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Blended Family IRA Beneficiary Designation

Congress recently passed—and the President signed into law—the SECURE Act, landmark legislation that affects the rules for creating and maintaining employer-provided retirement plans. Whether you currently offer your employees a retirement plan, or are planning to do so, you should consider how these new rules may affect your current retirement plan (or your decision to create a new one).

Here is a look at some of the more important elements of the SECURE Act that have an impact on employer-sponsors of retirement plans. The changes in the law apply to both large employers and small employers, but some of the changes are especially beneficial to small employers. However, not all of the changes are favorable, and there may be steps you could take to minimize their impact. Please give me a call if you would like to discuss these matters.

It is easier for unrelated employers to band together to create a single retirement plan. A multiple employer plan (MEP) is a single plan maintained by two or more unrelated employers. Starting in 2021, the new rules reduce the barriers to creating and maintaining MEPs, which will help increase opportunities for small employers to band together to obtain more favorable investment results, while allowing for more efficient and less expensive management services.

New small employer automatic plan enrollment credit. Automatic enrollment is shown to increase employee participation and retirement savings. Starting in 2020, the new rules create a new tax credit of up to $500 per year to employers to defray start-up costs for new 401(k) plans and SIMPLE IRA plans that include automatic enrollment. The credit is in addition to an existing plan start-up credit, and is available for three years. The new credit is also available to employers who convert an existing plan to a plan with an automatic enrollment design.

Increased credit for small employer pension plan start-up costs. The new rules increase the credit for plan start-up costs to make it more affordable for small businesses to set up retirement plans. Starting in 2020, the credit is increased by changing the calculation of the flat dollar amount limit on the credit to the greater of

  1. $500, or
  2. The lesser of:
    1. $250 multiplied by the number of nonhighly compensated employees of the eligible employer who are eligible to participate in the plan, or
    2. $5,000.

The credit applies for up to three years.

Expand retirement savings by increasing the auto enrollment safe harbor cap. An annual nondiscrimination test called the actual deferral percentage (ADP) test applies to elective deferrals under a 401(k) plan. The ADP test is deemed to be satisfied if a 401(k) plan includes certain minimum matching or non-elective contributions under either of two safe harbor plan designs and meets certain other requirements. One of the safe harbor plans is an automatic enrollment safe harbor plan.

Starting in 2020, the new rules increase the cap on the default rate under an automatic enrollment safe harbor plan from 10% to 15%, but only for years after the participant’s first deemed election year. For the participant’s first deemed election year, the cap on the default rate is 10%.

Allow long-term part-time employees to participate in 401(k) plans. Currently, employers are generally allowed to exclude part-time employees (i.e., employees who work less than 1,000 hours per year) when providing certain types of retirement plans—like a 401(k) plan—to their employees. As women are more likely than men to work part-time, these rules can be especially harmful for women in preparing for retirement.

However, starting in 2021, the new rules will require most employers maintaining a 401(k) plan to have a dual eligibility requirement under which an employee must complete either a one-year-of-service requirement (with the 1,000-hour rule), or three consecutive years of service where the employee completes at least 500 hours of service per year. For employees who are eligible solely by reason of the new 500-hour rule, the employer will be allowed to exclude those employees from testing under the nondiscrimination and coverage rules, and from the application of the top-heavy rules.

Looser notice requirements and amendment timing rules to facilitate adoption of nonelective contribution 401(k) safe harbor plans. The actual deferral percentage nondiscrimination test is deemed to be satisfied if a 401(k) plan includes certain minimum matching or nonelective contributions under either of two plan designs (referred to as a “401(k) safe harbor plan”), as well as certain required rights and features, and satisfies a notice requirement. Under one type of 401(k) safe harbor plan, the plan either

  1. Satisfies a matching contribution requirement, or
  2. Provides for a nonelective contribution to a defined contribution plan of at least 3% of an employee’s compensation on behalf of each nonhighly compensated employee who is eligible to participate in the plan.

