Tax Markers of a Partnership

Tax Markers of a Partnership

Let’s talk about partnerships, and what constitutes as one for tax purposes. According to the IRS, a partnership is when two or more owners “carry on a trade, business, financial operation, or venture and divide the profits therefrom”, while all income and deductions pass through to the partners. Under this description, a partnership can be formed by both entities or individuals. For each tax period, the business owners are to be taxed on the partnership’s income, while the partnership itself must file under Form 1065 to show each partner’s income share, deductions, losses, and gains. Additionally, the business owners should report these on their own tax returns as well. At first glance, this loose terminology of what constitutes as a partnership can be confusing. For instance, what happens when a married couple decide to go into business together? Would they then qualify as a partnership or a sole proprietor? To help clear the air, in case Luna v. Commissioner, the United States Tax Court lays out eight defining factors on what makes a partnership: 1) All parties involved agree on business decisions and to become a partnership; 2) Any contributions made by partners goes towards the business only; 3) Each partner has control over the business’ income and capital, and maintains the right to withdraw money at any time; 4) Each partner – whether principle or co-proprietor – must share in both the net profits and losses; 5) All business is conducted in the joint names of all parties involved; 6) All partners file their returns as a federal partnership, or provide additional legal representation as a collective enterprise;...
IRS Confirms New Meal Tax Deduction

IRS Confirms New Meal Tax Deduction

Since the new Tax Cuts and Jobs Act (TCJA), there’s been a lot of questions and rumors in the tax community, while the IRS has been hard pressed to clear up some of the confusion. Their latest Notice? Whether or not entertainment and meal tax deductions were cut. Turns out, the rumors surrounding that decision were true – the IRS officially confirming that entertainment write-offs are no longer accepted, while meal deductions will remain at 50%. With the new Notice 2018-76, comes a few simple rules: • All meals must qualify as a standard business expense in accordance with Section 162(a); • The expense cannot be extravagant, a luxury item, or over the top; • An employee or the business owner themselves must be present for the meal; • The meal purchased is given to a current or prospective client, customer, consultant, or business contact; and • If the meal is provided along with entertainment, such as purchased at a ballgame, the cost of the food or drink must be bought separately from the entertainment, or otherwise reported individually on tax records. In upcoming months, the IRS plans to release more publications on the details behind what qualifies as nondeductible entertainment and when business meals may be eligible for 50% deductions, but until then, taxpayers are advised to follow the regulations given in Notice 2018-76, as well as seek the advice of their tax professionals. If you have questions on how this change applies to you, consult with your CPA and see how this may affect your tax return. (Thanks to this article by Ken Berry for the...
New Employer Credit Available for Paid Family Leave Providers

New Employer Credit Available for Paid Family Leave Providers

Yet another provision to the Tax Cuts and Jobs Act (TCJA), employers who traditionally provide paid family leave to their employees, now have a new and improved tax credit available to them. Eligible through the years 2018 and 2019, the IRS affirms that for employers who either establish or fix existing paid family leave programs to qualify by December 31st, the employer credit can be applied for the entire tax year of 2018. There are a few changes as to what is considered “qualifying” paid family leave, however. In addition to the traditional stipulation that employee compensation must not exceed $72,000 to qualify for the credit, the paid family leave policy must also: • Provide at least two weeks of paid medical and family leave for every full-time employee, along with a similar amount for every part-time employee; • All paid leave must be at least 50% of the employee’s usual paycheck; and • Any paid leave given or taken by state or local government is not to be considered into the amount of the employee compensation at all. For more details on how to apply for the tax credit, calculate your amount, and the surrounding rules and limitations, check out the official IRS Notice...
New Per Diem Rates for Travel and Business Expenses

New Per Diem Rates for Travel and Business Expenses

Effective as of October 1st, the IRS has released their annual report of the updated per diem rates taxpayers may use for business and travel expenses. Used in the high-low substantiation method and to give taxpayers an idea of how much they can spend per day to leave them eligible for a deduction, the changed rates are as follows… For the special meal and incidental expense rate, those working in the transportation industry have a $66 allowance while within the U.S., and a $71 per diem for travel outside of the U.S borders. Local travel, however, has an incidental expense deduction of only $5. To set the limitations under the high-low substantiation method, travel to a high-cost area is set at a daily rate of $287, whereas a low-cost locality has a per diem of $195. Under those same two rates, a $71 allowance is given for meals in a high-cost locale, and $60 for meals in cheaper areas. When no meal or incidental expense rate applies, the per diem for travel to any high-cost locality within the U.S is $71, and $60 for travel to low-cost locales. Want to read the IRS release for yourself, or check which areas within the continental U.S are considered “high-cost”? Click here for the original notice, whereas our thanks goes out to Micael Cohn and this article for the summary...
7 Steps to Obeying Nanny Tax Laws

7 Steps to Obeying Nanny Tax Laws

Most of us when we think of the word “nanny” picture a twenty-something college student, watching the kids during the weekdays for cash before she heads home for the night. Rarely, if ever, do we think “employee, with payroll, a time-card, and W-2”. But did you know that under tax law that’s exactly how a nanny should be treated? If you’re about to hire a nanny, stop first to read just what’s required to be tax compliant. 1) Classify Your Nanny as an Employee As the IRS has consistently held that household workers are not independent contractors, but rather employees, not classifying a nanny as such can be labeled as felony tax evasion. After all, the family sets the rules, babysitting schedule, and provides the necessary equipment to keep the children fed and happy, meeting all the descriptors of an employee who should receive a W-2 at the end of each tax year. 2) Pay Overtime and At Least Minimum Wage Under federal law, all domestic workers are entitled to at least the federal minimum wage of $7.25 per hour, but many states and counties have higher minimums. Worker’s rights call for the highest minimum wage between state, local, or federal rulings to be paid, so be sure to check your area to see which rate applies. In addition, federal rules require overtime for any hours worked over 40 per week must be given to any nanny in your household – though some exceptions exist for live-in care and companionship. Failing to comply with either of these can result in costly lawsuits, so know what’s required of you as...
2018 Meal Entertainment Deduction Elimination

2018 Meal Entertainment Deduction Elimination

Are you a business owner that takes customers or potential clients out for dinner or entertainment? Or do you support your nonprofit organizations locally through their fundraising events? If so, please be aware that the write-off laws have changed in 2018. Where as in the past you used to be able to write off 50% of your entertainment or meal costs and 100% of your charitable donations, the new tax law has required that no entertainment be written off and only meals for travel are 50% deduction. And now charitable organizations would need to break out the total cost of the ticket price to show how much covers the actual event expense and how much is over and above, and only the amount over and above the expense is able to be written off. So if you’re counting on these tax deductions to help you save this coming year be aware that that’s not possible anymore. The only thing that you can do is if you have some special meal, such as in a celebratory event, you can still get a portion of that write-off as well. Or again, if you’re traveling for a seminar or things like that, you can still have that written off. But it’s really important for you to also make sure that the nonprofit organization gives you a breakdown for the ticket price so you can at least write off the portion over and above the expenses they incur for that deduction. It’s also really important that your bookkeeping would track all of this properly. If you just lump everything into a meals and...

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