January 31, 2018 § Leave a comment
There has been one common theme in almost every tax conversation I have had with friends and family over the last couple of months….. Bitcoin.
What is it? How is it valuable? Will I get rich investing in cryptocurrency?
“I don’t know” is a standard response to these questions from most CPAs these days. But as CPAs, we do need to be aware of the taxation issues involved when holding cryptocurrency for investment. We also need to understand the tax impact of business owners accepting virtual currency for payment of goods and services, as well as using virtual currency as payment for business expenditures.
Cryptocurrency, such as Bitcoin, is a type of ‘virtual currency’ based on cryptographic algorithms and block-chain technology. Bitcoins are digitally ‘mined’ by solving very complicated math problems, thereby verifying a public record of transactions for that Bitcoin.
According to IRS Notice 2014-21, “Bitcoin is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value.” Virtual currencies, like Bitcoin, can be used like any other “normal” currency, or treated as an investment instrument, and these different uses can cause different taxable events.
A business owner may accept Bitcoin as payment for goods and services. The business would record ordinary income based on the fair market value (FMV) of the bitcoin at the time it was accepted. This FMV is then treated like any other income and is taxable. As Bitcoins are also treated as an investment instrument, basis and gain/loss impact must also be considered for every bitcoin transaction.
Let’s say the business owner takes the Bitcoin received for payment and uses that bitcoin to pay for business expenditures. The business would record a deductible business expense at the FMV of the Bitcoin, at the time of the transaction. The business would also record gain or loss based on the FMV at the time of the transaction and the basis in the Bitcoin used as payment for expense. Thus, in this scenario, the business owner would have two separate taxable events if they used Bitcoin to pay for business expenditures.
Bitcoin can also be held for investment use by an individual. In this case, the individual would have a taxable event every time they sold Bitcoin on an exchange, or used Bitcoin to pay for personal expenditures. The individual taxpayer would calculate a taxable gain/loss based on the FMV at the time of the transaction less their cost basis in that Bitcoin. (Note any virtual currency received by an individual as compensation for goods or services provided is treated as ordinary income.)
The main thing to remember with personal or business cryptocurrency transactions is that the currency must be “held for investment” to allow a deduction of any potential loss. The gain is always taxable!
(Please note – In the past, some taxpayers have attempted to apply like-kind exchange treatment to certain types of cryptocurrency transactions, in order to delay the recognition of taxable gain. The like-kind exchange provisions of the Internal Revenue Code have been adjusted by recent tax reform, and no longer allow any property, other than real estate property, to be eligible for like-kind exchange tax treatment.)
(Ref. Thomson Reuters Checkpoint Tax Action Memo-1854, 6/6/2017)
January 24, 2018 § Leave a comment
Change is in the air, at least when it comes to taxes. There is both good and bad within the new Tax Cuts and Jobs Act (TCJA) that was signed into law in late 2017; however, for most businesses a positive impact is expected. You have probably heard a lot about tax reform in the past month, but what are the things your business should know about right now to proactively plan for your 2018 tax return? Below are four items in the TCJA your business should be aware of and what you can do right now in preparation of the tax law change.
- If your business is an S-corporation, there may be tax savings in converting to a C-corporation. One of the biggest changes in the tax reform bill was that of the C-corporation tax rate dropping from 35% to 21%. S-corporations are still taxed at your individual tax rate; however, there is also a valuable 20% deduction available to provide some tax relief to business owners (sole proprietorships, partnerships, and S-corporations). Unfortunately, there is not a clear-cut answer on when an S-corporation should switch to a lower tax rate C-corporation. It may be worth your time to discuss your specific situation with our CPAs to determine if there are tax savings in converting from an S to a C-corporation.
- Deducting the cost of property and equipment in one year became easier under the TCJA. Section 179 limits have increased, and 100% bonus depreciation is now available. In 2017, Section 179 allowed for a $510,000 deduction with a phaseout beginning at $2 million of assets placed in service. Under the TCJA, Section 179 increased to $1 million with phaseout beginning at $2.5 million. In addition, the new law allows for 100% bonus depreciation for both new and used assets placed in service after September 27, 2017. This gives businesses the green light to invest in equipment and receive a full deduction in the same year. As a reminder, there are phaseouts to be aware of along with tax strategy for future years, so discuss with our CPAs prior to making any major purchases.
