Category Archives: Kevin’s Korner

Kevin’s monthly updates for Shaw & Associates

The Shaw Atlas – March 2018 Article

Tax Cuts and Jobs Act: Pass-Through Deduction

This month’s article details a rather complicated section of the Tax Cuts and Jobs Act, and we would like to break it down to its simplest form so you can rest easy knowing exactly how it relates to your business. Let’s discuss Section 199A of the law which covers the new 20% deduction for pass-through income from S Corporations, LLCs, partnerships, and sole proprietorships.

Right off the bat, if you receive pass-through income and your taxable income is less than $315,000, you automatically qualify to receive a special 20% deduction on the LESSER OF your qualified business income (QBI) or taxable income.

If this applies to you, you have all the information you need. That was easy, right?

Things get a bit more complicated as taxable income rises over $315,000, but here is an essential overview of the key aspects.

The first question you must answer is whether or not you qualify as a “specified service business.” As currently defined, this includes…

  • Accounting
  • Law firms
  • Health care
  • Financial services
  • Consulting, and
  • Brokerage services

Additionally, if your business is dependent on the reputation of you or your employees to generate revenue, you also fall under the “specified service business” category. It is important to note as well that architectural and engineering firms are exempt from consideration as specified service businesses.

From here, let’s break down the businesses into two subsections: Specified Service Businesses and Non-Specified Service Businesses, and discuss how the credit rules apply within each category.

Specified Service Businesses

As noted above, if you receive pass-through income and your taxable income is less than $315,000, you qualify for a 20% deduction on the lesser of your QBI or taxable income.

If your taxable income is anywhere between $315,000 and $415,000, you receive a partial deduction based upon a prorated calculation.

If your taxable income is greater than $415,000 you do not qualify for this special deduction.

Non-Specified Service Businesses

On the other side of the scale, if your business does not fall under the “specified services” net, there may be additional calculations you must make.

Again, as stated above, if you receive pass-through income and your taxable income is less than $315,000, you automatically qualify for a 20% deduction on the lesser of your QBI or taxable income.

Under the “non-specified service business” net, if your taxable income is between $315,000 and $415,000, you qualify for a deduction that is determined using a prorated calculation factoring in W-2 wages and qualified business property as discussed below.

If your taxable income is greater than $415,000, you must meet an additional standard related to W-2 wages paid to your employees and/or your qualified business property. In this scenario, you may deduct the LESSER OF

  • 20% of your QBI or taxable income, or
  • The greater of 50% of W-2 wages paid to employees or 25% of W-2 wages plus 2.5% of qualified business property

You may be thinking, wait…what? We know how you feel. To clear things up, let’s look at it again using an example.

Assume that your company has a QBI of $500,000 per year, taxable income of $420,000, the total amount of W-2 wages paid to employees is $150,000, and your qualified business property is equal to $1,000,000. This would mean…

    • 20% of your QBI (20% x 500,000 = 100,000)
    • 20% of your taxable income (20% x 420,000 = 84,000)
    • 50% of W-2 wages paid to employees (50% x 150,000 = 75,000), and
    • 25% of W-2 wages plus 2.5% of qualified business property
    • (25% x 150,000 = 37,500)
    • (2.5% x 1,000,000 = 25,000)
      • Which, together, equals 62,500

The first step is to determine which is the lesser value between your anticipated QBI deduction and your taxable income deduction. In this case, it would be the taxable income deduction at $84,000.

Next, calculate which is the greater value between 50% of W-2 wages ($75,000) and 25% of W-2 wages plus 2.5% of qualified business property ($62,500). We can conclude here that the greater value is 50% of W-2 wages at $75,000.

Following so far?

Now that we know which two values to compare, the final step is to take the LESSER OF these two deduction values (taxable income of $84,000 and 50% of W-2 wages at $75,000). The smaller value here is $75,000, and therefore would be the final overall value your business could deduct.

