If you have a child in college, you may be eligible to claim the American Opportunity credit on your 2016 income tax return. If, however, your income is too high, you won’t qualify for the credit — but your child might. There’s one potential downside: If your dependent child claims the credit, you must forgo your dependency exemption for him or her. And the child can’t take the exemption.
The maximum American Opportunity credit, per student, is $2,500 per year for the first four years of postsecondary education. It equals 100% of the first $2,000 of qualified expenses, plus 25% of the next $2,000 of such expenses.
The ability to claim the American Opportunity credit begins to phase out when modified adjusted gross income (MAGI) enters the applicable phaseout range ($160,000–$180,000 for joint filers, $80,000–$90,000 for other filers). It’s completely eliminated when MAGI exceeds the top of the range.
Running the numbers
If your American Opportunity credit is partially or fully phased out, it’s a good idea to assess whether there’d be a tax benefit for the family overall if your child claimed the credit. As noted, this would come at the price of your having to forgo your dependency exemption for the child. So it’s important to run the numbers.
Dependency exemptions are also subject to a phaseout, so you might lose the benefit of your exemption regardless of whether your child claims the credit. The 2016 adjusted gross income (AGI) thresholds for the exemption phaseout are $259,400 (singles), $285,350 (heads of households), $311,300 (married filing jointly) and $155,650 (married filing separately).
If your exemption is fully phased out, there likely is no downside to your child taking the credit. If your exemption isn’t fully phased out, compare the tax savings your child would receive from the credit with the savings you’d receive from the exemption to determine which break will provide the greater overall savings for your family.
We can help you run the numbers and can provide more information about qualifying for the American Opportunity credit.
Yes, there’s still time to make 2016 contributions to your IRA. The deadline for such contributions is April 18, 2017. If the contribution is deductible, it will lower your 2016 tax bill. But even if it isn’t, making a 2016 contribution is likely a good idea
Benefits beyond a deduction
Tax-advantaged retirement plans like IRAs allow your money to grow tax-deferred — or, in the case of Roth accounts, tax-free. But annual contributions are limited by tax law, and any unused limit can’t be carried forward to make larger contributions in future years.
This means that, once the contribution deadline has passed, the tax-advantaged savings opportunity is lost forever. So it’s a good idea to use up as much of your annual limit as possible.
The 2016 limit for total contributions to all IRAs generally is $5,500 ($6,500 if you were age 50 or older on December 31, 2016). If you haven’t already maxed out your 2016 limit, consider making one of these types of contributions by April 18:
1. Deductible traditional. If you and your spouse don’t participate in an employer-sponsored plan such as a 401(k) — or you do but your income doesn’t exceed certain limits — the contribution is fully deductible on your 2016 tax return. Account growth is tax-deferred; distributions are subject to income tax.
2. Roth. The contribution isn’t deductible, but qualified distributions — including growth — are tax-free. Income-based limits, however, may reduce or eliminate your ability to contribute.
3. Nondeductible traditional. If your income is too high for you to fully benefit from a deductible traditional or a Roth contribution, you may benefit from a nondeductible contribution to a traditional IRA. The account can still grow tax-deferred, and when you take qualified distributions you’ll be taxed only on the growth. Alternatively, shortly after contributing, you may be able to convert the account to a Roth IRA with minimal tax liability.
Want to know which option best fits your situation? Contact us.
It’s not uncommon for adult children to help support their aging parents. If you’re in this position, you might qualify for the adult-dependent exemption. It allows eligible taxpayers to deduct up to $4,050 for each adult dependent claimed on their 2016 tax return.
For you to qualify for the adult-dependent exemption, in most cases your parent must have less gross income for the tax year than the exemption amount. (Exceptions may apply if your parent is permanently and totally disabled.) Generally Social Security is excluded, but payments from dividends, interest and retirement plans are included.
In addition, you must have contributed more than 50% of your parent’s financial support. If you shared caregiving duties with a sibling and your combined support exceeded 50%, the exemption can be claimed even though no one individually provided more than 50%. However, only one of you can claim the exemption.
Factors to consider
Even though Social Security payments can usually be excluded from the adult dependent’s income, they can still affect your ability to qualify. Why? If your parent is using Social Security money to pay for medicine or other expenses, you may find that you aren’t meeting the 50% test.
Don’t forget about your home. If your parent lives with you, the amount of support you claim under the 50% test can include the fair market rental value of part of your residence. If the parent lives elsewhere — in his or her own residence or in an assisted-living facility or nursing home — any amount of financial support you contribute to that housing expense counts toward the 50% test.
Easing the financial burden
Sometimes caregivers fall just short of qualifying for the exemption. Should this happen, you may still be able to claim an itemized deduction for the medical expenses that you pay for the parent. To receive a tax benefit, the combined medical expenses paid for you, your dependents and your parent must exceed 10% of your adjusted gross income.
The adult-dependent exemption is just one tax break that you may be able to employ to ease the financial burden of caring for an elderly parent. Contact us for more information on qualifying for this break or others.
If last year your business made repairs to tangible property, such as buildings, machinery, equipment or vehicles, you may be eligible for a valuable deduction on your 2016 income tax return. But you must make sure they were truly “repairs,” and not actually “improvements.”
Why? Costs incurred to improve tangible property must be depreciated over a period of years. But costs incurred on incidental repairs and maintenance can be expensed and immediately deducted.
What’s an “improvement”?
In general, a cost that results in an improvement to a building structure or any of its building systems (for example, the plumbing or electrical system) or to other tangible property must be capitalized. An improvement occurs if there was a betterment, restoration or adaptation of the unit of property.
Under the “betterment test,” you generally must capitalize amounts paid for work that is reasonably expected to materially increase the productivity, efficiency, strength, quality or output of a unit of property or that is a material addition to a unit of property.
Under the “restoration test,” you generally must capitalize amounts paid to replace a part (or combination of parts) that is a major component or a significant portion of the physical structure of a unit of property.
Under the “adaptation test,” you generally must capitalize amounts paid to adapt a unit of property to a new or different use — one that isn’t consistent with your ordinary use of the unit of property at the time you originally placed it in service.
2 safe harbors
Distinguishing between repairs and improvements can be difficult, but a couple of IRS safe harbors can help:
1. Routine maintenance safe harbor. Recurring activities dedicated to keeping property in efficient operating condition can be expensed. These are activities that your business reasonably expects to perform more than once during the property’s “class life,” as defined by the IRS.
Amounts incurred for activities outside the safe harbor don’t necessarily have to be capitalized, though. These amounts are subject to analysis under the general rules for improvements.
2. Small business safe harbor. For buildings that initially cost $1 million or less, qualified small businesses may elect to deduct the lesser of $10,000 or 2% of the unadjusted basis of the property for repairs, maintenance, improvements and similar activities each year. A qualified small business is generally one with gross receipts of $10 million or less.
There is also a de minimis safe harbor as well as an exemption for materials and supplies up to a certain threshold. Contact us for details on these safe harbors and exemptions and other ways to maximize your tangible property deductions.
Incentive stock options allow you to buy company stock in the future at a fixed price equal to or greater than the stock’s fair market value on the grant date. If the stock appreciates, you can buy shares at a price below what they’re then trading for. However, complex tax rules apply to this type of compensation.
Current tax treatment
ISOs must comply with many rules but receive tax-favored treatment:
So if you were granted ISOs in 2016, there likely isn’t any impact on your 2016 income tax return. But if in 2016 you exercised ISOs or you sold stock you’d acquired via exercising ISOs, then it could affect your 2016 tax liability. And it’s important to properly report the exercise or sale on your return to avoid potential interest and penalties for underpayment of tax.
Future exercises and stock sales
If you receive ISOs in 2017 or already hold ISOs that you haven’t yet exercised, plan carefully when to exercise them. Waiting to exercise ISOs until just before the expiration date (when the stock value may be the highest, assuming the stock is appreciating) may make sense. But exercising ISOs earlier can be advantageous in some situations.
Once you’ve exercised ISOs, the question is whether to immediately sell the shares received or to hold on to them long enough to garner long-term capital gains treatment. The latter strategy often is beneficial from a tax perspective, but there’s also market risk to consider. For example, it may be better to sell the stock in a disqualifying disposition and pay the higher ordinary-income rate if it would avoid AMT on potentially disappearing appreciation.
The timing of the sale of stock acquired via an exercise could also positively or negatively affect your liability for higher ordinary-income tax rates, the top long-term capital gains rate and the NIIT.
Keep in mind that the NIIT is part of the Affordable Care Act (ACA), and lawmakers in Washington are starting to take steps to repeal or replace the ACA. So the NIIT may not be a factor in the future. In addition, tax law changes are expected later this year that might include elimination of the AMT and could reduce ordinary and long-term capital gains rates for some taxpayers. When changes might go into effect and exactly what they’ll be is still uncertain.
If you’ve received ISOs, contact us. We can help you ensure you’re reporting everything properly on your 2016 return and evaluate the risks and crunch the numbers to determine the best strategy for you going forward.
The Section 199 deduction is intended to encourage domestic manufacturing. In fact, it’s often referred to as the “manufacturers’ deduction.” But this potentially valuable tax break can be used by many other types of businesses besides manufacturing companies.
Sec. 199 deduction 101
The Sec. 199 deduction, also called the “domestic production activities deduction,” is 9% of the lesser of qualified production activities income or taxable income. The deduction is also limited to 50% of W-2 wages paid by the taxpayer that are allocable to domestic production gross receipts.
Yes, the deduction is available to traditional manufacturers. But businesses engaged in activities such as construction, engineering, architecture, computer software production and agricultural processing also may be eligible.
The deduction isn’t allowed in determining net self-employment earnings and generally can’t reduce net income below zero. But it can be used against the alternative minimum tax.
How income is calculated
To determine a company’s Sec. 199 deduction, its qualified production activities income must be calculated. This is the amount of domestic production gross receipts (DPGR) exceeding the cost of goods sold and other expenses allocable to that DPGR. Most companies will need to allocate receipts between those that qualify as DPGR and those that don’t — unless less than 5% of receipts aren’t attributable to DPGR.
DPGR can come from a number of activities, including the construction of real property in the United States, as well as engineering or architectural services performed stateside to construct real property. It also can result from the lease, rental, licensing or sale of qualifying production property, such as:
The property must have been manufactured, produced, grown or extracted in whole or “significantly” within the United States. While each situation is assessed on its merits, the IRS has said that, if the labor and overhead incurred in the United States accounted for at least 20% of the total cost of goods sold, the activity typically qualifies.
Contact us to learn whether this potentially powerful deduction could reduce your business’s tax liability when you file your 2016 return.
Investment interest — interest on debt used to buy assets held for investment, such as margin debt used to buy securities — generally is deductible for both regular tax and alternative minimum tax purposes. But special rules apply that can make this itemized deduction less beneficial than you might think.
Limits on the deduction
First, you can’t deduct interest you incurred to produce tax-exempt income. For example, if you borrow money to invest in municipal bonds, which are exempt from federal income tax, you can’t deduct the interest.
Second, and perhaps more significant, your investment interest deduction is limited to your net investment income, which, for the purposes of this deduction, generally includes taxable interest, nonqualified dividends and net short-term capital gains, reduced by other investment expenses. In other words, long-term capital gains and qualified dividends aren’t included.
However, any disallowed interest is carried forward. You can then deduct the disallowed interest in a later year if you have excess net investment income.
Changing the tax treatment
You may elect to treat net long-term capital gains or qualified dividends as investment income in order to deduct more of your investment interest. But if you do, that portion of the long-term capital gain or dividend will be taxed at ordinary-income rates.
If you’re wondering whether you can claim the investment interest expense deduction on your 2016 return, please contact us. We can run the numbers to calculate your potential deduction or to determine whether you could benefit from treating gains or dividends differently to maximize your deduction.
The break allowing taxpayers to take an itemized deduction for state and local sales taxes in lieu of state and local income taxes was made “permanent” a little over a year ago. This break can be valuable to those residing in states with no or low income taxes or who purchase major items, such as a car or boat.
Your 2016 tax return
How do you determine whether you can save more by deducting sales tax on your 2016 return? Compare your potential deduction for state and local income tax to your potential deduction for state and local sales tax.
Don’t worry — you don’t have to have receipts documenting all of the sales tax you actually paid during the year to take full advantage of the deduction. Your deduction can be determined by using an IRS sales tax calculator that will base the deduction on your income and the sales tax rates in your locale plus the tax you actually paid on certain major purchases (for which you will need substantiation).
2017 and beyond
If you’re considering making a large purchase in 2017, you shouldn’t necessarily count on the sales tax deduction being available on your 2017 return. When the PATH Act made the break “permanent” in late 2015, that just meant that there’s no scheduled expiration date for it. Congress could pass legislation to eliminate the break (or reduce its benefit) at any time.
Recent Republican proposals have included elimination of many itemized deductions, and the new President has proposed putting a cap on itemized deductions. Which proposals will make it into tax legislation in 2017 and when various provisions will be signed into law and go into effect is still uncertain.
Questions about the sales tax deduction or other breaks that might help you save taxes on your 2016 tax return? Or about the impact of possible tax law changes on your 2017 tax planning? Contact us — we can help you maximize your 2016 savings and effectively plan for 2017.
If you’re like many Americans, you might not start thinking about filing your tax return until close to this year’s April 18 deadline. You might even want to file for an extension so you don’t have to send your return to the IRS until October 16.
But there’s another date you should keep in mind: January 23. That’s the date the IRS will begin accepting 2016 returns, and filing as close to that date as possible could protect you from tax identity theft.
Why early filing helps
In an increasingly common scam, thieves use victims’ personal information to file fraudulent tax returns electronically and claim bogus refunds. This is usually done early in the tax filing season. When the real taxpayers file, they’re notified that they’re attempting to file duplicate returns.
A victim typically discovers the fraud after he or she files a tax return and is informed by the IRS that the return has been rejected because one with the same Social Security number has already been filed for the same tax year. The IRS then must determine who the legitimate taxpayer is.
Tax identity theft can cause major headaches to straighten out and significantly delay legitimate refunds. But if you file first, it will be the tax return filed by a potential thief that will be rejected — not yours.
Another important date
Of course, in order to file your tax return, you’ll need to have your W-2s and 1099s. So another key date to be aware of is January 31 — the deadline for employers to issue 2016 W-2s to employees and, generally, for businesses to issue 1099s to recipients of any 2016 interest, dividend or reportable miscellaneous income payments.
Delays for some refunds
The IRS reminded taxpayers claiming the earned income tax credit or the additional child tax credit to expect a longer wait for their refunds. A law passed in 2015 requires the IRS to hold refunds on tax returns claiming these credits until at least February 15.
An additional benefit
Let us know if you have questions about tax identity theft or would like help filing your 2016 return early. If you’ll be getting a refund, an added bonus of filing early is that you’ll be able to enjoy your refund sooner.
Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2017. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
File 2016 Forms 1099-MISC with the IRS and provide copies to recipients. (Note that Forms 1099-MISC reporting nonemployee compensation in Box 7 must be filed by January 31, beginning with 2016 forms filed in 2017.)
If a calendar-year partnership or S corporation, file or extend your 2016 tax return. If the return isn’t extended, this is also the last day to make 2016 contributions to pension and profit-sharing plans.
There are many ways to save for a child’s or grandchild’s education. But one has annual contribution limits, and if you don’t make a 2016 contribution by December 31, the opportunity will be lost forever. We’re talking about Coverdell Education Savings Accounts (ESAs).
How ESAs work
With an ESA, you contribute money now that the beneficiary can use later to pay qualified education expenses:
Not just for college
One major advantage of ESAs over another popular education saving tool, the Section 529 plan, is that tax-free ESA distributions aren’t limited to college expenses; they also can fund elementary and secondary school costs. That means you can use ESA funds to pay for such qualified expenses as tutoring and private school tuition.
Another advantage is that you have more investment options. So ESAs are beneficial if you’d like to have direct control over how and where your contributions are invested.
Annual contribution limits
The annual contribution limit is $2,000 per beneficiary. However, the ability to contribute is phased out based on income.
The limit begins to phase out at a modified adjusted gross income (MAGI) of $190,000 for married filing jointly and $95,000 for other filers. No contribution can be made when MAGI hits $220,000 and $110,000, respectively.
Maximizing ESA savings
Because the annual contribution limit is low, if you want to maximize your ESA savings, it’s important to contribute every year in which you’re eligible. The contribution limit doesn’t carry over from year to year. In other words, if you don’t make a $2,000 contribution in 2016, you can’t add that $2,000 to the 2017 limit and make a $4,000 contribution next year.
However, because the contribution limit applies on a per beneficiary basis, before contributing make sure no one else has contributed to an ESA on behalf of the same beneficiary. If someone else has, you’ll need to reduce your contribution accordingly.
Would you like more information about ESAs or other tax-advantaged ways to fund your child’s — or grandchild’s — education expenses? Contact us!
A tried-and-true estate planning strategy is to make tax-free gifts to loved ones during life, because it reduces potential estate tax at death. There are many ways to make tax-free gifts, but one of the simplest is to take advantage of the annual gift tax exclusion with direct gifts. Even in a potentially changing estate tax environment, making annual exclusion gifts before year end can still be a good idea.
What is the annual exclusion?
The 2016 gift tax annual exclusion allows you to give up to $14,000 per recipient tax-free without using up any of your $5.45 million lifetime gift tax exemption. If you and your spouse “split” the gift, you can give $28,000 per recipient. The gifts are also generally excluded from the generation-skipping transfer tax, which typically applies to transfers to grandchildren and others more than one generation below you.
The gifted assets are removed from your taxable estate, which can be especially advantageous if you expect them to appreciate. That’s because the future appreciation can also avoid gift and estate taxes.
Making gifts in 2016
The exclusion is scheduled to remain at $14,000 ($28,000 for split gifts) in 2017. But that’s not a reason to skip making annual exclusion gifts this year. You need to use your 2016 exclusion by Dec. 31 or you’ll lose it.
The exclusion doesn’t carry from one year to the next. For example, if you don’t make an annual exclusion gift to your daughter this year, you can’t add $14,000 to your 2017 exclusion to make a $28,000 tax-free gift to her next year.
While the President-elect and Republicans in Congress have indicated that they want to repeal the estate tax, it’s uncertain exactly what tax law changes will be passed, since the Republicans don’t have a filibuster-proof majority in the Senate. Plus, in some states there’s a state-level estate tax. So if you have a large estate, making 2016 annual exclusion gifts is generally still well worth considering.
We can help you determine how to make the most of your 2016 gift tax annual exclusion.
You may be aware of the rule that allows businesses to deduct bonuses employees have earned during a tax year if the bonuses are paid within 2½ months after the end of that year (by March 15 for a calendar-year company). But this favorable tax treatment isn’t always available.
For one thing, only accrual-basis taxpayers can take advantage of the 2½ month rule — cash-basis taxpayers must deduct bonuses in the year they’re paid, regardless of when they’re earned. Even for accrual-basis taxpayers, however, the 2½ month rule isn’t automatic. The bonuses can be deducted in the year they’re earned only if the employer’s bonus liability is fixed by the end of the year.
The all-events test
For accrual-basis taxpayers, the IRS determines when a liability (such as a bonus) has been incurred — and, therefore, is deductible — by applying the “all-events test.” Under this test, a liability is deductible when:
Generally, the third requirement isn’t an issue; it’s satisfied when an employee performs the services required to earn a bonus. But the first two requirements can delay your tax deduction until the year of payment, depending on how your bonus plan is designed.
For example, many bonus plans require an employee to remain in the company’s employ on the payment date as a condition of receiving the bonus. Even if the amount of the bonus is fixed at the end of the tax year, and employees who leave the company before the payment date forfeit their bonuses, the all-events test isn’t satisfied until the payment date. Fortunately, it’s possible to accelerate deductions with a carefully designed bonus pool arrangement.
How a bonus pool works
In a 2011 ruling, the IRS said that employers may deduct bonuses in the year they’re earned — even if there’s a risk of forfeiture — as long as any forfeited bonuses are reallocated among the remaining employees in the bonus pool rather than retained by the employer. Under such a plan, an employer satisfies the all-events test because the aggregate bonus amount is fixed at the end of the year, even though amounts allocated to specific employees aren’t determined until the payment date.
Additional rules and limits apply to this strategy. To learn whether your current bonus plan allows you to take 2016 deductions for bonuses paid in early 2017, contact us. If you don’t qualify this year, we can also help you design a bonus plan for 2017 that will allow you to accelerate deductions next year.
Donations to qualified charities are generally fully deductible, and they may be the easiest deductible expense to time to your tax advantage. After all, you control exactly when and how much you give. To ensure your donations will be deductible on your 2016 return, you must make them by year end to qualified charities.
When’s the delivery date?
To be deductible on your 2016 return, a charitable donation must be made by Dec. 31, 2016. According to the IRS, a donation generally is “made” at the time of its “unconditional delivery.” But what does this mean? Is it the date you, for example, write a check or make an online gift via your credit card? Or is it the date the charity actually receives the funds — or perhaps the date of the charity’s acknowledgment of your gift?
The delivery date depends in part on what you donate and how you donate it. Here are a few examples for common donations:
Check. The date you mail it.
Credit card. The date you make the charge.
Pay-by-phone account. The date the financial institution pays the amount.
Stock certificate. The date you mail the properly endorsed stock certificate to the charity.
Is the organization “qualified”?
To be deductible, a donation also must be made to a “qualified charity” — one that’s eligible to receive tax-deductible contributions.
The IRS’s online search tool, Exempt Organizations (EO) Select Check, can help you more easily find out whether an organization is eligible to receive tax-deductible charitable contributions. You can access EO Select Check at http://apps.irs.gov/app/eos. Information about organizations eligible to receive deductible contributions is updated monthly.
Many additional rules apply to the charitable donation deduction, so please contact us if you have questions about the deductibility of a gift you’ve made or are considering making. But act soon — you don’t have much time left to make donations that will reduce your 2016 tax bill.
In order to take advantage of two important depreciation tax breaks for business assets, you must place the assets in service by the end of the tax year. So you still have time to act for 2016.
Section 179 deduction
The Sec. 179 deduction is valuable because it allows businesses to deduct as depreciation up to 100% of the cost of qualifying assets in year 1 instead of depreciating the cost over a number of years. Sec. 179 can be used for fixed assets, such as equipment, software and leasehold improvements. Beginning in 2016, air conditioning and heating units were added to the list.
The maximum Sec. 179 deduction for 2016 is $500,000. The deduction begins to phase out dollar-for-dollar for 2016 when total asset acquisitions for the tax year exceed $200,010,000.
Real property improvements used to be ineligible. However, an exception that began in 2010 was made permanent for tax years beginning in 2016. Under the exception, you can claim a Sec. 179 deduction of up to $500,000 for certain qualified real property improvement costs.
Note: You can use Sec. 179 to buy an eligible heavy SUV for business use, but the rules are different from buying other assets. Heavy SUVs are subject to a $25,000 deduction limitation.
First-year bonus depreciation
For qualified new assets (including software) that your business places in service in 2016, you can claim 50% first-year bonus depreciation. (Used assets don’t qualify.) This break is available when buying computer systems, software, machinery, equipment, and office furniture.
Additionally, 50% bonus depreciation can be claimed for qualified improvement property, which means any eligible improvement to the interior of a nonresidential building if the improvement is made after the date the building was first placed in service. However, certain improvements aren’t eligible, such as enlarging a building and installing an elevator or escalator.
Contemplate what your business needs now
If you’ve been thinking about buying business assets, consider doing it before year end. This article explains only some of the rules involved with the Sec. 179 and bonus depreciation tax breaks. Contact us for ideas on how you can maximize your depreciation deductions.
Smart timing of deductible expenses can reduce your tax liability, and poor timing can unnecessarily increase it. When you don’t expect to be subject to the alternative minimum tax (AMT) in the current year, accelerating deductible expenses into the current year typically is a good idea. Why? Because it will defer tax, which usually is beneficial. One deductible expense you may be able to control is your property tax payment.
You can prepay (by December 31) property taxes that relate to 2016 but that are due in 2017, and deduct the payment on your return for this year. But you generally can’t prepay property taxes that relate to 2017 and deduct the payment on this year’s return.
Should you or shouldn’t you?
As noted earlier, accelerating deductible expenses like property tax payments generally is beneficial. Prepaying your property tax may be especially beneficial if tax rates go down for 2017, which could happen based on the outcome of the November election. Deductions save more tax when tax rates are higher.
However, under the President-elect’s proposed tax plan, some taxpayers (such as certain single and head of household filers) might be subject to higher tax rates. These taxpayers may save more tax from the property tax deduction by holding off on paying their property tax until it’s due next year.
Likewise, taxpayers who expect to see a big jump in their income next year that would push them into a higher tax bracket also may benefit by not prepaying their property tax bill.
Property tax isn’t deductible for AMT purposes. If you’re subject to the AMT this year, a prepayment may hurt you because you’ll lose the benefit of the deduction. So before prepaying your property tax, make sure you aren’t at AMT risk for 2016.
Also, don’t forget the income-based itemized deduction reduction. If your income is high enough that the reduction applies to you, the tax benefit of a prepayment will be reduced.
Not sure whether you should prepay your property tax bill or what other deductions you might be able to accelerate into 2016 (or should consider deferring to 2017)? Contact us. We can help you determine the best year-end tax planning strategies for your specific situation.
The last month or so of the year offers accrual-basis taxpayers an opportunity to make some timely moves that might enable them to save money on their 2016 tax bill.
Record and recognize
The key to saving tax as an accrual-basis taxpayer is to properly record and recognize expenses that were incurred this year but won’t be paid until 2017. This will enable you to deduct those expenses on your 2016 federal tax return. Common examples of such expenses include:
You can also accelerate deductions into 2016 without actually paying for the expenses in 2016 by charging them on a credit card. (This works for cash-basis taxpayers, too.) Accelerating deductible expenses into 2016 may be especially beneficial if tax rates go down for 2017, which could happen based on the outcome of the November election. Deductions save more tax when tax rates are higher.
Look at prepaid expenses
Also review all prepaid expense accounts and write off any items that have been used up before the end of the year. If you prepay insurance for a period of time beginning in 2016, you can expense the entire amount this year rather than spreading it between 2016 and 2017, as long as a proper method election is made. This is treated as a tax expense and thus won’t affect your internal financials.
Miscellaneous tax tips
Here are a few more year-end tax tips to consider:
Consult us for more details on how these and other year-end tax strategies may apply to your business.
The election of Donald Trump as President of the United States could result in major tax law changes in 2017. Proposed changes spelled out in Trump’s tax reform plan released earlier this year that would affect businesses include:
President-elect Trump’s tax plan is somewhat different from the House Republicans’ plan. With Republicans retaining control of both chambers of Congress, some sort of overhaul of the U.S. tax code is likely. That said, Republicans didn’t reach the 60 Senate members necessary to become filibuster-proof, which means they may need to compromise on some issues in order to get their legislation through the Senate.
So there’s still uncertainty as to which specific tax changes will ultimately make it into legislation and be signed into law.
It may make sense to accelerate deductible expenses into 2016 that might not be deductible in 2017 and to defer income to 2017, when it might be subject to a lower tax rate. But there is some risk to these strategies, given the uncertainty as to exactly what tax law changes will be enacted. Plus no single strategy is right for every business. Please contact us to develop the best year-end strategy for your business.
Saving for retirement can be tough if you’re putting most of your money and time into operating a small business. However, many retirement plans aren’t difficult to set up and it’s important to start saving so you can enjoy a comfortable future.
So if you haven’t already set up a tax-advantaged plan, consider doing so this year.
Note: If you have employees, they generally must be allowed to participate in the plan, provided they meet the qualification requirements.
Here are three options:
Contact us if you want more information about setting up the best retirement plan in your situation.
Nonqualified deferred compensation (NQDC) plans pay executives at some time in the future for services to be currently performed. They differ from qualified plans, such as 401(k)s, in that:
They also differ in terms of some of the rules that apply to them, and it’s critical to be aware of those rules.
What you need to know
Internal Revenue Code (IRC) Section 409A and related IRS guidance have tightened and clarified the rules for NQDC plans. Some of the most important rules to be aware of affect:
Timing of initial deferral elections. Executives must make the initial deferral election before the year in which they perform the services for which the compensation is earned. So, for instance, if you wish to defer part of your 2017 compensation to 2018 or beyond, you generally must make the election by the end of 2016.
Timing of distributions. Benefits must be paid on a specified date, according to a fixed payment schedule or after the occurrence of a specified event — such as death, disability, separation from service, change in ownership or control of the employer, or an unforeseeable emergency.
Elections to change timing or form. The timing of benefits can be delayed but not accelerated. Elections to change the timing or form of a payment must be made at least 12 months in advance. Also, new payment dates must be at least five years after the date the payment would otherwise have been made.
Employment tax issues
Another important NQDC tax issue is that employment taxes are generally due when services are performed or when there’s no longer a substantial risk of forfeiture, whichever is later. This is true even though the compensation isn’t actually paid or recognized for income tax purposes until later years. So your employer may:
Consequences of noncompliance
The penalties for noncompliance can be severe: Plan participants (that is, you, the executive) will be taxed on plan benefits at the time of vesting, and a 20% penalty and potential interest charges also will apply. So if you’re receiving NQDC, you should check with your employer to make sure it’s addressing any compliance issues. And we can help incorporate your NQDC or other executive compensation into your year-end tax planning and a comprehensive tax planning strategy for 2016 and beyond.
