Small Business TCJA Tax Changes
- Qualified Business Income Deduction – The 20% deduction for qualified business income (QBI) will be available for 2018 federal income tax returns. The Sec. 199A deduction is generally available to pass-through businesses. More information is available through the Sec. 199A frequently asked questions (FAQs) on www.IRS.gov. There are complex phaseout rules for business owners with higher-income levels.
- 100% Expensing – Most depreciable assets may be deducted if they are placed in service during 2018. The 100% depreciation deduction generally is applicable for machinery, equipment, computers, appliances and furniture with a recovery period of 20 years or less.
- Entertainment and Meals – Many of the prior deductions for business expenses related to entertainment, amusement or recreation were reduced or eliminated. There is still a 50% deduction for the cost of business meals if all IRS requirements are met and meals are provided to a current or potential customer, client, consultant or other business contact.
- Transportation – Most deductions for fringe benefits related to transportation or commuting have been eliminated. An exception may apply if the transportation expense is necessary for employee safety.
- Bicycle Commuting – Employers may deduct qualified bicycle commuting reimbursements. While this is a qualified business expense for the employer, the employee will report the reimbursement as wages.
- Moving Expenses – Most moving expenses in 2018 are now taxable income for the employee.
- Estimated Taxes – If a sole proprietor, partner or subchapter S corporation shareholder has substantial income, he or she may be required to make quarterly estimated tax payments. Taxpayers are excluded from estimated payments if they owe less than $1,000 in tax in 2018 or had no tax liability in 2017 (with some limitations). The IRS website has a “Pay As You Go” page and also Pub. 505, Tax Withholding and Estimated Tax. The website and the publication may help business owners determine whether they will need to pay estimated taxes.
Foundations Seek SALT Relief
On October 11, 2018, community foundations from five states sent a letter to the IRS requesting relief from the state and local tax (SALT) proposed regulations. Under the proposed SALT regulations, a state tax credit that is equal to more than 15% of the charitable gift value is considered a “quid pro quo” that reduces the federal charitable deduction. All five states offer endowment credits that are above the 15% limit and potentially will be impacted by the SALT proposed regulations.
There are specific provisions in these state laws designed to encourage endowment gifts.
- Iowa – The Endow Iowa Tax Credit program enables donors to receive a 25% state tax credit for endowment gifts. Donors gave $45 million to Endow Iowa last year, bringing the program total to $504 million since the program was created in 2003. The endowed funds benefit over 4,000 charitable nonprofits and causes each year in Iowa.
- Kentucky – The Endow Kentucky Tax Credit allows donors to qualify for a 20% credit, with a total credit limit of $1 million. Donors must apply to the state to qualify for the credit. Since 2016, $5 million in endowment funds have been created in Kentucky under the program. Total endowment gifts by Endow Kentucky participants have been over $25 million.
- Maryland – The Endow Maryland program was created in 2015. Donors may receive a credit of 25% with a limit of $15,000 in tax credits each year.
- Montana – The Montana Endowment Tax Credit (METC) was created in 1997. It offers a credit of 40% of the federal charitable deduction with a limit of $10,000 per year per taxpayer. The credit applies to both endowments and planned gifts.
- North Dakota – The North Dakota Tax Credit for Charitable Giving was introduced in 2007. It enables donors who give $5,000 or more to receive a 40% tax credit, with a limit of $10,000 per year for each taxpayer. The Fargo-Moorhead Area Foundation estimates that the credit has facilitated over $100 million in endowment gifts.
The states noted, “The proposed regulations appear to cast a wide net and impact not only these government agencies or government-form charities, as addressed above, but also long-established charitable giving tax credits such as the endowment tax credits in our states – several of which were enacted specifically to provide additional incentives to give to charity through one’s local community foundation.”
The community foundations concluded by urging “the Treasury Department and the Internal Revenue Service to withdraw the proposed regulations and instead draft regulations that will more effectively target recently enacted laws and not jeopardize our state’s endowment credits.”
Georgia Representatives Request SALT Exemption
On October 18, 2018, five Georgia representatives asked the IRS to exclude state credit programs that pre-date the Tax Cuts and Jobs Act from the proposed SALT regulations.
Representatives Rob Woodall (R-GA), Jody Hice (R-GA), Tom Graves (R-GA), Karen Handel (R-GA) and Earl L. Carter (R-GA) signed the letter.
The five Republican Members of Congress recognized the purpose of the $10,000 limit on the SALT deductions as passed under TCJA. They agree that some states are passing workarounds to defeat the $10,000 limit and recognize that “those schemes should rightly be thwarted.”
Georgia previously created several educational and relief programs through state tax credits. In 2008, Georgia created the Qualified Education Expense Tax Credit Program and the Qualified Rural Hospital Organization Expense Credit Program. Under the Qualified Education Expense Tax Credit Program, over 13,200 students benefited from scholarships in 2017.
Because these state credit programs were not established with the intent of “aiding taxpayers in eluding or reducing tax liabilities owed to the federal government,” the Georgia representatives argue that these credits should be excluded from the final SALT regulations.
The five Members of Congress ask the IRS to “carefully review and consider all comments on the proposed rule, and we recommend that any final rule include a method that clearly differentiates pre-TCJA state tax credit programs from those newly created tax credit programs that have been adopted or being considered for the sole purpose of aiding taxpayers in sidestepping the newly imposed SALT limitations.”
Applicable Federal Rate of 3.6% for November — Rev. Rul. 2018-28; 2018-45 IRB 1 (18 October 2018)
The IRS has announced the Applicable Federal Rate (AFR) for November of 2018. The AFR under Section 7520 for the month of November is 3.6%. The rates for October of 3.4% or September of 3.4% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2018, pooled income funds in existence less than three tax years must use a 1.4% deemed rate of return.