The Tax Cuts and Jobs Act, a $1.5 trillion tax cut package, was signed into law on December 22, 2017. The centerpiece of the legislation is a permanent reduction of the corporate income tax rate. The corporate rate change and some of the other major provisions that affect businesses and business income are summarized below. Provisions take effect in tax year 2018 unless otherwise stated.
Cryptocurrencies can be used entirely within a virtual economy or can be used instead of a government-issued currency to purchase goods and services in the real economy (GAO Report: Virtual Economies and Currencies —Additional IRS Guidance Could Reduce Tax Compliance Risks (GAO-13-516), (June 18, 2013)). Cryptocurrency, also known as virtual currency, is a digital representation of value that functions as a medium of exchange, a unit of account, or a store of value, but is not backed by a government-issued legal tender. A few examples of popular cryptocurrencies are Bitcoin, Ethereum, and Litecoin.
Since virtual currencies don’t have the status of legal tender, the Internal Revenue Service has said it will treat virtual currency as property rather than currency, since it is not regulated by any central banking system (IRS Notice 2014-21). This means that the sale or exchange of a virtual currency that has gained value since they were acquired could trigger a tax liability.
Through certain exchanges, virtual currencies can be digitally traded between users and purchased or exchanged for U.S. dollars, other foreign currencies, or other crypto-currencies. Accordingly, taxpayers can have gain or loss on the exchange of virtual property. The tax treatment of that gain or loss, well, depends on a number of factors. Many of these factors have not been completely defined, as the AICPA points out in its comment letter to the IRS (AICPA Comments on Notice 201421, June 10, 2016).
Generally, convertible virtual currency (e.g., Bitcoin), which has an equivalent value in or acts as a substitute for real currency, is treated as property for federal tax purposes. Transactions using convertible virtual currency are subject to the general tax principles that apply to property transactions. A taxpayer who receives convertible virtual currency as payment for goods or services must include in gross income the currency's fair market value, measured in U.S. dollars, as of the date it was received. If a taxpayer successfully "mines" convertible virtual currency (e.g., uses computer resources to validate Bitcoin transactions and maintain the public Bitcoin transaction ledger), the currency's fair market value is includible in gross income as of the date of receipt (IRS Notice 2014-21) (U.S. Master Tax Guide® (2018), 785, Taxation of Miscellaneous or Other Income).
Selling or Exchanging Virtual Currency
Generally, stocks and virtual currencies are taxed the same when held as capital assets by the taxpayer, according to the IRS Notice. The character of gain or loss from an exchange of virtual currency for property depends on whether the virtual currency is a capital asset in the taxpayer’s hands. Thus, if virtual currency is a capital asset in the taxpayer’s hands, the taxpayer realizes capital gain or loss from the exchange of virtual currency for property. If the virtual currency is not a capital asset in the taxpayer’s hands, the taxpayer realizes ordinary gain or loss.
Taxpayers who exchange virtual currency for other property will have gain or loss on the transaction. Like other exchanges of property, the amount of gain or loss is based on the difference between the fair market value of the property received and the adjusted basis of the property given up. Thus, a taxpayer has taxable gain if the fair market value of the property received in exchange for the virtual currency exceeds the taxpayer’s adjusted basis for the virtual currency. A taxpayer has a loss if the fair market value of the property received in exchange for the virtual currency is less than the taxpayer’s adjusted basis for the virtual currency.
Taxpayers who engage in a like-kind exchange of property held for investment or for productive use in a trade or business may defer gain on the transaction. However, like-kind exchanges cannot be used for certain types of property including stocks, bonds, and foreign currencies. It is not clear if cryptocurrency can be disposed of in a like-kind exchange; and, if it can be, what would qualify as like-kind property. The AICPA has requested that the IRS clarify "if there are particular factors that distinguish one virtual currency as likekind to another virtual currency for section 1031 purposes" (AICPA Comments on Notice 201421, June 10, 2016).
Receiving Virtual Currency for Earned Income
Taxpayers have gross income if they receive virtual currency as payment for providing goods or services.
Employers and employees. Individuals who receive virtual currency, such as bitcoin, from their employer as payment for services must include the fair market value of the virtual currency in income. Employers that pay their employees’ wages in virtual currency must withhold tax on the wages. The fair market value of the virtual currency paid is subject to federal income tax withholding, Federal Insurance Contributions Act (FICA) tax and Federal Unemployment Tax Act (FUTA) tax. Employers must report such amounts on Form W-2, Wage and Tax Statement.
Independent contractors. An individual who receives virtual currency for performing services as an independent contractor has self-employment income equal to the fair market value of the virtual currency measured in U.S. dollars on the date of receipt.
