Small Business Tax Q&A: July ’18
Tax twists for teenage child
Q. I paid my teenage daughter to update our company website. Are there any tax consequences? T.S., Nashua, N.H.
A. Yes. Unless it is a gift, your child has received taxable compensation. Although the Form W-2 reporting requirement only applies to wages above $600 for the year, any amount is technically taxable to the recipient and usually deductible by the payor. In most cases, your teenager won’t owe any tax anyway due to her standard deduction. What’s more, you might have your daughter exempt the wages from income tax withholding on the W-4 she fills out.
Tip: If your business is unincorporated—say, a sole proprietorship or partnership—wages paid to your under-age-18 child are exempt from Social Security and Medicare taxes.
Getting personal about corporations
Q. Did the new law eliminate the rules for personal service corporations? M.R., Houston
A. Not exactly. The rules for personal service corporations are still on the books, but the tax rates have changed, starting with tax years beginning in 2018. Previously, personal service corporations were taxed at a flat rate of 35%, the highest tax rate in effect for corporations. This rate applied to corporations in the fields of accounting, architecture, actuarial science, consulting, engineering, health, law or performing arts. Under the Tax Cuts and Jobs Act (TCJA), a flat tax rate of 21% applies to all corporations, including personal service corporations.
Tip: The TCJA also authorizes a deduction for pass-through entities subject to limits for personal service providers.
Lost deduction for IRA fees
Q. Can I still deduct my IRA custodial fees? J.D., Pinconning, Mich.
A. No. Under the Tax Cuts and Jobs Act (TCJA), the itemized deduction for most miscellaneous expenses is eliminated for 2018 through 2025. This deduction category includes many production-of-income expenses like IRA custodial fees and tax advisory fees. As an alternative to paying the fees directly, you can have them paid out of your IRA, an option often chosen by IRA owners in the past. One reason: Even when miscellaneous expenses were deductible, they were subject to a threshold of 2% of your adjusted gross income (AGI).
Tip: The miscellaneous deduction also included unreimbursed employee business expenses. You could only deduct the excess.
Donating Savings Bonds to charity
Q. I own U.S. Savings Bonds with substantial accrued interest. Can I donate them to charity? B.B.C., Yakima, Wash.
A. Yes, but this may not be the best tax move. When you donate U.S. Savings Bonds to charity, the IRS treats it as a taxable event, just as if you had cashed in the bonds and then donated the resulting cash. So you will owe tax on all the accrued interest. On the plus side, if you itemize deductions in 2018, your charitable deduction will be based on the full face value of the bonds plus the interest. Scour your portfolio for securities that have appreciated in value that you might donate instead. You’ll still qualify for a deduction without being taxed on the appreciation in value if selling the securities would result in a long-term capital gain.
Tip: Another alternative is to donate the Savings Bonds through your will.
