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In Fairfax County, How Solar Energy Equipment Can Cut Your Business Taxes

More and more local small business owners are looking at adding solar energy equipment to their facilities, and with good reason. Solar allows them to cut their electricity costs by producing power on site. Solar installations can increase the value of their buildings. It can mean more reliable power in areas that are subject to blackouts and power disruptions related to adverse weather events. It is also a sustainable source of energy that can cut down greenhouse emissions and conserve fossil fuels. In addition to all these benefits is that solar equipment can help take a bite out of your tax bill through the Fairfax County’s Solar Energy Equipment Tax Exemption.

What Solar Equipment Qualifies for the Exemption?

Property owners can qualify for the exemption when they install solar equipment that fills a need otherwise provided for with conventional energy sources. Most people realize that systems that include solar water heating, air conditioning, heating and electricity for the facility qualify for these sorts of clean energy exemptions. However, many are surprised to learn about less obvious equipment that could save them money, such as south-facing windows that heat your building in winter or shades that cut down cooling costs during summer heat. A few examples of systems include:

  • passive solar systems.
  • solar hot water heaters.
  • solar heating.
  • south-facing windows that function as solar collectors.
  • shading devices that assist in summer cooling.
  • greenhouses that are integrated into the heating system.
  • thermal storage systems (also known as thermal batteries).
  • trombe walls that act as thermal mass heaters for the structure.
  • movable insulation.

The exemption is available for both residential and commercial properties. Both the cost of equipment and installation qualify for the exemption.

How Does the Exemption Work?

The exemption is a percentage that is outlined in Virginia’s Administrative Code. On some items, like solar panels and hot water systems, you can use the exemption for 100% of the cost of your equipment and its installation. On other items, like south-facing windows, you are able to take off a percentage of the cost. The exemption is deducted from your property tax bill every year for five years.

Consider a scenario where you are having a solar hot water heater installed at your place of business. Imagine the water heater costs $10,000 and installation costs $3,000, for a total cost of $13,000. Your tax savings would be based on your tax rate. So, if you pay $1.09 per hundred dollars of assessed value, the exemption each year would come to around $141.70. This becomes a tax credit that is deducted from your property tax bill each year until the exemption period runs out.

How Do I Sign Up?

To sign up for this exemption, you’d have to full out an application form and send it in with the required back-up documents. You’ll need to submit the plans and specifications for your solar device, as well as receipts, canceled checks or other documents that show the cost. Additionally, you must write a brief narrative that describes what your solar equipment does. You’ll also need any applicable permits that are required.

Once all of those have been submitted and your equipment is installed, Land Development Services will forward your application to the Department of Tax Administration. The Tax Administration reviews your application and estimates the value of your tax exemption. You’ll receive a letter confirming that your application has been accepted and how much your exemption is worth.

Help with Tax Exemption Applications

Managing all of the forms and documentation for this and other tax credits can be onerous. As experienced small business tax preparation and accounting professionals, we are familiar with the requirements for this credit and can help you ensure you dot every I and cross every T. Our careful team members will help you ensure that you identify every item that qualifies for the credit and that you have the proper documentation to back up your claims and get the tax credits you have coming to you. Get in touch to learn more our this solar tax exemption and other programs that your business might qualify for.

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    What Business Tax Deductions Can My Small Business Claim in Virginia?

    At Lipsey and Associates, our phone rings daily with questions from small and midsized business owners asking whether specific expenses may qualify as a tax deduction – and for a good reason. 

    Claiming appropriate tax deductions is an essential aspect of managing a small business’ finances and maximizing profit. 

    However, every once in a while, we see an instance of an overly aggressive list of deductions, or the work of a DIYer earn the attention of the Internal Revenue Service. Not good. 

    If you run a small business in Virginia, there are many potential tax deductions that your business might be able to claim. Here are some of the most common and important ones.

    Home Office Deduction

    One of the most useful tax deductions for home-based businesses is the home office deduction. If you’re able to qualify for this deduction, you can deduct a proportionate amount of your mortgage or rent expenses on your business taxes.

    For example, assume you maintain a home office that’s 10 percent of your house’s total square footage and you pay $1,200 a month in qualifying housing costs. This would net you a $120 per month deduction — or a $1,440 annual deduction — for your home office.

    With housing costs so high in Northern Virginia, this is an especially helpful deduction for home-based business owners in this part of the state. In order to claim a home office, though, the office can only be used for work. Home office/play space and home office/bedroom combinations don’t count.

    Mileage Deduction

    Whenever a vehicle is driven for work-related purposes, the miles that are driven on account of business can be deducted. This deduction is unfortunately mileage-based, which might not be a great calculation when you’re stuck on the Beltway for 3 hours, but it still amounts to a sizeable deduction if you drive for work.

    The mileage deduction is calculated via either of two methods. The standard mileage rate method multiples the miles driven by the rate set by the IRS for that year. 2020’s rate is 57.5 cents per mile. The actual expense method requires keeping track of all your driving expenses, but then you can deduct all of those expenses even if they exceed the standard rate.

    Importantly, the deduction can be taken whether you drive a personal or commercial vehicle for work. If you drive a personal vehicle, however, you need to keep especially accurate records that show what was driven for work and what was driven for personal use. An accountant can help set a record-keeping system up.

    Capital Expense Depreciation

    If you make a capital investment in equipment or other physical assets, your investment can be depreciated as a deduction on your business’ taxes. This is an especially generous deduction, because the tax law allows for a 100 percent depreciation of up to $1 million in capital expenditures in the year when the equipment is made. Few small businesses in Virginia will exceed that level of investment.

    Education for Your Business

    One of the best investments a small business owner can make is in themselves, and education that directly helps your business is generally a tax-deductible expense. Classes, seminars, webinars, books, workshops and more materials can all qualify as long as they’re connected to what you do.

    Of course, there is some gray area with some educational courses and materials. If you’re unsure whether a particular education expense’s association with your work is close enough to claim the deduction, a certified public accountant can help you decide.

    Bonus Depreciation vs Section 179
    Businesses in Virginia must be mindful on which depreciation method to use if they want to take advantage of the IRS’s advanced depreciated methods. Virginia does not recognize Bonus Depreciation and will require you to add back any Bonus Depreciation taken on the federal return that wouldn’t normally be allowed under the MACRS tables. Virginia does recognize the IRS advanced depreciation methodology under Section 179 and will not require you to add back the Section 179 depreciation unless that amount is over $25,000.

    Because Bonus Depreciation is taxed more favorably upon disposal than Section 179, most tax software defaults to Bonus Depreciation and most individuals do not know to decipher the difference on their state return. We can. This is why by default we choose Section 179 over Bonus for small businesses to get the maximum benefit now. How much? Virginia’s top tax rate is 6%–which means its a current tax savings of $1500 on Virginia taxes alone just by that one switch.

