CPA Tips, Tricks and Information

Another Great Reason to Live in Missouri

Beautiful Ozarks, great people, and great sports teams all are reasons to love living in Missouri. Another more reason is Missouri’s tax credits. Unlike many states whose tax credits are only applicable to certain taxpayers, Missouri has tax credits that can be used by a much broader population.

One of the Missouri tax credits, which is most beneficial to a large group of individuals is the Self-Employed Health Insurance (SHC) credit.[1] As the instructions on Form MO-SHC states “if you are a self-employed individual and were not able to deduct all of your health care premiums from your federal adjusted gross income, you may be eligible for a tax credit equal to the portion of your federal tax liability incurred due to the inclusion of your health care premiums in your federal adjusted gross income.”[2]

In other words, self-employed individuals who pay health insurance premiums but have a loss on their business may not be able to deduct these health insurance premiums on their federal tax return. These premiums would only be deductible as an itemized deduction which has deductibility limits. Missouri allows a portion of these health insurance premiums as a credit on the individual’s Missouri tax return.

Since the calculation is a little confusing, let’s look at an example. “RT” is a Missouri resident who has adjusted gross income (AGI) on her federal return of $65,000. RT’s spouse makes $75,000 at his job, which doesn’t provide health insurance. RT just started her own business so has a loss the first year of ($10,000). Both are 41 years old and they have two children. Health insurance costs RT $5,000 per year (assume RT doesn’t qualify for any subsidies), and RT has no other medical expenses. Since RT has a loss on her business and her medical expenses are under 10% of her AGI (itemized deduction floor), RT would not be able to deduct any of the health insurance premiums on her federal return.

Missouri would allow RT a tax credit on her Missouri tax return for 2016 (approximate):

Federal Taxable Income: $32,500

Amount RT paid for health insurance premiums: $5,000

Federal Taxable Income without health Insurance Premiums: $27,500

Federal Tax Liability RT Actually Paid: $3,950

Estimated Federal Tax Deducting Premiums (on $27,500): $3,200

Self Employed Health Insurance Credit on Missouri return: $750

So even though the federal government will not allow RT to take a deduction for the health insurance premiums paid for her family, Missouri allows a tax credit for the additional federal tax RT had to pay.

Please contact CPA WorldTax at taxinfo@cpaworldtaxllc.com or 888-512-4860 to see how Missouri tax credits affect you.

[1] http://dor.mo.gov/forms/MO-SHC.pdf [accessed 6/30/17] & http://www.moga.mo.gov/mostatutes/stathtml/14300001191.html [accessed 6/30/17].

[2] http://dor.mo.gov/forms/MO-SHC.pdf [accessed 6/29/17].

Kansas Taxpayers Hit with a Quadruple Whammy in 2017

On June 6, 2017, the Kansas Legislature enacted SB 30 into law. SB 30 raises tax rates and repeals the exclusion of income for business, rental and farm income. Changes in deductions and credits (mainly lifting the limitations on itemized deductions and enacting a child and dependent care credit) don’t take effect until 2018.

*Many Kansas taxpayers will be in the bullseye for their 2017 state taxes due to recent changes.*

SB 30’s intent was to repeal many of the key parts of Governor Sam Brownback’s 2012 tax cuts. What many Kansas taxpayers don’t realize is that in the intervening years, the KS Legislature eliminated deductions and credits to try to make up the shortfall caused by the 2012 tax cuts. This included limiting itemized deductions (namely eliminating a deduction for medical expenses and only allowing a 50% deduction for real estate & personal property taxes and mortgage interest) and eliminating the dependent care credit. SB 30 phases these deductions and credits back in, but the phase-in doesn’t start until 2018. This causes some Kansas taxpayers to get hit with a quadruple whammy in 2017.

Let’s take hypothetical taxpayer “BT” as an example. BT is a single dad who owns a small service company. He has two daughters, age 2 and 4. BT owns a home in Johnson County and nets $85,000 from his business (approximately the median income for Johnson County). BT paid $12,750 in child care costs in 2017 for his two daughters. Below is BT’s approximate Kansas tax liability in 2017.