Many tax breaks are reduced or eliminated for higher-income taxpayers. Two of particular note are the itemized deduction reduction and the personal exemption phaseout.
If your adjusted gross income (AGI) exceeds the applicable threshold, most of your itemized deductions will be reduced by 3% of the AGI amount that exceeds the threshold (not to exceed 80% of otherwise allowable deductions). For 2016, the thresholds are $259,400 (single), $285,350 (head of household), $311,300 (married filing jointly) and $155,650 (married filing separately). The limitation doesn’t apply to deductions for medical expenses, investment interest, or casualty, theft or wagering losses.
Exceeding the applicable AGI threshold also could cause your personal exemptions to be reduced or even eliminated. The personal exemption phaseout reduces exemptions by 2% for each $2,500 (or portion thereof) by which a taxpayer’s AGI exceeds the applicable threshold (2% for each $1,250 for married taxpayers filing separately).
The limits in action
These AGI-based limits can be very costly to high-income taxpayers. Consider this example:
Steve and Mary are married and have four dependent children. In 2016, they expect to have an AGI of $1 million and will be in the top tax bracket (39.6%). Without the AGI-based exemption phaseout, their $24,300 of personal exemptions ($4,050 × 6) would save them $9,623 in taxes ($24,300 × 39.6%). But because their personal exemptions are completely phased out, they’ll lose that tax benefit.
The AGI-based itemized deduction reduction can also be expensive. Steve and Mary could lose the benefit of as much as $20,661 [3% × ($1 million − $311,300)] of their itemized deductions that are subject to the reduction — at a tax cost as high as $8,182 ($20,661 × 39.6%).
These two AGI-based provisions combined could increase the couple’s tax by $17,805!
If your AGI is close to the applicable threshold, AGI-reduction strategies — such as contributing to a retirement plan or Health Savings Account — may allow you to stay under it. If that’s not possible, consider the reduced tax benefit of the affected deductions before implementing strategies to accelerate deductible expenses into 2016. If you expect to be under the threshold in 2017, you may be better off deferring certain deductible expenses to next year.
For more details on these and other income-based limits, help assessing whether you’re likely to be affected by them or more tips for reducing their impact, please contact us.
Typically, it’s better to defer tax. One way is through controlling when your business recognizes income and incurs deductible expenses. Here are two timing strategies that can help businesses do this:
But if you think you’ll be in a higher tax bracket next year (or you expect tax rates to go up), consider taking the opposite approach instead — accelerating income and deferring deductible expenses. This will increase your tax bill this year but can save you tax over the two-year period.
These are only some of the nuances to consider. Please contact us to discuss what timing strategies will work to your tax advantage, based on your specific situation.
If a corporate business is seeking to quickly expand, it may be considering one of these options:
1. Gaining control over another corporation's business (the target) indirectly via a merger transaction that would result in your corporation being in charge.
With a merger, the corporation generally issues stock to the target company's shareholders, which means they wind up owning part of the merged company. A merger can often be structured as a tax-free transaction for the seller, as well as the buyer.
2. Alternatively, the corporation may directly buy the target's stock or assets in a taxable transaction. With a taxable direct purchase deal, the corporation simply pays cash and/or issues debt in exchange for the target corporation's stock or assets. The target or its shareholders may owe income taxes but the buyer will not.
Here are some key factors to keep in mind when evaluating a corporate acquisition by merger (as opposed to a taxable stock or asset purchase).
How to Join Forces? Factors That Might Dictate Making An Acquisition With a Tax- Free Merger
Tax-Free Merger Pluses
From a company's perspective as a buyer, the beauty of a tax-free merger is that it doesn't require cash. Instead the corporation issues stock to the seller to finance the acquisition.
From the seller's perspective, the beauty of a tax-free merger is that it doesn't trigger an immediate income tax hit. Instead, the tax consequences are postponed until the stock received in the transaction is sold. That may be years later. Under current federal income tax rules, the maximum federal rate on an individual seller's long-term gain from a stock sale is only 15 percent. (If the seller is the target company's corporate parent, there's no preferential federal tax rate for the stock sale gain.)
While tax-free treatment is great, the merger must be carefully structured to gain the desired result. The applicable tax rules are complicated. Professional advice is critical to avoid mistakes.
Non-tax considerations are also important. It may be much easier from a legal perspective to take over control of the target company's assets with a merger rather than having to formally transfer title to a large number of acquired assets that would be necessary with an asset purchase transaction. (With a merger, the controlling corporation can generally take over effective ownership of the target's assets without filing any legal paperwork.)
Last but not least, a merger may allow you to gain control over valuable non-transferable assets owned by the target corporation, such as leases and licenses, that could not be acquired with an asset purchase.
Now for the Minuses of Mergers
Unlike a taxable asset purchase, a tax-free merger doesn't allow the buyer to "step up" (increase) the tax basis of the target's appreciated assets to reflect the purchase price. This means if your company is the buyer, it won't benefit from bigger post-purchase tax write-offs for depreciation, amortization, cost of goods sold and so forth. However, this is not a negative factor if:
With a merger, any target corporation liabilities (known or unknown) generally become the buyer's responsibility for all practical purposes — because the buyer effectively takes over legal ownership of the target corporation, including its imperfections. The seller or sellers are generally taken off the hook once the deal is done. To avoid unpleasant surprises about liabilities, a buyer may want to hire a professional firm to conduct a detailed due diligence investigation of the target.
With a merger, the target corporation's shareholder (or shareholders) will retain a piece of the business through their ownership of stock in the post-merger corporation. In other words, they buyer will have to put up with one or more new shareholders. If this is a big concern, the buyer should consider making a taxable stock or asset purchase instead. These transactions allow buyers to avoid having to take on additional shareholders.
Upshot: If your corporation is considering expanding by merging with a target corporation, there are important tax and non-tax factors to evaluate. Before finalizing any deal, get professional tax and valuation advice. A due diligence study can help avoid being harmed by unanticipated target corporation liabilities.
There’s a lot to think about when you change jobs, and it’s easy for a 401(k) or other employer-sponsored retirement plan to get lost in the shuffle. But to keep building tax-deferred savings, it’s important to make an informed decision about your old plan. First and foremost, don’t take a lump-sum distribution from your old employer’s retirement plan. It generally will be taxable and, if you’re under age 59½, subject to a 10% early-withdrawal penalty. Here are three tax-smart alternatives:
1. Stay put. You may be able to leave your money in your old plan. But if you’ll be participating in your new employer’s plan or you already have an IRA, keeping track of multiple plans can make managing your retirement assets more difficult. Also consider how well the old plan’s investment options meet your needs.
2. Roll over to your new employer’s plan. This may be beneficial if it leaves you with only one retirement plan to keep track of. But evaluate the new plan’s investment options.
3. Roll over to an IRA. If you participate in your new employer’s plan, this will require keeping track of two plans. But it may be the best alternative because IRAs offer nearly unlimited investment choices.
If you choose a rollover, request a direct rollover from your old plan to your new plan or IRA. If instead the funds are sent to you by check, you’ll need to make an indirect rollover (that is, deposit the funds into an IRA) within 60 days to avoid tax and potential penalties.
Also, be aware that the check you receive from your old plan will, unless an exception applies, be net of 20% federal income tax withholding. If you don’t roll over the gross amount (making up for the withheld amount with other funds), you’ll be subject to income tax — and potentially the 10% penalty — on the difference.
There are additional issues to consider when deciding what to do with your old retirement plan. We can help you make an informed decision — and avoid potential tax traps.
If you’re charitably inclined, making donations is probably one of your key year-end tax planning strategies. But if you typically give cash, you may want to consider another option that provides not just one but two tax benefits: Donating long-term appreciated stock.
More tax savings
Appreciated publicly traded stock you’ve held more than one year is long-term capital gains property. If you donate it to a qualified charity, you can enjoy two benefits: 1) You can claim a charitable deduction equal to the stock’s fair market value, and 2) you can avoid the capital gains tax you’d pay if you sold the stock. This will be especially beneficial to taxpayers facing the 3.8% net investment income tax (NIIT) or the top 20% long-term capital gains rate this year.
Let’s say you donate $10,000 of stock that you paid $3,000 for, your ordinary-income tax rate is 39.6% and your long-term capital gains rate is 20%. If you sold the stock, you’d pay $1,400 in tax on the $7,000 gain. If you were also subject to the 3.8% NIIT, you’d pay another $266 in NIIT.
By instead donating the stock to charity, you save $5,626 in federal tax ($1,666 in capital gains tax and NIIT plus $3,960 from the $10,000 income tax deduction). If you donated $10,000 in cash, your federal tax savings would be only $3,960.
Beware that donations of long-term capital gains property are subject to tighter deduction limits — 30% of your adjusted gross income for gifts to public charities, 20% for gifts to nonoperating private foundations (compared to 50% and 30%, respectively, for cash donations).
And don’t donate stock that’s worth less than your basis. Instead, sell the stock so you can deduct the loss and then donate the cash proceeds to charity.
If you own appreciated stock that you’d like to sell, but you’re concerned about the tax hit, donating it to charity might be right for you. For more details on this and other strategies to achieve your charitable giving and tax-saving goals, contact us.
Section 529 plans provide a tax-advantaged way to help pay for college expenses. Here are just a few of the benefits:
Prepaid tuition plans
With this type of 529 plan, if your contract is for four years of tuition, tuition is guaranteed regardless of its cost at the time the beneficiary actually attends the school. This can provide substantial savings if you invest when the child is still very young.
One downside is that there’s uncertainty in how benefits will be applied if the beneficiary attends a different school. Another is that the plan doesn’t cover costs other than tuition, such as room and board.
This type of 529 plan can be used to pay a student’s expenses at most postsecondary educational institutions. Distributions used to pay qualified expenses (such as tuition, mandatory fees, books, supplies, computer equipment, software, Internet service and, generally, room and board) are income-tax-free for federal purposes and typically for state purposes as well, thus making the tax deferral a permanent savings.
The biggest downside may be that you don’t have direct control over investment decisions; you’re limited to the options the plan offers. Additionally, for funds already in the plan, you can make changes to your investment options only twice during the year or when you change beneficiaries.
But each time you make a new contribution to a 529 savings plan, you can select a different option for that contribution, regardless of how many times you contribute throughout the year. And every 12 months you can make a tax-free rollover to a different 529 plan for the same child.
As you can see, each 529 plan type has its pluses and minuses. Whether a prepaid tuition plan or a savings plan is better depends on your situation and goals. If you’d like help choosing, please contact us.
If you have incomplete or missing records and get audited by the IRS, your business will likely lose out on valuable deductions. Here are two recent U.S. Tax Court cases that help illustrate the rules for documenting deductions.
Case 1: Insufficient records
In the first case, the court found that a taxpayer with a consulting business provided no proof to substantiate more than $52,000 in advertising expenses and $12,000 in travel expenses for the two years in question.
The business owner said the travel expenses were incurred ”caring for his business.“ That isn’t enough. ”The taxpayer bears the burden of proving that claimed business expenses were actually incurred and were ordinary and necessary,“ the court stated. In addition, businesses must keep and produce ”records sufficient to enable the IRS to determine the correct tax liability.“ (TC Memo 2016-158)
Case 2: Documents destroyed
In another case, a taxpayer was denied many of the deductions claimed for his company. He traveled frequently for the business, which developed machine parts. In addition to travel, meals and entertainment, he also claimed printing and consulting deductions.
The taxpayer recorded expenses in a spiral notebook and day planner and kept his records in a leased storage unit. While on a business trip to China, his documents were destroyed after the city where the storage unit was located acquired it by eminent domain.
There’s a way for taxpayers to claim expenses if substantiating documents are lost through circumstances beyond their control (for example, in a fire or flood). However, the court noted that a taxpayer still has to ”undertake a ‘reasonable reconstruction,’ which includes substantiation through secondary evidence.“
The court allowed 40% of the taxpayer’s travel, meals and entertainment expenses, but denied the remainder as well as the consulting and printing expenses. The reason? The taxpayer didn’t reconstruct those expenses through third-party sources or testimony from individuals whom he’d paid. (TC Memo 2016-135)
Keep detailed, accurate records to protect your business deductions. Record details about expenses as soon as possible after they’re incurred (for example, the date, place, business purpose, etc.). Keep more than just proof of payment. Also keep other documents, such as receipts, credit card slips and invoices. If you’re unsure of what you need, check with us.
The deadline for the Department of Labor's (DOL's) new final overtime rule is December 1, 2016. While CFOs at most large U.S. companies have been working overtime themselves to prepare for the changes, many small and midsize firms haven't been as quick to react.
Current Overtime Rule
The Fair Labor Standards Act (FLSA) is the federal law that controls overtime pay. It requires employers to pay employees 1.5 times their regular pay rate for overtime above 40 hours a week, unless specifically exempted. The FLSA "white collar" exemptions exclude from the federal overtime rules certain executive, administrative and professional (EAP) employees and outside salespeople.
The DOL requires each of the following three tests to be met for employees to be covered by the EAP exemption and, therefore, ineligible for overtime pay:
1. Salary basis test. The employee must be paid a predetermined and fixed salary that isn't subject to reduction because of variations in the quality or quantity of work performed.
2. Salary level test. The amount of salary paid must meet a minimum specified amount. Currently, this figure is $455 per week for EAP employees. (This is the equivalent of $23,660 annually for a full-year employee.)
3. Duties test. The employee's job duties must primarily involve executive, administrative or professional duties as defined by the DOL regulations. In addition, the regulations include a relaxed duties test for certain highly compensated employees (HCEs) who receive total annual compensation of $100,000 or more and are paid at least $455 per week under current levels.
The DOL released updated guidance in May that makes significant changes to the overtime regs. Prior to those changes, the DOL regulations on overtime pay — which date back to 1940 — hadn't been updated since 2004.
New Overtime Rule
The new final rule makes several significant changes related to overtime pay. Here are the highlights:
Salary level test. The standard salary level used to determine whether EAP employees are exempt from overtime will increase from $455 per week ($23,660 per year) to $913 per week ($47,476 per year) for full-time workers.
Employers aren't necessarily in compliance with the new standard salary level threshold if an employee's pay meets the $47,476 annual threshold. An employee's eligibility to receive overtime is determined on a weekly basis. What's more, this limit will be adjusted every three years, beginning January 1, 2020.
Bonuses and incentive payments. For the first time ever, employers will be permitted to use nondiscretionary bonuses and incentive payments (including commissions) to satisfy up to 10% of the standard salary level. These payments may include, for example, nondiscretionary incentive bonuses tied to productivity and profitability. For employers to credit nondiscretionary bonuses and incentive payments toward a portion of the standard salary level test, payments must be made at least on a quarterly basis, although employers can still make "catch-up" payments.
HCEs. The total annual compensation threshold for an HCE will increase from $100,000 to $134,004. The final rule makes no changes to the requirement that HCEs receive at least the full standard salary amount each pay period on a salary or fee basis without regard to nondiscretionary bonuses and incentive payments.
Thus, if employees earn at least $913 per week and pass the standard duties test for an EAP employee, they won't be affected by the increase in the annual threshold. If they pass only the relaxed duties test for an HCE, the employer must raise the compensation to the new $134,004 threshold to retain the exempt status.
While HCEs must receive 100% of the $913 weekly threshold on a salary or fee basis, nondiscretionary bonuses and incentive payments (including commissions) may be used to satisfy the remainder of the $134,004 total annual compensation requirement.
Duties test. The final rule doesn't make any changes to the existing EAP job duty requirements to qualify for exemption from overtime.
Outside salespeople. These employees aren't subject to the salary basis or salary level requirements. Therefore, they aren't affected by the rule changes.
Salaries for nonexempt employees. "Salaried status" and "exempt status" are separate concepts. So, employees entitled to overtime pay may still be paid on a salary basis as long as they receive overtime pay for working over 40 hours in a workweek.
Seasonal employers. A seasonal employer must comply with these rules during the period the employer is open for business. For example, if a seasonal employer is open during eight months of the year, the employer must guarantee that at least $913 per week is paid to an employee during that eight-month period for the employee to be exempt from overtime.
Job classifications. Employees with the same job classification don't all have to be classified as either eligible or exempt from overtime. The determination is made on an employee-by-employee basis.
Compliance Options for Employers
Faced with the fast-approaching implementation date, employers have several options to comply with the new rule:
1. Increase salaries of employees who are paid near the salary level threshold to maintain their exempt status (assuming they also meet the EAP duties test). The DOL says that this option works best for employees who have salaries close to the new salary level and regularly work overtime. But it may be only a short-term fix, because the salary level threshold will be increased again, beginning in 2020.
2. Pay overtime in addition to the employee's current salary when necessary. Employers can also continue to pay their newly overtime-eligible employees the same salary and pay them overtime whenever they work more than 40 hours in a week.
The DOL says that this approach may be preferable for companies with employees who work 40 hours or fewer in a typical workweek, but they have occasional spikes that require overtime. Thus, the employer can plan and budget for the extra pay. The DOL also notes that there's no requirement to convert employees from salaried to hourly for overtime pay calculations.
3. Limit workers' hours to 40 hours per week. Under this option, employers must ensure that workload distribution, time and staffing levels are managed appropriately for EAP workers earning below the salary threshold. Employers might hire additional workers to achieve this goal.
There's no "wrong" or "right" answer for employers. The optimal approach for your company will depend on the particular facts and circumstances. It also will require a balancing act between meeting the company's needs and being fair to employees. Employers already operating on slim profit margins may seek to cut costs in other ways, including making better use of technology.
At the very least, employers need to review how they manage payroll before December 1. For instance, you may want workers who never had to "punch in" in the past to start reporting their hours worked. Employers will need to think about the nuts-and-bolts of how they want employees to track their time.
The time to address the new final overtime rule is growing short. Is your company ready? If not, consult with your financial and legal advisors to ensure you'll be in full compliance when the rule goes into effect. These outside professionals can help analyze your payroll systems and determine the best approach for your company.
If you invest, whether you’re considered an investor or a trader can have a significant impact on your tax bill. Do you know the difference?
Most people who trade stocks are classified as investors for tax purposes. This means any net gains are treated as capital gains rather than ordinary income.
That’s good if your net gains are long-term (that is, you’ve held the investment more than a year) because you can enjoy the lower long-term capital gains rate. However, any investment-related expenses (such as margin interest, stock tracking software, etc.) are deductible only if you itemize and, in some cases, only if the total of the expenses exceeds 2% of your adjusted gross income.
Traders have it better in some situations. Their expenses reduce gross income even if they can’t itemize deductions and not just for regular tax purposes, but also for alternative minimum tax purposes.
Plus, in certain circumstances, if traders have a net loss for the year, they can claim it as an ordinary loss (so it can offset other ordinary income) rather than a capital loss. Capital losses are limited to a $3,000 ($1,500 if married filing separately) per year deduction once any capital gains have been offset.
Passing the trader test
What does it take to successfully meet the test for trader status? The answer is twofold:
1. The trading must be “substantial.” While there’s no bright line test, the courts have tended to view more than a thousand trades a year, spread over most of the available trading days, as substantial.
2. The trading must be designed to try to catch the swings in the daily market movements. In other words, you must be attempting to profit from these short-term changes rather than from the long-term holding of investments. So the average duration for holding any one position needs to be very short, generally only a day or two.
If you satisfy these conditions, the chances are good that you’d ultimately be able to prove trader vs. investor status. Of course, even if you don’t satisfy one of the tests, you might still prevail, but the odds against you are higher. If you have questions, please contact us.
If you recently redeemed frequent flyer miles to treat the family to a fun summer vacation or to take your spouse on a romantic getaway, you might assume that there are no tax implications involved. And you’re probably right — but there is a chance your miles could be taxable.
Usually tax free
As a general rule, miles awarded by airlines for flying with them are considered nontaxable rebates, as are miles awarded for using a credit or debit card.
The IRS partially addressed the issue in Announcement 2002-18, where it said “Consistent with prior practice, the IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel.”
There are, however, some types of mile awards the IRS might view as taxable. Examples include miles awarded as a prize in a sweepstakes and miles awarded as a promotion.
For instance, in Shankar v. Commissioner, the U.S. Tax Court sided with the IRS, finding that airline miles awarded in conjunction with opening a bank account were indeed taxable. Part of the evidence of taxability was the fact that the bank had issued Forms 1099 MISC to customers who’d redeemed the rewards points to purchase airline tickets.
The value of the miles for tax purposes generally is their estimated retail value.
If you’re concerned you’ve received mile awards that could be taxable, please contact us and we’ll help you determine your tax liability, if any.
If you go on a business trip within the United States and tack on some vacation days, you can deduct some of your expenses. But exactly what can you write off?
Transportation costs to and from the location of your business activity are 100% deductible as long as the primary reason for the trip is business rather than pleasure. On the other hand, if vacation is the primary reason for your travel, then generally none of your transportation expenses are deductible.
What costs can be included? Travel to and from your departure airport, airfare, baggage fees, tips, cabs, and so forth. Costs for rail travel or driving your personal car are also eligible.
Business days vs. pleasure days
The number of days spent on business vs. pleasure is the key factor in determining if the primary reason for domestic travel is business. Your travel days count as business days, as do weekends and holidays if they fall between days devoted to business, and it would be impractical to return home.
Standby days (days when your physical presence is required) also count as business days, even if you aren’t called upon to work those days. Any other day principally devoted to business activities during normal business hours also counts as a business day, and so are days when you intended to work, but couldn’t due to reasons beyond your control (such as local transportation difficulties).
You should be able to claim business was the primary reason for a domestic trip if business days exceed personal days. Be sure to accumulate proof and keep it with your tax records. For example, if your trip is made to attend client meetings, log everything on your daily planner and copy the pages for your tax file. If you attend a convention or training seminar, keep the program and take notes to show you attended the sessions.
Once at the destination, your out-of-pocket expenses for business days are fully deductible. These expenses include lodging, hotel tips, meals (subject to the 50% disallowance rule), seminar and convention fees, and cab fare. Expenses for personal days are nondeductible.
We can help
Questions? Contact us if you want more information about business travel deductions.
Giving away assets during your life will help reduce the size of your taxable estate, which is beneficial if you have a large estate that could be subject to estate taxes. For 2016, the lifetime gift and estate tax exemption is $5.45 million (twice that for married couples with proper estate planning strategies in place).
Even if your estate tax isn’t large enough for estate taxes to be a concern, there are income tax consequences to consider. Plus it’s possible the estate tax exemption could be reduced or your wealth could increase significantly in the future, and estate taxes could become a concern.
That’s why, no matter your current net worth, it’s important to choose gifts wisely. Consider both estate and income tax consequences and the economic aspects of any gifts you’d like to make.
Here are three strategies for tax-smart giving:
1. To minimize estate tax, gift property with the greatest future appreciation potential. You’ll remove that future appreciation from your taxable estate.
2. To minimize your beneficiary’s income tax, gift property that hasn’t appreciated significantly while you’ve owned it. The beneficiary can sell the property at a minimal income tax cost.
3. To minimize your own income tax, don’t gift property that’s declined in value. Instead, consider selling the property so you can take the tax loss. You can then gift the sale proceeds.
For more ideas on tax-smart giving strategies, contact us.
In the global, new media economy, patent due diligence has taken on increased importance in M&A negotiations. Emerging advancements have resulted in patented technology becoming the driving force behind many transactions.
Patent due diligence is crucial in these deals. In such an environment, a patent due diligence team is often required to assess whether a competitor may have a similar patent or whether a similar technology is at work in the marketplace without a patent.
Determining the Value of a Business and its Intellectual Property
Obtaining an independent, formal business valuation is critical in M&A transactions. It helps illustrate that the appraiser does not have a vested interest and the value is not overstated or understated.
When buying, selling, merging or acquiring, a business valuation can be used as a starting point for negotiations and might even provide an estimate that a seller can expect to receive.
Professional appraisers use various methods to calculate the value of a business. In addition to valuing tangible assets, such as real estate and equipment, a business valuation includes intangible assets such as patents, trademarks, copyrights, royalties, customer lists, franchise agreements, goodwill, non-compete covenants and option rights.
M&A transactions are not the only reason why business valuations are performed. They can also be needed in other situations including estate planning, divorce, litigation, partnership dissolution, buy-sell agreements and shareholder actions.
A Component For All Deals
Increasingly, however, patent due diligence is being carefully conducted for businesses without significant patent portfolios. This is due to the ever-transforming nature of business in the 21st Century. When patent due diligence is conducted for businesses with small patent portfolios, patentable assets are sometimes identified.
In addition, due diligence takes into account whether developing technologies and planned rollouts of new products are patentable. Such a proactive exercise can protect proprietary technology and products or services.
A number of potential red flags can also be uncovered during a patent due diligence process. Possible scenario:One of the companies in question is unknowingly infringing upon an existing patent. This information may be crucial in determining the feasibility of a deal centering around the technology or product and would likely be uncovered in a thorough patent due diligence process.
Determining Ownership and Licensing
When it comes to emerging technology, the developer of the technology may own it outright rather than the company for which it was developed. This is crucial information that may make or break a deal. How the patent was registered reflects who owns the technology or service and patent due diligence can verify the ownership status.
Another factor that needs to be assessed is whether or not loans were taken out against the technology. This can affect the ownership interest of the technology. Additionally, the technology — although owned by the company — may have been licensed out to a third party. This license may be exclusive, which prevents the new owner from utilizing the technology or non-exclusive, which allows the technology to be used but lessens the proprietary value of it.
Some patents cover technology, products or services that have a higher value than others. Valuing patents is also a vital component of patent due diligence and one that tends to vary depending upon the industry involved. Generally, competitor patents are assessed to determine their value.
When it comes to new and emerging technologies, however, sophisticated forecasts are utilized to determine a patent's value. At this point in the patent due diligence process a thorough search is often conducted to identify patents that could block future integration or expansion plans.
Sometimes a 'dominant' patent exists which may thwart an expansion of the newly merged or acquired company or require that a licensing fee be paid to the third-party holder of the dominant patent.
Global Patent Implications
Since the U.S. Patent Office only governs patents within the United States, each offshore country that the product or technology will be marketed to needs to be assessed to determine if foreign protection is available in each country and what the process entails to acquire it. Additional searches should be undertaken to determine if such a product or technology is already patented under the system of the country in question.
The Complexity of Patents in M&A
Patent due diligence is one of the most crucial factors in M&A transactions and also one of the most complex. Companies considering a merger often need to create a patent due diligence team in order to clearly determine the issues of ownership and potential infringement upon existing patents both domestically and abroad.
For anyone who takes a spin at roulette, cries out “Bingo!” or engages in other wagering activities, it’s important to be familiar with the applicable tax rules. Otherwise, you could be putting yourself at risk for interest or penalties — or missing out on tax-saving opportunities.
You must report 100% of your wagering winnings as taxable income. The value of complimentary goodies (“comps”) provided by gambling establishments must also be included in taxable income because comps are considered gambling winnings. Winnings are subject to your regular federal income tax rate, which may be as high as 39.6%.
Amounts you win may be reported to you on IRS Form W-2G (“Certain Gambling Winnings”). In some cases, federal income tax may be withheld, too. Anytime a Form W-2G is issued, the IRS gets a copy. So if you’ve received such a form, keep in mind that the IRS will expect to see the winnings on your tax return.
You can write off wagering losses as an itemized deduction. However, allowable wagering losses are limited to your winnings for the year, and any excess losses cannot be carried over to future years. Also, out-of-pocket expenses for transportation, meals, lodging and so forth don’t count as gambling losses and, therefore, can’t be deducted.
To claim a deduction for wagering losses, you must adequately document them, including:
The IRS allows you to document income and losses from wagering on table games by recording the number of the table that you played and keeping statements showing casino credit that was issued to you. For lotteries, your wins and losses can be documented by winning statements and unredeemed tickets.
Please contact us if you have questions or want more information. If you qualify as a “professional” gambler, some of the rules are a little different.
An information piece for clients and prospective clients by Craig HD Field B.Acc, EA, CPA
The tax issues related to deceased estates tend to be largely ignored in the USA. This is largely due to, in my view, the lack of any real tax liability for most estates. However this should not lead us to ignore one key concept – the step-up in basis.
We need to take a step back to understand how an estate is treated for tax purposes. There are two taxes that come into play with deceased estates; one is income tax, which is based on net income of the estate, and the other is the estate tax, which is based on the assets in the estate. When a person passes away their assets, generally, go into an “estate”. An estate is a separate legal entity with its own income tax number. It has to file an annual income tax return if it has income of more than $600, and an Estate Tax return if it has assets worth more than $5,450,000[i].
Once all the assets of the estate have been collected and all bills paid, the executor of the estate will usually wind up the estate and share all the assets among the beneficiaries or heirs. Often the heirs receive this distribution tax free because usually comprises the after tax assets that the deceased person had owned. The value of the assets inherited by the heir in this process is the fair market value of the assets on the date of death[ii]. This is known as the stepped-up basis.
The stepped-up basis is an important number for anyone who owns an asset that they might one day sell. The tax payable on the sale is based on the difference between the net sale proceeds and the basis. The higher the basis, the lower the tax payable on the sale. The stepped up basis estate does exactly this, raises the basis for a future sale.
