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Posts by BA Jones

Tax Reform – The New and Improved Standard Deduction

Then, the good news for many filers is the nearly doubled standard deduction.  Most tax policy wonks estimate more than half of all Schedule A filers will now happily take the standard deduction for federal purposes.

$24,000         Married/Joint

$12,000         Single and Married/Separate

$18,000         Head of Household

Formerly, you had a deduction, and an exemption.

Your itemized deduction included state income taxes, home mortgage interest and real estate taxes (for up to 2 homes) plus charity, medical (within limitations,) and certain business expenses (within limitations,) among other things.  State and local taxes (SALT) now have a limitation of $10,000.  This applies to your state income taxes, any sales tax, personal property taxes, and real estate taxes.  Limiting this to $10K hurts a lot of people.  However, the powers-that-be felt the new limit contributed to a leveling of the playing field.  We shall see.  I do know a lot of DIY people did not understand Schedule A, and mistakes were very common.

Also changed – you can no longer take a deduction for your investment fees, your tax prep, or your employee business expenses.  Granted, most regular folks never got this deduction because even if they filled out the forms, the amounts did not go over the threshold.  But it was apparently fun trying.

Some people will still itemize!  I expect seniors will still have heavy medical expenses, and some people will still be extremely charitable.  They talked about limiting charity, but they did not do it.  (Yet.)  Some people are reorganizing how they give so as to improve their tax situation.  Example:  Give a whopping amount every second (or third) year so as to itemize, but then slack off to the standard deduction in the off years.

As for that exemption – well, it’s just gone, too.  No more multiplying by all the people you managed to cram into your tax return.  Instead, there is an increased $2000 deduction for each child under age 17, and they’ve added a $500 “Other Dependent Credit” for miscellaneous other dependent relatives.

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Tax Reform – The Forms

The forms were restructured.

All people now file on the same Form 1040.  No 1040-A.  No 1040-EZ.

There is rumor of a new form for seniors (1040-SR,) but nobody really knows why.  If both rich and poor non-seniors can file on the same 1040, why can’t rich and poor seniors file on the same 1040.  Maybe 1040-SR will have larger type?  Or bigger spaces to write in?

What happened to the postcard?  Think about it – do you really want your SSN sent by postcard through the mail?  Ted Cruz may be a helluva guy, but this was not a good idea.

Instead, we have 2 half-pages, which are thankfully being printed on 1 side of 1 piece of paper.

The top half is the demographics, in this order:

Your filing status

Your name and SSN

Your spouse’s name and SSN

Your address

Your dependents with SSN, etc

Your signature (and mine)

 

The second half of the page is a quick recap of your income, and how it’s taxed.

The most basic income information (totals for wages, interest, dividends, IRAs and pensions, and Social Security benefits) comes first.  The rest of the information has been organized into 6 sections, which are called Schedules 1, Schedule 2, Schedule 3, Schedule 4, Schedule 5, and Schedule 6.  (Clever.)  Pretty much all of the forms and schedules we used to file have been coordinated into these 6 schedules, and their totals flow to the second half of the 1040 page.

But some information appears on its own line, with no help from a newly numbered Schedule.  This includes your deduction (standard or itemized,) the new QBID, any withholding totals, and various refundable credits, plus the math.  I think they could have done a better job.

It is interesting to note that they managed to highlight the refund section by putting the word “Refund” in large, bold type, offset to the left, while they downplayed any amount you might owe by using a smaller font and tucking this information at the very bottom.

And did you notice the very first line, up at the top, was your filing status?  Now we know what they’re really interested in.

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Tax Reform – Intro

Tax Reform – Like it or lump it – it’s the law. 

Late December 2017, Congress gave the American people the most far-reaching tax code changes since income taxes were first shoved down our throats created.  They changed forms, rules, and thresholds.  Some cherished provisions were wiped away, and new twists were created.  Some changes are “permanent” while others are “temporary.”  In my opinion, now that congress has a taste for tax-law tinkering, nothing in tax law will ever be permanent, and I fully expect each new administration – state and federal – to take a swipe at it.  Be that as it may, our government is still issuing guidance on various provisions.

