IRS: Several tax law changes may affect bottom line of many business owners

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WASHINGTON — The Internal Revenue Service today reminded business owners that tax reform legislation passed last December affects nearly every business.

With just a few months left in the year, the IRS is highlighting important information for small businesses and self-employed individuals to help them understand and meet their tax obligations.

Here are several changes that could affect the bottom line of many small businesses:

Qualified Business Income Deduction

Many owners of sole proprietorships, partnerships, trusts and S corporations may deduct 20 percent of their qualified business income. The new deduction — referred to as the Section 199A deduction or the qualified business income deduction — is available for tax years beginning after Dec. 31, 2017. Eligible taxpayers can claim it for the first time on the 2018 federal income tax return they file next year.

A set of FAQs provides more information on the deduction, income and other limitations.

Temporary 100 percent expensing for certain business assets

Businesses are now able to write off most depreciable business assets in the year the business places them in service. The 100-percent depreciation deduction generally applies to depreciable business assets with a recovery period of 20 years or less and certain other property. Machinery, equipment, computers, appliances and furniture generally qualify.

Taxpayers can find more information in the proposed regulations.

Fringe benefits

  • Entertainment and meals: The new law eliminates the deduction for expenses related to entertainment, amusement or recreation. However, taxpayers can continue to deduct 50 percent of the cost of business meals if the taxpayer or an employee of the taxpayer is present and other conditions are met. The meals may be provided to a current or potential business customer, client, consultant or similar business contact.
  • Qualified transportation: The new law disallows deductions for expenses associated with transportation fringe benefits or expenses incurred providing transportation for commuting. There’s an exception when the transportation expenses are necessary for employee safety.
  • Bicycle commuting reimbursements: Employers can deduct qualified bicycle commuting reimbursements as a business expense for 2018 through 2025. The new tax law also suspends the exclusion of qualified bicycle commuting reimbursements from an employee’s income for 2018 through 2025. Employers must now include these reimbursements in the employee’s wages.
  • Qualified moving expenses reimbursements: Reimbursements an employer pays to an employee in 2018 for qualified moving expenses are subject to federal income tax.  Reimbursements incurred in a prior year are not subject to federal income or employment taxes; nor are payments from an employer to a moving company in 2018 for qualified moving services provided to an employee prior to 2018.
  • Employee achievement award: Special rules allow an employee to exclude certain achievement awards from their wages if the awards are tangible personal property. An employer also may deduct awards that are tangible personal property, subject to certain deduction limits. The new law clarifies that tangible personal property doesn’t include cash, cash equivalents, gift cards, gift coupons, certain gift certificates, tickets to theater or sporting events, vacations, meals, lodging, stocks, bonds, securities and other similar items.

The tax reform for businesses page has more information on fringe benefit changes.

Estimated Taxes

Individuals, including sole proprietors, partners and S corporation shareholders, may need to pay quarterly installments of estimated tax unless they owe less than $1,000 when they file their tax return or they had no tax liability in the prior year (subject to certain conditions). More information about tax withholding and estimated taxes can be found on the agency’s Pay As You Go page as well as in Publication 505, Tax Withholding and Estimated Tax. Publication 505 has additional details, including worksheets and examples, which can help taxpayers determine whether they should pay estimated taxes. Some affected taxpayers may include those who have dividend or capital gain income, owe alternative minimum tax or have other special situations.

More information

See IRS.gov/taxreform for more information about these and many other tax law changes.

 

Source: https://www.irs.gov/newsroom/irs-several-tax-law-changes-may-affect-bottom-line-of-many-business-owners

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Low-income housing units nationwide may be offered to displaced victims of Hurricanes Michael and Florence, other recent disasters

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WASHINGTON — The Internal Revenue Service has provided temporary relief from certain requirements of the Internal Revenue Code to allow owners and operators of low-income housing projects located anywhere in the United States and its territories to provide temporary emergency housing to individuals who are displaced by a major disaster from their principal residences, regardless of income.

This special relief, detailed in Revenue Procedure 2014-49 and Revenue Procedure 2014-50, authorizes owners and operators, in conjunction with agencies and issuers, to disregard the income limits, transience rules and certain other restrictions that normally apply to low-income housing units when providing temporary emergency housing to displaced individuals.

As a result, owners and operators can offer temporary emergency housing to displaced individuals who lived in a county or other local jurisdiction designated for individual assistance by the Federal Emergency Management Agency (FEMA). Currently, this includes parts of Florida, Georgia, North Carolina, South Carolina and Virginia, though FEMA may add other locations in the future. Upon approval, emergency housing can be provided for up to a year after the close of the month in which the major disaster was declared by the President.

