Monthly Archives: May 2018

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Tax Cuts and Jobs Acts

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The IRS is expected to curtail workarounds to the state and local tax deduction limit. The Tax Cuts and Jobs Act generally limits individuals’ deductions for these taxes to $10,000. So some states have adopted, or are considering, legislation allowing taxpayers to make payments to state-run charitable funds in exchange for tax credits against state and local taxes they owe. The aim is for the payments to be deductible charitable donations. The IRS says it will propose regulations addressing the federal income tax treatment of such transfers. (Notice 2018-54)


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Business Losses

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Business owners can generally deduct business losses on their tax returns. But the activity must show a profit motive by operating in a businesslike manner, which includes proving expenses. An owner of a music production and promotion company wasn’t allowed to deduct the net operating losses (NOLs) he incurred, because the IRS determined he was engaged in a hobby. The U.S. Tax Court found a profit motive did exist, but denied the deductions because the NOLs weren’t substantiated. (TC Memo 2018-67)


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“Payroll Checkup”

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If you typically itemize deductions on your tax return, you may want to rethink that decision due to changes brought by the Tax Cuts and Jobs Act. To help, the IRS is encouraging itemizers to do a “payroll checkup” using its withholding calculator. Changes take effect this year, including the standard deduction nearly doubling, and limits on several itemized deductions. These changes may make it more beneficial to claim the standard deduction. If so, you may need to adjust your withholding as early as possible. To access the calculator: https://bit.ly/2aLxK0A


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Business Deductions

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Taxpayers can generally deduct ordinary and reasonable costs of running a business, but they must provide proof, including the business purpose of expenses. In one case, a married couple was denied deductions when they failed to adequately prove that costs such as travel, meals and entertainment related to the wife’s business. They also deducted living expenses they paid for their college-age kids, which they called “compensation” but failed to show how the costs were reasonable or business-related. Their arguments were deemed “unpersuasive.” (TC Memo 2018-63)


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IRS issues guidance to ease transition to FASB’s new revenue recognition rule

Category : Blog , sccm


In 2014, a new accounting standard on how to recognize revenue from contracts was issued by the Financial Accounting Standards Board (FASB). Now the IRS is allowing a new automatic change in accounting method for businesses to use to conform with the new financial accounting standard. This will allow for more book-tax conformity and facilitate accounting method change requests associated with adopting the new standard.

New accounting rules

Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, goes into effect in 2018 for public companies and 2019 for private ones. The new revenue recognition standard requires entities following U.S. Generally Accepted Accounting Principles (GAAP) to recognize contract revenue for promised goods and services to customers based on the following five steps:

1. Identify the contracts with a customer.

2. Identify the performance obligations in the contract.

3. Determine the transaction price.

4. Allocate the transaction price to the performance obligations.

5. Recognize revenue as the entity satisfies a performance obligation.

The new revenue recognition standard is a significant change from current accounting practices, particularly for technology firms, construction contractors and service providers with warranty and repair service contracts. However, the recognition rules for tax purposes remain unchanged.

Under the tax rules, businesses that follow the accrual method of accounting accrue income when the right to receive income is fixed and the amount can be determined with reasonable accuracy. This is known as the “all events” test.

IRS change of accounting method

Your business can apply for a change in accounting method by filing IRS Form 3115 and submitting detailed information about the change. To alleviate the administrative burden, the IRS created a list of “automatic” method changes whereby a business is deemed to have the consent of the IRS to change its accounting method if it’s within the scope of a revenue procedure and any related guidance for the specific method change.

When a business changes its accounting method for tax purposes, adjustments are generally required to be made to prevent items from being duplicated or omitted. Sometimes, the IRS allows a “cutoff” method instead, where only the items arising on or after the beginning of the year of change are accounted for under the new accounting method.

Syncing GAAP revenue and taxable income

Most entities would prefer to use the same method of recognizing revenue under GAAP as they do for reporting taxable income to the IRS. The new IRS guidance provides procedures to obtain automatic IRS consent to change to an otherwise permissible accounting method under ASU 2014-07, if such method change is otherwise permissible for federal income tax purposes and is made for the tax year in which a business adopts the new accounting standard.

Specifically, Revenue Procedure 2018-29 applies small business exception rules to more businesses and gives taxpayers the option of implementing the accounting method change either with an adjustment or on a cutoff basis. If needed, the IRS may issue additional guidance as the IRS and businesses obtain more experience with the interaction of the new standard with federal income tax accounting methods.

We can help

The new IRS guidance simplifies the procedures needed to align your taxable income with the amount of revenue reported on your financial statements. Contact us for answers to your questions about how to implement the changes.

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