As we embark on a new an uncertain year for the Affordable Care Act, employers should remain focused on certain shifting deadlines and reporting requirements for ACA coverage in 2017. No matter what happens to current efforts to “repeal and replace” Obamacare, it’s a good bet that these changes will kick in long before any major restructuring will take effect, so it’s important to keep compliant now, and into the foreseeable future.
Several reporting deadlines are coming earlier than they did last year, despite an extension from the IRS announced in November 2016. In addition, the ACA’s transition relief period has drawn to a close, and new coverage requirements are in force. While future changes are anticipated in the underlying legislation, current rules remain in force, and non-compliance can trigger penalties.
In 2016, the IRS extended its employee notification and IRS filing deadlines, giving employers an extra two months to get forms out to their employees and an extra three months to get forms over to the IRS. This year, that extra leeway has been trimmed.
- Forms 1095-B and 1095-C, provided to employees: This year’s deadline for employee notification of last year’s month-by-month coverage was originally January 31, 2017 (compared to last year’s deadlines of March 31). However, in November, the IRS announced a 30-day extension, with a new deadline of March 2, 2017. Regardless, employers should act now to ensure these amounts are reconciled, printed and provided to employees by the deadline.
- Forms 1094-B, 1095-B, 1094-C and 1095-C, provided to the IRS: If an employer is filing these forms by paper, the deadline is Feb. 28, 2017. If an employer is filing them electronically, the deadline is March 31, 2017. Any employer filing 250 or more of these forms during the calendar year must file electronically.
New coverage requirements
Heading into 2017, the transition relief period for employer shared responsibility – offering affordable coverage that provides at least “minimal value” to your employees if you are an employer of a certain size – has come to an end. In 2015, only organizations with 100 or more full-time (or full-time-equivalent) employees were subject to the employer shared responsibility mandate, and they were only required to insure 70% of their full-time employees. In 2016, however, the threshold was dropped to 50 or more full-time or full-time-equivalent employees, and the requirement to insure full-time employees was increased to 95%. In 2017, the IRS is expected to collect payroll and benefit data to ensure that indicator codes on Form 1095-C are accurate. With more employees coming under coverage, employers will need to ensure that these forms are completed correctly for each.
Wave of ACA uncertainty
The current rules are expected to remain in place for this year. That being said, 2017 brings a great deal of uncertainty to the ACA. With efforts expected from the incoming administration and Republicans in Congress to repeal the act, there could be further changes in line for employers. We recommend that you keep an eye on these changes, and consult with a tax and benefits professional regarding what these changes mean for your business.
When considering your options for giving to a nonprofit organization, whether you are an individual or a company, you should always evaluate the organization’s ability to accomplish its mission. There are a number of ways that this can be accomplished.
Begin with goal assessment. Start with looking at how the organization defines its goals: Are they specific or broad? More importantly, does the organization use concrete criteria and standards to define these goals? Do these goals align with your reason for donating to the organization?
Do a financial health checkup. Once you’re satisfied with a nonprofit’s ability to define its goals, the next step is to review the nonprofit’s financial history, and how it fares in comparison to other nonprofits working on similar strategies, if possible.
The leading document that will allow you to evaluate a nonprofit’s financials is its Form 990, which is the basic IRS filing document for nonprofits seeking tax exemption. This form is used by both the public and the IRS to evaluate how a nonprofit operates. It collects a multitude of information, including the nonprofit’s mission, programs, finances, conflicts of interest, compensation of board members and staff, and other information relating to financial accountability and fraud prevention. Depending on the size of the nonprofit, there are varying versions of this form. It should be noted that if the nonprofit isn’t filing for tax exemption, they are not required to file this form with the IRS.
Evaluating the financials of a nonprofit can be tricky. Unlike other business models where a healthy bottom line typically indicates success, a large bottom line at a nonprofit may signal that donations aren’t being put to use. A donor should also evaluate the percentage of a nonprofit’s funds being used for programs versus administration. There aren’t necessarily standard benchmark percentages that can be applied to the nonprofit sector, as each varies in its administrative needs. However, certain nonprofit ranking systems will rank a nonprofit higher if its administrative expense percentage falls between 0% and 15%, while they also recommend that the organization spends 65% to 75% of its total expenses on program activities.
Look to third-party evaluators. While Form 990 is one way to evaluate a nonprofit, there are a number of other options – for example, the Better Business Bureau provides a review of 1,300 national charities. The BBB holds nonprofits accountable to 20 standards including governance, oversight and effectiveness. Another resource is Charity Navigator, which evaluates the financial health, accountability, transparency and results reporting of a nonprofit.
Follow the money. Another key consideration involves what restrictions, if any, the nonprofit places on the donated funds. Your donation may be put to better use if the organization allows for unrestricted use of the given fund, which will better support the organization’s ability to freely meet its needs and goals. Depending on the size of the nonprofit, the amount of your donation could have varying implications; a smaller organization, for example, may not be able to effectively handle a larger donation.
Nonprofits that have only a vague definition of their goals, and those that can’t demonstrate sound governance, proper financial protocols and established accountability measures, should raise a red flag for donors. Turning to an expert that understands nonprofits can help you evaluate a nonprofit’s viability and, ultimately, whether it’s in a position to properly execute your donation.
This past May, President Obama announced the publication of the Labor Department final rule updating overtime regulations, which will automatically extend overtime pay to over 4 million workers within the first year of implementation. This has significant implications for many businesses, including smaller enterprises and nonprofits that may have less experience with overtime rules.
As a result of the revised regulations, the salary threshold for the overtime exemption will increase from $455 per week (or $23,600 per year) to $913 per week (or $47,476 per year). This rule takes effect on Dec. 1, which means your businesses will need to begin tracking hours for salaried employees who are at or below the $47,476 threshold. Whether each employee is covered depends on their role, the classification of their role, and the number of hours worked, meaning there are multiple scenarios to consider.
Small businesses that boast a high number of hourly and seasonal employees; nonprofit organizations; and employers in the retail, manufacturing and restaurant industries stand to be most affected by the changes.
To help steer clear of potential employee lawsuits or an audit by the Labor Department under the new regulations, small business owners are advised to track hourly data for their employees for a few reasons:
- Accuracy. Employers will be required to pay even salaried employees who are below the new threshold for any overtime hours worked.
- Audit trail. If your business or organization is reported for not adhering to the new regulations, the Department of Labor will subject your business to an audit.
- Decision support. As you consider how to handle each employee’s exemption situation, having accurate information is necessary, as the amount of hours they work directly impacts how their compensation is handled.
To mitigate any unexpected surprises, you should openly communicate changes to employees to give them advance notice of the potential impact. Because the changes may limit flexible schedules for those impacted by the change, you have a few options to consider:
- Raising salaries above the exemption threshold. An employer that decides to raise salaries to the $47,476 threshold or higher will avoid the additional regulatory burden. However, it could be incurring significant operating costs for a potential minimal return.
- Reclassifying affected employees without limiting overtime. Any employer deciding to not limit overtime will also incur additional costs for each employee. Employers have a responsibility to understand how many hours their employees are working to make sure they set their new pay structure accordingly.
- Reclassifying affected employees and prohibiting overtime without authorization. Although this may reduce the number of hours that employees work, it may also mean affected employees cannot maintain a similar workload.
If you’re curious about the best course of action to take in order to be prepared for the upcoming changes, the best solution is to touch base with a professional who can help assess your needs and requirements.
In early August, the Treasury Department released draft regulations which, should they be finalized in their current form, could eliminate nearly all valuation discounts for family businesses, including family limited partnerships holding securities. While the new rules are being met with opposition – including a newly introduced bill that aims to nix the proposed rules – the possible elimination of valuation discounts could lead many family businesses to evaluate whether they should make certain wealth transfers now, before a finalized version of the rules would take effect.
The IRS’s assistant secretary for tax policy asserts the new rules are intended to close a loophole, in which valuation discounts are used on marketable securities (e.g., stock and bonds) when they are intended to be used on non-marketable securities (e.g., land or real estate).
In their current form, the proposed rules would “add a new class of ‘disregarded restrictions’ that will be ignored if, after the transfer, the restriction will lapse or may be removed – without regard to certain interests held by nonfamily members – by the transferor or the transferor’s family,” reports Bloomberg BNA.
The IRS defines a disregarded restriction as one that: “(a) limits the ability of the holder of the interest to liquidate the interest; (b) limits the liquidation proceeds to an amount that is less than a minimum value; (c) defers the payment of the liquidation proceeds for more than six months; or (d) permits the payment of the liquidation proceeds in any manner other than in cash or other property, other than certain notes.”
If you own a small business, your first impulse may be to trigger transactions ahead of any finalized rules; however, it’s important to consider the long-term picture. Even if the proposed rules are finalized as drafted – limiting the appeal of certain valuation discounts – family wealth transfers could remain a viable, attractive option in some cases, according to some legal experts.
There is a 90-day comment period for the proposed rules, and hearings are scheduled for Dec. 1st. Depending on the outcome of these processes, it’s possible that final regulations may come into effect by year-end. While many practitioners expect the early concerns will be ironed out during the comment and hearing process, it’s recommended that you discuss your family’s situation with your tax advisor, including any planned transactions, to determine the best long-term strategy for your wealth plan and estate and how these changes could affect you.
The IRS released its new figures and tax provisions for the 2017 tax year, and for the most part, taxable amounts related to retirement benefit plans remain unaltered, according to the agency.
For payroll administrators, it’s important to know the new figures and adjustments. Although in most cases, there are either no changes or only minor changes, these limits will impact payroll requirements for all of the upcoming year.
Among the unchanged retirement benefit amounts is the deferral limit for Section 401 (k), 403 (b) and most 457 plans, which holds steady at $18,000 for the year. For employees age 50 or older who are participating in these plans and the federal government’s Thrift Savings Plan, the catch-up contribution limit remains unmoved as well, sitting at $6,000.
One retirement amount that did change was the defined contribution maximum annual addition, which is now set at $54,000 for 2017, up from $53,000 in 2016.
- For single taxpayers, the standard deduction is $6,350, up from $6,300 in 2016.
- For married couples, it is $12,700, up from $12,600 in 2016.
- For heads of households, the standard deduction is $9,350 in 2017, up from $9,300 in 2016.
Medical Coverage and Health Savings
- The annual deductible for self-only coverage in a medical savings account remains unchanged at no less than $2,250, but no more than $3,350, while the maximum out-of-pocket expense amount for self-only coverage will increase to $4,500 from $4,450.
- The annual deductible for family coverage in a medical savings account will increase to $4,500 from $4,450, with a ceiling of $6,750, up from a previous limit of $6,700. The out-of-pocket expense limit for family coverage will increase to $8,250 from $8,150.
- The limit under voluntary employee salary reductions for contributions to health flexible spending arrangements will increase to $2,600 from $2,550.
Other Miscellaneous Deductions
- The foreign earned-income exclusion amount under tax code Section 911(b)(2)(D)(i) moves to $102,100, up from $101,300.
- The maximum exclusion amount from an employee’s gross income for amounts or expenses incurred by an employer under an adoption-assistance program is now $13,570, up from $13,460.
- There were no changes to the monthly tax-free amount of an employer subsidy for mass-transit passes and van pools used by an employee, or the monthly benefit exclusion amount for qualified parking, which both remain at $255 for 2017.
Your nonprofit’s internal controls are strong only if they’re current. So perform a risk assessment every time you experience major organizational changes, such as significant expansion, or when factors such as the loss of a large grant put new stresses on your not-for-profit. Two functions deserve particular scrutiny:
1. Cash inflows
Receiving funds is an important job that shouldn’t be overlooked or undersupervised. No one person should ever have sole responsibility for tasks such as opening the mail, recording incoming payments and making bank deposits. Your organizational risk only increases if that staff member also performs financial or accounting functions such as making journal entries, writing checks or performing bank reconciliations.
If your nonprofit has limited accounting staff, consider providing the necessary checks and balances with outside help. This could be from an employee in another department, a trusted board member or an external accounting service.