Approximate Kansas Tax Liability	$2,800
Increase due to tax rate changes	$264.00
Decrease in taxes if could deduct itemized deductions in full	$346.00
Decrease in taxes if DCC implemented	$300.00
Kansas Tax liability if tax rates had not changed and deductions/credits fully implemented	$1,890.00

BT would not have paid any Kansas tax liability in 2016 because all of his income is self-employment income.
BT is now taxed on this business income. But he is taxed on the new tax rates, not the rates prior to 2017. This raises his tax liability approximately $264.
BT paid $13,314 in real estate taxes, personal property (auto) taxes and mortgage interest on his home. These itemized deductions are limited to 50% in 2017. If BT was able to deduct these fully, he could have saved $346 ($6,657 * 5.2%).
BT paid $12,750 in child care costs in 2017. The federal dependent care credit is $1,200. The Kansas dependent care credit (25% of federal credit) will be phased back in, but not until 2018. BT is paying an additional $300 in Kansas tax liability in 2017 because he is not benefiting from the Kansas dependent care credit.

BT is getting hit by a quadruple whammy on his 2017 Kansas tax return because of Kansas tax law changes from 2012-2017. Please contact CPA WorldTax at taxinfo@cpaworldtaxllc.com or 888-512-4860 to see how the Kansas tax law changes will affect you.

BIG Tax Changes for Kansas Taxpayers

The Kansas Legislature recently made big changes to the tax code.

June 6, 2017 brought big changes to Kansas Taxpayers. The Kansas Legislature overrode Governor Brownback’s veto, passing SB 30 into law. SB 30 repeals many of the tax cuts enacted during 2012.

Most Kansas taxpayers will be impacted by SB 30 and many will pay more in Kansas tax starting in 2017.

Beginning in 2017:

Repeal of the income tax adjustment for income or losses from Schedule C, Schedule E or Schedule F.
Net Operating Losses-Reinstatement of the federal net operating loss deduction.
Increase individual income tax rates:
- Before SB 30 -Two tax brackets with a top rate of 4.6%.
- After SB 30 -Three-bracket system with a top rate of 5.2% for taxable income over $30,000 ($60,000 for married filing jointly).
Itemized Deductions will not change. This means that itemized deductions will be limited to the following amounts on the federal return:
- 100% of charitable contributions
- 50% of mortgage interest
- 50% of property taxes

Beginning in 2018 and beyond:

Individual Income tax rates will increase to a top rate of 5.7% for taxable income over $30,000 ($60,000 for married filing jointly).
Itemized Deductions will gradually be reinstated to the following amounts on the federal return:
- 2018-deduct 50% mortgage interest, property taxes and medical expenses
- 2019-deduct 75% mortgage interest, property taxes and medical expenses
- 2020 and beyond-100% mortgage interest property taxes and medical expenses

Charitable Contributions are 100% deductible in all years.

Reduce the low income exclusion to $2,500 (single) and $5,000 (married filing jointly). This exclusion provides taxpayers with taxable income below the exclusion amounts to have a tax liability of zero. In 2017 the low income exclusion was $5,000 (single) and $12,500 (married filing joint).
Reenact a credit for child and dependent care expenses
- 2018-12.5% of allowable federal amount
- 2019-18.75% of allowable federal amount
- 2020 and beyond-25% of allowable federal amount

As you can see from the above summary, 2017 will be an especially hard year for Kansas taxpayers. The exclusion of business income will be repealed, tax rates will be increasing but there will still be limits on itemized deductions. Please contact CPA WorldTax at taxinfo@cpaworldtaxllc.com or 888-512-4860 if you want to find out how these BIG Tax Changes will affect you.

What is an FBAR?

In the Streamlined Filing post of this blog on November 4 2016, I mentioned the 6 year FBAR filing requirements. You may be wondering, what is an FBAR?

Certain foreign investments beyond $10,000 have very specific requirements with the IRS.

