation with you and develop strategies accordingly. I suggest you contact me using my email address below to setup a time for a phone conversation.

Jeff Haywood, CPA
The CPA Superhero
jeff.jhtaxes@gmail.com
217-923-8007
twitter.com/thecpasuperhero


References:

CPA Journal: Avoiding Costly Mistakes on Guaranteed Payments to Partners

Forbes: The New 'Qualified Business Income Deduction' Varies Based on Your Business Type - Or Does It?

Be careful when reading about tax law and its application, including my articles, because the wording and definitions are such a challenge and are influenced by writers perspective, specifically his own clients situations that he is mindful of and other situations the writer is not thinking of. The point is talk to your CPA about your situation and circumstances and don't rely on or make conclusions based on articles you read, including articles form irs.gov, because concepts and definitions are not very clear, and of course, they are subject to change. Now is the time to be having discussions about your situation and developing strategies for you and your business. Again, contact me using my information above to discuss your situation. I help business owners all over the U.S. and in foreign countries with their tax returns.

Cryptocurrency and U.S. Income Taxes

Cryptocurrency and U.S. Income Taxes

The IRS issued guidance on cryptocurrency (virtual currency or digital currency) back in 2014 and this guidance has tax implications that I will address here without getting into any political issues.

My clients that have cryptocurrencies want to know what are the tax implications. To make it complicated, or seem complicated, they acquire and use cryptocurrencies through transactions for goods and services. They also acquire and use them by buying, selling, and trading (trading between different cryptocurrencies).

Tax Consequences

The guidance from the IRS is that cryptocurrencies are consider property rather currency for federal tax purposes. The implications are that receipt of cryptocurrencies for exchange of goods and services are consider revenue to the seller and potentially an expense for the buyer if it is for business use. So the recipient must report the value at the time of the transaction in U.S. dollars as revenue in the case of a business or as wage income in the case of an employee. The use of cryptocurrency held that has changed in value is also required to be reported as investment income.

Additionally these payments are subject to reporting requirements. Payments to a business (independent contractor or other service provider) may have to be reported on a 1099-MISC. Wages paid to an employee must be reported by the employer on a Form W-2. Third parties who settle payments made in cryptocurrency (virtual currency) on behalf of merchants that accept cryptocurrency from their customers are required to report payments to those merchants on Form 1099-K.

What is the Value

How much income or expense is reported? In other words what is the value of the transaction? The concept is similar to foreign currency transactions only cryptocurrency is not considered currency for U.S. federal tax purposes. But the reporting of the value is done by the same concept. What was the value in U.S. dollars on the date of the transaction? That is the value that should be the value reported.

Conversion

So a business or a person may receive payment for goods or services in cryptocurrency and later use those cryptocurrencies. What is the result from a tax standpoint. First, the initial receipt would be based on the value at the time of the transaction. Then, when the cryptocurrency is used to purchase something, is sold for another currency or traded for another cryptocurrency or any other property that results in a taxable transaction. The difference in the value from the date of the transaction using the crytocurrency versus the value on the date it was received would be a taxable transaction likely a capital gain or loss. 

Tracking Value

For these transactions it will be necessary to track the value of the cryptocurrency received and the date received as well as the value and date on the day of the sale or exchange and any cost incurred in the transactions. This information will be required to report capital gains and losses since crytocurrency is consider property like an investment in gold or silver or other assets. Also, remember to track any costs involved in purchasing or receiving and selling cryptocurrencies.

Exchanging Cryptocurrency

What about exchanging one crytocurrency for another? It is the same concept as trading gold for silver. Because it is consider property for Federal U.S. purposes the exchange is a taxable event. 

Capital Gain

Capital Gains are treated differently for long-term and short-term transactions with long-term being for assets held for more than a year and they often receive favorable tax as a result. Therefore, it is imperative to track all transactions involving cryptocurrencies including the information referred to above in "Tracking Value".

Use to Purchase Goods or Services

When cryptocurrencies are used to purchase goods or services this is another reportable transaction for tax purposes. Again, the use of the cryptocurrency would need to reported and potentially be a taxable transaction. Any appreciation or depreciation of the value could result in a capital gain or loss. When the purchase is made using crytocurrency the purchaser would need to establish the value of the cryptocurrency at the time of the transaction. For example, if a product is purchased for so many of the cryptocurrency and would have required so many U.S. dollars to execute the same transaction that would establish the value of the cryptocurrency at the time of the transaction.

Foreign Transactions

First of all, realize that all worldwide income needs to be reported on your U.S. tax return. So even if the transaction is with someone outside the U.S. it is still a reportable and potentially taxable transaction on your U.S. tax returns. This applies even if the transaction is made using property rather than currency. Barter income and revenue received in cryptocurrency is taxable income on your U.S. tax return. 

Second, even if you spend the crytocurrency outside the U.S. you will still need the information mentioned above to track and report these transactions on your U.S. federal income tax returns.

Where to report

Receipt of cryptocurrency for your sale of goods or services would be reported as revenue on your business tax returns. Likewise, use of cryptocurrency to purchase goods or services for your business would be reported on your business tax return.

If cryptocurrency is used for personal non business purposes your transactions would be reported on Schedule D of your personal return similar to investment transactions for gold or silver.

As mentioned above, if you receive cryptocurrency for your services as an employee your employer will be required to report that on a W-2 and you will need to report it on your personal tax return like you would any other W-2 income.

Foreign Accounts

For now the IRS has not required the holding of cryptocurrency in a foreign country to be reported as you are required to report foreign financial accounts. This, of course, is subject to change.

Realize you are still required to report income from transactions using cryptocurrencies, just not the amount held in foreign countries as you are required to report the amounts held in foreign financial accounts.

Penalties and Interest

Keep in mind that failure to timely report cryptocurrency transactions on your tax returns can result in penalties and interest. However, if my clients inform me of a penalty, we will explore avenues to get the penalty abated. The point is, however, to report your cryptocurrency transactions in a timely manner. This would include making estimated tax payments on business or investment income involving transactions using cryptocurrency.

Exchange Rates

As mentioned above, transactions using cryptocurrency need to reported in U.S. dollars so you will need to determine that value. It is similar to using exchange rates to determine the value of foreign currencies accepted or used in your business transactions.

Here is a link to an IRS.gov article on exchange rates to help you understand the exchange rate concept.
concept IRS: Foreign Currency and Currency Exchange Rates


The tax treatment of cryptocurrencies is relatively a new area that has complicated aspects to it, as you can see from the information above. I expect to see more clarifications from the federal government over time. If you use or are thinking of using cryptocurrencies I can help you with the tax implications. Just contact me  by sending me an email to setup a time for phone conversation.

Jeff Haywood, CPA
The CPA Superhero
jeff.jhtaxes@gmail.com
217-923-8007

References:

IRS: IRS reminds taxpayers to report virtual currency transactions

Nasdaq: Understanding Cryptocurrency Tax Obligations

CNN Money: 4 things to know about your cryptocurrency at tax time

Forbes: What You Need To Know About Taxes & Cryptocurrency

CryptoSlate: The Investor's Guide to Cryptocurrency Taxes

The Tax Advisor: Basis issues in crytocurrency 

Be careful when reading about tax law and its application, including my articles, because the wording and definitions are such a challenge and are influenced by the writers perspective, specifically his own clients situations that he is mindful of and other situations the writer is not thinking of . The point is talk to your tax professional about your situation and don't draw conclusions based on articles, including from irs.gov, because concepts and definitions are not very clear and, of course, they are subject to change. Now is the time to be having discussions about your situation and developing strategies for you and your businesses. Again, please contact me using my information above to discuss your situation. I help business owners all over the U.S. and foreign countries with their U.S. tax returns.

Qualfied Business Income Deduction




Some business owners will get a deduction based on business income from for 2018 under the new Tax Cuts and Jobs Act (TCJA). Do you qualify? For Business Owners, I will help you get a general idea about the 20% Qualified Business Income Deduction. Keep in mind several of the words and concepts mentioned have not been clearly defined, so tax experts are seeking clarifications on many of the issues and definitions of various terms used. 

Qualified Business Income Deduction

It appears the intent with the 20% Qualified Business Income Deduction is to level the playing field for all business types. It seems that other business types were given this deduction due to the reduction in Income Tax Rates given to C Corporations. I will address some of the business types that could benefit from this deduction, including sole proprietors, partnerships, and S Corporations. The deduction is to give the owners, partners, and shareholders of these entity types a deduction on their personal tax returns.

Basic Deduction

Basically the deduction is the lesser of the following:

   a) 20% of your pass through "Qualified Business Income" (QBI) plus 20% of your qualified REIT dividends and qualified PTP income or

   b) 20% of your taxable income minus your net capital gains

What if you are limited by b) 20% of your taxable income minus your net capital gains, can you carry forward the portion you are not allowed to take this year? No, if you can't take all of your 20% of your pass through "Qualified Business Income" then you lose it.