2. Financial outflows
You also need to maintain policies for financial outlays. This includes requiring dual signatures on checks over a certain amount. In fact, consider lowering your current threshold of expenses or payments that trigger review or a co-signature and performing more random check audits.
Many fraud perpetrators invent vendors and create fake invoices for work that’s never performed. Or they may divert payments to legitimate vendors to their personal accounts. Review and approval of journal entries and adjustments is a critical control for all organizations.
Getting outside help
If you’re tempted to eliminate outside bookkeeping, accounting or audit help and bring these tasks in-house to save money, consider the bigger picture. In many cases, outsourcing provides you with expertise you might lack and monitoring you need.
For help performing a thorough risk assessment, contact us. We can find internal control vulnerabilities before dishonest staff members do.
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 run your business as an S corporation, you’re probably both a shareholder and an employee. As such, the corporation pays you a salary that reflects the work you do for the business — and you (and your company) must remit payroll tax on some or all of your wages.
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 from classifying payments as dividends rather than salary may be even greater than it once would have been.
IRS audit target
But paying little or no salary is risky. The IRS targets S corporations with owners’ salaries that it considers unreasonably low and assesses unpaid payroll taxes, penalties and interest.
To avoid such a result, S corporations should establish and document reasonable salaries for each position using compensation surveys, comparable industry studies, company financial data and other evidence. Spell out the reasons for compensation amounts in your corporate minutes. Have the minutes reviewed by a tax professional before being finalized.
Prove a salary is reasonable
There are no specific guidelines for reasonable compensation in the tax code or regulations. Various courts, which have ruled on this issue, have based their determinations on the facts and circumstances of each case. Factors considered in determining reasonable compensation include:
• Training and experience,
• Duties and responsibilities,
• Time and effort devoted to the business,
• Dividend history,
• Payments to non-owner employees,
• Timing and manner of paying bonuses to key people, and
• Compensation agreements.
Ascertain the right mix
Do you have questions about compensation? Contact us. We can help you determine the mix of salary and dividends that can keep your tax liability as low as possible while standing up to IRS scrutiny.
Some companies may decide to delist from the public markets, especially if shareholders and the reporting requirement of the Securities and Exchange Commission (SEC) are stunting their growth. In terms of financial reporting and regulatory scrutiny, however, the process of going private is almost as complex as going public. Here’s a closer look at what to expect if you decide to delist.
The SEC scrutinizes going private transactions to ensure that unaffiliated shareholders are treated fairly. Among other requirements, a company that’s delisting — together with its controlling shareholders and other affiliates — must generally file detailed disclosures pursuant to SEC Rule 13e-3.
To comply with this rule, companies must disclose the purposes of the transaction (including any alternatives considered and the reasons they were rejected) and the fairness of the transaction (in terms of both price and procedure). The company must also identify any reports, opinions and appraisals “materially related” to the transaction.
Failure to act with the utmost fairness and transparency can bring harsh consequences. The SEC’s rules are intended to protect shareholders, and some states even have takeover statutes to provide shareholders with dissenters’ rights
Case in point
One of the leading companies in the PC market, Dell, decided to go private in 2013. The company’s board president and founder, Michael Dell, opted to delist because he said that public shareholders didn’t to appreciate his new-and-improved strategic direction. Dell felt that taking the company private through a management buyout was the most effective way to achieve its long-term value potential.
Dissenting minority shareholders argued that the buyout price of $13.75 per share was unfair. The Delaware Chancery Court agreed, ruling that Dell’s stock had been underpriced by more than 20% in the management buyout. This decision is expected to add millions of dollars to Dell’s going private transaction, if it’s not appealed and overturned.
Handle with care
In light of cases like Dell’s, companies that pursue going-private transactions should exercise extreme caution. To withstand SEC scrutiny and avoid lawsuits, it’s critical to structure these transactions in a manner that ensures transparency, procedural fairness and a fair price.
Many expenses that may qualify as miscellaneous itemized deductions are deductible only to the extent they exceed, in aggregate, 2% of your adjusted gross income (AGI). Bunching these expenses into a single year may allow you to exceed this “floor.” So now is a good time to add up your potential deductions to date to see if bunching is a smart strategy for you this year.
Should you bunch into 2016?
If your miscellaneous itemized deductions are getting close to — or they already exceed — the 2% floor, consider incurring and paying additional expenses by Dec. 31, such as:
But beware . . .
These expenses aren’t deductible for alternative minimum tax (AMT) purposes. So don’t bunch them into 2016 if you might be subject to the AMT this year.
Also, if your AGI exceeds the applicable threshold, certain deductions — including miscellaneous itemized deductions — are 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).
If you’d like more information on miscellaneous itemized deductions, the AMT or the itemized deduction limit, let us know.
It’s critical to report inventory using the optimal method. There are several legitimate options for reporting inventory — but take heed: The method you choose ultimately affects how much inventory and profit you’ll show and how much tax you’ll owe.
Inventory is generally recorded when it’s received and title transfers to the company. Then, it moves to cost of goods sold when the product ships and title transfers to the customer. But you can apply different inventory methods that will affect the value of inventory on your company’s balance sheet.
FIFO vs. LIFO
Under the first-in, first-out (FIFO) method, the first units entered into inventory are the first ones presumed sold. Conversely, under the last-in, first-out (LIFO) method, the last units entered are the first presumed sold.
In an inflationary environment, companies that report inventory using FIFO report higher inventory values, lower cost of sales and higher pretax earnings than otherwise identical companies that use LIFO. So, in an increasing-cost market, companies that use FIFO appear stronger — on the surface.
But LIFO can be an effective way to defer taxes and, therefore, improve cash flow. Using LIFO causes the low-cost items to remain in inventory. Higher cost of sales generates lower pretax earnings as long as inventory keeps growing. To keep inventory growing and avoid expensing old cost layers, however, some companies may feel compelled to produce or purchase excessive amounts of inventory. This can be an inefficient use of resources.
When a company’s inventory is one of a kind, such as artwork or custom jewelry, it may be appropriate to use the specific-identification method. Here, each item is reported at historic cost and that amount is generally carried on the books until the specific item is sold. But a write-off may be required if an item’s market value falls below its carrying value.
Weighing your options
Each inventory reporting method has pros and cons — and what worked when you started your business may not be the right choice today. As you prepare for year end, consider whether your method is still optimal, given your current size and business operations, expected market conditions, and today’s tax laws and accounting rules. Not sure what’s right? We can help you evaluate the options.
Paying the proper amount of tax by the annual federal income tax filing deadline isn’t enough to avoid interest and penalties; you must also meet requirements for paying tax throughout the year through withholding and/or quarterly estimated tax payments. If you have income from sources such as self-employment, interest, dividends, alimony, rent, prizes, awards or the sales of assets, you may have to pay estimated tax.
Generally, you must pay estimated tax if both of these statements apply:
If you’re a sole proprietor, partner or S corporation shareholder, you generally have to make estimated tax payments if you expect to owe $1,000 or more in tax when you file your return.
Making the payments
Payments are spaced through the year into four periods or due dates. Generally, the due dates are April 15, June 15, Sept. 15 and Jan. 15, unless the date falls on a weekend or holiday.
Estimated tax is calculated by factoring in expected gross income, taxable income, taxes, deductions and credits for the year. The easiest way to pay estimated tax is electronically through the Electronic Federal Tax Payment System. You can also pay estimated tax by check or money order using the Estimated Tax Payment Voucher or by credit or debit card.
If you’d like assistance determining whether you need to pay estimated tax or calculating your payments, contact us.
If your not-for-profit is struggling and other organizations provide similar services in your community, you may want to consider a merger. Teaming up with another nonprofit may enable you to pool resources, cut costs and possibly better serve your constituents.
The right choice?
A merger may be appropriate if:
Combining forces may help both organizations involved achieve objectives faster, use funding more efficiently, provide better services and maximize capabilities.
Are you ready?
If you’re mulling a merger, think about what you really want to achieve. Develop realistic objectives stated in measurable terms, such as striving for a 25% increase in donations or expanding services into an adjacent community.
Also assess your readiness to be a partner. Consult managers, board members, advisors and even major donors to identify potential financial, legal and public relations implications of a potential merger. Generally, the best nonprofit merger candidates have stable management and a good handle on their strategic challenges. Growth-oriented nonprofits, with a history of successful risk-taking, can also make strong candidates.
What’s the next step?
There are always risks associated with a merger, including stakeholder resistance. That’s why it’s important to work with advisors experienced in handling nonprofit combinations. They can guide you through the complicated process, including due diligence, negotiations and integration, and help ensure that your merger will improve your organization’s long-term viability. For more information, contact us.
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.
An auditor does significant legwork before starting field work. During the audit planning phase, he or she reviews the preliminary financials and compares the current year’s results to last year and industry benchmarks. Here’s a closer look at what happens behind the scenes — and why you might want to implement a similar approach internally.
Preliminary analytics start with a horizontal comparison. That is, auditors compare internally prepared financial statements for the current year to last year’s audited results. Usually, changes are shown as a dollar amount and percentage.
The amount of change that warrants additional attention depends on the “materiality” threshold the auditor sets. For example, an auditor of a small business may decide to inquire about any line item that changes by, say, $10,000 or 10% and then possibly incorporate additional testing for questionable line items. A higher dollar amount threshold may apply for a larger company.
Accountants also may use a vertical or “common-size” approach when planning an audit. This technique shows each line item as a percentage of sales or total assets.
For example, a common-size income statement — which shows expenses as a percentage of sales — explains how each dollar of sales is distributed between costs, expenses and profits. Changes in a company’s financial statements over time can highlight trends and operating inefficiencies that warrant closer scrutiny.
Additionally, auditors calculate ratios to capture the relationships between various items on a company’s financial statements. For example:
• Profit margin = net income / sales.
• Total asset turnover = sales / total assets.
Ratios are helpful when benchmarking a company against competitors (which may be bigger or smaller) or in comparison with industry averages. What’s good or bad for a particular ratio depends on the industry in which the company operates.
Significant variances from year to year and from industry norms can help auditors decide where to focus. Owners can adopt similar analytical procedures to anticipate the questions that will be asked during audit field work and improve audit efficiency.
More important, however, using a similar type of analysis in-house can help owners monitor the company’s performance throughout the year and catch mistakes early. Contact us for a detailed explanation of how to think like an auditor and perform an interim financial analysis of your company.
More than half of financial statement frauds involve sales and accounts receivable, according to the Committee of Sponsoring Organizations of the Treadway Commission. (COSO is a joint initiative of five private sector organizations that develops frameworks and guidance on enterprise risk management, internal control and fraud deterrence.) But why do fraudsters tend to target accounts receivable?
For accrual-basis entities, accounts receivable is typically one of the most active accounts in the general ledger. It’s where companies report contract revenue and any other sales that are invoiced to the customer (rather than paid directly in cash). The sheer volume of transactions flowing through this account helps hide a variety of scams. Here are some examples.
Sometimes fraudsters book phony sales — and receivables — to make their company’s performance appear rosier than reality. Increased sales assure stakeholders that the company is growing and building market share. They also increase profits artificially, because bogus sales generate no costs. And, overstated receivables inflate the collateral base, allowing the company to secure additional financing.
Unscrupulous owners or employees might manipulate cutoffs to boost sales and receivables in the current accounting period. For example, a salesperson could prematurely report a large contract sale even though material uncertainties exist. A retail chain CFO could hold the accounting period open a few extra days to boost year-end sales. Or a contractor might use aggressive percentage-of-completion estimates to boost revenues.
Some employees divert customer payments for their personal use. Then, the fraudster applies a subsequent payment from another customer to the customer whose funds were stolen. The second customer’s account is credited by a third customer’s payment, and so on. Delayed payments continue until the fraudster repays the money, makes an adjusting journal entry or gets caught.
Know the red flags
Accounts receivable fraud can be hard to unearth. Fortunately, experienced forensic accountants know to look for such anomalies as:
If something seems awry with your accounts receivable, we can help verify your outstanding balances and find holes in your internal controls system to safeguard against future scams.
For years, public broadcasting stations have successfully marketed sustaining memberships to their listeners and viewers — and now other not-for-profits are catching on. Properly designed and implemented, a sustainer program can provide your organization with a strong, predictable income stream, raise its public profile and increase donor loyalty.
How they work
Sustainer programs enable supporters to make periodic, automatic donations. Donors provide bank account or credit card information and are billed regularly for an agreed-upon amount. In return for their commitment, donors usually receive sustainer program memberships, with benefits that might include invitations to members-only events.
Research suggests that monthly sustainers give significantly more per year than single-gift donors. They also show higher retention rates and are more likely than not to continue as sustainers when they renew each year.
Although sustainer programs make regular giving easy and convenient, they can be challenging for nonprofits to administer. Be prepared to pour time and resources into building a system to capture donor information, process payments and run regular performance and trend reports. Many nonprofits — particularly smaller organizations — outsource this function.
The public face of your program requires just as much attention. You’ll need to regularly thank, reward and update supporters. A members-only newsletter can help instill a sense of ownership and keep sustaining supporters in the loop.
If you’re considering a trial run and planning to ditch your sustainer program if it doesn’t produce an immediate or dramatic increase in donations, think again. You probably won’t realize the highest net per donor relative to fundraising cost in the first year of your sustainer program — but that should be your long-term goal.
To make sure you achieve it, thoroughly research this fundraising model and decide whether it makes sense given your mission, financial and human resources, and pool of prospective sustaining donors. Make sure staff members understand how sustainer programs differ from traditional fundraising methods and that you have their buy-in.
For more information, contact us. We can help you review current numbers and project potential costs and income related to various fundraising models.
Last year a break valued by many charitably inclined retirees was made permanent: the charitable IRA rollover. If you’re age 70½ or older, you can make direct contributions — up to $100,000 annually — from your IRA to qualified charitable organizations without owing any income tax on the distributions.
Satisfy your RMD
A charitable IRA rollover can be used to satisfy required minimum distributions (RMDs). You must begin to take annual RMDs from your traditional IRAs in the year in which you reach age 70½. If you don’t comply, you can owe a penalty equal to 50% of the amount you should have withdrawn but didn’t. (An RMD deferral is allowed for the initial year, but you’ll have to take two RMDs the next year.)
So if you don’t need the RMD for your living expenses, a charitable IRA rollover can be a great way to comply with the RMD requirement without triggering the tax liability that would occur if the RMD were paid out to you.
You might be able to achieve a similar tax result from taking the RMD payout and then contributing that amount to charity. But it’s more complex because you must report the RMD as income and then take an itemized deduction for the donation. This has two more possible downsides:
A charitable IRA rollover avoids these potential negative tax consequences.
Have questions about charitable IRA rollovers or other giving strategies? Please contact us. We can help you create a giving plan that will meet your charitable goals and maximize your tax savings.
It’s common for parents, grandparents and others to make gifts to minors and college students. Perhaps you want to help fund education expenses or simply remove assets from your taxable estate. Or maybe you’re hoping to shift income into a lower tax bracket. Whatever the reason, beware of the “kiddie tax.”
What is the kiddie tax?
For children subject to the kiddie tax, any unearned income beyond $2,100 (for 2016) is taxed at their parents’ marginal rate (assuming it’s higher), rather than their own likely low rate.
For example, let’s say you transferred to your 16-year-old some stock you’d held for several years that had appreciated $10,000. You were thinking she’d be eligible for the 0% long-term gains rate so could sell the stock with no tax liability for your family. But you’d be in for an unhappy surprise: Assuming your daughter had no other unearned income, $7,900 of the gain would be taxed at your rate (15% or 20%, depending on your bracket).
Or let’s say you transferred the appreciated stock to your 18-year-old grandson with the plan that he could sell the stock tax-free to pay for his college tuition. If his parents are in a higher tax bracket, he won’t end up with the entire $10,000 gain available for tuition because of the kiddie tax liability.
Who’s a “kiddie”?
Years ago, the kiddie tax applied only to those under age 14 — providing families with the opportunity to enjoy significant tax savings from income shifting. Today, the kiddie tax applies to children under age 19 and to full-time students under age 24 (unless the students provide more than half of their own support from earned income).
Fortunately, there may be ways to achieve your goals without triggering the kiddie tax. For example, if you’d like to shift income and you have adult children who’re no longer subject to the kiddie tax but in a lower tax bracket, consider transferring income-producing or highly appreciated assets to them. Or, if you want to help your grandchild fund college, consider paying tuition directly to his or her school. An added bonus: a direct tuition payment isn’t subject to gift tax.
For more on the kiddie tax and ways to achieve your goals without triggering it, contact us.
Auditors reconsider the “going concern” assumption every time they audit your financial statements. When your company’s long-term viability is doubtful, it may cause the auditor to issue a qualified audit opinion. Depending on the level of uncertainty and the underlying reasons, a qualified opinion could raise a red flag that your company is under financial distress and might need to file for bankruptcy in the near future.
Going concern assumption
Financial statements are generally prepared under the assumption that the business will remain a going concern. That is, the entity is expected to continue to generate a positive return on its assets and meet its obligations in the ordinary course of business.
Sometimes adverse conditions and events — such as negative operating cash flow or pending lawsuits — cast “substantial doubt” on the entity’s ability to continue as a going concern over the next year.
Levels of opinion
Audit opinions vary depending on available information, financial viability, errors discovered during audit procedures and other limiting factors. When an auditor issues an unqualified opinion, he or she is saying that the company’s financial condition, position and operations are fairly presented in the financial statements.
When uncertainties exist regarding the going concern assumption, the auditor will typically issue a qualified opinion. A qualified opinion may also be issued if your financial statements appear to contain a small deviation from U.S. Generally Accepted Accounting Principles (GAAP) — or if management limits the scope of audit procedures.
Much less desirable are adverse opinions. They indicate material exceptions to GAAP that affect the financial statements as a whole.
By far the most alarming opinion is a disclaimer, which occurs when the auditor gives up midaudit. Reasons for a disclaimer may include significant scope limitations and uncertainties within the subject company itself.
Guidance that shifts the responsibility for identifying going concern issues from external auditors to internal managers was issued by the Financial Accounting Standards Board in 2014. This change is intended to inform stakeholders about financial problems sooner.
If you identify a going concern issue, ask yourself, “Can we fix it?” Then, assemble a team of internal and external advisors to brainstorm remedies. If it’s not fixable, expect a downgraded audit opinion and prepare to address inquiries from your lenders and investors when your financial statements are issued.
The market value of property and equipment often exceeds book value, especially for fixed assets that appreciate (rather than depreciate) in value or if your company uses accelerated depreciation methods. But the reverse sometimes occurs, too. When book value exceeds market value, a write-off may be required under U.S. Generally Accepted Accounting Principles.
Companies normally record fixed assets at historic cost and then depreciate them over their useful lives. But sometimes an asset’s book value (historic cost less accumulated depreciation) overstates its fair value. Fair value is “the price that would be received to sell an asset . . . in an orderly transaction between market participants at the measurement date,” according to Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures.
To the extent that book value exceeds fair value, the value of an asset is “impaired.” And you must report the impairment loss as part of your income from continuing operations. Impairment losses also reduce the carrying value of the impaired asset on your balance sheet. Once impairment has occurred, the FASB prohibits the upward revaluation of the asset in subsequent periods.
Testing for impairment
Companies aren’t required to test property and equipment for impairment every accounting period. Rather, testing should occur on a consistent basis — say, every three to five years. Possible reasons for interim testing include changing market conditions, inaccurate useful lives or overpaying for an acquisition.
Unfortunately, there are many reasons management may delay or deny impairment. An impairment loss lowers earnings and the value of fixed assets and, therefore, raises a red flag to investors and lenders. Additionally, impairment testing may be outside the comfort zones of some internal accounting personnel.
Your balance sheet also may be “off” if the fixed asset ledger isn’t accurate. For example, you may no longer physically possess an asset that’s been stolen by an employee. Or an asset may be idle, damaged or obsolete.
Many businesses struggle with reporting property and equipment. We can help you get a handle on managing, depreciating and reporting impairment for these valuable assets. Contact us for more information.
Suppose your not-for-profit provides medical services to low-income families. You’re approached by a group that wants to serve the same population with reduced-cost dental clinics, and it has already lined up several large donations. The fledgling charity, however, doesn’t have 501(c)(3) status, and wants your organization to act as its fiscal sponsor.
A fiscal sponsorship — a kind of legal and financial umbrella — could benefit both your organization and the project that seeks your help. But before saying “yes,” make sure you understand how such sponsorships work.
Know the benefits
In a fiscal sponsorship, the 501(c)(3) sponsor is legally responsible for the charitable project. It acts as employer to the project’s paid workers and manages all of its funds. Donations and grants are made directly to the fiscal sponsor, thus qualifying the smaller charity’s donors for a charitable deduction.
For charitable projects, sponsorships provide much-needed infrastructure and fiscal management. And they can make more funds available by facilitating charitable donations. Plus, associating with an established charity enhances the project’s credibility.
For sponsors, this type of arrangement can provide greater exposure, possibly resulting in new donors. When you choose a project that shares your mission and basic objectives, it can enhance your own program offerings with minimal monetary outlay. Although it isn’t intended to be a source of income, many nonprofits charge a nominal fee for the sponsorship to offset their overhead costs.
Projects that can benefit from a fiscal sponsorship include those that are:
When you find a good candidate, discuss expectations and roles with the group. Mutually agree on start and termination dates and decide which charity will make decisions about what. Be sure to decide on the sponsorship charge (up to 10% is typical), how disbursements will be made and who will handle audit and reporting requirements.
Keep in mind that any fiscal sponsorship involves some risk to your organization’s finances and reputation. Contact us before agreeing to enter into one of these arrangements.
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 the deductible expenses of a business exceed its income, a net operating loss (NOL) generally occurs. If you’re planning ahead or filing your income tax return after an extension request and you find that your business has a qualifying NOL, there’s some good news: The loss may generate some tax benefits.
Carrying back or forward
The specific rules and exact computations to figure an NOL can be complex. But when a business incurs a qualifying NOL, the loss can be carried back up to two years, and any remaining amount can be carried forward up to 20 years. The carryback can generate an immediate tax refund, boosting cash flow during a time when you need it.
However, there’s an alternative: The business can elect instead to carry the entire loss forward. If cash flow is fairly strong, carrying the loss forward may be more beneficial, such as if the business’s income increases substantially, pushing it into a higher tax bracket — or if tax rates increase. In both scenarios, the carryforward can save more taxes than the carryback because deductions are more powerful when higher tax rates apply.
Your situation is unique
Your business may want to opt for a carryforward if its alternative minimum tax liability in previous years makes the carryback less beneficial. In the case of flow-through entities, owners might be able to reap individual tax benefits from the NOL. Also note that there are different NOL rules for farming businesses.
Please contact us if you’d like more information on the NOL rules and how you can maximize the tax benefits of an NOL.
You might be able to claim a deduction for the business use of a home office. If you qualify, you can deduct a portion of expenses, including rent or mortgage interest, depreciation, utilities, insurance, and repairs. The exact amount that can be deducted depends on how much of your home is used for business.
Basic rules for claiming deductions
The part of your home claimed for business use must be used:
A strict interpretation
The words “exclusively” and “regularly” are strictly interpreted by the IRS. Regularly means on a consistent basis. You can’t qualify a room in your home as an office if you use it only a couple of times a year to meet with customers. Exclusively means the specific area is used solely for business. The area can be a room or other separately identifiable space. A room that’s used for both business and personal purposes doesn’t meet the test.
The exclusive use rule doesn’t apply to a daycare facility in your home.
What if you’re audited?
Home office deductions can be an audit target. If you’re audited by the IRS, it shouldn't result in additional taxes if you follow the rules, keep records of expenses and file an accurate, complete tax return. If you do have a home office, take pictures of the setup in case you sell the house or discontinue the use of the office while the tax return is still open to audit.
