Ref: HR 1 Tax Cuts and Jobs Act

Assumption: You receive income from your sole proprietorship, S corporation, LLC , partnership or other pass through entity.  Also, that entity is NOT a service business.  Example: Retail, manufacturing or leasing personal property.

Simple example:  Net income from the business is $350,000 and the business paid total W2 wages of $100,000.  Assuming no equipment placed in service in the year, the deduction would be the lesser of 20% of $350k ($70k) OR 50% of wages of $100k = $50k.  The pass through deduction is $50k.

This deduction is taken on page 2 of the Form 1040 when determining taxable income.  It is NOT taken into account in dertmining Adjusted Gross Income (AGI) on page 1 of the return.

This is a simple example.  Your pass through deduction should be calculated specifically to your tax situation.

Ref: HR 1, “Tax Cuts and Jobs Act”

NOW is the time to negotiate with your employer for 2018.  If you are an employee tasked with paying many unreimbursed costs for your employer, work with the company to set up a qualified reimbursement plan.

GONE ARE:

1. MILEAGE DEDUCTION
2. BUSINESS MEALS DEDUCTION (i.e., entertaining customers)
3. TRAVEL EXPENSE DEDUCTION INCLUDING PER-DIEM
4. EMPLOYEE HOME OFFICE DEDUCTION
5. ALL OTHER UNREIMBURSED DEDUCTIONS

Nearly all of these can be reimbursed by your employer.  If so, the employer gets a deduction and you DON’T have reportable income.  (Big exception… even the employer doesn’t get a business meals / entertainment deduction in 2018).

SELF EMPLOYED:  The above DOESN’T apply to self employed.  This change only applies to W2 employees who in 2017 and before took an itemized deduction for unreimbursed employee expenses. For self-employed, see our post dateed Jan 24, 2018.

Ref: Barry v. Comm’r, TC Memo 2017-237

Summary: Taxpayer hired an attorney to reclaim alimony that he felt was overpaid.  He argued the legal fees were deductible under Sec 212(1) because the result would be taxable income.

Tax court: Not deductible: Under the “origin of claim” doctrine, the transaction started under family law and not under a profit seeking venture.  The Tax Court also referenced earlier decisions where it disallowed legal payments incurred for alimony adjustment and for alimony recovery in prior cases. Lastly, the Court argued that had Barry brought this claim in the year of the divorce, the legal fees would have been clearly nondeductible as part of the divorce proceedings (a personal expense).

Reference: IRS Notice 2017-54

The rate for meals and incidentals (M&IE) has been raised to $68 for high cost localities under the IRS high/low method.  Like all business meals, the net deduction is one half of that amount.

Example: Sole proprietor is on a six day business trip. M&IE under CONUS is $68 * 6 * 1/2 = $204 as the net deduction on the tax return.  M&IE is in lieu of actual expenses for meals, tips and other incidental travel charges.

Fiscalini v. Commissioner, TC Memo 2017-163

In summary, a taxpayer sold his residence to his parents for a sales price of $975,000.  He received no cash directly.  The parents paid off his mortgages with a total of $664,000.

The Tax Court determined that the mortgage relief was the effective sales price of $664,000. Minus basis and the $250,000 Section 121 exclusion for sale of a residence resulted in gain of $122,000.

The remaining equity of $311,000 ($975k – 664k) was deemed to be a gift from the taxpayer to his parents.

Ref: Rev Proc 2017-37

The IRS has announced maximum HSA funding limits for 2018.

For individuals with self-only coverage: $3,450 (up $50 from 2017)

For family coverage: $6,900 (up $150 from 2017)