Author: Howard Tax Prep LLC

IRS Issue Number: Tax Reform Tax Tip 2018-179

After last year’s tax reform legislation, some S corporations may choose to revoke their S election to be a C corporation because of the new, flat 21-percent C corporation tax rate. Before taking any action, S corporations should consult their tax advisors.

S Corporations and C Corporations are among the types of business structures. A C corporation is taxed on its earnings, and then the shareholder is taxed when earnings are distributed as dividends. S corporations elect to pass corporate income, losses, deductions and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the pass-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level.

The Tax Cuts and Jobs Act includes two changes that affect a corporation’s revocation of an S election to be a C corporation:

• The corporation should report net adjustments attributable to the revocation over six years. For more information see Revenue Procedure 2018-44.
• Distributions of cash following the post-termination transition period may be treated as coming out of the corporation’s accumulated adjustments account and accumulated earnings and profits proportionally resulting in part of the distributions being non-dividend distributions from the C corporation. The non-dividend distributions may not be subject to tax at the shareholder level if the shareholder has sufficient stock basis. Additional guidance will be coming.

These law changes only apply to a C corporation that:

• Was an S corporation on December 21, 2017,
• Revokes its S corporation election after December 21, 2017, but before December 22, 2019, and
• Has the same owners of stock in identical proportions on the date of revocation and on December 22, 2017.

Although we’ve given you the basics, this is not an all-inclusive article. Should you have questions, or need business tax preparation, business entity creation, business insurance, or business compliance assistance please contact us online, or call our office at 855-743-5765. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth.

Tax reform made changes to the tax law that significantly impact the alternative minimum tax (AMT). The changes could mean more money in your pocket and less going to the government.

If you own a C corporation, then you are the big AMT winner: Tax reform completely eliminated AMT for C corporations. C corporations are now subject only to a flat 21 percent income tax rate.

If you are an individual taxpayer, you also have good news. Tax reform increased the AMT exemption amounts (and they will continue to increase for inflation) as follows:

• The joint return and qualifying widower exemption went from $84,500 to $109,400.
• The single and head of household exemption went from $54,300 to $70,300.
• The married filing separately exemption went from $42,250 to $54,700.

Your AMT exemptions phase out if your alternative minimum taxable income is over a certain threshold. Good news—tax reform substantially increased these thresholds:

• The phase-out on a joint return or a qualifying widower return used to start at $160,900 and now starts at $1,000,000.
• The phase-out for single and head of household returns used to start at $120,700 and now starts at $500,000.
• The phase-out on a married filing separately return used to start at $80,450 and now starts at $500,000.

These changes mean that it is less likely you will pay AMT in tax year 2018 and going forward.

Tax reform also took aim at the most common deductions that triggered AMT, by

• limiting the state and local tax deduction on Schedule A to $10,000 starting in 2018,
• suspending 2 percent miscellaneous itemized deductions starting in 2018, and
• suspending personal exemption deductions starting in 2018.

You probably are not happy with the limitation on the state and local tax deductions if you live in a high-tax state. You likely stand to lose tens of thousands of dollars in tax deductions.

But if you were paying a lot in state and local taxes, you probably didn’t get the full benefit of this deduction, because AMT clawed back its tax benefits. The end result could mean that when this washes out, you might pay less tax under tax reform without your state and local tax deductions.

Although we’ve given you the basics, this is not an all-inclusive article. Should you have questions, or need business tax preparation, business entity creation, business insurance, or business compliance assistance please contact us online, or call our office at 855-743-5765. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth.

The first good news is that you can be both real estate investor and real estate dealer with respect to your real estate portfolio.

The next good news is that you are in control, and by knowing just a few rules about dealer and investor classifications, you can do much to increase your net worth.

Profits on dealer sales are generally subject to taxes at both ordinary income rates of up to 37 percent, and self-employment rates of up to 14.13 percent. Profits on investor sales are taxed at tax-favored capital gains rates of 20 percent or less, and not subject to self-employment taxes.

Let’s take a quick look at how big a difference you can make in the tax bite. Say you have a $90,000 profit on the sale of a property.

• Dealer taxes could be as high as $46,017.
• Investor taxes could be as high as $18,000.

The investor potentially saves a whopping $28,017 in taxes.

You, the individual taxpayer, can be both a dealer and an investor! The law does not cut you in half or anything. No, the law simply looks at each property in its respective light.

But you need to make the light shine on your properties by making a clear distinction in your books and records as to which properties are investment properties and which are dealer properties.

Should you fail to make the distinction, you place yourself at the mercy of the IRS. (The word “mercy” does not exist in the tax code, so expect a very unhappy result if you rely on mercy.)

The courts look at your intent in buying and holding the property. Your books and records help establish that intent.

Dealer property is property you hold for sale to customers in the ordinary course of a trade or business. The more properties you buy, and the more properties you sell during a calendar year, the greater the chances that you are a dealer with respect to those properties.

Properties that you buy, fix up, and sell generally are dealer properties.

Also, properties that you subdivide have a great chance of being dealer property, except when those subdivisions are done under the very limited rules of Section 1237.

Unlike with dealer property, where the dealer’s principal purpose for owning the property is to sell it to customers in the ordinary course of business, the investor’s purpose in owning property is to

• have it appreciate in value, and/or
• produce rental income.

Each property stands alone with respect to its status as a dealer or an investor property.

Thus, you (the individual taxpayer) or your corporation may own both dealer and investor properties. If you have both types of properties, make a clear distinction in your books and records as to which properties are investment properties and which are dealer properties.

Although we’ve given you the basics, this is not an all-inclusive article. Should you have questions, or need business tax preparation, business entity creation, business insurance, or business compliance assistance please contact us online, or call our office at 855-743-5765. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth.