Tax Law Archives

IRS Form W-4 Changes for 2020 – Here’s What You Need To Know

January 8, 2020 By PWB CPAs

The IRS has announced substantial improvements to the IRS Form W-4, Employee’s Withholding Certificate, for 2020. These changes will have a significant impact on employees and employers, but do not worry, we’re here to help you get through it.

If you are an employee

The new form and revised withholding calculations could affect your tax withholding and year-end refund or tax due amounts when you file your annual income tax return. The form is designed to be both easier and more accurate, permitting easy adjustments for anticipated tax credits, other income, and deductions. If you would like to adjust your withholding to account for these factors, you will now be able to simply enter your full-year estimated amounts on the Form W-4.

Form W-4 Highlights

There are three options for employees with multiple jobs or two-earner families:
- Simplified worksheet in the W-4 instructions
- Enhanced IRS online Withholding Estimator
- New checkbox to automatically adjust for multiple jobs or two-earner families
New filing status — Head of Household
New adjustment entries:
- Full-year child and dependent tax credits
- Full-year other income; and,
- Full-year deductions

In addition, you will still be able to authorize an additional dollar amount to withhold from each pay period, for any reason.

If you are an employer

Understanding these changes and being able to communicate them to your employees is crucial, not to mention required to keep you compliant. That’s why we’re passing along a comprehensive IRS 2020 Form W-4 Employer Toolkit, courtesy of our partners at ADP. The toolkit is loaded with important information, like:

An employer guide designed to help you understand and prepare for the changes.
Instructions for complying with new 2020 withholding calculations and procedures.
Frequently asked questions for you and your employees.
Legislative updates and blog articles about the changes and their impact on employers.
Webcasts loaded with information about the change and prepping for year end.

In addition, the IRS provides an Income Tax Withholding Assistant spreadsheet to help small employers calculate the amount of federal income tax to withhold from their employees’ wages.

There’s no time to waste, as these changes will affect your first filings in 2020.

Have questions? We’re here to help! Contact your PWB advisor at 763-550-1100 or reach out to Derek Dittmer, our dedicated representative, at ADP Payroll and HR Solutions for more information and preferred partner pricing: 320-309-2180 derek.dittmer@adp.com

The Truth About Equity Compensation: Employee Stock Option Plans

November 20, 2019 By PWB CPAs

By Jacob Rengstorf, CPA

Attracting and retaining talent is critical to the success of your business. But in a competitive marketplace, it’s easier said than done. You can promote your team-driven culture, your flexible work schedule, and your wide-ranging benefits, but there’s no getting around it: money talks. Providing equity compensation is one way you can make sure your offer package comes through loud and clear.

Since there are several types of equity compensation you could offer, I’ve decided to break this topic up over a series of blog posts. First up: employee stock option plans. Not to be confused with employee stock ownership plans (ESOPs), employee stock option plans involve granting your employees the right to purchase your company’s stock at a fixed price for a stated period of time. (An ESOP involves giving stock to employees.)

There are two main types of stock option plans: non-qualified stock options and incentive stock options. Before you decide which type to implement at your company, it’s important to consider the tax characteristics, statutory requirements, and employee impacts associated with both. Here’s a quick look at each.

Non-Qualified Stock Options (NQSO)

NQSOs can be offered without restriction, and they can also be offered to vendors, contractors, and board of director members—not just employees. Other benefits of NQSOs include:

No limitation for the option duration, holding period, or aggregate amount to first become exercisable (i.e., eligible for the employee to buy) in any calendar year
No statutory guidelines for the plan
Provides a company with greater flexibility in structuring the plan

Expenses recorded on your company’s financial statements for NQSOs are non-deductible for tax purposes. However, you’re allowed to take a tax deduction in the year the option is exercised. In the year of exercise, you would be entitled to a deduction equal to the spread between the fair market value and exercise price of the option. This amount is reported as income on the employee’s Form W-2 or on a non-employee’s Form 1099.

If your company is required to track the balance of deferred tax assets and liabilities under ASC 740, it’s important to keep records of the amounts that have been historically expensed on your financial statements for each NQSO. These amounts will be included in your deferred tax assets and will reverse upon exercise or forfeiture. The truth is, it’s good practice to keep these records regardless of ASC 740 reporting.

Incentive Stock Options (ISO)

ISOs are similar to NQSOs except for their tax treatment and statutory requirements. Benefits of these plans include:

Enhanced employee incentives
No tax withholding requirements

Unlike NQSOs, ISOs can be offered only to employees of your company. To be eligible, an employee must be employed at all times during the period beginning on the date the option is granted and ending three months before the date the option is exercised. Other requirements for ISO plans include:

Plans must be granted under a shareholder-approved written plan
The options must be exercised within 10 years
Maximum grant of $100,000 per person
Options are non-transferable, except at death
Minimum holding period of two years from the grant date and one year from the date of exercise
Options must be exercised during employment or within three months after separation

Similar to NQSOs, the expenses recorded on your financial statements for ISOs are non-deductible. In contrast, you are not permitted take a tax deduction when ISOs are exercised. Moreover, ISOs are not reported as income on an employee’s Form W-2.