Clear as mud, right? We understand that Section 199A is a complicated element of the new tax law and we would be delighted to discuss how it applies to you. We recommend contacting Shaw & Associates (or your own financial advisor if you use a different tax preparer) to determine the impact of this law on your business specifically and how to proceed. Please give us a call or schedule an appointment—following tax season please—and we will be happy to help!

The Shaw Atlas – February 2018 Article

Tax Cuts and Jobs Act: Meals & Entertainment

There has been a great deal of information circulating recently about the Tax Cuts and Jobs Act. We aim to provide you with access to knowledge that will ensure you feel confident about these changes and how they may affect you or your business.

As we indicated, this article will be the first of a three-part series addressing the new tax law. To begin, there have been some important shifts in business deductions for meals and entertainment.

2017 Meals & Entertainment

Prior to the new tax law, meals and entertainment charges related to business could typically be deducted by 50%. Deductible meal and entertainment expenses under this category included meals consumed while traveling for business, entertaining customers for business purposes, and attending a conference, business lunch or meeting.

There were also expenses that could be 100% deductible if the meals were provided to the employee as a means of convenience for the employer. This includes providing an on-site cafeteria to minimize lunch breaks or make up for a lack of dining options near the office. A meeting held on-site during lunch hours was also 100% deductible.

2018 Changes

Under the Tax Cuts and Jobs Act, signed into law on December 22, 2017, many of the expenses that were once 50% deductible have since been eliminated. However, there have been significant differences in interpretations of this new law by experts, Currently what we know to be true is that entertainment expenses intended for current or potential clients, such as sporting events or a round of golf, are no longer deductible. Still unclear is whether or not meal expenses for current or potential clients will fall under the same category as entertainment. We are waiting for more clarification from the IRS on this subject, which we expect to be issued in 2018.

Additionally, expenses for employee meals at work have been reduced to a 50% deduction. Any charges made for these purposes between January 1, 2018 and December 31, 2025 will continue to be 50% deductible. Following December 31, 2025 they will not be deductible.

How to Record Meals and Entertainment in Your Books

In order for us to make the proper judgement when preparing your taxes until more clarification is given, we ask that you create and use the following accounts in your books for meals and entertainment expenses as of January 1, 2018:

  • Entertainment: includes golfing, skiing, sporting events, etc. (non-deductible)
  • Meals-travel: Any meal for business travel outside of the 50-mile geographic area of your business (deductible at 50%)
  • Meals-employer convenience: Meals for employees located on business premises (deductible at 50%)
  • Meals-other: (waiting for IRS clarification on deductibility)
  • Holiday, summer parties: All costs for such parties for staff including meals, supplies, site charges, etc. (deductible at 100%)

If you have any unanswered questions regarding this plan and how it impacts you, please call us to schedule an appointment for after April 17.

KRFC Radio Tax Tips

I have partnered with KRFC 88.9 public radio to do a series of tax related episodes on Money Matters: Investing In Your Financial Future for the next few weeks. As the episodes air over the next few weeks, we will post them here for our clients and friends to listen to (in case you miss the airings on the radio). You can catch the episodes as they air every Tuesday until March 3, 2015 at 9:00 am on 88.9 KRFC.  

Episode 1 Tuesday Jan. 27, 2015: Benefits of Legal Entities for Small Business Owners 

Episode 2 Tuesday Feb. 3, 2015: How Small Business Owners Can Save on Taxes

Episode 3 Tuesday Feb. 10, 2015: Commonly Asked Questions About Deductions for Small Businesses

Thank You, and Don’t Keep Us A Secret

Now that tax season is behind us I want to take a moment to thank all of our clients for allowing us to continue to be their tax and financial advisor. We understand that it is very important that you have an advisor that you can trust and whose primary concern is for your financial well-being. We have an annual survey that we ask you to complete and are pleased to report that your responses have been very favorable. We hope that we are living up to your expectations and that you will let us know if we need to improve in any areas. There is a radio commercial currently airing that I find a bit corny, but which sums up my feelings as to our relationship with our clients. To paraphrase, if you like our services tell a friend as there is no higher compliment than your trust in referring us to that person. If you’re not happy, please call me so I can address any issues you may have.