Neilley & Co. CPA Blog

If you own a business and don’t have a tax-advantaged retirement plan, it’s not too late to establish one and reduce your 2018 tax bill. A Simplified Employee Pension (SEP) can still be set up for 2018, and you can make contributions to it that you can deduct on your 2018 income tax return.

Contribution deadlines

A SEP can be set up as late as the due date (including extensions) of your income tax return for the tax year for which the SEP is to first apply. Unlike an IRA, which is always due April15th.  That means you can establish a SEP for 2018 in 2019 as long as you do it before your 2018 return filing deadline. You have until the same deadline to make 2018 contributions and still claim a potentially substantial deduction on your 2018 return.

Generally, other types of retirement plans would have to have been established by December 31, 2018, in order for 2018 contributions to be made (though many of these plans do allow 2018 contributions to be made in 2019).

Discretionary contributions

With a SEP, you can decide how much to contribute each year. You aren’t obligated to make any certain minimum contributions annually. But, if your business has employees other than you:

1. Contributions must be made for all eligible employees using the same percentage of compensation as for yourself, and
2. Employee accounts must be immediately 100% vested.

The contributions go into SEP-IRAs established for each eligible employee.

For 2018, the maximum contribution that can be made to a SEP-IRA is 25% of compensation (or 20% of self-employed income net of the self-employment tax deduction), subject to a contribution cap of $55,000. (The 2019 cap is $56,000.)

Next steps

To set up a SEP, you just need to complete and sign the very simple Form 5305-SEP (“Simplified Employee Pension — Individual Retirement Accounts Contribution Agreement”). You don’t need to file Form 5305-SEP with the IRS, but you should keep it as part of your permanent tax records. A copy of Form 5305-SEP must be given to each employee covered by the SEP, along with a disclosure statement.

Although there are rules and limits that apply to SEPs beyond what we’ve discussed here, SEPs generally are much simpler to administer than other retirement plans. Contact us with any questions you have about SEPs and to discuss whether it makes sense for you to set one up for 2018 (or 2019).
© 2019

Once your 2018 tax return has been successfully filed with the IRS, you may still have some questions. Here are brief answers to three questions that we’re frequently asked at this time of year.

Question #1: What tax records can I throw away now?

At a minimum, keep tax records related to your return for as long as the IRS can audit your return or assess additional taxes. In general, the statute of limitations is three years after you file your return. So you can generally get rid of most records related to tax returns for 2015 (and earlier years) after April 15th, 2019, or October 15th if you filed for an extension on your 2015 return.

However, the statute of limitations extends to six years for taxpayers who understate their gross income by more than 25%. Even if you didn’t do that, if the IRS asserts you did, it will be difficult to defend yourself if you don’t have your records. So we recommend keeping all your records for at least seven years to be safe.

Either way, you’ll need to hang on to certain tax-related records longer. For example, keep the actual tax returns and W-2s indefinitely, so you can prove to the IRS that you filed a legitimate return. (There’s no statute of limitations for an audit if you didn’t file a return or you filed a fraudulent one.) You’ll also need them to correct any mistakes you might find in your Social Security earnings record, which could have happened any time within the last 35 years.

If you have a business or rental property, you need to keep records on anything that still affects future returns. For example, you need to keep the purchase documents on a building until the statute of limitations runs on the last return where you claimed depreciation on it. Ditto for equipment, vehicles and other fixed assets. The same concept goes for rental agreements, ongoing contracts of any sort, etc.

When it comes to retirement accounts, keep records associated with them until you’ve depleted the account and reported the last withdrawal on your tax return, plus three (or six) years.

Question #2: Where’s my refund?

The IRS has an online tool that can tell you the status of your refund. Go to irs.gov and click on “Refund Status” to find out about yours. You’ll need your Social Security number, filing status and the exact refund amount.

Question #3: Can I still collect a refund if I forgot to report something?

In general, you can file an amended tax return and claim a refund within three years after the date you filed your original return or within two years of the date you paid the tax, whichever is later. So for a 2018 tax return that you filed on April 15 of 2019, you can generally file an amended return until April 15, 2022.

However, there are a few opportunities when you have longer to file an amended return. For example, the statute of limitations for bad debts is longer than the usual three-year time limit for most items on your tax return. In general, you can amend your tax return to claim a bad debt for seven years from the due date of the tax return for the year that the debt became worthless.

We can help

Contact us if you have questions about tax record retention, your refund or filing an amended return. We’re available all year long — not just at tax filing time! 614-418-1775
© 2019

Legislation is making its way through the Ohio Statehouse which would make significant changes to Ohio’s generous business income deduction.  After a rare unanimous bipartisan vote in the House Finance Committee, Ohio H.B. 166 passed the full Ohio House on May 9th and is currently under consideration in the state Senate, where it is expected to face tighter scrutiny.

Under current law, any individual Ohio taxpayer with $250,000 or less of business or pass-through income pays no state tax on that income at all.  Business income for purposes of this deduction includes self-employment, K-1 income from S-corporations, partnerships and even trusts (generally not interest, dividends or capital gains, with some exceptions), rents and royalties.  One type of income includable in the deduction which we frequently see missed, is any wages paid to an S-corporation shareholder who owns 20% or more of the company, as well as guaranteed payments to partners owning 20% or more of their partnership.

Under HB 166, the $250,000 cap would go down to $100,000.  Any income above the cap is currently taxed at a flat 3% (ie, business income above $250,000), but would be taxed at normal rates after $100,000 if the change is enacted.  Currently, Ohio’s top income tax bracket is just under 5% (4.997), and would be reduced slightly to 4.667% under the bill.  However, it would also eliminate Ohio’s bottom two income tax brackets, doubling the amount of income not subject to tax no matter what its source (about $10,800 under current law, raised to roughly $22,000 under the bill’s provisions).

The bill also addresses collection of sales tax in the wake of last year’s Supreme Court Wayfair decision.  Out of state vendors would be required to collect Ohio sales tax if they have $100,000 or more in gross sales to Ohio customers, or 200 or more sales transactions, even if they don’t have a physical presence in Ohio, which was the normal standard before Wayfair.  “Sharing economy” companies like Uber or Lyft would also be required to collect sales tax on behalf of drivers.

If enacted, these changes would be effective for tax years starting on or after January 1, 2019.  A final budget must be signed by Governor Mike DeWine by June 30th.