An FBAR, or Form 114 “Report of Foreign Bank and Financial Accounts” is required to be filed annually by all U.S. citizens or residents who have greater than $10,000 USD in reportable foreign bank and financial accounts any time during the year. (https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-accounts-fbar [accessed 12/9/16]).

The definition of ‘reportable foreign bank and financial accounts’ is very broad. For example, any savings accounts, checking accounts, brokerage accounts or any other account maintained in a financial institution outside of the U.S. would be included. It includes accounts that the taxpayer has only signature authority on.

As you can imagine, if you live outside the U.S., this $10,000 USD threshold is easy to exceed very quickly. In my experience, for U.S. citizens living outside the U.S., the FBAR is the most common filing requirement. It was even more common than having to file a U.S. tax return. Remember that there are minimum income filing requirements for filing a U.S. return. So even if a homemaker living in a foreign country does not have a U.S. tax filing requirement, they usually were joint owners with their spouse on bank accounts that caused them to have to file an FBAR.

FBARs are the most common filing requirement, but they also have some of the most stringent penalties for non-compliance. The penalties can be as much as $10,000 “per violation for nonwillful violations that are not due to reasonable cause. For willful violations, the penalty may be the greater of $100,000 or 50% of the balance in the account.” (https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-accounts-fbar [accessed 12/9/16]).

Along with FBAR filing, The Foreign Account Tax Compliance Act (FATCA) also requires certain U.S. taxpayers holding foreign financial assets to report these assets on Form 8938 Statement of Specified Foreign Financial Assets (https://www.irs.gov/businesses/corporations/summary-of-fatca-reporting-for-u-s-taxpayers [accessed 12/9/16]). The reporting thresholds are higher than the FBAR threshold (thresholds start at $50,000 USD). There are slight differences in reporting on the Form 8938 vs the FBAR reporting requirements (for example, accounts in which a taxpayer has signature authority only are not reported on the Form 8938, but are reported on the FBAR).

To add to the complexity, FBARS do need to be e-filed through FinCEN (Financial Crimes Enforcement Network). Plus, the due dates for FBARS have changed this reporting year (for the 2016 tax filing year). In prior years, FBARs were due on June 30. They are now due on the due date of most taxpayer’s tax returns (April 18, 2017 for the 2016 tax year). FBARs can now be extended with the U.S. tax return.

Do you need help on your U.S. tax returns? Please contact CPA WorldTax for help and support at taxinfo@cpaworldtaxllc.com.

Business Structure Tax Issues-Part 3 LLCs

This is the third and last installment in a series of articles which addresses the tax implications of various business structures. The business structure that an entrepreneur chooses for his or her business has both legal and tax implications. This installment will discuss the tax implications of a Limited Liability Company.

Your business structure can impact your tax liability.

This series of articles has already discussed C Corporations and S Corporations. Both of these forms of business structure had the advantage of limited liability. But they both have disadvantages. The C Corporation has the disadvantage of double taxation, while the S Corporation has a lack of flexibility (for example, limits on the type and number of shareholders, etc.).

The Limited Liability Company(LLC) arose as an alternative form of business structure. LLCs are a relatively new business structure, arising from state law less than forty years ago. States viewed the LLC form of business as a way to attract companies to their State with a more flexible business structure. In 1988, after the IRS ruled that LLCs would be treated as partnerships for tax purposes, the number of States that created statutes allowing the LLC form of business grew exponentially (http://law.jrank.org/pages/8277/Limited-Liability-Company-History.html [accessed 12/2/2016]).

As a general rule, LLCs allow limited liability[1], pass through taxation to the individual owners, along with flexibility.

For example, as discussed in the Part 2-S Corporations, in the S Corporation structure, the owners must allocate profits and losses on a pro rata basis, dependent upon stock ownership on each day of the tax year. In LLCs, the partnership agreement governs the split of profits and losses, and special allocations are permitted. This means that the profits and losses may be allocated differently than on a pro rata basis which allows greater flexibility.