For plan years beginning after Dec. 31, 2019, the new rules change the nonelective contribution 401(k) safe harbor to provide greater flexibility, improve employee protection, and facilitate plan adoption. The new rules eliminate the safe harbor notice requirement, but maintain the requirement to allow employees to make or change an election at least once per year. The rules also permit amendments to nonelective status at any time before the 30th day before the close of the plan year. Amendments after that time are allowed if the amendment provides

  1. A nonelective contribution of at least 4% of compensation (rather than at least 3%) for all eligible employees for that plan year, and
  2. The plan is amended no later than the last day for distributing excess contributions for the plan year (i.e., by the close of following plan year).

Expanded portability of lifetime income options. Starting in 2020, the new rules permit certain retirement plans to make a direct trustee-to-trustee transfer to another employer-sponsored retirement plan, or IRA, of a lifetime income investment or distributions of a lifetime income investment in the form of a qualified plan distribution annuity, if a lifetime income investment is no longer authorized to be held as an investment option under the plan. This change permits participants to preserve their lifetime income investments and avoid surrender charges and fees.

Qualified employer plans barred from making loans through credit cards and similar arrangements. For loans made after Dec. 20, 2019, plan loans may no longer be distributed through credit cards or similar arrangements. This change is intended to ensure that plan loans are not used for routine or small purchases, thereby helping to preserve retirement savings.

Nondiscrimination rules modified to protect older, longer service participants in closed plans. Starting in 2020, the nondiscrimination rules as they pertain to closed pension plans (i.e., plans closed to new entrants) are being changed to permit existing participants to continue to accrue benefits. The modification will protect the benefits for older, longer-service employees as they near retirement.

Plans adopted by filing due date for year may be treated as in effect as of close of year. Starting in 2020, employers can elect to treat qualified retirement plans adopted after the close of a tax year, but before the due date (including extensions) of the tax return, as having been adopted as of the last day of the year. The additional time to establish a plan provides flexibility for employers who are considering adopting a plan, and the opportunity for employees to receive contributions for that earlier year.

New annual disclosures required for estimated lifetime income streams. The new rules (starting at a to-be-determined future date) will require that plan participants’ benefit statements include a lifetime income disclosure at least once during any 12-month period. The disclosure will have to illustrate the monthly payments the participant would receive if the total account balance were used to provide lifetime income streams, including a qualified joint and survivor annuity for the participant and the participant s surviving spouse and a single life annuity.

Fiduciary safe harbor added for selection of annuity providers. When a plan sponsor selects an annuity provider for the plan, the sponsor is considered a plan “fiduciary,” which generally means that the sponsor must discharge his or her duties with respect to the plan solely in the interests of plan participants and beneficiaries (this is known as the “prudence requirement”).

Starting on Dec. 20, 2019 (the date the SECURE Act was signed into law), fiduciaries have an optional safe harbor to satisfy the prudence requirement in their selection of an insurer for a guaranteed retirement income contract, and are protected from liability for any losses that may result to participants or beneficiaries due to an insurer’s future inability to satisfy its financial obligations under the terms of the contract. Removing ambiguity about the applicable fiduciary standard eliminates a roadblock to offering lifetime income benefit options under a plan.

Increased penalties for failure-to-file retirement plan returns. Starting in 2020, the new rules modify the failure-to-file penalties for retirement plan returns.

The penalty for failing to file a Form 5500 (for annual plan reporting) is changed to $250 per day, not to exceed $150,000.

A taxpayer’s failure to file a registration statement incurs a penalty of $10 per participant per day, not to exceed $50,000.

The failure to file a required notification of change results in a penalty of $10 per day, not to exceed $10,000.

The failure to provide a required withholding notice results in a penalty of $100 for each failure, not to exceed $50,000 for all failures during any calendar year.

 

If you would like to discuss any of the new laws, please call me at 513-731-6612.

 

Sincerely,

 

 

William E. Hesch

 

 

2019 extender legislation – energy credits

In December, 2019, Congress passed legislation to extend some tax provisions until December 31, 2020.  Since some of the provisions had expired on December 31, 2018, congress not only extended the legislation but also resurrected the provisions retroactively to January 1, 2018.  This means that you not only can apply the tax breaks to your 2019 and 2020 tax returns, you can also amend your 2018 return to tax advantage of the tax savings if they apply to you.

