Neilley & Co. CPA Blog

This year, the optional standard mileage rate used to calculate the deductible costs of operating an automobile for business increased by 3.5 cents, to the highest level since 2008. As a result, you might be able to claim a larger deduction for vehicle-related expense for 2019 than you can for 2018.

Actual costs vs. mileage rate

Businesses can generally deduct the actual expenses attributable to business use of vehicles. This includes gas, oil, tires, insurance, repairs, licenses and vehicle registration fees. In addition, you can claim a depreciation allowance for the vehicle. However, in many cases depreciation write-offs on vehicles are subject to certain limits that don’t apply to other types of business assets.

The mileage rate comes into play when taxpayers don’t want to keep track of actual vehicle-related expenses. With this approach, you don’t have to account for all your actual expenses, although you still must record certain information, such as the mileage for each business trip, the date and the destination.

The mileage rate approach also is popular with businesses that reimburse employees for business use of their personal automobiles. Such reimbursements can help attract and retain employees who’re expected to drive their personal vehicle extensively for business purposes. Why? Under the Tax Cuts and Jobs Act, employees can no longer deduct unreimbursed employee business expenses, such as business mileage, on their individual income tax returns.

But be aware that you must comply with various rules. If you don’t, you risk having the reimbursements considered taxable wages to the employees.

The 2019 rate

Beginning on January 1, 2019, the standard mileage rate for the business use of a car (van, pickup or panel truck) is 58 cents per mile. For 2018, the rate was 54.5 cents per mile.

The business cents-per-mile rate is adjusted annually. It is based on an annual study commissioned by the IRS about the fixed and variable costs of operating a vehicle, such as gas, maintenance, repair and depreciation. Occasionally, if there is a substantial change in average gas prices, the IRS will change the mileage rate midyear.

More considerations

There are certain situations where you can’t use the cents-per-mile rate. It depends in part on how you’ve claimed deductions for the same vehicle in the past or, if the vehicle is new to your business this year, whether you want to take advantage of certain first-year depreciation breaks on it.

As you can see, there are many variables to consider in determining whether to use the mileage rate to deduct vehicle expenses. Contact us if you have questions about tracking and claiming such expenses in 2019 — or claiming them on your 2018 income tax return.

© 2019

Important: Action Required By All PartnershipsAnd LLCs Filing Partnership Income Tax Returns

 In 2015, IRS released new regulations creating the Centralized Partnership Audit Regime (CPAR).  CPAR changes the way partnership tax returns will be audited, beginning with the tax year 2018 return.  The changes are significant, and can have substantial negative consequences.  (When we refer to partnerships throughout this article, we also mean limited liability companies (LLCs) which file partnership returns with the IRS.)

Certain partnerships may opt out of CPAR, and generally speaking, we recommend doing so if you qualify.  However, a partnership in which an interest is held by any type of trust (including a revocable living trust, which is often used in estate planning), or an LLC (even if it is a disregarded entity) will not qualify to opt out.  Therefore, it’s important to verify the entity type of every partner of your partnership when putting together your tax information every year.

If your partnership cannot opt out, or chooses not to, you must name a Partnership Representative.  This person (or company) does not have to be a partner, but in the case of an audit, they will have sole authority to represent all partners and deal with the IRS, binding the partnership to any audit adjustments.  This is a serious responsibility and should not be taken lightly.  While we are available to represent partnerships before the IRS in an audit as your tax advisor, the Partnership Representative has a much deeper legal relationship with the partnership, and we cannot serve in that capacity.

If audit adjustments are made, the partnership will be required to pay any associated tax at the highest personal tax rate.  It is possible to reduce the tax paid by making a Pull Down or Push Out election requiring each partner to amend their personal returns to pay the tax at the individual level instead, but only the Partnership Representative may do so.  If tax is paid at the partnership level, the current partners will in essence bear the burden, even if they were not in the partnership during the year under audit.  Conversely, any partners who are no longer present but were during the year under audit, will have no financial responsibility.

As a result of the CPAR rules, you should meet with your attorney to update your partnership or operating agreement to address these issues:

• Require, prohibit or specify conditions for opting out of CPAR when eligible
• Consider whether to restrict ownership of partner interests by disqualifying entities
• Name a Partnership Representative (PR) for years subject to CPAR
• Define the PR’s duties to notify and communicate with the partners in an audit
• Require, prohibit or specify conditions for the PR to make Pull Down or Push Out elections when applicable
• Departing partners indemnify all other partners as to any tax liability related to years audited when they were still in the partnership.

This may also be a good time to review and update your partnership or operating agreement for other issues unrelated to CPAR.  For example, adding language to ensure partners may take a deduction for unreimbursed expenses such as mileage, home office, client meals, dues, licenses, etc.  Or perhaps you might add language regarding transfer of deceased partners’ interests to avoid probate and other legal costs.

Please contact your legal counsel to update your documents.  Many attorneys may be unfamiliar with these new rules and the implications of decisions to be made; if that is the case, you should include your tax advisor in those discussions to ensure you make informed decisions that are the most appropriate for your particular situation.

We would be happy to discuss any questions you may have about this or any other tax or business issues, please contact us to schedule an appointment if we may be of service.

If most of your money is tied up in your business, retirement can be a challenge. So if you haven’t already set up a tax-advantaged retirement plan, consider doing so this year. There’s still time to set one up and make contributions that will be deductible on your 2018 tax return!

More benefits

Not only are contributions tax deductible, but retirement plan funds can grow tax-deferred. If you might be subject to the 3.8% net investment income tax (NIIT), setting up and contributing to a retirement plan may be particularly beneficial because retirement plan contributions can reduce your modified adjusted gross income and thus help you reduce or avoid the NIIT.

If you have employees, they generally must be allowed to participate in the plan, provided they meet the qualification requirements. But this can help you attract and retain good employees.

And if you have 100 or fewer employees, you may be eligible for a credit for setting up a plan. The credit is for 50% of start-up costs, up to $500. Remember, credits reduce your tax liability dollar-for-dollar, unlike deductions, which only reduce the amount of income subject to tax.

3 options to consider

Many types of retirement plans are available, but here are three of the most attractive to business owners trying to build up their own retirement savings:

1. Profit-sharing plan. This is a defined contribution plan that allows discretionary employer contributions and flexibility in plan design. You can make deductible 2018 contributions as late as the due date of your 2018 tax return, including extensions — provided your plan exists on Dec. 31, 2018. For 2018, the maximum contribution is $55,000, or $61,000 if you are age 50 or older and your plan includes a 401(k) arrangement.

2. Simplified Employee Pension (SEP). This is also a defined contribution plan, and it provides benefits similar to those of a profit-sharing plan. But you can establish a SEP in 2019 and still make deductible 2018 contributions as late as the due date of your 2018 income tax return, including extensions. In addition, a SEP is easy to administer. For 2018, the maximum SEP contribution is $55,000.

3. Defined benefit plan. This plan sets a future pension benefit and then actuarially calculates the contributions needed to attain that benefit. The maximum annual benefit for 2018 is generally $220,000 or 100% of average earned income for the highest three consecutive years, if less. Because it’s actuarially driven, the contribution needed to attain the projected future annual benefit may exceed the maximum contributions allowed by other plans, depending on your age and the desired benefit.

You can make deductible 2018 defined benefit plan contributions until your tax return due date, including extensions, provided your plan exists on Dec. 31, 2018. Be aware that employer contributions generally are required.

Sound good?

If the benefits of setting up a retirement plan sound good, contact us. We can provide more information and help you choose the best retirement plan for your particular situation.

© 2018