If the LLC has a single owner, the LLC will be taxed like a sole-proprietorship.[2] The single owner can include the revenue and expenses on their individual income tax return (Schedule C, Schedule E or Schedule F) (https://www.irs.gov/pub/irs-pdf/p3402.pdf [accessed 12/2/2016]). If the LLC has multiple owners, the LLC is treated as a partnership and files a Form 1065-U.S. Return of Partnership Income (https://www.irs.gov/pub/irs-pdf/p3402.pdf [accessed 12/2/2016]).[3]

The LLC seems like the best of all worlds, right? There are some disadvantages to an LLC. Since the LLC is considered either an entity disregarded as separate from its owner (one-member LLC) or a partnership (multi-member LLC), the net income to the owners is considered self-employment income and subject to self-employment tax.

Plus, remember that a multi-owner LLC is treated as a partnership for tax purposes. Several years ago, I heard a presenter at a tax conference state that partnership tax law is the most complex tax law in the U.S. Internal Revenue Code. (My response to that is that this presenter obviously had never been exposed to the U.S. tax law related to foreign transactions!).

Even so, partnership tax law, especially concerning partnership acquisitions and dissolutions, is very complex. This is something to keep in mind when choosing the LLC form of business. LLC’s may give you a lot of flexibility, but be sure you receive good tax and legal advice.

If you have any U.S. small business tax questions or need some help with your taxes, feel free to contact CPA WorldTax at taxinfo@cpaworldtaxllc.com or 888-512-4860.

[1] If you have questions on legal implications, please discuss with your attorney.

[2] If the LLC is owned by a husband and wife, the reporting options vary. Be sure to consult a qualified tax advisor.

(https://www.irs.gov/businesses/small-businesses-self-employed/single-member-limited-liability-companies [accessed 12/2/2016]).

[3] Unless the owners elect the check-the-box regulations to be taxed as a corporation. Treas. Reg. Sec 301-7701-2 (https://www.law.cornell.edu/cfr/text/26/301.7701-2 [accessed 12/2/2016]).

Business Structure Tax Issues-Part 2 S Corporations

This is the second installment in a series of articles which addresses the tax implications of various business structures. The business structure that an entrepreneur chooses for his or her business has both legal and tax implications.[1] This installment will discuss the implications of an S Corporation.

People interconnected with depth of field on the concept of team. — Organizing your business obviously focuses on production and efficiency. It also has legal and tax implications.

As discussed in the first installment, C Corporations are legal entities separate from their owner (https://www.sba.gov/starting-business/choose-your-business-structure/corporation [accessed Nov. 4 2016]). The separate legal entity was a distinct advantage for business owners over an unincorporated business. But the disadvantage was that the C Corporation was subject to taxation both at the entity level and the shareholder level (double taxation).

In the 1950’s U.S. Congress decided to review Subchapter C of the Internal Review Code because they felt that C Corporations were too restrictive for small businesses. What resulted from this examination was Subchapter S of the Internal Revenue Code.

The purpose of Subchapter S was to allow small businesses to select a corporate business structure without being concerned about tax implications and to allow the income or losses from their business to be taxed at the shareholder level instead of at the corporate level (S. Rept. No. 1983, 85^th Cong., 2d Sess., p. 87 (1958)).

An S Corporation is a “flow-through” entity for tax purposes. Like a partnership, all of the income and losses “flow-through” the S Corporation to the individual shareholders, retaining their character. For example, if the S Corporation sells stock at a long-term capital gain (LTCG), this LTCG flows through to the individual shareholders and retains it character so that it is taxed at LTCG rates to the shareholders.

The S Corporation would seem on first glance to solve the problems of the C Corporation. It is a separate legal entity, but there is only one level of taxation.

But do remember that an S Corporation is a construct of the U.S. Congress.[2] That means that it is an election that the shareholders need to make (with Form 2553-Election by a Small Business Corporation). That also means that most of the other corporate rules governing formation and dissolution, for example, are still governed by the C Corporation rules.

Further, there are several restrictions to the S Corporation which have made them a little more unappealing. Many of these rules have been loosened over the years, but there are still restrictions on the number of shareholders and type of shareholder which can own S Corporation stock.

One restriction concerns the allocation of profits and losses. A shareholder receives a pro rata share of each item of income or loss based upon their stock ownership on each day of the tax year (IRC 1366(a), Treas. Reg. 1-1366-1(a)). Another restriction is that the S Corporation can only have a single class of stock (IRC 1361(b)(1)(D)).

These restrictions mean that the shareholders cannot determine the allocation of income or loss items through an agreement or stock ownership. These rules decrease the flexibility of an S Corporation.

In the next installment, we will look at Limited Liability Companies (LLC) which is a business structure with generally less restrictions than an S Corporation.

If you have any U.S. small business tax questions or need some help with your taxes, feel free to contact CPA WorldTax at taxinfo@cpaworldtaxllc.com or 888-512-4860.

[1] If you have questions on legal implications, please discuss with your attorney.

[1] Be sure to check the tax laws of your individual State. State tax laws may not recognize the S election.

Streamlined Filing-A Way to Catch Up

It is hard to imagine for people who have lived in the U.S. all their lives, but there are people who are U.S. citizens but don’t realize it. A person can be a U.S. citizen because they were born in the U.S.; or if one or both of their parents were born in the U.S. and their parents met certain residency requirements.

I have met people who didn’t realize that because their parents met these U.S. residency requirements it affects their personal citizenship status. I have even met people who did not realize that because they were born in the U.S. they are U.S. citizens. For example, the only reason they were born in the U.S. was because the closest hospital was across the border!

Why this is important is that the U.S. is one of the only countries in the world which taxes based upon citizenship, not residency. Most countries tax on residency. If you are a resident and/or you have income which is sourced (earned) in that country, then you have to file a tax return.

The U.S. is the exception in that the U.S. requires their citizens to file a tax return if they meet the filing requirements no matter where they live.

The IRS is becoming more aggressive in trying to get U.S. citizens worldwide to file their tax returns. One of the ways that the IRS is encouraging filing is called the Streamlined Filing Compliance Procedure.[1]

Without Streamlined Filing, a U.S. person who has not filed for 20 years (and met the U.S. filing requirements for all 20 years) would technically be required to file 20 years of tax returns.

If the taxpayer is eligible for Streamlined Filing, they will file 3 years of U.S. tax returns and 6 years of FBARS (Foreign Bank Account Reporting).[2]

These requirements reduce the onerous filing requirements inflicted on U.S. citizens or other U.S. taxpayers living in a foreign country who did not realize they need to file U.S. tax returns.

Are you a U.S. taxpayer who needs help in catching up on your tax returns? Please contact CPA WorldTax for help and support at taxinfo@cpaworldtaxllc.com.

[1] https://www.irs.gov/individuals/international-taxpayers/streamlined-filing-compliance-procedures [accessed Nov 4 2016].

[2] https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-accounts-fbar [accessed Nov 4 2016].

FBARs will be covered in a future article.

Business Structure Tax Issues-Part I C Corporations

The business structure that an entrepreneur chooses for his or her business has both legal and tax implications. This series of articles will be addressing the tax implications of various business structures.[1]

C Corporations are generally the most complex; tax-wise and administratively. A C Corporation “is an independent legal entity owned by shareholders. This means that the corporation itself, not the shareholder that own it, is held legally liable for the actions and debts the business incurs.”[2]

Since the corporation is a separate legal entity, this results in two levels of taxation; one for the owner (shareholder) and one for the corporation. If the corporation distributed its earnings as dividends to the shareholder, double taxation would apply with a tax rates as high as 39.6% individual and 35-39% corporate.

C Corporations are not necessarily the ideal form of business structure for smaller companies. They are generally recommended for larger companies with numerous shareholders.

But part of the reason the corporate form developed was in response to unincorporated businesses (sole proprietorships/partnerships) needing some form of legal protection. The resulting double taxation caused other business structures (such as S Corporations, LLCs, etc…) to develop either federally or at the state level.