And so we begin a series on Tax Reform.  Not everything…just the HIGHLIGHTS that impact my people, and just the broad strokes because if you really want all the details, you may as well read all 400 pages of the Tax Cuts and Jobs Act of 2017, and then move on to the hundreds of additional pages of guidance issued (and still being issued) by the Internal Revenue Service.

Most people just want to know what it means in practice, and so that is our focus.

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LLC? LLP? Partnership?

Food for thought for the would-be entrepreneur (part 7 in a series)

A long, long time ago, a person who started a business was a sole proprietor, and 2 or more people who shook hands to begin a business were partners.  (And nobody was a “member.”)

A partnership happens spontaneously anytime 2 people, together, buy a house to flip – or begin any other money-making venture.  A partnership does not necessarily have “LLC” after its name, but it can.  It can also have “LLP” (limited liability partnership.)  A partnership does not even need a legal filing, though it would probably be a good idea.  That is, the group really can just shake hands and start the business.

The distinction between multi-member LLC and partnership is very small, and as far as I can tell, functionally irrelevant for tax purposes.  Most partnerships now register with their state and get the all-encompassing FEIN.  Most partnerships also formally establish themselves as LLCs.  (or LLPs.)

The real difference is fundamentally the paperwork prepared (and signed!) in advance.  Without any paperwork, that is, without any partnership agreements, a group of 2 or more people who start a venture with a profit motive are depending upon the laws of their state to work out any issues and to determine who has what responsibilities and who gets what money.

Consider this:  Kjeld and Knud shake hands on a house-flipping venture.  If Kjeld wanders away and leaves Knud to finish the job, but there is no paperwork, the state could still determine that Kjeld gets half the proceeds of the eventual sale.

Furthermore, if the money trail is non-existent, or comprised primarily of commingled receipts, Knud might not even be able to reimburse himself for all the supplies and materials he paid for from his own funds.

Bottom line:  visit a lawyer!  If you can’t afford a few hundred dollars to protect yourselves from each other, you aren’t ready to go into business.

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But what if it’s “we,” not just me? Multi-member LLC

Food for thought for the would-be entrepreneur (part 6 in a series)

So it’s not just you, but you and your buddy?  Or you and your 14 cousins?  No problem!  You can also form your business venture as an LLC.

What’s the same?  The filing process is much the same.  The banking requirements are definitely the same.  The need to keep your personal and business bank and credit card activity separate continues to be the same.  You must get a federal ID number.  My recommendation for insurance persists, too.

What’s different?  With multiple members, you are no longer treated as a disregarded entity for tax purposes.  Instead, for income tax purposes, the entity’s activities are reported on Form 1065.  (Most states also have a stand-alone form for multi-member LLC’s that file Form 1065 for federal purposes.)  Form 1065 is the federal form for partnerships.  Most multi-member LLCs are de facto partnerships, and they follow their state’s partnership tax rules.

Another big difference is that you really should visit a lawyer to draw up a partnership agreement between all of you.  You may be BFFs today, but the demands of business have a way of shoving wedges between even the closest of friends.  A partnership agreement will address each person’s responsibilities, the way money goes into the venture, the way money comes out of the venture, and what to do if things go south.  Do not get this from your uncle, the real estate attorney!  Spend the time and money to visit an experienced business attorney who will ask you plenty of hard questions.  Be prepared!

With a multi-member LLC, it is very important that you track money, especially money between the partners/members and the LLC.  This includes the money each person contributes and the money each person takes out, as well as each person’s share of annual profits/losses.

Finally, like the sole member LLC, the people in a multi-member LLC are still called “members.”

As for taxes…we’ll address that in its own article.

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Next? Sole member LLC

Food for thought for the would-be entrepreneur (part 5 in a series)

In an earlier article, we brushed up against the concept of “protection from exposure to legal liability,”  and we’ve seen that there is absolutely no such automatic protection for the sole proprietor.  It is for this very reason that so many people opt to become a sole member LLC.  (Sole member LLC = single member LLC = sole LLC = single LLC.)