    Get Help with Small Business Taxes

    If you need help filing taxes for a small business in Virginia, contact the team at Lipsey and Associates. Our team will carefully review your business’ situation, and we’ll help you get every deduction for which your business qualifies for.

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      Do Teleworking and Remote Employees Trigger Income Tax Nexus

      A few months ago, as an employer, you may not have given much thought to where your employees live. Perhaps your main concerns were over commute times and where to send their tax forms at the end of the year.

      Now, amidst COVID-19, many employees are working from home using teleworking technologies. Not only is this forcing many businesses to adapt their business models on the fly, but it is also raising some important tax-related questions.

      For example, if a business based in Northern Virginia now has employees teleworking from their home located in Maryland, West Virginia, and the District of Columbia because of COVID-10, what are the business tax and accounting implications?

      Does your business now have a business connection with these states?  Let’s look at the impact that your employees working from home can have on your business.

      WHAT IS TAX NEXUS?

      Nexus means that your company has established a business connection in that state, and if nexus is established, your business may now be eligible to be taxed in that state.  The criteria are typically based on whether or not your business has a substantial presence in that jurisdiction.

      Recent legislation has removed the physical presence as a requirement for nexus, though it is still looked to first when considering nexus.

      It is important to note that nexus is defined separately for both income tax purposes and sales tax purposes. They are slightly different when it comes to defining nexus as it relates to teleworking and remote employees.

                  INCOME TAX

      For income tax purposes, nexus is established if an employee’s activity goes beyond mere sales activity in the state. For employees working exclusively from home, this standard is likely to have been met. 

                  SALES TAX1

      For sales tax purposes, merely having employees in the state may be enough to establish nexus.  Recent legislation in South Dakota v. Wayfair helped to clarify some of these provisions.

      Having employees in a state, even temporarily, can be enough to trigger nexus in that state.

      HOW MIGHT YOUR COMPANY HAVE ESTABLISHED NEXUS WITH NEW STATES?3

      Before the COVID-19 pandemic, some of your employees may have commuted from a neighboring state each day to get to the office.

      If stay-at-home orders have forced you and your employees to work from home, they may now be temporarily working full-time in that neighboring state.

      According to the legislation of many states, you have now established nexus for income tax purposes in that state and may have additional tax obligations and filing requirements.

      This could change how your employees’ compensation is classified for income tax purposes. In addition, this could affect how revenues are categorized and taxed for your business.

      Where an employee may have previously been taxed as if the income was earned in the state where your business is headquartered, they may now be taxed as if the income is earned in their home state.  Applying the nexus rules could have a significant impact for payroll tax withholding purposes.

      This could also have an effect on your company’s filings, such as corporate business tax filings.

      Each state has its specific provisions for handling state tax nexus for teleworking and remote employees, so it is important to review your state’s regulations for further guidance.4

      ARE THERE EXCEPTIONS TO THE NEXUS RULES?2

      Some states and jurisdictions have taken the time to issue legislation related to the COVID-19 pandemic and how it affects the establishment of nexus for employees who are working from their homes.

      As of the time of this writing, Indiana, Mississippi, New Jersey, Pennsylvania, and the District of Columbia have all issued legislation related to working from home due to the coronavirus crisis.

      These states have determined that employees who have been required to work from home as a result of the COVID-19 pandemic will not trigger corporate tax nexus in their home state for that company.

      This means that at least temporarily, companies and employees with connection to these states can continue with “business as usual”.  It remains to be seen what guidance will be released by other jurisdictions at this time.

      For residents of Washington D.C., who typically work in surrounding states and are currently working from home, the nexus rules will not apply.  Income earned while the employee is working from home will still be sourced to the state where the resident is typically employed.

      Additionally, the employee working from home in Washington D.C. will not result in tax nexus for their employer.

      No special rules have been made for Virginia, West Virginia, or Maryland at the time of this writing, however, the team at Lipsey and Associates actively monitors for any changes in legislation.

      The current health crisis has temporarily changed the way that we work, live, and relate to one another a way few of us have experienced in our lifetimes.

      In times like this, it is especially important to keep your business operating smoothly and in compliance with current legislation. 

      If you have any questions about how having teleworking and remote employees will affect you and your business, please feel free to reach out to us for more information.

      For more information on whether your business is subject to tax nexus in various states, please contact Lipsey and Associates at 1-703-988-6573 or using the contact form below.

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        1https://www.salestaxinstitute.com/sales_tax_faqs/what_is_nexus

        2https://tax.thomsonreuters.com/blog/nexus-waivers-for-covid-19-telecommuting/

        3https://www.insidesalt.com/2020/04/the-nexus-implications-of-teleworking/

        4https://www.nge.com/portalresource/lookup/poid/Z1tOl9NPluKPtDNIqLMRV56Pab6TfzcRXncKbDtRr9tObDdEnCZCn0!/arFile.name=/Establishing%20State%20Tax%20Nexus%20Through%20Telecommuting%20Employees.pdf


        Does My Small Business Need Multiple Bank Accounts?

        Do you really need that other bank account?

        I have read multiple articles by a variety of sources: HR Journals, Bankers, News Outlets, etc. explaining the need to be able to track specifically how you are spending the PPP Loan money. Yes, you will likely need receipts, payroll journals, canceled checks—all the good stuff. Then I read (and heard directly from a high-level local banker): “You should also open a new account just track it.” Did you hear that noise? That is alarm bells in my head going off.

        For years, bankers have been promoting the need to open new accounts for specific needs (highlighted most recently by the Wells Fargo scandal). Savings account paying 0.01% Interest? Check. Payroll account to track those 4 payroll transactions every month. Check. For most small business owners, all this does is add to my invoice every month.

        There is some merit to having a separate savings account and it is not about interest but rather preservation of capital. If you write someone a check and then get your account hacked, your checking account could be drained. But if you only keep the bare minimum in your checking account and keep most of it in savings, then you severely reduce your risk of having your account drained completely before the banks can figure it out. But this situation is ideal for businesses with low volume but high balances, not high volume but low balances. Those payroll accounts, however, nothing good can come from that.

        I remember a conversation I had when I was just starting out as a new business owner. I have no problem mentioning that I bank at United Bank here in the Tysons area and when I started out, I was in Arlington. Why United Bank? I have no idea—seriously. I know I had a PNC account until they charged me a monthly fee—and then I did not have one anymore. United Bank had a branch nearby and so that is what I chose—sometimes just being present is all you need to land a new account. Over time, I ended up developing a relationship with that bank manager and stayed there ever since.

        This theory of mine that payroll accounts are pointless is not a new revelation. I had been wondering “why bother” ever since I saw my first client have the separate account and I was forced to reconcile this account which seemingly was unnecessary. Then one day many years ago, I was depositing checks at the bank and that bank manager asked me: “Are you interested in opening a payroll account today?” I smiled and asked her right back: “If you can tell me the benefit of doing so, I’d gladly consider it.” She struggled with a response and mentioned simply that it would allow me to keep my transactions separate. As an accountant this has no benefit, especially for payroll: If you are with ADP or Paychex, you need to adjust payroll figures anyway to be accurate. If you are importing your data, then it flows through to your Profit and Loss anyway so why separate it?

