Changes to Self-Employment Taxation in the State of Kansas.

Tax Increase In Kansas

Since 2012, self-employment income in Kansas has been exempt from state income tax. This massive tax cut was commonly referred to as “the LLC Loophole” and led to budget problems due to lack of tax revenue. The label “LLC Loophole” was a misnomer – this tax cut was not a loophole, it was a big tax cut that worked exactly as intended, and it really didn’t have a heck of a lot to do with LLCs.

Let me explain: a broad range of businesses became exempt from taxation on ordinary business income that was non-wage income. These businesses included sole proprietors, partnerships, most LLCs, and many corporations, as well as farms and rental properties. Not only did they not need to be LLCs to qualify, they didn’t have to be any type of entity: plain old self-employed individuals and owners of property benefited from the tax cut.

So you may have heard that massive quantities of new LLCs were formed in Kansas because of this tax cut, but you’re wrong. Massive quantities of new LLCs were formed in Kansas because people had no real comprehension of this law and read only the headline.

What does this mean for self-employed individuals?  Start making Kansas estimated tax payments. The tax bill is retroactive to January 1, 2017, so you’ll be paying Kansas taxes on your next tax return. Technically, you're already behind and have missed the first and second quarter estimated tax deadlines. You'll have to catch up. The Kansas Department of Revenue says they won't charge penalties for estimated tax payments that are late solely because of this tax change.

2.      Assess your structure. Now that self-employment income is no longer exempt from tax, it’s time to re-assess whether it’s prudent to make a tax election to become an S-Corp or a C-Corp. If that’s what’s right for you, there are forms to file and formalities to observe. Depending on your situation, it might be possible to make your election retroactive to January 1, 2017.

      If you're a wage earner, your tax rate also went up. The tax increase on wage earners wasn't as large as for self-employed individuals, so it's going to be less noticeable. Withholding tables should have been adjusted automatically in most payroll software. You may have noticed in the last month or so that your Kansas withholding went up a bit. There's nothing more you need to do. If your HR or payroll department changed your withholding since June 30, they have implemented the change already.

Why Do Business Owners Love to Buy Trucks?

You may have noticed that some business owners like to buy a new truck or heavy SUV each year to save on their taxes. Have you found yourself wondering how spending money on a truck really saves money?

What are the elements that come into play?

Depreciation – All vehicles can be depreciated over 5 years.

Bonus Depreciation – New vehicles qualify to take extra depreciation in their first year.

Section 179 deduction – All vehicles can expense a portion of their cost outright. The limit for vehicles that weigh less than 6000 lbs is $3,160. The limit for vehicles that weight more than 6000 lbs is $25,000.

Business use – These deductions work to some degree for vehicles that are used 50% or more in your business. The examples used in this discussion are for vehicles used 100% for business.

All put together, the biggest tax deductions come from buying new vehicles that weigh more than 6000 lbs, due to the combination of bonus depreciation and the Section 179 deduction. But used vehicles that weigh more than 6000 lbs make a good showing on your tax return, too.

Due to limits on deductions for new and used vehicles that weigh less than 6,000 lbs, lighter vehicles make for a less attractive tax deduction.

What kinds of Vehicles qualify?

Dennis Bishop, a Commercial and Retail Sales Consultant at Laird Noller Automotive was kind of enough to curate a short list of his favorite heavy vehicles. If optioned correctly, all of these vehicles will weigh more than 6,000 lbs – but make sure to check the weight on the tag before buying:

Ford Explorer

Ford Expedition

Ford F-150

Ford F-250, F-350, F-450, F-550, F-650, F-750

Lincoln MKT

Lincoln Navigator

Dennis might be understandably biased toward brands that are for sale at Laird Noller, but if you're local to Lawrence, Kansas and you’d like for him to show you any of these models, please contact him at: dbishop@lairdnoller.com.

                           The Ford F-150 needs to be optioned correctly to weigh more than 6,000 lbs.

                           Photo courtesy of Ford Motor Company (2017 model).

Show me the Money!

Here are some examples of how much tax savings you could see. Each example shows a self-employed business owner who reports all income on Schedule C and has no children and no other deductions. The vehicle costs $35,000 in each example. Tax rates will be different for C-Corps and S-Corps, as well as for families with children. Each tax return is different – so treat these examples as illustrative estimates.