LLC stands for Limited Liability Company.  It can have many owners/partners, or just one.  The name says it all:  liability has now been limited.  For a simple filing fee,* you’ve created a whole new entity with its very own federal ID number.

[ *This fee varies by state, but in NJ is still only $125. ]

For tax purposes, the LLC still files on Schedule C as a sub-form of your personal 1040.  At the federal level, you will be subject to self-employment tax in addition to regular income tax.  At the state level, you will just be subject to income tax.  And yup:  you are still a disregarded entity.  (Out of context, this is such a terrible phrase.)

And now a word of caution:  just because you paid a fee to acquire that limit to liability does not mean you don’t need insurance.  Depending on your activities, this could still be a requirement, rather than just a good idea.

And a second word of caution:  just because you paid a fee to acquire that limit to liability does not mean that you can’t inadvertently lose it!  Depending on your business practices, you could shred that protection.  Keep separate bank accounts for business and personal needs.  Don’t comingle credit card use, either.  Example:  Groceries are a personal expense.  If you buy coffee for the office, it gets its own receipt.

Every time your purchases share a receipt or bank account or credit card, you are chopping away at that nice thick liability wall that you purchased.  The smallest nick can be enough for someone to claim it isn’t really there at all.  The most likely party to make this claim is the IRS (and the second is your state.)  The most likely time for such a claim to be made is during an audit.  This means, a business audit turns into a personal audit, and vice versa.  Do you really want every stray deposit into your personal checking account to be considered business income?  This would apply to that $500 check from Aunt Tillie for your birthday, and the coin-counting deposit of all those coins you saved up for the last 10 years.

Best practice is to immediately set up separate banking.  Today, many banks will allow a sole LLC bank account to show up on your personal online banking page.  This allows you to easily transfer money between accounts, and provides an excellent paper trail.

Worst practice is to write a check a $1000 check from one of the accounts, and only deposit $900 of it in the other (taking the extra $100 in cash.)  Don’t do this!  (Oh, the troubles I’ve seen from this…)

Take steps to keep your credit and debit cards and purchases separate, even if you have to paste a big shiny star on one of them to make it obvious.  If you do make a mistake and spend $88.88 on the wrong card, immediately reimburse the other account for the exact amount, preferably by check, and save that receipt.  Maybe having to do so much extra work will remind you to be more careful the next time.

On a personal level, my only misgiving about this entity is that the technical, legal term for the owner/founder is “member.”

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What’s the simplest solution? Sole Proprietor

Food for thought for the would-be entrepreneur (part 4 in a series)

Simply stated, a sole proprietor is a person who is “doing something” with the intent of making money.  All it takes to be a sole proprietor is for somebody to pay you for your efforts.

This means most babysitters are sole proprietors.  Other examples include a granny who takes in ironing, a housewife selling cosmetics from a catalog, a 12 year-old with a snow shovel (or leaf rake) going door-to-door, the youngster with a lemonade stand, and anyone selling on Ebay (or the equivalent.)  Granny might be trying to earn enough to keep the lights on while junior just wants to buy comic books, but they each have what the IRS calls “a profit motive” – that is, they each want “to make money.”

But wait!  Before our system got so complicated and people worried so much about liability, pretty much every business that wasn’t a giant corporation was a sole proprietorship.  Doctors, lawyers, accountants, barbers, farmers, shop keepers… And they still can be, today.

Some jurisdictions require that sole proprietors register, which could come with fees.  This is generally accomplished at the local or county level rather than the state level.  There could also be zoning restrictions if you work out of your home.

Being a sole proprietor means you are the one-and-only owner and boss.  You are also the one-and-only responsible party and all profits are yours.  Think of it as having yet another pocket built into your pants.

All problems are yours, too!  As a sole proprietor, the business is considered an extension of your personal person.  Suing the business is the same as suing you personally:  either way, both personal assets and business assets are at risk.  A recommendation: get insurance!

