Tag Archives: 20% Qualified Business Income Deduction

Understanding The “New” Form 1040

So, when lawmakers vowed in 2017 to simplify the tax code, one of their targets was the good ‘ol IRS Form 1040 pictured above. There was much hoopla about making it so taxpayers could file their taxes on something about as big as a post card. Well, the new Form 1040 is smaller than it’s predecessors. But will it make the filing process more simplified? We don’t think so. Read on to see why.

More Schedules. The new Form 1040 replaces the former Form 1040 as well as the Form 1040A and the Form 1040EZ. The new Form 1040 uses a “building block” approach, in which the tax return is reduced to a simple form. That form can be supplemented with additional schedules if needed. Taxpayers with straightforward tax situations would only need to file this new 1040 with no additional schedules. But what if you do need one of the additional schedules? Well, just know that there are six new schedules to accommodate this approach. What are these new schedules?

Schedule 1 Additional Income and Adjustments to Income. This schedule is used to report all of the income that was reported on lines 10 and 21 of the 2017 form. This includes income from Schedule C (business income), Schedule D (capital gains and losses), Schedule E (supplemental income and loss from rental real estate) and Schedule F (farm and ranch income). It also includes the reductions to income that that were formerly reported on lines 23 to 35 of the 2017 form.

Schedule 2 Tax. This schedule reports lines 45 to 47 of the 2017 form 1040, including the tax, alternative minimum tax and any excess premium tax credit.

Schedule 3 Non-Refundable Credits. This schedule contains lines 48 to 55 of the 2017 form, including education expenses, child and dependent care credit, foreign tax credit, retirement savings plan credit and child tax credit.

Schedule 4 Other Taxes. This schedule contains lines 57 to 63 of the 2017 form, including self-employment tax, additional tax on IRA and retirement plan withdraws, household employment tax and the individual responsibility payment for not having health care.

Schedule 5 Other Payments and Refundable Credits. This schedule contains lines 65 to 74 of the 2017 form, including estimated tax payments and amounts applied to the next year’s return, earned income credit, additional child tax credit, American opportunity credit (the amount of the education credit that is refundable), amount paid with a request for extension and several other credits.

Schedule 6 Foreign Address and Third-Party Designee. This schedule is used to report your foreign address or if you would like the IRS to be able to discuss the return with a third party (e.g. your paid preparer).

Why Was This Done? Keeping politics out of the conversation, we believe that this switch was done to fulfill a campaign promises. Why so?

  • The new building block approach doesn’t actually simplify anything. If anything, it makes one have to look at additional forms/pages when one only had to formerly look at a two page document (i.e. the old “long form” 1040) to see it all.
  • Only around 13% of tax returns are file via paper as opposed to being e-filed according to the IRS statistics. With that being said, who really cares if the Form 1040 is the size of a postcard? Most people who file are using software!
  • Schedules 1 through 6 are additional to the ones that existed prior to 2018 (e.g. Schedules A, C, D, E, F, H, SE and 8812). While taxpayers can ignore them if they don’t have any lines on those schedules to fill out, they still might have to review them to determine if they are required. Simplification? We’re not so sure.

The Result? While the new form is shorter, we can’t say that it will be easier for taxpayers to understand. We have already started preparing 2018 returns and we can say that it makes it “slightly” more challenging to review. Most professional software has a view/comparison mode/worksheet that allows us to analyze variances to ensure nothing is missed. But we can say that the building block scheme takes a little extra work.

To that end, don’t expect it to cost you any less to have your “simplified” tax return prepared when compared to years past. Most paid preparers, if anything, are actually raising their prices to accommodate the extra forms and other changes such as the 20% QBI deduction.

Should I Hire a Tax Professional For My Small Business?

Do I really need a tax professional?

For taxpayers with the simplest income tax returns, do-it-yourself software and websites often seem like the way to go.  These individuals often have only one source of income (i.e. W2 from their employer),  may have a home mortgage with interest, some student loan debt and maybe some childcare credits.  But for those with more complex situations, such as revenue from businesses, income from interest and dividends, capital gains on a home sale or foreign assets, seeking the expertise of a professional can save time, money and potential legal complications.

For small business owners, and many other taxpayers, there are several reasons why seeking a tax professional might be better than going it alone.  In this post, we’ll discuss some of the most common and influential drivers that typically signal it’s time to make the switch.

Types of Tax Advisors
The first thing to know is that anyone can claim to be a tax expert.  Furthermore, there is no requirement that people who prepare tax returns have to be licensed by the IRS.  With that being said, note that there are (generally) three designations when it comes to tax professionals:

  • Enrolled agent (EA).  An EA is licensed by the IRS and has either passed a difficult test or has at least five years of experience working for the IRS.  EAs are “generally” the least expensive of the tax pros and often offer bookkeeping and accounting assistance.
  • Certified public accountant (CPA) and other accountants.  CPAs are licensed and regulated by each state.  They perform sophisticated accounting and business-related tax work and prepare tax returns.  Larger businesses or businesses with complex business tax returns often use CPAs. The larger CPA firms (e.g. The Big 4) are expensive.  Smaller CPA firms and practitioners can be less expensive and may be better suited for the typical small business.
  • Tax Attorneys.   Tax Attorneys are lawyers with a special tax law degree (called an L.L.M. in taxation) or a tax specialization certification from a state bar association.  Tax attorneys can be expensive, but you should consult one if you have a tax problem, are in criminal trouble with the IRS, need legal representation in court, or need business and estate planning.

