NEVER FORGET!

 Police Officer Maurice Barry - PATH Emergency Service Unit - P.O. Shield #1038

A Port Authority officer for 16 years, Maurice "Moe" Barry, 48, was assigned to the PATH commuter train system. The resident of Rutherford, NJ, upon hearing the reports of the terrorist attacks, was one of the first on scene when he rushed from Jersey City to Lower Manhattan and then into the North Tower to help in the rescue efforts. As thousands fled the searing flames and smoke of the Towers, Officer Barry was attempting to reach trapped and frightened workers on the upper floors. The last time he was seen, he was on his way to the higher floors to get people out.
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Moe had a history of heroism - he was involved in rescue efforts during an airplane crash at La Guardia airport; he once climbed a bridge to retrieve the body of a person electrocuted there; he was involved in the rescue effort during the 1993 bombing of the World Trade Center; and he rescued a woman from her home, by boat, during Hurricane Floyd. Moe was also a volunteer for the Rutherford Ambulance Corps.

NO BUZZ TODAY

No BUZZ of any consequence to report.

I just want to share Kay Bell’s post “Ways to help Bahamas' residents recover from Dorian” from DON’T MESS WITH TAXES.

TTFN

WHEN CHOOSING A BUSINESS ENTITY DON’T FORGET FICA TAXES

An often-overlooked issue when deciding on the type of entity to choose to operate your one-person or closely-held business is the FICA or FICA-equivalent tax (self-employment tax).

If you operate as a sole-proprietor, filing a Schedule C, (or as a partnership) your FICA-equivalent self-employment tax is calculated on net earnings from self-employment BEFORE deducting health insurance premiums and retirement plan contributions.

The net amount on your Schedule C is $100,000.  You also deduct $24,000 in self-employed health insurance and a $15,000 contribution to your SEP retirement plan as adjustments to income.  So, your net “out of pocket” is $61,000.  Your self-employment tax is $14,130 - $100,000 x .9235 = $92,350 x 15.3% = $14,130.  The Schedule C filer is entitled to a tax deduction, as an “adjustment to income”, of $7,065 for half of the self-employment tax.

If you operate as a corporation and take $55,000 as a salary your FICA tax is $4,207.50 - $55,000 x 7.65% = $4,207.50.  The corporation matches this and also pays $4,207.50, so the total cost is $8,415.  As a corporation you are $3,000 -$5,000 less (the $5,715 in reduced FICA tax less the tax savings you would have received from the self-employment tax adjustment to income) out of pocket.

If the business has a $100,000 net gain, as per the Schedule C, and pays out $55,000 in wages, $39,000 in employee benefits (the owner’s health insurance premiums and pension contribution) and $4,208 in FICA tax the net taxable income of the corporation is $1,792.  The federal corporate income tax if a “C” corporation is $376.  If it is an “S” corporation the taxpayer may be allowed an additional $358 “Section 199a” deduction and pay federal income tax as an individual on $1,434 - $315 for a taxpayer in the 22% bracket.

Clearly the Schedule C filer pays substantially less in FICA-equivalent taxes than the corporation pays in FICA taxes.

However, regarding the 20% Section 199a deduction – for a “C” corporation there is no deduction allowed, for the “S” corporation the deduction is on the net business income reported on K-1 and does NOT include the sole-shareholder’s wages, but for a sole-proprietorship filing a Schedule C the deduction is allowed on the net amount reported on Schedule C less the adjustments to income for self-employment tax, self-employed health insurance and retirement income contributions.  In the above example the taxpayer’s “Qualified Business Income” (QBI) eligible for the 20% deduction is $53,935 - $100,000 less $24,000 less $15,000 less $7,065 = 53,935 – which could result in a deduction that reduces net taxable income by $10,787.

So, a Schedule C filer could pay less federal income tax on his or her net “in pocket”.

Obviously, the payroll tax cost, or the QBI deduction, is not the only consideration to be reviewed when choosing a business entity.  There are additional filing and administrative costs associated with operating as a corporation – when creating the corporation, during its operation, and when terminating/dissolving it.  There will probably be additional state payroll tax costs – unemployment, disability and/or family leave insurance contributions – and may be required worker’s compensation insurance premiums for the owner being paid as an employee that would not exist for a sole-proprietor.  And the management and administration of a corporation is more time consuming and requires more detailed recordkeeping and federal, state and local government filings.

As a point of information – operating as a corporation provides the owner with “limited liability”, but so does registering your Schedule C sole-proprietorship as a “Limited Liability Company” (LLC).  And if you are an LLC you can file your taxes as either a sole proprietor on Schedule C (or as a partnership if more than own owner) or a corporation, either “C” or “S”.

In terms of the Social Security component of the FICA payroll tax, paying the tax on a lower earnings base may affect the benefits you receive when you begin to collect.  In the above example the Social Security earnings for the Schedule C filer is $92,350, but is only $55,000 for the corporate employee.  Social security benefits are based on your 40 highest-earning years.  FYI - there is a maximum wage/earnings cap on the Social Security component of FICA tax, which applies to both wages and net earnings from self-employment.

What I am saying is that choosing a business entity is a serious and complicated matter involving many important issues – both tax and non-tax.  There is no “one size fits all” answer – regardless of what a lawyer may tell you.  When deciding on the entity you should consider the difference in payroll tax costs, and now under the GOP Tax Act the potential savings from the Section 199a QBI deduction.  Do multiple calculations based on various amounts of anticipated income.

And consult a tax professional BEFORE you consult an attorney!

TTFN

WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’?

*  An interesting development.  Kelly Phillips Erb reports “Charitable Donation Deductions Plummet After Tax Reform” at FORBES.COM.

“According to the most recent data available from the Internal Revenue Service (IRS), just 12,177,779 taxpayers claimed the charitable donation deduction for the 2018 tax year, totaling $102.7 billion. That compares to 33,629,985 taxpayers who claimed the charitable donation deduction for the 2017 tax year, totaling $160 billion. That’s a difference of 21,452,206 taxpayers claiming nearly $37 billion less in donations.”

If I may be allowed one correction – it should read “After GOP Tax Act” and not “After Tax Reform”.  The GOP Tax Act was, as its official title identifies, a tax cut and NOT tax reform.

This news does not necessarily mean that Americans are actually donating less to charity – it just means that they are claiming less tax deductions for charitable giving.  In order to deduct a charitable contribution, one must itemize, and the GOP Tax Act resulted in a substantial decrease in the number of taxpayers who itemize.  While being able to deduct one’s contributions is a plus – the tax savings from itemized deductions is pennies on the dollar.  Giving $100 to charity may put $22 back in your pocket via an itemized deduction, but you are still out of pocket $78 – so I doubt very much that people give to charity only to get a tax deduction. 

However, it may mean that the taxpayer in the above example will only donate $78 to the charity instead of $100 if they are unable to benefit from itemizing.  In a tweet responding to a comment on the post KPE tells us studies suggest that actual contributions are also down.

And let’s be honest.  While the issue is not as bad as it had been these past few years - a result of the more stringent documentation requirements - the amount of charitable contributions reported on Schedule A does not necessarily accurately reflect the actual amount of charitable contributions made.  This category has historically been the one where taxpayers have truly been “generous” in their estimations (i.e. – “same as last year” or “whatever I am allowed”).

* Yesterday’s post at BOBSERVATIONS talked about “Found Money” – how I found it and how you can, too.

* In light of Hurricane Dorian Kay Bell explains “IRS and other government resources can help you deal with a natural disaster” at DON’T MESS WITH TAXES.

* And Kay reminds us not to forget about our four-legged “children” during a disaster with “7 tips to ensure your pets' safety during a disaster”.

* From ACCOUNTING TODAY – “Opportunity zones andcapital gains: What your clients need to know”.

* Just got the word from NATP -

“The General Services Administration (GSA) has released the federal domestic per diem rates for 2020. The IRS permits taxpayers to use these rates to substantiate business expenses for lodging, meals and incidental expenses incurred while traveling away from home.”

The new rates are effective October 1, 2019. Click here to access them.

THE FINAL WORD

Cutting taxes is not the answer to all of our problems.  Taxing the rich, merely because they can afford it, is not the answer to all of our problems. 

We must understand and acknowledge that the one and only purpose of the US Tax Code is to raise the money necessary to run the government – and should not be used for social engineering, to redistribute income or wealth or to deliver social welfare and other government benefits.

The Tax Code must not punish ambition, entrepreneurship or success.  While it can be used to encourage savings, investment, and growth, it must not encourage or discourage specific economic decisions, or provide exclusive benefits for specific industries, business activities, or classes of taxpayers.

TTFN

TAX FORMS, SCHEDULES AND WORKSHEETS FOR THE SELF EMPLOYED

HAPPY LABOR DAY!

No holiday for me (no rest for the wicked) - I am laboring away today on a GDE.

Speaking of laboring, here is a question for my self-employed readers.  Are you keeping good records of your business tax deductions?

In addition to my compilation of TAX PROFESSIONAL FORMS, SCHEDULES AND WORKSHEETS I have also compiled a special package of forms, schedules and worksheets especially for self-employed taxpayers, which I am offering for only $6.95!

You can use these unique forms, logs and worksheets to help document your business tax deductions and to help organize and gather the tax information needed to give to your tax professional.

Please be aware that this is copyrighted material and for your internal use only.

This compilation includes –

In “Portrait” Format:

• BUSINESS MILEAGE LOG

• AUTOMOBILE EXPENSE LOG

• AUTOMOBILE EXPENSE SUMMARY

• CONFERENCES, CONVENTIONS AND EDUCATION

• BUSINESS TRAVEL RECORD

• COMPUTER USE LOG 

• HOME OFFICE DEDUCTION

• ALLOCATING BUSINESS EXPENSES TO SCHEDULE C

• RECORD OF CLIENT MEALS AND ENTERTAINMENT

• SECTION 199a QBI DEDUCTION WORKSHEET 

• EMPLOYEE TIME CARD 

• LISTING OF DEDUCTIBLE BUSINESS EXPENSES

In “Landscape” Format:

• ANALYSIS OF BUSINESS EXPENSES 

• DEPRECIATION SCHEDULE 

The package will be sent as 2 separate “word document” email attachments (portrait format and landscape format), so you may edit and revise them as you see fit to personalize and adopt them for your business and to update the forms for annual COLAs or tax law changes.

BTW – I also have a compilation of forms, schedules and worksheets for taxpayers to record income, Schedule A and Schedule E deductions and other things, for only $6.95.  Click here for more information.  You can order BOTH forms compilations for $9.95.

Send your check or money order for $6.95, or $9.95, payable to TAXES AND ACCOUNTANTS, INC, and your email address to –

TAXES AND ACCOUNTING, INC

BUSINESS TAX FORMS COMPILATION

POST OFFICE BOX A

HAWLEY PA 18428

 .

TTFN

THE VALUE OF A TAX DEDUCTION - MORE THAN YOU MAY THINK

An interesting development worth discussing.  This is something that should be considered when doing year-end tax planning in a year you had qualifying dividend and capital gain income.

A client had substantial capital gains for 2018 which were taxable at the lower capital gains rates.  A portion of the capital gains were taxed at 0% while most was taxed at 15%.  The client’s “ordinary” income was taxed at the 12% marginal tax rate.  If we disregard the capital gain income – if all his income had been taxed as ordinary income - the client would have been in the 24% marginal bracket.

After I had done an initial write up and tax calculation the client told me about an additional $350 non-cash contribution to the Salvation Army he had failed to include when sending me his stuff.

This additional $350 reduced his net taxable income and therefore reduced his “ordinary” income tax by $42 - $350 x 12%. 

But the $350 reduction in net taxable income also allowed an additional $350 of his capital gains to be eligible for the 0% rate, so $350 less in capital gain income was taxed at 15%.  He reduced his tax liability by another $52.50 - $350 x 15%. 

The bottom line - the additional $350 deduction saved him $94.50 – or 27% - in federal income tax.

As we can see, because of the different rates for different types of income the savings from a tax deduction can be more than the ordinary marginal tax rate.  In the above example the savings was more than twice this rate.

This example involved a “below the line” tax deduction, the “line” being AGI.  Deductions allowed “above the line” can generate even more savings by reducing the amount of other deductions or credits that are phased-out based on AGI and reducing the amount of taxable Social Security or Railroad Retirement benefits.

This is something that should be considered when doing year-end tax planning in a year you had qualifying dividend and capital gain income.

TTFN

RECORDKEEPING FOR COLLEGE

If you have a child beginning college this fall be sure to have him or her save and give to you the receipts for all textbook purchases.  If purchased online have them print hard copies of the receipts.  The American Opportunity Credit, available for the first 4 calendar years of undergraduate education, allows you to include the cost of books with tuition and fees in calculating the credit.

You should also save, again in hard copy, the bills, receipts and “Bursar’s Statements” that itemize the individual charges for tuition, fees, room and board, and other items and amounts and sources of payments.  You should receive a Form 1098-T from the school in January of 2020, but these forms do not always provide all the information you may need.

If you are paying separately for off-campus lodging for your student while away from home at college keep track of these payments also. 

In addition to claiming an American Opportunity Credit, or a Lifetime Learning Credit, if you have used withdrawals from a Section 529 Qualified Tuition Program to pay for all or some of the college expenses the detailed information of expenses and payments will be needed.

If your level of income turns out to be too high to claim a full American Opportunity Credit your student child may be able to claim a credit on his or her tax return if they have sufficient income to have to pay tax.

TTFN