When is Bartering Taxable?

The notion of bartering may conjure an image of a crowded, bustling medieval bazaar. Dusty travelers, farmers perchance, haggle with merchants over textiles or metal tools. Live chickens are exchanged for handspun cloth and, eventually, everyone goes home happy.

Although usually less dusty, these types of transactions continue to occur in today’s high-tech modern world. In fact, it’s not unusual for small businesses — especially start-ups that are short on capital — to exchange goods or services instead of cash.

For example, a microbrewery might ask the graphic designer across the street to design its logo in exchange for several cases of beer. Contrary to popular belief, these bartering transactions are taxable. In this case, the graphic design company would be required to include the fair market value of the beer in its gross income.

Granted, an informal transaction like this may fly under the IRS’s radar. But business owners who engage in bartering should know that the value of products or services involved in these kinds of deals is generally considered taxable income. (And this is true even if you’re not a business.)

Companies involved in bartering may be required to file Form 1099-MISC. The penalties for failure to file can be harsh. Also, if you use a barter exchange to broker trades with other businesses, the exchange is required to report the proceeds on Form 1099-B. Contact us for further details.

How Spouse-Owned Businesses Can Reduce Self-Employment Taxes

If you own a profitable, unincorporated business with your spouse, you probably find the high self-employment (SE) tax bills burdensome. An unincorporated business in which both spouses are active is typically treated by the IRS as a partnership owned 50/50 by the spouses. (For simplicity, when we refer to “partnerships,” we’ll include in our definition limited liability companies that are treated as partnerships for federal tax purposes.)

For 2018, that means you’ll each pay the maximum 15.3% SE tax rate on the first $128,400 of your respective shares of net SE income from the business. Those bills can mount up if your business is profitable. To illustrate: Suppose your business generates $250,000 of net SE income in 2018. Each of you will owe $19,125 ($125,000 × 15.3%), for a combined total of $38,250. Fortunately, there may be ways your spouse-owned business can lower your combined SE tax hit.

Divorce Yourself From the Concept

While the IRS creates the impression that involvement by both spouses in an unincorporated business automatically creates a partnership for federal tax purposes, in many cases it will have a tough time making the argument — especially when the spouses have no discernible partnership agreement and the business hasn’t been represented as a partnership to third parties (such as banks and customers).

If you can establish that your business is a sole proprietorship (or a single-member LLC treated as a sole proprietorship for tax purposes), only the spouse who is considered the proprietor owes SE tax. So, let’s assume the same facts as in the previous example, except that your business is a sole proprietorship operated by one spouse. Now you have to calculate SE tax for only that spouse. For 2018, the SE tax bill is $23,172 [($128,400 × 15.3%) + ($121,600 × 2.9% Medicare tax)]. That’s much less than the combined SE tax bill from the first example ($38,250).

Show a Lopsided Ownership Percentage

Even if you do have a spouse-owned partnership, it’s not a given that it’s a 50/50 one. Your business might more properly be characterized as owned, say, 80% by one spouse and 20% by the other spouse, because one spouse does much more work than the other.

Let’s assume the same facts as in the first example, except that your business is an 80/20 spouse-owned partnership. In this scenario, the 80% spouse has net SE income of $200,000, and the 20% spouse has net SE income of $50,000. For 2018, the SE tax bill for the 80% spouse is $21,722 [($128,400 × 15.3%) + ($71,600 × 2.9%)], and the SE tax bill for the 20% spouse is $7,650 ($50,000 × 15.3%). The combined total SE tax bill is only $29,372 ($21,722 + $7,650).

Explore All Strategies

More-complicated strategies are also available. Contact us to learn more about how you can reduce your spouse-owned business’s SE taxes.

Study Up On the Tax Advantages of a 529 Savings Plan

With kids back in school, it’s a good time for parents (and grandparents) to think about college funding. One option, which can be especially beneficial if the children in question still have many years until heading off to college, is a Section 529 plan.


Tax-Deferred Compounding

529 plans are generally state-sponsored, and the savings-plan option offers the opportunity to potentially build up a significant college nest egg because of tax-deferred compounding. So, these plans can be particularly powerful if contributions begin when the child is young. Although contributions aren’t deductible for federal purposes, plan assets can grow tax-deferred. In addition, some states offer applicable state tax incentives.

