Small Business Tax Q&A: June’ 18

Limit on state tax options

Q. Can I still choose between deducting state income tax and sales tax? J.G. , West Babylon, N.Y.

A. Yes, but with a new restriction. Under prior law, you could deduct the full amount of your state and local property taxes plus either your state and local income taxes or state and local general sales taxes. Under the new Tax Cuts and Jobs Act (TCJA), the annual deduction for 2018–2025 is limited to $10,000 for any combination of (1) property taxes and (2) income taxes or state taxes. For many residents of high-tax states like New York, the overall deduction will be significantly lower than it was before the TCJA. But you can still choose to deduct state and local general sales taxes instead of state and local income taxes, subject to the overall $10,000 limitation.

Tip: If you don’t itemize deductions, you get zero tax benefit for any state and local taxes.

Max out Section 179 deduction

Q. I have two S corps. Can one boost the Section 179 deduction for the other? G.A., Milwaukee

A. Maybe. Under the Tax Cuts and Jobs Act, the maximum Section 179 deduction for 2018 is increased to $1 million, subject to a phase-out at $2.5 million. (These figures will be indexed for inflation in future years.) However, the Section 179 deduction is limited to the taxpayer’s business income. Fortunately for you, the business income limit applies at your personal level. Therefore, if you have income of $100,000 from one S corp and $900,000 from the other, your maximum Section 179 deduction is $1 million because you can combine the two income amounts for purposes of the business income limitation.

HR Forms D

Tip: The same property may qualify for bonus depreciation deductions. If so, there is no business income limitation on those deductions.

Avoid tax underpayment penalty

Q. I was told I had to pay the full amount of my tax owed by April 17th. Is that correct? M.B.C., Tenafly, N.J.

A. Yes, if you want to avoid an interest charge penalty. We’re assuming you applied for an extension to file your 2017 tax return buy filing Form 4868 before the April 17th deadline. But an extension to file is not an extension to pay the income tax owed. To avoid an interest charge penalty on estimated tax payments for your 2017 tax year, you must have paid at least 90% of your 2017 tax liability or 100% of your tax liability for 2016. (Other special rules may apply.) The 100% figure is increased to 110% if your adjusted gross income (AGI) for 2016 was $150,000 or more. Then you will owe an interest charge penalty based on any difference between your 2017 tax bill and your estimated payments for your 2017 tax year—until you pay in the difference.

Tip: The deadline for filing a 2017 return with an extension is October 15, 2018.

Parental guidance on education credits

Q. Can I still claim an education credit if I go back to school? S.W. , Superior, Ariz.

A. Yes. The credits for higher education—the American Opportunity Tax Credit (AOTC) and the Lifetime Learning Credit (LLC)—aren’t limited to education expenses of children. Either one can be claimed by parents, too. For instance, the maximum $2,500 AOTC is available for the first four years of undergraduate study at a qualified institution. But the credits are phased out for higher-income taxpayers.

Tip: For 2018, the AOTC phase-out for joint filers begins at $160,000 of modified adjusted gross income (MAGI) and ends at $180,00 of MAGI.