Interestingly, other countries have the same issues, but their solutions differ. For example, Canada has the corporate form also. Instead of developing numerous business structures[3], Canada counteracted the double taxation issue by changing the tax rates on dividends.

In Canada, when an individual receives a dividend, they “gross up” the dividend on their individual tax returns, and then receive a tax credit for part of the gross up. Canadian corporations also receive several tax credits depending upon their ownership and size.

The net effect is that the tax paid overall on the dividend distribution can be approximately the same as if the individual earned this income personally.

So instead of creating the myriad of business structures that the U.S. has, Canada adjusts the tax rates on the dividends so that the tax paid is approximately the same as an unincorporated business.

Which seems simpler to you?

If you have any U.S. (or Canadian!) tax questions, feel free to contact CPA WorldTax at taxinfo@cpaworldtaxllc.com.

[1] If you have questions on legal implications, please discuss with your attorney.

[2] https://www.sba.gov/starting-business/choose-your-business-structure/corporation [accessed Nov 4 2016]. Discuss any legal implications with your attorney.

[3] Canada does have a few business structures beyond the corporation but they are beyond the scope of this article

Passport Issuance Can Now Be Linked To U.S. Tax Liability

U.S. passports can now be denied or revoked due to non-payment of a U.S. tax liability.

The tax liability must be considered “seriously delinquent tax debt”[1]. IRC §7345 states that if the Secretary of State receives certification from the Commissioner of the IRS that an individual has “seriously delinquent tax debt” of greater than $50,000 USD, then the Secretary of State can deny or revoke or limit the individual’s U.S. passport.[2]

There actually has to be a notice of lien or a notice of levy in place for the revocation or denial to occur.[3] If a taxpayer is in the process of disputing a tax liability, then this section will probably not apply. Or, if the IRS and the taxpayer have negotiated an installment agreement or an offer-in-compromise and the taxpayer is making timely payments, then this section will probably not apply.

This is the first time that the IRS has linked U.S. tax liability to issuing of passports. The concern is always that now that the precedence is in place, the IRS could become more aggressive by reducing the applicable U.S. tax liability or link non-filing of U.S. tax returns to passport issuance.

Many U.S. citizens who live in foreign countries are not aware of their U.S. tax filing obligations. The U.S. requires all U.S. citizens to file a tax return, if they meet U.S. filing requirements, no matter what country they actually live in. The IRS’ Offshore Voluntary Disclosure Program (OVDP) can help individuals “catch up” on their U.S. tax filings. A future blog will discuss these programs. In the meantime, if you have any U.S. tax questions, feel free to contact CPA WorldTax at taxinfo@cpaworldtaxllc.com

[1] IRC §7345

[2] IRC §7345 [http://uscode.house.gov/view.xhtml?req=(title:26%20section:7345%20edition:prelim), accessed October 17, 2016].

Special Tax Numbers Can Now Expire

ITINs (Individual Taxpayer Identification Numbers) now can expire.

An ITIN is a tax processing number issued by the IRS to individuals who need to have a U.S. taxpayer ID number (for example, for individuals who need to file a U.S. tax return). These individuals are not eligible for a social security number.

Some of the most common reasons to have an ITIN is if the individual needs to file a U.S. tax return because they have U.S. source income (such as a U.S. rental property or the sale of U.S. real estate). It used to be that ITINs did not expire. So if an individual didn’t have to file a U.S. return every year they could continue to use the ITIN only when they needed to file a return.

A good example of this is a U.S. nonresident alien who only needed to file a U.S. tax return when they sold a U.S. property. This has now changed. ITINs which have not bee used on a federal tax return at least once in the last three years will need to be renewed.

Other ITINs (depending on the #) may also expire. This may catch some U.S. tax filers unawares. Check out https://www.irs.gov/uac/newsroom/irs-now-accepting-itin-renewal-applications-taxpayers-encouraged-to-act-soon-to-avoid-processing-delays-in-2017.