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8 Steps For Planning With The New Tax Law, A New Deduction For A Pass-Through Entity, & Virtual Currencies – #Tax #taxreform

As your mailbox fills up with the forms you need to file your 2017 returns, you may already be thinking ahead to how tax reform legislation will impact you in 2018. This newsletter outlines seven issues resulting from the Tax Cuts and Jobs Act to think about after the 2017 tax season. The new tax rules affecting small businesses are also explored in detail here, as well as some guidelines for virtual currencies like Bitcoin. Also included: a primer on the current world of crowdfunding, both for entertainment and for entrepreneurs who want to try it themselves.

Should you wish to review your situation please feel free to call. Also feel free to forward this newsletter to someone who may benefit from this information.

New Tax Legislation Requires Planning

Though many taxpayers appreciate the income tax cuts in the Tax Cuts and Jobs Act (TCJA) passed late last year, others are skeptical that it will simplify their tax planning. With every simplification, there are many more tax issues that still require planning to realize extra tax benefits. Here are seven of them:

 

1.  Planning for all the moving parts

In many ways, the TCJA gives with one hand and takes away with the other. The “giving hand” provides a lower income tax rate structure and a higher standard deduction, while the “taking hand” gets rid of personal exemptions, suspends many itemized deductions and limits deductions that remain. There are many variables that determine whether you come out ahead or behind and a tax planning session can help you figure it all out.

Seven Tax Reform Areas
2. Getting creative and flexible about itemizing

Many itemized deductions remain the same, others were eliminated completely and some have new limits. For example, while charitable contributions are still a qualified deduction, there is now a $10,000 combined cap on state, local and property tax deductions. The new constraints mean considering creative solutions to maximize these deductions. One idea is to make better use of the donation of appreciated stock as part of your charitable giving.

3. Dealing with new complexity in small business ownership

Small business owners and sole proprietors will have to do a complicated calculation to see how much of the 20 percent reduction to pass-through qualified business income they can take. It depends on your profession and your expenditures on capital and wages. This calculation can get complicated very quickly.

4. Understanding the newly changed “marriage penalty”

The disadvantage for married couples within the tax code is still very much in place, but it is changing. For instance, the marriage penalty that had given unfavorable income tax rates to married joint filers when compared to single individuals goes away in the TCJA for most income levels. But it rears its head again in the $10,000 combined state, local and property tax limitation, which does not double for married joint filers. This is something you’ll have to plan around.

5. Getting credit for your kids

There are many new tax benefits for parents in the TCJA. The child tax credit doubles to $2,000 and the phaseout threshold jumps to $400,000 from $110,000 previously for joint filers, making it available to more taxpayers. Dependents ineligible for the child tax credit can qualify for a new $500 per-person family tax credit. On top of that, distributions from 529 education savings plans can now be used to pay private school tuition for K-12 students.

6. Adjusting to disappearing tax breaks

If your tax planning was built on any of the following expiring tax provisions, you’ll have to change your plan: personal exemptions; miscellaneous itemized deductions; home equity interest; alimony deductions (expiring in 2019); the additional child tax credit; theft and casualty losses; and the domestic production activity deduction (DPAD).

7. Facing the old complexities

Many areas of the tax code remain largely the same and contain both potential pitfalls and opportunities to find tax savings: Managing capital gains and tax-loss harvesting; charitable activity deductions; and a tax-advantaged retirement strategy are just a few areas where you can unlock extra value with smart planning.

The big changes to tax reform this year may be disconcerting at first, but in change there is opportunity. After the dust settles on the 2017 tax season, get ready to take a detailed look at what 2018 tax reform means for you.

Your New Life as a Pass-Through Entity Owner

An initial look at the new business deduction
If you are a small business owner, your planning could get a lot trickier after the passage of the Tax Cuts and Jobs Act (TCJA). That’s because most small businesses have legal structures that are treated as pass-through entities for tax purposes, meaning they “pass through” their income to be taxed on owners’ Form 1040 individual tax returns. These entities include S corporations, partnerships and sole proprietorships.

On one hand, these kinds of businesses will benefit from the TCJA’s 20 percent reduction to the taxation of business income. On the other, the rules used to determine how much of that reduction each business gets are complex. Here are some tips to help find out where your business falls in the new structure:

Know your businesses’ QBI

QBI stands for qualified business income, which is generally your business net income other than income in the way of wage compensation. QBI is the basic figure you need to determine how much of the 20 percent reduction you get. It excludes business losses, as well as factoring in amortization and capitalized expenditures. QBI is determined separately for each business activity, not per taxpayer.

The first simple threshold rule is:

Pass-Through Entity Owner
If your taxable income is less than $157,500 as an individual filer, or $315,000 as a married couple filing jointly, you can take the 20 percent deduction from your QBI.

If your taxable income is higher than those levels, several other factors come into play. Buckle up and hold on, here is where it gets complex:

Know whether your profession matters

Several “specified service professions” are treated differently under the new rules. The list includes health, law, consulting, athletics, financial services, brokerage services, accounting firms or “any trade or business where the principal asset is the reputation or skill of one or more of its employees or owners.”

If your business is in one of these professions, the 20 percent deduction starts to phase out to zero once your taxable income passes $157,500 as an individual filer or $315,000 as a married joint filer. The phaseout range before the reduction reaches zero is $50,000 for individual filers and $100,000 for married filers.