        Now is a good time for me to be upfront:  I have never worked at a bank. I have no idea what banks need to be successful other than people with money depositing it into accounts in their bank. There is probably a research paper somewhere that was distributed 50 years ago to bankers saying, “the more accounts you have your clients open the more money you’ll make.” This is all probably likely, true, and correct. But what is also true is that if you ask banker “should I have an account for (insert reason here)” that banker will say yes.

        This is not like planting seeds in a garden where if you plant two seeds in the same location, you will only get 1 plant but if you plant two seeds in two different locations you can get two plants. That is not how money works. So regardless of how many accounts you have the sum of the amount of money you have will be the same. Always.

        There is one exception where your money actually could decrease: Banks can charge fees (sometimes hidden by reducing interest paid) based on the number of accounts you have. I have seen those fee disclosures and they are not easy to read, and I have way too much stuff to do to figure out why I only received $9 in interest last month rather the usual $12. Multiply that by 10,000 every month and this is how banks make their money.

        That brings me to another topic about how money “works:” Cash is fungible (I googled that and came up with “mutually interchangeable”). Essentially if you give me a $10 bill to spend only on Chipotle, but I pocket that $10 and then use my debit card to pay for Chipotle instead—that essentially sums up how that concept works.

        So, let us circle back to the PPP Loan topic again, do you need that new account? First there has been ZERO REQUIREMENT to do so by the SBA. They will want documentation for forgiveness but do not mention anything about a separate account.

        These articles I have read state that you should get new checks created to use specifically for this purpose. I do not know about you but the last few times I’ve ordered checks it has taken weeks for them to arrive. Plus, that is one more cost not forgivable by that PPP Loan so if we do not have to pay it, why would we? You are not going to get that PPP money and then wait 3 weeks to spend it because you do not have the checks. You will take advantage of the “cash is fungible” principle and spend it out of any account, because you cannot wait on someone else to send you those checks.

        And what about payroll? Before running your next payroll, you would have to go through the process of changing the bank account from which the money comes from. Let us go into that process because most small business owners have not had to do that in a very long time. And for this we will talk about payroll as two separate transactions: 1) The act of paying staff and 2) The act of paying taxes.

        For large payroll companies like ADP or Paychex, they act as a clearing account and take all the money from you for both transactions before paying your staff. They take 2 drafts one for wages and one for taxes so changing the account is usually not more than changing your bank info. There could be a delay for a couple business days as they might need to authenticate that account again by making two sample deposits. I can handle a couple days, so this is not a huge problem if you plan ahead.

        But smaller payroll companies like Intuit or myself (even though I’m trying to get out of it) rely heavily on the EFTPS.gov infrastructure to make payments. Bank accounts are tied specifically to PIN numbers and changing your bank account with EFTPS.gov takes at least 7 days to receive a PIN by mail. Have you ever not received one? I have, and then you must wait again! I do not recommend changing EFTPS bank accounts unless necessary. Also, the IRS isn’t exactly open right now so will you get the PIN notice by mail?

        Moving on, there are also other transactions that assuredly qualify for PPP Loan forgiveness but just will not come out of that account. Utilities for example are routinely set on autopay with a credit card. By changing accounts, you would no longer get those credit card points!! Ok, not a big deal but still a hassle.

        There are many instances where business owners pay rent to themselves and have those buildings in LLCs (aka Real Estate Holding Companies). Now that rent payment is not forgivable for PPP but if that LLC pays a mortgage then the interest paid on that loan should count (at least as of today’s writing). You are not going to be able to change that source account where the mortgage payment is made on that separate LLC to your new bank account.

        So all of these examples I’m bringing up are there to illustrate one point: There is a very strong chance that even with a separate account, and doing the best you can, very likely you will have transactions that don’t come out of that account. Knowing that, why go through the hassle of the remaining transactions?

        If for you to receive that PPP Loan a bank REQUIRES you to make an account or banking relationship (for example: new accounts), then 100% you need that account because you need that money. But if you already have an account and you are going to need source documents anyway, I will re-ask that question: Do we really need that separate account?

        According to the SBA regulations, it is not a requirement. If you ask a banker, they are going to tell you yes, always. If you ask me, as an accountant, my opinion is: Do not waste your time.

        For more information on how your business can minimize the Paycheck Protection Program Loan, please contact Lipsey and Associates at 1-703-988-6573 or using the contact form below.

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          Small Business Paycheck Protection Program Loan Strategies: How To Maximize Returns

          Congratulations! You’ve successfully navigated the complicated and at times contradictory PPP loan application from your bank. You are due your money any day now and the next stage of this funding is set to begin: Figuring out how it can be forgiven.

          Let’s recap first: The PPP loan amount is based on 2.5 times your average monthly payroll costs for a 12-month period. Which 12-month period? That depends on your bank, your accountant and ideally which period is the best for you. And what are payroll costs? The answer to that question has been my living hell for the last 3 weeks and I won’t rehash it here.

          The forgiveness of this PPP Loan (or Grant, if you’d rather consider it that way) comes with some strict guidelines that have changed a lot over the last few weeks and will likely change again before June. What we know (right now) is that only 25% of your loan amount can be used for qualified non-payroll expenses such as: 1) Rent–if you don’t own your own building (Mortgage Interest if you do); and 2) Utilities—Water, Electric, Gas, Telephone, Internet and Garbage. Believe it or not these numbers are easy to budget as they are fairly well fixed if you maintain your business and will be lower if you are temporarily closed.

          The remaining 75% of that PPP loan can be forgiven based on payroll costs which, honestly, is a cost entirely determined by you right now. I want to go through a specific scenario that I believe some small business owners will be wondering as well.

          I want to start with some assumptions. Some are to make my math easier and to avoid unnecessary complexities. Others are situation based because this article is only going to be about a narrow slice of business owners. After the following assumptions I’ll detail the problem and attempt to explain in my opinion what the best course of action should be using as clear language as possible.

          Assumptions

          1. The business is an S Corp and owned by only one individual. Their combined Federal and State tax bracket is 35%. This is to make my math easier.
          2. PPP Loan amount of $1,000,000 was deposited today, which is 2.5 average monthly payroll costs. This is to make my math easier.
          3. You budget the next 8 weeks of expenses and you expect to come up short of full forgiveness by 10% (or $100,000). Also, you have at least 40 employees other than yourself. The math really doesn’t work out given the PPP Loan amount unless you have 40 full-time employees at $100k/year in salary. But the number of employees nor the amount of the forgiveness itself doesn’t matter as you’ll see as we get to the conclusion.
          4. The most important assumption of them all: You have plenty of other funding sources with any interest rate. I plan on using 10% in my calculations because it’s a round number. Plus, that is actually a very high-interest rate for many small businesses so it’s a very conservative figure.
            1. How much funding am I talking about here in proportion to the original PPP Loan? With that kind of payroll costs, revenue must be several million a year so there is probably already a chance of a Line of Credit that is untapped. The owner also could tap their home equity for more funding and could factor the receivables if there was any.
            1. You might be wondering: If the owner has this much access to financing then why is the owner applying for a PPP loan? Well, its very likely the business has been affected by COVID19—perhaps it’s closed down and not able to generate revenue. If the owner qualifies to receive the funding shouldn’t that owner apply and receive it? I don’t know—that debate is for another article and is probably best left to those who are creating the laws and not those of us trying to help our client navigate the many pitfalls along the way. Plus, I could discuss that topic for another 2000 words and not concluded the right answer so I will leave it be…. For now.