- One downside of the TCJA is that entertainment expenses are no longer deductible. Activities related to amusement and recreation for a client including dues to social, athletic, or sporting clubs are no longer deductible. Meals are still subject to the 50% deductibility rules. In addition, meals provided on the employer’s premises for convenience are also now subject to the 50% rule, whereas before, they were 100% deductible. Many business entities have historically grouped meals and entertainment into one account. With the difference in deductibility for meals and entertainment, it would be best to split these into two separate and distinct accounts. This will prevent you or your accountant from having to dig through this account next year to determine what is and is not deductible.
- Employee payroll withholding tables have been updated due to the change in the individual tax brackets in the TCJA. The IRS released the updated tables last week. Many accounting software programs, like Quickbooks, have updated their systems for the change. However, employees also need to be aware of this change so they can adjust their withholding appropriately for their 2018 income taxes. Expect your employees to want to change their withholding amounts by filling out new Form W-4s, especially when the IRS releases a calculator in mid-February to better help individuals determine their tax liabilities.
While there are many changes in the TCJA, the above is a good start in helping your business prepare for the new tax law. Let McGowen, Hurst, Clark, and Smith be your resource in navigating these changes and finding tax saving strategies for your business.
January 17, 2018 § Leave a comment
As I am sure you have heard, Congress passed new tax legislation just in time for President Trump to call it a Christmas gift from the White House. Well, we are yet to see how much of a gift it is, but one thing we do know is that it is going to change how your taxes are figured and, for at least the next year, it will complicate your tax return. So what was included in this gift? Let’s unwrap it and see.
- Corporate tax rates lower from a maximum of 35% to 21% beginning in 2018.
- Expansion of first year depreciation: 100% bonus depreciation is allowed for qualifying property for the next 5 years. After that, the 100% will decrease by 20% per year until it is eliminated.
- Section 179 is expanded, which allows businesses to immediately expense qualifying property. It would increase from $510,000 in 2017 to $1 million in 2018.
- Restriction of business interest deductions: Beginning in 2018, interest would be limited to 30% of adjusted gross income, but only on businesses with revenue above $25 million.
- Net operating losses can no longer be carried back two years. It also limits the net operating loss deduction to 80% of taxable income for losses incurred after December 31, 2017.
- Like kind exchanges are eliminated for personal property such as equipment or vehicles, but are still allowed for real property.
- Cash accounting has been expanded to businesses that have $25 million of gross receipts or less.
- Domestic Production Activities Deduction (DPAD) has been eliminated beginning in 2018.
- Corporate AMT (Alternate Minimum Tax) would be eliminated for businesses.
- Individual tax brackets have lowered to the seven rates of 10%, 12%, 22%, 24%, 32%, 35% and 37%. The top rate lowered from 39.6% to 37%. Maximum rates for capital gains and qualified dividends remain as they are under current law.
- Standard deduction increases to $24,000 for married taxpayers, $12,000 for single taxpayers and $18,000 for head of households. In 2017, the standard deduction is $12,700 for married taxpayers, $6,350 for single taxpayers and $9,350 for head of households, so it is almost double the deduction.
- Personal exemptions are eliminated. The personal exemption is $4,050 for each taxpayer and dependent for the 2017 tax year.
- Child tax credit is increased from $1,000 per child to $2,000 per qualifying child. This applies to children under 17 at the end of the year. The act also would allow $1,400 to be refunded.
- There are several changes to itemized deductions: the deduction of state income taxes and property taxes will be limited to a maximum of $10,000; home mortgage interest will be restricted to only new acquisition indebtedness up to $750,000; and home equity line of credit interest will no longer be deductible. Also, miscellaneous deductions such as employee business expenses, investment fees and tax preparation fees will no longer be deductible.
- Alimony payments are no longer deductible which means that the income is no longer taxable as income to recipients.
- Moving expenses are no longer deductible unless you are a member of the Armed Forces.
- Individual AMT (Alternate Minimum Tax) would be retained, but the exemption amounts will be substantially increased so less people are affected by it.
- Penalty for not having health insurance coverage will be eliminated beginning in 2019.
These are just some of the changes to the tax law. We will continue to research and monitor the changes to see how this unfolds so we can continue to advise you on the effects of this new tax law. Each individual will need to look at their personal tax situation to determine how big of a reduction in taxes they will receive – that is, if they receive any reduction. In the meantime, HO-HO-HO and Happy New Year!