Reasons to Hire A Tax Professional
So when is the right time to hire one of the individuals listed above? Typically, it’s once one of the following items below occurs:

  • Your tax situation exceeds your expertise or your software.  Even what may seem like a “straightforward” situation can quickly turn into more than one bargained for.  For example, let’s say that you drive for one of those ride share companies.  At tax time, you receive a Form 1099-K, a Form 1099-MISC and a Yearly Summary.  Some of the documents include numbers from one of the other documents, and some documents appear to have totally different numbers.  Some have fees that “may be deductible” but you aren’t sure which ones to include.  Do you add them all?  Do you only include some?  What if you leave a number off that should have been reported?  A tax professional can help ensure everything is reported correctly and that you don’t wind up getting an IRS Automated Adjustment Notice for under reporting your income.
  • Your time is valuable and you’re spending too much of it preparing your return.  While you may be able to prepare your taxes yourself for $100 or less online, many do-it-yourself filers spend an enormous amount of time when doing so.  According to the 2018 Form 1040 Instructions per the IRS, the average taxpayer will spend 11 hours preparing their return. 
    Average Taxpayer Burden for Individuals
    Average Time (Hours)
    Type of TaxpayerPercentage
    of Returns
    Total
    Time
    Record
    Keeping
    Tax
    Planning
    Form
    Completion &
    Submission
    All
    Other
    Average
    Cost
    (Dollars)
    All taxpayers100%115241$200
    Nonbusiness70%72131$110
    Business30%1910351$400
    Estimated Average Taxpayer Burden for Individuals by Activity per 2018 Form 1040 Instructions
    This number jumps to 19 hours if you have a business!  Hiring a professional can reduce that to the time it takes to gather your tax documents and forward them to their office, go over a few items with them and then review the final return for accuracy.  If your time is better spent closing sales deals, running your business or spending it with family and friends, then hiring a tax professional can make perfect cents (pun intended).
  • You could be missing out on valuable deductions.  In addition to saving you countless hours of painfully boring and costly tax guessing, experienced preparers know the deductions that you may qualify for, and which items are tax deductible if you own a business.  They can also easily tell you if it’s more beneficial to itemize or take the standard deduction.  Even if you just earn only a little income on the side, a professional may be able to find you deductions or credits that will more than pay for their services and keep more of your hard earned money out of the pockets of Uncle Sam.  Lastly, the cost of having your taxes prepared by a professional can also be tax deductible as a professional fee if you have a business.
  • The tax law is constantly changing.  Adding to the complexity, new tax laws are enacted every year that affect virtually everyone, making it tough to keep up with changes and how they might affect you.  For example, the new 20% Qualified Business Income Deduction will no doubt cause some frustration for those this tax year (especially if you in the “phase in” range for a partial deduction).  For small businesses that have to manage income tax withholding and reporting for their employees, taxes are even more complex.  While tax software can help, an experienced professional that “has seen it all before,” and also keeps up with tax law changes through educational courses, can make the process easy peasy lemon squeezy!
  • A mistake was made in the past.  If you do your taxes yourself, you are much more likely to make a mistake.  Mistakes happen, but when they happen to you, it may feel like they are costing you big time.  A simple math error can cause a return to be inaccurate, leaving you liable for unpaid taxes and interest.  For errors the IRS believes are not accidental, such as failing to report income, taxpayers can also face large fines and even criminal prosecution.  A skilled tax professional can not only help ensure that your returns are accurately prepared, but they often can help you rectify a past mistake.
  • You want peace of mind.  The only people that look forward to an IRS audit are IRS auditors!  The best way to avoid their scrutiny is to make sure your tax return is in compliance with the tax laws.  To do that, why not hire a professional who lives, works and breathes taxes every day (or at least a lot more frequently than you do)?  There is still a chance than any taxpayer will get audited, but if you use the services of a professional CPA, Enrolled Agent or Tax Attorney, and your return is selected for further inspection by the IRS, those professionals can typically help represent you on your behalf before the IRS.  Don’t go before a court without a lawyer, and don’t go before the IRS without a professional.

How much does it cost to hire a tax professional? 
According to the 2018 survey by the National Society of Accountants, the average federal tax return in the U.S., including the tax return for the person’s state of residence, cost $294 for a professional preparer to handle if the taxpayer itemizes and $188 if they don’t.  If you own a business that needs to file a Schedule C (for business income and expenses) that will tack on $187 more.  But as outlined above, there are numerous reasons why this cost can be well worth it.

Do you need help with your business taxes this year?
If you don’t want to deal with the hassle and headache of navigating the new tax law, or simply don’t have the time, we’d be happy to assist you!  Call the office now to schedule your appointment or request your complementary tax situation analysis (valued at $197 but free if you mention this blog post).  We are a year round practice and can even help you file your state taxes no matter where you are located.