          Given those assumptions, we have to figure what should you do with that $100,000? Fortunately, it turns into a loan with 1% interest, payable in 24 months with 6 months deferred payments (as with all calculations, these terms could change the day after this article is posted so please verify with a primary source aka sba.gov or your banker). I’ve detailed below some of those options that you’re probably thinking about.

          Option 1: Repay SBA the $100,000 immediately with remaining cash. Pro: You keep the debt off of your balance sheet and you’ll save roughly $2000 in interest expense (1% of $100,000 per year for 2 years). Con: You’re giving up the best loan terms you will probably ever receive again. You can’t use this money for anything? ANYTHING? Two years is a long time. You could throw that money in a 2-year CD paying 2% interest (I just googled what that rate is and found a couple) and double your money. Please don’t do Option 1.

          Option 2: Repay SBA the $100,000 immediately by taking a higher interest rate loan. This makes even less sense than Option 1. You will pay even more in interest over the two-year period.

          So alright we’ve figured out repaying that loan isn’t a good idea until the loan term has ended. I’m hoping its obvious to most people who have made it this far that that was the case but if not, I want to make sure we’re now on the same page. Let’s move on.

          Option 3: Keep the money and use it for future expenses. You’re in debt to SBA of $100k. Pro: You have that extra cash on hand without seeking other debt. You’d be in debt to someone either SBA or someone else to do this so SBA is better right? Perhaps, but again remember assumption #4 about the ability to fund future expenses by other debt. I know this is a long article but I’m almost ready to explain my purpose for this article!

          Option 4: You call your CPA (me) to recalculate my figures and verify that indeed you’re coming up $100,000 short in your budget for the loan forgiveness. You then pay that money out to staff over the next 8 weeks as a bonus.

          Huh, bonus? You’ll be the best employer ever!!

          Sure, employee morale is as good a reason as any to open those coffers but trust me, there is bonus for you too as the business owner. For starters, that $100,000 you just spent on payroll came at little cost to you because it will be forgiven by the SBA anyway. Did I mention you can pay yourself some of that money? Well if you weren’t already maxed out now is the time (annualized at $100k/year—ask your accountant to help you figure this out if necessary).

          And then… you will receive even more money from the Federal and State Governments. Impossible! But it’s not and I’ll explain why soon and with math to prove it.

          You might think that there is a negative to paying your staff a bonus to cover the remaining loan amount. Sure, you no longer have that $100k to use for future expenses. But, is it really a negative?

          Let’s revisit assumption #4 again: You have plenty of access to capital, some cheaper than others. So, unlike many of your small business peers, you are still very fortunate to have ways of infusing cash into your business to pay for those future expenses.

          In my math below I’m going to take that sweet 1% loan the SBA is giving you and replacing it with an alternative (and very sour) 11% interest on alternative financing. For the business owners, this article is about, that 11% interest rate is a non-starter—you can get a better rate from any bank (at least half, no doubt). But I’m using 11% because I want to be conservative and the difference between the two notes is very easy to calculate 10%.

          More Free Money

          UPDATE 05/01/2020: The IRS released Notice 2020-32 which states that expenses used for loan forgiveness are no longer deductible. That changes the conclusion of this article entirely.

          Perhaps the best thing about this SBA loan forgiveness is that it will not be considered taxable income. And you can increase tax-deductible expenses with this non-taxable income. In fact, the ONLY way to increase tax-deductible expenses and have it count for SBA loan forgiveness is to pay your staff more money. In case you’re new: Paying your staff $100,000 more will reduce your taxable income by that amount.

          But there are additional costs to paying your staff an extra $100,000 that you need to include in your calculations. First, you’re financing all of that money at 11% interest (but the actual cost to you is a net of 10%, since we’re comparing the 11% interest rate with the SBA’s offering of 1%). The additional costs include the employer’s portion of Social Security and Medicare Taxes (6.2% and 1.45%, respectively) which combined equal $7650. Then in order to be fair let’s finance those too for 2 full years:

          Salaries: $100,000
          Payroll taxes: $7650
          Net Interest (11% – 1%) for two years ($100,000 + 7650) * 10%/year * 2 years) = $21,530

          Total Cash Out Over 2 Years: $100,000 + 7650 + 21530 – 100,000 = $29,180. Yikes!

          However, the increase in your tax deductions would be:

          Payroll: $100,000Payroll Taxes: $7650
          Interest Expense: $21,530
          Total Deductions: $129,180
          Tax Savings to you (at 35%): $45,213

          Net Savings (Tax Savings Less Costs): $16,033 (16% of forgiveness amount)

          So, there you go. By paying your staff an additional $100,000 over the next 8 weeks, you’ll see an additional $16,033 in your pocket over the next two years. Can’t wait that long? Reduce your estimated tax payments or withholding on your salary (you are an S Corp so you can do that, remember?) and get that money now. The math is even more in your favor with a lower interest rate.

          How A Change of Assumptions Changes Everything

          I’ve revisited the assumptions that I first outlined at the start of this article in the same numerical order:

          1. If the number of owners change, or the marginal tax rate changes or the entity type changes (Partnership vs C Corp Vs Sole Proprietor) then the math also changes. Maybe for the worse? You’d have to contact us to do the math for you to see just in case.
          2. The amount of the PPP Loan doesn’t really matter in our calculations. You can increase or decrease it as needed.
          3. The amount of forgiveness and the number of employees doesn’t really matter, either. The number of employees that make over $100k/year annualized does matter. So, you’d have to remember that additional bonus payments to these employees would not increase your potential loan forgiveness over the 8-week period. The bonuses would go to employees making less than $100k/year (and that could also include yourself).
          4. Obviously, if you have no access to additional debt or capital, and your survival depends on the receipt of these funds then you should do everything in your power to stay in business. This article doesn’t apply to your situation.
            1. Also, maybe you have some access to additional capital but only enough for 3 months or 6 months of expenses after the 8-week period. Is that enough? I don’t think anyone can answer that right now. To be conservative, if you’re worried about not being able to pay bills in 6 months and that additional loan money will make you feel better then, by all means, don’t pay the additional amount to staff.
            1. But I know there are many small business owners who 1) are affected by COVID19, 2) Qualify for the PPP Loan and 3) Are virtually guaranteed to survive through this crisis with little more than a few bruises. This article is definitely for you.