This relief automatically applies as soon as the President declares a major disaster and FEMA designates any locality for individual or public assistance. For that reason, individuals affected by some other recent major disasters may also qualify for emergency housing relief. For a list of recent disasters, see the disaster relief page on IRS.gov.

Although owners and operators of low-income housing projects are allowed to offer temporary housing to qualified disaster victims, they are not required to do so. For those who do, special rules apply, detailed in Revenue Procedure 2014-49 and Revenue Procedure 2014-50, available on IRS.gov.

Source: https://www.irs.gov/newsroom/low-income-housing-units-nationwide-may-be-offered-to-displaced-victims-of-hurricanes-michael-and-florence-other-recent-disasters

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Reduced 24-percent withholding rate applies to small businesses and other payers

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Washington — The Internal Revenue Service today urged small businesses and other payers to check out the agency’s newly-revised backup withholding publication, now available on IRS.gov.

Publication 1281, Backup Withholding for Missing and Incorrect Name/TIN(s), posted last month on IRS.gov, has been updated to reflect a key change made by the Tax Cuts and Jobs Act (TCJA). As a result of this change, effective Jan. 1, 2018, the backup withholding tax rate dropped from 28 percent to 24 percent.

In general, backup withholding applies in various situations including, but not limited to, when a taxpayer fails to supply their correct taxpayer identification number (TIN) to a payer. Usually, a TIN is a Social Security number (SSN), but in some instances, it can be an Employer Identification Number (EIN), Individual Taxpayer Identification Number (ITIN) or Adoption Taxpayer Identification Number (ATIN). Backup withholding also applies, following notification by the IRS, where a taxpayer underreported interest or dividend income on their federal income tax return.

Publication 1281 is packed with useful information designed to help any payer required to impose backup withholding on any of their payees. Among other things, the publication features answers to 34 frequently asked questions (FAQs). One of them, Q/A 34, points out that a payer who mistakenly backup withheld at an incorrect rate (such as the old 28-percent tax rate, rather than the new 24-percent rate), need not refund the difference to the payee. However, a payer who chooses to refund the difference must do so before the end of the year and can then make appropriate adjustments to their federal tax deposits.

When backup withholding applies, payers must backup withhold tax from payments not otherwise subject to withholding. Payees may be subject to backup withholding if they:

  • Fail to give a TIN,
  • Give an incorrect TIN,
  • Supply a TIN in an improper manner,
  • Underreport interest or dividends on their income tax return, or
  • Fail to certify that they’re not subject to backup withholding for underreporting of interest and dividends.

Backup withholding can apply to most kinds of payments reported on Form 1099, including:

  • Interest payments;
  • Dividends;
  • Patronage dividends, but only if at least half of the payment is in money;
  • Rents, profits or other income;
  • Commissions, fees or other payments for work performed as an independent contractor;
  • Payments by brokers and barter exchange transactions;
  • Payments by fishing boat operators, but only the portion that’s in money and represents a share of the proceeds of the catch;
  • Payment card and third-party network transactions; and
  • Royalty payments.

Backup withholding also may apply to gambling winnings that aren’t subject to regular gambling withholding.

To stop backup withholding, the payee must correct any issues that caused it. They may need to give the correct TIN to the payer, resolve the underreported income and pay the amount owed, or file a missing return. The Backup Withholding page,  Publication 505, Tax Withholding and Estimated Tax and Publication 1335, Backup Withholding Questions and Answers have more information.

Payers report any backup withholding on Form 945, Annual Return of Withheld Federal Income Tax. The 2018 form is due Jan. 31, 2019. For more information about depositing backup withholding taxes, see Publication 15, Employer’s Tax Guide. Payers also show any backup withholding on information returns, such as Forms 1099, that they furnish to their payees and file with the IRS.

Like regular federal income tax withholding, a payee can claim credit for any backup withholding when they file their 2018 federal income tax return.

For updates on this and other TCJA provisions, visit IRS.gov/taxreform.

Source: https://www.irs.gov/newsroom/reduced-24-percent-withholding-rate-applies-to-small-businesses-and-other-payers-revised-backup-withholding-publication-features-helpful-faqs

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More than 2 million ITINs to expire this year; Renew soon to avoid refund delays

WASHINGTON — With more than 2 million Individual Taxpayer Identification Numbers (ITINs) set to expire at the end of 2018, the Internal Revenue Service today urged affected taxpayers to submit their renewal applications soon to beat the rush and avoid refund delays next year.