Joe Smith owns ACME Trading Inc., a business that he started in his garage 20 years ago and is now a large and successful business. Joe started the business with a $5,000 loan from his bank which he has long since repaid. Joe thinks the business is worth $1 million now. He isretired and his daughters, Sammy and Abby, are doing a fine job running the show. Joe wants to give the business to them and is considering his options.
The tax savings available using the step-up in basis can be substantial, as can be seen in the above example. Given these savings, it is important that the fair market value basis is well supported and justified. For this reason it is advisable to retain the services of a reputable and professional appraiser, whether it be real estate, equipment or an accredited business valuation.
For further information on the step-up in basis or to engage Taylor & Morgan for an independent accredited business valuation, please contact us:
[i] The basic exclusion amount for 2016.
[ii] Or the alternate valuation date 6 months after the date of death.
Unless you've extended the due date for filing last year's individual federal income tax return to October 17, the filing deadline passed you by in April. What if you didn't extend and you haven't yet filed your Form 1040? And what if you can't pay your tax bill? This article explains how to handle these situations.
"I Didn't File but I Don't Owe"
Let's say you're certain that you don't owe any federal income tax for last year. Maybe you had negative taxable income or paid your fair share via withholding or estimated tax payments. But you didn't file or extend the deadline because you were missing some records, were too busy, or had some other convincing reason (to you) for not meeting the deadline.
No problem, since you don't owe — right? Wrong.
While it's true there won't be IRS interest or penalties (these are based on your unpaid liability, which you don't have), blowing off filing is still a bad idea. For example:
There are other more esoteric reasons that apply to taxpayers in specific situations.
The bottom line is, you should file a 2015 return, even though you've missed the deadline and believe you don't owe.
"I Owe but Don't Have the Dough"
In this situation, there's no excuse for not filing your 2015 return, especially if you obtained a filing extension to October 17.
If you did extend, filing your return by October 17 will avoid the 5%-per-month "failure-to-file" penalty. The only cost for failing to pay what you owe is an interest charge. The current rate is a relatively reasonable 0.83% per month, which amounts to a 10% annual rate. This rate can change quarterly, and you'll continue to incur it until you pay up. If you still can't pay when you file by the extended October 17 due date, relax. You can arrange for an installment arrangement (see below).
If you didn't extend, you'll continue to incur the 5%-per-month failure-to-file penalty until it cuts off:
While the penalty can't be assessed for more than five months, it can amount to up to 25% of your unpaid tax bill (5 times 5% per month equals 25%). So you can still save some money by filing your 2015 return as soon as possible to cut off the 5%-per-month penalty. Then you'll continue to be charged only the IRS interest rate — currently 0.83% per month — until you pay.
If you still don't file your 2015 return, the IRS will collect the resulting penalty and interest. You'll be charged the failure-to-file penalty until it hits 25% of what you owe. For example, if your unpaid balance is $10,000, you'll rack up monthly failure-to-file penalties of $500 until you max out at $2,500. After that, you'll be charged interest until you settle your account (at the current monthly rate of 0.83%).
Save Money with an Installment Agreement
By now you understand why filing your 2015 return is crucial even if you don't have the money to pay what you owe. But you may ask: When do I have to come up with the balance due? The answer: As soon as possible, if you want to halt the IRS interest charge. If you can borrow at a reasonable rate, you may want to do so and pay off the government, hopefully at the same time you file your return or even sooner if possible.
Alternatively, you can usually request permission from the IRS to pay off your bill in installments. This is done by filing a form with your 2015 return. On the form, you suggest your own terms. For example, if you owe $5,000, you might offer to pay $250 on the first of each month. You're supposed to get an answer to your installment payment application within 31 days of filing the form, but it sometimes takes a bit longer. Upon approval, you'll be charged a $120 setup fee or $52 if you agree to automatic withdrawals from your bank account.
As long as you have an unpaid balance, you'll be charged interest (currently at 0.583% a month, which equates to a 7% annual rate), but this may be much lower than you could arrange with a commercial lender. Other details:
Warning: When you enter into an installment agreement, you must pledge to stay current on your future taxes. The government is willing to help with your 2015 unpaid liability, but it won't agree to defer payments for later years while you're still paying the 2015 tab.
Pay With a Credit Card
You can also pay your federal tax bill with Visa, MasterCard, Discover or American Express. But before pursuing this option, ask about the one-time fee your credit card company will charge and the interest rate. You may find the IRS installment payment program is a better deal.
Filing a 2015 federal income return is important even if you believe you don't owe anything or can't pay right now. If you need assistance or want more information, contact your tax adviser.
You can only deduct losses from an S corporation, partnership or LLC if you “materially participate” in the business. If you don’t, your losses are generally “passive” and can only be used to offset income from other passive activities. Any excess passive loss is suspended and must be carried forward to future years.
Material participation is determined based on the time you spend in a business activity. For most business owners, the issue rarely arises — you probably spend more than 40 hours working on your enterprise. However, there are situations when the IRS questions participation.
To materially participate, you must spend time on an activity on a regular, continuous and substantial basis.
You must also generally meet one of the tests for material participation. For example, a taxpayer must:
There are other situations in which you can qualify for material participation. For example, you can qualify if the business is a personal service activity (such as medicine or law). There are also situations, such as rental businesses, where it is more difficult to claim material participation. In those trades or businesses, you must work more hours and meet additional tests.
Proving your involvement
In some cases, a taxpayer does materially participate, but can’t prove it to the IRS. That’s where good recordkeeping comes in. A good, contemporaneous diary or log can forestall an IRS challenge. Log visits to customers or vendors and trips to sites and banks, as well as time spent doing Internet research. Indicate the time spent. If you’re audited, it will generally occur several years from now. Without good records, you’ll have trouble remembering everything you did.
Passive activity losses are a complicated area of the tax code. Consult with your tax adviser for more information on your situation.
The income tax credit for certain energy-efficient home improvements and equipment purchases was extended through 2016 by the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act). So, you still have time to save both energy and taxes by making these eco-friendly investments.
The credit is for expenses related to your principal residence. It equals 10% of certain qualified improvement expenses plus 100% of certain other qualified equipment expenses, subject to a maximum overall credit of $500, which is reduced by any credits claimed in earlier years. (Because of this reduction, many people who previously claimed the credit will be ineligible for any further credits in 2016.)
Examples of improvement investments potentially eligible for the 10% of expense credit include:
Examples of equipment investments potentially eligible for the 100% of expense credit include:
Manufacturer certifications required
When claiming the credit, you must keep with your tax records a certification from the manufacturer that the product qualifies. The certification may be found on the product packaging or the manufacturer’s website. Additional rules and limits apply. For more information about these and other green tax breaks for individuals, contact us.
When considering a merger or acquisition, the most opportune time to find out about possible culture clashes is obviously before the deal is complete. In fact, one often-cited reason for mergers or acquisitions that fail to get off the ground is concern about potential cultural integration problems. Avoiding such costly pitfalls by conducting a cultural evaluation has become a high priority for most companies considering transactions.
While other facets of due diligence focus heavily upon quantitative factors such as assets and liabilities, a cultural evaluation conducted by a professional adviser assesses more subtle qualitative factors that go into a merger or acquisition. This can include an assessment of the values of each company, as well as each organization's management style, work environment and founding philosophies.
Strategic visions need to be examined to determine areas of compatibility and synergy. In addition, the employees, customers and shareholders of each firm are generally evaluated in an effort to assess areas of common ground and avenues of potential conflict. While no integration between two organizations is ever seamless, significant obstacles can be identified early in the process to determine if potential culture clashes might outweigh the benefits.
Steps at Each Stage of the Deal
While a cultural evaluation is a critical component prior to a merger or acquisition, there are basic factors assessed during all stages of the process:
1. Pre-Merger Stage - A cultural evaluation identifies leadership and middle management styles, as well as each company's values and work environment. An intercultural assessment is conducted to determine a cultural framework to guide early discussions.
2. Active Merger Stage - The evaluation monitors the progress of discussions, keeping the framework of the initial assessment in mind. The team provides a consultative analysis of any potential conflicts in management styles they foresee based on their observations of the negotiations.
3. Planning for the Post-Merger Stage - An evaluation can also provide valuable input that lays the groundwork for integrating the two cultures, management styles and work environments. It is vital that post-merger steps be planned prior to the deal being finalized. It is at this stage when many mergers or acquisition efforts fall through due to culture clashes that create insurmountable obstacles.
In the past, many companies failed to fully comprehend the difficult path of cultural integration that lay ahead. As a result, mergers and acquisitions were finalized without due consideration to this issue and incompatible companies wasted valuable resources attempting to bridge a wide cultural chasm. These days, however, with a thorough cultural evaluation, companies tend to create unions that are more compatible than in the past.
Cross Border M&A: Bridging the International Divide
With the sharp rise in international M&A transactions, cultural evaluations have taken on a whole new meaning. With these complex unions, cross-cultural factors need to be carefully examined prior to a transaction. Cultural differences need to be assessed and the potential benefits of cultural diversity needs to be evaluated for each organization.
In cross-border cultural evaluations, specialized knowledge is often needed with regard to the sensitive areas for each organization. The companies need to forge understanding across cultural divides. The evaluation can provide a detailed analysis of potential cross-cultural pitfalls in the negotiation process as well as the post-integration stage.
An Ounce of Prevention Versus a Pound of Cure
It used to be that the predominant focus of a premerger or acquisition evaluation was the quantitative side of the equation. The financial issues were thought to far outweigh the value of the qualitative issues. These days, however, companies have learned the importance of focusing on the whole picture with the goal of ending up with an integrated plan in which all of the divergent puzzle pieces eventually fit together. With this type of planning, companies can be more confident that the transition will be a smooth one down the road.
Investing in mutual funds is an easy way to diversify a portfolio, which is one reason why they’re commonly found in retirement plans such as IRAs and 401(k)s. But if you hold such funds in taxable accounts, or are considering such investments, beware of these three tax hazards:
If your mutual fund investments aren’t limited to your tax-advantaged retirement accounts, watch out for these hazards. And contact us — we can help you safely navigate them to keep your tax liability to a minimum.
No matter what the economy is like, many businesses see the benefits of allowing customers to make installment payments. With low interest rates, installment sales contracts have become an important tool for companies looking for ways to boost sluggish sales.
In some court cases, consumers' installment contracts have been ruled unenforceable under the "doctrine of unconscionability." This involves a contract so unfair and one-sided that it literally "shocks the conscience of the court."
Before rushing in and offering consumers the ability to buy products or services "on time," companies should understand that both federal and state laws closely regulate installment sales contracts. Failing to meet the terms of these laws can be costly.
In one case, Service Corporation International, the world's largest funeral industry company, settled a consumer lending class-action lawsuit in 2003 that arose from SCI's use of installment contracts for a potential of nearly $3 million.
In the lawsuit, filed in Miami, consumers claimed that under the installment contract used to purchase SCI's "Memorial Plan" SCI charged illegally high processing fees, and failed to disclose finance charges, the amount financed, and the annual interest rate to consumers. In addition, the suit alleged that SCI failed to provide consumers with copies of the paperwork as required by law.
Although SCI admitted no wrong doing in the case, it did agree to pay $50,000 cash to consumers with claims under federal law. The company also agreed to provide coupons worth $175 to some 16,000 customers with claims arising under state law. Finally, the company agreed to an injunction, which bars it from continuing to use the contract in question and lowers the processing fee in the future from $50 to just $10.
While laws vary from state to state, companies should always keep in mind that installment contracts must provide full disclosure of the terms of the loan. The annual percentage rate (APR) of the loan must be specified. Finance charges must be disclosed, and the amount financed (the amount of the loan) must be specified. In addition, added fees for processing, etc. must never be so high that the total cost of the loan is so high that it runs afoul of state usury laws. Care must be taken when drafting a company's contract for installment sales that all necessary disclosures are conspicuously made.
In addition to these consumer credit laws, there are separate federal and state laws involving the advertising of offers involving installment payments.
While full disclosure of the terms of the lending agreement is of paramount importance for any company considering installment contracts, it is also important to remember that many states have additional requirements. For example, some states require that consumer installment contracts be written in clear, concise, plain English. Some even specify the size of the type that must be used when printing such agreements.
Don't bury important aspects of lending agreements in legal jargon and "fine print." Information should be disclosed clearly and conspicuously so that consumers can evaluate the merits of an offer and make an informed purchasing decision.
Executives and other key employees are often compensated with more than just salary, fringe benefits and bonuses: They may also be awarded stock-based compensation, such as restricted stock or stock options. Another form that’s becoming more common is restricted stock units (RSUs). If RSUs are part of your compensation package, be sure you understand the tax consequences — and a valuable tax deferral opportunity.
RSUs vs. restricted stock
RSUs are contractual rights to receive stock (or its cash value) after the award has vested. Unlike restricted stock, RSUs aren’t eligible for the Section 83(b) election that can allow ordinary income to be converted into capital gains.
But RSUs do offer a limited ability to defer income taxes: Unlike restricted stock, which becomes taxable immediately upon vesting, RSUs aren’t taxable until the employee actually receives the stock.
Rather than having the stock delivered immediately upon vesting, you may be able to arrange with your employer to delay delivery. This will defer income tax and may allow you to reduce or avoid exposure to the additional 0.9% Medicare tax (because the RSUs are treated as FICA income).
However, any income deferral must satisfy the strict requirements of Internal Revenue Code Section 409A.
If RSUs — or other types of stock-based awards — are part of your compensation package, please contact us. The rules are complex, and careful tax planning is critical.
Many businesses host a picnic for employees in the summer. It’s a fun activity for your staff and you may be able to take a larger deduction for the cost than you would on other meal and entertainment expenses.
Generally, businesses are limited to deducting 50% of allowable meal and entertainment expenses. But certain expenses are 100% deductible, including expenses:
There is one caveat for a 100% deduction: The entire staff must be invited. Otherwise, expenses are deductible under the regular business entertainment rules.
Whether you deduct 50% or 100% of allowable expenses, there are a number of requirements, including certain records you must keep to prove your expenses.
If your company has substantial meal and entertainment expenses, you can reduce your tax bill by separately accounting for and documenting expenses that are 100% deductible. If doing so would create an administrative burden, you may be able to use statistical sampling methods to estimate the portion of meal and entertainment expenses that are fully deductible.
For more information about deducting business meals and entertainment, including how to take advantage of the 100% deduction, please contact us.
Private equity funds offer a way to get a capital infusion for your company for a period of time while maintaining a role in its operation and avoiding a sale or a merger.
It's called equity recapitalization and it typically involves selling a minority or majority stake in your company to a private equity fund.
With an equity recap, you retain part-ownership and remain involved in the daily operations of the company for an average of five years. Following that period of restructuring and growth, the equity fund typically sells its ownership stake. Then, a second deal is arranged with the equity firm that may involve the owner:
Equity Recap Candidates
Many candidates for equity recap are private business owners looking for personal liquidity or financing to expand their companies. But shareholder regulations may limit a corporate owner's ability to liquidate — or sell — a large portion of personal shares, which keeps the majority of the owner's personal wealth tied up in the company.
With an equity recap, however, the owner is freed up to sell a large stake in the company. An equity recap can offer multiple advantages, including:
Despite the advantages, however, if you consider an equity recap restructuring, you should proceed carefully with professional help both during the initial share transfer and the subsequent resale. There are two pitfalls in particular that you want to clarify, both regarding ownership:
Seek Expert Guidance
One of the most important steps when considering an equity recap is to seek expert guidance in the following areas:
Bottom line: An equity recap is a complex transaction that takes several months to complete and also has an interim period of several years. Yet many business owners have found it a preferable path to selling their companies outright or merging with other corporate entities.
With health care costs continuing to climb, tax-friendly ways to pay for these expenses are more attractive than ever. Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs) and Health Reimbursement Accounts (HRAs) all provide opportunities for tax-advantaged funding of health care expenses. But what’s the difference between these three accounts? Here’s an overview:
HSA. If you’re covered by a qualified high-deductible health plan (HDHP), you can contribute pretax income to an employer-sponsored HSA — or make deductible contributions to an HSA you set up yourself — up to $3,350 for self-only coverage and $6,750 for family coverage for 2016. Plus, if you’re age 55 or older, you may contribute an additional $1,000.
You own the account, which can bear interest or be invested, growing tax-deferred similar to an IRA. Withdrawals for qualified medical expenses are tax-free, and you can carry over a balance from year to year.
FSA. Regardless of whether you have an HDHP, you can redirect pretax income to an employer-sponsored FSA up to an employer-determined limit — not to exceed $2,550 in 2016. The plan pays or reimburses you for qualified medical expenses.
What you don’t use by the plan year’s end, you generally lose — though your plan might allow you to roll over up to $500 to the next year. Or it might give you a 2 1/2-month grace period to incur expenses to use up the previous year’s contribution. If you have an HSA, your FSA is limited to funding certain “permitted” expenses.
HRA. An HRA is an employer-sponsored account that reimburses you for medical expenses. Unlike an HSA, no HDHP is required. Unlike an FSA, any unused portion typically can be carried forward to the next year. And there’s no government-set limit on HRA contributions. But only your employer can contribute to an HRA; employees aren’t allowed to contribute.
Questions? We’d be happy to answer them — or discuss other ways to save taxes in relation to your health care expenses.
Are you thinking about turning a business trip into a family vacation this summer? This can be a great way to fund a portion of your vacation costs. But if you’re not careful, you could lose the tax benefits of business travel.
Reasonable and necessary
Generally, if the primary purpose of your trip is business, expenses directly attributable to business will be deductible (or excludable from your taxable income if your employer is paying the expenses or reimbursing you through an accountable plan). Reasonable and necessary travel expenses generally include:
Expenses associated with taking extra days for sightseeing, relaxation or other personal activities generally aren’t deductible. Nor is the cost of your spouse or children traveling with you.
Business vs. pleasure
How do you determine if your trip is “primarily” for business? One factor is the number of days spent on business vs. pleasure. But some days that you might think are “pleasure” days might actually be “business” days for tax purposes. “Standby days,” for example, may be considered business days, even if you’re not engaged in business-related activities. You also may be able to deduct certain expenses on personal days if tacking the days onto your trip reduces the overall cost.
During your trip it’s critical to carefully document your business vs. personal expenses. Also keep in mind that special limitations apply to foreign travel, luxury water travel and certain convention expenses.
Maximize your tax savings
For more information on how to maximize your tax savings when combining business travel with a vacation, please contact us. In some cases you may be able to deduct expenses that you might not think would be deductible.
The number of mergers and acquisitions has continued to be strong in recent years, and private equity has remained as one of the driving forces.
With private equity capital looking for investments these days, the gates may be open for companies to find opportunities for cash infusions while business owners remain at the helm.
At some point in their business cycles, midsized companies often find they lack the financial resources or management skills to cut overhead and spark growth. In such instances, private equity investors might be able to help.
Rather than investing in companies that they possibly break up and sell off, many private equity firms take another tack. They work with existing management to enhance shareholder value by finding profit solutions, including plant and equipment upgrades, new product development and process improvements that shorten lead times.
In these transactions, a private equity group targets businesses with strong track records to add to its portfolio of companies. Some private equity investors specialize in certain industries. The terms of the deal depend on fundamentals such as the company's financial position, management team, business plan, growth strategy, customer base and objectives for the capital infusion.
Often, private equity investors turn to outside professionals, including accountants and attorneys, to provide due diligence, tax advice, business consulting and other services for their portfolio companies, as well as businesses they are interested in acquiring. (See right-hand box for a list of ongoing services that accounting firms may offer in private equity transactions.)
In addition to providing expertise, some private equity investors operate a purchasing group, which allows their portfolio companies to buy certain goods and services at lower prices than they can obtain themselves.
Retaining Some Control
If the existing business owners hope to retain management after the transaction closes, they must consider the private equity group's horizon for involvement. Generally, a private equity firm's stays engaged for three to seven years, after which it expects a solid return on its investment. The investor's exit plan and ideas should match the vision of existing management. A private equity deal can eventually result in a third-party acquisition, a management buyout, an initial public offering or other exit strategy.
The level of a private equity firm's financial and operational contributions — and a factor business owners must closely evaluate — often depends on the approach investors plan to take: hands-on or hands-off.
With a hands-on, active approach, the goal is to become a business partner. Although day-to-day operational control isn't usually part of the deal, private equity firms expect to have a seat on their portfolio companies' boards. They may also want businesses to:
In a hands-off, passive approach the investing firm basically allows management to run the business until the exit time. However, the firm still expects regular financial reports. And if a business fails to meet agreed targets, defaults on payments, or runs into other difficulties, the private equity investors typically become more involved.
In the end, private equity investment can help ensure some companies thrive. It can also offer employees and management a chance to share in the company's success through incentive-based programs that allow them to buy or earn equity.
Money Isn't the Only Contribution
Generally, private equity investments are value-added propositions that can make major contributions in areas including:
If a company receives an offer from a private equity investment firm, here are some considerations:
Risks. What are the financing conditions? Can the deal be financed at the leverage level proposed? How will that leverage affect the business and its ability to achieve goals? Will the business be over-leveraged?
Financing Structure. Some private equity groups may want to include earnouts, convertible preferred investments, clawbacks and guaranteed return instruments.
Management Details. What terms are being proposed for keeping current management?
Chemistry. Given a choice, businesses should examine the chemistry with potential investors. Also important is a knowledge of the company's industry and investors that can add value rather than simply offer financial re-engineering.
Outside Pros Are Often Tapped
Private equity investors often partner with accounting firms and other professional service providers to help identify target businesses, close transactions and provide operational assistance to companies in their portfolios. Services include:
This year’s stock market volatility can be unnerving, but if you have a traditional IRA, this volatility may provide a valuable opportunity: It can allow you to convert your traditional IRA to a Roth IRA at a lower tax cost.
Contributions to a traditional IRA may be deductible, depending on your modified adjusted gross income (MAGI) and whether you participate in a qualified retirement plan, such as a 401(k). Funds in the account can grow tax-deferred.
On the downside, you generally must pay income tax on withdrawals, and, with only a few exceptions, you’ll face a penalty if you withdraw funds before age 59½ — and an even larger penalty if you don’t take your required minimum distributions (RMDs) after age 70½.
Roth IRA contributions, on the other hand, are never deductible. But withdrawals — including earnings — are tax-free as long as you’re age 59½ or older and the account has been open at least five years. In addition, you’re allowed to withdraw contributions at any time tax- and penalty-free.
There are also estate planning advantages to a Roth IRA. No RMD rules apply, so you can leave funds growing tax-free for as long as you wish. Then distributions to whoever inherits your Roth IRA will be income-tax-free as well.
The ability to contribute to a Roth IRA, however, is subject to limits based on your MAGI. Fortunately, anyone is eligible to convert a traditional IRA to a Roth. The catch? You’ll have to pay income tax on the amount you convert.
This is where the “benefit” of stock market volatility comes in. If your traditional IRA has lost value, converting to a Roth now rather than later will minimize your tax hit. Plus, you’ll avoid tax on future appreciation when the market stabilizes.
Of course, there are more ins and outs of IRAs that need to be considered before executing a Roth IRA conversion. If your interest is piqued, discuss with us whether a conversion is right for you.
It seems like a simple question: How many full-time workers does your business employ? But, when it comes to the Affordable Care Act (ACA), the answer can be complicated.
The number of workers you employ determines whether your organization is an applicable large employer (ALE). Just because your business isn’t an ALE one year doesn’t mean it won’t be the next year.
50 is the magic number
Your business is an ALE if you had an average of 50 or more full time employees — including full-time equivalent employees — during the prior calendar year. Therefore, you’ll count the number of full time employees you have during 2016 to determine if you’re an ALE for 2017.
Under the law, an ALE:
A full-timer is generally an employee who works on average at least 30 hours per week, or at least 130 hours in a calendar month.
A full-time equivalent involves more than one employee, each of whom individually isn’t a full-timer, but who, in combination, are equivalent to a full-time employee.
If you’re hiring employees for summer positions, you may wonder how to count them. There’s an exception for workers who perform labor or services on a seasonal basis. An employer isn’t considered an ALE if its workforce exceeds 50 or more full-time employees in a calendar year because it employed seasonal workers for 120 days or less.
However, while the IRS states that retail workers employed exclusively for the holiday season are considered seasonal workers, the situation isn’t so clear cut when it comes to summer help. It depends on a number of factors.
We can help
Contact us for help calculating your full-time employees, including how to handle summer hires. We can help ensure your business complies with the ACA.
Selling a business requires a great deal of time and effort on both the buyer's and seller's behalf. In addition, determining the right time to finalize the transaction can make a huge difference in the price.
Obviously, determining when to sell a business is primarily the seller's decision. In order to help determine the optimal time to sell your business, here are 12 questions to consider:
1. Who is the ideal buyer for the business?Specifically, what attributes does the buyer need in order to complete the acquisition and successfully operate the company? Has anyone expressed interest in the past? Are those individuals appropriately qualified to make the purchase?
2. Do you have the appropriate team of advisers available to help complete the sale? For example, does your attorney have the appropriate experience reviewing the purchase agreements?
3. Do you know what the business is worth? Can you provide support to a potential buyer, for example, a third-party valuation report? If the buyer engages a valuation expert, do you have all of the appropriate information readily available to support their efforts (financial statements, customer lists etc.).
4. What role do you wish to have after the acquisition? Would you like a consulting contract or other position for yourself and other executives? Further, what level of income do you need to support your current lifestyle as well as your personal goals once the business is sold?
5. Is the business currently performing at a level that would attract buyers?If not, what steps do you need to take to improve the operations?
6. Do you have the right team in place? One important asset you're selling is the employees who work at your company. From the buyer's point of view, is the team properly trained and is there a winning company culture?
7. What about the outside team? In addition to the employees, you are also selling your customer base and relationships with vendors that took time to build.
8. Are the company's financial statements reviewed or audited by a reputable accounting firm?
9. Have you documented all of the company's processes and procedures?Do they accurately detail how the business performs on a day-to-day basis?
10. From a buyer's perspective, does the business have a strong track record of financial performance? How confident would a buyer be that the business will maintain or improve once bought?
11. Have you considered how the sale should be structured for federal tax purposes? The tax consequences can vary widely depending on how long you've owned the business, the type of entity (C corporation, S corporation, LLC, etc.) and exactly how the deal is structured. By planning ahead with your tax adviser, you may be able to substantially reduce the tax bill. Don't forget to assess state and local tax issues.
12. What will you tell employees, vendors and shareholders who may hear about a proposed sale? Controlling rumors is very important in terms of keeping the company operating at peak performance.
Words of Caution: Be careful not to invest too much time in one potential buyer. A buyer may not complete the transaction so it can be a smart move to negotiate with two or three potential buyers, at least in the early stages of the sales process. Doing so also creates the potential for a bidding war.
Keep in mind that sellers, as well as buyers, must conduct due diligence investigations. For example, assess the creditworthiness of a potential buyer by obtaining credit reports and financial statements. Also check the buyer's business reputation and management experience. Do an internet search for information about any unethical business practices the buyer might have engaged in. Check public records to uncover any outstanding liens and judgments against the buyer or related parties, undisclosed litigation, and so forth.
Once all of the questions above have been addressed, consider developing an offering memo that summarizes the key elements of your business. The information needed to complete the memo can often be derived from your company's five-year business plan. It should include the history of the company, a list of markets or customers served, financial performance to date, as well as general comments regarding future growth potential.
Although the kids might still be in school for a few more weeks, summer day camp is rapidly approaching for many families. If yours is among them, did you know that sending your child to day camp might make you eligible for a tax credit?
The power of tax credits
Day camp (but not overnight camp) is a qualified expense under the child and dependent care credit, which is worth 20% of qualifying expenses (more if your adjusted gross income is less than $43,000), subject to a cap. For 2016, the maximum expenses allowed for the credit are $3,000 for one qualifying child and $6,000 for two or more.
Remember that tax credits are particularly valuable because they reduce your tax liability dollar-for-dollar — $1 of tax credit saves you $1 of taxes. This differs from deductions, which simply reduce the amount of income subject to tax. For example, if you’re in the 28% tax bracket, $1 of deduction saves you only $0.28 of taxes. So it’s important to take maximum advantage of the tax credits available to you.
Rules to be aware of
A qualifying child is generally a dependent under age 13. (There’s no age limit if the dependent child is unable physically or mentally to care for him- or herself.) Special rules apply if the child’s parents are divorced or separated or if the parents live apart.
Eligible costs for care must be work-related, which means that the child care is needed so that you can work or, if you’re currently unemployed, look for work. However, if your employer offers a child and dependent care Flexible Spending Account (FSA) that you participate in, you can’t use expenses paid from or reimbursed by the FSA to claim the credit.
Are you eligible?
These are only some of the rules that apply to the child and dependent care credit. So please contact us to determine whether you’re eligible.
It doesn't matter where you are in the life span of your business. If you plan to sell someday or merge with another business — even years from now — you need to begin getting ready for the due diligence process. In today's environment, the M&A process is very detailed. Here is a list of issues that your business may be asked to document. The sooner you start preparing, the better.
As the school year draws to a close and the days lengthen, you may be one of the many homeowners who are getting ready to put their home on the market. After all, in many locales, summer is the best time of year to sell a home. But it’s important to think not only about the potential profit (or loss) from a sale, but also about the tax consequences.