However, your company would be entitled to a tax deduction in the event of a “disqualifying disposition” by an employee of their ISO. A disqualifying disposition arises if an employee does not fulfill the minimum holding period requirement or exercises the options three months or more after they left your company. If there is a disqualifying disposition, you would be entitled to a deduction equal to the difference between the fair market value at exercise and the exercise price. This amount would be reported to the employee’s Form W-2.

Which stock option plan is right for your business?

Companies typically favor NQSO plans due to the flexibility of having no statutory requirements to comply with, as well as for the tax deduction they receive upon exercises. ISO plans have statutory requirements and do not allow a tax deduction upon exercise unless a disqualifying disposition occurs.

But here’s an important consideration: ISO plans tend to be more favorable to employees since they don’t count as ordinary W-2 income, and employees will recognize capital gains only when they sell their options.

At the end of the day, the plan you choose should be the one that makes the most sense for your company. As I’ll discuss in my next blog post, there are other forms of equity compensation to consider, too. In the meantime, if you have questions about this topic, please don’t hesitate to contact the PWB team.

Contact your PWB advisor today.

763-550-1100

MN Construction Update: How the 2019 Legislative Session Could Impact Your Summer

July 25, 2019 By PWB CPAs

By Kathy Kirkeby, CPA

With summer in full swing, most Minnesota contractors are feeling the heat in more ways than one. There are job schedules to meet, crews to manage, and clients to please. And now, following the 2019 Minnesota legislative session, there are new laws to follow—many of which will impact the way contractors do business this season.

To help you stay in compliance, here’s a brief summary of the new laws and legislative changes that will affect contractors the most.

1. Tax relief for businesses

The approved tax bill passed by the legislature included a reduction in the commercial/industrial property tax levy by $77.5 million in fiscal year 2020-21 and $100 million in fiscal year 2022-23, which is expected to reduce the business property tax by 6%. The bill also cut the second-tier rate for personal income taxes from 7.05% to 6.8%. This affects married couples with taxable income between $37,850 and $150,380 as well as single filers with tax income between $25,890 and $85,060.

2. Federal tax conformity

For the most part, Minnesota’s tax code now conforms to the federal Tax Cuts and Jobs Act (TCJA). A few exceptions to this include the 80% add-back on Section 179 expenses; the Minnesota timeframe for the deduction is not as quick as what’s allowed by the federal government. The most significant change tax payers will notice is that the Federal Adjusted Gross Income (FAGI) is now the starting point for Minnesota taxes.

3. Changes to retainage laws

Public and private construction contracts entered into on or after August 1, 2019, must comply with changes to retainage, including an expedited deadline for when it must be released. Public contracting agencies or private owners must release all retainage no later than 60 days after substantial completion. Contractors on public or private construction projects must pay all remaining retainage to subcontractors within 10 days of receiving retainage from the public contracting agency or owner.

4. No changes to statewide workplace mandates

The legislature did not pass any new statewide workplace mandates. Although you may have heard about proposals for a new 0.6% payroll tax to fund a paid leave program and an earned sick and safe time mandate, these were not included in the final bill.

5. New vehicle signage requirements for plumbing contractors

As of August 1, 2019, Minnesota plumbing contractors must follow new rules for vehicle signage. Any vehicle used by a plumbing contractor while performing plumbing work must prominently display the contractor’s name and license number—exactly as it appears on the contractor’s license—on each side of the vehicle.

6. New continuing education requirement for residential contractors

Residential contractors must now devote one of their 14 hours of continuing education to business management strategies applicable to the residential construction business. The total number of required continuing education hours has not changed.

Questions?

If you have questions about how these new laws and legislative updates could impact your business this summer and throughout the year, please contact us as soon as possible. Many of these new laws go into effect as early as August, so don’t wait to take action.

Contact your PWB advisor today.

763-557-2582

Spouses Are Guilty Until Proven Innocent

March 18, 2019 By PWB CPAs

When you got married, you knew it was for “better or worse.” But you might not know about laws that hold you responsible if your spouse cheats on a tax return.

Married couples filing jointly should be aware that:

You are both responsible for tax, interest and penalties — even after a divorce or the death of a spouse.
The IRS may hold you responsible for all the tax due even if there is a divorce decree stating that your ex-spouse is accountable for previous joint returns.
You can be liable for tax even if none of the income on a tax return is attributed to you.

To illustrate how the law works, let’s say you have a wage-earning job and your spouse is self-employed. You file joint tax returns.

