The Tax Cuts and Jobs Act (TCJA) provides a valuable new tax break to noncorporate owners of pass-through entities: a deduction for a portion of qualified business income (QBI). The deduction generally applies to income from sole proprietorships, partnerships, S corporations and, typically, limited liability companies (LLCs). It can equal as much as 20% of QBI. But once taxable income exceeds $315,000 for married couples filing jointly or $157,500 for other filers, a wage limit begins to phase in.

Full vs. partial phase-in

When the wage limit is fully phased in, at $415,000 for joint filers and $207,500 for other filers, the QBI deduction generally can’t exceed the greater of the owner’s share of:

• 50% of the amount of W-2 wages paid to employees during the tax year, or
• The sum of 25% of W-2 wages plus 2.5% of the cost of qualified business property (QBP).

When the wage limit applies but isn’t yet fully phased in, the amount of the limit is reduced and the final deduction is calculated as follows:

1. The difference between taxable income and the applicable threshold is divided by $100,000 for joint filers or $50,000 for other filers.
2. The resulting percentage is multiplied by the difference between the gross deduction and the fully wage-limited deduction.
3. The result is subtracted from the gross deduction to determine the final deduction.

Some examples

Let’s say Chris and Leslie have taxable income of $600,000. This includes $300,000 of QBI from Chris’s pass-through business, which pays $100,000 in wages and has $200,000 of QBP. The gross deduction would be $60,000 (20% of $300,000), but the wage limit applies in full because the married couple’s taxable income exceeds the $415,000 top of the phase-in range for joint filers. Computing the deduction is fairly straightforward in this situation.

The first option for the wage limit calculation is $50,000 (50% of $100,000). The second option is $30,000 (25% of $100,000 + 2.5% of $200,000). So the wage limit — and the deduction — is $50,000.

What if Chris and Leslie’s taxable income falls within the phase-in range? The calculation is a bit more complicated. Let’s say their taxable income is $400,000. The full wage limit is still $50,000, but only 85% of the full limit applies:

($400,000 taxable income – $315,000 threshold)/$100,000 = 85%

To calculate the amount of their deduction, the couple must first calculate 85% of the difference between the gross deduction of $60,000 and the fully wage-limited deduction of $50,000:

($60,000 – $50,000) × 85% = $8,500

That amount is subtracted from the $60,000 gross deduction for a final deduction of $51,500.

That’s not all

Be aware that another restriction may apply: For income from “specified service businesses,” the QBI deduction is reduced if an owner’s taxable income falls within the applicable income range and eliminated if income exceeds it. Please contact us to learn whether your business is a specified service business or if you have other questions about the QBI deduction.

© 2018

[et_pb_section bb_built=”1″][et_pb_row _builder_version=”3.5.1″][et_pb_column type=”4_4″][et_pb_text _builder_version=”3.5.1″]

Wayfair Ruling Redefines State Tax Filing Requirements for Businesses

 

By: Griffin Jankowski, CPA

Supervising Senior Accountant

 

As e-commerce continues to grow and evolve so do the states methods for the assessment and collection of sales and use tax. We wanted to take the opportunity to alert you of a recent Supreme Court ruling which will likely have a significant impact on numerous businesses’ sales tax compliance requirements moving forward. On June 21^st, 2018 in South Dakota v. Wayfair, Inc. the Supreme Court standardized taxing rules for traditional retailers and online transactions, ruling that states and localities may collect sales tax on all purchases over the internet. This decision overrules the previous case law set in Quill Corp. v. North Dakota which ruled in favor of a physical presence requirement test for purposes of the assessment and collection of sales and use tax.