If you’re selling your principal residence, you can exclude up to $250,000 ($500,000 for joint filers) of gain — as long as you meet certain tests. Gain that qualifies for exclusion also is excluded from the 3.8% net investment income tax.
To support an accurate tax basis, be sure to maintain thorough records, including information on your original cost and subsequent improvements, reduced by any casualty losses and depreciation claimed based on business use. Keep in mind that gain that’s allocable to a period of “nonqualified” use generally isn’t excludable.
A loss on the sale of your principal residence generally isn’t deductible. But if part of your home is rented out or used exclusively for your business, the loss attributable to that portion may be deductible.
If you’re selling a second home, be aware that it won’t be eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 exchange. Or you may be able to deduct a loss.
If you’re considering putting your home on the market, please contact us to learn more about the potential tax consequences of a sale.
In today's economic environment, one major concern for businesses is maintaining a healthy cash flow.
If your company is feeling the squeeze of a tight economy — and tight credit — its ability to manage cash flow is critical. Enterprises that successfully practice good cash management generally survive and prosper. Those that don't are likely to be undone by the weight of increasing debt and the inability to pay employees and suppliers.
Cash flow is the heartbeat of your business and keeping it stable requires juggling most aspects of your operation, including accounts receivables, payroll, credit and inventory.
With that in mind, here are a dozen strategies to strengthen your company's cash flow:
1. Take the maximum time to pay your suppliers. Essentially, this amounts to an interest-free line of credit and gives you more time to use your working capital.
2. Check to see if your suppliers offer payment incentives. Some companies offer a discount for paying early. Even if your business regularly purchases a substantial amount from another company, you're in a good position to negotiate favorable payment terms. In addition to early payment incentives, ask for special terms that accommodate your cash flow requirements. For example, negotiate to make payments after your busy season.
Many suppliers are willing to offer incentives, in order to speed up their own receivables and cement long-term relationships with good customers.
3. On your end, offer customer discounts to early payers. Consider providing a one to two percent discount, if bills are paid within ten days of delivery. It may cost you a little, but it can also light a fire under slow payers — and have a major positive effect on your cash flow.
4. Examine payment terms and your billing schedule. If possible, send an invoice with your shipments — not separately afterward. Waiting until the end of the month can add as many as 30 extra days to your cash flow conversion period. If your business provides a service and it is appropriate, ask customers for a deposit before work begins.
Remind customers of your credit terms. Check your invoices or statements to ensure there is a clear indication of when payment is due. Encourage customers to pay with fund transfers or Internet payments.
5. Closely track and collect overdue accounts. Have your accounting department prepare fast, accurate reports on overdue payments. Monitoring accounts can reveal early warning signs. Act immediately on past-due accounts and use a collection agency, if necessary. Telephone tardy customers and obtain a payment commitment by a specific date. Consider giving staff members financial rewards when they collect long-overdue bills.
Don't keep delivering services or shipping goods when payments are far behind. Put problem customers on a C.O.D. system, or stop shipments altogether.
6. Consider establishing an interest penalty for late payments. Once a bill becomes long overdue, you may have to resort to penalties. While you can, and should, sympathize with hard-pressed customers for a reasonable amount of time, don't let their problems drag your cash flow down.
7. Don't extend credit without taking the proper precautions. Require all new customers to fill out credit applications. Request and check credit references.
A written agreement at the onset of a business relationship can help avoid misunderstandings later on. Spell out the terms of the arrangement on your credit application. You might want to go one step further and have customers sign a separate statement or contract identifying when payments are due and that the other party is liable for any legal or arbitration costs if a bill is not paid.
If your business is extending credit to a financially troubled company, insist on securing personal guarantees from the owners, as well as their spouses.
8. Trim expenses and cut unnecessary spending. Look for ways to reduce waste in office supplies, company vehicles, cell phones and land lines, utilities, business travel, overtime pay, insurance and more. Ask your employees for cost-cutting suggestions. They are likely to come up with ideas management hasn't thought about.
Dispose of unused vehicles, vacant real estate and machinery you don't need. You could be paying insurance, maintenance and storage costs on them. Selling idle assets can result in a cash flow boost, while donating to a qualified charity can be a tax-wise move.
9. Keep your inventory lean. As a rule of thumb, the expense of maintaining stock in inventory averages about two percent of the cost of those goods for each month not sold. If your business carries an item for a year, you're down 24 percent. It's hard to overcome this kind of cost handicap — especially in hard times.
Don't fall into the trap of hanging onto slow-moving inventory in order to avoid admitting you made a mistake. Cut your losses on old and outdated inventory items or donate them and claim a charitable tax deduction.
10. Speaking of tax deductions, look for valuable opportunities you may have overlooked. The complex Internal Revenue Code is filled with breaks for various industries and taxpayers in certain situations. Consult with your tax adviser to see if there are potential opportunities or steps you should take by the end of the year to reduce your tax bill.
11. Free up cash by leasing rather than buying. Leasing computer equipment, cars, facilities, tools and other gear generally costs more than buying, but you avoid tying up cash. You can also limit your exposure with short-term leases.
12. Examine prices. Many company owners and executives won't consider increasing prices in a tough economy because they're afraid customers will head to the competition. However, it may be necessary if your prices aren't keeping pace with expenses. If you do raise prices, explain the reasons to your customers and, if possible, give them notice. Emphasize the value of your products or services.
These ideas are just some of the ways your company can improve cash flow. Consult with your accountant who can help you review cash flow statements, find weaknesses and come up with solutions to maintain a healthy balance between the money flowing in and out of your organization.
By investing in qualified small business (QSB) stock, you can diversify your portfolio and enjoy two valuable tax benefits:
1. Tax-free gain rollovers. If within 60 days of selling QSB stock you buy other QSB stock with the proceeds, you can defer the tax on your gain until you dispose of the new stock. The rolled-over gain reduces your basis in the new stock. For determining long-term capital gains treatment, the new stock’s holding period includes the holding period of the stock you sold.
2. Exclusion of gain. Generally, taxpayers selling QSB stock are allowed to exclude up to 50% of their gain if they’ve held the stock for more than five years. But, depending on the acquisition date, the exclusion may be greater: The exclusion is 75% for stock acquired after Feb. 17, 2009, and before Sept. 28, 2010, and 100% for stock acquired on or after Sept. 28, 2010. The acquisition deadline for the 100% gain exclusion had been Dec. 31, 2014, but Congress has made this exclusion permanent.
The taxable portion of any QSB gain will be subject to the lesser of your ordinary-income rate or 28%, rather than the normal long-term gains rate. Thus, if the 28% rate and the 50% exclusion apply, the effective rate on the QSB gain will be 14% (28% × 50%).
Keep in mind that these tax benefits are subject to additional requirements and limits. For example, to be a QSB, a business must be engaged in an active trade or business and must not have assets that exceed $50 million.
Consult us for more details before buying or selling QSB stock. And be sure to consider the nontax factors as well, such as your risk tolerance, time horizon and overall investment goals.
It’s not unusual for the IRS to conduct audits of qualified employee benefit plans, including 401(k)s. Plan sponsors are expected to stay in compliance with numerous, frequently changing federal laws and regulations.
For example, have you identified all employees eligible for your 401(k) plan and given them the opportunity to make deferral elections? Are employee contributions limited to the amounts allowed under tax law for the calendar year? Does your 401(k) plan pass nondiscrimination tests? Traditional 401(k) plans must be regularly tested to ensure that the contributions don’t discriminate in favor of highly compensated employees.
If the IRS uncovers compliance errors and the plan sponsor doesn’t fix them, the plan could be disqualified.
What happens if qualified status is lost?
Tax law and administrative details that may seem trivial or irrelevant may actually be critical to maintaining a plan’s qualified status. If a plan loses its tax-exempt status, each participant is taxed on the value of his or her vested benefits as of the disqualification date. That can result in large (and completely unexpected) tax liabilities for participants.
In addition, contributions and earnings that occur after the disqualification date aren’t tax-free. They must be included in participants’ taxable incomes. The employer’s tax deductions for plan contributions are also at risk. There are also penalties and fees that can be devastating to a business.
Finally, withdrawals made after the disqualification date cannot be rolled over into other tax-favored retirement plans or accounts (such as IRAs).
The good news is that 401(k) plan errors can often be voluntarily corrected. We can help determine if changes should be made to your company’s qualified plan to achieve and maintain compliance. Contact us for more information.
The major U.S. card companies — including Visa, MasterCard, Discover and American Express — voluntarily imposed a shift of liability for counterfeit "card present" transactions that went into effect for most merchants on October 1, 2015. (Gas stations with automated fuel dispensers have until October 1, 2017, before their liability on counterfeit cards will shift.)
As a result of this liability shift, brick-and-mortar stores are expected to upgrade their card readers and processing systems to accept chip cards, also known as Europay, MasterCard and Visa (EMV) cards. If a store fails to upgrade and accepts an in-store payment with a chip card using a magnetic-only card reader, the store — not the card issuer — is generally responsible for replacing any fraud losses.
CardHub, a credit card comparison website, recently followed up on the status of EMV compliance in the United States with its "2016 EMV Adoption Survey." It revealed that 42% of U.S. retailers still haven't upgraded the terminals in any of their stores. What's more, the adoption rate is no better for merchants who've been hacked in the past. The study found that, among U.S. retailers who've experienced a data breach in the last five years, 43% haven't upgraded their card readers.
Although upgrading may be costly, especially for small banks and retailers, EMV technology provides greater protection for card issuers, merchants and consumers. By using a card without a chip or shopping at stores that aren't EMV-compliant, you're putting your accounts at greater risk of fraud. Here's why.
Magnetic Strips vs. Chips
How do chip cards help fight payment card fraud? A chip card contains a tiny metallic square that's actually a minicomputer. Chip cards generate a unique encrypted code for each transaction, so they're more secure than magnetic cards when read by an EMV-compliant processing device. For now, most U.S. chip cards call for dual authorization with card holder signatures, unless the card previously required a personal identification number (PIN). Eventually, the United States may transition to chip-and-PIN cards, which would add a layer of fraud protection.
Conversely, magnetic cards store static information, similar to old-fashioned music cassette tapes, making them easy targets for hackers. If a thief steals data from a magnetic credit card, he or she can copy the unchanging data onto a cloned card and use it to make purchases or withdraw cash.
Card issuers in Canada and several European, Asian and Latin American countries have already seen payment card fraud rates drop significantly after they switched from magnetic cards to chip cards. In addition, most foreign chip card readers already require PINs.
In the past, card issuers — including banks, credit unions and other financial institutions that issue debit or credit cards — generally accepted all liability for counterfeit payment card transactions. But on October 1, 2015, the liability for counterfeit in-store payment card transactions generally shifted to the party (either the issuer or merchant) that doesn't support EMV.
The liability shift doesn't change the responsibility for online purchases, in-store transactions conducted using lost or stolen cards, or in-store transactions conducted using cards that only offer magnetic strips. Payment card issuers will continue to be liable for payment fraud that occurs with these types of transactions.
Consumer Perceptions of Chip Cards
Many consumers remain indifferent or uncertain about the benefits that chip cards offer. CardHub's survey revealed that:
It's easy to tell if you're using EMV technology. Chip cards have a tiny metallic square on the front. Most chip cards will also have a magnetic strip on the back, at least for now. These may be used if the merchant's card reader isn't chip-enabled or the chip reader (or card) malfunctions.
You know a store has installed chip-enabled terminals if the checkout clerk asks you to "dip" your card into the bottom of the reader, rather than "swipe" the magnetic strip. You also might notice that chip card payments take about 10 seconds longer to process than magnetic strip card payments. This gives the chip card's minicomputer time to communicate with the merchant's terminal.
Protect Your Accounts
Although consumers aren't directly affected by this shift of liability, they'll benefit from more secure credit and debit cards. Criminals steal billions of dollars through payment card frauds each year. When fraud strikes, it's a huge inconvenience to card holders.
Victims might, for example, need to dispute fraudulent charges on their monthly card statements, cancel their existing cards and wait for new cards to arrive. They should also switch all automated bill payments and online shopping accounts to the new card numbers and expiration dates.
Fortunately, chip card technology can help reduce your chances of becoming the next payment card fraud victim. But you only get the added layer of protection if you use chip cards and shop at stores that have updated their equipment and processing systems. Contact your financial or legal advisers for more information.
Now that the April 18 income tax filing deadline has passed, it may be tempting to set aside any thought of taxes until year end is approaching. But don’t succumb. For maximum tax savings, now is the time to start tax planning for 2016.
A tremendous number of variables affect your overall tax liability for the year. Starting to look at these variables early in the year can give you more opportunities to reduce your 2016 tax bill.
For example, the timing of income and deductible expenses can affect both the rate you pay and when you pay. By regularly reviewing your year-to-date income, expenses and potential tax, you may be able to time income and expenses in a way that reduces, or at least defers, your tax liability.
In other words, tax planning shouldn’t be just a year-end activity.
In recent years, planning early has been a challenge because there were a lot of expired tax breaks where it was uncertain whether they’d be extended for the year. But the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) extended a wide variety of tax breaks through 2016, or, in some cases, later. It also made many breaks permanent.
For example, the PATH Act made permanent the deduction for state and local sales taxes in lieu of state and local income taxes and tax-free IRA distributions to charities for account holders age 70½ or older. So you don’t have to wait and see whether these breaks will be available for the year like you did in 2014 and 2015.
To get started on your 2016 tax planning, contact us. We can discuss what strategies you should be implementing now and throughout the year to minimize your tax liability.
Starting a new business is an exciting time. But before you even open the doors, you generally have to spend a lot of money. You may have to train workers and pay for rent, utilities, marketing and more.
Entrepreneurs are often unaware that many expenses incurred by start-ups can’t be deducted right away.
How expenses are handled on your tax return
When planning a new enterprise, remember these key points:
An important decision
Time may be of the essence if you have start-up expenses that you’d like to deduct this year. You need to decide whether to take the elections described above. Recordkeeping is important. Contact us about your business start-up plans. We can help with the tax and other aspects of your new venture.
If you suffer damage to your home or personal property, you may be able to deduct these “casualty” losses on your federal income tax return. A casualty is a sudden, unexpected or unusual event, such as a natural disaster (hurricane, tornado, flood, earthquake, etc.), fire, accident, theft or vandalism. A casualty loss doesn’t include losses from normal wear and tear or progressive deterioration from age or termite damage.
Here are some things you should know about deducting casualty losses:
When to deduct. Generally, you must deduct a casualty loss in the year it occurred. However, if you have a loss from a federally declared disaster area, you may have the option to deduct the loss on an amended return for the immediately preceding tax year.
Amount of loss. Your loss is generally the lesser of 1) your adjusted basis in the property before the casualty (typically, the amount you paid for it), or 2) the decrease in fair market value of the property as a result of the casualty. This amount must be reduced by any insurance or other reimbursement you received or expect to receive. (If the property was insured, you must have filed a timely claim for reimbursement of your loss.)
$100 rule. After you’ve figured your casualty loss on personal-use property, you must reduce that loss by $100. This reduction applies to each casualty loss event during the year. It doesn’t matter how many pieces of property are involved in an event.
10% rule. You must reduce the total of all your casualty or theft losses on personal-use property for the year by 10% of your adjusted gross income (AGI). In other words, you can deduct these losses only to the extent they exceed 10% of your AGI.
Have questions about deducting casualty losses? Contact us!
Tax Day is right around the corner. Have you filed your federal tax return yet? The filing deadline to submit 2015 individual federal income tax returns is Monday, April 18, 2016, rather than the traditional April 15 date. Washington, D.C., will celebrate Emancipation Day on Friday, April 15, which pushes the deadline to the following Monday for most of the nation. The deadline will be Tuesday, April 19, in Maine and Massachusetts, due to Patriots' Day.
Fortunately, there's still time to take steps to reduce your 2015 federal tax liability. Here are five last-minute ideas for individuals and small businesses
Ground Rules for Deductible Contributions to Traditional IRAs
Making a tax deductible contribution to a traditional IRA is an easy and quick way to lower your tax liability. But this doesn't work for everyone. Here's a checklist to see if you might be eligible for this last-minute strategy:
1. Have you and your spouse (if you're married) reported sufficient "earned income" in 2015 to offset what you plan to contribute to your IRA for 2015?
2. Were you younger than 70 1/2 on December 31, 2015? If you turned 70 1/2 last year, you can't make a deductible contribution.
3. Were you covered by an employer-sponsored retirement plan in 2015? If so, your eligibility to make a deductible contribution to a traditional IRA in 2015 is phased out at the following income levels:
For example, suppose you're a 40-year-old single taxpayer in the 25% federal income tax bracket who makes a $5,500 deductible IRA contribution on April 1. If you meet all of the eligibility requirements, this move would reduce your federal income tax bill by $1,375 (plus any state income tax savings).
On the other hand, if you're married and file jointly and both spouses were over 50 years old on December 31, 2015, you could potentially make two $6,500 contributions (for a total of $13,000). If you meet all of the eligibility requirements, these contributions would reduce your joint federal income tax bill by $3,250 if you are in the 25% bracket (plus any state income tax savings).
1. Individuals Can Choose to Deduct State and Local Sales Taxes
Congress recently made permanent the option to claim a federal income tax deduction for general state and local sales taxes as opposed to deducting state and local income taxes. The option is now available for 2015 and beyond. This is good news for individuals who live in states with low or no personal income taxes, as well as for those who owe little or no state taxes.
If you choose the sales tax option, you can use a table provided by the IRS to calculate your sales tax deduction. Your deduction will vary based on your state of residence, income, and personal and dependent exemptions.
If you use the IRS table, you can also add on actual sales tax amounts from major purchases, such as:
In other words, you can deduct actual sales taxes for these major purchases on top of the predetermined amount from the IRS table. Alternately, if you saved receipts from your 2015 purchases, you can add up the actual sales tax amounts and deduct the total if that gives you a bigger write-off.
2. Qualified Individuals Can Make Deductible IRA Contributions
If you haven't made the maximum deductible traditional IRA contribution for the 2015 tax year, you can still make a contribution between now and the tax filing deadline and claim the resulting write-off on your 2015 return. The maximum deductible contribution for 2015 was $5,500 per taxpayer — or $6,500 if you or your spouse was age 50 or older as of December 31, 2015.
However, there are a couple of catches. First, you must have enough 2015 earned income from jobs, self-employment or alimony received to equal or exceed your IRA contributions for the 2015 tax year. If you are married, either spouse (or both) can provide the necessary earned income.
Second, deductible IRA contributions are gradually phased out if your income was too high last year. (See "Ground Rules for Deductible Contributions to Traditional IRAs" at right.) Fortunately, the phaseout ranges are much higher than they were a few years ago.
3. Business Owners Can Establish SEPs
If you work for your own small business and haven't yet set up a tax-favored retirement plan for yourself, you can establish a simplified employee pension (SEP). Unlike other types of small business retirement plans, a SEP can be created this year and still generate a deduction on last year's return.
Important note. If you are self-employed and extend the filing deadline for your 2015 Form 1040 until October 17, you'll have until that late date to take care of the paperwork and make a deductible contribution for 2015.
The deductible contribution to a SEP can be up to 20% of your 2015 self-employment income or up to 25% of your 2015 salary if you work for your own corporation. The absolute maximum amount you can contribute for the 2015 tax year is $53,000. If you have the cash on hand to fund a SEP contribution, the tax savings can be substantial.
For example, if you're self-employed and in the 28% federal income tax bracket, a $30,000 SEP contribution could lower your 2015 federal income tax bill by $8,400 (plus any state income tax savings). In many cases, the tax savings could fund a big chunk of your contribution.
Establishing a SEP is simple. Your bank or financial adviser can help you complete the required paperwork. But don't jump the gun if your business has employees. Your SEP will likely have to cover them and make contributions to their accounts, which could be cost prohibitive. Your tax and financial advisers can help you decide whether establishing a SEP is a smart move for your business.
4. Small Business Owners Can Claim Section 179 Deduction for Real Property Expenditures
Section 179 provides a federal income tax break that allows eligible small businesses to deduct the entire cost of qualifying asset purchases (including software) in the year they're placed in service (rather than depreciating them over their useful lives). Real property improvement costs have traditionally been ineligible for the Sec. 179 deduction. But there's an exception for qualified real property improvements placed in service in tax years beginning in 2015.
You can claim a Sec. 179 deduction for real property expenditures of up to $250,000 for:
The Sec. 179 allowance for real estate had previously expired at the end of 2014, but recent legislation made it permanent for 2015 (and beyond). Additional rules and restrictions may apply, so consult your tax adviser before claiming Sec. 179.
5. Businesses Can Take Advantage of Favorable Provisions in Tangible Property Regulations
In general, IRS regulations require most tangible property costs to be capitalized and depreciated over their useful lives, rather than deducted in the tax year that they're placed in service. But there are a few taxpayer-friendly exceptions, including:
Consult with a Tax Pro
These are some of the more common last-minute tax-saving maneuvers that individuals and small business owners can take before Tax Day. As always, your tax professionals can advise you on the optimal tax-saving strategies for your specific situation.
The Baby Boomer generation reached its peak in 1957 at an annual birth rate of about 4.3 million people. It's hard to believe that these Baby Boomers will turn 59 years old in 2016. An important rite of passage that comes with this age is that they'll soon be eligible to withdraw funds from their qualified retirement funds without incurring the 10% early withdrawal penalty. But this is just the start of milestones they'll encounter as they face retirement.
Like many 60-somethings, these Boomers might not be ready — emotionally or financially — for full retirement. Ready or not, there are key financial decisions everyone needs to eventually make and reasons you can't afford to ignore financial matters as the golden years approach.
Age 59 1/2: Withdraw Retirement Funds without Incurring Penalties
Once you hit age 59 1/2, you can take money out of your IRAs, 401(k) plans, pensions and tax-deferred annuities — for any reason whatsoever — without incurring the 10% early withdrawal tax penalty. Obviously it's unwise to go on a spending spree at age 59 1/2, because these funds must last for the rest of your life.
Now is the time to budget how much to draw on your retirement savings and when. Also remember to consider taxes. Distributions from traditional IRAs, 401(k) plans and other employer-sponsored retirement plans are taxed as ordinary income. That's because original contributions to these accounts were tax deductible.
However, earnings on qualified distributions from Roth IRAs can be taken on a federal income-tax-free basis. That's because contributions to these accounts weren't originally tax deductible. (A qualified distribution is one made after age 59 1/2 and at least five years after contributions to the Roth IRA began.)
Age 62: Decide When To Receive Social Security Benefits
You qualify to start receiving Social Security benefits at age 62, based on your work history or your spouse's work history. But if you decide to take benefits before your full retirement age, they'll be reduced at a rate of 0.5% for each month you begin taking Social Security early. When making this decision, look at your health and family history of longevity.
Your full retirement age depends on when you were born. For example, people born in 1957 will be eligible to receive 100% of their benefits when they reach age 66 1/2 years. Those born in 1960 or later must reach age 67 to be eligible for full benefits.
Alternatively, you may delay receiving benefits until after your full retirement age. In that case, your benefits will increase by 8% annually. Under current law, this increase will be automatically added each month from the moment you reach full retirement age until you start taking benefits or reach age 70.
If you continue to work and start receiving benefits before full retirement age, your benefits will be reduced by $1 for every $2 in earnings above the prevailing annual limit of $15,720 in 2016. If you work during the year in which you attain full retirement age, your benefits will be reduced by $1 for every $3 in earnings over a different annual limit of $41,880 in 2016 until the month you reach full retirement age. Once you have attained full retirement age, you can keep working and your benefits won't be reduced, regardless of how much you earn.
Full benefits from Social Security typically replace about 40% of an average worker's income after retiring. Benefit levels are adjusted annually for the cost of living. But, there's no cost of living increase scheduled in 2016. Depending on an individual's overall income (or the combined income of a married couple that files a joint tax return), some portion of Social Security benefits might be subject to income tax.
When you start receiving Social Security, other family members may also be eligible for payments, including qualifying children and current (and former) spouses. In addition, your family may continue to be eligible for a percentage of your benefits after you die.
Age 65: Choose Medicare and Medigap Coverage
The Social Security Administration recommends applying for Medicare benefits three months before you reach age 65. If you elect to receive Social Security benefits before your full retirement age, you'll automatically be enrolled in Medicare Parts A and B without an additional application.
Hospitalization coverage. Medicare Part A covers a portion of your costs for a semi-private room during your stay in a hospital, skilled nursing facility or hospice, after you pay an initial hospital stay deductible. It also covers some home health care. Medicare only pays for up to 100 days in a long-term care facility and only following a qualified hospital stay. Other rules and restrictions apply.
If you or your spouse paid Medicare taxes while you worked, you're generally eligible for Part A coverage for free. If you're not eligible for free coverage, you can pay a monthly premium in 2016 of up to $411, depending on your income.
Medical insurance coverage. Even if you don't qualify for Medicare Part A coverage, you may be eligible to enroll in Medicare Part B coverage. Part B medical insurance covers doctor bills for treatment in or out of the hospital, as well as the costs of medical equipment, tests and services provided by clinics and laboratories. It doesn't cover other medical expenses, such as routine physical exams or medications.
When Medicare Part B covers an item, it generally pays 80% of the amount it approves (after a $166 deductible in 2016) and you pay the remaining 20%. However, Part B covers 100% of approved charges for home health care, clinical laboratory services, and flu and pneumonia vaccines.
Part B coverage costs $121.80 a month in 2016 when an individual has an annual income of $85,000 or less ($170,000 or less for married couples filing joint tax returns). People with higher annual incomes pay higher premiums.
Medigap coverage. This fills the gaps that exist in Medicare, such as co-payments and co-insurance. It's usually a type of private health insurance that's governed by federal and state laws. In some cases, you might opt for Medicare Part C coverage, which may function like a Medigap policy administered by Medicare.
The optimal time to buy Medigap insurance is within the first six months you're at least 65 years old and enrolled in Medicare Part B. That way, you won't need to undergo a medical underwriting. For those with existing health conditions, this enables them to buy a policy at the same price that is charged for people in good health.
Important note. Before you travel outside the United States, find out whether Medicare will cover you while you're away. Generally, the coverage is limited or nonexistent. If you don't have coverage when traveling overseas, you can purchase supplemental policies to cover medical expenses incurred outside the United States, including evacuations.
Prescription drug coverage. Medicare Part D covers prescription drugs. The premium you pay today is based on your income as reported on your IRS tax return from the last two years. So if your income from 2014 was above a certain limit, you'd currently pay an income-related monthly adjustment amount in addition to your plan premium.
Individual taxpayers who had income of $85,000 or less in 2014 (or married couples filing jointly with income of $170,000 or less in 2014) would currently pay no additional premium for Part D coverage. The highest monthly premium for Part D coverage is $72.90 (plus your plan premium) for individual taxpayers who had income above $214,000 in 2014 (or married couples filing jointly with income above $428,000 for 2014).
Important note. You may be charged a late enrollment penalty if you go without credible prescription drug coverage through Medicare Part D or another source for any continuous period of 63 days or more after your initial enrollment period ends (three months after the month you turn 65).
Age 70 1/2: Take RMDs — or Else
Many people are surprised to learn that the IRS generally mandates annual distributions from traditional IRAs and qualified retirement plans once they reach age 70 1/2. You also must pay income tax on these required minimum distributions (RMDs). No mandatory distributions are required from Roth IRAs while the original owner of the account is alive.
RMDs are based on your account balance and life expectancy. The initial RMD is for the year you turn 70 1/2, but you can postpone that payout until as late as April 1 of the following year. If you chose that option, you must take two RMDs in the following year: The first must be taken by April 1, and the second must be taken by December 31. For each subsequent year, you must take RMDs by December 31.
The penalty for not taking your full RMD on time is severe. You'll owe 50% of the amount you should have withdrawn but didn't. RMDs also must be taken from inherited accounts.
Important note. An exception to the RMD rule is permitted for taxpayers who continue working after they reach age 70 1/2 and don't own more than 5% of the company. These people can postpone taking RMDs from their employer plans until after retirement. However, they must still take RMDs from qualified plans that remain at former employers (that is, the plans that haven't been rolled over to their current employer's plan).
Before Your 60th Birthday Hits
Concerns about rising medical costs, longer life expectancies and insufficient retirement savings are forcing many people to stay in the workforce longer than expected. Regardless of whether you continue to work in your 60s and beyond, the government requires you to make important decisions about retirement benefits and health care coverage as you reach certain ages. These requirements won't cover all the financial contingencies that you'll eventually encounter, however.
It's also important to address other financial issues, including whether you should switch to annuities or other less aggressive investments once you retire. In addition, you might consider how you'll pay for long-term nursing and home care, without depleting the value of your estate.
Ideally, you should meet with your financial adviser before you turn age 60 (and beyond) to review your retirement plans. He or she can help you evaluate your investment portfolio, manage monthly living expenses, understand Medicare and long-term care options, and decide when to take Social Security benefits and withdrawals from retirement accounts and pension plans. Planning ahead can help minimize the stress and maximize the upsides of retirement.
When it comes to deducting charitable gifts, all donations are not created equal. As you file your 2015 return and plan your charitable giving for 2016, it’s important to keep in mind the available deduction:
Cash. This includes not just actual cash but gifts made by check, credit card or payroll deduction. You may deduct 100%.