The top tax breaks that have been brought back that will affect the individual taxpayer are:

  • The exclusion from income for the cancellation of acquisition debt on your principal residence (up to $2 million)
  • The mortgage insurance premiums deduction as resident interest
  • The 7.5% floor to deduct medical expenses on Schedule A of your individual tax return (instead of 10%)
  • A deduction for above-the-line tuition and fees
  • The deduction for nonbusiness energy property credit when you have energy-efficient improvements to your residence.

In addition to the nonbusiness energy credit, Congress also retroactively reinstated the energy-efficient home credit and the energy-efficient commercial buildings deduction for improvements back to January 1, 2018 through improvements placed in service by December 31, 2020.

The nonbusiness energy property credit and the residential energy-efficient property credit are for residential property owners.  The nonbusiness energy property credit is available when there are improvements for energy-efficient windows, doors, roofs and added insulation.  This credit is applied to the cost of the improvements but not the installation cost.  The residential energy-efficient property credit is applied the cost of qualified residential solar panels, solar water heating equipment, wind turbines, and geothermal heat pumps.  This credit is applied to the cost, as well as, the assembly and installation expenses.

The energy-efficient commercial buildings deduction was originally enacted in 2005 but expired on December 31, 2017.  With the retroactive reinstatement of this deduction (179D deduction), taxpayers may be able to claim the deduction for any qualifying property placed in service from January 1, 2006 through December 31, 2020 without filing amended tax returns.  The credit is applied to commercial property which includes apartment buildings with at least four stories.  The improvements must be made to the heating, cooling, ventilation, or hot water systems; interior lighting system; or to the building’s envelope.  The credit is up to $1.80 per square foot.  The credit is taken in the first year similar to bonus depreciation.

SECURE Act changes to IRA’s

Do you have an Individual Retirement Account (IRA)?  Are you 70 years or older?  If so, congress passed tax legislation late last year in the Setting Everyone Up for Retirement Enhancement Act of 2019 (SECURE Act) with changes that will benefit you in 2020.

Before December 31, 2019, you were not able to make traditional IRA contributions after you turned 70½.  Now the SECURE Act allows you to continue to contribute to your IRA as long as you have earned income. This is a benefit but there are complications if you make qualified charitable distributions from your IRA after 2019.

Another change is related to the IRA distributions.  Prior to December 31, 2019, you had to take required minimum distributions (RMDs) from your IRA or qualified retirement plan in the year you turned 70 ½.  Starting in 2020, you can put off taking the RMDs until you reach 72.  This change is only available to individuals who turn 70 ½ in 2020 or later.  If you turned 70 ½ prior to 2020, you are still required to take the RMDs or be subject to a penalty.

There was also a change to the Required Minimum Distribution on inherited IRA’s.  In the past, the RMDs could be extended out over several years depending on the beneficiary of the IRA.  The Secure Act has eliminated the RMD each year but the IRA must be fully distributed by the end of the 10th calendar year following the year of death.  There are some exceptions to this rule including distributions to the surviving spouse and minor children but for others, there is the 10 year distribution limit.

If you are near 70 years old or older and have an IRA, give us a call.  Let us help to ensure you are getting the best tax benefits from your IRA.

HOW TO DEDUCT ASSISTED LIVING AND NURSING HOME BILLS

Watch your wallet: the median cost in 2018 for an assisted living facility was $48,000 and over $100,000 for nursing home care.

If you could deduct these expenses, you’d substantially reduce your income tax liability—possibility down to $0—and dramatically reduce your financial burden from these costs.

As you might expect, the rules are complicated as to when you can deduct these expenses. But I’m going to give you some tips to help you understand the rules.

Medical Expenses in General

On your IRS Form 1040, you can deduct expenses paid for the medical care of yourself, your spouse, and your dependents, but only to the extent the total expenses exceed 7.5 percent of your adjusted gross income.  In December 2019, Congress retroactively reduced the 10% adjusted gross income limitation to 7.5% in 2018.  Therefore, taxpayers can file amended personal income tax returns for 2018 and 2019 as a result of that retroactive tax law change.

Medical care includes qualified long-term care services.

Assisted living and nursing home expenses can be qualified long-term care expenses depending on the health status of the person living in the facility.