TAX SAVINGS FROM PURCHASING A $35,000 VEHICLE ON 12/31/16 THAT IS USED 100% IN BUSINESS
Income		New Ford F-250			Used Ford F-250			New car or light SUV
		Single	Married		Single	Married		Single	Married
$40,000.00*		$7,844.00	$5,932.00		$6,855.00	$5,261.00		$3,129.00	$2,612.00
$100,000.00		$11,300.00	$8,490.00		$9,528.00	$7,158.00		$4,164.00	$3,129.00
$250,000.00		$10,911.00	$9,167.00		$9,197.00	$7,727.00		$4,392.00	$3,381.00

* At the $40,000 income level, the taxpayer potentially qualifies for the Earned Income Tax Credit after taking this deduction - EITC is not factored in to this table as it varies considerably by family size.

From the table, we see that if a single self-employed person who makes $100,000 in profit purchases a new truck on the very last day of the year they will save $11,300 in taxes – or 32% of the vehicle cost! Those are some big tax savings!

The beauty of purchasing a truck for tax savings is that debt-financed vehicles qualify for this great tax deduction – in other words, the taxpayer qualifies for this deduction before they’ve even paid for the truck.

A Public Service Announcement From Your Accountant 

Depending on your situation, buying trucks every year is probably not the most efficient way to save on taxes or manage your business budget! Please talk to your CPA about tax planning strategies for your specific situation.

Are You Ready to File 1099-MISC?

There’s a new deadline for filing 1099-MISC for independent contractors: this year’s 1099-MISC's that report non-employee compensation will be due by January 31, 2017, bringing them in line with when W-2s are filed.

 What is 1099-MISC and why do I care about it?

When a business hires an independent contractor and pays them $600 or more, it is required by law to file a 1099-MISC reporting non-employee compensation. This form is how the IRS knows that person has income.

In general, businesses have been lackadaisical about filing 1099-MISC's, which creates an enforcement problem for the IRS. Without 1099-MISC, the IRS can’t easily tell if self-employed individuals are reporting their income accurately.

With that in mind, the penalties for filing 1099-MISC late or not filing at all are increasing.

 What's the problem with filing 1099-MISC by January 31?

Due to poor planning or a poor understanding of the law, businesses often neglect to have independent contractors fill out form W-9, which is the form that provides the business all of the details they need to file a 1099-MISC, such as the taxpayer identification number.

After contractors are paid, the business might lose touch them, or they may be unresponsive or uncooperative about filling out a W-9.

Often, businesses don’t know they’re going to pay an independent contractor more than $600 and don’t realize until the end of the year when they’re reviewing their books for tax return purposes.

With one short month to get the 1099-MISC's filed, meeting that deadline, businesses will need to be certain they are collecting W-9s in a timely fashion.

To issue a 1099-MISC or not to issue a 1099-MISC, that is the question.

You don’t need to file a 1099-MISC if you’re not a business.

Self-employed individuals, business entities, and landlords are all “businesses,” so contractors hired in the course of doing business need a 1099-MISC. However, no 1099-MISC is needed if you hire an independent contractor to perform a service to you as a private individual.

For example:

Sarah hires a contractor to make repairs on her personal residence and pays him more than $600. NO 1099-MISC.

Sarah hires a contractor to make repairs to the offices of Stonecreek Accounting, her business, and pays him more than $600. FILE 1099-MISC.

Sarah hires a contractor to make repairs in excess of $600 to a rental property that she owns. FILE 1099-MISC.

You do not need to file a 1099-MISC if you pay by credit card or PayPal.

When you use a third-party processor to make a payment, such as a credit card or PayPal, you do not need to collect a W-9 or issue a 1099-MISC to the contractor.

Third-party processors file a different form, called a 1099-K, to report payments to the recipient. Any payment that is eligible to be reported on a 1099-K is not eligible to be reported on a 1099-MISC.

If you did file a 1099-MISC in this situation, you run the risk of double reporting that person’s income, which may now appear on both a 1099-MISC and a 1099-K.

If you pay by cash, check, wire transfer, ACH, or direct deposit, then you file a 1099-MISC.

If you pay by credit card, debit card, PayPal, or via some other processor, then you don’t file a 1099-MISC, because those payments are reported on a 1099-K by the third party processor.

You do not need to file a 1099-MISC if the independent contractor is something other than a self-employed individual.

The hitch here is that single-owner LLCs often count as self-employed individuals, but you don’t know if the LLC needs a 1099-MISC without asking. An LLC could be a partnership, an S-Corp, or a C-Corp, none of which need a 1099-MISC.

