34 THE QUEENS COURIER • AUGUST 22, 2019 FOR BREAKING NEWS VISIT WWW.QNS.COM
TAX TIPS
CHANGES MADE
BY TAX REFORM
BY JOHN SAVIGNANO, CPA
The 20% qualified business income deduction.
Self employed people and owners of pass through firms
such as S corporations can take this popular break, subject to
limitations that apply to high earners. The K-1s you get have
new codes to reflect this change.
Also, the limitation on deducting business losses on
individual returns. The amount of trade or business losses
that exceeds a $500,000 threshold for couples and $250,000
for other filers is nondeductible, with the excess carried
forward.
Keep and eye on a Senate bill’s proposed simplifications
for S corporations. Among the desired changes: Allowing
banks to have IRAs as shareholders. And easing rules for
corporations with retained profits that switch to S status.
More of their income could be passive before a special penalty
tax would apply. Currently, if over 25% of a former regular
corporation’s gross receipts are passive, the S firm owes a 21%
tax on the excess. And if this happens for three straight years,
it can lose its S status. The bill would hike the 25% passive
income threshold to 60% and would appeal the excessive
passive income rule as an S-election termination event.
Boosting tax enforcement on the S corporation front is a
goal of IRS. Among the desired changes: As shown by
campaigns from its Large Business and International
Division that focus on risk areas in which IRS has found
taxpayer compliance to be lacking.
One targets distributions by S corporations. Among some of
the concerns: S firms that fail to report gain on distributions
of appreciated property to shareholders. C corporations with
accumulated earnings and profits that elect to switch to S
status and later make distributions that should properly be
treated as taxable dividends. Also, cash or property
distributions by S firms to shareholders in excess of stock
basis.
A second, risk-focused compliance campaign involves the
built-in-gains tax…the 21% levy paid by corporations that
convert to S status on profits from sales of assets owned
before the conversion and sold within five years after the
switch.
Shareholder basis in S corporations is a third big
enforcement priority. Owners of S corporations can deduct
losses only up to their stock basis and loans that they make to
the company. IRS knows that compliance in this area is
deficient.
IRS is conducting audits in this area. Exams are at the
shareholder level. Agents are checking to see whether
shareholders are properly tracking their basis.
Many S firm owners must now include basis information
with their 1040.
John Savignano is a partner with Savignano Accountants &
Advisors located at 47-46 Vernon Blvd., Second Floor, in Long
Island City. If you have any questions or require additional
information, please call John at 718-707-0955.
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Co-Author of the
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“Breaking the Tax Code”
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Salvatore P. Candela, EA, ATA, ABA
Enrolled Agent - Tax Advisor
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