However, there are qualifications and limitations to take into account.

Qualified Business Income

First, what is "Qualified Business Income" (QBI)? QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business. This income must be connected with a U.S. trade or business. Items such as capital gains and losses, certain dividends and interest income are excluded. QBI also does not include reasonable salaries paid to shareholders of an S Corporation or Guaranteed Payments to partners for services rendered to a business not dependent on the partnership's income level. 

Qualified Trade or Business

What businesses are not qualified? The IRS mentions, other than C Corporations, two types of businesses, Specified service trade or business (SSTB), and performing services as an employee.

However, income from a SSTB does not qualify only if the taxpayer has taxable income that exceeds $315,000 for a married couple filing a joint return, or $157,000 for all other taxpayers. So for purposes of this article I am going to present this type of business as one that can qualify but with that limitation. It's just semantics. 😕😕😕

Domestic Business Qualification Question???

It is important to note that the deduction only applies to qualified income from a Qualified Trade or Business that is a domestic business. Here is how it is stated on IRS.gov:
Eligible taxpayers may be entitled to a deduction of up to 20 percent of qualified business income (QBI) from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust or estate. 
Notice the reference to "a domestic business". What is that? I don't think that is clear yet. However, the IRS also indicates the following in regard to Qualified Business Income:
QBI is the net amount of qualified items of income, gain, deduction and loss from any qualified trade or business. Only items included in taxable income are counted. In addition, the items must be effectively connected with a U.S. trade or business. Items such as capital gains and losses, certain dividends and interest income are excluded.
Notice the reference to "income effectively connected with a U.S. trade or business". This expression is used in the tax law to require foreign businesses in anyway doing business in the U.S. to report income on a U.S. tax return.

So look for clarification of this issue. Absent such clarification it should be important to carefully develop strategy and keep good documentation. I would also be ready to comply by tracking revenue according to these categories. This would involve some discussions about the specific situation for the business in question. 😀

Overall Limitation

The QBI deduction is limited to 20% if the taxpayer's taxable income in excess of any net capital gain. Again, there is no carryover of the used portion because of this limitation.

Other Limitations

Qualified Wage and Capital Limitations


The QBI deduction may also be limited by a qualified wage and capital limitation and/or a limitation for s SSTB. These limitations are calculated based on the taxpayer's taxable income. The taxable income thresholds for 2018 are outlined below:

Taxable Income MFJ/Single or other
Below $315,000/$157,500                                                           No Limit
Between $315,000-$415,000/$157,500-$207,500                      Partial Limitation
Above $415,000/$207,500                                                          Fully Applied Limitations

Taxpayers above the $415,000/$207,500 threshold are subject to another limit:
The lesser of:

  • 20% of QBI or 
  • The greater of 50% of the taxpayer's share of qualified W-2 wages for the business, or 25% of the qualified W-2 wages plus 2.5% of the business's unadjusted basis in all qualified property.
Taxpayers in the middle threshold are subject to a prorated portion of the limitations mentioned above. The prorated percentage is the amount of taxable income in excess of the threshold divided by $100,000/$50,000. This ratio is multiplied by the difference between the pre-limitation deductible QBI amount and the fully phased-in wage and capital limitation amount. This is the amount used to reduce the pre-limitation deductible QBI amount.

Just contact me for help.

Limitation for Specified service trade or business (SSTB)

There are limitations for what are called specified service trade or business (SSTB), which are trades or businesses involved in the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, investing and investment management, trading, dealing in certain assets or any trade or business where the principal asset is the reputation or skill of one or more of its employees. There is no limitation for QBI from an SSTB for taxpayers whose taxable income is less than $315,000 for a married couple filing a joint return, or $157,000 for all other taxpayers. However, there the deduction is limited for taxpayers whose income is between $315,000 and $415,000 for MFJ filers and $157,500 and $207,500 for all other taxpayers. The limitation is the same as the discussed for Qualified Wage and Capital Limitations. However, for taxpayers over the top threshold there is no deduction allowed for QBI from an SSTB.

More to Come

This post addresses just the basics of the Section 199A - Qualified Business Income Deduction. I have in mind additional posts about other specifics later. 

The Situation Now

This is a unique time with complicated aspects of the new tax law, the Tax Cuts and Jobs Act. There is much discussion among tax preparers about the definitions and issues and we will see that increase as we start preparing returns for 2018. I have been going through scenarios and having ongoing discussions with my business clients about their specific situations and we are working on strategies for this year and on into the future. I can help you too with your situations. Just contact me  by sending me a text or an email to setup a time for an initial phone conversation.

Jeff Haywood, CPA
The CPA Superhero
jeff.jhtaxes@gmail.com







The above information is general information, it is not all inclusive, and keep in mind, in your tax situation everything "depends on facts and circumstances." So call me to talk about your specific facts and circumstances.


References






Be careful when reading articles about your finances or the tax law and its application, including my articles, because the wording and definitions are such a challenge and the articles are influenced by the writers perspective, specifically his own clients situations that he is mindful of and other situations the writer is not thinking of . The point is talk to your CPA about your situation and don't draw conclusions based on articles, including from irs.gov, because concepts and definitions are not very clear and, of course, they are subject to change. Now is the time to be having discussions about your situation and developing strategies for you and your businesses. Again, please contact me using my information above to discuss your situation. I help business owners all over the U.S. and foreign countries with their U.S. tax returns and strategies to reach their goals.

The Foreign Earned Income Exclusion and Number of Days Outside the United States



You have heard that you must live outside the United States and can only return for a few days a year to qualify for the Foreign Earned Income Exclusion. While that may be true in a particular case, in general it will not apply to someone living outside the United States each year of their foreign residency. Let me explain.

First, you might want to read about the basics at my previous posts:



The first article listed above explains the Foreign Earned Income Exclusion and how you qualify. But there are two ways to qualify and one of them requires that you live in a foreign country and are physically present in a foreign country for at least 330 full days during a period of 12 consecutive months. The other way is to be a bona fide resident of another country.

The Physical Presence Test vs Bona Fide Residence

So the question is, do you have to be outside the U.S. for 330 full days each year or how does that work? Let's take an example for a 2018 tax return. Let's say in 2018 you move to another country after January 1, 2018 and you make some trips back to the United States. 

If you are out of the country 330 full days between February 1, 2018 to January 31, 2019 you would qualify under the physical presence test to exclude foreign earned income that you earned between February 1 and December 31, 2018, subject to the pro-rated limit for the year.

Then would you still need to be counting days in 2019? Yes, but only up until January 31, 2019 so that we could take a pro-rated portion of the foreign earned income exclusion when I prepare your 2018 tax return in the upcoming spring tax season. So in this case, we would have to wait until after you met the requirement on January 31, 2019 to file your 2018 tax return. Then in 2019, after January 31, 2019, you would not have to worry about the requirement of being outside the U.S. for 330 full days in a period of twelve consecutive months. In this case, in the calendar year  2019 you will satisfy the bona fide resident test because as of December 31, 2019 you will have lived outside the U.S. for a full calendar year. So after February 1, 2019 you can spend more days in the US, but here is the IRS wording on that qualification:

During the period of bona fide residence in a foreign country, you can leave the country for brief or temporary trips back to the United States or elsewhere for vacation or business.

To keep your status as a bona fide resident of a foreign country, you must have a clear intention of returning from such trips, without unreasonable delay, to your foreign residence or to a new bona fide residence in another foreign country.

So you can't make an extended stay in US and still claim the exclusion just because you rent a place in another country. You have to fulfill the spirit of having a foreign residency. 

Then too any of your income that you earn while you are in the US you don't get to exclude. 

Filing a Tax Return for First Year Tax When You Move to Another Country 


Now here are details about taking and meeting the bona fide residence test. This is complicated but necessary details and I will explain the relevancy in the next paragraph. The requirement to be outside the US for 330 full days in a twelve month period is to be able to take the exclusion on, in this case, your 2018 tax return for part of the year you lived outside the U.S. when we file your return in the spring of 2019. Without it you would have to file without the exclusion until you become a bona fide resident of another country which requires you live outside the U.S. for a "full calendar year". Once you meet the bona fide residence test, which in this case will be the calendar year 2019, the requirement to be outside the U.S. for 330 full days in a period of 12 consecutive months would not not apply.  In our example you would not have to be concerned about being out of the U.S. for 330 days of a twelve month period after you met the test on January 31, 2019. So on your return for 2019 we will show, as long as you reside outside the U.S. and meet the requirements for the bona fide residence test, that you were a bona fide resident of another country for the full year 2019. 