Miners of virtual currency. Individuals will have gross income if they receive virtual currency for successfully mining virtual currency. An example of mining is using computer resources to validate bitcoin transactions and maintain the public bitcoin transaction ledger. When a “miner” successfully mines virtual currency, the miner has gross income equal to the fair market value of the virtual currency on the date of receipt of the currency.
An individual who mines virtual currency as a trade or business and not as an employee is subject to self- employment tax on the income derived from the mining activities. Self-employment tax is applied to the individual’s net earnings from self-employment from the mining activity, which is the gross income derived from the trade or business of mining less allowable deductions.
Gifts or Inheritance
The current IRS guidance on virtual currency transactions does not address the tax treatment of gifts and inheritances involving virtual currency. Since the IRS’s stated taxing principle is to treat virtual currency as property, gifts or inheritances of virtual currency should be treated as gifts or inheritances of other kinds of property.
Regarding Fair Market Value
Fair market value of virtual currency. In order to calculate gross income, gain or loss, or basis for virtual currency transactions, taxpayers must determine the fair market value of the virtual currency. Since virtual currency transactions are reported in U.S. dollars for tax purposes, taxpayers must determine the fair market value of virtual currency in U.S. dollars as of the date of payment or receipt of the virtual currency.
The fair market value for popular virtual currencies, such as bitcoin, ethereum or litecoin, can easily be determined. If a virtual currency is listed on an exchange and the exchange rate is established by market supply and demand, the fair market value is determined by converting the virtual currency into U.S. dollars at the exchange rate in a reasonable manner that is consistently applied. If the virtual currency is converted into a different real currency, then that amount must be converted into U.S dollars. Virtual currency converters are widely available on the internet.
Although the fair market value of virtual currency can easily be determined if it is listed on an exchange, the IRS has not provided any guidance on determining the fair market value of the hundreds of virtual currencies that are not listed on an exchange.
Taxpayer’s are responsible for maintaining adequate records and documentation to substantiate the accuracy and completeness of their tax return. Also, it’s possible that each virtual currency transaction is reportable in some form on a taxpayer’s tax return. Support of a tax professional who is familiar with the virtual currency environment is recommended to assist with reporting requirements. We are excepting a limited number of new clients this tax season. Contact our office today to schedule a consultation.
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act, a sweeping $1.5 trillion tax-cut package that fundamentally changes the individual and business tax landscape. While many of the provisions in the new legislation are permanent, others (including most of the tax cuts that apply to individuals) will expire in eight years. Some of the major changes included in the legislation that affect individuals are summarized below; unless otherwise noted, the provisions are effective for tax years 2018 through 2025.
Self-employment is the opportunity to be your own boss, to come and go as you please, and oh yes, to establish a lifelong bond with your accountant. If you're self-employed, you'll need to pay your own FICA taxes and take charge of your own retirement plan, among other things. Here are some planning tips.
The recent announcement that the IRS is turning over certain collection cases to third-party debt collectors has sent some shockwaves through our profession. The IRS has stated that only very old, inactive cases over a certain dollar limit will be referred to third-party collection agencies. The reality is that a taxpayer has the right to immediately request that their account be returned to the IRS for collection, and this may be beneficial for many taxpayers.
Disclaimer: This checklist is provided to help you start your business. Due to the various policy and legislative changes that occur frequently, some of these steps may not apply to your business. Additionally, there may be other steps that are required by your business that are not covered here. As always, legal counsel is strongly advised.
- Choose a business. Research the business idea.
- Consult your tax professional regarding tax aspects of various business entities.
- Consult an attorney regarding federal and state laws governing creation, ownership, and operation of the entity.
- Write a business plan and marketing plan. Choose a business name.
- See if the business name is available for use as a domain name. Register the domain name even if you aren't ready to use it yet. Choose a location for the business.
- Check zoning laws.
- File partnership, corporate or limited liability company papers.
- Contact the Internal Revenue Service to apply for your federal identification number and for filing your federal tax schedules.
- Apply for state employee identification number if you will have employees. Find out about worker's compensation if you will have employees.
- Apply for sales tax number if needed. File state tax forms.
- Check to get any required business licenses or permits. Register or reserve federal trademark/service mark.
- Register copyrights.
- Apply for patent if you will be marketing an invention.
- Order any required notices (advertisements you have to place) or your intent to do business in the community.
- Have business phone phone installed. Check into business insurance needs.
- Get adequate business insurance or a business rider to a homeowner's policy.
- Get tax information such as record keeping requirements, information on withholding taxes if you will have employees, information on hiring independent contractors, facts about estimating taxes, etc.