          Conclusion

          If you choose to sit on the remaining funds that the SBA will not forgive, then the total opportunity cost to you will be at least 16% of whatever that non-forgivable portion will be. The opportunity cost will be even higher with access to cheaper debt or capital.

          Also, let’s not forget that the intent of the PPP Loan is to support payroll for staff (The first “P” in PPP stands for Payroll). You get the benefit of paying yourself, as the owner, some of that money too AND you also get the hefty tax benefit of being able to deduct expenses paid for by this funding on next years’ tax return.

          Finally, there is the human element of you sitting on that money. Probably your staff really needs that money and needs that money now—don’t wait. They probably don’t know that you’re getting this PPP Loan and even if they do, they probably don’t know that you have the potential for extra benefits. Did you know before you read this article?

          So, if you KNOW that there will be funds not-forgiven after the end of 8 weeks, and you have the ability to fund future expenses for the foreseeable future, you are hurting yourself by not paying that money to your staff. You’re also hurting your staff.

          For more information on how your business can minimize the Paycheck Protection Program Loan, please contact Lipsey and Associates at 1-703-988-6573 or using the contact form below.

          Update 05/01/2020: Please read IRS Notice 2020-32 which states that expenses are no longer deductible. I believe this now makes Option 1 the best course of action.

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            The Impact of the CARES Act On Your Business

            We’re monitoring the developments of the COVID-19 pandemic and are committed to keep you informed of the implications for you and your business with a dedicated focus on all aspects of the CARES Act. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act)1 has recently been signed into law with a number of provisions designed to support small businesses including real estate enterprises and investors.

            Here is an overview of some of the related real estate provisions.

            Lipsey And Associates - The Impact of the CARES Act On Your Business

            DEPRECIATION FOR QUALIFIED IMPROVEMENT PROPERTY

            The CARES Act corrects an error contained in the 2017 Tax Cuts & Jobs Act (TCJA). Rather than a 39-year time period for depreciation of qualified improvement property, the CARES act provides for immediate depreciation of these assets. In addition, the CARES Act reduces the depreciable life of qualified improvement property from 39 years to 15 years, making it bonus-eligible property.  This correction will benefit retail establishments, restaurants and hotels as a “qualified improvement property” is now eligible for immediate depreciation and is also retroactive applying to 2019 and 2018 tax years. Amending your 2018 and 2019 tax returns is required to take advantage of the adjustment.

            PROVISIONS FOR NET OPERATING LOSSES

            The CARES Act allows taxpayers to carry back net operating losses resulting from tax years 2018, 2019, or 2020 to the five years preceding the net operating loss.   In addition, for the 2020 tax year, the net operating loss deduction limit of 80% of taxable income is suspended, allowing businesses to use net operating losses to offset 100% of their income accruing in 2020. The 80% limit will be reinstated for the 2021 taxable year.

            ADJUSTMENTS FOR ALTERNATIVE MINIMUM TAX CREDITS 

            For tax years 2018, 2019, and 2020, The CARES Act removes the limit for tax deductions arising from business losses non-corporate taxpayers were subjected to under the 2017 Tax Cuts and Jobs Act.  Those previously filed tax returns for 2018 and 2019 can be amended to take advantage of this provision.  The CARES Act authorizes corporations with unclaimed Alternative Minimum Tax credits to utilize them immediately.  Previously, the TCJA ended the corporate Alternative Minimum Tax and authorized corporations with previous Alternative Minimum Tax liability to claim credits, but the credits were spaced over multiple tax years.

            CHANGES TO 163(J) BUSINESS INTEREST EXPENSE DEDUCTION

            The CARES Act adjusts the maximum business interest expense deduction from 30% to 50% of adjusted taxable income (for tax years 2019 and 2020).   Taxpayers may also choose to use their 2019 adjusted taxable income, as opposed to their 2020 adjusted taxable income, in determining their maximum business interest deduction for 2020.  This 50% limit on adjusted taxable income excludes partnership entities.  Instead, any interest not deductible at the partnership level is passed on to its partners, and is suspended at the partner level under the 2017 Act rules.  In 2020, however, 50% of this suspended interest becomes available, and will be fully deductible by the individual taxpayer. The remaining interest expense continues to be suspended until the partner receives additional excess taxable income or interest expense from the partnership.

            PAYROLL TAX CREDITS

            With the CARES Act, special provisions apply for partnerships and a payroll tax credit for employee retention is available to specific businesses affected by COVID-19. One allows for a refundable payroll tax credit based on 50% of eligible wages paid by employers while another permits the deferral of the employer portion of specific payroll taxes through the end of the 2020 calendar year.

            The 50% refundable payroll tax credit2 allows for a credit of up to $10,000 for businesses whose revenues decrease in excess of 50% due to coronavirus related disruptions when compared to the same quarter in the previous year.  The credit applies for small business owners who retain their employees on the payroll, but are not currently working due to the pandemic.

            The payroll tax deferral allows for employers to defer their portion of the social security tax payment through accrued through January 1, 2021.  The first half of the payment would be due December 31, 2021, with the remaining balance owed due December 31, 2022.

            ADDITIONAL BENEFITS

            The CARES Act has minimal direct relief provisions for multi-family unit landlords and commercial property owners whose mortgages are held by non-federally backed or non-traditional lenders.  

            Qualified businesses may be eligible to receive forgivable small business loans that can be used to cover payroll, rent, and other operating expenses3  related to their businesses.   The current limit for eligible borrowers is the lesser of 2.5 times monthly average payroll or $10 million.

            Additional, borrowers holding a government-backed multifamily mortgage loan who are experiencing a financial hardship due either, directly or indirectly, to the impact the COVID-19 emergency, may be able to temporarily defer payments securing an initial forbearance of 30 days, and allowing for requests of two additional 30-day extensions(totaling 90 days of forbearance) in exchange for not evicting any tenant for inability to pay rent or assessing penalties and fees for late payment of rent.

            As the COVID-19 pandemic continues to develop, additional legislation may be passed which changes current benefits or provides additional relief. 

            Contact Lipsey & Associates

            If you have any questions about the current CARES Act legislation and how it impacts you and your business, please feel free to contact the team here at Lipsey & Associates for more information.

            To set up a free 1 hour consultation or if you want to get in touch with us to discuss your tax needs, please enter your information below:

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              For more information on the process from there, read our What To Expect page.