If you operate a business, your business could establish a medical plan strategy that could make the medical expenses business deductions for your business.

Qualified Long-Term Care Services

The term “qualified long-term care services” means necessary diagnostic,preventive, therapeutic, curing, treating, mitigating, and rehabilitative services, and maintenance or personal care services, which

  • are required by a chronically ill individual, and
  • are provided pursuant to a plan of care prescribed by a licensed health care practitioner.

Chronically Ill Individual

A chronically ill individual is someone certified within the previous 12 months by a licensed health care practitioner as

  1. being unable to perform, without substantial assistance from another individual, at least two activities of daily living for a period of at least 90 days due to a loss of functional capacity;
  2. having a similar level of disability (as determined under IRS regulations prescribed in consultation with the Department of Health and Human Services) to the level of disability described in the first test; or
  3. requiring substantial supervision to protect the individual from threats to health and safety due to severe cognitive impairment.

A licensed health care provider is a doctor, a registered professional nurse, a licensed social worker, or another individual who meets IRS requirements.

Activities of Daily Living Test

For someone to be a chronically ill individual, at least two of the following activities of daily living must require substantial assistance from another individual:

  • Eating
  • Toileting
  • Transferring
  • Bathing
  • Dressing
  • Continence

Substantial assistance is both hands-on assistance and standby assistance:

  • Hands-on assistance is the physical assistance of another person without which the individual would be unable to perform the activity of daily living.
  • Standby assistance is the presence of another person within arm’s reach of the individual that’s necessary to prevent, by physical intervention, injury to the individual while the individual is performing the activity of daily living.

Examples of standby assistance include being ready to

  • catch the individual if the individual falls while getting into or out of the bathtub or shower as part of bathing, or
  • remove food from the individual’s throat if the individual chokes while eating.

Cognitive Impairment Test

Severe cognitive impairment is a loss or deterioration in intellectual capacity that is comparable to, and includes, Alzheimer’s disease and similar forms of irreversible dementia, and measured by clinical evidence and standardized tests that reliably measure impairment in the individual’s short- or long-term memory; orientation as to people, places, or time; and deductive or abstract reasoning.

Substantial supervision is continual supervision (which may include cuing by verbal prompting, gestures, or other demonstrations) by another person that is necessary to protect the severely cognitively impaired individual from threats to his or her health or safety (such as may result from wandering).

You have much to consider if you face the medical issues above. I’m happy to help you understand if your medical expenses can qualify for the medical deductions and what this means taxwise.

 

William E Hesch

William E. Hesch Law Firm, LLC

William E. Hesch CPAs, LLC

3047 Madison Road, Suite 201

Cincinnati, Ohio  45209

Office:  513-731-6601

Direct:  513-509-7829

bill.hesch@williamhesch.com

www.heschlaw.com

www.heschcpa.com

AFFORDABLE CARE ACT CHANGES

Under the Affordable Care Act, there are new reporting requirements for the employer to report the cost of coverage under an employer-sponsored group health plan. For years after 2011, employers generally are required to report the cost of health benefits provided on the Form W-2. All employers that provide “applicable employer-sponsored coverage” under a group health plan are subject to the reporting requirement.

The IRS Notices 2011-28 and 2012-9 provide transitional relief from the reporting requirements for the following:

    • Small employers(employers filing fewer than 250 Forms W-2 for the previous calendar year);
    • Self-insured plans of employers not subject to COBRA continuation coverage or similar requirements
    • Multiemployer plans;
    • HRAs;
    • Stand-alone dental and vision plans;
    • Employers furnishing W-2s to employees who terminate before the end of the calendar year and request a W-2 before the end of that calendar year

In the above situations, the new Form W-2 reporting requirements will not apply until the IRS publishes guidance giving at least six months advance notice of any change to the transition relief. The new Form W-2 reporting requirement is effective for taxable years beginning after 2012(the2012 W-2 due in January 2013).

If your business does not qualify for one of the exceptions above, then you must comply with the new W-2 reporting requirements. I have attached a chart from the IRS website which reviews the reporting requirements for Box 12, Code DD, and has no impact on the requirements to report these items elsewhere. For example; while contributions to Health Savings Arrangements (HSA) are not to be reported in Box 12, Code DD, certain HSA contributions are reported in Box 12, Code W.

Please contact our office if you wish to discuss how the new reporting requirements effect you individually. We will be happy to answer any question you might have.

TAX LAW CHANGES FOR EMPLOYERS

  • Employers Hiring Tax Incentives
    • Qualified new hire:
      • Must sign affidavit on new IRS Form W-11 under penalties of perjury that he qualifies as a new hire…has not worked a total of 40 hours over 60 days prior to hire date.
      • Begins work for a qualified employer which is not a governmental entity (exclusive of a public higher education institute).
      • Not employed to replace another employee of employer unless such employee separated for cause or voluntarily quits work.
      • Is not a related party.
    • Applies to all new hires that began work after 2/3/10 and before 1/01/11, whether full time or part time.
    • Benefit to employer….does not pay 6.2% social security tax for wages paid to qualifying employee beginning 3/19/10 and ending 12/31/10.
    • If employee qualifies for New Hire Credit and Work Opportunity Tax Credit, employer has election to claim only one credit, not both.
  • Business credit for retention of new hire for one year,
    • Employer may claim a general business income tax credit equal or lesser than $1,000 or 6.2% of wages for each qualified new hire who:
      • Is employed on any date during tax year after 3/18/10.
      • Continues to be employed for a period not less than 52 consecutive weeks.
      • Receives wages during last 26 weeks of such period that are at least 80% of such wages during first 26 weeks.
    • Prospective planning points:
      • Prospective employee who is out of work and looking for a job needs to work only 40 hours during 60 day period prior to begin working.
      • Prospective employee should find out if employee qualifies for Work Opportunity Tax Credit, which may provide a better tax credit to employer and needs to be certified at time hired.
      • The credit may be claimed on a return for calendar year 2011 or any fiscal year ending 3/31/11 or later.
  • Employer tax credit for company paid health related insurance,
    • Small businesses who pay for 50% or more of the cost of health related premiums (i.e. – health insurance as well as dental, vision, long-term care, etc) qualify for a tax credit for 2010.
    • The credit ranges from 9% for company with 15 or less employees and average wages of $35,000 to 35% for a company with 10 or fewer employees and average of $25,000. For tax exempt organizations, the credit is limited to 25%
    • The 35% credit percentage decreases rapidly for employers with more employees and higher average wages.
    • Insurance premiums paid for owners and related parties do not qualify for the credit.

PROPER PLANNING OF INVESTMENTS IN START-UP BUSINESSES MAY ELIMINATE TAX ON GAINS – CINCINNATI CAPITAL GAINS TAX

Proper Planning of Investments In Start-Up Businesses May Eliminate Tax on Gains.

Investors in new start-up businesses should consider the benefits of a provision in the Small Business Jobs act of 2010 which eliminates the tax on gains on the sale of Qualified Small Business (QSB) stock issued between September 27, 2010 and December 31, 2010 and held for more than 5 years.

The act modifies Section 1202, which is a tax provision intended to stimulate cash flow into new start-up companies by reducing the taxes on future gains. The provision was originally enacted in 1993 and excluded 50% of gains on Qualified Small business Stock. The exclusion was increased to 75% for stock acquired after February 17, 2009 and was increased to 100% for stock issued between September 27, 2010 and December 31, 2010.

Qualified Small Business Stock Defined

Qualified Small Business Stock is common or preferred stock which meets the following requirements:

    • Is stock in a domestic C corporation.
    • Is acquired by the investor at original issue. The original issuance requirement is designed to encourage inflows of new capital into businesses. The stock may be acquired through the exercise of an option, warrant, or conversion of convertible debt.
    • Is acquired in exchange for money, property (except stock) or services.
    • The corporation has aggregate gross assets of less than $50 million or less at all times prior to date of issue.
    • At least 80% of the value of the corporation’s assets is used in the active conduct of one or more qualified trades or businesses.

A Qualified Trade or Business means any business other than:

    • Any trade or business involving the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more employees.
    • Banking, insurance, financing, leasing, investing or similar business.
    • Any farming business (including raising or harvesting trees).
    • Any mining or mineral extraction business.
    • Any business of operating a hotel, motel, restaurant or similar business.

