May 3, 2019

Recent Tax Developments You Should Know About

Recent Tax Developments You Should Know About

Various important tax developments occurred in Q1 2019 that may affect you financially. Please review the following summary of changes.

Estimated Tax Penalty Relief

For 2018, the IRS is waiving the estimated tax penalty for any taxpayer who paid in at least 80% of their total tax liability through withholding, estimated tax payments or a combination of the two.  Relief was prompted by changes in the Tax Cuts and Jobs Act (TCJA) which have negatively impacted withholding due to repeal of the personal exemptions, many itemized deductions, and the capping of state and local income tax deduction to $10,000. Nearly 30 million taxpayers could be short on their 2018 withholdings. The IRS has provided procedures for either requesting a waiver or a refund for those who have already paid underpayment penalties.

Electric Car Credit Declines

Tesla and General Motors (GM) have each reached a total threshold of more than 200,000 sales of vehicles eligible for the plug-in electric drive motor vehicle credit under Code Sec. 30D(a). Accordingly, the credit for all new qualified plug-in electric drive motor vehicles sold (leases excluded from credit) by Tesla and GM have begun to phase out.  Please see the credit phase out schedules below:

Federal Tax Credit

For Tesla Vehicles Delivered

For GM Vehicles Delivered

$7,500

On or before December 31, 2018

On or before March 31, 2019

$3,750

January 1 to June 30, 2019

April 1 to September 30, 2019

$1,875

July 1 to March 31, 2020

October 1 to March 31, 2020

 

Qualified Business Income (QBI) Deduction: Final Regulations

The IRS issued final Code Sec. 199A regulations for determining the amount of the deduction of up to 20% of income from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust, or estate (the QBI deduction). The regulations cover a wide range of topics and discuss:

  1. Operational rules, including definitions, computational rules, special rules, and reporting requirements;
  2. Determination of W-2 wages and unadjusted basis immediately after acquisition of qualified property;
  3. Computation of QBI, qualified real estate investment trust (REIT) dividends, and qualified publicly traded partnership income;
  4. Optional aggregation of trades or businesses;
  5. Treatment of specified services trades or businesses (SSTB) and the trade or business of being an employee; and
  6. Rules for relevant passthrough entities, publicly traded partnerships, beneficiaries, trusts, and estates.

Qualified Business Income (QBI) Deduction: Rental Real Estate Safe Harbor

For non-corporate tax payers, under a new safe harbor, rental and lease income may qualify for the Code Sec. 199A deduction by treating the rental real estate as a “trade or business”. Solely for this purpose, a rental real estate enterprise will be treated as a trade or business if:

  1. Separate books and records are maintained to reflect income and expenses for each rental real estate enterprise;
  2. For tax years beginning prior to January 1, 2023, 250 or more hours of rental services were performed per year with respect to the rental enterprise; and
  3. The taxpayer maintains contemporaneous records on the hours of all services performed; a description of all services performed; the dates on which such services were performed; and who performed the services. (This contemporaneous records requirement does not apply to tax years beginning before January 1, 2019).

Options for Those Unable to Pay

The IRS outlined ways in which taxpayers may be able to defer paying their income taxes by way of installment agreements (such as a short-term (120-day) or long-term payment plan) or an offer in compromise.   As a reminder, a 6-month extension of time to file does not extend the time to pay.  Interest and penalties can be incurred if your tax is not fully paid by April 15th.

We anticipate these recent developments announced by the IRS will have substantial impact on certain individuals and businesses.  If you feel you may be affected, we can assist you in providing careful, personalized planning to ensure you maximize the benefit of these changes. Please contact us for more information about any of these developments to take advantage of favorable law changes and minimize the impact the unfavorable.