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.

“Obamacare” and Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs)

One of President Trump’s most vocal campaign promises was to eliminate the Affordable Care Act (ACA), or “Obamacare”. While some steps have been taken toward accomplishing this goal, the ACA still remains in tact for a few of its key provisions. One of these include Market Reforms, which imposes financial penalties on employers who choose to reimburse their employees for health insurance premiums as a way to circumvent providing group health insurance.

Even though some members of Congress are actively attempting to eliminate various provisions of the Affordable Care Act (ACA), there are many of the ACA provisions which currently remain in effect. The Market Reform provisions are one of those. One of the key provisions of the Market Reforms prohibits employers from reimbursing employees for health insurance premiums. Reimbursing employees for health insurance traditionally had been a way for employers to provide a tax-free fringe benefit to employees where the employer did not maintain its own group health insurance plan. Violations of the Market Reform provisions result in a harsh penalty of $100 per day per employee ($36,500 per employee per year!).

Fortunately, the 21st Century Cures Act created QSEHRAs as a remedy to this prohibition. Employers establishing a QSEHRA are exempt from the $100 per day penalty and can reimburse employees for the cost of health insurance premiums. Like most tax benefits, there are detailed requirements that must be followed to receive tax-free treatment. The following is a list of the major requirements.

  1. Reimbursements must be funded solely by a small employer (employed less than 50 full-time employees during the prior year),
  2. Reimbursement may only take place after the employee provides proof of minimum essential coverage,
  3. Reimbursement may not exceed certain amounts
    1. $5,050 for single coverage or
    2. $10,250 for family coverage, and
  4. Reimbursement must be offered on a non-discriminatory basis to all eligible employees.

In addition, the arrangement must be written and timely communicated to each eligible employee. While there are some additional minor details that must be followed, the QSEHRA has brought back a valuable employer and employee benefit that appeared to be dead immediately following enactment of the Affordable Care Act. Please contact us if you would like to discuss how this type of arrangement may benefit your business.

South Dakota v. Wayfair – What’s Next for Sales Tax?

Over the past decade, more and more big-box stores are feeling the effects of online shopping. Sellers like Amazon have lured consumers in with free shipping and the ease of shopping from the comfort of their couch. However, since online shopping has become more and more prevalent, the question of how to tax these purchases has become a major topic of discussion. A recent Supreme Court decision will likely change the way some online marketplaces do business.

 

What is nexus?

First, let’s define a term that you’ll hear a lot when discussing this case. “Nexus” for this purpose is often used to determine if a taxpayer has a sufficient connection with a state. It is the determining factor of whether an out-of-state business is required to collect sales tax on sales generated into that state. Each state has its own rules and guidelines for determining nexus. Some factors that might affect nexus include if the business has a physical location or employees working in the state in question, or how much revenue is generated in that state.

 

South Dakota v. Wayfair

So why is this a topic of discussion now? On June 21, 2018, the U.S. Supreme Court issued its opinion in South Dakota v. Wayfair, a landmark sales and use tax nexus case that will have implications for many online sellers and multistate businesses. In a 5-4 decision, the Court ruled that a state can require an out-of-state seller to collect sales tax on sales to customers in that state, even though the seller lacks an in-state physical presence.

In Wayfair, the Supreme Court considered the constitutionality of a South Dakota law that requires certain remote sellers to register for, collect, and remit South Dakota sales tax. Under that law, a remote seller has sales tax nexus with South Dakota if the seller in the current or previous calendar year met either of the two characteristics below:

  1. Seller had gross revenue from sales of taxable goods and services delivered into the state exceeding $100,000.
  2. Seller sold taxable goods and services for delivery into the state in 200 or more separate transactions.

The Commerce Clause of the U.S. Constitution requires that a seller have “substantial nexus” with a state before the state can require the seller to collect and remit sales and use taxes. Under a precedent affirmed in the 1992 case of Quill Corp. v. North Dakota, this nexus depended on whether the seller had a physical presence in the state. The Wayfair decision is considered an “economic” nexus, where states assert jurisdiction to impose sales tax collection based on certain sales thresholds. It’s not uncommon for states to find different ways to establish nexus. Some states have established this boundary based on the company’s activities and property, with others even harpooning digital mediums, such as “click throughs” and “cookies” to identify in-state customers which may create nexus.


Considerations for Sellers

The most immediate impact from Wayfair will be on sellers with a significant virtual or economic presence in a state that asserts economic nexus. Sellers delivering taxable products or services into South Dakota (and other economic nexus states) will need to determine if they surpassed the dollar amount or transaction volume thresholds for establishing nexus with the state. Sellers will need to do this analysis for each state that has adopted an economic nexus threshold policy and they should be prepared for states to adopt and aggressively enforce expanding nexus provisions. Our home state of Illinois recently adopted such a rule.

 

Next Steps

We expect state revenue departments to issue guidance regarding the Wayfair decision in the coming weeks and months, and we will be following those developments closely. In the meantime, if you would like to discuss how this decision may impact your business, please do not hesitate to contact us.

Proudly Introducing Our New CPAs!

We are excited to share that we have three new CPAs roaming our halls! Patrick Stowe of Edwardsville, Taylor Jarvis of Highland, and Patrick Meyer of Highland all passed the CPA exam in the month of June.

Congratulations on this great accomplishment and we look forward to a bright future for you all!

 

Four Questions to Ask Before Hiring Household Help

When you hire someone to work in your home, you may become an employer. Thus, you may have specific tax obligations, such as withholding and paying Social Security and Medicare (FICA) taxes and possibly federal and state unemployment insurance. Here are four questions to ask before you say, “You’re hired.”

 

1. Who’s considered a household employee?

A household worker is someone you hire to care for your children or other live-in family members, clean your house, cook meals, do yard work or provide similar domestic services. But not everyone who works in your home is an employee.