The amount of gain that can be excluded from gross income under Section 1202 for any particular corporation over a taxpayer’s lifetime is limited to the greater of $10,000,000 or 10 times the adjusted basis of the stock.

In order to take full advantage of this provision investors should acquire the shares in a QSB before December 31, 2010. On January 1, 2011the exclusion percentage goes down to 75%. Likewise holders of convertible debt or vested options in a QSB should consider exercising before year end.

In addition entrepreneurs seeking financing prior to January 1, 2011 should consider operating as a C corporation in order that investors may take advantage of this provision.

TAX-SAVING TIPS

NEW IRS 199A REGULATIONS BENEFIT OUT-OF-FAVOR SERVICE BUSINESSES

If you operate an out-of-favor business (known in the law as a “specified service trade or business”) and your taxable income is more than $207,500 (single) or $415,000 (married, filing jointly), your Section 199A deduction is easy to compute. It’s zero.

This out-of-favor specified service trade or business group includes any trade or business

    • involving the performance of services in the fields of health, law, consulting, athletics, financial services, and brokerage services; or
    • where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners; or
    • that involves the performance of services that consist of investing and investment management trading or dealing in securities, partnership interests, or commodities. For this purpose, a security and a commodity have the meanings provided in the rules for the mark-to-market accounting method for dealers in securities [Internal Revenue Code Sections 475(c)(2) and 475(e)(2), respectively].

If you were not in one of the named groups above, you likely worried about being in a reputation or skill out-of-favor specified service business. If you were worried, you joined a large group of worried businesses, because many businesses depend on reputation and/or skill for success.

For example, the National Association of Realtors believed real estate agents fell into this out-of-favor category.

But don’t worry, be happy. The IRS has come to the rescue by regulating the draconian reputation and/or skill provision down to almost nothing. The reputation and/or skill out-of-favor specified service business includes you if you

    • receive fees, compensation, or other income for endorsing products or services;
    • license or receive fees, compensation, or other income for the use of your image, likeness, name, signature, voice, trademark, or any other symbols associated with your identity; or
    • receive fees, compensation, or other income for appearing at an event or on radio, television, or another media format.

Example. Harry is a well-known chef and the sole owner of multiple restaurants, each of which is a single-member LLC—disregarded tax entities that are taxed as proprietorships. Due to Harry’s skill and reputation as a chef, he receives an endorsement fee of $500,000 for the use of his name on a line of cooking utensils and cookware.

Results. Harry’s restaurant business is not an out-of-favor business, but his endorsement fee is an out-of-favor specified service business.

If you have questions about how the law will treat your business income for the new Section 199A 20 percent tax deduction, please give us a call, and we’ll examine your situation.

Does Your Rental Qualify for a 199A Deduction?

The IRS, in its new proposed Section 199A regulations, defines when a rental property qualifies for the 20 percent tax deduction under new tax code Section 199A.

One part of the good news on this clarification is that it does not require that we learn any new regulations or rules. Existing rules govern. The existing rules require that you know when your rental is a tax law–defined rental business and when it is not. For the new 20 percent tax deduction under Section 199A, you want rentals that the tax law deems businesses.

You may find the idea of a rental property as a business strange because you report the rental on Schedule E of your Form 1040. But you will be happy to know that Schedule E rentals are often businesses for purposes of not only the Section 199A tax deduction but also additional tax code sections, giving you even juicier tax benefits.

Under the proposed regulations, you have two ways for the IRS to treat your rental activity as a business for the Section 199A deduction:

  1. The rental property qualifies as a trade or business under tax code Section 162.
  2. You rent the property to a “commonly controlled” trade or business.

Your rental qualifying as a Section 162 trade or business gets you other important tax benefits:

    • Tax-favored Section 1231 treatment
    • Business use of an office in your home (and, if it’s treated as a principal office, related business deductions for traveling to and from your rental properties)
    • Business (versus investment) treatment of meetings, seminars, and conventions

If your rental activity doesn’t qualify as a Section 162 trade or business, it will qualify for the 20 percent Section 199A tax deduction if you rent it to a commonly controlled trade or business.