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              1S.3548 – CARES Act (https://www.congress.gov/bill/116th-congress/senate-bill/3548/text, March 25, 2020)

              2“Congress Approves Economic Relief Plan for Individuals and Businesses” (https://taxfoundation.org/cares-act-senate-coronavirus-bill-economic-relief-plan/, March 30, 2020)

              3″Real Estate Implications of the CARES Act” (www.greenbergglusker.com/publications/real-estate-implications-of-the-cares-act/, April 1, 2020)

              4“Key Provisions of the CARES Act and Effects on the Real Estate Industry” (https://aronsonllc.com/key-provisions-of-the-cares-act-and-effects-on-the-real-estate-industry/,  March 30, 2020)

              Should You Reincorporate Your Practice as a C or Personal Service Corporation?

              In the face of the 2018 tax reform, many small business owners in the professional services sector have an array of new business tax benefits. For most small business owners who operate under a pass-through business entity like an S corporation or limited liability partnership, the massive overhaul to personal tax provisions also needs to be factored in for business decisions made in 2018.

              When it comes to professional services like doctors and attorneys, these major changes to the tax code make it worth examining whether you should reorganize your practice under a different entity type. Personal services corporations (PSCs) are something to consider if you are not already mandated to operate as one.

              What is a PSC and How Does It Differ From Regular Corporations?

              PSCs are for professionals in health, law, architecture, accounting, actuarial science, engineering, consulting, and the performing arts and intended for owner-operators who are considered employee-owners. It’s a type of C corporation where more than 10% of the voting stock is held by professionals in any of the above fields who are providing these services. 95% of the stock must be held by the corporation’s employees (including employee-owners), retired employees, estates of both current and retired employees, or inheritors of the stock (within two years of the original stockholder’s death.) If you plan to wind down your current practice and reincorporate, your new practice would likely be classified as a PSC opposed to a normal C corporation if the conditions above apply.

              What makes a PSC more attractive than pass-through entities is that it gets most of the same benefits as normal C corporations do in that the owners get tax-free fringe benefits which are deductible to the corporation. Salaries and bonuses are also deductible and any cash that hasn’t been paid out in owner salaries can sit on the books to be reinvested (unlike operating as a pass-through where the owner’s entire share of profit is taxed regardless of actual cash distributions.)

              To make up for the loss in personal income tax revenue resultant of these major benefits, the IRS eliminated the graduated tax brackets for corporations so PSCs are always taxed at the maximum corporate rate. It was 35% until the tax reform bill passed. With the highest corporate tax rate at 21% now, and the top three personal income rates now 32%, 35%, and 37%, it’s certainly worth weighing the costs and benefits of converting your practice to a PSC if you were operating as a pass-through business.

              The Pass-Through Entity Deduction

              This new deduction for owner-operators of pass-through businesses primarily intends to reward new business owners and middle-income professionals. For professional services that are just starting out or operating on a small scale, operating as a pass-through business like a sole proprietorship or S corporation hasn’t completely lost its attractiveness in the face of the drastically-reduced maximum corporate tax rate.

              To qualify for the pass-through deduction which is worth up to 20% of the profits, your total taxable income must be under $157,500 ($315,000 if married filing jointly) to have no additional requirements for the full benefit. If your income is between $157,500 and $207,500 (between $315,000 and $365,000 if married filing jointly), the amount of the deduction has a phaseout range and there are two additional limitations. One of them automatically disqualifies a majority of professional practices with the exception of engineers, in that the chief product or service can’t be your skills and/or reputation. The other limitation is based on a required investment formula based on 25% of W-2 wages paid to your employees and 2.5% of qualified business property. Qualified business property would be any assets in the 10-year class or higher such as furniture and fixtures and commercial real estate. If you have no or few employees and qualified business property, the deduction is also nullified. Once your income is above $207,500 ($365,000 if married filing jointly), there is no deduction.

              While the pass-through deduction will reduce income taxes, the full profit or share of profit is still subject to self-employment tax for partnerships and sole proprietorships. S corporation profits are still exempt from self-employment tax.

              Is Reorganizing As a PSC Worth It?

              Using the figures from the pass-through deduction’s eligibility guidelines, PSCs are presenting colossal tax savings that they might not have in the past. Under the new tax rates, a single professional with a taxable income of $250,000 would be taxed at the 35% bracket and a married couple with the same income would be taxed at 24%, but only pay 21% with a PSC. Additionally, for 2018 the 15% tax rate for dividend income begins at $38,600 for single taxpayers, $51,700 for heads of household, and $77,200 for married taxpayers filing jointly. The 20% dividend tax rate begins at $425,800 for single professionals, $452,400 for heads of household, and $479,000 for married couples filing jointly.

              Many entrepreneurs and self-employed professionals opt for S corporations to save on self-employment tax as the profits are not subject to it unlike a sole proprietorship or a partnership. But unlike S corporations, PSCs are not subject to reasonable compensation rules. If your salary is considered unreasonably high to get a deduction however, the excess portion can be reclassified as a dividend (lower tax rate at the personal level but no deduction at the corporate level.) In spite of these limitations, the lower tax rates on dividends and corporate income are making PSCs a more attractive option.  While there may be higher administrative burden in having a PSC since it’s still a C corporation that also has additional limitations in place for what makes it a qualifying PSC, it can be worth it to avoid both self-employment taxes operating as a sole proprietor and the reasonable compensation rules that apply to S corporations.

              If your practice is new or on a small enough scale to the point that you will qualify for the pass-through benefit, it would be prudent to operate as an S corporation to save on self-employment tax and reap the benefit of this new deduction. If you’re looking to hold onto your earnings to reinvest in new equipment, training, or other major investments in your career, that’s also when you should consider moving to a PSC.

              Ultimately, reincorporating as a PSC depends on both your personal and business financial needs and which types of taxes you are specifically trying to avoid. Operating as a PSC is certainly starting to look more attractive. This is especially so given the major reduction to the highest corporate tax rate. If your income falls into or above the phaseout range for the pass-through deduction and you don’t have enough personal tax benefits to offset your taxable income, reorganizing as a PSC would result in major tax savings especially if your income remains steady or increases through 2025.

              The Differences Between VA, MD, and DC Taxation

              Did you just get a great job offer or are thinking of relocating your practice to better serve your clients? If you’re considering moving to or within the Washington DC area, you’ll likely be comparing the costs of living in DC proper to opting for nearby Virginia or Maryland. Personal circumstances like commutes and lifestyle choices are often the determinants for deciding which is the best state to move to, but taxes also need to be considered if you’re looking to save money on state income taxes in the face of the 2018 tax reform. Here are some of the most crucial differences in the ways that the three states will tax your income.

              Income Tax Rates

              Of the three states, Washington DC has the highest income taxes. As of 2019, there are six income tax brackets ranging from 4% to 8.95%.

              • 4% on the first $10,000 of taxable income
              • 6% on taxable income between $10,001 and $40,000
              • 6.5% on taxable income between $40,001 and $60,000
              • 8.5% on taxable income between $60,001 and $350,000
              • 8.75% on taxable income between $350,001 and $1,000,000
              • 8.95% on taxable income of $1,000,001 and above.