For example, some workers are classified as independent contractors. These self-employed individuals typically provide their own tools, set their own hours, offer their services to other customers and are responsible for their own taxes. To avoid the risk of misclassifying employees, however, you may want to assume that a worker is an employee unless your tax advisor tells you otherwise.

2. When do I pay employment taxes?

You’re required to fulfill certain state and federal tax obligations for any person you pay $2,100 or more annually (in 2018) to do work in or around your house. (The threshold is adjusted annually for inflation.)

In addition, you’re required to pay the employer’s half of FICA (Social Security and Medicare) taxes (7.65% of cash wages) and to withhold the employee’s half. For employees who earn $1,000 or more in a calendar quarter, you must also pay federal unemployment taxes (FUTA) equal to 6% of the first $7,000 in cash wages. And, depending on your resident state, you may be required to make state unemployment contributions, but you’ll receive a FUTA credit for those contributions, up to 5.4% of wages.

You don’t have to withhold federal (and, in most cases, state) income taxes, unless you and your employees agree to a withholding arrangement. But regardless of whether you withhold income taxes, you’re required to report employees’ wages on Form W-2.

3. Are there exceptions?

Yes. You aren’t required to pay employment taxes on wages you pay to your spouse, your child under age 21, your parent (unless an exception is met) or an employee who is under age 18 at any time during the year, providing that performing household work isn’t the employee’s principal occupation. If the employee is a student, providing household work isn’t considered his or her principal occupation.

4. How do I make tax payments?

You pay any federal employment and withholding taxes by attaching Schedule H to your Form 1040. You may have to pay state taxes separately and more frequently (usually quarterly). Keep in mind that this may increase your own tax liability at filing, though the Schedule H tax isn’t subject to estimated tax penalties.

If you owe FICA or FUTA taxes or if you withhold income tax from your employee’s wages, you need an employer identification number (EIN).

There’s no statute of limitations on the failure to report and remit federal payroll taxes. You can be audited by the IRS at any time and be required to pay back taxes, penalties and interest charges. We can help ensure you comply with all the requirements.

Don’t Let the Kiddie Tax Play Costly Games With You

It’s not uncommon for parents, grandparents and others to make financial gifts to minors and young adults. Perhaps you want to transfer some appreciated stock to a child or grandchild to start them on their journey toward successful wealth management. Or maybe you simply want to remove some assets from your taxable estate or shift income into a lower tax bracket. Whatever the reason, beware of the “kiddie tax.” It can play costly games with the unwary.

 

An Evolving Concept

Years ago, the kiddie tax applied only to those under age 14. But, more recently, the age limits were revised to children under age 19 and to full-time students under age 24 (unless the students’ earned income is more than half of their own support).

Another important, and even more recent, change to the kiddie tax occurred under the Tax Cuts and Jobs Act (TCJA). Before passage of this law, the net unearned income of a child was taxed at the parents’ tax rates if the parents’ tax rates were higher than the tax rates of the child. The remainder of a child’s taxable income — in other words, earned income from a child’s job, plus unearned income up to $2,100 (for 2018), less the child’s standard deduction — was taxed at the child’s rates. The kiddie tax applied to a child if the child:

  • Hadn’t reached the age of 19 by the close of the tax year, or the child was a full-time student under the age of 24 whose earned income was less than half of their own support, and either of the child’s parents was alive at such time,
  • Had unearned income exceeding $2,100 (for 2018), and
  • Didn’t file a joint return.

Now, under the TCJA, for tax years beginning after December 31, 2017, the taxable income of a child attributable to earned income is taxed under the rates for single individuals, and taxable income of a child attributable to net unearned income is taxed according to the brackets applicable to trusts and estates. This rule applies to the child’s ordinary income and his or her income taxed at preferential rates. As under previous law, the kiddie tax can potentially apply until the year a child turns 24.

The Tax in Action

Let’s say you transferred to your 16-year-old some stock you’d held for several years that had appreciated $10,000. You were thinking she’d be eligible for the 0% long-term gains rate and so could sell the stock with no tax liability for your family. But you’d be in for an unhappy surprise: Assuming your daughter had no other unearned income, in 2018 $7,900 of the gain would be taxed at the estate and trust capital gains rates, equal to a tax of $795.

Or let’s say you transferred the appreciated stock to your 18-year-old grandson with the plan that he could sell the stock tax-free to pay for his college tuition. He won’t end up with the entire $10,000 gain available for tuition because of the kiddie tax liability.

Fortunately, there may be ways to achieve your goals without triggering the kiddie tax. For example, if you’d like to shift income and you have adult children (older than 24) who’re no longer subject to the kiddie tax but in a lower tax bracket, consider transferring income-producing or highly appreciated assets to them.

A Risky Time

Many families wait until the end of the year to make substantial, meaningful gifts. But, given what’s at stake, now is a good time to start a methodical process to determine the best possible way to pass along your wealth. After all, with the many changes made under the TCJA, the kiddie tax might affect you in ways you weren’t expecting. The best advice is to simply run the numbers with an expert’s help. Please contact us for more information and some suggestions on how to achieve your financial goals.

Scheffel Boyle Ranks #14 on St. Louis’ Largest Accounting Firms Lists

The St. Louis Business Journal recently released its annual Largest Accounting Firms lists and ranked Scheffel Boyle as the 14th largest firm in the entire St. Louis region. The Journal publishes two lists for ranking CPA firms each year: one based on number of CPAs and the other on number of professionals. Scheffel Boyle ranked #14 on both lists this year.

Click here to view St. Louis’ largest accounting firms ranked by CPAs.

Click here to view St. Louis’ largest accounting firms ranked by professionals.