There are more rules than can be covered here. Contact us about how your business use of a home affects your tax situation now and in the future. Also be aware that deductions for a home office may affect the tax results when you eventually sell your home.
Content written by Toal, Griffith + Ragula.
When it comes to your nonprofit organization, every dollar counts. While it’s important to maintain a board of directors that reflects the diversity and values of those your organization serves, it is equally important to have a board whose members are financially versed.
Not every member on your board needs to be a financial expert. But it is necessary for each to have a certain level of business or finance experience to draw from—including an understanding of basic terminology, the acumen to evaluate financial statements, and the ability to ask the right questions to help determine your organization’s financial health.
Such questions may include:
- Does your organization’s budget support its strategic plan?
- Are your organization’s cash-flow projections achievable?
- Are you complying with requirements established by your funders?
- Do you have the necessary policies in place to protect against errors, fraud or abuse?
By ensuring that all board members have the capacity to recognize financial warning signs, you can significantly reduce the risk that your nonprofit will face a sudden budget shortfall, come across an unexpected expense, or be blindsided by accusations of financial impropriety.
An effective fraud-prevention measure that many boards employ is to disperse specific duties among their members. For instance, one member may be given responsibility for authorizing payments, disbursing funds, reconciling bank statements and reviewing credit card statements, while other members could bear the responsibility for depositing and reconciling the receipt of funds.
Similarly, a policy that requires two layers of approval for expenses can reduce the risk of embezzlement. Boards should enact policies requiring two signatories on checks over a specified amount and two different signatories on every authorization or payment.
Good governance policies can also play an integral role in ensuring the financial health of your nonprofit organization. These should include a conflict-of-interest policy and a document retention policy, in addition to a code of ethics to establish conduct guidelines for board, management, volunteers and staff. Your organization may also consider enforcing a whistleblower policy, which would help protect anyone who reports unethical or unlawful practices.
Incorporating financial capabilities among your board is essential. Often, boards will look to a partner to provide advisory services for issues or requirements that may fall outside its capabilities. Also, a partner can help ensure that proper financial policies are in place and offer a third-party view of the organization’s financial health and processes.
Content written by Toal, Griffith + Ragula
Maryland-based businesses large and small are getting ready for the first of three minimum wage increases, each scheduled to take effect on July 1 over the next three years. The first, effective July 1, 2016, will see the minimum wage rise to $8.75 an hour. By the time the third minimum wage increase kicks in on July 1, 2018, that figure will be $10.10 an hour.
While this is being touted as a win for many employees, there are a number of considerations that need to be taken into account if you are a business owner. The most obvious impact of any minimum wage increase is the effect that it has on business operating costs. For some businesses, payroll expenses can consume up to 50% of their gross income.
Questions concerning the minimum wage can divide the business community. A recent survey found a nearly even split between business owners who favored increasing the minimum wage (51%) versus those who were against it (49%).
Regardless of which side of the debate you favor, there are number of new requirements businesses operating in Maryland must follow under the new law:
It is also essential for that you keep good records, as employers are required to maintain records for three years that include:
The Maryland Department of Labor has the right to enter a place of employment to inspect and copy a businesses’ minimum wage records at any time, so it’s critical that businesses understand the new law coming into effect on July 1st, and have the proper reporting capabilities in place.
Businesses that fail to adhere to the new minimum wage requirements face potential civil and criminal penalties. Employers that pay less than minimum wage, or that let an employee go for complaining about being underpaid, can be charged with a misdemeanor and could face fines of up to $1,000. Further, should an employer pay an employee less than minimum wage, they could be liable for the difference between the two amounts.
Turning to an outsourced accounting and payroll partner can help you assess your financial risks and ensure that reporting processes are put in place and properly adhered to in order to limit risk of penalties in the future.
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.
It’s a myth that not-for-profits as a group suffer disproportionately high losses due to occupational fraud. According to the Association of Certified Fraud Examiners’ (ACFE’s) 2016 Report to the Nations on Occupational Fraud and Abuse, surveyed nonprofits lost a median amount of $100,000, compared with $150,000 for all organizations.
Yet nonprofits have special vulnerabilities to fraud. Knowing such weaknesses can help you take action to prevent crooked employees from exploiting them.
Mind the gaps
The core of any organization’s fraud-prevention program is strong internal controls. These are policies that govern everything from accepting cash to signing checks to training staff to performing regular audits.
But internal controls aren’t always a priority with nonprofits. Charities tend to devote most of their budgets to programming and have fewer dollars available to enforce internal controls.
This can be especially problematic when the “tone at the top” is lax. Nonprofit boards may inadvertently enable fraud when they place too much trust in the executive director and fail to challenge that person’s financial representations. Unlike for-profit companies, nonprofit boards may lack members with financial oversight experience who might notice when something is amiss.
Trust is another potential Achilles’ heel. Nonprofits often regard their staff members as family and skip such important fraud-prevention measures as conducting background checks. In some cases, managers are allowed to override internal controls without recourse and volunteers are trusted to accept cash donations or keep the books without the oversight of a staff member — both very risky activities.
Proper segregation of duties — for example, assigning account reconciliation and fund depositing to two different staff members — is essential. Strong management oversight and confidential hotlines also help reduce fraud. If you catch a fraud perpetrator, don’t sweep the incident under the rug. File a police report, contact your attorney and, if an investigation shows that the employee did commit fraud, fire him or her. Punitive action sends a strong message to other would-be cheats.
You can’t always take a balance sheet at face value, because it may omit certain valuable assets and costly future obligations. Here are some examples of items that may not be reported on a company’s balance sheet and a closer look at the rules for recording contingent losses under U.S. Generally Accepted Accounting Principles (GAAP).
What GAAP requires
Patents, brands, goodwill and other intangible assets provide significant value for many companies. Acquired intangibles may be reported at their fair value and either amortized over time or tested at least annually for impairment. But the values of internally generated intangible assets are generally not included on a GAAP-basis balance sheet.
On the other hand, pending litigation, governmental investigations and other contingent losses may be reported on the balance sheet as an accrued liability, disclosed in the footnotes or omitted from the financial statements, depending on how they’re classified under GAAP. Accounting Standards Codification (ASC) Topic 450, Contingencies, requires companies to classify contingent losses as “probable” (that is, likely to occur), “remote” (meaning the chances that a loss will occur are slight), or “reasonably possible” (falling somewhere between remote and probable).
When to report or disclose
Under GAAP, a company must record an accrued liability only if a contingent loss is probable and the amount (or a range of amounts) can be reasonably estimated. If it can’t be reasonably estimated, companies must disclose the nature of a probable contingency and explain why the amount can’t be quantified.
If a contingent loss is reasonably possible, the company must disclose it but doesn’t need to record an accrual. The disclosure should include an estimate of the amount (or range of amounts) of the contingent loss or an explanation of why it can’t be estimated. If a contingent loss is remote, no disclosure or accrual is required.
Reporting contingencies requires professional judgment. We can help you classify and estimate losses to help give investors a clearer picture of your company’s financial position — and protect against shareholder claims in the event a loss occurs.
A principal consideration for any new or existing business is choosing an appropriate legal entity. Available options in most states include C corporations, S corporations, general and limited partnerships, limited liability companies (LLCs), limited liability partnerships (LLPs) and sole proprietorships.
Each entity type has advantages and disadvantages. It’s important to consider the tax implications. A certain type of entity can minimize your taxes. Understanding the total tax situation, including income tax, payroll tax, and estate tax exposure, is essential when determining the choice of entity.
Personal liability protection is often an owner’s main objective in choosing the appropriate entity. Operating as a proprietorship or general partnership offers no owner liability limitation. Limited partnerships, LLCs, LLPs, S corporations, and C corporations provide varying degrees of liability protection for the owners, depending on state law. For sole owners, the single-member LLC is a popular liability-limiting alternative to a proprietorship.
If a business is owned by more than one individual, it cannot be run as a proprietorship. If all owners provide management services, a limited partnership is not a viable option, because that would jeopardize their status as limited partners. Limited partnerships,
LLPs, LLCs, C corporations, and S corporations allow for management by multiple individuals without limitations.
Get ready for succession
In many cases, an entity status change is sought to accomplish a transition in ownership. Whether the objective involves moving ownership to a successor via gifts, an installment sale, a stock redemption, a bequest, or a combination of methods, it is often necessary to use a different form of entity to meet these objectives. Each entity selection situation is unique. The business owner’s objectives must be systematically matched with the various entities’ attributes. All major tax and nontax issues must be considered and alternatives explored before choosing the appropriate structure for your business.
As with most business decisions, planning can have a positive, lasting effect on your venture. Contact us with questions about the appropriate entity structure for your existing business, a business you intend to purchase, or a contemplated new start-up business.
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.
On May 16, new guidance went into effect that allows companies to raise as much as $1 million a year through regulated online portals as long as the companies have submitted annual financial reports to the Securities and Exchange Commission (SEC). They don’t have to actually register with the SEC. Such “crowdfunding” offers could be an alternative to venture capital and angel investor financing for startups and other privately held businesses. But it’s not for everyone.
In October, the SEC finalized its long-delayed guidance under the Jumpstart Our Business Startups (JOBS) Act in Release No. 33-9974, Crowdfunding. It’s been more than a month since the guidelines went into effect — and so far, the market has been slow to warm up.
The new rule allows online crowdfunding offers to be made to accredited and nonaccredited investors. The former are defined as those who make $200,000 a year, or $300,000 jointly with a spouse, or have at least $1 million in net worth, not including their primary residence. Both accredited and nonaccredited investors are, however, limited in how much they can contribute to crowdfunding deals each year based on their net worth and income.
Online crowdfunding offers must be made through intermediaries that must either be registered brokers or a new type of registered entity called a “funding portal.” Currently only nine funding portals have successfully registered with the SEC. Setting up a portal requires significant upfront investment in technology, financial reporting and other compliance costs.
The SEC holds funding portals to a high standard, expecting them to act as “gatekeepers” to protect investors against fraud. The new guidance calls for intermediaries to establish a “reasonable basis” to believe an issuer is in compliance with the crowdfunding rules. And intermediaries must provide investors with educational materials, including descriptions of the securities offered and when they can be resold. In general, stock or debt purchased in a crowdfunding deal is subject to a one-year holding period.
Over the next three years, the SEC will evaluate whether the restrictions in the crowdfunding guidance are too burdensome for run-of-the-mill startups. If so, lawmakers may go back to the drawing board once the process becomes more established. Contact us for more information on this up-and-coming opportunity to raise capital and market awareness for your private business. Our accounting professionals can help your crowdfunding offer comply with the SEC’s financial reporting requirements.
Some not-for-profits are required to hire an outside CPA to audit their books. Even if external audits aren’t mandated, however, your organization should consider them. Audits can provide assurance to stakeholders that you’re operating with integrity and within acceptable accounting guidelines.
Mandate or not
Generally, nonprofits that expend more than $750,000 in federal funding over the course of a fiscal year must submit to independent audits. States impose their own guidelines. Some require nonprofits that receive a certain level of state funding to submit independent audits to the state agency that provided the funding.
If your organization isn’t subject to any independent-audit mandates, perhaps an employee or board member regularly conducts internal audits — reviewing financial statements and accounting policies. Such audits promote fiscal responsibility and are essential to good governance, but they don’t necessarily arrive at the most accurate conclusions. After all, they’re conducted by people who may not have had extensive audit training and experience and who have a vested interest in issuing a clean bill of health.
External auditors are in a better position to determine whether your statements offer a fair picture of your finances and adhere to recognized standards. External auditors usually work with accounting staffs and audit committees to ensure access to balance sheets and income and cash flow statements, as well as documents relating to:
An auditor also may interview staff members about internal controls and any unusual findings.
After completing the fieldwork, an auditor will issue a formal opinion about the accuracy of your financial statements and, in most cases, meet with your board’s audit committee. This is the time to ask questions, particularly if your auditor has rendered an “adverse opinion” indicating that material misstatements or accounting irregularities were found. Also discuss any recommendations the auditor has made regarding operations, accounting or internal controls.