The phaseout range also determines how much of the next factor matters:

Know whether wage and capital limits matter

Once you go above the threshold, special wage and capital limits start to reduce your deduction.

The formula for calculating the wage and capital limits is based on the greater of 50 percent of the W-2 wages paid by your business, OR 25 percent of the W-2 wages, plus 2.5 percent of the unadjusted basis of all qualified property acquired by your business over the year.

These wage and capital limits are phased in over the threshold and apply in full after passing the $50,000 range for individual filers or $100,000 for married filers.

Bottom line: Get help

As you can see, the 20 percent deduction can be a great benefit, but taking it can get complex very quickly. If you are a small business owner, don’t try to do it yourself. The new rules apply for the 2018 tax year, so after you’ve wrapped up 2017 taxes under the old rules, reach out for a consultation to determine how to position your business under the new laws.

In the meantime, please be patient. The IRS has yet to publish guidance on the new rules.

Taxes and Virtual Currencies

What you need to know
Virtual currencies are all the rage lately. Here are some tax consequences you must know if you decide to dip your toe in that world.
The IRS is paying close attention

The first thing to know is that the IRS is scrutinizing virtual currency transactions, so if you live in the U.S. you’ll have to report your transactions in Bitcoins and the like. Despite some early misconceptions, virtual currency transactions can be traced back to their owners by governments and other cyber sleuths.

If you decide to use or hold virtual currencies, carefully report and pay tax on your transactions. Act as if you are going to be audited, because if you don’t, you just might be!

It’s property, not money

Virtual Currencies
Note that the IRS doesn’t treat Bitcoin or other virtual currencies as money. Instead, they are considered property. That means that if you are paid in Bitcoin, you will have to report it as income based on its fair market value on the date you received it.

And, if you sell Bitcoin, you have to pay tax on your gain using the cost (basis) of when you received it. The IRS has said that if Bitcoin is held as a capital asset, like a stock or a bond, then you would pay capital gains tax. Otherwise, if it is not held as a capital asset (for example if it is treated as inventory that you intend to sell to customers), it would be taxed as ordinary income.

Example: Craig Crypto bought a single Bitcoin on Dec. 29, 2016 for $967. After holding it as an investment (capital asset) for more than a year, Craig sold his Bitcoin for $14,492. He reports and pays 15 percent tax as a capital gain on his profit of $13,525.

Be aware of the risk

In addition to the increased oversight by the IRS, virtual currencies are at risk of virtual theft with no recourse to a government agency like the Federal Deposit Insurance Corporation, which insures U.S. bank balances.

If you need help with any tax questions related to virtual currency transactions, don’t hesitate to call.

How to Navigate the World of Crowdfunding

Crowdfunding is a phenomenon in which entrepreneurs raise money to fund their projects through the Internet, typically by obtaining small donations from a large number of people. An estimated $34 billion was collected using crowdfunding campaigns globally in 2015, and it’s expected to overtake the total amount of venture capital funding within the next several years.
Why crowdfunding?

In the past, an entrepreneur would pitch a creative idea to investors who put up the money. These investors could be a bank or venture capitalist providing a loan. Ultimately, it was a limited pool of people willing to take on financial risk to support an entrepreneur’s idea.

Crowdfunding goes directly to consumers over the Internet, asking them to donate a small amount of money to support a business or a creative project. The financial risk to each person is low, so the barrier to find funding for a project is also low.

Popular crowdfunding sites for business ideas and creative projects include Kickstarter, Indiegogo and GoFundMe.

The good, the odd and the silly

Crowdfunding
One of the additional benefits of crowdfunding is that a creator can measure the strength of their idea merely based on the number of people who agree to contribute.

One of the most successful crowdfunding projects so far is by Chris Roberts, creator of the popular 1990 video game Wing Commander. He took to Kickstarter to promote his plans to create an ambitious successor to his first game, called Star Citizen. To date he’s raised more than $175 million. The game is still under development.

Then there’s the Coolest Cooler, which raised $13 million to make a multifunction cooler with built-in water-resistant speakers, an ice-crushing blender, LED lights and a USB charging port. More than 60,000 people thought this was a good idea.

Or consider Zach Brown, who raised $55,000 to make a single bowl of potato salad (he ended up throwing a huge potato salad party for his backers).

Tips to try it yourself

If you are going to try crowdfunding out yourself, here are a few suggestions from experts:

Two Do your research. 

See if your idea has been pitched before, and how well it did. This will give you an idea of what your competition is, and what worked (or didn’t) for others.

Three Plan your campaign. 

Plan everything from the initial pitch, to the progress updates, to the rewards and equity stakes you offer people in exchange for their investment.

Three Make frequent video updates.

 The most successful projects use compelling videos of the creators introducing their ideas, as well as updates showing progress underway.

Three Set your funding goal as low as possible. 

The way most sites work is that if you reach your minimum funding goal, you can keep the money, but if you fall even a dollar short, you get none. Set your goal low to successfully fund your project, but not so low that you can’t complete it. Angry backers asking for their money back is not a pleasant outcome.

As always, should you have any questions or concerns regarding your situation please feel free to call.

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