2020 Pension Plan Limits

The IRS has announced the 2020 pension plan limits, including the following:

·         401(k), 403(b) and most 457 plans Deferral Limit - $19,500—This is a $500 increase from the 2019 limits.

·         Annual Additions Limit - $57,000—This is a $1,000 increase from the 2019 threshold.

·         Maximum Compensation Limit - $285,000—This is a $5,000 increase from the 2019 limit.

·         Catch-Up Contribution Limit - $6,500—This is a $500 increase from the 2019 threshold.

·         Highly Compensated Employee - $130,000—This is a $5,000 increase from the 2019 threshold.

·         The annual benefit under a defined benefit plan under Section 415(b)(1)(A) - $230,000.—This is an increase of $5,000 from the 2019 limit.

·         ESOP 5-Year Distribution Threshold - $1,150,000—This is a $20,000 increase from the 2019 limit.

·         ESOP Additional Year Threshold - $230,000—This is a $5,000 increase from the 2019 limit.

·         The dollar limitation under § 416(i)(1)(A)(i) concerning the definition of “key employee” in a top-heavy plan is $185,000 which is an increase of $5,000 from the 2019 limit.

Here is the link to the full announcement which includes additional details:

https://www.irs.gov/pub/irs-drop/n-19-59.pdf

If you have any questions about the information above, or have anything other questions related to your employee benefit plan audit, send us an email at info@btandcocpa.com or give Stacey Hammond or Dusty Wagoner a call at (785) 234-3427.

Section 199A for Rental Real Estate

Section 199A or QBID (Qualified Business Income Deduction) left a lot of tax professionals scratching their heads and saying things that I would not want to repeat in polite company when it was passed and signed into law by President Trump on December 22, 2017 as part of the Tax Cut and Jobs Act.  Not only was it the most complicated legislation that we have seen in several years, but it didn’t address a lot of the real-life client scenarios that the profession faces.

QBID is a complicated calculation.  Simply stated, it is a 20% deduction on trade and business income and/or rental income that you deduct on your Form 1040 before arriving at taxable income.  Also, it can be passed through to you with a K-1 from a partnership or S-Corporation.

Recently, the IRS issued a final revenue procedure regarding the usage of the safe harbor on rental real estate under QBID.  Having a safe harbor is beneficial because it offers protection from any liability and/or penalties that the IRS may assess for understatement of tax.  No boat required.  Since so many of our clients own rental real estate, we thought you might find this article helpful.  Or, if printed, can be used as tinder.

Safe Harbor Requirements

In order to claim safe harbor for your rental real estate activities, you must:

1.    Maintain separate books and records for each property or you may aggregate your properties as one.  More on this later.

2.    Prove that you have 250 hours or more per year actively managing your properties.  These activities can be performed by you, your employees, or independent contractors.  Activities include negotiating and executing leases, property maintenance and repairs, advertising the property, collecting rent, purchasing supplies and materials, and supervision of employees and independent contractors.

3.    Maintain contemporaneous records, such as time spent reports.  Basically, this consists of who, what, and when.  The contemporaneous records requirement goes into effect beginning January 1, 2020.

4.    The safe harbor election must be attached to the return.

Aggregation

Aggregation of your rental properties can help to push you over the 250-hour hump requirement. If you wish to aggregate your rental activities, only residential property can be aggregated together, and only commercial property can be aggregated together.  Further, any new properties acquired must become part of its respective aggregation.  However, aggregation does not mean combining financial records.  You must still maintain separate financial records for each property, so your friendly neighborhood CPA can accurately prepare your return and keep whatever hair they may have left by the end of tax season.

For mixed-use properties (one property that consists of both commercial and residential units), you have a choice.  You may bifurcate it into its residential and commercial portions, or you may treat it as a single rental real estate enterprise.  If you treat it as a single rental real estate enterprise, you may not mix it with any of the above-mentioned aggregations.

Exclusions

Finally, the IRS would not be the IRS if they didn’t have exceptions.  Gotta love ‘em.

1.    You may not use the real estate as a residence.

2.    Real estate rented under a triple net lease is excluded.  A triple net lease, for this revenue procedure, is where the tenant pays for taxes, fees, insurance, maintenance, and utilities.

3.    Rental real estate used in a trade or business that is conducted by you is also a no-no.

4.    If any portion of the real estate is treated as a SSTB (Specified Service Trade or Business), the entire real estate interest is excluded.  SSTB’s are a whole other topic that is outside the scope of this Rev. Proc.  Plus, it’s late, and I want to go home.

As always, if you have any questions about this or if you have any other tax questions that are keeping you awake at night, all of us in the BT&Co tax department are standing by waiting to take your call.  Well, not really, but we will be happy to answer any questions you may have.