In-house audits are no substitute for an external audit by a qualified CPA. Your nonprofit is sure to benefit — even if you aren’t required to submit professionally audited statements.
Electronic financial tools — such as online banking, mobile payment apps and paperless invoicing — are increasingly popular in today’s business world. But existing auditing standards still require auditors to send out paper confirmation letters through the U.S. Postal Service. To modernize the confirmation process, the Public Company Accounting Oversight Board (PCAOB) may revive a 2010 proposal to expand the definition of “confirmation responses.” Here’s how confirmation procedures will likely change if the proposal is reissued and approved.
Auditors send third-party confirmation letters to customers to verify accounts receivable and to financial institutions to confirm notes payable. They also may choose to substantiate notes receivable, inventory, consigned merchandise, long-term contracts, accounts payable, contingent liabilities, and related-party and unusual transactions.
When confirmation responses signal exceptions, auditors follow three steps: 1) Determine the cause, 2) extrapolate the misstatement to see whether additional testing is necessary, and 3) consider fraud.
Auditors must maintain control over confirmation procedures to minimize the possibility that the results will be biased because of alteration of the confirmation requests or responses. So, they typically send paper requests through standard U.S. Postal Service mail in accordance with Interim Auditing Standard AU Section 330, The Confirmation Process. This can be time-consuming, especially if recipients fail to respond.
Need for change
AU Sec. 330 went into effect in 1992. In addition to mailed confirmation responses, it refers to confirmation responses received orally or via facsimile — but not to electronic communications or online records.
In 2010, the PCAOB issued a proposal that, among other changes, defined a confirmation response to include electronic or other media. This would make the confirmation process more efficient — although auditors would need to take into account the risks associated with electronic confirmation responses.
Work in progress
After tabling the proposal for five years to work on other projects, the PCAOB is planning to revive it. If electronic responses are accepted, the confirmation process could soon be more efficient.
Financial statements reflect a company’s financial position at a particular date and the operating results and cash flows for a period ended on that date. But major events or transactions sometimes happen after the reporting period ends but before financial statements are finalized. Do your financial statements need to address these so-called “subsequent events”? This is one of the gray areas in financial reporting. Fortunately, the AICPA offers some guidance.
Financial statements often aren’t available to be issued for a few months after the close of the reporting period, because it takes time to schedule and complete fieldwork. Unforeseeable events may happen during this period in the normal course of business. Examples include disasters such as fires, buyouts, and changes in foreign exchange rates.
Chapter 27 of the AICPA’s Financial Reporting Framework for Small- and Medium-Sized Entities classifies subsequent events into two groups:
To decide which events to disclose in the footnotes, consider whether omitting the information about them would mislead investors, lenders and other stakeholders. Disclosures should, at a minimum, describe the nature of the event and estimate the financial effect, if possible.
In some extreme cases, the effect of a subsequent event may be so pervasive that your company’s viability is questionable. This may cause your CPA to re-evaluate the going concern assumption that underlies your financial statements.
We can help take the guesswork out of reporting subsequent events. For more information, contact us.
No not-for-profit wants to cut programs that it believes further its mission. But sometimes you need to scale back or even eliminate programs so you’ll have the resources for more effective initiatives.
Effectiveness and impact
Instead of relying on assumptions and anecdotes about your current programs’ effectiveness, do some homework:
If you don’t already have goals and a method of measuring your programs’ progress toward them, you need to set them. Your evaluation system should be strategic, realistic and timely. For example, a charity that provides tutoring to high school students in low-income neighborhoods might measure the program’s success with class grades and graduation rates as well as feedback from participants.
Old vs. new
After performing research and measuring progress toward goals, you may find it relatively easy to identify obsolete programs that should be eliminated. Deciding on new programs typically is harder. New programs can be variations of old ones, but they must better serve your not-for-profit’s basic mission, values and goals. Be careful to avoid repeating old mistakes.
Also remember that programs can’t be successful if they overspend. For every new program, make a tight budget and stick to it. Consider starting small so you don’t have to commit a lot of money upfront to an unproved program. If your soft launch gets positive results, you can revise your budget.
Although change can be difficult, you need to recognize when your nonprofit’s programs are no longer working and be willing to try new strategies. Call us — we can help ensure you’re making the most of your program budget.
More than 80% of S&P 500 companies issued sustainability reports in 2015, according to a recent study by the Governance & Accountability Institute (GAI). That amount has more than quadrupled since the GAI began tracking the prevalence of sustainability reports in 2011. Providing information about sustainable business practices has become increasingly popular as a way to gain a competitive advantage and demonstrate industry leadership. This is particularly true when sustainability information is combined with financial data into an integrated report that’s audited by an objective third party.
Financial statements tell only part of the story
Companies publish sustainability reports to show the economic, environmental and social impacts caused by their everyday activities. They aren’t mandatory in the United States, but the Securities and Exchange Commission requires U.S. public companies to provide some sustainability-related disclosures in their financial reports.
If you have any doubt about the interdependence of financial and nonfinancial issues, consider this: Environmental issues (such as pollution or carbon emissions), social issues (such as union relations or health and safety matters), and supply chain issues (such as human rights violations or use of conflict minerals) can all lead to fines, remedial costs and reputational damage. And the sale of toxic or unsafe products can result in product liability lawsuits, recalls and boycotts.
Benefits often outweigh costs
Measuring, managing and disclosing environmental, social and governance performance can yield many significant benefits, including:
Tracking sustainability also helps companies identify ways to reduce their energy consumption, streamline their supply chains, eliminate waste and operate more efficiently.
We can help
Sustainability reporting can create long-term value and improve your relationships with investors, employees, customers, suppliers, regulators and the general public. Contact us for help preparing an integrated sustainability report for 2016 — or auditing your sustainability report.
Acquired goodwill and other indefinite-lived intangible assets must be reported on your balance sheet at fair value and tested at least annually for impairment. Testing is also required when a “triggering event” — such as the loss of a key customer or unanticipated competition — occurs that could lower the asset’s value. But there are possible exceptions that could simplify your recordkeeping.
Testing goodwill for impairment requires two steps under U.S. Generally Accepted Accounting Principles (GAAP). First, you must estimate the fair value of the company (or reporting unit if multiple product lines or divisions exist). If book value exceeds fair value, goodwill impairment has likely occurred.
Under the second part of the test, you must allocate fair value to the tangible and identifiable intangible assets. What’s left over is the implied fair value of goodwill. Once the book value of goodwill has been written down to its fair value, GAAP prohibits you from reversing impairment losses, even if the value eventually recovers. So, companies are understandably hesitant to report impairment and prematurely alarm investors about losses that may someday be recoverable.
In 2014, the Financial Accounting Standards Board (FASB) provided private companies with some simplified reporting alternatives. Under one exception, private companies are required to test for impairment only when there’s a triggering event. Private companies also may elect to amortize acquired goodwill over a period not to exceed 10 years, rather than capitalize it on the balance sheet and test for annual impairment.
In addition, the FASB recently proposed guidance that, if approved, would remove the second step of the goodwill impairment test for all companies. Under the proposal, an impairment charge for goodwill would equal the amount by which the company’s (or reporting unit’s) book value exceeds its fair value.
Work in progress
We can help you test for impairment or elect one of the simplified reporting alternatives. Contact us for more information.
Content written by Toal, Griffith + Ragula.
In the world of nonprofit organizations, every dollar can make a big difference. While many nonprofits rely on the the generosity of the public, other sources of funding are available for the benefit of these organizations and their missions.
Enter the world of federal grants: government-funded initiatives supporting the ideas and projects of people and organizations working to deliver societal benefits. The application process for these grants can be a labor-intensive, but in certain circumstances it can be a rewarding one.
The first step in the process is determining if you’re eligible for a grant, the requirements for which are included with each posting. This is a critical part of the grant application process, and one that will save an organization time and resources by helping it steer clear of programs for which it is not eligible.
Once eligibility for a federal grant is confirmed, registration is the next step in the process. Included in this step is obtaining a DUNS number, registering with the System Award Management database, and the creation of a grants.gov username and password.
Following registration, work can begin on the grant application itself. Organizations should allow themselves plenty of time for this stage, as the applications often require detailed information concerning the proposal, along with relevant financial data.
Applications will receive an initial screening after submission to verify that they meet all eligibility requirements, after which they are passed on to the appropriate federal agency for review by a group of program stakeholders.
The review process can be a time-consuming step. Here, in addition to other considerations, the budget portion of the grant application goes through a cost analysis in which each line item, and the overall proposed budget, is checked for compliance with statutory and financial regulations.
Successful organizations are paired with an appropriate federal agency to oversee the program and ensure the grant remains on track and on budget. These monitoring procedures are essential to maintaining transparency while also preventing fraud and abuse.
If the process sounds a little overwhelming, it is not one that needs to be undertaken alone. Working with a financial advisor can ease the burdens of the grant application process.
Content written by Toal, Griffith + Ragula
Before establishing a charity, and each year after that, there are lots of considerations that should be made to ensure you are abiding by laws that govern charitable activities. Many of these laws vary from state to state–and what may be acceptable in one state may be illegal in another.
In general, organizations are required to register with a state agency before soliciting charitable contributions from a state’s residents. But each state has its own registration requirements, exemption rules, and often its own reporting requirements. Also, state laws may impose further requirements on fundraising activities involving paid solicitors and fundraising counsel.
In Maryland, a charitable organization soliciting in state generally must file documents with the Office of the Secretary of State. The type of registration required and the accompanying registration fees depend on the level of charitable contributions received by the organization:
For the most part, the information that needs to be disclosed during the registration process involves the finances of the organization, its administration, and its agreements (if any) with a professional solicitor.
If your charity is soliciting from individuals outside the state (even if a longstanding donor moves to a different state and continues donations), you must then file for registration in every state where registration is required. (There are only a handful of states where this isn’t required.) This can get tricky, since one state’s registration requirements and exemption rules may differ from another’s. Failure to register in other states where you are soliciting can result in significant penalties, and possibly prevent your organization from further solicitation activities in that state.
To help organizations that solicit in multiple states, there is a system that aims to amalgamate the data requirements of all states requiring registration. The Unified Registration Statement (or URS, as it’s commonly known) offers an alternative to filing individual registrations on a state-by-state basis. While not all states participate in the standard filing system, Maryland does.
What’s important to remember is that registration is not a one-time deal: It must be done annually. Further, depending on what happened with your organization over the course of the past year, you could find that your registration requirements have changed from one year to the next.
As the charitable world increasingly moves online, there are additional considerations that should be made, since a “donate now” button can be clicked by anyone, from anywhere. Laws governing charitable solicitations have yet to catch up to this digital era of philanthropy. However, there are certain guidelines that organizations must consider when determining if online solicitation requires multi-state registration.
An outsourced CFO and accounting partner can ensure that your organization understands where it falls within state and multi-state registration requirements and, alternatively, exemption rules. It can also ensure that the registration process is completed in a timely manner and handled in accordance with varying state laws, allowing your organization to continue doing what it set out to do: support a worthy cause.
Content written by Toal, Griffith + Ragula, LLC
The very mention of the word “audit” can set off alarm bells at even the most upstanding company, evoking images of officials poring over balance sheets with a fine-tooth comb and calculator. But it doesn’t have to be that way.
An audit need not induce anxiety; in fact, the most beneficial are those that are conducted willingly and regularly. The importance of periodic self-audits to a firm cannot be underestimated, as such reviews can help a company ensure that its balance sheet and financial control processes are in order. It can also help a firm identify potential weaknesses in its internal operations and proactively find solutions before they become a larger – and costlier – problem.
Self-audits can benefit virtually any type of organization or entity, from nonprofits and construction contractors to employee benefit plans and franchisors. Audits not only reassure you that your company is doing everything it can to ensure its compliance, but it also demonstrates this reassurance to the outside world. This added level of transparency can be attractive to companies that are eyeing expansion, as it shows an emphasis on accountability that will appeal to potential investors and customers alike.
