(Copyright 2018, Bradford Tax Institute – thanks for the article on S Corp vs C Corp Debate in 2018.)

When you first see that 21 percent tax rate for the C corporation, you have to think that this could be the choice of entity for your business operation. Further, when you find yourself in the out-of-favor group for the 20 percent deduction authorized by new tax code Section 199A, you naturally gravitate to thinking about the C corporation, perhaps as a means of getting even.

The table below gives you a good look at how you would pay taxes on your profits, depending on your Form 1040 tax bracket. In the S corporation column, we listed the tax rates by the brackets that apply to individuals. To see exactly how this table works, let’s say that you are in the 34 percent tax bracket and have $100,000 in profits.

If you operate as an S corporation, the profits come to you on a K-1 and you pay your Form 1040 taxes at the 34 percent rate, for a total tax of $34,000 on your S corporation profits.

If you operate as a C corporation, the profits are first taxed at the C corporation level at a rate of 21 percent, for a tax of $21,000. This leaves you with $79,000 of the $100,000 in profits available for distribution as a dividend to you.

You are in your “give me the money” mode, so to get the cash, you endure the double taxation, starting with the dividend tax of 15 percent. This creates an $11,850 tax ($79,000 x 15 percent).

Your tax bracket also triggers the net investment income tax (NIIT) that applies because of your dividend income. The NIIT is $3,002 ($79,000 x 3.8 percent).

As a C corporation, your total federal taxes on the $100,000 of income are $35,852, which consists of the following:

1. C corporation taxes of $21,000
2. 1040 dividend taxes of $11,850
3. 1040 NIIT of $3,002

Based on the same $100,000 in profits, operating as an S corporation results in $34,000 to the government compared with the C corporation, where you and the corporation combined pay $35,853. The winner: the S corporation.

You might ask: Why no NIIT on the S corporation profits? Answer: If the shareholder materially participates in the S corporation, the NIIT does not apply to the pass-through income derived from active business operations. In the table below, we treat you as materially participating in your S corporation.

Okay, with this background, you can see how the table below works. You simply compare column 1 (S Corp.) with column 2 (C Corp.) to see the percentage taxes on the profits. And you will note that in all cases, the S corporation pays less in taxes.

So, based on the tax rates alone, you have no reason to switch to the C corporation because of the recent tax reform.

You can count on us to count for you!

Email: bstonercpa@sbcglobal.net  Phone: 818-317-6035   Website: www.briantstonercpa.com

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In 2018, various retirement plan contribution limits have changed.  Here are the new limits for amounts and income levels for the following:

Traditional IRAs: The maximum contribution for 2018 stays at $5,500.00 if you are under age 50. The catch-up contribution for those who are 50 or older also stays at $1,000.00. If you are in a qualified plan, the maximum income you can make if single and still make a full traditional IRA contribution starts at $63,000.00 Adjusted Gross Income (AGI) and phases out the contribution if you make over $73,000.00.  If you are married filing jointly, the phaseout starts at AGI of $101,000.00 and phases out at $121,000.00. If you file married separately, the contribution starts  phasing out immediately and at $10,000.00 AGI the contribution is phased out entirely (Boo!)

Roth IRAs: The maximum contribution for 2018 stays at $5,500.00 if you are under age 50. The catch-up contribution for those who are 50 or older also stays at $1,000.00. You have an income limitation to contribute to a Roth IRA, whether or not you are in a qualified plan at work. The maximum income you can make if single and still make a full Roth IRA contribution starts at $120,000.00 AGI and phases out the contribution if you make over $135,000.00.  If you are married filing jointly, the phaseout starts at AGI of $189,000.00 and phases out at $119,000.00. If you file married separately, the contribution starts phasing out immediately and at $10,000.00 AGI the contribution is phased out entirely (Boo again!).

Contributing to a Traditional IRA means a deduction on your return for the contribution and deferral of tax on the contribution and earnings until you withdraw the money in retirement.  Contributing to a Roth IRA means no deduction now for your contribution but when you retire and start taking out the money (if you are 59 1/2 or have had the IRA for five years) you never pay tax on the contributions OR the earnings (a pretty good deal over 1t least 10 years.)