Specifically, in 1992 the Supreme Court ruled in Quill Corp. v. North Dakota that it was unconstitutional for states to demand that out-of-state sellers collect and remit sales taxes on all purchases. The court said that states could not extend their taxing authority to companies that had no stores, warehouses or “physical presence” within the state. As online shopping has grown exponentially since 1992, the state of South Dakota and 41 other states urged the high court to revisit the question and consider overturning Quill Corp v. North Dakota. In 2016, while states continued to push for the reversal of the Quill decision, South Dakota became the first state to enact a pure economic nexus statute for sales and use tax collection purposes. More specifically, South Dakota required all entities with annual South Dakota sales of at least $100,000 or 200 separate transactions in the state to collect and remit South Dakota sales and use tax. As a result of noncompliance, South Dakota v. Wayfair, Inc. became a significant Supreme Court case to determine the legality of a state’s right to collect sales and use tax from online retailers selling to customers located in their state. The Supreme Court concluded that the long-standing physical presence rule put businesses with a physical presence in the state at a competitive disadvantage compared to remote sellers because entities with a physical presence were required to collect and remit sales and use tax while remote sellers were not held to the same requirement.

The South Dakota v. Wayfair, Inc. case fundamentally redefines a taxpayers potential filing requirements in all states. Not only are additional sales and use tax filing requirements expected to be enforced, states may also begin to require income tax returns from taxpayers with economic nexus. It can be expected for other states to act quickly to enact their own economic nexus standards and thresholds to capture sellers without a physical presence in the state.  Specifically, the following states already have laws in place to allow them to begin enforcing economic nexus rules in the very near future; Alabama, Connecticut, Georgia, Hawaii, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Minnesota, Mississippi, North Dakota, Oklahoma, Pennsylvania, Rhode Island, South Dakota, Tennessee, Vermont, and Washington. Although many states do not currently have laws in place to enforce an economic nexus regime, it likely will not be long before they mirror the aforementioned economic nexus enforced states.

As we move forward with our internal analysis of this ruling along with monitoring various specific state developments, we feel it is important to be proactive in determining the states where economic nexus may exist. If you have concerns or questions regarding your current or future sales and use tax requirements in light of this recent development, we suggest contacting one of our tax professionals to further discuss potential filing requirements resulting from the South Dakota v. Wayfair, Inc. decision. We appreciate the opportunity to serve your business needs and look forward to working with you to ensure you meet your compliance requirements.

[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section]

Technology is tricky. Much of today’s software is engineered so well that it will perform adequately for years. But new and better features are being created all the time. And if you’re not getting as much out of your financial data as your competitors are, you could be at a disadvantage.

For these reasons, it can be hard to decide when to upgrade your company’s accounting software. Here are three keys to consider:

1. Your users are ready. When making a major change to your accounting software, the sophistication of the system needs to align with the technological savvy of its primary users. Sometimes companies buy expensive software only to have many of its features gather virtual dust because the employees who use it are resistant to change.

But if your users are well trained and adaptable, they may be able to extract added value from a more sophisticated accounting system. For instance, they could track key performance indicators to generate more meaningful financial reports.

2. The price is right. You’ll of course need to consider the costs involved. As holds true for any technology purchase, project leaders must set a budget and focus the search on products and vendors offering only the functions your company needs.

But don’t stop there. Explore add-on services such as free trials, initial training and ongoing support. You want to get the most value from the software, which goes beyond the new and improved features themselves.

3. You need to integrate. This is the concept of networking your accounting system with your other mission-critical systems such as sales, inventory and production.

For most companies today, integration is essential to maximizing the return on investment in accounting software. So, if you haven’t yet implemented this functionality, an upgrade may be highly advisable. Just be aware that a successful companywide integration will call for buy-in from every nook and cranny of your business.

Typically, if a company doesn’t need any major accounting process changes, it probably doesn’t need a major accounting software change either. But if upgrading both will help grow your business, it’s absolutely a step worth considering. We can provide further guidance and info.

© 2018

Because donations to charity of cash or property generally are tax deductible (if you itemize), it only seems logical that the donation of something even more valuable to you — your time — would also be deductible. Unfortunately, that’s not the case.

Donations of time or services aren’t deductible. It doesn’t matter if it’s simple administrative work, such as checking in attendees at a fundraising event, or if it’s work requiring significant experience and expertise that would be much more costly to the charity if it had to pay for it, such as skilled carpentry or legal counsel.