In the event that a company does attract unwanted attention from government regulators, being able to demonstrate an ongoing commitment to compliance could go a long way to resolving the issue. Federal agencies, including the FTC and SEC, have recently highlighted the importance of maintaining and monitoring internal controls. Or, as the IRS puts it: “Self-auditing should result in establishment of internal controls and other practices and procedures that will help avoid failures and will reinforce the goals of compliance and prompt correction of errors in the plan administration process.”
Audits may have an ominous reputation, but periodic self-audits of operations and administration can provide a company with the peace of mind that its accounting practices are sound and the reassurance that it’s limiting the chance of falling victim to fraud. Further, turning to an independent third party to assist in the self-audit can provide a valuable layer of objectivity, and ensure that all areas of compliance are considered.
Although it may be tempting to ignore potential weaknesses and hope they don’t cause a problem, a proactive approach to compliance can help identify and solve issues before they get out of control. Instead of just sweeping these challenges under the rug, you could be setting your company up for future success.
Content written by Toal, Griffith + Ragula, LLC
Tax Day, April 15th, is fast approaching. And there may be circumstances that might cause you to miss the deadline. It’s OK. There are steps you can take to ensure minimal penalties are imposed on you.
First, if you’re expecting a refund, you can stop panicking altogether. Returns for 2015 that will result in a refund only need to be filed by April 15, 2019, with the possibility of extension to October 17, 2019. However, avoid sitting on this for too long: If the extension date elapses, you’ll lose that refund.
If, on the other hand, you expect to find yourself owing taxes, it’s best to bite the bullet and file an extension or return as soon as possible—even if you can’t pay your tax bill right away. This is because in most cases, the late-filing penalty is far higher than the late-payment penalty. And the longer you wait, the steeper the penalties. According to the IRS:
There are certain situations that allow you to miss the filing date yet qualify for an automatic extension, such as living outside the United States or serving in the U.S. military abroad. However, even in these instances, the IRS will charge interest on taxes not paid by April 15th.
As the date inches closer, it’s important to know your options. You have the option to file for an extension of up to six months—but to do so, you must still estimate your 2015 tax liability AND file a Form 4868 by April 15th.
We recommend consulting a tax specialist to help you estimate your tax liability—if you are opting to file for an extension—and also to ensure that the required forms are prepared and filed properly.
Content written by Toal, Griffith + Ragula
Calculating your income tax return can be challenging enough. But calculating it twice? Once using the regular tax system, and then again using the alternative minimum tax (AMT) rules? Seems a little redundant. But this is a burgeoning reality for many individuals during tax season, as this tax strikes a growing number of taxpayers.
The AMT came into play in the late 1960s as a way to ensure the highest income individuals – those who tended to have the greatest number of deductions – paid a minimum amount of income tax. Over the years, the tax has grown to encompass a greater number of Americans, including a growing portion of the middle class. It’s estimated that roughly 4 million taxpayers are subject to this tax – many of whom may not even be aware that they are.
The AMT comes with its own rules about deductions, exemptions and tax rates (26% and 28%) – often stripping taxpayers of certain exemptions and deductions that would otherwise benefit them. Individuals are required to pay the greater of the amounts calculated using the AMT method and those using the regular tax method.
Adding to the complexity is that there is no particular income threshold where the AMT tax kicks in. Instead, there are a number of variables that impact whether you’re more likely to be hit by this tax, such as:
- If you have a large family, you are more apt to pay this tax, since the AMT eliminates the larger exemption for those households that the regular tax code provides.
- If you itemize deductions (as opposed to using the standard deduction), you have a greater chance of paying the AMT.
- If you live in an area with high property taxes or state and local income taxes, such as Maryland, personal taxes are not deductible when calculating your income under AMT rules.
For the 2015 tax year, the AMT tax exemption for individuals is $53,600, while for joint filers, the exemption is $83,400. In general, research has found that if your household income is less than $200,000 a year, it’s unlikely that you will be required to pay the AMT. However, consulting with a tax professional can help you confirm this. Better yet, in certain cases, a tax professional can offer advice and strategies on how to minimize your AMT risk — possibly even avoiding it all together.
Content written by Toal, Griffith + Ragula, LLC.
It’s that time of year again. When you start rummaging through envelopes and receipts, trying to piece together your tax story for the year.
We’ve compiled a few other helpful hints to guide you through the filing process this year.
Err on the side of caution. If you think the receipt could be tax deductible, give it to your tax preparer. Leave it up to the tax professionals to determine if the expense is deductible or not.
Don’t sell yourself short. Many people will opt to file for the standard deduction simply because it’s easier. There are a number of deductions – some standard, some a bit peculiar – that can increase your refund, or reduce your tax bill.
Don’t overpay Social Security taxes. If you earned more than $118,500 from two or more employers, you may be able to get some of your overpaid Social Security tax back.
Understand the tax implications of Obamacare. There are certain exemptions, penalties and new forms tied to the Affordable Care Act. Knowing where you fit within the tax implications of Obamacare will ensure you’re in compliance.
Don’t forget your tax history. Taxes aren’t cut and dried from calendar year to calendar year, and there are trails of deductions and adjustments from 2014 and 2015 that could impact your 2016 filing.
Recognize that a life change likely means a tax change. If during the year you experienced a significant change in your life – had a baby, went through a divorce, or started a business, for example – it’s likely that your tax filing requirements have changed. This could mean new forms and new deductions.
Just because it’s on the Internet doesn’t mean it’s true. If you’re turning to an online program to file this year, be sure to review certain assumptions that these programs make, such as the assumption that your tax liability for this year is the same as last.
Whether you’re filing yourself and simply need answers to a few questions, or you require full support, turning to a tax professional can not only reduce your chance of audit by ensuring you’re in compliance, but also ensure you’re not leaving money on the table. There’s still time to connect with a tax professional to guide you through your 2016 filing.
Content Written by Toal, Griffith + Ragula, LLC
You’ve dreamed long and hard about bringing your product or service to life as an independent enterprise. But before you do, you’ll want to be sure that your business is in order and that you understand the tax implications that could impact your operations and resources.
When starting a business—any business—entrepreneurs need to consider which type of entity they want to establish. Although this may appear to be less important than, say, market strategy, the way in which you structure your business can have a significant impact on how much you pay in taxes, and the amount of paperwork you are required to produce.
A little bit of research to understand the different options can save a great deal of time and effort down the road. While most small businesses start out as a sole proprietorship, successful growth often necessitates that the business evolve into a different type of entity, such as a corporation or a limited liability company.
The most common legal entities are sole proprietorship, partnership, corporation, LLC, and S corporation—each with their respective tax structures and implications:
Sole proprietorship: the most basic and simple entity, because no additional action is needed to create it. As a sole proprietor, you are personally liable for all financial obligations of the business, including taxes.
Partnership: two or more individuals, pooling resources including money and skills and sharing profits (and losses) in accordance with terms set out in a partnership agreement. An advantage of a partnership is that it does not bear the tax burden of profits, as profits or losses are passed through to partners to report on their individual tax returns.
Corporation: a legal entity created to conduct business. It is an entity separate from those who founded it, and the corporation (sometimes referred to as a “C corporation”) can be taxed. Double taxation, when income taxes are paid twice on the same source of earned income (the corporation and its shareholders), is sometimes considered a drawback to incorporation.
Limited liability company: a hybrid form of partnership and incorporation, where personal assets are separated from those of the business. This structure provides owners some of the advantages of both a corporation and a partnership, as profits and losses can be passed through to owners without taxation of the business itself.
S corporation: a variation of the standard C corporation that has elected a special tax status with the IRS, avoiding double taxation by allowing income or losses to be passed through on individual tax returns, similar to a partnership.
Starting a business is no easy feat; financing, developing a marketing plan, securing customers and establishing operations all require many decisions that will ultimately determine the success of the venture.
Entrepreneurs have a vision for how to turn an idea into a product that people will love to buy, but they can get tripped up in the administrative details of business ownership. Turning to a tax specialist can help you understand which tax structure makes the most sense for you and your business, and will ensure that you adhere to IRS registration requirements and that tax reporting is performed in accordance and on time.
Content written by Toal, Griffith + Ragula, LLC
With the passing of the Bipartisan Budget Act of 2015, partnerships need be aware of certain changes that are slated to take effect; particularly, the IRS’s enhanced ability to audit large partnerships and limited liability companies (LLC) that, for tax purposes, are treated as partnerships.
The changes were made to improve the efficiency and effectiveness of such audits, updating rules that dated back to 1982. These new rules streamline the IRS’s ability to audit partnership tax returns, and allows it to collect taxes, interest and penalties as a result of the audit adjustment directly from the partnership’s balance sheet.
This is a departure from existing partnership tax audit rules, in which the IRS typically collected any additional taxes, interest and penalties at the partner level. Under the new rules, unless a partnership elects to implement the Form K-1 adjustment procedure, the amount of the tax adjustment will need to be satisfied by its own balance sheet or with contributions from its current partners.
The amount of the tax adjustment will be adjusted based on the individuals and entities that are partners of the partnership when the IRS makes the tax adjustment, which could vary from those that formed the partnership when the audit began.
Should a tax adjustment be required under the new rules, it will be calculated based on the net of all adjustments for any of the reviewed years, and at the highest individual or corporate tax rate.
Under the elective Form K-1 adjustment procedure, the partnership can send amended Form K-1s to the individuals or entities that were partners during the audit’s reviewed year. Each partner for the reviewed year would then be required to pay any adjusted tax, interest and penalties in the current year, thereby allowing the partnership to avoid amending tax returns for the reviewed year.
Although the changes will apply only to tax returns of partnerships for tax years beginning after 2017, it’s important for partnerships to get ahead of the curve and understand what is required of them, and what the implications are if changes aren’t made.
There are a few considerations that partnerships should take into account before the changes take effect:
- Does the partnership has 100 or fewer partners? (If so, it will be permitted to opt out of the new rules.)
- Should the partnership amend its operating agreements to enable or require it to elect the Form K-1 adjustments procedure?
- Who should be selected as the “partnership representative,” with sole authority to enter into settlement agreements with the IRS on the partnership’s behalf?
Talking with a tax advisor before the new rules take effect will help partnerships better understand how the changes apply to them, and what actions may be advisable to ensure compliance and maximum tax efficiency in the years ahead.
Content written by Toal, Griffith + Ragula, LLC
The IRS is increasing its scrutiny of S Corporations, aiming to identify instances where controlling S Corp shareholders receive distributions instead of reasonable compensation for their services.
An absence of definitive guidelines within the tax code regarding reasonable compensation has led courts to examine suspected infractions on a case-by-case basis, taking into account shareholder/officers’ training, experience, and apparent level of involvement in the S Corporation.
Some experts suggest that S Corps use the “independent investor test” to analyze their own compensation practices. The test looks at the actual rate of return on owners’ equity of the subject company compared with a market-derived rate. This test has been used by the U.S. Tax Court in the past, and it boils down to the question of whether an outside investor would have approved the executive compensation in question.
As reported by the Journal of Accountancy, there are a number of strategies S Corps can take to reduce their risk of being targeted by these audits:
1. When reporting compensation, fully understand the FICA Social Security limit, and ensure that the appropriate amount of compensation is reported to reduce taxes without triggering an audit.
2. Encourage shareholders to log details on time and services rendered. While this can feel tedious and at times challenging, such records are crucial, since after-the-fact estimates can’t be submitted. Keep in mind that the IRS generally examines at least the past three years of tax returns when conducting audits.
3. Provide comparable industry data, and make sure the company can justify any salaries outside the industry range.
4. Encourage shareholders to keep company loans at a minimum, as unpaid shareholder loans may be perceived as disguised compensation to the shareholders.
The best strategy to reduce the risk of an audit, however, is to ensure that as an S Corporation you’re in compliance. This can most effectively be achieved by turning to an accountant who can help walk you through the reporting requirements and offer advice on how to best reduce risk.