In the third year of the renewal program, the IRS has increased staffing to handle the anticipated influx of W-7 applications for renewal. This third wave of expiring ITINs is expected to affect as many as 2.7 million taxpayers. To help taxpayers, the renewal process for 2019 is beginning earlier than last year.

“Even though the April tax deadline has passed, the IRS encourages people affected by these ITIN changes to take steps as soon as possible to prepare for next year’s tax returns,” said Acting IRS Commissioner David Kautter. “Acting now to renew ITIN numbers will help taxpayers avoid delays that could affect their tax filing and refunds in 2019. The IRS appreciates the help from partner groups across the nation sharing this information with those with expiring ITIN numbers.”

Under the Protecting Americans from Tax Hikes (PATH) Act, ITINs that have not been used on a federal tax return at least once in the last three consecutive years will expire Dec. 31, 2018. In addition, ITINs with middle digits 73, 74, 75, 76, 77, 81 or 82 will also expire at the end of the year. These affected taxpayers who expect to file a tax return in 2019 must submit a renewal application as soon as possible.

ITINs are used by people who have tax filing or payment obligations under U.S. law but who are not eligible for a Social Security number. ITIN holders who have questions should visit the ITIN information page on IRS.gov and take a few minutes to understand the guidelines.

Once again, the IRS is launching a nationwide education effort to share information with ITIN holders. To help taxpayers, the IRS offers a variety of informational materials, including flyers and fact sheets, available in several languages on IRS.gov.

IRS will continue to work with partner groups and others in the ITIN community to share information widely about these important changes.

Who should renew an ITIN

  • Taxpayers whose ITIN is expiring and who need to file a tax return in 2019 must submit a renewal application. Others do not need to take any action. ITINs with the middle digits 73, 74, 75, 76, 77, 81 or 82 (For example: 9NN-73-NNNN) need to be renewed even if the taxpayer has used it in the last three years. The IRS will begin sending the CP-48 Notice, You must renew your Individual Taxpayer Identification Number (ITIN) to file your U.S. tax return, in early summer to affected taxpayers. The notice explains the steps to take to renew the ITIN if it will be included on a U.S. tax return filed in 2019. Taxpayers who receive the notice after taking action to renew their ITIN do not need to take further action unless another family member is affected.
  • ITINs with middle digits of 70, 71, 72, 78, 79 or 80 have previously expired. Taxpayers with these ITINs can still renew at any time.
  • Spouses or dependents residing inside the United States should renew their ITINs. However, spouses and dependents residing outside the United States do not need to renew their ITINs unless they anticipate being claimed for a tax benefit (for example, after they move to the United States) or if they file their own tax return. That’s because the deduction for personal exemptions is suspended for tax years 2018 through 2025 by the Tax Cuts and Jobs Act. Consequently, spouses or dependents outside the United States who would have been claimed for this personal exemption benefit and no other benefit do not need to renew their ITINs this year.

Family option remains available

Taxpayers with an ITIN that has middle digits 73, 74, 75, 76, 77, 81 or 82, as well as all previously expired ITINs, have the option to renew ITINs for their entire family at the same time. Those who have received a renewal letter from the IRS can choose to renew the family’s ITINs together, even if family members have an ITIN with middle digits that have not been identified for expiration. Family members include the tax filer, spouse and any dependents claimed on the tax return.

How to renew an ITIN

To renew an ITIN, a taxpayer must complete a Form W-7 and submit all required documentation. Taxpayers submitting a Form W-7 to renew their ITIN are not required to attach a federal tax return. However, taxpayers must still note a reason for needing an ITIN on the Form W-7. See the Form W-7 instructions for detailed information.

There are three ways to submit the W-7 application package. Taxpayers can:

  • Mail the Form W-7, along with original identification documents or copies certified by the agency that issued them, to the IRS address listed on the Form W-7 instructions. The IRS will review the identification documents and return them within 60 days.
  • Work with Certified Acceptance Agents (CAAs) authorized by the IRS to help taxpayers apply for an ITIN. CAAs can authenticate all identification documents for primary and secondary taxpayers, verify that an ITIN application is correct before submitting it to the IRS for processing and authenticate the passports and birth certificates for dependents. This saves taxpayers from mailing original documents to the IRS.
  • In advance, call and make an appointment at a designated IRS Taxpayer Assistance Center to have each applicant’s identity authenticated in person instead of mailing original identification documents to the IRS. Applicants should bring a completed Form W-7 along with all required identification documents. See the TAC ITIN authentication page for more details.