However, you potentially can deduct out-of-pocket costs associated with your volunteer work.

The basic rules

As with any charitable donation, for you to be able to deduct your volunteer expenses, the first requirement is that the organization be a qualified charity. You can use the IRS’s “Tax Exempt Organization Search” tool (formerly “Select Check”) at https://www.irs.gov/charities-non-profits/tax-exempt-organization-search to find out.

Assuming the charity is qualified, you may be able to deduct out-of-pocket costs that are:

• Unreimbursed,
• Directly connected with the services you’re providing,
• Incurred only because of your charitable work, and
• Not “personal, living or family” expenses.

Supplies, uniforms and transportation

A wide variety of expenses can qualify for the deduction. For example, supplies you use in the activity may be deductible. And the cost of a uniform you must wear during the activity may also be deductible (if it’s required and not something you’d wear when not volunteering).

Transportation costs to and from the volunteer activity generally are deductible, either the actual cost or 14 cents per charitable mile driven. But you have to be the volunteer. If, say, you drive your elderly mother to the nature center where she’s volunteering, you can’t deduct the cost.

You also can’t deduct transportation costs you’d be incurring even if you weren’t volunteering. For example, if you take a commuter train downtown to work, then walk to a nearby volunteer event after work and take the train back home afterwards, you won’t be able to deduct your train fares. But if you take a cab from work to the volunteer event, then you potentially can deduct the cab fare for that leg of your transportation.

Volunteer travel

Transportation costs may also be deductible for out-of-town travel associated with volunteering. This can include air, rail and bus transportation; driving expenses; and taxi or other transportation costs between an airport or train station and wherever you’re staying. Lodging and meal costs also might be deductible.

The key to deductibility is that there is no significant element of personal pleasure, recreation or vacation in the travel. That said, according to the IRS, the deduction for travel expenses won’t be denied simply because you enjoy providing services to the charitable organization. But you must be volunteering in a genuine and substantial sense throughout the trip. If only a small portion of your trip involves volunteer work, your travel expenses generally won’t be deductible.

Keep careful records

The IRS may challenge charitable deductions for out-of-pocket costs, so it’s important to keep careful records. If you have questions about what volunteer expenses are and aren’t deductible, please contact us.

© 2018

On one level, every company’s inventory is a carefully curated collection of inanimate objects ready for sale. But, on another, it can be a confounding, slippery and unpredictable creature that can shrink too small or grow too big — despite your best efforts to keep it contained. If your inventory has been getting the better of you lately, don’t give up on showing it who’s boss.

Check your math

Getting the upper hand on inventory is essentially one part mathematics and another part strategic planning. You need to have accurate inventory counts as well as the controls in place to regulate quality and keep things moving.

As is true for so much in business, timing is everything. Companies need raw materials and key components in place before starting a production run, but they don’t want to bring them in too soon and suffer excess costs. The same holds true for finished products — you need enough on hand to fulfill sales without over- or understocking.

If you’re struggling in this area, re-evaluate your counting process. One alternative to consider is cycle counting. This process involves taking a weekly or monthly physical count of part of your warehoused inventory. These physical counts are then compared against the levels shown on your inventory management system.

The goal is to pinpoint as many inventory discrepancies as possible. By identifying the source of accuracy problems, you can figure out the best solutions. Of course, you can’t conduct cycle counting once and expect a cure-all. You’ll need to use it regularly.

Use technology

With all this data flying around, you need the right tools to gather, process and store it. So, investing in a good inventory software system (or upgrading the one you have) is key. As the saying goes, “garbage in, garbage out” — imprecise information coming from your current system could be leading to all those write-offs, inflated costs, missed sales and lost profits.

As always, you get what you pay for: Investing in a new software system and then paying ongoing maintenance fees (which are usually recommended to keep it running smoothly) could seem like a bitter pill to swallow. But, in the long run, strong inventory management can pay for itself.

Another way to use technology for inventory purposes is as a communication tool. Knowing which products are hot and which are not will go a long way toward developing correct purchasing and stocking levels. Consider using online surveys, email contests and even social networking (such as a Facebook page) to keep in touch with customers and gather this info.