Distributions used to pay qualified expenses (such as tuition, mandatory fees, books, supplies, computer-related items and, generally, room and board) are income-tax-free for federal purposes and, in many cases, for state purposes as well. (The Tax Cuts and Jobs Act changes the definition of “qualifying expenses” to include not just postsecondary school costs, but also primary and secondary school expenses.)

Additional Benefits

529 plans offer other benefits, too. They usually have high contribution limits and no income-based phaseouts to limit contributions. There’s generally no beneficiary age limit for contributions or distributions. And the owner can control the account — even after the child is a legal adult — as well as make tax-free rollovers to another qualifying family member.

Finally, 529 plans provide estate planning benefits: A special break for 529 plans allows you to front-load five years’ worth of annual gift tax exclusions, which means you can make up to a $75,000 contribution (or $150,000 if you split the gift with your spouse) in 2018. In the case of grandparents, this also can avoid generation-skipping transfer taxes.

Minimal Minuses

One negative of a 529 plan is that your investment options are limited. Another is that you can make changes to your options only twice a year or if you change the beneficiary.

But whenever you make a new contribution, you can choose a different option for that contribution, no matter how many times you contribute during the year. Also, you can make a tax-free rollover to another 529 plan for the same child every 12 months.

More to Learn

We’ve focused on 529 savings plans here; a prepaid tuition version of 529 plans is also available. If you’d like to learn more about either type of 529 plan, please contact us.

TCJA Draws a Silver Lining Around the Individual AMT

The Tax Cuts and Jobs Act (TCJA) didn’t eliminate the individual alternative minimum tax (AMT). But the law did draw a silver lining around it. Revised rules now lessen the likelihood that many taxpayers will owe substantial taxes under the AMT for 2018 through 2025.


Parallel Universe

Think of the AMT as a parallel universe to the regular federal income tax system. The difference: The AMT system taxes certain types of income that are tax-free under the regular tax system and disallows some regular tax deductions and credits.

The maximum AMT rate is 28%. By comparison, the maximum regular tax rate for individuals has been reduced to 37% for 2018 through 2025 thanks to the TCJA. For 2018, that 28% AMT rate starts when AMT income exceeds $191,100 for married joint-filing couples and $95,550 for others (as adjusted by Revenue Procedure 2018-18).

Exemption Available

Under the AMT rules, you’re allowed a relatively large inflation-adjusted AMT exemption. This amount is deducted when calculating your AMT income. The TCJA significantly increases the exemption for 2018 through 2025. The exemption is phased out when your AMT income surpasses the applicable threshold, but the TCJA greatly increases those thresholds for 2018 through 2025.

If your AMT bill for the year exceeds your regular tax bill, you must pay the higher AMT amount. Originally, the AMT was enacted to ensure that very wealthy people didn’t avoid paying tax by taking advantage of “too many” tax breaks. Unfortunately, the AMT also hit some unintended targets. The new AMT rules are better aligned with Congress’s original intent.

Under both old and new law, the exemption is reduced by 25% of the excess of AMT income over the applicable exemption amount. But under the TCJA, only those with high incomes will see their exemptions phased out, while others — particularly middle-income taxpayers — will benefit from full exemptions.

Need to Plan

For many taxpayers, the AMT rules are less worrisome than they used to be. Let us help you assess your liability and help you plan accordingly.

 

Sidebar: High-income earners back in the AMT spotlight

Before the Tax Cuts and Jobs Act (TCJA), many high-income taxpayers weren’t affected by the alternative minimum tax (AMT). That’s because, after multiple legislative changes, many of their tax breaks were already cut back or eliminated under the regular income tax rules. So, there was no need to address the AMT.

If one’s income exceeds certain levels, phaseout rules chip away or eliminate other tax breaks. As a result, higher-income taxpayers had little or nothing left to lose by the time they got to the AMT calculation, while many upper-middle-income folks still had plenty left to lose. Also, the highest earners were in the 39.6% regular federal income tax bracket under prior law, which made it less likely that the AMT — with its maximum 28% rate — would hit them.