               

              Maryland has eight income tax brackets ranging from 2% to 5.75% for 2019:

              • 2% on the first $1,000 of taxable income
              • 3% on taxable income between $1,001 and $2,000
              • 4% on taxable income between $2,001 and $3,000
              • 4.75% on taxable income between $3,001 and $150,000
              • 5% on taxable income between $150,001 and $175,000
              • 5.25% on taxable income between $175,001 and $225,000
              • 5.5% on taxable income between $225,001 and $300,000
              • 5.75% on taxable income of $300,001 and above.

               

              Virginia has four income tax brackets ranging from 2% to 5.75% for 2019:

              • 2% on the first $3,000 of taxable income
              • 3% on taxable income between $3,001 and $5,000
              • 5% on taxable income between $5,001 and $17,000
              • 5.75% on taxable income of $17,001 and above.

               

              Of the three states, Maryland has the lowest state income tax rates for most middle-income taxpayers which are roughly half of the taxes you’d pay living in DC proper. For taxpayers earning more than $250,000 per year, both Maryland and Virginia will tax you at the same exact rate which is still about 3% less than what you would pay as a DC resident. However, since Maryland also has taxes at the county and/or city level, the total state and local income taxes that you pay would be very similar to what you would pay in Virginia and still less than DC.

              Specific Income Tax Items

              For Washington DC residents, if your taxable income is $50,500 or less ($61,900 or less if you are age 70 or older) you can get a tax credit of up to $1,025 for 2019 based on your rent or property taxes with an exception for public housing or property owned by nonprofits or houses of worship. For retirees considering moving to DC, Social Security benefits aren’t taxed at the state level and the first $3,000 of pension income from the military, DC, and federal income is also tax-free.

              Virginia doesn’t have as many additional tax benefits as other states do and a relatively simple income tax structure. Maryland, however, has more complex local income taxes in addition to a variety of credits and deductions. There is also a 1.75% nonresident tax in addition to your standard Maryland state income tax if you operate a practice or have rental property in Maryland. If you live in Virginia, DC, West Virginia, or Pennsylvania however and your only source of income in Maryland is wages, then you don’t have to file a nonresident tax return and pay this tax. 

              Maryland has a tax credit for childcare expenses based on a percentage of your federal Child and Dependent Care Credit. There is also a state-level tuition relief tax credit for Maryland public school teachers and teachers who work in state or local correctional or juvenile facilities and are paying for higher education expenses. Physicians and nurse practitioners working in counties with workforce shortages can also claim a tax credit. Certain student loan borrowers can also get a refundable tax credit if they owe more than $20,000 in student debt and obtain certification from the Maryland Higher Education Commission.

              Sales Tax

              The general sales tax rate in Washington DC is 6.00%. In addition to hotel and commercial parking taxes, there is a specific 10% tax for food eaten or taken out of restaurants, rental cars, calling cards, and alcohol. Most goods are taxed at the general rate except groceries, prescription and over-the-counter drugs, and residential utilities.

              Maryland’s general sales tax rate is 6% with no general local rates. Most tangible goods are taxed except for food sold in grocery stores and prescription drugs. Purchases made out of state are subject to a 6% use tax unless the business has a physical location or delivers services in-state.

              Virginia’s general sales and use tax rate is 4.3% with a 1% additional local sales tax. Most purchases in Virginia are subject to this 5.3% sales tax while some localities in Northern Virginia and Hampton Roads charge 6% due to the 0.7% additional tax imposed in those areas. Some food items are subject to sales tax but at a reduced base rate of 1.5%, making it 2.5% after accounting for local tax. Use taxes apply to purchases over $100 made out of state throughout the year.

              Estate Tax

              In Washington DC, an estate tax return is required if your gross estate is worth $1 million or more. There is no inheritance tax.

              Maryland residents with estates worth $4 million or more as of 2018 need to pay estate taxes. As of 2019 and onward, the federal estate tax thresholds will be used. There is also an inheritance tax paid to the Register of Wills which can be used to reduce the amount of estate tax owed. This tax is based on the value of the property the decedent left to certain beneficiaries (other than their spouse.)

              Virginia repealed their estate tax in 2007 and does not collect inheritance tax.

              At the end of the day, lifestyle considerations, the housing market, and proximity to your job or business are likely to guide your decision on where to live. If you’re considering moving to the metro DC area, you should be aware of the different tax environments that DC, Maryland, and Virginia impose on their residents to make the best choice congruent to your finances and lifestyle.

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                Will the Loss of the Business Entertainment Deduction Affect Business Decisions?

                One of the material changes made to the tax code resultant of the 2018 tax reform is that the business entertainment deduction has been suspended until 2026. It’s not just large enterprises that are affected by this law, but also small businesses, freelancers, solopreneurs, and other self-employed individuals who may now be changing their plans and budgets depending on how integral this deduction was to their operations. While company funds can still be used to cover these expenses, they are just no longer deductible.

                Since the tax code intends to influence behavior, the significant overhaul to the business entertainment deduction could spell some interesting outcomes for business decision-making. Here’s a detailed explanation of how the law changed and what behavioral shifts could ensue.

                Offsite Entertainment No Longer Deductible

                If you’re taking a prospect or client out to a ball game, concert, or other event it’s unfortunately not deductible anymore. The same also goes for other offsite entertainment such as facility rental for parties and other activities deemed primarily for recreation. It also applies to memberships and season tickets at recreational facilities. This provision has small business owners, freelancers, and their advocates worried since the elimination of tax savings on these expenses will hurt them. They rely on these events to develop closer relationships with prospects and clients given that fully-deductible traditional advertising is more effective for established and/or larger businesses.

                A possible work-around for entrepreneurial types is to host parties that have more promotional than recreational elements present. Events purely for marketing purposes, like getting a booth at a trade show, are still fully deductible. If your business hosts a party that prominently features your branding and has some kind of presentation or professional networking aspects that are front and center with the recreational portion being more incidental, you may be able to work around the death of the business entertainment deduction.

                The Meals Deduction Remains

                There is currently a lot of confusion regarding business meals in light of this law change. Entertaining clients by taking them out for a meal or just brainstorming over a cup of coffee is still deductible, as are meal expenses for eligible business travel. Both are still subject to the 50% limit with the only exception being for meals that are a significant part of your line of work such as a chef or food blogger. But if you’re taking your client out to dinner and a show, only the dinner portion is deductible.

                Then for businesses that have employees and a physical workplace, the provisions for providing meals to employees aren’t as generous as they were. Prior to 2018, employers could deduct 100% of the cost of meals furnished to employees as a de minimis benefit. This means that the meals were provided for the employer’s convenience, such as giving employees free dinner for working late using a corporate meal delivery account, to get de minimis treatment. The deduction remains but is now subject to a 50% limit just like the standard business meals and entertainment deductions have been for most taxpayers. However, after 2025, de minimis benefits for employer-provided meals intended for their convenience will no longer be deductible.

