This month I’m discussing tax savings ideas and issues. Next month I’ll continue to discuss the concept of managing for prosperity in 2019.
Payroll IRA deductions
PR agencies may want to offer employees a way to save for retirement but aren't ready to launch and operate a 401(k) or another employee benefit plan. A payroll deduction IRA can be a solution.
With a payroll deduction IRA, employees’ contributions to their IRA are deducted directly from their paychecks. As an employer, the PR agency acts as a conduit between employees and the financial institution at which the IRA is established. After withholding the payroll deduction amounts, the employees authorize the PR agency to transmit the withholding to their financial institution. This setup shouldn’t be considered an employer retirement plan. That means it isn’t subject to the federal reporting requirements with which employer plans must comply.
Employees decide how much they’ll contribute to their accounts and whether to establish a traditional or Roth IRA. All the tax rules that apply to IRAs apply to this employer assisted plan. So, why bother with this? A payroll deduction IRA enables employers to provide their employees with a tool that can make it easier to save for retirement, with little cost to the business.
New Limit on interest expense deductions
The Tax Cuts and Jobs Act introduced a variety of tax benefits for business. At the same time, the TCJA placed limits on several tax breaks, including the amount of interest expense a business may deduct.
If your gross receipts exceed the $25 million threshold then, beginning in 2018, your annual deduction for business interest is limited to the sum of: 1. Your business interest income, 2. 30 percent of your adjusted taxable income, and 3. Floor-plan financing interest (this won't apply to PR agencies).
Your adjusted taxable income is your taxable income without regard to nonbusiness income; business interest expense on income; the amount of any net operating loss deduction; and depreciation and amortization or depletion. The last item will expire at the end of 2021. Interest that’s not allowed may be carried forward indefinitely and deducted in subsequent years, subject to the same limits. Note: if your average annual gross receipts are $25 million or less for the three previous years, this new rule won't apply to you. Caution: related business businesses must combine gross receipts. This means you can’t avoid the limit by splitting larger agency into separate entities.
Meals and entertainment
PR agencies that entertain prospects and clients won’t appreciate the new rule that disallows entertainment expenses. Under the prior law, agencies could deduct 50 percent of reasonable entertainment costs. This is no longer available, but the 50 percent deduction for meals remains.
Something to think about. Suppose an agency VP takes a client to dinner ($100) to discuss PR matters, then takes the client to see a Broadway show ($300). Because the Internal Revenue Code requires that each component of the meeting be separately identified, the Broadway show would not be deductible. However, assume, the VP takes his or her client to dinner and a show costing $400. If, in this case, the receipt just indicates the price for the dinner is $400, without indicating a show was included, there’s a possibility that the IRS would allow the expense to be deducted subject to the 50 percent limitation.
Section 179 expensing
Prior to the TCJA, agencies could elect Section 179 expensing on eligible property of up to $500,000, phasing out at $2 million. Starting in 2018, however, the above limits increase to $1.0 million with a $2.5 million phase-out not to exceed business income. The amount of the Section 179 expensing amount will be indexed to inflation. So, what does this mean? For most PR agencies, it will not be necessary to depreciate asset acquisitions or keep detail depreciation records.
Net operating loss deduction
In 2017, PR agencies could offset a net operating loss deduction up to 100 percent of business income, with a two-year carry-back and 20-year carry-forward provision. Beginning in 2018, the deduction is reduced to 80 percent, with no carry-back and unlimited carry-forward allowed. (Applies to regular corporations.)
The tax break for employer-paid transportation benefits, including parking and mass transit reimbursement, was repealed. However, if an employer still offers this benefit it will at least be tax-free to employees.
The estate tax exemption amount has doubled to $22.36 million for couples and $11.18 million for individuals. These amounts will be adjusted for inflation each year. It’s important to plan your estate now, because these higher amounts are scheduled to revert to the 2017 levels on January 1, 2026, unless Congress acts to prevent it.
Alternative minimum tax
How many of you were caught in the AMT in prior years? I was! The AMT, in theory, was designed to prevent high-income taxpayers from abusing large tax deductions. Truth be told, the AMT snagged taxpayers of more modest means! The TCJA increase the exemption amounts. For example, a married couple filing jointly will see an increase from $84,500 to $109,400.
Kiddie tax changes
Families with children having a modest amount of unearned income could be snagged due to changes in the kiddie tax. Previously, this tax was a complex formula involving earned and unearned income. The big change for children under the age of 19 or full-time students under the age of 24 is how unearned income is taxed. You may recall that the unearned income was taxed at your rate. However, the TCJA changed the rates to the higher trust and estate rates. For example, unearned income of $12,501 or more will now be taxed at 37 percent.
Richard Goldstein is a partner at Buchbinder Tunick & Company LLP, New York, Certified Public Accountants.