Category: Small Business

Our blogs focusing on small business tax strategies and related issues.

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.

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

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.
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, 85th 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.

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