Don’t assume. Ask for a W-9 from every individual contractor and every LLC. The independent contractor will check the appropriate boxes on the W-9 to help you ascertain whether or not you need to file a 1099-MISC.

Who counts as an independent contractor?

We won’t go into the finer points of differentiating independent contractors from employees, but an independent contractor is essentially any person that you pay for services who is not your employee.

Examples may include:

 An accountant or attorney

 Someone hired to work on a single, short-term project

 A consultant

 A worker with specialized skills needed temporarily

A repair person

Example:

A landscaper does not have an irrigation specialist on staff, so she hires an irrigation company that’s an LLC to install an irrigation system for a project she’s doing. She’s not sure if she’ll end up paying this irrigation company more than $600. She should ask the irrigation company to fill out a W-9, because she may need to issue a 1099-MISC.

Example:

A business normally pays its accountant $500 to complete its tax return, but this year asked the accountant to provide some additional consultation and paid her a total of $1,000 this year. The business should ask the accountant to fill out a W-9, because it may need to issue a 1099-MISC.

With the January 31 deadline in mind, now is the time to look back on your year and start trying to collect any W-9's that you've missed, and put a policy in place going forward to ensure you have all of the information you need to file your 1099's at the end of the year.

MISTAKE #7: Not Filing a Tax Return

MISTAKE #7: Not Filing a Tax Return

Top Tax Return Mistakes Made By Self Preparers

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You know you’re supposed to file a tax return, but sometimes it drops to the bottom of the to-do list. It’s a big chore to collect all of the documents and then sit down and actually prepare your tax return. It can be an all-day event. You may need to hunt down some tax data. Ain’t nobody got time for that!

First of all, if you know you’re not going to file your tax return on time, then file an extension. If you file Form 4868 before the April 15 deadline, it’ll extend your deadline by six months, until October. It’s free and you can do it online, or you can mail it. It takes a few minutes and can save you from costly late-filing penalties. Form 4868 only extends your time to file – your taxes are still due April 15. But the penalties for late filing your return are quite a bit more costly than the penalties for not paying your taxes on time. So file Form 4868 even if you won’t be making a tax payment on time.

If the reason you aren’t filing is because you’re afraid of your tax bill, then you should understand that your tax bill won’t go away just because you don’t file – it’ll just get bigger. The advantage to filing, even if you can’t afford your taxes, is that you can fairly easily initiate a payment plan with the IRS, and you avoid additional penalties for not filing the tax return. Eventually those taxes are going to catch up to you – it’ll cost you less if you address them head-on in a timely manner.

A lot of people don’t file their tax returns because they become self-employed and get busy. The bookkeeping falls behind, so it’s hard to catch up. If you begin to feel like you’re falling behind on your accounting as a self-employed person, there is no shame in hiring an accountant to help. It gets harder and harder to pull together your income and expenses as more time passes.

Some self-employed people feel that they didn’t make enough money to justify filing, or they had a loss. It’s important for self-employed individuals to file, even if they didn’t make a lot of money for a couple of reasons. The first is that if your business lost money, you get to carry forward your loss until you make a profit, and then deduct it. So you’re costing yourself money by not filing. The second reason is that the filing threshold is a very low $400 for self-employed individuals. One unreported 1099 is all it takes to cause a problem.

Finally, not filing a tax return can be costly for other reasons: You may be eligible for tax credits, such as the Earned Income Tax Credit, or a healthcare subsidy that you didn't realize you could claim. It's very common for people to avoid filing their tax returns, only to discover later that they missed out on some big tax credits. 

Read about Mistake #6.

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MISTAKE #6: Forgetting About Form 1095-A

Top Tax Return Mistakes Made By Self Preparers

When a taxpayer enrolls in health insurance through Healthcare.gov or a state health insurance exchange, they'll receive Form 1095-A, a Health Insurance Marketplace Statement. All of their health insurance costs and coverage are reported on the 1095-A, along with any Affordable Health Act subsidies that they received. 

In a letter to Congress, the IRS commissioner said that about one third of taxpayers who received Advance Premium Tax Credits didn’t report the credit on their 2014 tax return.  When a taxpayer enrolls in health insurance through the healthcare marketplace or a state exchange, they can estimate their income for the upcoming year, and if they qualify, they can receive an advance payment of a healthcare subsidy to help reduce the monthly cost of insurance.