The point is in regard to what we do with your 2018 tax return. By using the physical presence test we can take the exclusion on your 2018 return for the part of the year that you use to meet the test of being outside the U.S. for 330 full days in a twelve month period, in our example, from February 1 to December 31, 2018. Without it you would not be able to take the exclusion on your 2018 return when it is filed in the spring for 2019. Then you would have to wait until you meet the bona fide resident test which would not be until after December 31, 2019. Then in 2020 we could go back and amend your 2018 return to take the exclusion for the part of the year that you lived outside the U.S.. So in that case you pay more taxes for 2018 when you file in the spring for 2019 but you could get some of that back for the exclusion using the bona fide residence test but you would have to wait until after you meet the test which has to cover a full calendar year, so after December 31, 2019. 


Taking the Foreign Earned Income Exclusion Your First Year Abroad


So the take away is you probably want to take the exclusion for part of 2018 when you file in the spring of 2019. However, if you don't meet the 330 full days in a twelve month period requirement you can still take the exclusion for 2018 but you would have to wait until 2020 to claim it by filing an amended return. Which would be fine with me, because I would charge you for amending the return, but you probably don't want the IRS keeping a portion for your money for a year.  In this case you would want to see if you can meet the 330 full days in a twelve consecutive month period requirement ​for February 1, 2018 to January 31, 2019 so as to take the exclusion on your 2018 return. But know that if you don't meet the 330 full days in a twelve month period requirement ​that you can still qualify for the exclusion for part of 2018 but you will have to wait until 2020, when you will have lived outside the US for a full calendar year, to file an amended return and to get some of your taxes for 2018 back.​

Other Issues

It is also important to understand what foreign earned income is and that the exclusion applies to income taxes and not self employment taxes. In addition, if you open foreign bank accounts you may have a reporting requirement to fulfill. If you are entertaining the possibility of moving to a foreign country I recommend you contact me first to make sure you understand the tax a reporting consequences of your move. 

This is a unique and complicated aspect of U.S. income taxes. There are not too many tax preparers that understand how it works. However, I have done several of this type of returns and I can help you with yours.

Jeff Haywood, CPA
The CPA Superhero
jeff.jhtaxes@gmail.com




The above information is general information and is not all inclusive and as always in your tax situation everything "depends on facts and circumstances." So call me to talk about your specific facts and circumstances.

Second Quarter Estimated Tax Payment Due June 15th

Estimated Taxes


If you are self employed or have income in the second quarter that you will owe taxes on, you are required to make an estimated tax payment. You will want to get in the habit of making these payments in a timely manner to avoid or minimize the underpayment penalty.

Here is a sample of an email I send my clients as a reminder:

This is a reminder that the first quarter estimated tax payment is due on June 15. If things have changed and you want to discuss how much to pay in let me know.  Based on your income and taxes from last year, if you make estimated tax payments of $amount each quarter it should help you minimize the underpayment penalty. Here are the due dates for the year:

First Quarter April 15
Second Quarter June 15
Third Quarter September 15
Fourth Quarter January 15 of the following year.

Remember, it is easy now to make the payments online, so you don't have to mail anything in.  To do so go to this IRS site:

For 2018 - select Make a PaymentReason - Estimated TaxApply Payment to - 1040ESTax Period - 2018

Avoid the Underpayment Penalty

The underpayment penalty may be applied if you didn't pay enough tax, either from withholding from your paycheck or by making TIMELY estimated tax payments. Generally, you may owe a penalty if  any of the following situations apply:

* your tax payments were not at least 90% of your tax for the current year

* or 100% of your tax from the prior year

* or 110% of your tax from the prior year if you are a higher income taxpayer.

For more information from the IRS on Estimated Tax Payments refer to Publication 505

Get Started Now

If you are a situation that requires you to make estimated tax payments, get started now by contacting me to help you figure out how much you should pay in. You will want to avoid the trap of paying when your tax return is due because by then, April 15, your first payment for the following year will be due. It is hard playing catch-up with your taxes.

File and Pay Online

The days of mailing in a coupon with a payment as your only option are gone. Now you can make your payment online using the link above without needing to send in a 1040ES estimated payment form. Using the link above you can make your payment from your bank account or use a credit card but that service comes with a fee.

Act Now

So act now by contacting me, The CPA Superhero, today to get started. You can email me at jeff.jhtaxes@gmail.com to arrange an initial conversation to discuss your situation. Remember, while taxes are complicated and stressful, I have been through numerous times and I can help you. So email me today to arrange an appointment to discuss your situation.


Jeff Haywood, CPA
The CPA Superhero
217-923-8007
jeff.jhtaxes@gmail.com



The above information is general information and is not all inclusive and as always in your tax situation everything "depends on facts and circumstances." So call me to talk about your specific facts and circumstances.

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