If your 2015 tax liability is higher than you’d hoped and you’re ready to transfer some assets to your loved ones, now may be the time to get started. Giving away assets will, of course, help reduce the size of your taxable estate. But with income-tax-smart gifting strategies, it also can reduce your income tax liability — and perhaps your family’s tax liability overall:
1. Gift appreciated or dividend-producing assets to loved ones eligible for the 0% rate. The 0% rate applies to both long-term gain and qualified dividends that would be taxed at 10% or 15% based on the taxpayer’s ordinary-income rate.
2. Gift appreciated or dividend-producing assets to loved ones in lower tax brackets. Even if no one in your family is eligible for the 0% rate, transferring assets to loved ones in a lower income tax bracket than you can still save taxes overall for your family. This strategy can be even more powerful if you’d be subject to the 3.8% net investment income tax on dividends from the assets or if you sold the assets.
3. Don’t gift assets that have declined in value. Instead, sell the assets so you can take the tax loss. Then gift the sale proceeds.
If you’re considering making gifts to someone who’ll be under age 24 on December 31, make sure he or she won’t be subject to the “kiddie tax.” And if your estate is large enough that gift and estate taxes are a concern, you need to think about those taxes, too. To learn more about tax-smart gifting, contact us.
Tax credits reduce tax liability dollar-for-dollar, making them particularly valuable. Two valuable credits are especially for small businesses that offer certain employee benefits. Can you claim one — or both — of them on your 2015 return?
Retirement plan credit
Small employers (generally those with 100 or fewer employees) that create a retirement plan may be eligible for a $500 credit per year for three years. The credit is limited to 50% of qualified startup costs.
Of course, you generally can deduct contributions you make to your employees’ accounts under the plan. And your employees enjoy the benefit of tax-advantaged retirement saving.
Small-business health care credit
The maximum credit is 50% of group health coverage premiums paid by the employer, provided it contributes at least 50% of the total premium or of a benchmark premium. For 2015, the full credit is available for employers with 10 or fewer full-time equivalent employees (FTEs) and average annual wages of $25,000 or less per employee. Partial credits are available on a sliding scale to businesses with fewer than 25 FTEs and average annual wages of less than $52,000.
To qualify for the credit, online enrollment in the Small Business Health Options Program (SHOP) generally is required. In addition, the credit can be taken for only two years, and they must be consecutive. (Credits taken before 2014 don’t count, however.)
Take all the credits you’re entitled to
If you’re not sure whether you’re eligible for these credits, we can help. We can also advise you on what other tax credits you might be eligible for when you file your 2015 return.
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:
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.
© 2016 THOMSON REUTERS
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:
- The American Opportunity credit — up to $2,500 per year per student for qualifying expenses for the first four years of postsecondary education.
- The Lifetime Learning credit — up to $2,000 per tax return for postsecondary education expenses, even beyond the first four years.
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.
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.
Content written by Toal, Griffith + Ragula, LLC
Until recently, the Maryland estate tax exemption amount remained stagnant for 13 years. Estates of decedents valued at $1 million or less were exempt from Maryland estate tax, and larger estates were taxed on amounts in excess of $1 million at a starting tax rate of 16%.
In 2015, however, the state of Maryland enacted the first of a set of phased increases to its estate tax exemption to eventually bring it in line with the federal amount – currently $5.45 million for 2016.
The increase follows a laddered approach, whereby the exemption increases slightly each year through 2019, when it reaches the federal level, which is estimated to be $5.9 million at that time. Following 2019, the Maryland exemption will mirror the federal one, increasing annually to account for inflation. The state exemption will grow as follows:
- Deceased in 2015: $1.5 million
- Deceased in 2016: $2 million
- Deceased in 2017: $3 million
- Deceased in 2018: $4 million
- Deceased in 2019: Matching federal exemption
To file a Maryland return, a federal estate tax return must be completed, even though you may not be required to file the return with the IRS. Using information from the federal return, the appropriate Maryland estate tax return form – dependent on the date of the decedent’s death – must then be completed and filed directly with the Comptroller of Maryland within nine months after the decedent’s date of death, unless an extension is otherwise provided.
Another significant change stemming from the new law is that Maryland will begin offering portability of its state estate tax exemption beginning in 2019. This option is currently available only for federal tax exemption amounts and, at the state level, in Hawaii.
While changes to the Maryland estate tax exemption does streamline the process for estates, allowing married couples to more easily create a tax-efficient plan, the Maryland estate tax is a “pick up” tax, relying primarily on federal estate tax law to define the taxable estate.
It’s important to ensure that that those involved in the estate process are kept abreast of changes to the federal or Maryland estate tax exemption amounts, as it’s possible for state laws to change rapidly. This can be done by turning to an estate planning professional who can ensure that the proper returns are filed within the appropriate timeframes and help to preserve as much capital as possible for beneficiaries.
The Protecting Americans from Tax Hikes Act of 2015 (PATH Act) extended a wide variety of tax breaks, in some cases making them permanent. Extended breaks include many tax credits — which are particularly valuable because they reduce taxes dollar-for-dollar (compared to deductions, for example, which reduce only the amount of income that’s taxed).
Here are two extended credits that can save businesses taxes on their 2015 returns:
1. The research credit. This credit (also commonly referred to as the “research and development” or “research and experimentation” credit) has been made permanent. It rewards businesses that increase their investments in research. The credit, generally equal to a portion of qualified research expenses, is complicated to calculate, but the tax savings can be substantial.
2. The Work Opportunity credit. This credit has been extended through 2019. It’s available for hiring from certain disadvantaged groups, such as food stamp recipients, ex-felons and veterans who’ve been unemployed for four weeks or more. The maximum credit ranges from $2,400 for most groups to $9,600 for disabled veterans who’ve been unemployed for six months or more.
Want to know if you might qualify for either of these credits? Or what other breaks extended by the PATH Act could save taxes on your 2015 return? Contact us!
© 2016 THOMSON REUTERS
By purchasing stock in certain small businesses, you can not only diversify your portfolio but also enjoy preferential tax treatment. And under a provision of the tax extenders act signed into law this past December (the PATH Act), such stock is now even more attractive from a tax perspective.
100% exclusion from gain
The PATH Act makes permanent the exclusion of 100% of the gain on the sale or exchange of qualified small business (QSB) stock acquired and held for more than five years. The 100% exclusion is available for QSB stock acquired after September 27, 2010. (Smaller exclusions are available for QSB stock acquired earlier.)
The act also permanently extends the rule that eliminates QSB stock gain as a preference item for alternative minimum tax (AMT) purposes.
What stock qualifies?
A QSB is generally a domestic C corporation that has gross assets of no more than $50 million at any time (including when the stock is issued) and uses at least 80% of its assets in an active trade or business.
Many factors to consider
Of course tax consequences are only one of the many factors that should be considered before making an investment. Also, keep in mind that the tax benefits discussed here are subject to additional requirements and limits. Consult us for more details.
Content written by Toal, Griffith + Ragula, LLC
For payroll departments, the end of the year can be busy due to the additional time and resources required for IRS reporting and tax form preparation—in particular, the all-encompassing preparation of the W-2 form. Many hours go into preparing this form, which is a crucial document for employers and employees alike.
The W-2 form, also known as the Wage and Tax Statement form, can be a source of confusion and frustration for employers, especially when it comes to the correct uses of box 12 and box 14. Failing to understand the various reporting requirements that go into these boxes can lead to incorrect deductions and credits on an employee’s tax return, or—in the employer’s case—create compliance issues with employment tax reporting requirements.
Here are the five most common box 12- and box 14-related mistakes made by employers when preparing this form:
1. Choosing the wrong code. The most common mistakes with Box 12 involve using the wrong code. This box is the catch-all of the W-2 form, but not all of the income coded at box 12 is taxable. Box 12 also has 30 possible code options—some of which vary depending on the age of the employee, creating additional complexity for employers completing the form.
2. Using an invalid code. Beyond using the wrong code, some employers will fall victim to using an invalid code. The code options for box range from A to EE. As an employer, if you’re using anything outside of these options, the code is invalid.
3. Not understanding the differences in codes relating to employee retirement plans. This can be a tricky area, as there’s confusion around the deferral amounts and codes as it relates to 401(k) deferrals, 408(p) SIMPLE deferrals and Roth contributions.
4. Reporting the incorrect amount for employer-sponsored health insurance. In most cases, what should be reported for this amount includes both the portion paid by the employer and by the employee, including employee pre-tax and after-tax contributions. However, depending on company size and whether it offers a flexible spending account, the guidance for this amount may vary.
5. Including an amount in box 14 that has a home elsewhere on the W-2 form. Box 14 is essentially the box for all items that the employer wants to provide that fall outside of the other W-2 boxes. This includes state disability insurance taxes withheld, union dues, uniform payments, educational assistance payments and more. The most common mistake here is that employers use this box to report amounts that should be listed elsewhere in the W-2 form.
For payroll departments, understanding box 12 and box 14’s many different codes, and the items that belong there, are essential. Mistakes can have unfortunate consequences for both the employee and the employer. Turning to a partner that has expertise in this area can not only reduce confusion, but ensure that the employer is complying with the relevant tax reporting requirements.
Content written by Toal, Griffith + Ragula, LLC
With December upon us and holiday activities competing for everyone’s attention, we thought it would be useful to share a short list of payroll items that can cause headaches if they aren’t addressed before the ball drops on 2015, along with a list of other suggested actions that will keep you ahead of the curve in the new year.
The end of the calendar year is a common time to collect annual data and prepare for the myriad upcoming reporting and filing requirements, such as those regarding Forms W-2, Wage and Tax Statement. However, while the deadline for W-2s is early in the new year, there are some matters that need to be handled before year-end to avoid causing unnecessary costs to the business. These include:
All adjustments to an employee’s wages for taxable fringe benefits should be made before 2015’s last regular payroll in order to allow the applicable taxes to be withheld or adjusted accordingly, as these non-cash benefits are subject to FICA tax for the employee and employer.
Additional year-end tasks:
One last reminder: Be sure to report health insurance premiums paid on behalf of shareholders who own more than 2% of a corporation on those shareholders’ W-2 forms. The IRS considers these to be wages subject to withholding; however, they are not subject to FICA—so they can be done after year-end if necessary.
Content written by Toal, Griffith + Ragula, LLC
The end of the year is fast approaching. This year, with the Affordable Care Act (ACA) in full effect, there are additional reporting requirements that employers need to be aware of in order to avoid certain penalties.
Form 1095-A, Form 1095-B and Form 1095-C: they all relate to health insurance coverage, but which organizations are required to file which form, and when? And what happens when they don’t?
In general, Form 1095-A is filed by a health care marketplace, Form 1095-B by an insurer, and Form 1095-C by the employer. However, certain scenarios can alter this rule of thumb.
Under the ACA, if your company has at least 50 full-time equivalent employees, you are considered an Applicable Large Employer (ALE). As an ALE, you are required to offer ACA-compliant healthcare coverage or risk paying a penalty. In addition, as an ALE, you are required to report information to the IRS about the health care coverage offered to your FTEs using Forms 1094-C and 1095-C, and a copy of the 1095-C must be distributed to the employee.
Form 1094-C functions as the cover letter for Form 1095-C, and is filed only with the IRS. Form 1095-C, which goes to both the IRS and the employee, describes the coverage provided to an employee during the course of the 12-month reporting period.
A separate form, 1095-B, provides details about an employee’s actual insurance coverage, including who in the employee’s family was covered during the year. This form is normally sent out by an insurance provider rather than the employer. However, companies that are not considered an ALE and are self-funded are considered to be an insurance provider in this situation, and are required to send out Form 1095-B. In this instance, the employer can combine the B and C forms.
Starting in 2016, both Form 1094-C and Form 1095-C must be filled with the IRS annually, no later than February 28 (or March 31 if filed electronically) for the previous calendar year. Form 1095-C must also be distributed to employees annually, no later than February 1, 2016. Employers that are filing more than 250 forms are required to file electronically.
The IRS uses the information from these forms to administer the Employer Shared Responsibility provision. The penalty for failing to file a Form 1095-C is typically $250 per employee, up to a total penalty of $3 million per calendar year.
