Tax

Beat the Unfair $10,000 SALT Cap with a C Corporation

C corporations cause double taxation for business owners, so you probably think you want to avoid them at all costs.

And for many of you, this is true, as the S corporation often provides the lower overall tax outcome.

But for some of you, the C corporation could provide the best tax outcome because it bypasses the $10,000 state and local tax (SALT) deduction cap, which was introduced by the Tax Cuts and Jobs Act (TCJA).

Prior to the TCJA, you could deduct as itemized deductions on your Form 1040, Schedule A—without limit—the following foreign, state, and local taxes:

• Income taxes
• Real property taxes
• Personal property taxes
• Foreign income and real property taxes

Tax reform took two direct actions against your Form 1040 itemized deductions for foreign, state, and local taxes. Beginning in tax year 2018,

• you can’t deduct foreign real property taxes, and
• your combined state and local income, real property, and personal property tax deductions may not exceed $10,000 ($5,000 on a married filing separate return).

If you operate your business as an S corporation, the S corporation passes its net income to your individual tax return. This causes you, the individual, to pay state income taxes on the S corporation income. Those state income taxes are subject to the $10,000 cap.

C Corporation Loophole

But there is an exception: This $10,000 limit applies only to individuals—meaning, taxes deducted on your Form 1040, Schedule A. The limit does not apply to C corporations.

If you operate your business as a C corporation, then your C corporation pays state income taxes on its net income and deducts those taxes on its corporate income tax return.

• By Leon Clinton
• April 5, 2020

Dealing With Deposits in Quickbooks

Recording payments, whether they come in to comply with an invoice you sent or are issued as sales receipts, is one of the more satisfying tasks you do in QuickBooks. The sales cycle is almost complete, and you’re about to have more money in the bank – once you document the payments as bank deposits.

Unless you use QuickBooks Payments, which moves your company’s remittances into an account automatically, you’ll have to deal with your deposits twice. First, you’ll have to make out a deposit slip for the bank. You’ll also need to record the deposit in QuickBooks itself.

Fortunately, the software makes this easy for you. Here’s how it works.

A Special Account

By default, QuickBooks transfers payments received into an account called Undeposited Funds. You can see it in your Chart of Accounts by clicking the Chart of Accounts icon on QuickBooks’ home page and scrolling down a bit. Look over to the end of the line and you’ll see its current balance. This account is an Other current asset. It holds your payments until you record them as deposits and take your money to the bank.

When you’re getting ready to take cash and checks to the bank, click the Record Deposits icon on the home page. The Payments to Deposit window will open.

Figure 1: When money moves into Undeposited Funds from invoice payments or sales receipts, it’s displayed in the Payments to Deposit window.

We recommend completing your physical deposit slip first, based on the checks and cash you have in hand. Then, match them to payments in the window pictured above. You can click in front of each one you’ve matched to create a checkmark. When you’ve finished, click OK. The Make Deposits window will open. Make sure that the account you want to Deposit to is showing in the upper left corner. You can add a Memo and change the Date if needed.

Do you want cash back from your deposit? You may want to move this to Petty Cash, for example. Click the down arrow in the Cash goes back to field and select the correct account. Add a memo if necessary and enter the Cash back amount. When you’re done, save the transaction. QuickBooks now knows that you’re taking a deposit slip to the bank.

The total for your handwritten deposit slip and the final tally in the Make Deposits window should be the same. This will ensure that the amount deposited in your bank account will match the bank deposit amount in QuickBooks when reconciling. If you have leftover cash or checks, you’ll need to track down their origins and create new transactions.

Checking Your Work

It’s a good idea to check your Undeposited Funds account occasionally to make sure that you haven’t left money undeposited. To do this, open your Chart of Accounts again. Right-click Undeposited Funds and click on QuickReport: [number] Undeposited Funds. All should be selected in the Date field in the upper left. Click on Customize Report and select the Filters tab. Scroll down in the Filters list and click on Cleared. Select No and click OK to display your report.

Figure 2: You can customize your QuickReport to see if you’ve neglected to deposit any payments. If this list contains any, open the Banking menu and select Make Deposits to follow the steps above again.

Changing Your Destination Account

As we’ve already mentioned, QuickBooks is set up to automatically move payments into Undeposited Funds. We recommend leaving it this way so you can easily check for money that hasn’t been deposited. You can change this, though. If you feel it’s necessary, please call the office and speak to a QuickBooks professional who will help you modify your destination account.

Working with Payment Methods

QuickBooks comes with a default set of payment methods. You can add to these and/or make existing ones inactive, so they don’t clutter up the drop-down list. Open the Lists menu and select Customer & Vendor Profile Lists | Payment Method List. If you don’t accept Discover cards, for example, right-click on that entry and select Make Payment Method Inactive. To add one, click the down arrow next to Payment Method and then New. The Payment Method should always match the Payment Type.

Precision Critical

Account reconciliation is difficult enough without having to deal with deposit discrepancies. Treat this element of your accounting with great care. If you need help with account management, financial reporting or any other QuickBooks-related issues don’t hesitate to call.

• By Leon Clinton
• March 30, 2020

Reporting Tip Income: The Basics

The short answer is yes, tips are taxable. If you work at a hair salon, barbershop, casino, golf course, hotel, or restaurant, or drive a taxicab, then the tip income you receive as an employee from those services is taxable income. Here are a few other tips about tips:

• Taxable income. Tips are subject to federal income and Social Security and Medicare taxes, and they may be subject to state income tax as well. The value of noncash tips, such as tickets, passes, or other items of value, is also income and subject to federal income tax.
• Include tips on your tax return. In your gross income, you must include all cash tips you receive directly from customers, tips added to credit cards, and your share of any tips you receive under a tip-splitting arrangement with fellow employees.
• Report tips to your employer. If you receive $20 or more in tips in any one month, you should report all your tips to your employer. Your employer is required to withhold federal income, Social Security, and Medicare taxes.
• Keep a daily log of your tip income. Be sure to keep track of your tip income throughout the year. If you’d like a copy of the IRS form that helps you record it, please call.

Tips can be tricky. Don’t hesitate to contact the office if you have questions.

• By Leon Clinton
• March 28, 2020