Ordinary-income property. Examples include stocks and bonds held one year or less, inventory, and property subject to depreciation recapture. You generally may deduct only the lesser of fair market value or your tax basis.
Long-term capital gains property. You may deduct the current fair market value of appreciated stocks and bonds held more than one year.
Tangible personal property. Your deduction depends on the situation:
• If the property isn’t related to the charity’s tax-exempt function (such as an antique donated for a charity auction), your deduction is limited to your basis.
• If the property is related to the charity’s tax-exempt function (such as an antique donated to a museum for its collection), you can deduct the fair market value.
Vehicle. Unless it’s being used by the charity, you generally may deduct only the amount the charity receives when it sells the vehicle.
Use of property. Examples include use of a vacation home and a loan of artwork. Generally, you receive no deduction because it isn’t considered a completed gift.
Services. You may deduct only your out-of-pocket expenses, not the fair market value of your services. You can deduct 14 cents per charitable mile driven.
Finally, be aware that your annual charitable donation deductions may be reduced if they exceed certain income-based limits. If you receive some benefit from the charity, your deduction must be reduced by the benefit’s value. Various substantiation requirements also apply. If you have questions about how much you can deduct, let us know.
Most Americans hate receiving unsolicited telemarketing calls. Inevitably, they seem to happen at the worst possible times — when you're sitting down to dinner, tuning in to your favorite television show or drifting off to sleep. Fortunately, the Federal Trade Commission (FTC) allows you to sign up for the Do Not Call (DNC) registry.
In general, this free service makes it illegal for telemarketers to contact you, but there are a number of exceptions and rules that must be followed. Here are 10 facts about the registry that you should know to protect yourself from unsolicited interruptions to your daily grind.
Debunking the Myths about Telemarketing Calls to Cell Phones
Don't believe the rumors you've heard about telemarketers calling your cell phone. Placing telemarketing calls to wireless phones is illegal in most cases. The government doesn't maintain a registry for wireless numbers — and it has no plans to establish one in the future — so compiling lists of wireless numbers is expensive and time consuming. And the Federal Communications Commission (FCC) promises that most calls to cell phones will continue to be illegal even if a 411 phone directory is established for wireless numbers.
FCC regulations prohibit telemarketers from using automated dialers to call cell phone numbers. Most telemarketers use automated dialers, so they're generally barred from calling consumers on their cell phones without their consent. Consumers do not have to register wireless phones with the Do Not Call (DNC) Registry, although many cell phone users register for the list anyway.
Unfortunately, the rules don't prevent exempt organizations — such as charities, researchers and pollsters — from calling your cell phone manually. In fact, many exempt organizations plan to increase the calls they make to cell phones to keep pace with people's changing habits.
Nearly half of U.S. adults have only a cell phone, according to a recent Pew Research study. In general, these individuals tend to be younger, have lower income and education levels, and are more likely to live in urban areas than people with landlines. Reasons for opting out of landline telephone services include cost savings and frustration with unsolicited calls from telemarketing companies and researchers.
1. The Purpose
The FTC created the national DNC Registry in January 2003 when it issued final amendments to the Telemarketing Sales Rule. It's intended to provide consumers with a choice about whether to receive telemarketing calls at home.
The FTC's biennial report about the DNC Registry for 2014-2015 reveals that more than 222 million people are currently using this free service. In general, unsolicited calls to people on this registry are illegal, unless the caller falls under one of the exemptions (see below).
There's no deadline for adding your phone number to the DNC list. FTC rules require callers that aren't exempt from the rules to stop telemarketing calls 30 days after you register a number.
Important note. Business-to-business calls are not covered under the DNC rules.
When the DNC list was created, registrations expired and consumers had to renew their listing every five years. However, that's no longer the case. Now your number stays on the DNC registry until you cancel your registration or discontinue service.
If you move within the same geographic area and keep the same phone number, you probably won't need to re-register with the FTC. Such "ported" numbers are removed from the DNC list only if both the address and name on the account change.
Important note. People who move and retain the same phone number may need to re-register if they also change names. For example, newlyweds who change their names and then move in together may want to verify that their phone numbers are still on the list.
3. Fees for Business Access
Most legitimate companies don't call consumers on the DNC registry. But some businesses intentionally sidestep the registry — or are unaware of the DNC rules.
Before calling a personal phone number, businesses are supposed to reference the DNC registry and remove registered numbers from their calling lists (unless the caller qualifies for an exemption).
The annual fee for businesses to access the registry is $60 per area code for 2015 and 2016. But the first five area codes are available for free to provide relief to smaller businesses and startups. The maximum annual fee for accessing the entire DNC list is $16,482 in 2015 and 2016. More than 23,000 organizations accessed the registry last year, including 2,504 businesses that paid more than $13.3 million to the FTC.
Failure to follow the DNC rules could result in consumer complaints, FTC investigations and fines of up to $16,000 per call. Wrongdoers also may be required to pay redress to injured consumers.
Some organizations are exempt from the government's DNC rules, including:
Last year, 521 exempt organizations voluntarily chose to access the registry to honor the wishes of people on the list. When exempt organizations make calls to phone numbers on the list, it can create "badwill" for the organization making the call. The FTC allows exempt organizations to access the DNC registry for free.
Important note. Because it's a presidential election year, expect an unusually high volume of calls from political candidates and pollsters this summer and fall. Unfortunately, these callers generally qualify as exempt organizations, so there's nothing you can do to prevent them from calling your home.
5. "Existing Business Relationship" Exception
Telemarketers can legitimately call people on the DNC registry if they can prove an "established business relationship." Relationships that meet this exception include:
Existing customers. Consumers who purchase, rent or lease goods or services from the specific seller (or engage in a financial transaction with the seller) within the 18 months immediately preceding the date of a telemarketing call.
Prospective customers. Consumers who inquire about or apply for a product or service offered by the specific seller within the three months immediately preceding the date of a telemarketing call.
In November 2015, the Telemarketing Sale Rule was amended to shift the burden of proving the existence of established business relationships to the seller.
Important note. This exemption does not apply if the person has asked to be on the seller's entity-specific DNC list by telling the caller that he or she doesn't want to receive telemarketing calls from the seller. Other types of exempt organizations, including charities, may not be required to keep an entity-specific DNC list, but many do as a courtesy to consumers.
6. Related Party Rules
Does the established business relationship exception extend to related parties, such as affiliates or subsidiaries? That's a gray area in the DNC rules, so the FTC looks at two primary factors to answer that question: 1) the degree of similarity between the products and services offered by the seller and its affiliate or subsidiary, and 2) the degree of similarity between the entities' names. Greater similarity generally equates with greater likelihood that a call will fall within the scope of this exception.
In addition, affiliates and subsidiaries must maintain separate entity-specific DNC lists. Just requesting a company to put you on its DNC list doesn't result in that request being extended to related parties. If an affiliate or a subsidiary calls, you will have to request to be placed on that company's list, too.
7. Lead Generators and Sweepstakes
Some companies try to exploit the established business relationship exception. For example, lead generators may try to find customers who are interested in a product or service through Web advertisements, free offers or cold calling campaigns. Then they may sell customer information to other companies who sell similar products and services.
Before using a list obtained from lead generators, businesses must access the DNC registry and remove registered numbers from their calling list. Under FTC rules, the lead generator might have a relationship with a consumer, but that relationship doesn't automatically pass to the purchaser of the list of leads. The relationship transfers only if the consumer inquired about the offerings of the specific seller or the lead generator told the consumer to expect calls from the specific seller.
Likewise, some companies may try to use sweepstakes to demonstrate an established business relationship. But entry in a sweepstakes contest alone doesn't allow companies to circumvent the DNC registry.
8. Technology Issues
Technological advances have made telemarketing campaigns cheaper and easier to implement. Most telemarketers routinely use automatic telephone dialing systems or prerecorded messages (commonly referred to as "robocalls"), instead of calling consumers directly. In October 2013, the Federal Communications Commission eliminated the established business relationship exception that applied to prerecorded telemarketing calls to residential lines.
These technologies — along with equipment that allows callers to fake their identities on caller ID — make it harder for the FTC to find and prosecute scammers. The problems related to technology-driven DNC rule violations are pervasive. In 2015, the FTC received an average of more than 175,000 complaints about robocalls each month.
9. FTC Contests
The FTC is working with industry groups, academic experts and other government agencies to encourage new technologies to combat illegal telemarketing calls. It's even held contests to spur technological solutions from the private sector. A contest in 2012 led to the development of Nomorobo, a free service that's helped stop over 65 million robocalls. Additional contests were held in 2014 and 2015.
10. Getting Help
If you'd like to register your phone number for the DNC list or verify that your number is already included, visit the registry at www.donotcall.gov or call (888) 382-1222 from the phone number you're registering.
If you receive an illegal call on a registered phone line, the FTC warns not to interact in any way. Don't press buttons to be taken off the call list or to talk to a live person. Doing so could lead to more unwanted calls. Instead, hang up and file a complaint immediately. Complaints may be filed online, by phone or by mail with either the FTC or Federal Communications Commission (for illegal calls to cell phones).
Contact your legal or financial advisers for additional information about how these rules, as well as any applicable state DNC rules, affect you — or your business, if you sell products or services using telemarketing campaigns.
If there was a college student in your family last year, you may be eligible for some valuable tax breaks on your 2015 return. To max out your education-related breaks, you need to see which ones you’re eligible for and then claim the one(s) that will provide the greatest benefit. In most cases you can take only one break per student, and, for some breaks, only one per tax return.
Credits vs. deductions
Tax credits can be especially valuable because they reduce taxes dollar-for-dollar; deductions reduce only the amount of income that’s taxed. A couple of credits are available for higher education expenses:
But income-based phaseouts apply to these credits.
If you’re eligible for the American Opportunity credit, it will likely provide the most tax savings. If you’re not, the Lifetime Learning credit isn’t necessarily the best alternative.
Despite the dollar-for-dollar tax savings credits offer, you might be better off deducting up to $4,000 of qualified higher education tuition and fees. Because it’s an above-the-line deduction, it reduces your adjusted gross income, which could provide additional tax benefits. But income-based limits also apply to the tuition and fees deduction.
How much can your family save?
Keep in mind that, if you don’t qualify for breaks for your child’s higher education expenses because your income is too high, your child might. Many additional rules and limits apply to the credits and deduction, however. To learn which breaks your family might be eligible for on your 2015 tax returns — and which will provide the greatest tax savings — please contact us.
Giving to charity can provide you with a warm feeling as well as a nice tax break. But you've got to itemize deductions on your tax return. And, like most tax breaks, charitable deductions come with a number of rules you must follow to actually claim the write-off. Here are the details.
8 Steps to Finding an IRS-Approved Charity
For donations to be tax deductible, they must be approved by the IRS. To discover which organizations qualify, follow these eight steps:
1. Go to www.irs.gov.
2. In the search function at the top, enter "Publication 78."
3. Click the "EO Select Check" link.
4. Click the "Exempt Organizations Select Check Tool."
5. Select "Are eligible to receive tax-deductible charitable contributions."
6. Fill in the information you know about the charity. The organization's name and location should be enough.
7. Scroll through the charities until you find the one you want. By clicking the arrow next to "Legal Name," you can make the list alphabetical by name. You can also organize it by city.
8. Click the deductibility status link for the charity. For example, if the status is PC, the organization is a public charity. You can make deductible donations of up to 50% of adjusted gross income to public charities.
You can deduct donations only if you have adequate documentation. The amount and nature of that documentation depends on what you're donating. For example:
Cash under $250. In this case, the best proof of your generosity is a cancelled check or credit card statement. Preferably, you should also get a receipt from the organization showing its name, the date and place of the contribution, and the amount given. For small cash donations, such as gifts to the Salvation Army around the holidays, keep a log.
Noncash under $250. For donations of non-cash items worth less than $250, you need a receipt. The receipt should show the organization's name, date and place of the donation, and a description of what you're giving. You may have to fill in most of this information yourself.
You must also place a reasonable value on the donated item(s). Finally, you must have the receipt in hand by the time you file your return to claim a deduction. So keep all such receipts with your tax records for the year.
Cash of $250 or more. With these gifts, canceled checks or other similar evidence isn't good enough. Instead, you must get from the charity a contemporaneous qualified written acknowledgment (more detailed than a simple receipt) that meets IRS guidelines. If you don't and you get audited, you'll lose the deduction even if there's proof that you made the donations claimed.
An acknowledgement meets the contemporaneous requirement if you obtain it on or before the earlier of:
If you don't have an acknowledgement in hand by the applicable date, you can't claim the deduction. Legitimate charities know these rules, so you should have no problem collecting a suitable acknowledgment. Keep it with your tax records.
Key Point: For purposes of the $250 threshold for the written acknowledgment, each contribution is considered separately. So if you give $25 every Sunday at church, you don't need an acknowledgment. But keep a log of all your contributions if they aren't made by check. Similarly, you don't need an acknowledgment if you have $50 taken out of each paycheck for charity at work. But keep your check stubs and the pledge card from when you signed up for payroll deductions
Non-cash of $250 to $5,000. For these donations, you need the contemporaneous written acknowledgment plus written evidence that supports the item's acquisition date, cost, fair market value (FMV), etc. Keep this information with your tax records.
A written acknowledgment in this case generally must include three things:
1. A description of the non-cash item,
2. An explanation of whether the charity provided goods or services in exchange for the donation (other than intangible religious benefits), and
3. A description and good faith estimate of the value of any goods or services the charity provided in exchange for your donation.
If your total non-cash donations for the year exceed $500, an IRS form must be filled out and included with your return.
Non-cash of more than $5,000. For these donations, you generally must get a contemporaneous written acknowledgment. In addition, you'll need to file an IRS form with your return and obtain a qualified written appraisal by the time you file.
Stricter rules apply to contributions of artwork worth $50,000 or more. You can't write off the appraisal fee as a charitable donation. However, it qualifies as a miscellaneous itemized expense subject to the 2% of adjusted gross income (AGI) deduction threshold.
Clothing and Household Items
If you donate clothing and household items (furniture, linens, electronics, appliances, etc.), all the preceding documentation rules apply. In addition, you generally can claim deductions for only items in "good condition or better."
However, you can deduct the FMV of an item that's not in "good condition or better" if you attach a qualified appraisal that values the item at more than $500. For example, this might apply to valuable antiques that are in only "fair" condition.
If you contribute appreciated securities, give away those you've owned for more than one year. That way, you can deduct the full market value and avoid capital gains tax on the appreciation.
In contrast, if you donate appreciated securities you've held for 12 months or less, your deduction is limited to the cost of the securities, which may be much lower. No appraisal is required for donations of publicly traded securities.
Vehicles, Boats and Planes
You've probably seen or heard ads asking for donations of used vehicles. In addition to the aforementioned documentation requirements, other rules apply to donations of motor vehicles, boats and planes. To begin with, for a vehicle valued at $500 or less, you can deduct the item's FMV.
But if the FMV exceeds $500 and the charity sells the vehicle, your deduction is limited to the sale price. Because charities often sell donated vehicles at auctions, the sale price might be significantly less than FMV.
On the other hand, if the charity uses the vehicle in its tax-exempt purpose (for example, to deliver items), you can deduct the full FMV. The same is true if a charity makes significant improvements to the vehicle (for instance, rebuilding the engine or transmission). Minor dent removal and paint don't count as significant.
You can't claim a deduction for donating a vehicle with a claimed value exceeding $500 unless you receive a contemporaneous qualified written acknowledgment. Usually, the charity supplies IRS Form 1098-C as the acknowledgement. The form should include:
Additional information must be provided if the charity intends to use the vehicle or make significant improvements.
Important: The FMV for a vehicle doesn't mean the highest value you can find in a used car buyer's guide. You must make appropriate adjustments for mileage and condition.
Depending on the charity type, and whether you contribute cash or property, your write-off can be limited to 20%, 30% or 50% of your AGI. Contributions that exceed the AGI limit can be carried over for up to five years and usually deducted then.
The AGI limitation rules are complicated, but they normally affect only large contributors. If you don't know the rules, be sure to read up on them before committing to big gifts. Otherwise, you may not reap the hefty tax savings that you're expecting.
Rules and Write-offs
Itemized deductions for charitable donations can save you tax dollars while you're doing good. Just be sure to work with your tax adviser to follow the rules and maximize your write-offs.
Today it’s becoming more common to work from home. But just because you have a home office space doesn’t mean you can deduct expenses associated with it.
If you’re an employee, your use of your home office must be for your employer’s convenience, not just your own. If you’re self-employed, generally your home office must be your principal place of business, though there are exceptions.
Whether you’re an employee or self-employed, the space must be used regularly (not just occasionally) and exclusively for business purposes. If, for example, your home office is also a guest bedroom or your children do their homework there, you can’t deduct the expenses associated with that space.
A valuable break
If you are eligible, the home office deduction can be a valuable tax break. You may be able to deduct a portion of your mortgage interest, property taxes, insurance, utilities and certain other expenses, as well as the depreciation allocable to the office space.
Or you can take the simpler “safe harbor” deduction in lieu of calculating, allocating and substantiating actual expenses. The safe harbor deduction is capped at $1,500 per year, based on $5 per square foot up to a maximum of 300 square feet.
For employees, home office expenses are a miscellaneous itemized deduction. This means you’ll enjoy a tax benefit only if these expenses plus your other miscellaneous itemized expenses exceed 2% of your adjusted gross income (AGI).
If, however, you’re self-employed, you can deduct eligible home office expenses against your self-employment income.
Finally, be aware that we’ve covered only a few of the rules and limits here. If you think you may be eligible for the home office deduction, contact us for more information.
The research credit is back — this time for good — and it's better than ever for some small companies. The Protecting Americans from Tax Hikes (PATH) Act of 2015, signed into law by the president on December 18, does much more than extend this credit. Under the PATH Act, the research credit is restored retroactive to January 1, 2015, and has finally been made permanent. The new law also provides two additional tax benefits that take effect in 2016 for certain employers.
What Is the Research Credit?
The research credit was introduced in 1981 to encourage spending on research and experimentation activities by cutting-edge companies. But it was enacted on a temporary basis, and subsequent extensions — generally lasting only a year or two — have also been temporary. The last extension, approved by Congress as part of the Tax Increase Prevention Act of 2014, was the 16th extension of the credit and applied only for one year before the credit expired again on January 1, 2015.
Over the years, the research credit has been modified several times. Currently, the credit equals the sum of the following items:
The base amount used in this calculation is a fixed-base percentage (not to exceed 16%) of the average annual receipts from a U.S. trade or business, net of returns and allowances, for four years prior to the year in which you claim the credit. It can't be less than 50% of the annual qualified research expenses. In other words, the minimum credit equals 10% of qualified research expenses (50% of the 20% credit).
For an expense to qualify for the research credit, it must meet the following criteria:
Is There a Simpler Way to Calculate the Research Credit?
In lieu of claiming the basic research credit as described above, Congress has authorized an alternative simplified credit (ASC). Currently, the ASC equals 14% of the amount by which qualified expenses exceed 50% of the average for the three preceding tax years.
The ASC may be preferable to the regular research credit for some companies. For example, your company possibly may opt for the ASC, rather than the regular credit, under the following conditions:
The ASC, which first became available in 2007, replaced the alternative incremental research credit (AIRC).
How Does the New-and-Improved Research Credit Measure Up?
The practice of periodically allowing the research credit to expire and then be reinstated, often on a retroactive basis, has made it especially difficult for companies to plan ahead. Previously, managers frequently made decisions about incurring expenses and authorizing projects without knowing whether those expenditures would be eligible for the research credit. This likely had a dampening effect on the research and experimentation activities at companies that heavily rely on the credit to help defray the costs.
Now that uncertainty is over. The research credit has finally been made permanent by the PATH Act, without any interruption since it was last extended in 2014. The new law also improves the credit for some small companies in the following two ways:
1. AMT liability. Effective for 2016 and thereafter, a qualified small business may claim the research credit against its alternative minimum tax (AMT) liability. For this purpose, a qualified small business is one with $50 million or less in annual gross receipts.
2. Payroll taxes. Also effective for 2016 and thereafter, a qualified startup company may claim the research credit against up to $250,000 in FICA taxes annually for up to five years. For this purpose, the company must have less than $5 million in gross receipts.
It's important to note that the bill that worked its way through Congress also included a provision to increase the base figure for the ASC from 14% to 20%. Although this particular modification didn't make it into the final version of the PATH Act, it's likely that supporters of such an increase will renew their efforts to have the ASC modified in subsequent legislation.
Take Advantage of This Tax Planning Opportunity
Now qualifying companies can count on claiming the research credit when they plan for their research and development projects. Before doing so, meet with your tax adviser to develop a plan that maximizes the benefits allowed under the new law.
Another Tax Break for Research Expenses
The research credit isn't the only tax break available for research activities. Section 174 of the tax code allows taxpayers to elect to either: 1) deduct "research or experimental expenditures" or 2) amortize the costs over a period of not less than 60 months. Qualified expenses are limited to the following:
Important note. The Sec. 174 deduction must be reduced if you claim the research credit for the same expenses. Consult with your tax adviser to determine the best approach for your situation.
If you’re like many Americans, you may not start thinking about filing your tax return until the April 15 deadline (this year, April 18) is just a few weeks — or perhaps even just a few days — away. But there’s another date you should keep in mind: January 19. That’s the date the IRS began accepting 2015 returns, and filing as close to that date as possible could protect you from tax identity theft.
How filing early helps
In this increasingly common scam, thieves use victims’ personal information to file fraudulent tax returns electronically and claim bogus refunds. When the real taxpayers file, they’re notified that they’re attempting to file duplicate returns.
Tax identity theft can cause major headaches to straighten out and significantly delay legitimate refunds. But if you file first, it will be the thief who’s filing the duplicate return, not you.
Another key date
Of course you need to have your W-2s and 1099s to file. So another key date to be aware of is February 1 — the deadline for employers to issue 2015 W-2s to employees and, generally, for businesses to issue 1099s to recipients of any 2015 interest, dividend or reportable miscellaneous income payments.
An added bonus
Let us know if you have questions about tax identity theft or would like help filing your 2015 return early. An added bonus of filing early, if you’ll be getting a refund, is enjoying that refund sooner
The Affordable Care Act (ACA) seems to be making Health Savings Accounts (HSAs) more popular than ever. A recent report issued by Devenir, an HSA industry participant, highlights two key findings:
1. As of June 30, 2015, the number of HSAs had climbed 23% from the previous year to 14.5 million, and
2. Account balances jumped 25% to approximately $28.4 billion over the same time period.
Impact of Other Health Coverage
You're ineligible to make a Health Savings Account (HSA) contribution for any month that you're also covered under any non-high-deductible health plan that provides coverage for any benefit that's covered under the high-deductible plan.
Such prohibited plans include most employer-sponsored health care Flexible Spending Account (FSA) arrangements. However, the following types of health-related coverage do not make you ineligible to make HSA contributions:
In 2010, the Employee Benefit Research Institute reported that there were 5.7 million HSAs with balances totaling $7.7 billion. Clearly, these accounts are becoming more popular.
Under the ACA, health insurance plans are categorized as bronze, silver, gold or platinum. Bronze plans have the highest deductibles and least-generous coverage, so they're the most affordable. At the opposite end of the spectrum, platinum plans have no deductibles and more coverage, but they're also much more expensive. In many cases, the ACA has led to significant premium increases — even for those who prefer more basic (and economical) plans.
Fortunately, some of the more basic plans also can make you eligible to make tax-saving HSA contributions. Those tax savings partially offset premium increases and skimpier coverage, leading to a surge in the popularity of HSAs.
An HSA is an IRA-like trust or custodial account that you can set up at a bank, insurance company or any other entity the IRS declares suitable, such as brokerage firms or credit unions. (You can find suitable HSA trustees with a simple Internet search.)
HSAs must be intended exclusively for paying qualified medical expenses. In other respects, they're subject to rules similar to those that apply to IRAs. HSAs also may offer the same investment options as IRAs (stocks, mutual funds, bonds, certificates of deposit and so forth). But some HSA trustees may limit investment choices to more conservative options.
For the 2016 tax year, you can make a deductible HSA contribution of as much as $3,350 if you have qualifying high-deductible self-only coverage or as much as $6,750 if you have qualifying high-deductible family coverage. If you are age 55 or older as of the end of 2016, the maximum deductible contribution goes up by $1,000.
For 2015, the contribution caps are the same, except the maximum deductible contribution for family coverage is $6,650. These amounts are increased by $1,000 if you were 55 or older as of December 31, 2015. You have until April 18, 2016, to make an HSA contribution for the 2015 tax year.
You must have a qualifying high-deductible health insurance policy — and no other general health coverage — to be eligible for this HSA contribution privilege. For 2015 and 2016, a high-deductible policy is defined as one with a deductible of at least $1,300 for self-only coverage or $2,600 for family coverage.
For 2016, qualifying high-deductible policies can have out-of-pocket maximums of as much as $6,550 for self-only coverage and $13,100 for family coverage. For 2015, these amounts are $6,450 and $12,900, respectively.
If you are eligible to make an HSA contribution for a tax year, the deadline is April 15 of the following year (adjusted for weekends and holidays) to open an account and make a contribution for the earlier year. This is the same deadline as for IRA contributions. So there's still time to make a contribution for the 2015 tax year.
The write-off for HSA contributions is an above-the-line deduction, so you needn't itemize to benefit. Also, the HSA contribution privilege isn't lost if you are a high earner.
Tax Treatment of Distributions
HSA distributions used to pay qualified medical expenses of the HSA owner and his or her spouse or dependents are free from federal income tax. You may build up a balance in the account if contributions plus earnings exceed withdrawals.
Any income earned is also free of federal income taxes. So, if you are in very good health, you can use your HSA to build up a substantial medical expense reserve fund over the years while collecting deductions and earning tax-free income along the way.
If you still have an HSA balance after reaching Medicare eligibility age, you can drain the account at any time. You will owe federal income tax on the withdrawals, but there's no penalty. Alternatively, you can keep your HSA open and continue using it to pay medical expenses with tax-free withdrawals.
Thus, an HSA can function like an IRA if you stay healthy. Even if you have to empty the account every year to pay medical expenses, the HSA arrangement allows you to pay those expenses with pretax dollars. But there are some important caveats to bear in mind:
According to the general rule, eligibility to make HSA contributions is determined on a monthly basis. So, when you have qualifying high-deductible health coverage for only part of the year, you can contribute and deduct one-twelfth of the annual limit for each month that qualifying coverage is in effect.
Under an exception to this rule, if you are eligible to make HSA contributions as of the last month of the year, you can be treated as eligible for the entire year and thus contribute the maximum for that year. While being able to make a full HSA contribution based on end-of-year eligibility is helpful, a harsh recapture rule may apply if you become ineligible for HSA contributions during the subsequent 12-month testing period.
The testing period begins with the last month of the tax year and ends on the last day of the twelfth month following that month. Any recapture amount must be included in your taxable income and incurs a 10% penalty. The risk of falling under the recapture provision may make it inadvisable to use the exception in order to make a bigger HSA contribution.
HSAs can provide a smart tax-saving opportunity for individuals with qualifying high-deductible health plans. If you're eligible to make an HSA contribution for the 2015 tax year, you have until April 18, 2016, to open an account and make a deductible contribution. (For the 2016 tax year, you'll have until April 17, 2017.) Completing the necessary forms takes only a few minutes. Consult with your tax adviser for more information about HSAs.
Is there frustration building in your organization due to clashing generational attitudes about work? If so, you are not alone. The good news is it doesn't need to trigger an explosion.
In many workplaces, Baby Boomer and Gen X supervisors are exasperated with younger workers — typically those in the Millennial generation, who were born between 1981 and 2000. Some older supervisors have trouble managing the younger workers.
By the same token, Millennial generation employees often are demoralized by an environment they do not find conducive to doing their best work.
If you are facing these issues, don't wait for things to get out of hand. It's better to be proactive and sensitize employees and supervisors to generational differences in typical attitudes and expectations about work.
When a problem is evident, don't just hope it will go away or tell a younger employee chafing under the supervision and communication style of a Baby Boomer boss, "this is the way it is around here."
One basic preemptive problem-solving strategy is to explain each group to the other. Understanding why each generation behaves as it does allows supervisors and workers to overcome the belief that one party is merely going out of its way to annoy or undermine the other. Next, improve on the golden rule. Instead of treating people the way you want them to treat you, treat them the way they want to be treated — within reason.
An "aha moment" for Boomer and Gen X supervisors in understanding how Millennials want to be treated often comes when they are asked about how they raised their children. The younger generation was constantly told they were special. They won trophies merely for participating on sports teams (winning optional) and were heavily programmed with organized activities during their childhoods. Their school essays may have been proofread by their parents. All of these experiences lead to certain expectations in the work environment.
In particular, these employees often expect lots of feedback (especially praise) and direction. They may also have less respect for hierarchies if they viewed their parents more as friends than as authority figures.
Life is too Short?
Many Millennials developed certain attitudes about work by witnessing the fate of some Boomer parents who devoted themselves fully to their jobs and companies, worked long hours without complaint, only to be laid off during times of economic difficulty. This can lead to an attitude that life is too short to sacrifice yourself for a job that might disappear without warning.
Other common differences:
A Two-Way Street
Mitigating inter-generational conflict is a two-way street. Millennials may need to be coached about the meaning of concepts such as initiative and "ownership" of projects. You may want to advise them to narrow down their requests from supervisors.
When Millennials are sensitized to such issues, along with generational attitude differences, they may walk away realizing: "My boss isn't an evil person, just a product of his time." They may become content to make a few adjustments to "meet the boss in the middle," or perhaps embrace a more Boomer or Gen X-like attitude.
When older supervisors are encouraged to make some accommodations to the emotional needs of younger workers, a common response is: "Hey, nobody did that for me." However, their grumbling may soften when they learn that the accommodations they need to make often aren't very time-consuming — and they can bring positive results. Examples include sending an occasional thank-you note for a job well done, or cc'ing a boss on an e-mail praising a younger employee.
Some members of each generation are probably going to conclude that those of other generations are wrong and "just need to get over it." But the differences are not going away. Compromise is key, and if all sides are willing to give a little, the workplace can be a much more productive and pleasant place to be.
For the last several years, taxpayers have been allowed to take an itemized deduction for state and local sales taxes in lieu of state and local income taxes. This break can be valuable to those residing in states with no or low income taxes or who purchase major items, such as a car or boat. But it had expired December 31, 2014. Now the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) has made the break permanent.
So see if you can save more by deducting sales tax on your 2015 return. Don’t worry — you don’t have to have receipts documenting all of the sales tax you actually paid during the year to take full advantage of the deduction. Your deduction can be determined by using an IRS sales tax calculator that will base the deduction on your income and the sales tax rates in your locale plus the tax you actually paid on certain major purchases.
Questions about this or other PATH Act breaks that might help you save taxes on your 2015 tax return? Contact us — we can help you identify which tax breaks will provide you the maximum benefit.
There can be negative tax consequences when purported loan payments are recast as corporate distributions to shareholders. In some cases, the courts have ruled that withdrawals from two closely held corporations were constructive corporate distributions rather than loan proceeds and repayments. As such, the withdrawals triggered taxable dividends and capital gains for the shareholders
Corporate Distribution Basics
For federal income tax purposes, non-liquidating distributions paid by C corporations to individual shareholders can potentially fall into three different layers. Withdrawals from each layer have different tax consequences.
First Layer: Taxable Dividends to Extent of Earnings and Profits. Corporate distributions of cash or property are classified as taxable dividends to the extent of the corporation's current or accumulated earnings and profits, which is a tax accounting concept that is somewhat similar to the financial accounting concept of retained earnings.
Dividends may be formally declared or they may be constructive. A constructive dividend arises when a corporation distributes earnings and profits to shareholders without formally declaring a dividend but without the expectation of repayment.
The maximum federal income tax rate on C corporation dividends is 20 percent for single people with taxable income above $400,000 ($450,000 for married joint-filing couples). Upper-income individuals may also owe the 3.8 percent Medicare net investment income tax on dividend income. For other taxpayers, the tax rate on dividends remains 15 percent.
Second Layer: Tax-Free Return of Capital to Extent of Stock Basis. After the distributing corporation's E&P is exhausted, subsequent distributions reduce each shareholder's basis in his or her stock. In other words, distributions up to basis are treated as tax-free returns of shareholder capital.
Third Layer: Capital Gain after Stock Basis Is Exhausted. After a shareholder's stock basis is reduced to zero, any additional distributions are treated as capital gains. Assuming the gains are long-term because the stock has been held for more than a year, the maximum individual federal income tax rate is 20 percent for high income taxpayers.
This applies to singles with taxable income above $400,000, (married joint-filing couples with income above $450,000). For taxpayers with income below that, the maximum long-term capital gains rate is 15 percent.
Steer Clear of Negative Tax Consequences
Whenever cash or property passes between closely held corporations and their shareholders, there are tax consequences. The only way to control the tax consequences is to document what the transactions are intended to be and follow through by acting accordingly.
When transactions are intended to be loans, the objective factors in the right-hand box must be considered and respected. Otherwise, the IRS can re-characterize the transactions in ways that have negative tax consequences for shareholders, their corporations, or both. Consult with your tax adviser for guidance in your situation.
Shareholder Loans: Courts Examine Eight Factors
In determining if a payment to a shareholder is proceeds from a tax-free loan from a corporation to a shareholder or a tax-free repayment of a loan from the shareholder to the corporation (as opposed to a potentially taxable corporate distribution to the shareholder), courts look at whether:
1. There is a written promise to repay evidenced by a note or other document.
2. There is a stated principal repayment schedule or balloon repayment date.
3. Principal payments are actually made on time.
4. Stated interest is charged.
5. Interest is actually paid on time.
6. There is adequate security for the purported loan.
7. The borrower has a reasonable prospect of being able to repay the loan.
8. The parties conduct themselves as if the transaction is a loan (for example, by shareholders showing loans they purportedly owe to their corporations as liabilities on personal balance sheets).
Many businesses are uncertain how to account for costs to acquire, produce or improve property, plant and equipment. So, in 2013 the IRS issued regulations on capitalizing versus deducting the costs of tangible personal property. In 2014, the IRS added rules covering dispositions of tangible property.
On November 24, the IRS announced an increase in the de minimis safe harbor that will make it easier to deduct items like tablets and smartphones. As a result, taxpayers will be able to immediately deduct many purchases that would otherwise need to be spread over a period of years through annual depreciation deductions. Here's more on this potential tax savings opportunity.
Two Options for Reporting Fixed Assets
When deciding how to handle tangible property costs, businesses generally have two options:
Deduct now. Internal Revenue Code Section 162 allows you to deduct all ordinary and necessary expenses paid or incurred during the tax year in carrying on any trade or business, including the costs of certain supplies, repairs and maintenance.
In addition, businesses can deduct materials and supplies that cost $200 or less to acquire or produce under Section 162, as well as incidental repairs and routine building maintenance, including costs to inspect, clean, test and replace parts.
Capitalize and depreciate later. Section 263 requires you to capitalize amounts paid to acquire, produce or improve tangible property. Capitalized costs are generally not deducted in the current tax year; they're depreciated over their economic useful lives.
Under Section 263, however, you must generally capitalize improvements that:
1. Add to the value, or substantially prolong the useful life, of your property, or
2. Adapt the property to a new or different use.
The decision to expense or capitalize an item is just a matter of timing. You will pay the same taxes over the life of the asset, regardless of how you classify the costs, as long as tax rates and laws remain consistent. If you expect higher tax rates or more restrictive tax laws in the future, you might prefer to capitalize costs to reduce taxable income in future periods.
Some items are easily classified as a deductible business expense (such as a box of staples) or a capital expenditure (such as a new forklift). Others fall in the gray area between Sections 162 and 263. The final repairs refine and clarify those gray areas, as well as provide various de minimis "safe harbors."
Safe Harbor for Companies with Audited Financial Statements
As an alternative to the general capitalization rule, the final regs permit businesses to elect to expense their outlays for "de minimis" business expenses. The IRS permits certain taxpayers to deduct tangible property they acquire or produce, if the total cost per item (or invoice) is $5,000 or less. To qualify for this safe harbor, you must:
The de minimis safe harbor also applies to property with an economic useful life of 12 months or less as long as the item doesn't cost more than $5,000 per item (or per invoice).
Updated Safe Harbor
However, taxpayers without applicable (audited) financial statements will be subject to a new $2,500 capitalization threshold (up from $500). Tangible property costs below this amount are generally considered to be ordinary and necessary business expenses and, therefore, not treated as capital expenditures under the final repair regs.
"We received many thoughtful comments from taxpayers, their representatives and the professional tax community. This important step simplifies taxes for small businesses, easing the recordkeeping and paperwork burden on small business owners and their tax preparers," said IRS Commissioner John Koskinen.
Since February, the IRS received more than 150 letters from businesses and their representatives requesting an increase in the threshold. Many of those commenting noted that the cost of many commonly expensed items — such as tablet-style personal computers, smart phones, and machinery and equipment parts — surpass the $500 threshold.
As before, taxpayers can still claim otherwise deductible repair and maintenance costs, even if they exceed the $2,500 threshold. In addition, the existence of the de minimis safe harbor doesn't mean that a taxpayer cannot establish a de minimis deduction threshold in excess of the safe harbor amount, provided the taxpayer can demonstrate that a higher threshold clearly reflects the taxpayer's income.
The new $2,500 threshold takes effect starting with tax year 2016. In addition, the IRS will provide audit protection to eligible taxpayers by not challenging use of the new $2,500 threshold in tax years prior to 2016.
Updating Your Capitalization Policies
In light of IRS Notice 2015-82, it's easier than ever before for qualifying taxpayers to deduct tangible personal property costs under the de minimis safe harbor. Before filing your 2015 federal tax review, update your tangible property capitalization policies for the increased safe harbor threshold. Doing so could result in potential tax savings opportunities.
This brief article merely scratches the surface of this complex topic. Contact your tax adviser for more information. He or she can help evaluate the decision to deduct or capitalize tangible property costs and ensure compliance with the latest IRS regulations and procedures.
After you reach age 70½, you must take annual required minimum distributions (RMDs) from your IRAs (except Roth IRAs) and, generally, from your defined contribution plans (such as 401(k) plans). You also could be required to take RMDs if you inherited a retirement plan (including Roth IRAs).
If you don’t comply — which usually requires taking the RMD by December 31 — you can owe a penalty equal to 50% of the amount you should have withdrawn but didn’t.
So, should you withdraw more than the RMD? Taking only RMDs generally is advantageous because of tax-deferred compounding. But a larger distribution in a year your tax bracket is low may save tax.
Be sure, however, to consider the lost future tax-deferred growth and, if applicable, whether the distribution could: 1) cause Social Security payments to become taxable, 2) increase income-based Medicare premiums and prescription drug charges, or 3) affect other tax breaks with income-based limits.
Also keep in mind that, while retirement plan distributions aren’t subject to the additional 0.9% Medicare tax or 3.8% net investment income tax (NIIT), they are included in your modified adjusted gross income (MAGI). That means they could trigger or increase the NIIT, because the thresholds for that tax are based on MAGI.
For more information on RMDs or tax-savings strategies for your retirement plan distributions, please contact us.
Another tax year is drawing to a close. But there's still time for individual taxpayers to trim their tax liabilities for 2015 and beyond, before the New Year begins. Here are 10 eleventh-hour moves that you can still make before the clock strikes midnight on January 1, 2016
1. Increase Your 401(k) Deferral
Consider increasing your 401(k) deferral for the last few paychecks of the year. Doing so can add to your retirement savings and lower your tax liability. Many taxpayers will have plenty of room to spare with an annual deferral limit of $18,000 in 2015 ($24,000 if you're age 50 or over). It's especially easy to do if you've exceeded the Social Security wage base of $118,500 in 2015 — if you just allocate the Social Security tax savings to your 401(k) account, you won't cut your take-home pay.
2. Assess Your AMT Situation
With the help of your tax adviser, you should have enough information in December to make a reasonable estimate of whether you'll be subject to alternative minimum tax (AMT) for 2015. Don't panic if it looks like you'll owe significant AMT in 2015 — there's still time to take steps to lower your income for AMT purposes. For instance, you may be able to postpone certain tax preference items (such as tax-exempt interest on certain private activity bonds). Also, consider deferring expenses that aren't deductible for the AMT (such as state and local taxes) to next year so you don't lose the benefit of the deduction.
3. Take Your RMD
Generally, you need to take required minimum distributions (RMDs) from qualified retirement plans and traditional IRAs every year once you hit age 70½. Contact your tax adviser immediately if you've waited this long to arrange an RMD for 2015. The penalty for failing to take an RMD equals 50% of the amount that should have been withdrawn — and that's on top of the regular tax. The amount of your RMD in 2015 is based on IRS life expectancy tables and account balances on December 31, 2014.
4. Visit Your Doctor or Dentist
Unreimbursed medical and dental expenses are deductible only to the extent that the annual total exceeds 10% of your adjusted gross income (AGI) or 7.5% of AGI if you're age 65 or older. If you're close to this threshold (or you've exceeded it), additional elective expenses — such as a dental work or eyeglasses — can boost your deduction. If your medical and dental expenses are too low to be deductible, you might as well wait until next year to visit a health care professional for services that aren't covered by insurance (unless it's an emergency situation).
5. Convert to a Roth IRA
Invest in your future by converting all (or part) of a traditional IRA to a Roth IRA this year. Unlike distributions from traditional IRAs, which are fully subject to tax, qualified distributions from a Roth IRA — generally, those made after age 59½ — are 100% tax-free after five years. But you must pay tax in the year of the conversion. Typically, it makes sense to convert IRA funds over several years to lessen the tax bite in a given year and avoid being pushed into a higher tax bracket. This strategy generally makes more sense if you're in a lower tax bracket today than you expect to be in when you receive retirement distributions. Although a Roth conversion will actually increase your taxes in 2015, it might save significant tax in future tax years.
6. Support a College Graduate
If your child graduated from college this year and is under age 24, you may claim a dependency exemption for him or her as long as you provided more than half of the child's support in 2015. However, it might be difficult to clear that threshold, especially if the child has landed a job that pays well. Barring other extenuating tax circumstances (for example, a potentially high "kiddie" tax), consider making this holiday season extra-special by giving a generous cash gift that will help support your child — and put you over the support threshold for the tax year.
7. Prepay Tuition for Next Semester
Parents of children enrolled in higher education programs may qualify for one or two higher education credits: the Lifetime Learning credit and the American Opportunity credit. If you pay next semester's tuition before January 1 — even for a semester beginning as late as March 2016 — some or all of the expense may reduce your tax liability dollar-for-dollar for 2015. Unfortunately, these credits are gradually phased out for higher-income parents. Other rules and limits apply, so be sure to contact your tax adviser before implementing this strategy.
8. Prepay Expenses on Real Property
Assuming you don't owe an AMT liability and don't expect to be in a higher tax bracket next year, it generally makes sense to accelerate deductible expenses into the current year to reduce your 2015 tax bill. Then you can worry about your 2016 tax bill next year end.
Among the largest itemized deductions for most taxpayers are mortgage interest and property taxes on their personal residences and vacation homes. Homeowners can lower their 2015 taxes by prepaying mortgages and state and local property taxes in December 2015 that are due in early 2016.
9. Sell Securities
Keep taxes in mind as you plan year-end stock transactions. Net long-term gain is taxed at a maximum rate of 20% for those in the top income tax bracket. If you expect to have a net capital gain, losses resulting from the sales of securities can offset the gain plus up to $3,000 of ordinary income. Alternatively, if you have a net loss, any capital gains from sales are tax-free up to the amount of the loss. If you want to claim a transaction for the 2015 tax year, the trade date must be on or before December 31.
10. Charge Your Donations
If you itemize expenses on your personal tax return, you can deduct charitable contributions made to a qualified organization in 2015 as long as they're charged before midnight on January 1 — even if you don't pay your credit card bill until 2016. Mailed checks must be postmarked on or before December 31 to be deducted on your 2015 tax return.
Have you seen the Chevrolet commercial where the boss tells a group of employees to "take a knee, team?" One young man drops into a quarterback kneel and the boss asks, "What's he doing?" With the rest of the group looking confused, the employee responds, "You said 'take a knee.'"
The boss responds: "That's what that means?"
The advertisement illustrates the growing use of sports metaphors in business. It also illustrates how many employees have no idea what their bosses or colleagues mean when they utter sports phrases in the workplace. Or as the Chevrolet commercial indicates, the person using the sports phrase may not even understand what it really means.
To make matters even more perplexing, sports metaphors are often misused or mixed when making business points. Who hasn't chuckled to themselves when a co-worker or boss says something like, "Step up to the plate and get a touchdown."
In addition to being misused, sports phrases can seem trite, divisive — or they may mean absolutely nothing to the audience.
Male managers are often advised to refrain from using sports terms to discuss business because they could seem exclusionary towards women. But you can't assume women don't follow sports. Condoleezza Rice, Secretary of State under President George W. Bush, is well known as a football fan. She once urged patience in referring to a plan to shut down North Korea's nuclear program, by saying: "This is still the first quarter. There is still a lot of time to go on the clock."
So if you know your colleagues and employees are sports fans, it can help to explain certain concepts using language they understand. Sports and business often seem compatible since they both involve teamwork, rules and competition.
However, business people should avoid sports metaphors when speaking with overseas customers, partners and colleagues. In today's diverse business world, many popular phrases do not translate well and may do more harm than good.
Take a look at some examples of common sports metaphors you may have heard around the office:
When it comes to using sports metaphors in the workplace, there's no easy answer as to whether it's appropriate or not. Choose your words carefully and you might hit a home run. But if you use the wrong sports maxim or deliver it to the wrong audience, you can strike out.
You have a great product. It was delivered quickly and in perfect shape. I'll be sure to tell my friends."
Statements like this can boost your company's sales as much as 250 percent. Even better, when you get a testimonial from a consumer, that person is likely to become a
If your company is a small or medium-sized enterprise, it probably doesn't have the built-in credibility of a national brand. But even on a tight advertising budget, you can build credibility with the help of satisfied customers.
Testimonials increase the comfort zones of potential buyers and help them overcome their concerns about trying new products. So consider a campaign to snag customer testimonials. Among the benefits:
Feedback - Customer testimonials provide valuable insight into what your company is doing right.
Increased loyalty - People who are willing to attach their names to your product are likely to become repeat buyers. These devoted customers also tend to develop a vested interest in your company and believe they have a hand in helping it grow.
Free advertising - Satisfied customers who put their names and reputations at stake for your company's products or services become a source of free, viral advertising.
The first step in gathering testimonials, of course, is to provide top-notch products or services and to support them with consistently high customer service. Then, start the testimonial collection process by taking these steps:
Once you receive complimentary comments, get permission to use them. Ask the customers if you can use their names, titles, and locations. A positive testimonial from a respected customer in your field goes a long way toward boosting your company's credibility. Depending on your marketing strategy, you may even want to get a picture with customers using your product or service.
What about surveys? Avoid asking for testimonials in the course of conducting them. Surveys are generally meant to be anonymous and customers need to feel free to make negative comments that can help your company improve.
Customer testimonials are among the best promotional copy around. In the end, let the customers speak for themselves so that the comments reflect their excitement and satisfaction. Edit them only when they need a little polish and get permission for the final version. more loyal customer and help spread the word about your company's products.
What Makes a Good Testimonial?
Not all testimonials are created equal. You've probably seen some that appear so fake that, if anything, they harm the reputation of the maker.
To ensure yours have the impact you are aiming for, keep them:
Donations to qualified charities are generally fully deductible, and they may be the easiest deductible expense to time to your tax advantage. After all, you control exactly when and how much you give. But before you donate, it’s critical to make sure the charity you’re considering is indeed a qualified charity — that it’s eligible to receive tax-deductible contributions.
The IRS’s online search tool, Exempt Organizations (EO) Select Check, can help you more easily find out whether an organization is eligible to receive tax-deductible charitable contributions. You can access EO Select Check at http://apps.irs.gov/app/eos. Information about organizations eligible to receive deductible contributions is updated monthly.
Also, with the 2016 presidential election heating up, it’s important to remember that political donations aren’t tax-deductible.
Of course, additional rules affect your charitable deductions, so please contact us if you have questions about whether a donation you’re planning will be fully deductible. We can also provide ideas for maximizing the tax benefits of your charitable giving.
The average organization loses 5% of its annual revenues to fraud, according to the 2014 Report to the Nations on Occupational Fraud and Abuse published by the Association of Certified Fraud Examiners (ACFE). Bear in mind, that's the top line of your income statement, not the bottom. So, for every $1 million in annual revenues, your company is expected to lose an average of $50,000 to fraudsters.
hen a small business falls prey to a fraud scam, it's often more costly than this average reflects, however. The ACFE's latest fraud report estimates that the median loss for businesses with fewer than 100 employees was approximately $154,000.
Proactive business owners take steps to minimize their fraud risks. The ACFE has established a weeklong campaign during the third week of November to promote antifraud efforts. You can jump on the bandwagon by initiating a fraud awareness campaign at your workplace. Here are some simple ideas.
Visit the ACFE's Website
Educating employees about fraud prevention and detection techniques doesn't necessarily have to be costly or time consuming. In fact, the ACFE offers free resources that managers and owners can download quickly, such as handouts and videos that can serve as training materials for your staff, press releases that can double as content for social media posts and posters to display in your lunchroom. You can even sign up as an official supporter of International Fraud Awareness Week.
Review Your Internal Controls
Chances are good that your company already has policies and procedures in place to prevent and detect fraud. Together, these antifraud efforts are known as your "internal control system." International Fraud Awareness Week is a good time to pause and reflect on your internal controls. Ask your management team: Are our existing internal controls adequate based on today's global, technology-driven marketplace? And how could we make them stronger?
The Committee of Sponsoring Organizations of the Treadway Commission (COSO), a joint initiative of five private sector accounting and finance organizations, lists five components of effective internal control systems:
1. Control environment. The ethical tone that management sets filters down the organizational chart. Relevant factors in the control environment include the integrity, ethical values, management operating style and delegation of authority.
2. Risk assessment. Companies should continually evaluate external threats and internal weaknesses. Once they've been identified, threats and weaknesses need to be eliminated — or at least reduced and monitored.
3. Information and communication.Strong controls allow employees to identify, capture and exchange information. Effective communication ensures information flows to the right people inside and outside the organization.
4. Control activities. Strong systems include formal policies and procedures to ensure management's directives are carried out. Examples of control activities include authorization of transactions, accounting reconciliations, supervisory reviews of operating performance, physical security of assets and segregation of duties.
5. Monitoring. Risk factors continually change. Management should continually review and improve antifraud control performance.
COSO recommends that companies design their antifraud controls "to provide reasonable assurance [of] the achievement of objectives in the effectiveness and efficiency of operations, reliability of financial reporting, and compliance with laws and regulations." A strong internal controls program — including fraud prevention and detection training, proactive data monitoring and analysis, employee support groups, management review and whistleblower hotlines — can be essential in preventing and detecting fraud.
Get Professional Help
Your accountant and attorney are allies in the fight against white collar crime. In fact, many companies solicit outside help with fraud awareness training. A forensic specialist can present on warning signs and real-life horror stories during internal fraud training sessions. He or she also can help the management team perform a formal fraud risk assessment that identifies weaknesses in your internal controls and recommends possible fixes.
If you suspect fraudulent activities, a forensic specialist can discreetly review your books and records in an agreed-upon-procedures engagement. If fraud is unearthed, he or she can expand the scope of the engagement into a full-blown fraud investigation.
Outside fraud examiners are often more efficient than insiders when it comes to investigating fraud, because they're disinterested third parties with no emotional attachments or preconceived notions about the accused and they're experienced in common fraud scams and know where to look for evidence. Forensic accountants and attorneys also know how to build a comprehensive case using analytical and interrogation techniques that will withstand legal scrutiny.
An Ongoing Battle
After International Fraud Awareness Week is over, it's important for businesses to remain focused on fraud awareness, because fraud happens year-round. It needs three elements to occur: opportunity, motive and rationalization. Regular staff training and strong internal controls eliminate the opportunity to commit fraud and deter would-be fraudsters by letting them know that you won't tolerate fraud and have implemented controls to detect it.
Retailers and the SBA Warn About Chip Card Problems
On October 1, a liability shift went into effect for "card present" transactions. The shift encourages businesses to adopt modern "chip" technologies to more effectively combat fraud from counterfeit cards. Chip cards — also known as EuroPay, MasterCard and Visa (EMV) cards — contain tiny metallic squares that generate a unique encrypted code for each transaction. In theory, they're more secure than magnetic cards when read by an EMV-compliant processing device.
Retailers Speak Out
But many retailers argue chip card protections fall short in the United States, because they don't require a personal identification number (PIN). Card issuers in Canada and several European, Asian and Latin American countries have seen payment card fraud rates drop significantly after they switched from magnetic cards to chip cards. But cards in those countries require customers to enter PINs.
Some merchants argue that U.S. cards aren't as protected against counterfeiting as chip-and-PIN cards. U.S. chip cards require only signatures, which are easy to forge — and EMV-compliant card readers don't authenticate them. To date, no major U.S. credit card issuers have announced plans to switch to chip-and-PIN cards in the near future.
SEC Warns Consumers
The Securities and Exchange Commission (SEC) recently issued a warning about fraud scams being perpetrated against consumers who haven't yet received a chip card from their bank. These scammers typically email people, pretending to be their card issuer, and request updated account information. Unwary cardholders click on an official-looking link and provide personal information, which perpetrators use to commit identity theft or install malware on the cardholder's device.
The SEC urges consumers to contact card issuers at the phone numbers listed on their cards, rather than to respond to unsolicited emails (or phone calls). If you receive a suspicious request for personal information in connection with the issuance of a chip card, contact your credit card company as soon as possible.
Now that fall has begun, it's time to start your year-end tax planning for 2015 — and to tie up loose ends that remain from the 2014 tax season. Here are some reminders that the IRS has sent out recently and related federal income tax-savings opportunities for individuals and businesses.
1. October 15 Extension Reminder
About a quarter of the 13 million taxpayers who requested an automatic six-month extension for their 2014 tax returns have yet to file. The IRS recently urged individuals whose tax-filing extension runs out on October 15 to double check their returns for often-overlooked tax benefits, such as deductions for job hunting costs or moving expenses andcredits for education or child care.
If you filed for an extension, you should file your return by October 15, even if you can't pay the full amount due. By doing so, you can avoid the late-filing penalty, which is normally 5% per month, that would otherwise apply to any unpaid balance after October 15. However, interest (currently at the rate of 3% per year compounded daily) and late-payment penalties (normally 0.5% per month) will continue to accrue on any unpaid tax bills.
If you need to file an extension for your personal tax return, don't forget to check the new box on Forms 1040, 1040A or 1040-EZ that indicates whether you had health coverage for 2014. If you plan to claim the Health Coverage Tax Credit (HCTC) for 2014, you must first file an original 2014 tax return without claiming the HCTC, even if you have no other filing requirement. Then you can file an amended return when the IRS issues further HCTC guidance.
2. Guidance for Filing an Amended Personal Return
Many taxpayers need to file an amended federal tax return for 2014, whether it's to correct an error or to claim a missing credit or deduction, such as the HCTC when the final guidance is published. (See above.) Don't panic if you need to correct your filing status, the number of dependents you claimed or your total income. The IRS allows individuals to amend a previously filed federal income tax return using Form 1040X.
But this form has specific requirements. For example, it currently can't be filed electronically. Instead, you'll need to file it on paper and mail it to the IRS. In addition, a separate form must be filed for each tax year that you're amending.
In some cases, the IRS will correct math errors on your behalf. If that happens, you generally don't need to file an amended return. Likewise, the IRS may just send you a notice for failing to attach a required form or schedule and simply request additional documentation. Such a notice generally doesn't necessitate an amended return either.
If you expect a refund but need to amend your original return, it's OK to cash your original refund check from the IRS. It generally takes the IRS a few months to process amended returns and issue additional refund checks. However, if you'll owe additional income taxes, send a check as soon as possible. Doing so will limit interest and penalty charges.
To claim a refund, file Form 1040X no more than three years from the date you filed your original tax return. You can also file it no more than two years from the date you paid the tax if that date is later than the three-year rule.
3. Affordable Care Act Reporting for Individuals
About 800,000 taxpayers who purchased health insurance from the federally facilitated Marketplace during 2014 received an erroneous Form 1095-A, "Health Insurance Marketplace Statement." The IRS recently reminded those taxpayers who filed a federal tax return based on their original Form 1095-A that they're not required to file an amended return based on a corrected Form 1095-A. This is true even if you would owe additional taxes based on the new information.
However, you may voluntarily choose to file an amended return based on the corrected form if it would result in an additional refund or lower the amount of taxes you owe. You may also want to file an amended return if you filed a federal tax return based on the original form and 1) incorrectly claimed a premium tax credit or 2) failed to file Form 8962, "Premium Tax Credit," to reconcile your advance payments of the premium tax credit.
4. Retroactive Extension of Bonus Depreciation and Section 179 Expense Elections
The IRS recently issued guidance on changes made by the Tax Increase Prevention Act of 2014 (TIPA) to provisions dealing with bonus depreciation options in 2014. The guidance is effective September 15, 2015.
In 2013, taxpayers were allowed to deduct 50% first-year bonus depreciation on qualifying new equipment and purchased software that was placed in service before year end. At the end of 2014, TIPA retroactively extended through 2014 the bonus depreciation provisions that expired at the end of 2013. But the extension was passed after some taxpayers had already filed their 2014 tax returns.
The recent IRS guidance provides options to amend returns to 1) claim missed bonus depreciation for assets brought into service in 2014, revoke an election, or file a change in method of accounting for the current year to claim missed bonus depreciation and 2) carry over to 2014 any disallowed Section 179 deduction for qualified real property placed in service during 2010 through 2013.
Important note: The deadline for making such an amendment is generally December 4, 2015. In some cases, the deadline may be later. Regardless, time is of the essence.
As the year winds down, it's important to (once again) watch for legislation on these and other expired tax provisions. For 2015, bonus depreciation is currently unavailable and the current maximum Section 179 deduction is only $25,000 (compared to $500,000 for tax years beginning in 2010 through 2014). But it's possible that Congress might extend these tax-saving opportunities again for fiscal tax year 2015.
If that happens, business owners should be prepared to act fast to lower taxable income for 2015. Remember that assets must be placed in service by no later than the end of your business's tax year to qualify for these deductions.
Contact Your Tax Adviser
As always, the federal tax rules are complex and ever-changing. Work with your tax professional to wrap up your 2014 tax return or plan for 2015. Doing so can eliminate the guesswork and frustration that comes with filing an amended tax return or staying atop the latest IRS guidance.
Over the last two decades, the Internet has become an increasingly important part of our everyday lives. Now that Internet penetration levels are nearing saturation for many demographic groups, many technology experts are speculating about how the Internet will continue to affect our personal and work lives over the next 10 years. Here's a closer look at who's currently using the Internet and where the "Internet of Things" may be headed by 2025.
How Long Have You Been Surfing the Net?
In October 1995, the Federal Networking Council coined the term "Internet." Over the 20 years that followed, the Internet has exploded, making individuals and businesses more efficient, informed and penny-wise. It shatters many of the geographic boundaries that limited the growth of small businesses. It has enhanced our abilities to communicate via email and social media, access and research data, and buy and distribute products. Unfortunately, opportunistic individuals have also used the Internet to monitor behaviors, infringe privacy rights and even commit fraud.
The widespread use of the Internet wouldn't have been possible without the creation of technology known as the "World Wide Web." Last year, the Web celebrated its 25thbirthday. Although many people use the terms "Internet" and "Web" interchangeably, they're technically different. The Internet is an infrastructure that connects networks across the globe. The Web is a way for users to transmit data over the Internet using a uniform resource locator (URL), such as irs.gov or fasb.org. But, for simplicity's sake, we'll use the term "Internet" to refer to both.
Commerce Department Delays Privatization of Domain Names
In March 2014, the U.S. Department of Commerce announced plans to complete the privatization of the Internet's domain name system. Originally, the department's contract with an international not-for-profit organization known as Internet Corporation for Assigned Names and Numbers (ICANN) was set to expire on September 30, 2015. However, it has become increasingly apparent over the last few months that more work is needed before the government is willing to hand over the reins to an unspecified group of private international stakeholders as planned.
So, the Commerce Department has extended its contract with ICANN for one year, to September 30, 2016. It also has options to extend the contract for up to three additional years if needed.
Who's Who on the Internet
Increasingly, Americans from all walks of life have made the Internet a part of their daily lives. Earlier this summer, a Pew Research study reported that 84% of adults in the United States use the Internet on a regular basis — up from just 52% in 2000 and 76% in 2010. Here are some characteristics that affect Internet usage, according to Pew Research's study Americans' Internet Access: 2000 - 2015:
Age. Not surprisingly, young people are more likely to use the Internet than seniors. Today, 96% of Americans between the ages of 18 and 29 use the Internet, up from 70% in 2000. By comparison, 58% of people ages 65 or older use the Internet today, up from only 14% in 2000.
Education level. Higher levels of education equate with higher Internet penetration rates. Today, 95% of college graduates use the Internet, compared with 66% of people who haven't completed high school. In 2000, 78% of adults with at least a college degree used the Internet and only 19% of people without a high school diploma used it.
Income level. Similarly, 97% of households earning more than $75,000 use the Internet, up from 81% in 2000. Nearly three-quarters of people in households earning less than $30,000 currently use the Internet, up from one-third in 2000.
Community. Today, 85% of suburban, 85% of urban and 78% of rural residents are Internet users. In 2000, those figures stood at 56%, 53% and 42% respectively.
These characteristics often overlap. For instance, rural communities tend to have a higher proportion of residents who are older, have lower income and have attained lower levels of education.
Integration of the Internet into people's daily lives has grown significantly for all groups. Moreover, the gap in penetration rates for different demographics seems to be closing. The affordability of smartphones has helped people with lower levels of income and education access the Internet. Many of these individuals are "smartphone-dependent" for Internet access.
Wave of the Future
People currently have many options for accessing the Internet, including personal computers, smartphones, tablets and other mobile handheld devices. Tech-savvy people with extra disposable income are already adopting the next wave of online technology: Wearable computing devices, such as Fitbit, Apple Watch and Google Glass. In 2013, 13 billion devices were connected to the Internet. By 2020, the number of Internet-connected devices is expected to grow to 50 billion, according to technology company Cisco.
Another Pew Research study, 2014 Future of the Internet, predicts, "The growth of the Internet of Things and embedded and wearable devices [will] have widespread and beneficial effects by 2025 ... resulting from amplified connectivity [that] will influence nearly everything, nearly everyone, nearly everywhere." To expedite the adoption of these technologies, future smartphones and wearables are expected to be easier to type on and have improved speech and gesture recognition capabilities.
The "Internet of Things" is a catchall phrase for all of the devices, appliances, vehicles, wearables and sensors that connect to each other and feed data back and forth. It will present users with numerous opportunities and challenges as more parts of our environment connect to the Internet. Here are some of predictions for the future of the Internet reported in the Pew Research study:
The Critics Chime In
Skeptical respondents to the Pew Research study doubt how much more the Internet realistically will change the lives of Americans now that penetration levels are nearing saturation. They contend that wearables are merely toys for the wealthy or tools in special purposes environments, such as prisons, hospitals and battlefields. They will be "handy but hardly life-changing."
Others worry that, as the Internet expands, devices and users will be increasingly vulnerable to cyberattacks and fraud scams. Instead of making people smarter, critics argue, Internet-connected devices threaten our abilities to think freely, remember facts and make decisions. In short, the Internet of Things could cause people to "learn less but achieve more." For example, a generation that relies exclusively on their smartphones to get from point A to point B may be getting there faster and more easily than less-smartphone-savvy generations. But what would happen if the grid suddenly went down? Would the smartphone-reliant generation be stranded? Would they know how to read a paper map?
The big advantage of Section 529 college savings plans is that withdrawals used to cover qualified higher education expenses are free from federal income tax (and usually state income taxes too). That part is very easy to understand, but the full story on withdrawals is not so simple. What are qualified expenses? What happens if you take out money for expenses that aren't qualified?
Here are five important facts that you should know about 529 plan withdrawals:
Fact #1: You Have Two Basic Payment Options
- You can direct the plan to make a withdrawal check out in the name of the account beneficiary (meaning the student for whom the account was set up, usually your child or grandchild).
- You can direct the plan to make a check out in your name as the account owner or plan participant (meaning the person who established and funded the account).
Assuming the withdrawn funds will be used for the benefit of the account beneficiary (to pay for his or her college costs or for whatever other reason), having the check made out to him or her is the recommended option. If the money will be spent on college costs, you can have the beneficiary endorse the check over to you so you can control the spending.
If you as the account owner will keep the withdrawn funds for your own benefit, having the check made out in your name is the recommended option.
Handling withdrawals in this fashion makes it easier to "follow the money" for tax purposes.
Beware: As a matter of state law, you're not permitted to keep a withdrawal from a 529 account that was funded with money from a custodial account established for the 529 plan beneficiary (your child or grandchild) under a state's Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA). In this case, the money in the custodial account belongs to the kid, and the money in the 529 account does too because it came from the custodial account. In other words, a 529 account that was funded with custodial account money belongs to the child for whom the custodial account was set up. Therefore, withdrawals must be used for the benefit of the child, and not for your own purposes.
On the other hand, if you funded the 529 account with your own money, you can take withdrawals and do whatever you want with them because it's your money. Just make sure you understand the tax implications.
Fact #2: The IRS Knows About Withdrawals
When a withdrawal is taken from a 529 account, the plan is supposed to issue a Form 1099-Q, Payments From Qualified Education Programs, by no later than February 1 of the following year.
If withdrawal checks were issued to the account beneficiary, the 1099-Q will come to the beneficiary with his or her Social Security number on it. If checks were issued to you as the account owner, you will receive the form with your Social Security number on it.
Line 1 of the 1099-Q shows the total withdrawn for the year. Assuming the account made money, withdrawals will include some earnings and some tax basis from contributions.
- Withdrawn earnings are shown on line 2 of the 1099-Q. They may or may not be tax free.
- Withdrawn basis amounts are shown on line 3. They are always free of any federal income taxes or penalties.
The IRS gets a copy of the Form 1099-Q, so the government knows withdrawals were taken and who received them.
Fact #3: Some Withdrawals May Not Be Tax-Free, Even in Years with Big College Expenses
When the 1099-Q shows withdrawn earnings, the IRS might become interested in looking at the recipient's Form 1040, because some or all of the earnings might be taxable. Here's how the tax rules work.
Withdrawn earnings used for the benefit of the account beneficiary are always federal-income-tax-free when total withdrawals for the year do not exceed what the IRS calls the adjusted qualified education expenses, or AQEE, for the year. These expenses equal:
- The account beneficiary's tuition and related fees for an undergraduate or graduate program;
- Room and board (but only if he or she carries at least half of a full-time load); and
- Books and supplies, computer and Internet access costs.
Once you add up the above costs, then subtract:
- Costs covered by Pell grants, tax-free scholarships, fellowships, tuition discounts and veterans' educational assistance;
- Costs covered by employer-provided educational assistance or any other tax-free educational assistance (not including assistance received by a gift or inheritance);
- Expenses used to claim the American Opportunity or Lifetime Learning tax credit; and
- Expenses used to claim the tax deduction for college tuition and fees.
When withdrawals exceed adjusted qualified education expenses, all or part of the withdrawn earnings will be taxable. This little-known fact is an unpleasant surprise for some people.
Example: Ben has $36,000 in college expenses. He receives $24,000 in tax-free scholarships and tuition discounts, so his adjusted qualified education expenses are only $12,000. His parents arrange for a $36,000 withdrawal from Ben's 529 account. Assume the withdrawal includes $6,000 in earnings. The parents use the money to cover the $12,000 of qualified education expenses, plus Ben's clothing, pizza, and other incidentals, as well as a car for him to get back and forth to school. Since the $12,000 of adjusted qualified education expenses are only one-third of the 529 withdrawal, only one-third of the withdrawn earnings, or $2,000, is tax free. The remaining $4,000 is taxable and should be reported on the miscellaneous income line of Ben's Form 1040. Depending on Ben's overall tax situation and whether the Kiddie Tax applies to him, the tax hit on the $4,000 may or may not be a significant percentage. (The $4,000 of taxable earnings Ben receives counts as unearned income for purposes of the Kiddie Tax rules.)
Tax-wise steps: The parents should direct the plan to issue the withdrawal check in Ben's name rather than their names. Then, the parents should have Ben endorse the check over to them so they can control the spending. That way, Ben will be issued the 1099-Q and will bear the tax consequences.
Example: This time, assume Ben has $36,000 in adjusted qualified education expenses because he doesn't receive any scholarships or tuition discounts. Since his qualified expenses do not exceed the amount taken from his 529 account, the withdrawn earnings are federal-income-tax-free. Therefore, the $6,000 is not reported on Ben's Form 1040.
Fact #4: You Can Usually Keep Withdrawals for Yourself — But there May Be Taxes
Assuming the 529 account was funded with your own money (as opposed to money from your child's custodial account), you are free to change the account beneficiary to yourself and take federal-income-tax-free withdrawals to cover your own qualified education expenses if you decide to go back to school.
Earnings included in withdrawals that you choose to use for purposes other than education must be included in your gross income and will probably be hit with a 10 percent penalty (explained below).
However, if you liquidate a 529 account that is worth less than you contributed (because of the stock market), there won't be any withdrawn earnings, so you won't owe anything to the IRS. You might even be able to claim a tax-saving write-off for your loss.
Fact #5: Withdrawals Not Used for Education Can Be Hit with a Penalty
As explained earlier, the earnings included in 529 account withdrawals that are not used to cover the account beneficiary's qualified education expenses must be included in gross income. In other words, the earnings are taxable. But there's more.
According to the general rule, taxable earnings are also hit with a 10 percent penalty tax. However, the penalty tax does not apply to earnings that are only taxable because the account beneficiary's adjusted qualified education expenses were reduced by Pell grants, tax-free scholarships, fellowships, tuition discounts, veterans' educational assistance, employer-provided educational assistance or any other tax-free educational assistance (other than assistance received by gift or inheritance), or costs used to claim the American Opportunity or Lifetime Learning tax credit. In addition, the penalty tax doesn't apply to earnings withdrawn because the beneficiary attends one of the U.S. military academies (such as West Point, Annapolis or the Air Force Academy). Finally, the penalty doesn't apply to earnings withdrawn if the account beneficiary dies or becomes disabled.
Example: Dave has a falling out with his daughter, who decides not to go to college. Dave liquidates her 529 account, which he funded with his own money, and uses the withdrawal to buy an expensive new car for himself. Assume the 529 withdrawal includes $8,000 of earnings. Dave must report the $8,000 as miscellaneous income on his Form 1040. In addition, he will be socked with the 10 percent penalty tax on the $8,000.
Section 529 plans are one of the most popular ways to save for college. But in addition to knowing the rules for making contributions, it's important to understand how you can get money out of a 529 plan with the best possible tax outcome. If you have questions, consult with your tax adviser.
If you are about to ask for a business loan, expect to deal with the issue of covenants — constraints lenders impose on your company to keep it operating within specified financial ratios and to prevent it from taking certain actions.
These clauses are meant to help the lender mitigate risk and get its money back. But if you are not careful, they can put your company in a stranglehold. Under some very strict loan agreements, if your firm violates a covenant, it can automatically go into default and be forced to pay the loan in full immediately. Typical commercial-loan covenants can require your business to, among other things
When considering a loan, you want to try to at least loosen, if not eliminate, the obligations that will be most difficult for your business to meet. Try to negotiate covenants that leave you the flexibility to run your business prudently. Some loan requirements set sound benchmark metrics that can help keep your company healthy. Others, however, could be too difficult to meet and result in disastrous consequences.
Here are four important considerations before you officially ask for — or agree to — a commercial loan:
1. Take your lender's perspective. Your loan officer has to deal with internal policies and external regulators and, depending on the size of the loan, may have to persuade a formal loan committee that the loan presents no undue risk given the covenants involved. Gather up your business and strategic plans, financial projections and other relevant financial information and try to come up with a set of covenants you would expect the bank to require as well as a set your organization can live with. Keep in mind that the loan panel will be looking at how profitable the lending relationship will be for its company.
2. Run some critical calculations. Some financial covenants, such as debt service coverage ratios, liquidity and performance ratios, and current ratio/working capital, involve several financial statements. Take the time to run various scenarios through your company's most recent financial statements to determine which covenants would be the best and worst for your operation.
3. Ask "What If." Once you have analyzed your company's financials and have a grasp of how sensitive potential covenants will be to changes in your projections, start discussing matters with your lender. Keep the talks on the level of simply asking "what would happen if ..." This is a chance for you and your banker to feel each other out and determine each other's expectations before drafting a formal agreement.
4. Avoid strict technical default clauses. This is critical. The default section of the loan agreement gives the lender the right to demand immediate repayment of the loan if your business does not live up to a covenant. You need to be sure that inadvertent or unintentional defaults will not be triggered without your business receiving prior notice and having a chance to take care of the problem.
For example, if you have a monthly fixed-rate loan, the bank could argue that your company's financial controls should make such notice unnecessary. You, on the other hand, could maintain that missed deadlines can sometimes result from computer malfunctions or business trips where executives with check-signing authority are out of town. This type of discussion could be sparked by each default provision. Some give and take is required to reach a compromise. For instance, you and your lender might agree to a limit on the number of late payment notices allowed before your business is in default. The goal is to make it easier for your company to avoid default while assuring the lender there are adequate mechanisms in place to protect its interests.
Although you have to expect to agree to certain covenants when you take out a commercial loan, get guidance from your accountant as well as your attorney on how to effectively negotiate fair and reasonable terms that you don't inadvertently violate. It could accelerate a premature demand for repayment and cause financial hardship for your company.
|More Tips to Bolster Your Company's Position|
When talking to lenders, make sure your enterprise's financial projections include a full financial model of income statement, balance sheet and statement of cash flows on a monthly basis. This will reflect any seasonal fluctuations in the business plan.
Develop early warning mechanisms to alert management if your company reaches a point where it may violate a covenant. Have a checklist of steps to monitor compliance with all provisions of the loan agreement.
Reassure your lenders that you are on top of the terms your company accepted. Explain the plan of action your business will take if it breaches any obligations. Lenders want to know that your organization's management is taking steps to protect their collateral and to ensure that the loan is repaid.
Taking costs out of a business can be deceptively easy to do — at least initially. Cutting low-hanging fruit such as providing coffee in break rooms, consulting services, laying off temporary employees or removing a layer of management can result in considerable savings. However, these savings are often not sustainable. Slowly but surely, decisions will be made by front line employees and managers alike that add costs back into the business. Within short order, many companies find themselves back in the exact same place they were before the costs were cut; only now employee morale has suffered and there is a general resistance or apathy to cost cutting throughout the organization.
Implementing sustainable cost reductions that "stick" over time requires a different approach. Instead of pursuing cost reductions to satisfy a short term goal, consider adopting a longer term approach that focuses on identifying value within business processes.
Depending on the size and complexity of your company, there may be thousands of complex processes in place to deliver the end product or service to customers. Unfortunately, complex processes often include waste, abuse and fraud. Consider the following approach to improving your internal processes:
Measuring the financial impact. Before a revised process is implemented, take the time to document the desired financial impact of the new process. For example, the financial benefits could include a reduction in staff needed to perform the process, a reduction in office supplies such as paper or an increase in revenue generated attributable to the process. A dedicated process improvement scorecard can help justify the time and effort expended to revise the process and also provide sufficient information to monitor the process over time to ensure that costs and inefficiency do not creep back in.
People respond to incentives. Launching sporadic cost reduction exercises results in big costs savings that are often unsustainable. Once the financial goals are achieved, employees and managers tend to resort to their previous behaviors and costs slowly escalate. Engaging employees in the process can help break this vicious cycle. Instead of periodically launching cost cutting efforts, your company should consider adopting a continuous improvement mindset that focuses on baking value into every process, not just removing costs. When employees are able to demonstrate that they increased the percentage of value-added tasks in a process, they should be recognized and rewarded.
For example, a front line employee with a golf club manufacturer suggested his department perform the final cleaning of the finished club instead of passing it to a separate department to be cleaned. Removing one step in the process without compromising the end product helped reduce costs and resulted in the finished product being shipped to customers one day after it had been finished versus two days after, under the old process.
When a senior executive launches a one-time cost cutting exercise, the results can be fleeting. Employees "hunker down" and wait for the initiative to falter or fade from the corporate consciousness. When your company and its employees embrace the concept of adding and maintaining value within a process over time, the results may not only be sustainable, they may ultimately provide your company with a competitive advantage.
When a deal is pending, the best negotiators know that the goal isn't to scoop up everything and leave the other side with little or nothing. The real goal is generally to exchange items of value so that both sides leave satisfied they have protected their basic interests and made a deal that benefits their companies.
Like all worthwhile endeavors, success depends on preparation. You must know what to concede, when to compromise, and how to handle concessions. Here are a dozen
steps to help you achieve success at the negotiating table:
"My father said: 'You mustnever try to make all the money that's in a deal. Let the other fellow make some money too, because if you have a reputation for always making all the money, you won't have many deals.'"
— J. Paul Getty, American Industrialist,
Founder of Getty Oil Company
1. Define What a Win Looks Like to You. For a transaction to make sense for your company, you obviously need certain terms to be met. Before the meeting, do some homework to figure out at what point the deal stops making sense. For example, you might want a price of $55,000 and three days to deliver the product. But after crunching the numbers, you find that the lowest terms you can agree to without losing money are $50,000 and two-day delivery.
2. Establish Ground Rules. In many cases, it's a good idea to set some ground rules about the negotiation process, especially if there is a culture or language barrier, or you think the other person may be less than honest.
3. Determine Value. Think in terms of basic interests on both sides. Decide ahead of time what is of value to you and what you can afford to give up. Try to determine the same thing on the other side. For example, you go into a sales meeting and find the other party can use some of your company's stock that you consider obsolete (and which you are paying to insure and store). Offering it at a deep discount could further their interests and in the long run, save you money by getting it out of your inventory.
4. Hold Back. Don't make the first move. You don't know what the other party's aspirations are and you may give away far more than you need to. And when the other party requests a concession, don't agree immediately. That could give the appearance that you were asking too much, you know it, and you aren't prepared to defend it.
5. Make Small Concessions. You can establish that your first offer is valid by keeping concessions small. That also suggests there is little wiggle room. Plus, if you make a big concession, the other party may conclude you were trying to take advantage of him or her from the start.
6. Don't Give Up Something Without Getting Something. The key to effective negotiations is to build trust and communication with an above board give-and-take process. When the other party requests a concession, respond with: "What will you offer in return?" or "will you do this for me?" Don't give a concession without getting one. Ask for something of equal or greater value. One-sided concessions encourage the other party to keep asking for more.
7. Remember, Small Concessions Add Up. Beware of incrementalism. In other words, you may make a bunch of small concessions, but you later realize that you've given away a great deal.
8. Give Reasons for Making Concessions. Explain that, in light of the new information provided, you are willing to give up X in exchange for Y. Example: "Your components are more expensive than our current supplier, but since you've offered free local delivery, it's clear we can save significant freight charges. If you put this guarantee in writing, I'll sign with you now."
9. Don't Overreach. Once you've gotten a concession, don't try to change the terms to get more on that particular issue, or you risk losing goodwill.
10. Focus on What You Will Do. Try to avoid saying "no" outright. Instead, keep the process positive by saying something like, "I will do this, if you will do that."
11. Make Sure You Actually Want Concessions. Be careful what you ask for and offer. You may toss out an outrageous suggestion in the belief the other party will never go for it. But what if they do? One good example is a salary negotiation between a staff member and the boss. The employee believes herself to be indispensable and says that she'll quit if she doesn't get the raise she wants, only to have the employer thank her for her service and accept the offer.
12. Remember Your Bottom Line. Make up your mind that if you can't reach a suitable agreement, you'll walk away. It's not that different from buying a car. No matter how many extras the salesman throws in, if he won't come down to the price you want, it's a win/lose deal, with you on the losing end.
With Congress returning from its August recess, this is the question on tax-savvy Americans’ minds. Many valuable tax breaks aren’t permanent, so Congress has to pass legislation extending them to keep them in effect. Unfortunately, Congress often waits until the last minute to do so.
For example, Congress didn’t pass 2014 extenders until December 2014, making the legislation retroactive to January 1, 2014 — but not extending the breaks to 2015. So we’re again in a waiting game to see what will happen with extenders legislation. Some believe Congress will act soon, while others think we’ll again be waiting until December.
Here are several expired breaks that may benefit you or your business if extended:
Please check back with us for the latest information. Keep in mind that quick action after extenders legislation is passed may be required in order to take maximum advantage of the extended breaks.
It seems that every couple years the IRS has a new focus and this year we hear that the big focus is on misclassification of 1099 vs W2. What this means is that if you “employ” someone but pay them as a contractor and issue them a 1099 at year end, you could be misclassifying them. Misclassification can deny workers the rights and protections to which they are entitled as an employee and it reduces tax revenue collected by the federal and state governments. For these reasons, federal and state agencies have identified misclassification of employees as independent contractors as one of their top enforcement priorities.
In general an employee is a worker whose activities are directed by an employer, while a contractor is normally more at arm’s length and left to perform at their own discretion. There are rules and guidelines for when a person is an employee or a contractor which can get quite technical, so we recommend getting clarity on this before it is too late. The penalties for misclassification can be significant. In addition to owing back pay, overtime, and benefits to a misclassified worker, the employer may be ordered to pay back taxes, interest, and fines. In some states, employers that intentionally misclassify a worker may also face criminal charges or stop-work orders.
This may even affect people who operate their businesses as “S” Corporations. One of the rules the IRS has for self-employer “S” Corporations is that the owner take a reasonable salary. Often this is accomplished by the owned simply taking 1099 income for his or her salary (which should be 50% of the corporation’s income). This results in the owner accounting for self- employment taxes at year end. However, it is quite conceivable that given the loss of cash flow to the government during the year, this could be included in the IRS focus and penalties levied because these self-employment taxes should be paid over monthly or quarterly.
Some people are under the misconception that Social Security benefits are always free from federal income tax. However, depending on how much income you have from other sources, you may have to report up to 85 percent of your benefits as income on Form 1040 and pay the resulting federal income tax.
If this happens, you're effectively getting taxed twice on the same dollars:
This article explains the two steps needed to find out if your Social Security benefits will be taxed.
Step 1: Figure Your Provisional Income
The amount of Social Security benefits that you must report as taxable income depends on your provisional income for the year. To calculate it, start with your adjusted gross income (AGI), which is the amount on the last line on Page 1 of your Form 1040. (However, don't count Social Security benefits when figuring your AGI.) Next, take that AGI number and add the following amounts (only the first two actually apply to most taxpayers):
Avoid Estimated Tax Penalties
If you do have to pay federal taxes on your Social Security benefits, you can make quarterly estimated tax payments to the IRS, or choose to have federal taxes withheld from your benefits.
The result of this calculation is your "provisional income" for the year.
Step 2: Find Your Social Security Scenario
Once you know your provisional income, you can determine which of the following three scenarios you fall under.
Scenario A: All Benefits Are Tax-Free
If your provisional income is $32,000 or less, and you file a joint tax return with your spouse, your Social Security benefits are federal-income-tax-free (but you might still owe state income tax).
If your provisional income is $25,000 or less, and you don't file jointly, the general rule is that you don't owe federal income tax on your Social Security benefits. (However, there are less favorable rules if you're married and file separately from your spouse who lived with you at any time during the year.)
As you can see, a tax free outcome only happens if your provisional income is low.
Scenario B: Up to 50 percent of Benefits Are Taxed
If your provisional income is between $32,001 and $44,000, and you file jointly with your spouse, you must report up to 50 percent of your Social Security benefits as income.
For single taxpayers, if your provisional income is between $25,001 and $34,000, you must report up to 50 percent of your Social Security benefits as income.
Scenario C: Up to 85 percent of Benefits Are Taxed
If your provisional income is more than $44,000, and you file jointly with your spouse, you must report up to 85 percent of your Social Security benefits as income on Form 1040.
If your provisional income is more than $34,000, and you don't file jointly, the general rule is that you must report up to 85 percent of your Social Security benefits as income on Form 1040.
You also must report up to 85 percent if you're married and file separately from your spouse who lived with you at any time during the year—unless your provisional income is zero or a negative number (which is rare).
You now know whether or not you owe federal income tax on your benefits, but you still don't know exactly how much tax you'll actually owe. The calculations to get to that number are complicated and your tax adviser will handle them when filing your return. Your adviser can also help with tax planning to keep your taxes as low as possible during retirement.
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If your business exports American-made goods or performs architectural or engineering services for foreign construction projects, an interest-charge domestic international sales corporation (IC-DISC) can help slash your tax bill.
An IC-DISC is a “paper” corporation you set up to receive commissions on export sales, up to the greater of 50% of net income or 4% of gross receipts from qualified exports. Your business deducts the commission payments, while distributions received from the IC-DISC are treated as qualified dividends, not capital gains.
Essentially, an IC-DISC allows you to convert ordinary income taxed at rates as high as 39.6% into dividends taxed at 15% or 20%. An IC-DISC also allows you to defer taxes on up to $10 million in commissions held by the IC-DISC by paying a modest interest charge to the IRS.
Think an IC-DISC might be right for you? Contact us for more information.
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Can you imagine using a computer from the 1960s to run your business? Of course you can't. But many U.S. merchants and banks still use payment cards with magnetic strip technology that's more than 50 years old. On October 1, a liability shift goes into effect that may entice businesses to adopt modern "chip" technologies to more effectively combat fraud from counterfeit cards. Here's critical information that merchants and consumers should know about the liability shift going forward
Pros and Cons of EMV Compliance
The U.S. Small Business Administration (SBA) estimates that payment card fraud will cost U.S. businesses about $10 billion in 2015. Card issuers in Canada and several European, Asian and Latin American countries have already seen payment card fraud rates drop significantly after they switched from magnetic cards to chip cards, also known as EuroPay, MasterCard and Visa (EMV) cards.
How do chip cards help fight payment card fraud? Like old-fashioned music cassette tapes, magnetic credit and debit cards store static information, making them easy targets for hackers. If a thief steals data from a magnetic credit card, he or she can copy the unchanging data onto a cloned card and use it to make purchases or withdraw cash.
Conversely, a chip card contains a tiny metallic square that's actually a mini-computer. Chip cards generate a unique encrypted code for each transaction, so they're more secure than magnetic cards when read by an EMV-compliant processing device.
To enhance security, major U.S. card companies have finally mandated a liability shift for certain payment card transactions, effective on October 1, 2015. The ultimate goal is to make the United States EMV-compliant and reduce payment card fraud rates — but that may be a long and confusing process. The SBA estimates that about 40% of U.S. payment cards will contain EMV chips by the end of 2015, up from 3% at the start of the year.
The downside of EMV compliance is cost. Chip cards are more expensive for banks to manufacture than magnetic strip cards. To ensure timely EMV compliance, banks must reissue thousands of chip cards, often before their expiration dates. Financial institutions also may need to upgrade their ATMs. In addition, merchants must upgrade to EMV-compliant equipment and processing systems to accept in-store card payments that are protected with EMV technology. These costs will be offset by a reduction in payment card fraud, however.