Changes to Financial Statements of Employee Benefit Plans

Statement on Auditing Standards No. 136, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA has been issued. There are certain new performance requirements for ERISA plan financial statement audits, and the SAS also changes the form and content of the related auditor's report. The changes are intended to improve audit quality and enhance the value of the auditor's report.

The SAS includes new requirements in all phases of an audit of ERISA plan financial statements. Updates related to engagement acceptance, risk assessment, communication with those charged with governance, performance of audit procedures, and new reporting requirements are included as part of the new SAS. SAS No. 136 also contains additional performance and new reporting requirements for ERISA Section 103(a)(3)(C) audits, which replaces the old limited scope audit terminology.

SAS No. 136 will be effective for audits of ERISA plan financial statements for periods ending on or after December 15, 2020. Early adoption of the new SAS is prohibited.

You can find a copy of the new SAS at the below link:

https://www.aicpa.org/content/dam/aicpa/research/standards/auditattest/downloadabledocuments/sas-136.pdf

If you have any questions about the information above, or have any other questions related to your employee benefit plan audit, send us an email at info@btandcocpa.com or give Stacey Hammond or Dusty Wagoner a call at (785) 234-3427.

The Effect of TCJA on Kansas Taxpayers

The Tax Cuts and Jobs Act (TCJA) took effect for tax year 2018. The TCJA lowered the income tax rates for individuals and nearly doubled the standard deduction. The federal standard deduction increased to $12,000 for single taxpayers and $24,000 for married filing joint taxpayers, with additional amounts for those over 65 and/or blind. We have been preparing projections for months to see how clients will be affected by the changes. The Joint Committee on Taxation estimates that about 88 percent of the households that file tax returns will take the increased standard deduction on their federal returns.

How does this affect Kansas taxpayers? For individual federal income taxes, taxpayers may claim either the standard deduction or itemized deductions, a more complex option. Some previously deductible items have been eliminated or limited by TCJA. For Kansas individual income tax returns, taxpayers may take itemized deductions only if they took itemized deductions on the federal return. These are subject to certain further limitations for the deduction to be allowed on the Kansas return. If they take itemized deductions on the federal return, they may also opt to take the standard deduction on Kansas if that is more advantageous for them. However, if taxpayers choose to take the standard deduction on their federal return, they must also take the standard deduction on the Kansas return. The current standard deduction for Kansas is $3,000 for single and $7,500 for married filing joint.

With such a large percentage of households that will now take the standard deduction on their federal return, they will be forced to take the standard deduction on their Kansas return. This could have a significant impact on their Kansas tax liability, as well as revenue to the state.

For years, Kansas tax law was considered "conforming to Federal law". But that ship has sailed with the dramatic changes beginning in 2013 and subsequent years. During the 2018 legislative session, a bill was introduced that would have given taxpayers the option to choose itemized or standard deduction, but that bill did not pass.

If you have strong feelings, one way or the other on whether Kansas taxpayers should have the option to choose between standard or itemized deductions in the future, or if the standard deductions should be changed, please contact your state legislators. Call us if you have questions on how the law change could affect your individual tax situation.

BT&Co. acquires CBIZ MHM, LLC and Mayer Hoffman McCann P.C. Topeka location

Berberich Trahan & Co., P.A. (BT&Co.) has acquired the Topeka office location of CBIZ MHM, LLC and Mayer Hoffman McCann P.C. (CBIZ MHM) effective January 1, 2019.

"For 105 years, Berberich Trahan has offered exceptional service to clients in eastern Kansas," said Karen Linn, BT&Co. managing director. "We are excited to grow the business with the CBIZ employees and clients by exploring new opportunities with a continued focus on service and commitment."

As a result of the acquisition, BT&Co. will have more than 50 employees to provide an array of accounting services and technical expertise to clients. With its expanded presence in the region, BT&Co. will operate out of both Topeka office locations until the fall of 2019, when the business will relocate to a new office that will accommodate the combined team. The new business will operate under the name Berberich Trahan & Co., P.A.

Founded in 1913, BT&Co. is one of the leading local accounting firms in eastern Kansas. For over a century, BT&Co. has provided audit, tax, general accounting, and consulting services, specializing in local governmental entities, nonprofit organizations, and employee benefit plans in its audit services and nonprofit and for-profit entities in its tax, general accounting, and consulting services. Since 1998, BT&Co. has been formally associated with the world’s fifth-largest accounting firm, RSM US LLP, as a member of the RSM US Alliance.

The CBIZ MHM Topeka office served the region for 40 years and, as BT&Co., will continue to provide audit, tax, general accounting, and consulting services, specializing in the real estate, construction, nonprofit, and health care industries. Chris Spurio, President of CBIZ Financial Services, stated, “We are pleased to have found the right fit to serve the needs of our Topeka staff and clients.”