                This law change is probably not going to make most employers immediately stop making employees work later or stay on the premises during lunch break. But for Silicon Valley type environments where lavish cafeterias are a major draw for talent, it could definitely give these employees less incentive to work later or stay on the premises for lunch if employers stop providing them meals. A healthier work-life balance could result over time if there’s no incentive for employers to provide this benefit and employees need to pay out of pocket for meals now.

                Office Holiday Parties and Entertainment on the Premises

                This is the only type of entertainment that survived the 2018 tax reform. Whether you’re a Fortune 100 company or solopreneur holding a party for your clients and colleagues, entertainment off the premises is no longer deductible. But if you’re hosting a party for your employees at the workplace, it’s actually 100% deductible. The party doesn’t need to specifically be for holidays: it can be for retirement, birthdays, celebrating a strong sales quarter, or making new hires feel welcome. But in order to be deductible, the party needs to be held at the workplace and not offsite like a restaurant or other external venue.

                Because this is the only surviving portion of the business entertainment deduction, employee morale could face a downturn if they feel like they never get to leave the workplace. However, event planners and other party professionals may also see a budding opportunity in making parties come to the workplace instead of hosting corporate events at the venues they’re affiliated with. With the reduction of the corporate meals deduction for employees and the entertainment deduction otherwise being eliminated, office parties being the only deductible form of entertainment will affect corporate catering budgets. With less incentive to provide meals on the premises or arrange for offsite parties at restaurants, budgets are likely to be cut. But given that the deduction for parties intended for employees at the workplace  is also not limited to 50% of the costs, there’s definitely more incentive to go all out for office parties now with the best food, decor, and entertainment although this definitely leaves out smaller employers who lack the proper facilities for this type of hosting.

                Given the costly audits and frequent misuse and abuse of the meals and entertainment deductions, it makes sense that Congress culled it as a cost savings measure. Not all of the behaviors associated with the business entertainment and meals deductions are necessarily going to go away overnight given how conducive they are to business. But one can expect to see entertainment budgets reduced and some events canceled or modified.

                Changes to Make Now to Optimize Your 2018 Tax Return

                With the 2017 tax season in full swing, thinking about what to do for 2018’s taxes may seem too far away right now. But with the last-minute sweeping overhaul made to the tax code late last year, it’s definitely not too early to start making some changes to your ordinary recordkeeping habits for your taxes sooner and change some decisions you had planned. Most of the provisions will expire in eight years without further action from Congress but for now, here’s what you need to do to get off on the right foot for 2018 taxes.

                Change your tax withholding if necessary.

                When you have taxes taken out of your paychecks, they go by a table the IRS updates every year. When starting a new job, people file a Form W-4 to claim allowances where the more you claim, the less taxes you’ll have withheld. You can always update your withholding by giving your employer a new W-4. Now that the withholding tables have significantly changed, you might not be having enough taxes taken out and could end up with a smaller refund than expected or owing taxes. Your employer must implement the new withholding tables by February 15, 2018.1

                Once your 2017 tax return is completed, if you expect 2018 to be similar in terms of income and deductions you should definitely compare your withholding and make sure enough is being taken out. Since the IRS is also updating Form W-4 for these tables, you will want to submit one once the 2018 version is available.

                Don’t neglect state and local income taxes.

                You also don’t want to forget about withholding at the state and local level. Washington DC, Maryland, and Virginia residents are subject to state income taxes while Philadelphia and New York City residents also pay them at the city level. If you’re starting a new job you will also need to file the state and local equivalents of Form W-4 to have taxes properly withheld.

                However, major changes were made to itemized deductions where state and local income taxes now have to be combined with real estate taxes for a maximum deduction of $10,000. The state and local income tax deduction has been the largest expenditure in itemized deductions, particularly for taxpayers earning $200,000 per year or higher.2 While you need to ensure that your state income taxes are also sufficiently withheld, there is now less incentive to over-withhold at the state and local level to get a larger itemized deduction.

                If you’re thinking of taking out a home equity loan, only do so if you’re going to use it for major home improvements.

                There is a lot of confusion surrounding the deductibility of home equity loan and HELOC interest since it was outlined in the tax bill as a deduction being eliminated. Provided that the proceeds of the loan are being used to make a substantial improvement (like an addition) to your home, you can still deduct the interest. But you can no longer deduct home equity interest used for personal purposes.

                With the state income and real estate tax deductions severely hampered for the next eight years, you’ll want to take advantage of the bigger mortgage and home equity loan interest deduction that comes in the early years of their lives when your payments are predominantly interest. However, the mortgage interest deduction is now limited to $750,000 in principal on new mortgages.4 Older mortgages have been grandfathered in under the old limit of $1,000,000 ($1,100,000 after accounting for home equity debt) but there is no grandfathering for home equity loans. Be mindful of how much you are borrowing relative to your home’s principal so your total outstanding debt is less than $750,000.

                Pay extra attention to medical expenses for the year.

                The tax overhaul limited the largest itemized deductions in favor of a higher standard deduction. However, the medical expense deduction rolled back to 7.5% of adjusted gross income regardless of age.5 While this provision is also retroactive for the 2017 tax year, it will revert to 10% of adjusted gross income (7.5% for taxpayers age 65 and older) in 2019.

                Given that the new standard deduction is $24,000 for married couples filing jointly, $18,000 for heads of household, and $12,000 for all other taxpayers, this benefit would only apply to those who are extremely burdened by healthcare costs. Deductible medical expenses include premiums for health and dental insurance, payments to doctors and hospitals, transportation to and from healthcare facilities, and prescription drugs. If you have any doctor visits or medical bills you were putting off and you’re under 65, 2018 would be a good time to claim them since they will be harder to deduct in 2019 onward.

                Make efficient use of 529 plans.

                If you send your children to private school, you can now make tax-free withdrawals from 529 education savings plans. You can withdraw up to $10,000 per student (not per account) for tuition paid to an elementary or secondary school.6 In spite of this limitation, you may want to consider opening a second 529 plan separate from your children’s college savings given the shorter timeframes for the investments.

                Consider making a career change to freelance or contract if you frequently have unreimbursed job-related expenses.

                The tax reform eliminated the employee business expense deduction.7 Self-employed taxpayers can still deduct business expenses as usual and there is also a new 20% deduction of profits for the owners of pass-through business entities like sole proprietorships and S corporations. While transitioning from employee to self-employed entails new recordkeeping requirements and having to pay self-employment taxes (Social Security and Medicare that you now must pay both the employee and employer share of), the loss of several tax benefits for employees and the new deduction for small business owners has made switching to contract status more preferable for some taxpayers in 2018 and onward. If you have to pay for conferences, travel, continuing education and licenses, and similar expenses out of pocket that take a significant bite out of your pay then it’s definitely worth considering.

                The IRS may issue further interpretations of the 2018 tax reform and Congress could also make additional updates before 2019. With the reforms that are currently in effect, making or considering these changes while it’s still early in the year can result in a lower tax bill when it’s time to file your 2018 tax return.