Avoid common errors now and prevent delays next year

Federal tax returns that are submitted in 2019 with an expired ITIN will be processed. However, certain tax credits and any exemptions will be disallowed. Taxpayers will receive a notice in the mail advising them of the change to their tax return and their need to renew their ITIN. Once the ITIN is renewed, applicable credits and exemptions will be restored and any refunds will be issued.

Additionally, several common errors can slow down and hold some ITIN renewal applications. These mistakes generally center on missing information or insufficient supporting documentation, such as name changes. The IRS urges any applicant to check over their form carefully before sending it to the IRS.

As a reminder, the IRS no longer accepts passports that do not have a date of entry into the U.S. as a stand-alone identification document for dependents from a country other than Canada or Mexico, or dependents of U.S. military personnel overseas. The dependent’s passport must have a date of entry stamp, otherwise the following additional documents to prove U.S. residency are required:

  • U.S. medical records for dependents under age 6,
  • U.S. school records for dependents under age 18, and
  • U.S. school records (if a student), rental statements, bank statements or utility bills listing the applicant’s name and U.S. address, if over age 18.

IRS continues to encourage more applicants for the Acceptance Agent Program to expand ITIN services

To increase the availability of ITIN services nationwide, particularly in communities with high ITIN usage, the IRS is actively recruiting Certified Acceptance Agents and accepting applications year-round. Interested individuals are encouraged to review all CAA program changes and requirements and submit an application to become a Certified Acceptance Agent.

For more information, visit the ITIN information page on IRS.gov

Source: https://www.irs.gov/newsroom/more-than-2-million-itins-to-expire-this-year-renew-soon-to-avoid-refund-delays

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Taxpayers Should do an End-of-Year Withholding Check-up

As the end of the year approaches, the IRS encourages taxpayers to consider a tax withholding checkup. When taxpayers take a close look to make sure the right amount of tax is withheld now, they can avoid an unexpected tax bill next year.

Here are five examples of taxpayers who would benefit from a withholding check-up:

  • Taxpayers who received large tax refunds in past years
    When a taxpayer has too much tax withheld from their paycheck, they pay too much tax during the year. They can change their withholding to have money upfront rather than waiting for a bigger refund.
  • Taxpayers who owed taxes in years past
    Taxpayers with too little tax withheld might owe money. Under-withholding can lead to both a tax bill and an additional penalty.
  • People with a second job
    This includes people who work in the sharing or ‘gig’ economy. Taxpayers who work more than one job should check the total amount of taxes they have withheld and make adjustments as necessary. This will ensure their withholding covers the total amount of the taxes they owe, based on their combined income from all their jobs.
  • Taxpayers who make estimated tax payments
    Some taxpayers make quarterly estimated tax payments throughout the year. This includes self-employed individuals, partners, and S corporation shareholders.  If these taxpayers also work for an employer, they can often forgo making these quarterly payments by instead having more tax taken out of their pay.
  • People with a new job
    Taxpayers who start a new job should check their withholding to make sure they are having enough taxes withheld. Their total withholding should cover the income tax owed from their new and old jobs combined.

To make sure their employer withholds the right amount of tax, employees can adjust their Form W-4, Employee’s Withholding Allowance Certificate. In many cases, this is all they need to do. The employer uses the form to figure the amount of federal income tax to be withheld from pay. This takes time, so taxpayers should make adjustments as soon as possible so the changes can take affect during the final pay periods of 2017.

The IRS has several resources that help taxpayers determine if they are having the right amount of tax withheld from their pay.

More Information:

Pay As You Go, So You Won’t Owe

Source: https://www.irs.gov/newsroom/taxpayers-should-do-an-end-of-year-withholding-check-up

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Five Facts about Charitable Contributions

With the holidays around the corner, many people will be making donations to benefit charitable organizations. However, come tax time, the person who made the donation might also benefit. That’s because taxpayers who donate to a charity may be able to claim a deduction for the donation on their federal tax return.

Here are five facts about charitable donations:

Qualified Charities. A taxpayer must donate to a qualified charity to deduct their contributions. Gifts to individuals, political organizations, or candidates are not deductible. To check the status of a charity, taxpayers can use Exempt Organizations Select Check on IRS.gov.

Itemize Deductions. To deduct charitable contributions, taxpayers must file Form 1040 and
itemize their deductions. To do this, taxpayers complete Schedule A, Itemized Deductions. They file this form with their tax return.