Show some tough love

In an ideal world, every company’s inventory would be its best friend. But don’t be surprised if you have to regularly show yours some tough love to keep it from making a mess of your bottom line. Let us help you identify the best metrics and methods for managing your inventory.

© 2018

“Going green” at home — whether it’s your principal residence or a second home — can reduce your tax bill in addition to your energy bill, all while helping the environment, too. The catch is that, to reap all three benefits, you need to buy and install certain types of renewable energy equipment in the home.

Invest in green and save green

For 2018 and 2019, you may be eligible for a tax credit of 30% of expenditures (including costs for site preparation, assembly, installation, piping, and wiring) for installing the following types of renewable energy equipment:

• Qualified solar electricity generating equipment and solar water heating equipment,
• Qualified wind energy equipment,
• Qualified geothermal heat pump equipment, and
• Qualified fuel cell electricity generating equipment (limited to $500 for each half kilowatt of fuel cell capacity).

Because these items can be expensive, the credits can be substantial. To qualify, the equipment must be installed at your U.S. residence, including a vacation home — except for fuel cell equipment, which must be installed at your principal residence. You can’t claim credits for equipment installed at a property that’s used exclusively as a rental.

To qualify for the credit for solar water heating equipment, at least 50% of the energy used to heat water for the property must be generated by the solar equipment. And no credit is allowed for solar water heating equipment unless it’s certified for performance by the nonprofit Solar Rating & Certification Corporation or a comparable entity endorsed by the state in which your residence is located. (Keep this certification with your tax records.)

The credit rate for these expenditures is scheduled to drop to 26% in 2020 and then to 22% in 2021. After that, the credits are scheduled to expire.

Document and explore

As with all tax breaks, documentation is key when claiming credits for green investments in your home. Keep proof of how much you spend on qualifying equipment, including any extra amounts for site preparation, assembly and installation. Also keep a record of when the installation is completed, because you can claim the credit only for the year when that occurs.

Be sure to look beyond the federal tax credits and explore other ways to save by going green. Your green home investments might also be eligible for state and local tax benefits, subsidized state and local financing deals, and utility company rebates.

To learn more about federal, state and local tax breaks available for green home investments, contact us.

© 2018

As you may be aware, major tax reform legislation has been signed into law this year and resulted in sweeping changes to the tax code for the first time in about 30 years. Businesses should be aware of the provisions that have changed and plan now for how they affect you moving into 2018.

The corporate rate cuts are significant. The 2017 tax act provides for a 21% flat corporate tax rate. Businesses conducted as sole proprietorships, partnerships, or S corporations are subject to a special deduction under the 2017 tax act beginning in 2018.

The 2017 tax act also significantly reforms international rules. This has made planning more difficult, particularly for businesses that must consider the impact of international tax rules.

Below are highlights of the 2017 tax act.

Business Deductions and Credits

Section 179 Expensing:

• For tax years beginning after 31, 2017, the expensing limitation is increased to $1 million and the phase out amount to $2.5 million. The new limitations are to be adjusted for inflation. The act further expands the definition of §179 property and the definition of qualified real property for improvements made to nonresidential real property.

Research and Development Credit:

• The research and development credit is preserved.

Deductions for Income Attributable to Domestic Production Activities:

• For tax years beginning after Dec. 31, 2017, the deduction for income attributable to domestic production activities is repealed.

Entertainments Expenses Deductions:

• For tax years beginning after 31, 2017, no deduction is allowed generally for entertainment, amusement, or recreation; membership dues for a club organized for business, pleasure, recreation, or other social purposes; or a facility used in connection with any of the above.

NOL Deduction:

• For NOLs arising in tax years beginning after Dec. 31, 2017, the limit on the NOL deduction is 80% of the taxpayer’s taxable income and provides that amounts carried to other years be adjusted to account for the Amounts are to be carried forward indefinitely.