- Open a bank account for the business. Fund the entity.
- Hold all necessary organizational meetings to elect officers and directors. Have business cards and stationery printed.
- Purchase equipment or supplies. Order inventory, signage and fixtures. Get an email address.
- Find a web hosting company. Get your website set up.
- Have sales literature prepared.
- Place advertising in newspapers, online or other media if yours is the type of business that will benefit from paid advertising.
- Call everyone you know and let them know you are in business.
Many people dread tax time, but it can be even more frustrating if you have to wait longer than you’d hoped for your refund. Unfortunately, the Internal Revenue Service is warning that patience may be necessary this year. For one thing, identity theft and tax refund scams have become significant concerns, so the Service is taking extra measures to spot fraudulent returns. The IRS is also required to hold refunds for returns claiming the Earned Income Tax Credit and the Additional Child Tax Credit until mid-February.
You can help prevent any additional delays by ensuring that you’re ready with all the necessary documents to file your return, including Forms W-2 and 1099 reporting your income, and all the required receipts and other paperwork to ensure you qualify for your deductions or credits. Contact our office today with any concerns you may have about preparing to file your return. We can offer personalized answers to all your financial questions.
Partnerships (Form 1065) — The due date is moved from April 15 to March 15 or the 15th day of the third month after the year-end.
Form 1065 partnership returns that are completed by our office: Please submit related financial information before March 15, 2017 via the client portal or other appropriate method.
For Form 1065 partnership returns that are compiled by outside firms: Provide Schedule K-1s to our office upon receipt. If you are expecting several Schedule K-1s, they should be submitted as you receive them.
Please notify our office if you have K-1s or Forms 1065 that will be prepared by someone outside our firm and do not expect to have the financial documentation to complete the return by the deadline so we can file an extension for you.
S Corporation (Form 1120S) — No change, due dates remain March 15, allowing for preparation of Schedule K-1s as they relate to individuals and organizations
C Corporations (Form 1120) — Due date moved from March 15 to April 15; in most cases, returns will be due on the 15th of the fourth month after the year-end. However, although the due date of these returns has been pushed back a month, we encourage clients to submit the financial information necessary to complete these returns as soon as possible.
Individuals and Businesses — Foreign Bank and Financial Accounts Report (FBAR) (Report 114) — This form is required for individuals and businesses with a financial interest in, or signature authority over, at least one financial account located outside of the United States, and the aggregate value of all foreign financial accounts exceeding $10,000 at any time during the calendar year reported.
This due date change is the most significant for individual taxpayers; forms are now due April 15 rather than June 30. However, for the first time, a six-month extension to Oct. 15 will be available. Please include any and all information related to foreign accounts when submitting your individual, partnership or corporate tax return documentation.
Do you contribute to a health savings account, or HSA, to help you cover your medical expenses? Taxpayers are allowed to make tax-deductible contributions to HSAs if they have health plans that have high deductibles, based on Internal Revenue Service guidelines. If you have an HSA, you’ll be happy to hear that the annual deductible contribution limit certain coverage has been raised for 2017. For individuals (with self-only coverage), it will be increased by $50 from 2016 to $3,400. The limit for family coverage will be unchanged at $6,750.
Do you work at home or have a home-based business? If so, you should be aware that the IRS has created a simpler option for calculating the deduction for the business use of your home. The new option makes recordkeeping easier because, instead of maintaining records of specific home office expenses, you can use a standard rate per square foot. The rate is $5 per square foot (up to a maximum of 300 sq. feet or $1,500) for qualifying business use space in place of taking a pro rata percentage of items such as mortgage interest, taxes and repairs.
Keep in mind there are good and bad aspects to this “simpler” method. The new method gives you back your full interest and tax deduction on schedule A, but you will lose your depreciation and loss carryover deductions. Of course, you must still use your home office regularly and exclusively for business. This may be a welcome relief for some taxpayers, but it might not be the best choice for others. Is it the right choice for you? Please contact us for answers to your financial questions.
People are sometimes surprised to learn that the IRS regulates gifts over a certain size.
As a donor, you are responsible for reporting the gift if it exceeds $14,000 and paying the gift tax if you have given more than $5.45 million in cash or property (over a lifetime). Regardless of the amount, you cannot deduct a gift as you could with a charitable donation.
As a recipient, you do not need to include the gift as part of your taxable income. However, if you receive property other than cash, you will need to determine the cost basis at the time of the transfer to have the proper value in case you dispose of it later.
Discussed dependent care credits tonight with my brother and sister-in-law (parents of 5 month-old twins), so I thought I would share the information on the federal credit with you all as well. Also, check out the link below for allowable credits in your state.