In addition, the AMT exemption is phased out as income goes up. This amount is deducted in calculating AMT income. Under previous law, this exemption had little or no impact on individuals in the top bracket, because the exemption was completely phased out. But the exemption phaseout rule made upper-middle-income taxpayers more likely to owe AMT under previous law. Suffice it to say that, under the TCJA, high-income earners are back in the AMT spotlight. So, proper planning is essential.

People on the Move!

We are excited to announce our promotions for 2018. We look forward to what the future holds for you all. Thank you for all you do for our clients and our firm!

Semi-Senior Accountant

Nick Hoff, Alton

Emily Keeven, Highland

Kayla Ervin, Edwardsville

Katelin Feldmann, Alton

Michael Kanallakan, Jerseyville

Maggie Stock, Belleville

Travis Wellen, Belleville

Noah Feldmeier, Belleville

Senior Accountant

Josh Goodnick, Belleville

Justin Goode, Jerseyville

Tyler Jackson, Alton

Jay Gensert, Alton

Kelly Kellerman, Belleville

Garrett Hay, Belleville

Accounting Supervisor

Jenni Flowers, Carrollton

Manager

Carrie Evans, Highland

Andrea Suhre, Belleville

 

Is Your Company Overpaying on Sales and Use Taxes?

It’s a safe bet that state tax authorities will let you know if your business hasn’t paid enough sales and use taxes. But the lines of communication may not be so open if you’re overpaying. For this reason, many businesses use reverse audits to find overpayments so they can seek reimbursements.

In most states, businesses are exempt from sales tax on equipment used in manufacturing or recycling, and many states don’t require them to pay taxes on the utilities and chemicals used in these processes, either. In some states, custom software and other computer equipment are exempt if used for research and development projects. These are just a few examples of potentially available exemptions.

Many companies have sales and use tax compliance systems to guard against overpaying, but if you haven’t reviewed yours recently, check to make sure it’s functioning properly. Employee turnover, business expansion or downsizing, and simple mistakes all can take their toll.

A formal reverse audit can extend across your business, going back as far as the statute of limitations on state tax reviews. If your state auditors can review all records for the four years preceding the audit, for example, the audit could encompass the same timeframe.

To be clear, reverse audits are often time consuming and complex. But a well-executed one can not only reap tax refund rewards now, but also help update your compliance systems going forward. Let us help you target the exemptions available to your business and ensure refund claims are properly prepared before submittal.

Proudly Introducing our New Principals

We are very excited to officially announce the two newest members of our Principal group, Danny Phipps, CPA and Cory Gallivan, CPA. Danny has been working in our Carrollton and Jerseyville offices since 1994, and Cory has been with our Alton office since 2000. They are both dynamic, passionate leaders in our firm and we look forward to all they bring to our leadership team.

Congratulations, Danny and Cory!

Assessing Your Exposure to the Estate Tax and Gift Tax

When Congress was debating tax law reform last year, there was talk of repealing the federal estate and gift taxes. As it turned out, rumors of their demise were highly exaggerated. Both still exist and every taxpayer with a high degree of wealth shouldn’t let either take their heirs by surprise.


Exclusions and Exemptions

For 2018, the lifetime gift and estate tax exemption is $11.18 million per taxpayer. (The exemption is annually indexed for inflation.) If your estate doesn’t exceed your available exemption at your death, no federal estate tax will be due.

Any gift tax exemption you use during life does reduce the amount of estate tax exemption available at your death. But not every gift you make will use up part of your lifetime exemption. For example:

  • Gifts to your U.S. citizen spouse are tax-free under the marital deduction, as are transfers at death (bequests).
  • Gifts and bequests to qualified charities aren’t subject to gift and estate taxes.
  • Payments of another person’s health care or tuition expenses aren’t subject to gift tax if paid directly to the provider.
  • Each year you can make gifts up to the annual exclusion amount ($15,000 per recipient for 2018) tax-free without using up any of your lifetime exemption.

It’s important to be aware of these exceptions as you pass along wealth to your loved ones.

A Simple Projection

Here’s a simplified way to help project your estate tax exposure. Take the value of your estate, net of any debts. Also subtract any assets that will pass to charity on your death.

Then, if you’re married and your spouse is a U.S. citizen, subtract any assets you’ll pass to him or her. (But keep in mind that there could be estate tax exposure on your surviving spouse’s death, depending on the size of his or her estate.) The net number represents your taxable estate.