Corporations

Corporate Tax Rate:

• For tax years beginning after Dec. 31, 2017, there is a 21% flat corporate tax rate; there is no special tax rate for personal service corporations.

Alternative Minimum Tax:

• For tax years beginning after 31, 2017, the alternative minimum tax is repealed. In 2018, 2019 and 2020, if the taxpayer has an AMT credit carryforward, the taxpayer is able to claim a refund of 50% of the remaining credits (to extent credits exceed regular tax for year). For 2021, the taxpayer is able to claim a refund of all remaining credits.

Pass-Through Entities

Pass-Through Tax Rate:

• For tax years beginning after Dec. 31, 2017, generally a 20% deduction for qualified business income is provided in lieu of tax rate changes. Special rules apply when computing the deduction. The deduction expires for tax years beginning after Dec. 31, 2025.

International

Base Erosion:

• U.S. shareholders of CFCs are subject to a tax on “global intangible low-taxed income” (GILTI) with a deduction of 37.5% for foreign-derived intangible income (FDII) plus 50% of the GILTI, and the amount treated as a dividend under §78. Deductions are reduced for tax years beginning after Dec. 31, 2025. There is a revised definition of intangible property to include goodwill, going concern value, workforce in place, or any other item the value of which is not attributable to tangible property or the services of an individual. Clarification of the Commissioner’s authority to specify the method used to determine value of intangible property has also been provided. There is now a denial of deduction for certain related party amounts paid or accrued in hybrid transactions or with hybrid entities. Dividends received by an individual shareholder of a surrogate foreign corporation are not eligible for reduced rates on dividends in §1(h).

If you would like a detailed review of the opportunities available to your business there will be a minimum fee of $1,000 for these consulting services; the fee will change based on the complexity of your business’ tax profile. Please contact us to set up a meeting to insure you are positioned to minimize your 2018 tax liability by taking advantage of the tax planning opportunities under these new rules that are generally going into effect for 2018.

The tax reform legislation signed into law on December 22, 2017, significantly changes the landscape for individuals beginning January 1, 2018, and continuing through 2025, when many of the individual provisions are set to expire without further Congressional action. For many taxpayers, the changes made by the legislation present a host of tax planning challenges and opportunities going forward.

Due to the elimination or limitation on itemized deductions, and the elimination of personal exemptions, a key consideration in planning for 2018 and future years is to first look at ways to lower your taxable income. You should thus consider maximizing all pre-tax contribution opportunities such as your 401(k), maximizing deductible’ IRA contributions, and consider investing in state and municipal bonds (whose interest is exempt from federal tax).

Also, despite the headlines, it will remain important for you to keep track of your medical expenses, mortgage interest, property and state income or sales tax payments and charitable contributions made during 2018 due to the new restrictions on itemized deductions.

Highlighted below are some of the more significant changes made by the reform legislation and possible challenges and opportunities to lower your tax bill for 2018 and beyond.

Lower Individual Tax Rates – The legislation creates lower individual income tax brackets of 10%, 12%, 22%, 24%, 32%, 35%, and lowers the top rate from 39.6% to 37%, respectively. (The pre-reform rates in effect before 2018 would be restored in 2026, i.e., 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%, respectively).

Modification of the Alternative Minimum Tax (AMT) – The legislation retains the AMT for individuals but increases the exemption amount and phase out thresholds so fewer people will pay it. From 2018 through 2025, a higher AMT exemption will apply to income, beginning with $109,400 for joint filers and $70,300 for other taxpayers in 2018. The exemption will begin to phase out at $1 million for joint filers and $500,000 for other taxpayers. These thresholds will be adjusted for inflation annually.

Increase in the Standard Deduction – For 2018 through 2025, the standard deduction increases significantly from $12,700 in 2017 to $24,000 for joint filers, from $9,350 to $18,000 for heads of households, and from $6,350 to $12,000 for singles. These amounts will be adjusted for inflation annually. Since you can claim the higher of the standard deduction or itemized deductions, you will want to closely compare the two methods as you may now benefit from a higher standard deduction given the many changes to itemized deductions.