You will file annual taxes on Schedule C, which is a sub-form of the IRS individual 1040.  At the federal level, you will be subject to self-employment tax in addition to regular income tax.  At the state level, you will just be subject to income tax.  The IRS has a term for this:  Disregarded Entity.  This sounds terrible, but it only means that for tax purposes, the business is not a separate entity with its own stand-alone tax form.

Yes, you can have employees.  To have employees, you would need a Federal Employer Identification Number (FEIN.)  You would also need to register at the state level in order to remit your employment taxes to the state.

Yes, you can sell products/services that are subject to sales tax.  You will need to register at the state level. Some states allow you to use your SSN, but others require you to obtain an FEIN.  (The FEIN is not used strictly for employment taxes.)  Be careful!  Some states actually make you pay for a license to collect sales tax.  I think this is very weird, but it probably allows the state to fine you more if you don’t get that precious license in advance.

Yes, there could be other state/local taxes, depending on your industry and your geography, and the same registration procedures would be necessary.

This is the easiest form of business to start, but as you can see, you definitely need to call your local and county governments to find out non-state-level rules.

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How?

Food for thought for the would-be entrepreneur (part 3 in a series)

I can feel you getting impatient!  All you really want to know is, How do you do it?

To form any business entity, you have choices.  You can meet with an attorney, or you can do it with one of those online companies, or you can call a number from a radio ad, or you can do it online, all by yourself.  Let’s look at these for a minute.

DIY

I know all you do-it-yourselfers like the idea of skipping straight to the federal and/or state websites where the only cost is the state filing fee, but, beware!  You sure aren’t getting any expert advice at all if you choose this method.  Too many times, I’ve seen the person actually only do half the filing.  NJ for instance, is a 2-part process, and the IRS is completely separate.  Don’t rush into this!

Radio/Online Solution

If you follow the advice of the radio/online ad, it is highly likely you will get no advice.  None.  Not legal advice, not tax advice, nothing.  Think about it:  their business model is just luring you in to spend money on a standard product which may or may not be suitable for your needs.  Additionally, NJ, like other states, has peculiarities which are not taken into consideration by the easy ad options.  From what I’ve seen, pretty much everyone who used this method got a shiny binder full of meaningless papers.  It may be cheaper than the lawyer, but it’s hardly better than DIY.

Attorney

It is hoped that an attorney will give you solid, dependable, legal advice, and basically explain all the different choices, and the ramifications of each, as it pertains to the state where you live and work.

Unfortunately, you have to make sure you have an appropriate attorney!  A wills-and-estates attorney isn’t the best choice for forming your business.  Neither is a personal injury attorney.  Or a divorce attorney.  Or a real estate attorney.  And maybe not even your well-meaning brother-in-law.

You need to find someone who specializes in business matters or you won’t get very good advice.  You are going to pay more to the attorney than to anyone else, so you should make sure you get one that is worthy.  Then, ask questions!  You’re paying for it:  get your money’s worth!

Disclosures

Sadly, I’ve seen all of these methods fail.  DIY folks can end up being registered for the wrong state tax forms.  The online/radio solution ignores a state basic, or provides a feature that is useless in that state.  Sure, Mr. DIY might not complete all the steps…but I’ve seen the radio/online solution and the attorney fail in this same way.  One fellow paid $800 to an attorney to become a sole member LLC…but he did not even get a federal ID number.  Some attorneys just log into the online solution and read the screens to you.  Other attorneys make a big deal out of doing all the paperwork longhand, mailing it in, then making you come back when it’s all been completed; I think this is just a ruse to let you think it is more complicated than it really is.  A really crazy one was a fellow whose trusted banker insisted he could do it for him for free:  he was trying to establish a bagel deli, but he ended up registered as a farm with seasonal labor.

In reality, for most small entities, the entire process can be done online in about an hour…if you know what you are doing.

Please be careful.  Please do your due diligence!

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