Recent Tax Changes to Keep in Mind For 2019

Now that tax season is over, it is important to look at some recent tax changes that affect compliance and planning for 2019.  These changes have been brought about by the Tax Cuts and Jobs Act (TCJA), new regulations, revenue procedures, notices, and other rulings.

Medical deduction: The threshold for deducting medical expenses on Schedule A is increased to 10% for 2019.

Donations: For those clients who have made more than $5,000 in non-cash donations and are required to have an appraisal, they must hire someone who meets the new qualified status. A Qualified Appraiser is a person with verified education and experience in valuing the type of property being donated (1.170A -17(b)). An appraiser satisfies this new rule if they have either:

  1. completed professional or college-level course work and have at least two years of experience in valuing the type of donated property, or
  2.  have a recognized appraiser designation for the type of property donated.

Section 199A:  There are three ways to secure the 199A deduction for our clients that have real estate rentals:  The safe harbor, self-rental to a trade or business, and having a rental activity that rises to the level of a trade or business.  For that last category the client may want to consider issuing 1099’s.  Consider this statement by the service “Taxpayers should consider the appropriateness of treating a rental activity as a trade or business for purposes of section 199A where the taxpayer does not comply with the information filing requirements…”

For the safe harbor a client will need to keep contemporaneous records of the work performed, dates, and who performed the work. This was not a requirement in 2018 because the safe harbor rules were not published until 2019.

Another consideration is if it feasible to separate a regular business from a service business so as to secure the 199A deduction for the non-service activity. The rules now state that for a business with $25 million or less of income a business is not a Specified Service Trade or business if less than 10% of the gross receipts are derived from service. The threshold drops to 5% for businesses with sales over $25 million.

At a minimum the client will have to keep separate books. But this may not be enough. An example in the regulations shows a company that provides veterinarian services and sells its own line of pet food.  In addition to keeping separate books the company separately invoices and has separate employees for each activity.

For new clients we need to be careful to look at the prior year before giving advice on 199A for 2019. If the client had an overall business loss in 2018, that amount carries over to reduce eligible business income for 2019. For example, suppose the overall 2018 business loss was $30,000. There was no 199A deduction for 2018. In 2019 the business shows a $100,000 profit. The Qualified Business Income for 2019 is $70,000.

We need to keep in mind the aggregation rules. Just because the client was able, or unable, to aggregate in 2018 does not mean the same will be true in 2019. The right change in ownership could either knock a business out or create an opportunity to include a business.

Generally, the election to aggregate cannot be made on an amended return. However, for 2018 an initial election can be made on an amended return. Remember this for new clients.

Opportunity Zones: Although this program officially started last year, in reality it is just ramping up.  The Opportunity Zone program allows investors to defer the recognition of capital gains on gains they invest into an Opportunity Zone (OZ) Fund. If the investment in the fund is held at least seven years the deferred gain can be reduced by 15%. For those investments held 5-7 years the reduction is 10%. Since there is a deemed sale on December 31, 2026, the investment must be made by December 31, 2019 to secure the full 15% reduction in gain.

A separate tax benefit relates to the investment in the fund itself. If the investment is held at least ten years there is no taxable gain when the investment is sold.  Housing Allowance: The Seventh Circuit just reversed the District Court ruling in Gaylor v. Mnuchin. The court held that housing allowance provided to clergy is not a violation of the first amendment. This is good news for those in ministry.

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John M. Stevko, CPA, has over 40 years of professional experience as a tax practitioner, national seminar instructor, writer, and business owner. John began his career with what is now a “Big 4” public accounting firm before founding a local CPA firm in Beaverton, Oregon. At that same time, John began speaking for Gear Up Tax seminars and eventually becoming a managing partner of the business. John has lectured on tax law and healthcare reform throughout the country at national conferences and in-house for top 100 CPA firms and the large banking industry. He has also appeared on television and radio programs seeking his expertise on tax and healthcare legislation.