Elimination of Personal Exemptions – In exchange for lower tax rates and an increase in the standard deduction, personal exemptions no longer may be claimed for tax years 2018 through 2025.

Child and Dependent Credits – For tax years 2018 through 2025, the reform legislation increases the value of the child tax credit to $2,000 per child under 17 from $1,000. As much as $1,400 of the credit will be refundable, thus allowing recipients to benefit even if they don’t owe taxes. You will need to provide your child’s Social Security number to claim the refundable portion through 2025. The refundable portion of the credit will be indexed for inflation. The legislation also expands eligibility for the credit by increasing the phase out threshold to $400,000 of adjusted gross income for joint filers (up from $110,000 under pre-reform law), with a threshold for all other filers set at $200,000. A $500 nonrefundable credit for dependents other than qualifying children will be available through 2025 (and no Social Security number is required).

$10,000 Cap on State and Local Tax Deduction – In a significant departure from prior law, the legislation will allow individuals to deduct no more than $10,000 of any combination of the following taxes – state and local income taxes, state and local property taxes, and sales taxes – for tax years 2018 through 2025. This overall limitation may result in the enhanced standard deduction yielding a larger deduction against your adjusted gross income and thus a lower tax bill.

Limits on Mortgage Interest Deduction – The tax reform act reduces the amount of mortgage indebtedness on which taxpayers may deduct interest to $750,000 for mortgages or HELOC’s incurred after December 15, 2017. (The $1 million limitation remains for older mortgages). Interest on your principal residence and a second home are deductible. Importantly, beginning in 2018 interest on home equity indebtedness, not used to improve the residence, is no longer deductible, regardless of when it was incurred. These rules apply through 2025.

Medical Expense Deduction – All individuals may deduct medical expenses for 2018 if the expenses exceed 7.5% of adjusted gross income, regardless of age. However, the AGI threshold returns to 10% of adjusted gross income in 2019 for all taxpayers, regardless of age. Again, you will need to review whether claiming such expenses, when combined with other allowable itemized deductions, yields a higher deduction than the standard deduction.

Charitable Contributions – For tax years 2018 through 2025, the legislation increases the AGI limitation on cash contributions from 50% to 60%, thus effectively allowing for an increased deduction. However, the reform act permanently repeals the 80% deduction for contributions made for university athletic seating rights, effective for contributions made after 2017.

Moving Expense Deduction – The deduction for moving expenses is eliminated for tax years 2018 through 2025 except for individuals who are active duty members of the United States Armed Forces.

Elimination of Miscellaneous Itemized Deductions (including Unreimbursed Employee Business Expenses) – The reform act eliminates the deduction for miscellaneous itemized deductions for tax years 2018 through 2025. Thus, deductions subject to the 2% floor of adjusted gross income for costs related to the production or collection of income such as appraisal fees, investment fees, and safety deposit box rentals are not deductible. Importantly, expenses related to employment, such as uniforms, union dues, professional society dues, cell phone, computer used for work, and job-hunting expenses also are not deductible. Employees who incur significant unreimbursed business expenses may want to ask their employer about adjusting their compensation or establish an accountable expense reimbursement plan that would allow the employer to reimburse the employee tax-free while also entitling the employer to a deduction against their business income.

Alimony Deduction – The tax legislation repeals the above-the-line deduction for alimony paid for divorces or separations executed after December 31, 2018. After that date, alimony payments will not be included in the recipient’s income and the payments no longer will be deductible by the payor. If you are currently contemplating divorce or separation, a careful review of the effects of the new law should be undertaken to determine the economic effects on your tax situation and timing of any agreements.

We can run a detailed tax projection to gauge the impact that the changes will have and to prepare you before yearend; there will be a minimum fee charged for these consulting services that will depend on your individual tax profile. Please contact us at your earliest convenience to discuss your personal tax and financial situation.