How to Find Your Section 199A Deduction with Multiple Businesses

If at all possible, you want to qualify for the 20 percent tax deduction offered by new tax code Section 199A to proprietorships, partnerships, and S corporations (pass-through entities).

Basic Rules—Below the Threshold

If your taxable income is equal to or below the threshold of $315,000 (married, filing jointly) or $157,500 (single), follow the three steps below to determine your Section 199A tax deduction with multiple businesses or activities.

Step 1. Determine your qualified business income 20 percent deduction amount for each trade or business separately.

Step 2. Add together the amounts from Step 1, and also add 20 percent of

    • real estate investment trust (REIT) dividends and
    • qualified publicly traded partnership income.

This is your “combined qualified business income amount.”

Step 3. Your Section 199A deduction is the lesser of

    • your combined qualified business income amount or
    • 20 percent of your taxable income (after subtracting net capital gains).

Above the Threshold—Aggregation Not Elected

If you do not elect aggregation and you have taxable income above $207,500 (or $415,000 on a joint return), you apply the following additions to the above rules:

    • If you have an out-of-favor specified service business, its qualified business income amount is $0 because you are above the taxable income threshold.
    • For your in-favor businesses, you apply the wage and qualified property limitation on a business-by-business basis to determine your qualified business income amount.

The wage and property limitations work like this: for each business, you find the lesser of

  1. 20 percent of the qualified business income for that business, or
  2. the greater of (a) 50 percent of the W-2 wages with respect to that business or (b) the sum of 25 percent of W-2 wages with respect to that business plus 2.5 percent of the unadjusted basis immediately after acquisition of qualified property with respect to that business.

If You Are in the Phase-In/Phase-Out Zone

If you have taxable income between $157,500 and $207,500 (or $315,000 and $415,000 joint), then apply the phase-in protocol.

If You Have Losses

If one of your businesses has negative qualified business income (a loss) in a tax year, then you allocate that negative qualified business income pro rata to the other businesses with positive qualified business income. You allocate the loss only. You do not allocate wages and property amounts from the business with the loss to the other trades or businesses.

If your overall qualified business income for the tax year is negative, your Section 199A deduction is zero for the year. In this situation, you carry forward the negative amount to the next tax year.

Aggregation of Businesses—Qualification

The Section 199A regulations allow you to aggregate businesses so that you have only one Section 199A calculation using the combined qualified business income, wage, and qualified property amounts.

To aggregate businesses for Section 199A purposes, you must show that

    • you or a group of people, directly or indirectly, owns 50 percent or more of each business for a majority of the taxable year;
    • you report all items attributable to each business on returns with the same taxable year, not considering short taxable years;
    • none of the businesses to be aggregated is an out-of-favor, specified service business; and
    • your businesses satisfy at least two of the following three factors based on the facts and circumstances:
      1. The businesses provide products and services that are the same or are customarily offered together.
      2. The businesses share facilities or share significant centralized business elements, such as personnel, accounting, legal, manufacturing, purchasing, human resources, or information technology resources.
      3. The businesses operate in coordination with or in reliance upon one or more of the businesses in the aggregated group (for example, supply chain inter dependencies).

HELP EMPLOYEES COVER MEDICAL EXPENSES WITH A QSEHRA

If you are a small employer (fewer than 50 employees), you should consider the qualified small-employer health reimbursement account (QSEHRA) as a good way to help your employees with their medical expenses.

If the QSEHRA is indeed going to be your plan of choice, then you have three good reasons to get that QSEHRA plan in place on or before October 2, 2018. First, this avoids penalties. Second, your employees will have the time they need to select health insurance. Third, you will have your plan in place on January 1, 2019, when you need it.

One very attractive aspect of the QSEHRA is that it can reimburse individually purchased insurance without your suffering the $100-a-day per-employee penalty. The second and perhaps most attractive aspect of the QSEHRA is that you know your costs per employee. The costs are fixed—by you.

Eligible employer. To be an eligible employer, you must have fewer than 50 eligible employees and not offer group health or a flexible spending arrangement to any employee. For the QSEHRA, group health includes excepted benefit plans such as vision and dental, so don’t offer them either.