You can then apply the exemption amount you expect to have available at death. Remember, any gift tax exemption amount you use during your life must be subtracted. But if your spouse predeceases you, then his or her unused estate tax exemption, if any, may be added to yours (provided the applicable requirements are met).

If your taxable estate is equal to or less than your available estate tax exemption, no federal estate tax will be due at your death. But if your taxable estate exceeds this amount, the excess will be subject to federal estate tax.

Be aware that many states impose estate tax at a lower threshold than the federal government does. So, you could have state estate tax exposure even if you don’t need to worry about federal estate tax.

Strategies to Consider

If you’re not sure whether you’re at risk for the estate tax, or if you’d like to learn about gift and estate planning strategies to reduce your potential liability, please contact us.

Charitable Contributions After the Tax Cuts and Jobs Act

Donating to charity is usually a selfless act, but that good deed in many cases also translated to a tax deduction for those that itemized on their annual filings. However, since the TCJA nearly doubled the standard deduction, this may result in less taxpayers itemizing. If you are one of these people, there may still be a way to benefit from charitable contributions without itemizing.

The TCJA almost doubled the standard deduction for most taxpayers. As a result, fewer individuals will itemize their deductions. The cap on taxes that may be claimed as an itemized deduction has also been limited to $10,000 for joint filers. These factors will also result in fewer individuals receiving any tax benefit from their charitable contributions.

There is still a way for certain individuals who don’t itemize to benefit from their charitable contributions. Taxpayers who are at least 70.5 years old and receiving required minimum distributions from their IRA (but not SIMPLE IRAs or SEP-IRAs) may have up to $100,000 transferred directly from their IRA to a qualified charity. The amount transferred to the charity reduces the otherwise taxable IRA distribution. These transfers are referred to as Qualified Charitable Distributions (QCDs). QCDs effectively allow the taxpayer to deduct the charitable contribution since these amounts reduce the taxable IRA distribution.


Let’s look at an example.

This taxpayer is 72 years old and has a required minimum distribution of $12,000. He does not have enough to itemize deductions and has traditionally given $5,000 to his church. Also, assume he has a combined federal and state tax rate of 30%. If he directs $5,000 of his required $12,000 distribution to be paid directly to his church, he is only taxed on $7,000 of the IRA distribution. If the amount is not directly transferred, he has $12,000 of taxable IRA distributions with no offsetting charitable deduction. By taking advantage of a QCD, he has saved $1,500 ($5,000 x 30%).

All taxpayers at least 70.5 years old and taking required distributions from their IRA should consider using the QCD to make their charitable contributions. Please contact us if you would like to discuss the QCD and whether this method would benefit you.

Entity Selection After the Tax Cuts and Jobs Act

Determining how your business is organized is often thought of as something you only do when your business is formed. In reality, changes in ownership, the business climate, and the passage of new tax laws are other important times to reevaluate whether your business is ideally organized. With the passage of the Tax Cuts and Jobs Act (TCJA), now is a good time to bring this subject to your attention.

Reading the headlines, one might think that with the top regular corporate income tax rate decreasing 40% (from 35% to 21%), every business should be organized as a regular corporation. However, the analysis is far from that simple. While it is true that the top rate decreased by 40% for some corporations, it is also important to note that many passthrough entities (partnerships and S corporations) also received a significant rate reduction through a newly created deduction. In fact, depending on where the business is located, it may be more beneficial to exit the regular corporate structure and move to a passthrough-type business.

Some factors that favor maintaining or switching to regular corporate status include low state corporate income taxes, a desire and ability of the corporation to maintain earnings in the corporation without paying those out to shareholders, and certain service type businesses (such as doctors, lawyers, accountants, consultants, etc.).

Some factors that favor maintaining or switching to passthrough status include higher state corporate income taxes, a need or desire to distribute most of the earnings on an annual basis, businesses that may be incurring losses, and businesses that hold appreciable assets such as real estate.

The above are just a few of the considerations in determining if your business is organized in the most tax-efficient manner. If you’re at all concerned about your current business and how its structured, we would be happy to discuss how the TCJA impacts your situation and if it makes sense to consider an alternative entity.