Next year, you get divorced and a year later, the IRS audits your tax return. Your ex-spouse is nowhere to be found and auditors determine that he or she didn’t report all the income from the business.

What Could Happen?

You are generally liable for paying the tax due, plus interest and any penalties. Your wages can be seized by the IRS even if you paid every penny owed on your share of the family income.

Fortunately, there may be a way to get off the hook. In some situations, the tax law provides “innocent spouse” relief if you can prove:

There is a substantial understatement of tax attributable to the grossly erroneous items of your spouse or ex-spouse.
The hidden income belonged to your ex-spouse and you didn’t benefit from it.
You didn’t know or have reason to know about the understatement.
It would be inequitable to hold you liable.

In January of 2012, the IRS released proposed streamlined procedures that make it easier to obtain equitable relief. In addition, the new guidelines includes an exception to the requirement that items must be attributable to the ex-spouse when that spouse’s fraud is the cause of the understatement or deficiency.

Be aware that the IRS is required to notify an ex-spouse that relief has been requested so that he or she can elect to participate. There are no exceptions, even for victims of domestic violence.

“Innocent” versus “Injured” Spouse

If your current or former spouse has gotten you into tax trouble, you may be able to get help from the IRS.

It all depends on whether the tax agency considers you “injured” or “innocent.” You probably think you qualify as both but they are two different legal terms:

An injured spouse files a joint return and loses all or part of a refund because of a spouse’s debts.

An innocent spouse claims no liability for items on a joint tax return that belong to a spouse or ex-spouse.

Let’s say you and your current spouse file a joint tax return and are expecting a large refund. But you receive a notice from the IRS stating that your refund is being seized to pay a debt owed only by your spouse. For example, back taxes from before you married, past due child support, a delinquent student loan or other federal debt.

You may be able to recover your portion of a joint tax refund that the IRS seized. To qualify, you must have earned your own income and made your own federal tax payments. Ask your tax adviser for more information if you think you qualify.

Advice: Don’t count on innocent spouse relief if you know your spouse is cheating on tax returns. The IRS often denies relief.

Consider filing separate tax returns — especially if you’re in the process of a divorce. It may save you a bundle in the future. For more information about your situation, consult with your tax advisor.

The New 199A Deduction for Business Owners: It’s Complicated

December 10, 2018 By PWB CPAs

By Asta Stark, CPA

One of the changes ushered in by the Tax Cuts and Jobs Act is a new deduction on a personal tax return for pass-through business owners, called the 199A deduction. For these individuals, the deduction could provide up to a 20 percent tax deduction for qualified business income. The deduction also applies to trusts that own an interest in a pass-through entity. Although the deduction might sound fairly straightforward, calculating it can be a complicated endeavor.

Think you could benefit from the 199A deduction? Here are several factors to consider.

What is your business entity?

The 199A deduction allows pass-through business owners to deduct up to 20 percent of their qualified business income. Qualified business income is—by and large—your ordinary business income. Pass-through businesses include S corporations, partnerships, single-member limited liability companies (LLCs), and so on. Basically, the 199A deduction applies to businesses that are not organized as C corporations, including sole proprietors.

Is your business a specified service trade or business?

If your business is a specified trade organizations financial statement audit service or business (SSTB), the 199A deduction is phased out based on your personal federal taxable income level. Generally speaking, the Internal Revenue Code defines SSTBs as businesses in the fields of healthcare/medical, law,business accounting , actuarial science, performing arts, consulting, athletics, financial services, brokerage services, investing and investment management, and trading. Businesses in trading and dealing with securities, partnership interest, and commodities, or based on the reputation and skill of one individual, such as a social media “influencer,” also fall into the SSTB category. Architects and engineers are not considered an SSTB.

What’s your income level?

The 199A deduction is phased out between the taxable income range of $315,000 and $415,000 for married filers filing jointly, and between $157,600 and $207,500 for other filers (including trusts). If your income exceeds the top range and your business is an SSTB, you will not be able to take advantage of the 20 percent deduction. If your business is not an SSTB, the deduction cannot be phased out; however, the 199A limitation applies. In this case, you can still take the deduction as long as your business has unadjusted basis of qualified property and/or W-2 wages. The math to calculate the total amount of the deduction gets complicated.

Additional factors to consider:

After all the calculations are done, the 199A deduction cannot be higher than 20 percent of your adjusted taxable income. If you have several businesses, the deduction is calculated separately for each business. If your businesses meet certain requirements, however, there’s an option to aggregate. In some cases, this could provide you with a higher deduction. Again, it’s complicated.

Planning is critical.

Determining if and how you could benefit from the 199A deduction could take time. In certain situations, it may be advantageous to change entities or explore ways to reduce your taxable income. Acting sooner rather than later can help you make the most of any tax benefit the 199A deduction could provide.

Contact your PWB advisor today.

763-550-1100