Myths and Misconceptions
There have been lots of rumors about EMV compliance in the business community. Just to clarify, merchants that haven't upgraded their equipment and processing systems to the minimum EMV requirements won't be arrested or shut down on October 1. There's no federal law mandating that card issuers, merchants or consumers upgrade to EMV-compliant cards or equipment.
Instead, major U.S. card companies — including Visa, MasterCard, Discover and American Express — have voluntarily imposed a liability shift for counterfeit "card present" transactions that goes into effect for most merchants on October 1, 2015. Gas stations with automated fuel dispensers have until October 1, 2017, before their liability on counterfeit cards is shifted.
In the past, card issuers — including banks, credit unions and other financial institutions that issue debit or credit cards — generally accepted all liability for counterfeit payment card transactions. But on October 1, 2015, the liability for counterfeit in-store payment card transactions generally shifts to the party (either the issuer or merchant) that doesn't support EMV.
In other words, if a merchant accepts an in-store payment with a chip card and processes the transaction using a magnetic-only card reader, the merchant will be responsible for replacing the funds from fraud losses, not the card issuer. Most new cards will be enabled with both chip and magnetic strip technology to facilitate the transition phase.
The liability shift doesn't change the liability for online purchases, in-store transactions conducted using lost or stolen cards, or in-store transactions conducted using cards that only offer magnetic strips. Payment card issuers will continue to be liable for payment fraud that occurs with these types of transactions.
Payments on Mobile Devices
The liability shift is part of an ongoing effort to reduce payment card fraud. The next generation of payments is expected to be even faster and more secure than EMV cards. Instead of pulling a payment card out of their purse or wallet, consumers of the future will likely pay with contactless near field communication (NFC) mobile wallets. This technology simply requires a tap of the buyer's smart phone or watch. As an added bonus, mobile payment devices may be protected with biometric data, such as thumbprints, to protect against lost or stolen cards.
Proactive merchants may decide to upgrade their equipment and internal processing systems to allow all three types of payments: magnetic strip cards, chip cards and mobile NFC devices. Doing so is likely to minimize the long-term cost and hassle of upgrading card readers, as well as providing optimal flexibility and fraud protection when processing transactions for years to come.
Dip or Swipe? The Lowdown on Chip Cards for Consumers
Although consumers aren't directly affected by the upcoming liability shift, they'll benefit from more secure credit and debit cards. Many people have already started to receive new EMV-compliant cards, which are easily identified by a small metallic square on the front. But they're often uncertain how chip cards will affect their shopping experiences. Here's the lowdown:
1. Chip card payments take longer to process than magnetic strip card payments. Instead of swiping the metallic strip, chip cards are dipped into the card reader for about 10 seconds, giving the card's chip and the merchant's terminal time to communicate. Most shoppers will hardly notice the difference; it's similar to paying in cash and waiting to receive change.
2. U.S. chip cards will continue to be equipped with backup magnetic strips, at least for now. These may be used if the merchant's card reader isn't chip-enabled or the chip reader (or card) malfunctions.
3. U.S. consumers typically won't need to worry about memorizing additional personal identification numbers (PINs). Most U.S. chip cards will continue to require signatures, unless the card previously required a PIN.
4. Traditional magnetic strip debit cards that formerly called for the use of PINs are likely to be replaced with the chip-and-PIN cards that are common overseas. However, some less sophisticated EMV-compliant card readers won't initially be equipped to accept PINs, just signatures. To accommodate the transition period, U.S. chip-and-PIN cards will typically allow a signature in lieu of a PIN.
5. It's common for foreign merchants and automated payment kiosks to deny U.S. magnetic payment cards as an acceptable form of payment. But don't assume that your new chip cards will be accepted overseas either, especially if the card doesn't have a PIN. Before you travel internationally, contact your credit card company to determine whether you'll need a different card, a PIN or an alternative method of payment where you're traveling.
Today's active real estate market, along with current tax laws, has opened up opportunities to invest in fixer-upper homes and make a nice tax-free profit.
The reason has to do with a tax law, passed in 1997, that increased the amount you can exclude from taxes after selling a home. If you qualify, you can walk away with as much as $500,000 tax-free if you're married and filing a joint tax return and $250,000 if you're single.
The tax law restrictions are much friendlier than they used to be. For example, homeowners can find a less expensive home at any age and get as much as $250,000 or $500,000 of tax-free profit. Before the 1997 law, a replacement home had to be of equal or greater value or you had to be older than 55 — and then, you could only avoid as much as $125,000 of capital gain.
To reap the current tax benefit, you must live in your principal residence for two out of the past five years. Here's where the money-making opportunity comes in. There's no limit to the number of times you can renovate and resell a house for the tax-free profit, as long as you own and live in the house for the required two years.
How Lucrative Can this Be? Let's say you find a structurally sound home that needs cosmetic work and buy it for $200,000 - a substantial discount from surrounding, better-maintained properties. You move in and spruce the place up in your spare time, spending $20,000 on paint, wallpaper and new carpeting. Two years later, you sell the house for $330,000 and pay $10,000 in closing costs. Your profit is a cool $100,000. (This is calculated by taking the $330,000 sales price and subtracting the $200,000 original cost, $20,000 fix-up expenses and $10,000 closing costs.)
If building sweat equity appeals to you, it's perfectly legal to move on to another house and repeat the process. The best part: You don't owe a cent in federal taxes.
Now compare this profit to earning a salary. In the 25 percent tax bracket, if you make $100,000 annually, you owe $25,000 in federal taxes — and that doesn't include Social Security, Medicare and any state taxes.
As you can see, selling homes for a profit can be a great way to earn tax-free dollars. In most cases, the key is finding the right house in the right neighborhood and spending the time to improve it. You get the fulfillment of turning an eyesore into an asset — and tax-wise, it may beat "regular work."
Hang on to receipts. Records relating to home improvements will come in handy if your profit exceeds the $250,000 amount for single taxpayers or $500,000 for married couples filing jointly. Qualified expenses can affect the adjusted basis, which is used to figure gain on the sale of a home.
Choose improvements carefully. Some fix-up projects do little to boost the resale prices and eat into profits.
Consider all costs. When evaluating a property, don't forget to factor in costs such as mortgage points, credit report fees, escrow charges and appraisal fees.
Efficient sales mean bigger margins, which improve the bottom line. Here are five steps to beef up your sales program:
1. Consolidate sales routes.Reorganizing your sales circuit can let your staff visit more than one customer on each trip.
2. Focus on trophy customers. If your top customers haven't bought anything for, say, 90 days, find out why. Offer them a well-crafted plan aimed at their long-term needs and introduce the plan as a new feature just for them. Include discounts, premiums and extended warranties.
3. Cut the paperwork. You hired your sales staff to spend time selling, not sitting at a desk doingpaperwork. Design an electronic or manual form where the sales staff fill in a few simple entries and then hand the form over to administrative staff.
4. Light a fire. Anyone can sell popular items. The real challenge is getting revenue from new items or stock that hasn't taken off. Replace across-the-board commission rates and motivate your sales force with higher commissions on new products or "tough sells." You might even consider reducing the commission on popular products or services that seem to "sell themselves."
5. Revise commissions. In addition to paying commission that's tied to the difficulty of the sale, consider commissions based on:
Setting up a compensation plan based on measurable financial goals lets your sales staff see and understand the value of every transaction.
One Click Sales Tracking
Owners of small and medium size businesses don't often think sales automation is a tool for them. But without the bells and whistles, the software can be affordable and can help manage your sales funnel, give you an instant view of where sales stand, and show you where salespeople are in the process.
If you decide to invest in this kind of software, here's what you can expect:
Final Analysis: The tool won't create sales or generate leads. It enhances sales and helps your employees operate more efficiently.
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By distributing profits in the form of dividends rather than salary, an S corporation and its owners can avoid payroll taxes on these amounts. Because of the additional 0.9% Medicare tax on wages in excess of $200,000 ($250,000 for joint filers and $125,000 for married filing separately), the potential tax savings may be even greater than it once would have been. (S corporation dividends paid to shareholder-employees generally won’t be subject to the 3.8% net investment income tax.)
But paying little or no salary to S corporation shareholder-employees is risky. The IRS has targeted S corporations, assessing unpaid payroll taxes, penalties and interest against companies whose owners’ salaries are unreasonably low. To avoid such a result, S corporations should establish and document reasonable salaries for each position using compensation surveys, company financial data and other evidence.
Do you have questions about compensating S corporation shareholder-employees? Contact us — we can help you determine the mix of salary and dividends that can keep tax liability as low as possible while standing up to IRS scrutiny.
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Human resources (HR) departments face some complicated and unique challenges during difficult economic times. For example, a business facing financial cutbacks may decide to cut the benefits budget in HR, and then require the department to motivate employees who are feeling the results of those budget reductions.
Such a challenge may seem impossible to meet, but there are tactics that can either ease the additional financial burdens of employees or help contain benefits costs. Let's look at seven considerations:
1. Health benefits are one of the largest expenses represented in the benefits budgets of most companies. As such, health benefits often have the greatest cost-cutting potential. Consider putting the health plan out to bid for both your current type of coverage and a different plan that could have a better value. Assess plan features that could hold significant savings, such as prescription drug programs with a good track record on generic usages. Make sure that you're using every available method of helping employees get the most from their benefit dollars, such as offering premium-conversion plans and flexible spending accounts. Health savings accounts and consumer-directed health plans are also worth exploring.
2. Since 100 percent of the cost of voluntary benefits are paid by employees, expanding on or adding voluntary benefits can beef up the benefits offerings without the company incurring a lot of expense. Employees can pay for the policies through regular payroll deductions. Because employees get to take advantage of a group rate, purchasing such policies under the employer is often cheaper for the employees than making the purchases on their own.
3. Assess the benefits being offered to ensure they aren't the most costly, but still play a role in both keeping and attracting employees. Two examples of such would be disability and life insurance coverage.
4. High gas prices mean that commuting to and from work is a costly expense for most workers. Offering qualified transportation benefits, such as transit passes, vanpooling or qualified parking, through reimbursement funded by employee pre-tax dollars, is a relatively inexpensive way for employers to help employees with expensive commuting. The arrangement can save workers money on their Social Security taxes, federal taxes and possibly state taxes.
5. In relation to the cost of transportation, another potential way to help employees save is by making some simple scheduling changes. For example, the schedule can be made to better allow employees the option of carpooling together. If certain employees have job responsibilities that could be completed from their home, consider incorporating one or two days of working from home for these employees.
6. Flexible work schedules, such as a ten-hour/four-day work week, may also be an option for some businesses to save their employees transportation costs and save themselves energy costs. Shorter work weeks are often favored by employees due to the extra time it provides them for their leisure activities and home responsibilities.
7. Even though the budget is tight, make some room to communicate with employees on the value of their benefits. Most employees only see their own out-of-pocket expense for benefits. They seldom realize just how much their employers are spending to provide valuable benefits for staff members and their dependents. It only takes a very simple and concise report to provide a summary of the employee benefits being offered and the employer's cost.
Of course, these are just a few tactics to tighten the benefits budget and still keep employees satisfied. Use these ideas as a starting point to get the ball rolling on other ideas to help your HR department meet the challenges presented by hard economic times.
With nonqualified stock options (NQSOs), if the stock appreciates beyond your exercise price, you can buy shares at a price below what they’re trading for. This is the same as for the perhaps better-known incentive stock options (ISOs).
The tax treatment of NQSOs, however, differs from that of ISOs: NQSOs create compensation income — taxed at ordinary-income rates — on the “bargain element” (the difference between the stock’s fair market value and the exercise price) when exercised. This is regardless of whether the stock is held or sold immediately. Also, NQSO exercises don’t create an alternative minimum tax (AMT) preference item that can trigger AMT liability.
When you exercise NQSOs, you may need to make estimated tax payments or increase withholding to fully cover the tax. Keep in mind that an exercise could trigger or increase exposure to top tax rates, the additional 0.9% Medicare tax and the 3.8% net investment income tax.
Have tax questions about NQSOs or other stock-based compensation? Let us know — we’d be happy to answer them.
Just because a merger or acquisition is completed on paper doesn't mean the transactions will be a success. The implications can generally be seen 18 to 24 months after the deals close and officials can assess how the combinations contributed to improvements or disappointments on profit and loss statements.
That leads to a statistic to consider if you're thinking about a merger or acquisition: A large percentage of corporate marriages fail and the failure rate has little to do with financial or legal complexities. Rather, it often involves operational difficulties in integrating different corporate structures and cultures, as well as a failure to properly manage employees during the change.
Nevertheless, there are times when acquisitions make sense. Your company may want to acquire people with new skills, or you may be looking for new systems, technology, products or customers. You may even want to make a purchase to eliminate the competition.
Whatever the reason, you will certainly be looking to reduce costs over the long term. For example, a purchase can ultimately generate:
Economies of scale. A combined, larger company can gain purchasing power and negotiate better deals when buying items ranging from office supplies to IT systems to manufacturing equipment. There will also be lower costs from staff reductions resulting from duplicated efforts or new efficiencies that make some jobs obsolete.
Expanded market reach. A new company can wind up with a larger and more geographically diverse marketing and sales staff, as well as larger distribution channels.
Financing clout. An integrated company, by virtue of its size, increased efficiencies and solid growth plan, can find that it's easier to obtain capital.
As you can see, M&A transactions can offer potential, particularly if you want rapid change or growth. But the eventual success or failure of a deal depends on how well your company overcomes risk factors and achieves the desired synergies. In one survey of 124 merged companies, 44 percent said they did not gain access to new markets, grow market share or add product during the three years after the deals closed.
So before opting for a merger or acquisition, consider the alternatives. Partnerships, alliances, and joint marketing and distribution are just some of the options that might help accomplish the same goals. If you still think an acquisition or merger is the best route, take some steps to maximize the chance of success and minimize the probability of failure.
Starting point: Devise a well-planned strategy that includes realistic expectations and time schedules. Meet with top executives and advisers to brainstorm possible bad events that could happen before and after the transaction. Invite key employees who report directly to top management — you want as much input as possible.
Then, be certain to have:
A clear transition plan. Ensure you have the right people and resources to execute the enormous task of integrating employees and structures into your own corporate architecture.
A realistic price. The buyer generally pays a premium of about 10 per cent. Set a maximum premium you are willing to pay and keep your eye on it. That can save you if a bidding war develops and you find yourself getting irrationally caught up in the frenzy. The premium represents part of the synergies you expect to achieve. Once it starts edging way out of your original range, you need to look for some phenomenal synergies.
Acceptable terms. You have to live with the terms. Sellers may try to negotiate large golden parachutes, job stability for themselves or key executives, limits on layoffs, or agreements to retain certain operations, even if they are unprofitable.
A reasonable debt load. Debt offers some advantages over equity, including significant tax benefits, but the load shouldn't be too heavy.
If it is well conceived, a merger or acquisition could potentially provide your company with a competitive advantage and many synergies. But a failure could end up hurting your company's bottom line, upsetting the stability of its core business, and undermining morale. Make a well-informed decision by taking a critical look at your plans, staying objective and preparing for the worst possible scenarios.
Assessing the Risks
After brainstorming possible negative events that could crop up before, during, and after a merger or acquisition, it can help to categorize them into four categories:
Catastrophic - Scenarios or potential demands from sellers that could kill the transaction before or after the deal is signed.
Booby traps - Unexpected events that could kill the deal if they happen.
Run of the mill - Scenarios that are likely to happen but you probably have the resources to deal with them.
Irritants - These events aren't likely to occur but if they do, your company will have no problem responding.
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If you usually receive a large federal income tax refund, you’re essentially making an interest-free loan to the IRS. Rather than wait until you file your 2015 tax return in 2016, why not begin enjoying your “refund” now by reducing your withholdings or estimated tax payments for the remainder of 2015?
It’s particularly important to review your withholdings, and adjust them if necessary, when you experience a major life event, such as marriage, divorce, birth or adoption of a child, or a layoff suffered by you or your spouse.
If you’d like help determining what your withholding or estimated tax payments should be for the second half of the year, please contact us.
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Let's say you get a brochure for an industry trade show. It looks awfully appealing. It's being held in a sun-drenched resort in the middle of winter. Sure, it's expensive, but you decide to attend because it's tax deductible.
Caution: Follow all the rules and keep proper records. IRS Auditors are suspicious of business conventions that look like vacations. Here are some answers to help you secure valuable deductions and stay out of trouble with the IRS:
Q. I'm planning to attend a convention paid for by my company. How much of the cost can the firm deduct?
A. It depends. In order to be deductible, the convention must be connected to your business and the primary purpose of the trip must be business-related. In other words, you can't write off the cost of a six-day trip if you spend one morning attending a seminar and the rest of the time sightseeing or lying on the beach.
If the convention qualifies, you can deduct travel costs to and from the location, convention fees and hotel bills. You can only deduct 50 percent of your meal expenses. If you do a small amount of sightseeing on a trip that is made primarily for business purposes, you can't deduct any of those personal expenses.
You also cannot write off the cost of bringing your spouse or other family members, unless they are employees of your company and have a bona fide business reason for making the trip.
Q. Can I deduct an educational conference offered on a cruise ship as part of my professional educational development?
A. In some cases, you can deduct travel expenses when you attend a convention on an ocean liner or cruise ship but the rules are very strict. In order to qualify for convention write-offs — on land or sea — you must show that attendance benefits your trade or business. No deductions are allowed for meetings related to personal investments, political causes or other purposes.
When you set sail on a cruise ship convention, there are additional restrictions:
- You can only deduct the cost of a business-related convention if the cruise involves a United States flagship and all ports of call are within the U.S. or its possessions.
- There's a $2,000 annual limit on cruise conventions.
- You must attach a written statement to your tax return that includes certain facts about the convention.
Tip: If you meet the qualifications for a deduction, keep a copy of the convention agenda or program with your tax records. It generally shows the purpose of the event and can be used to prove to the IRS that the convention benefited your business.
On June 26, the U.S. Supreme Court ruled that same-sex couples have a constitutional right to marry, making same-sex marriage legal in all 50 states. For federal tax purposes, same-sex married couples were already considered married, under the Court’s 2013 decision in United States v. Windsor and subsequent IRS guidance — even if their state of residence didn’t recognize their marriage.
From a tax planning perspective, the latest ruling means that, in states where same-sex marriage hadn’t been recognized, same-sex married couples no longer will need to deal with the complications of being treated as married for federal tax purposes but not married for state tax purposes. So their tax and estate planning will be simplified and they can take advantage of state-level tax benefits for married couples. But in some cases, these couples will also be subject to some tax burdens, such as the “marriage penalty.”
Same-sex married couples should review their tax planning strategies and estate plans to determine what new opportunities may be available to them and whether there are any new burdens they should plan for. Employers will need to keep a close eye on how these developments will affect their tax obligations in relation to employees who have same-sex spouses. Please contact us if you have questions
As the U.S. Supreme Court adjourns for its summer recess, the landmark cases about same-sex marriage and the Affordable Care Act premium tax credits have garnered most of the publicity. However, you should also know about these three lesser-known Supreme Court decisions that may significantly affect your business.
Supreme Court Rules on ACA Premium Tax Credits
On June 25, the U.S. Supreme Court released its long-awaited decision in King v. Burwell (S. Ct. No. 14-114). In a 6-3 ruling, it upheld a decision of the U.S. Court of Appeals for the Fourth Circuit that taxpayers purchasing health care coverage on a federal exchange can qualify for premium tax credits under the Affordable Care Act (ACA). The bottom line: The ACA remains intact.
In this case, four individuals who live in Virginia — a state using a federal exchange rather than establishing its own exchange — didn't want to purchase health insurance. So they argued that, because Virginia's exchange wasn't "an Exchange established by the State," they shouldn't receive any tax credits for buying health insurance. If they weren't eligible for the tax credits, the cost of buying insurance would be more than 8% of their income. This would make coverage unaffordable, exempting them from the ACA's coverage requirement.
The Supreme Court found that the text of certain provisions of the ACA is somewhat ambiguous, requiring the Court to look to the broader structure of the law. To that end, the majority opinion concludes, "[The tax] credits are necessary for the Federal Exchanges to function like their State Exchange counterparts, and to avoid the type of calamitous result that Congress plainly meant to avoid. [...] Congress passed the Affordable Care Act to improve health insurance markets, not to destroy them."
Kimble v. Marvel Enterprises (S. Ct. No. 13-270, June 22, 2015)
An inventor created a toy that simulated the web-shooting powers of Spiderman. The invention consisted of a glove with a valve and a canister of pressurized foam, allowing users to shoot webs from the palms of their hands.
In 1991, the inventor obtained a patent on the device. Subsequently, he met with representatives from an affiliate of Marvel Enterprises (Marvel) that markets Spiderman products, but the company didn't enter into any agreement with him. Soon afterward, Marvel began selling a similar toy.
The inventor sued Marvel in 1997 and the two sides settled in 2001. Under the terms of the agreement, Marvel agreed to pay an ongoing 3% royalty rate on sales of the toy. The patent expired in 2010, but the settlement had no "sunset date." The parties went to court after they disagreed about the royalty calculation.
In a 6-3 decision, the Supreme Court preserved its holding from a controversial 1964 case — Brulotte v. Thys Co. — that effectively punishes parties who sign away their patent rights. Citing Brulotte, the Court ruled that royalty agreements weren't enforceable after a patent expires.
This case reinforces the controversial notion, based on Brulotte, that royalty payments may be limited to the patent term. In practice, many royalty agreements don't include a "sunset date," or they otherwise imply that payments will occur indefinitely.
In the United States, the term of a new patent is generally 20 years from the date on which the application for the patent was filed in the United States or, in special cases, from the date an earlier related application was filed, subject to the payment of maintenance fees. Although 20 years may seem like a long time, it often takes several years from the application date for a patent to be approved by the U.S. Patent and Trademark Office and for a product to go to market.
As the dissenting opinion points out, entities that own patents — such as inventors, high-tech start-ups, research hospitals and universities — may be adversely impacted by this decision. On the other hand, businesses that pay royalties may be able to reduce their royalty expenses by keeping track of patent expiration dates.
Equal Employment Opportunity Commission v. Abercrombie & Fitch Stores, Inc. (S. Ct. 14-86, June 1, 2015)
Abercrombie & Fitch Stores (Abercrombie), a national chain of clothing stores, requires employees to meet a "look policy" reflecting its style. The policy prohibits black clothing and caps, although it doesn't expressly define the term "cap." If a question concerning the policy arises during a job interview, the policy specifies that the job applicant should contact the company's human resources department.
In 2008, a practicing Muslim applied for a position at an Abercrombie store. The job applicant wore a hijab, a kind of headscarf, every day, including on the day of her interview. There was no discussion of the hijab during the interview, but it did result in a lower rating in the "appearance" section of the application.
The Equal Employment Opportunity Commission (EEOC) sued Abercrombie on behalf of the job applicant. It claimed that the company had violated Title VII of the Civil Rights Act of 1964 ("Title VII") by refusing to hire the applicant because of the hijab.
Abercrombie argued that the applicant had failed to meet her duty to inform the interviewer that she required a special accommodation from the appearance policy. The Tenth Circuit Court of Appeals reversed a lower court ruling, deciding that the trial court should have granted summary judgment in favor of Abercrombie because the job applicant hadn't expressed any potential conflict.
The Supreme Court held that the job applicant didn't have to make a specific request to wear a headscarf to accommodate her religious beliefs, even if such a request was dictated by company policy. According to the opinion, proof of "actual knowledge" of the job applicant's religious need isn't required for an accommodation.
Title VII prohibits certain motives regardless of the employer's knowledge of the applicant. So, the job applicant had to show only that her need for an accommodation was a motivating factor in the employer's decision not to hire her. Thus, the Supreme Court ruled in favor of the EEOC.
Young v. United Parcel Service, Inc. (S. Ct. No. 12-1226, April 27, 2015)
A delivery driver for United Parcel Service (UPS) requested a leave of absence in 2006 to undergo in vitro fertilization. The procedure was successful, and she became pregnant.
During her pregnancy, medical personnel advised the driver that she shouldn't lift more than 20 pounds while working. But company policy at UPS requires drivers to be able to lift up to 70 pounds. Because the pregnant driver couldn't meet this work requirement — and because she had used up all of her available family and medical leave — UPS forced her to take an extended unpaid leave of absence.
While the driver was out on leave, she lost her medical coverage. After giving birth in 2007, she resumed her duties at UPS. In her lawsuit, she claimed that she was the victim of gender and disability-based discrimination under the Americans with Disabilities Act (ADA) and Pregnancy Discrimination Act (PDA).
UPS countered that the driver couldn't prove that its decision was based on her pregnancy or that she was treated differently from any other worker in similar circumstances. Also, UPS argued that pregnancy didn't qualify as a "disability" under the ADA. The U.S. Court of Appeals for the Fourth Circuit affirmed the lower court's dismissal of the claim.
Although the ADA didn't come into play, the Supreme Court advised courts to evaluate 1) the extent to which an employer's policy treats pregnant workers less favorably than nonpregnant workers with similar inabilities to work and 2) any legitimate reasons for such differences. The top court's interpretation of the PDA is that employers must offer the same accommodations to pregnant workers as others with comparable physical limitations, regardless of other factors.
The majority opinion concluded that a pregnant worker can "create a genuine issue of material fact as to whether a significant burden exists by providing evidence that the employer accommodates a large percentage of nonpregnant workers while failing to accommodate a large percentage of pregnant workers." The Court remanded the case to the Fourth Circuit for additional analysis.
With the U.S. Supreme Court’s June 25 decision upholding the Affordable Care Act (ACA) yet again, employers subject to the act’s information reporting provision can no longer afford to put off planning in the hope that the requirements might go away.
Beginning in 2016, “large” employers as defined by the act (generally employers with 50 or more full-time employees or the equivalent) must file Forms 1094 and 1095 to provide information to the IRS and plan participants about health coverage provided in the previous year (2015).
Fortunately, recent IRS guidance helps clarify the reporting requirements. And a new IRS Q&A document addresses more specific issues that may arise while completing the forms.
Keep in mind that, while some “midsize” employers (generally employers with 50 to 99 full-time employees or the equivalent) can qualify for an exemption from the play-or-pay provision in 2015 if they meet certain requirements, these employers still will be subject to the information reporting requirements.
If your organization is among those required to file Forms 1094 and 1095 and you need help complying with the requirements, please contact us.
A potential downside of tax-deferred saving through a traditional retirement plan is that you’ll have to pay taxes when you make withdrawals at retirement. Roth plans, on the other hand, allow tax-free distributions; the tradeoff is that contributions to these plans don’t reduce your current-year taxable income.
Unfortunately, modified adjusted gross income (MAGI)-based phaseouts may reduce or eliminate your ability to contribute:
You can make a partial contribution if your MAGI falls within the applicable range, but no contribution if it exceeds the top of the range.
If the income-based phaseout prevents you from making Roth IRA contributions and you don’t already have a traditional IRA, a “back door” IRA might be right for you. How does it work? You set up a traditional account and make a nondeductible contribution to it. You then wait until the transaction clears and convert the traditional account to a Roth account. The only tax due will be on any growth in the account between the time you made the contribution and the date of conversion.
Do you have a bank account or investments overseas? If so you may have a reporting requirement that is due June 30, 2015.
U.S. residents, citizens and entities, including corporations, partnerships and limited liability companies with a greater than 50% direct or indirect financial interest or signature authority over at least one foreign financial account must file the FBAR if the aggregate value of the account(s) at any time in the calendar exceeds $10,000. Types of accounts that must be reported include: securities and brokerage accounts; savings, demand, checking and deposit accounts. Tax-qualified retirement plans are excluded from the reporting requirement.
Please contact us urgently if you are not sure if this applies to you or if you need to file.
Even though portability now allows married couples to use up both spouses’ estate tax exemptions without having to make lifetime asset transfers or set up trusts, this “easier” path isn’t necessarily the better path. For couples with large estates, making lifetime asset transfers and setting up trusts can provide benefits that exemption portability doesn’t offer.
With portability, if one spouse dies and part (or all) of his or her estate tax exemption is unused at death, the estate can elect to permit the surviving spouse to use the deceased spouse’s remaining estate tax exemption. But making the portability election doesn’t protect future growth on assets from estate tax like applying the exemption to a credit shelter trust does.
Also, the portability provision doesn’t apply to the GST tax exemption, and some states don’t recognize exemption portability. Credit shelter trusts offer GST and state estate tax planning opportunities, as well as creditor and remarriage protection.
If you’d like to learn more about credit shelter trusts or other estate planning strategies for your situation, please let us know.
If you don’t pay attention to the details, the tax consequences of a sale may be different from what you expect. For example, if you bought the same security at different times and prices and want to sell high-tax-basis shares to reduce gain or increase a loss to offset other gains, be sure to specifically identify which block of shares is being sold.
And when it gets close to year end, keep in mind that the trade date, not the settlement date, of publicly traded securities determines the year in which you recognize the gain or loss.
Finally, consider the transaction costs, such as broker fees. While of course such costs aren’t taxes, like taxes they can have a significant impact on your net returns, especially over time, because they also reduce the amount of money you have available to invest.
If you have questions about the potential tax impact of an investment sale you’re considering — or all of the details you should keep in mind to minimize it — please contact us.
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