Getting Something in Return. Taxpayers may receive something in return for their donation. This includes things such as merchandise, meals, and event tickets. Taxpayers can only deduct the amount of the donation that’s more than the fair market value of the item they received. To figure their deduction, a taxpayer would subtract the value of the item received from the amount of their donation.

Type of Donation. For donations of property instead of cash, a taxpayer can only deduct the fair market value of the donated item. Fair market value is generally the price they would get if they sold the item on the open market. If they donate used clothing and household items, those items generally must be in good condition. Special rules apply to certain types of property donations, such as cars and boats.

Donations of $250 or More. If a taxpayer donates $250 or more in cash or goods, they must have a written receipt from the charity. The statement must show:

  • The amount of the donation.
  • A description of any property given.
  • Whether the taxpayer received any goods or services in exchange for their gift, and, if so, must provide a description and good faith estimate of the value of those goods or services.

Taxpayers can also use the Interactive Tax Assistant, Can I Deduct my Charitable Contributions? This tool helps determine if charitable contribution is deductible.

More Information:

Tax Topic No. 506 – Charitable Contributions

IRS YouTube Videos:

Charitable Contributions: English | Spanish | ASL

Source: https://www.irs.gov/newsroom/five-facts-about-charitable-contributions

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Individual Taxpayers: Seven Things to Do When an IRS Letter Arrives

The IRS mails millions of letters to taxpayers every year for many reasons. Here are seven simple suggestions on how individuals can handle a letter or notice from the IRS:

1. Don’t panic. Simply responding will take care of most IRS letters and notices.
2. Read the entire letter carefully. Most letters deal with a specific issue and provide specific instructions on what to do.
3. Compare it with the tax return. If a letter indicates a changed or corrected tax return, the taxpayer should review the information and compare it with their original return.
4. Only reply if necessary. There is usually no need to reply to a letter unless specifically instructed to do so, or to make a payment.
5. Respond timely. Taxpayers should respond to a letter with which they do not agree. They should mail a letter explaining why they disagree. They should mail their response to the address listed at the bottom of the letter. The taxpayer should include information and documents for the IRS to consider. The taxpayer should allow at least 30 days for a response.

When a specific date is listed in the letter, there are two main reasons taxpayers should respond by that date:

  • To minimize additional interest and penalty charges.
  • To preserve appeal rights if the taxpayers doesn’t agree.

6. Don’t call. For most letters, there is no need to call the IRS or make an appointment at a taxpayer assistance center. If a call seems necessary, the taxpayer can use the phone number in the upper right-hand corner of the letter. They should have a copy of the tax return and letter on hand when calling.

7. Keep the letter. A taxpayer should keep copies of any IRS letters or notices received with their tax records.

Additional IRS Resources:

Source: https://www.irs.gov/newsroom/individual-taxpayers-seven-things-to-do-when-an-irs-letter-arrives

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Five Things to Remember about Hobby Income and Expenses

From scrapbooking to glass blowing, many Americans enjoy hobbies that are also a source of income. A taxpayer must report income on their tax return even if it is made from a hobby.

However, the rules for how to report the income and expenses depend on whether the activity is a hobby or a business. There are special rules and limits for deductions taxpayers can claim for hobbies. Here are five things to consider:

  • Determine if the activity is a business or a hobby. If someone has a business, they operate the business to make a profit. In contrast, people engage in a hobby for sport or recreation, not to make a profit. Taxpayers should consider nine factors when determining whether their activity is a business or a hobby, and base their determination on all the facts and circumstances of their activity. For more about ‘not-for-profit’ rules, see Publication 535, Business Expenses.
  • Allowable hobby deductions. Taxpayers can usually deduct ordinary and necessary hobby expenses within certain limits:
    • Ordinary expense is common and accepted for the activity.
    • Necessary expense is appropriate for the activity.
  • Limits on hobby expenses. Taxpayers can generally only deduct hobby expenses up to the amount of hobby income. If hobby expenses are more than its income, taxpayers have a loss from the activity. However, a hobby loss can’t be deducted from other income.
  • How to deduct hobby expenses. Taxpayers must itemize deductions on their tax return to deduct hobby expenses. Expenses may fall into three types of deductions, and special rules apply to each type. See Publication 535 for the rules about how to claim them on Schedule A, Itemized Deductions.
  • Use IRS Free File. Hobby rules can be complex, and IRS Free File can make filing a tax return easier.

Source: https://www.irs.gov/newsroom/five-things-to-remember-about-hobby-income-and-expenses

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