At the end of the year, they need to submit Form 8962 to reconcile that credit with their actual income. If they underestimated their income, they might need to pay some of that healthcare subsidy back. If they overestimated their income, they might be entitled to more of a credit. That calculation occurs on Form 8962.

If you received an insurance subsidy through the health insurance marketplace and do not file Form 8962, then the IRS will demand that you send Form 8962 to them. They’ll delay your refund until you send it, too. Form 8962 isn’t too hard to fill out with the help of tax preparation software – but if you forget to report your subsidy and then try to do Form 8962 by hand, it can be a difficult form to complete.

There’s a different problem hidden within the commissioner’s comments, too. There are many taxpayers who purchased health insurance through the marketplace, but did not receive the Advance Premium Tax Credit. Some of them are eligible for that subsidy and could claim it on their tax return. In order to do that, they too would need to fill out Form 8962. If one third of people who definitely have to file Form 8962 aren't doing it - how big is the percentage of people who don't need to fill it out, but probably should and are missing out on a credit? Unfortunately, the IRS isn't rushing out to remind taxpayers to check their qualifications for these unclaimed subsidies.

Coming up next: Mistake #7 - Not Filing

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MISTAKE #5: Making Stuff Up

Top Tax Return Mistakes Made By Self Preparers

© Lane Erickson | Dreamstime.com

I don’t know the cause of this phenomenon, but a lot of people seem to get frustrated with tax software and start making stuff up to put in their tax return.

Maybe it’s because the deadline is approaching and they don’t have time to collect all of their tax documents. Or maybe the tax bill seems too high. Or maybe the software has an error message they need to get around. Or maybe it’s asking questions they don’t understand. In any case, people are prone to just make things up when preparing their own taxes.

The problem with making stuff up and putting it in your tax return (aside from the obvious problem of being illegal), is that the IRS has a sophisticated computer system that can generally figure out when you’ve fallen outside of “normal” parameters. That’s when you get audited.

Audits usually happen two years after you file the tax return. After two years, you’ve calmed down a bit from that day when you filed the original return. It’s then that you’ll be forced to look at what you filed and ask, “What was I thinking? Where did this number come from?”

So keep good records and don’t put your tax return off to the last minute. If it turns out to be too stressful for you to self-prepare, there’s no harm in hiring a tax professional. It’s important not to guess or make things up when preparing your tax return.

Coming up next: Mistake #6 - Forgetting about Form 1095-A.

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MISTAKE #4: Do you know where your depreciation is?

Top Tax Return Mistakes Made by Self Preparers

© Kseniya Ragozina | Dreamstime.com

For a lot of landlords depreciation is a real problem. Landlords often don’t have a complete understanding of depreciation and aren’t able to detect when an error has been made. It turns out that this isn’t just a self-preparer mistake, but a lot of paid preparers also make mistakes when depreciating rental property.

The biggest and most common mistake with depreciation? Not doing it.

Rental properties are supposed to be depreciated, but a large number of landlords don’t ever depreciate their property. I’ve looked at a staggering number of old tax returns for new clients with rental income and asked, “But where’s the rental property?” It’s just missing from the return. 

The rental property will sometimes get lost when a taxpayer switches accountants, or switches from an accountant to a do-it-yourself tax software. Often, it never gets depreciated – from day 1, it was never put on the return as an asset.

When taxpayers discover they’ve made a mistake with depreciation, the most common response is to ask, “Can I just start depreciating now?” or “Do I have to depreciate at all? Can’t we skip it?” The answer to both of these questions is “No.”

If the depreciation error has only gone on for a year, you can go back and amend. If it’s gone on for two years, there’s a choice between amending the two returns or the more complicated fix. If it’s been three or more years, most people will need to file Form 3115 for a change in accounting method. We won’t get into Form 3115 here, because it can be overwhelming. It’s an 8 page form with 23 pages of instructions. Unlike a lot of IRS forms, it’s not a “plain English” form, so it can be difficult for the average taxpayer to figure out. 

Despite this complication, you can’t just skip it. Depreciation isn’t optional. When you sell the rental property, you may have a gain if the sales price exceeds the depreciated value. If you haven’t depreciated, the IRS has the right to impute depreciation – in other words, tax you on the gain you should have had if you depreciated. You end up paying for this mistake twice – first, you miss out on the deduction each year on your tax return; and second when you sell the property and pay taxes on the amount that you should have depreciated!

Coming up next: Mistake #5 - Making Stuff Up!

Read about Mistake #3

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