Eligible employees. All employees are eligible employees, but the QSEHRA may exclude

    • employees who have not completed 90 days of service with you,
    • employees who have not attained age 25 before the beginning of the plan year,
    • part-time or seasonal employees,
    • employees covered by a collective bargaining agreement if health benefits were the subject of good-faith bargaining, and
    • employees who are non-resident aliens with no earned income from sources within the United States.

Dollar limits. Tax law indexes the dollar limits for inflation. The 2018 limits are $5,050 for self-only coverage and $10,250 for family coverage. For part-year coverage, you prorate the limit to reflect the number of months the QSEHRA covers the individual

2012 EXPIRING INCENTIVES

2012 began with great uncertainty over federal tax policy and now, with the end of the year approaching, that uncertainty appears to be far from any long-term resolution. A host of reduced tax rates, credits, deductions, and other incentives (collectively called the “Bush-era” tax cuts) are scheduled to expire after December 31, 2012. To further complicate planning, over 50 tax extenders are up for renewal, either having expired at the end of 2011 or scheduled to expire after 2012. At the same time, the federal government will be under sequestration, which imposes across-the-board spending cuts after 2012. The combination of all these events has many referring to 2013 as “Taxmeggedon.”

EXPIRING TAX INCENTIVES

Effective January 1, 2013, the individual income tax rates, without further Congressional action, are scheduled to increase across-the-board, with the highest rate jumping from 35 percent to 39.6 percent. The current 10 percent rate will expire and marriage penalty relief will sunset. Additionally, the current tax-favorable capital gains and dividends tax rates (15 percent for taxpayers in the 25 percent bracket rate and above and zero percent for all other taxpayers) are scheduled to expire.

Higher income taxpayers will also be subject to revived limitations on itemized deductions and their personal exemptions. The child tax credit, one of the most popular incentives in the Tax Code, will be cut in half. Millions of taxpayers would be liable for the alternative minimum tax (AMT) because of expiration of the AMT “patch.” Countless other incentives for individuals would either disappear or be substantially reduced after 2012. While a divided Congress may indeed act to prevent some or all of these tax increases, a year-end planning strategy that protects against “worst-case” situations may be especially wise to consider this year.

TAX RELIEF ACT – CINCINNATI TAX PLANNING TIPS

Congress has approved and the President quickly signed a multi-billion dollar tax cut package, the Tax Relief, Unemployment Insurance Re authorization and Job Creation Act of 2010 (2010 Tax Relief Act) (H.R. 4853).  The new law follows through on the framework agreed to on December 6 by President Obama and GOP leaders in Congress.  The 2010 Tax Relief Act extends the Bush-era individual and capital gains/ dividend tax cuts for all taxpayers for two years.

The bill provides the following major changes:

  1. A patch to the Alternative Minimum Tax (AMT) so that 21 million taxpayers will not be subject to AMT for 2009.
  2. A one year 2% payroll tax cut for the employee’s portion of Social Security taxes on a wage base of up to $106,800.  Self-employed individuals will pay 10.4% in Social Security taxes on self-employment income up to the threshold of $106,800, which is also a 2% rate reduction.
  3. For business owners, the 100% bonus depreciation has been extended through 2011 and the 50% bonus depreciation now applies for 2012.

The top Federal estate tax rate beginning January 1, 2011 will be 35% and an individual will be able to transfer $5,000,000 to his heirs free from Federal estate tax.  This change will expire on December 31, 2012.  On January 1, 2013, the estate rate will go to 55% and the amount exempt from estate tax will decrease from $5,000,000 to $1,000,000.

The tax law changes are numerous and taxpayers should seek professional assistance in the preparation of their 2010 tax returns.  Beware, of “off the shelf” tax software for 2010 tax returns, which may not include these December 2010 tax changes.

For a detailed 11 page tax briefing on the new tax law by CCH a Wolters Kluwer business, go to www.cchgroup.com, click on the link for “Latest Tax Legislation Updates” and click on the December 17, 2010 updates. There is also a comprehensive on line copy of the 2012/2013 Tax Planning Guide.  The tax planning guide provides tax planning tips for individuals and business owners.  To find answers to your estate tax and elder law questions go to law.tv where William E. Hesch is the estate planning attorney who provides answers to your questions.