 Simple IRAs: This type of IRA has a maximum annual contribution of $12,500.00 if you are under 50, the same as 2017. The catch-up contribution for those who are 50 or older also stays at $3,000.00. Since this is contributed through a company retirement plan, there are no income limits.

SEP (Simple Employee Pension) IRAs: You may contribute up to 25% of your payroll or 20% of your self-employed income with a maximum of $55,000.00 if under 50 and a catch-up contribution for those who are 50 or older at $6,000.00 maximum. Normally these are contributions through businesses (Corporations, LLCs or sole proprietorships.) 

Solo 401ks: This plan allows the employee to make a contribution of the greater of $18,500.00 or 100% of your payroll (called the employee deferral). Your employer can also contribute up to 25% of your payroll, with a maximum combined contribution if under 50 of $55,000.00, and if 50 or older, a catch-up contribution of $6,000.00.  The plan may also have an option to contribute up to the maximum amount of the employee deferral (up to the $18,500.00 if under 50 or up to $24,500.00 if 50 or older) into a Roth component of the 401k, which is treated like a Roth IRA, but with no income limitations on contributions.

A regular 401K has similar limits – you will need to talk to your employer about company matches and Roth components.

So now you have the information; use it to save for retirement so you won’t have to live on social security, buy lottery tickets or work till you die (unless you like working, then have at it.) 

You can count on us to count for you!

Email: bstonercpa@sbcglobal.net  Phone: 818-317-6035   Website: www.briantstonercpa.com

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(Copyright 2018, Bradford Tax Institute – thanks for the article on new automobile deductions in 2018.)

Finally, lawmakers did the right thing by increasing the luxury auto depreciation limits on business cars.

The old luxury limits were unrealistic, punitive, unfair, and discriminatory against any car that cost more than $15,800. The new limits don’t create parity in all respects, but they are a big improvement.

If you bought a car in 2017 and paid more than $15,800, you were driving a luxury car that lawmakers punished you for by putting a lid on your depreciation.

For example, say in 2017 you bought a $40,000 car and drove it 100 percent for business. Your maximum depreciation deductions for the first five years would total only $15,060. To fully depreciate this car under the old rules would have taken 19 years.

 It was ridiculous to take 19 years to depreciate that $40,000 car. And now, finally, lawmakers have fixed a big part of what the tax code calls luxury automobile limits.

 Under the new law, this $40,000 vehicle is fully depreciated in six years. Think about that. Old law: 19 years. New law: six years.

 Essentially, the new law sets the so-called luxury automobile limit at $50,000. This means that any vehicle costing $50,000 or less is not penalized by the luxury vehicle limits when using MACRS depreciation.

 Under the new law, the annual limits are: 

• Year 1, $10,000
• Year 2, $16,000
• Year 3, $9,600
• Year 4 and each succeeding year, $5,760

 What do the new limits mean? Before 2018, many business taxpayers were buying vehicles with gross vehicle weight ratings (GVWRs) greater than 6,000 pounds to escape the draconian roughly $15,000 luxury limits.

 Even today, SUVs, crossover vehicles, and pickup trucks can avoid the automobile luxury limits and even qualify for immediate write-offs of the full business cost using bonus depreciation or Section 179 expensing. Cars don’t qualify for unlimited bonus depreciation or any added benefits from Section 179 expensing.

 But the big deal in the new realistic luxury auto limits is that there’s far less need to buy the bigger, heavier SUV or crossover vehicle, because of the new higher luxury limits. With a car costing $50,000 or less, you realize 71.2 percent of your total vehicle deductions in the first three years.   

Takeaways:

You have to thank tax reform for the new luxury auto depreciation limits. They appear to capture the idea of a luxury car in today’s automotive market and seem realistic and fair. Also, you have to like the fact that for cars costing $50,000 or less, MACRS depreciation matches up evenly with SUVs, crossover vehicles, and pickups with GVWRs greater than 6,000 pounds.

As an aside, you have to question the lawmaker logic that penalizes business use of cars and rewards business use of the heavier SUVs (i.e., those with GVWRs greater than 6,000 pounds).

You can count on us to count for you!

Email: bstonercpa@sbcglobal.net  Phone: 818-317-6035   Website: www.briantstonercpa.com

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