By and large, today’s employees expect employers to offer a tax-advantaged retirement plan. A 401(k) is an obvious choice to consider, but you may not be aware that there are a variety of types to choose from. Let’s check out some of the most popular options:

Traditional. Employees contribute on a pretax basis, with the employer matching all or a percentage of their contributions if it so chooses. Traditional 401(k)s are subject to rigorous testing requirements to ensure the plan is offered equitably to all employees and doesn’t favor highly compensated employees (HCEs).

In 2018, employees can defer a total amount of $18,500 through salary reductions. Those age 50 or older by year end can defer an additional $6,000.

Roth. Employees contribute after-tax dollars but take tax-free withdrawals (subject to certain limitations). Other rules apply, including that employer contributions can go into only traditional 401(k) accounts, not Roth 401(k)s. Usually a Roth 401(k) is offered as an option to employees in addition to a traditional 401(k), not instead of the traditional plan.

The Roth 401(k) contribution limits are the same as those for traditional 401(k)s. But this applies on a combined basis for total contributions to both types of plans.

Safe harbor. For businesses that may encounter difficulties meeting 401(k) testing requirements, this could be a solution. Employers must make certain contributions, which must vest immediately. But owners and HCEs can maximize contributions without worrying about part of their contributions being returned to them because rank-and-file employees haven’t been contributing enough.

To qualify for the safe harbor election, the employer needs to either contribute 3% of compensation for all eligible employees, even those who don’t make their own contributions, or match 100% of employee deferrals up to the first 3% of compensation and 50% of deferrals up to the next 2% of compensation. The contribution limits for these plans are the same as those for traditional 401(k)s.

Savings Incentive Match Plan for Employees (SIMPLE). If your business has 100 or fewer employees, consider one of these. As with a Safe Harbor 401(k), the employer must make certain, immediately vested contributions, and there’s no rigorous testing.

So, how is the SIMPLE 401(k) different from a safe harbor 401(k)? Both the required employer contributions and the limits on participant deferrals are lower: The employer generally needs to either contribute 2% of compensation for all eligible employees or match employee contributions up to 3% of compensation. The employee deferral limits are $12,500 in 2018, with a $3,000 catch-up contribution for those age 50 or older.

This has been but a brief look at these types of 401(k)s. Our firm can provide you with more information on each, as well as guidance on finding the right one for your business.

© 2018

There continues to be much uncertainty about the Affordable Care Act and how such uncertainty will impact health care costs. So it’s critical to leverage all tax-advantaged ways to fund these expenses, including HSAs, FSAs and HRAs. Here’s how to make sense of this alphabet soup of health care accounts.

HSAs

If you’re covered by a qualified high-deductible health plan (HDHP), you can contribute pretax income to an employer-sponsored Health Savings Account — or make deductible contributions to an HSA you set up yourself — up to $3,450 for self-only coverage and $6,900 for family coverage for 2018. Plus, if you’re age 55 or older, you may contribute an additional $1,000.

You own the account, which can bear interest or be invested, growing tax-deferred similar to an IRA. Withdrawals for qualified medical expenses are tax-free, and you can carry over a balance from year to year.

FSAs

Regardless of whether you have an HDHP, you can redirect pretax income to an employer-sponsored Flexible Spending Account up to an employer-determined limit — not to exceed $2,650 in 2018. The plan pays or reimburses you for qualified medical expenses.

What you don’t use by the plan year’s end, you generally lose — though your plan might allow you to roll over up to $500 to the next year. Or it might give you a grace period of two and a half months to incur expenses to use up the previous year’s contribution. If you have an HSA, your FSA is limited to funding certain “permitted” expenses.

HRAs

A Health Reimbursement Account is an employer-sponsored account that reimburses you for medical expenses. Unlike an HSA, no HDHP is required. Unlike an FSA, any unused portion typically can be carried forward to the next year.

There’s no government-set limit on HRA contributions. But only your employer can contribute to an HRA; employees aren’t allowed to contribute.

Maximize the benefit

If you have one of these health care accounts, it’s important to understand the applicable rules so you can get the maximum benefit from it. But tax-advantaged accounts aren’t the only way to save taxes in relation to health care. If you have questions about tax planning and health care expenses, please contact us.

© 2018