Knowing which 1095 forms a company is required to complete and when they must be filed by can be burdensome for a payroll department, especially at year-end when there are other tax considerations and reporting requirements at play. Turning to a partner can help companies ensure they are filing the appropriate forms correctly and on time, reducing confusion and avoiding ACA penalties.
http://www.bna.com/short-walk-aca-b57982058702/ - Bloomberg
Content written by Toal, Griffith + Ragula, LLC.
The Affordable Care Act has been making headlines and spurring vigorous debate for quite some time, but whether you’re for it or against it, as a practical matter business owners must adapt and understand its impact on payroll administration. We have reached the point where failing to understand and comply with rules regarding coverage, communications and reporting could trigger significant additional costs or lost tax benefits.
The first step is to understand where your company fits within the regulatory structure, because different rules apply for companies of different sizes. Company size in this case is determined by the number of full time employees (FTEs), and the most significant distinction under the ACA is that companies with 50 or more FTEs are considered “large businesses” that are mandated to offer health insurance coverage. This is not the only threshold—for instance, some companies with fewer than 25 employees can qualify for tax credits, and those with 100 or more face additional requirements—so it’s important to know where all the lines are drawn and the specific burdens and/or opportunities that apply at each level.
Those organizations that are close to the 50 FTE threshold need to be particularly vigilant, as adding just one additional FTE might alter your status. Properly tracking employees’ hours worked becomes imperative – when an employee averages more than 30 hours a week during a reporting period, your business may need to offer health insurance to that employee.
In addition, depending on an employee’s level of income—or whether they’re receiving individual coverage or family coverage—there are added compliance requirements that payroll needs to address. Limits on employee contributions to flexible spending accounts, excise taxes on group health coverage thresholds, and changes to the percentage higher-earning employees must have withheld for Medicare Part A Hospital are just a few of the additional intricacies woven in to the ACA and its regulations.
We’ve seen a number of adjustments and delays during the rollout of the ACA, but as we move into 2016 most of these will be behind us, and businesses must understand where they stand within the ACA maze. Payroll partners can help companies navigate the current transition period and stay ahead of the curve; they can even help a business save money by identifying tax credit opportunities when applicable, such as the small business credit or the Premium Tax Credit for lower-income employees. In order to ensure proper compliance, and that deadlines are being met, working with a partner that is continuously monitoring developments in the space can help reduce risk and take the weight of ACA compliance off the payroll department and the company as a whole.
Content written by Toal, Griffith + Ragula, LLC.
No matter the size of a company – whether it’s 10 or 600 employees – payroll has its complexities. Complexities that, when not managed properly, can have consequences for business owners that reach far beyond an employee not getting their check.
Compliance with payroll taxation is one of those complexities. U.S. workers are responsible for paying two major types of taxes – payroll and individual. While the payroll tax, comprised of a fixed Social Security and a fixed Medicare tax, is pretty straightforward, individual income tax will vary depending on the state where the employee resides or where the company is operating. Beyond the federal income tax, local government in 17 states have additional individual income tax requirements. This all adds up to the fact that companies operating across state borders can face a convoluted process – and that goes double for companies operating over international borders.
Further, understanding payroll taxation is just half of the battle when it comes to compliance. Missteps in management of taxes collected can have consequences not just for the company, but for the individuals responsible for payroll within a company. A federal trial court ruled that an office manager was personally liable for 100% of her company's undeposited payroll taxes to the tune of $2.9 million (Miller v. U.S., No. 3:13-cv-00728, 2014). The IRS first went after the company's president, but ultimately found the office manager was liable since she had the effective power to pay the taxes.
Payroll involves more than simply paying an employee. It’s a multifaceted responsibility, and ensuring proper compliance and management can quickly eat up a company's time and resources. To sort through the complexity, companies of any size should turn to partners who are versed in payroll and are constantly monitoring new developments and regulations in the space. Not only can this help a company's bottom line and resource management, but it can also ensure that the company is on top of all its compliance responsibilities.
Waiver Period Open From Oct. 16 Through Nov. 16
The Maryland Transportation Authority (MDTA) is offering a one month waiver program for toll violators to pay off their toll debt without paying civil penalties. Between Oct. 16 and Nov. 16, 2015, the MDTA will waive civil penalties ($50 per transaction) and cease further enforcement activities for any pending Video Toll that a customer pays during this period.
Tomorrow the MDTA will begin sending letters to the registered owners of approximately 164,500 vehicles at risk for referral to the Maryland Motor Vehicle Administration (MVA) for enforcement action as a result of unpaid toll violations and civil penalties. For those who contested to court but have not been scheduled or appeared in court, their civil penalties will be waived and the court date cancelled if their toll balance is paid in full between Oct. 16 and Nov. 16, 2015, and before their court date (if scheduled).
"Before we begin referring toll violators to the Motor Vehicle Administration (MVA) for flagging and suspending vehicle registrations, we wanted to give them one last chance to pay off their toll debt with the added incentive of waiving civil penalties," said MDTA Executive Director Milt Chaffee. "This unique waiver program will happen only once."
In 2013, the Maryland General Assembly passed new legislation establishing a civil citation process to help the State collect unpaid Video Tolls. The ability to flag or suspend the registrations of motorists who continue to ignore their bills – even after ample time to pay – gives the MDTA the tool it needs to collect unpaid Video Tolls. Immediately following the waiver period, the MDTA will begin referring toll violators to the MVA for flagging and suspending vehicle registrations, and referring toll debt to the Maryland Central Collection Unit (CCU).
Customers with unpaid Video Tolls can pay by the following methods:
- Visit ezpassmd.com (click PAY VIDEO TOLLS).
- Mail check/money order payable to E-ZPass Maryland to P.O. Box 17600, Baltimore, MD 21297 (include license plate number with payment).
- Call the Maryland Video Toll Payment Line at 1-866-320-9995 during regular business hours (7 a.m. - 6 p.m., Monday – Friday).
- Visit an E-ZPass Maryland Stop-In Center (locations/hours at ezpassmd.com).
We have reached the mid-way point in 2015...now is the time to start thinking about and planning for your yearend tax picture. Here are some items to consider now:
Meet with your CPA
Your CPA should be one of your most trusted advisors. If you are considering major changes to your business, purchasing or leasing a piece of equipment, hiring more employees, or any other change to your operations, one of your first calls should be to your CPA so you are informed of all implications of these decisions. In some cases, after the decision is made is too late to effectively make tax planning decisions.
Review your salary (and distributions in an S Corporation)
Is your salary commensurate with the efforts you are putting into your business? Most small business owners can honestly say no. If your business operates as a S Corporation, special consideration should be given to the amount of money you take out of the business as distributions versus salary. Again, your CPA can help you adjust these amounts if needed based upon your year-to-date results and projections.
Consider a summer job for your children
Employing your child shifts income from you to your child, who normally is in a lower tax bracket or may avoid tax entirely due to the standard deduction. The earned wages also enable the child to contribute to an IRA. The wages paid must be reasonable given the child's age and work skills. There are considerations, including the type of entity and the age of the child, so again, consultation with your CPA is warranted.
Consider your (and your employees') retirement
If you haven't already, take time to set up a retirement plan or to reassess your contributions to your plan. Stocking away money for retirement is essential and also lowers your current taxable income. The specific rules, contribution limits, and deductions vary by plan type, and can be daunting, so consultation with your CPA with establish the best retirement plan option for your situation.
Take charge of recordkeeping
I know, I know, you didn't go into business to be a bookkeeper, but it is impossible to make informed decisions if your records are not current. Most small business owners are significantly involved in the day-to-day operations of their business, therefore recordkeeping may take a backseat. Most CPA firms have the ability to perform back-office services for you at rates that are lower than those charged for tax and other consulting services. They will be ecstatic to perform these services for you throughout the year rather than on April 1! If they can't perform these services, they should be able to refer you to a qualified and trusted resource. Again, contact your CPA!
The moral of this story is to keep in contact with your CPA. The best time for tax planning is 365 days a year, not the last 10 days of December. Don't wait for your CPA to call you; call them when you feel the need. If you are making a decision that will significantly impact your business, your CPA can help in the decision making process. It’s great to be patriotic, but no one wants to pay more than their fair share of taxes!
Please give me a call to discuss any of the ideas mentioned above or if you are in need of an CPA firm. Toal, Griffith + Ragula is qualified to assist in your tax planning and outsourced accounting and CFO needs. In addition, we provide payroll processing, business valuation, audit and attestation, and IRS resolution services. Please visit our website for full listing of services and to subscribe to our monthly newsletter: www.tgacpa.com.
Reminder of Reporting Requirement for Taxpayers with Foreign Connections: The IRS issued a news release reminding U.S. citizens and resident aliens, including those with dual citizenship who lived or worked abroad during all or part of 2014, that they may have a U.S. tax liability and a filing requirement in 2015. If so, their reporting deadline is 6/15/15. To use this automatic two-month extension, taxpayers must attach a statement to their return explaining whether they were living overseas or serving in the military outside the U.S. on the regular due date of their tax return. Also, all U.S. citizens and resident aliens with an interest in, or signature or other authority over, foreign financial accounts whose total value exceeded $10,000 at any time during 2014 must file electronically with the Treasury Department a Financial Crimes Enforcement Network (FinCEN) Form 114 [Report of Foreign Bank and Financial Accounts (FBAR)] by 6/30/15. IR 2015-70 .
Alimony Deduction Allowed for Home-schooling Contingency: Upon his divorce, a taxpayer agreed to pay child support and alimony to his ex-wife as long as she homeschooled their child, who had learning disabilities. If she discontinued homeschooling their child, the alimony payments would be cut in half. Although the taxpayer deducted the alimony payments for the year in question, the IRS disallowed them based on its position that the payments were conditioned on the child's being homeschooled and, thus, nondeductible child support under IRC Sec. 71(c)(2). The Tax Court disagreed, concluding that the contingency was related to the former wife's decision to return to gainful employment. Therefore, the alimony payments were deductible. Joshua H. Wish, TC Summ. Op. 2015-25 (Tax Ct.).
Beginning on 1/1/2015, the standard mileage rates for cars, vans, pickups, and panel trucks will be 57.5 cents per mile for business miles, 23 cents per mile for medical or moving purposes, and 14 cents per mile for charitable purposes. The business expense rate is up 1.5 cent per mile from 2014, while the medical and moving expense rates are down 0.5 cent per mile from the 2014 rates. The charitable rate is set by law and remains unchanged from last year's rate. The portion of the business standard mileage rate treated as depreciation is 23 cents per mile for 2012 and 2013, 22 cents per mile for 2014, and 24 cents per mile for 2015. When computing the allowance under a Fixed and Variable Rate (FAVR) plan, the standard vehicle cost cannot exceed $28,200 for autos or $30,800 for trucks and vans. Notice 2014-79, 2014-52 IRB.
IRS E-file Results for 2014 Filing Season: The IRS announced that almost 126 million tax returns were electronically filed (e-filed) during 2014. More than 47.9 million returns were prepared and e-filed by taxpayers from their home computer; up from 45.2 million a year ago, while e-filed returns from tax professionals increased slightly, totaling almost 78 million returns. During 2014, the IRS issued more than 109 million refunds worth $304 billion (average refund $2,783), with almost 77% of refund recipients choosing direct deposit (average deposit $2,915). The 2014 filing season statistics dated 11/21/14 are available at www.irs.gov/uac/Newsroom/Nov-21-2014.
Taxpayers born before 7/1/1944 generally must receive the Required Minimum Distribution (RMD) payments from their Individual Retirement Arrangements (IRAs) and workplace retirement plans [including Section 401(k) , 403(b) , and 457(b) plans] by 12/31/14. A special rule allows those who reached age 70 1/2 during 2014 to wait until as late as 4/1/15 to receive their first RMD. The special April 1 deadline applies only to the RMD for the first year; the remaining RMDs must be received each year by December 31. Consequently, deferring the first-year payment into 2015 will result in the taxpayer having two taxable distributions in 2015. News Release IR-2014-112 .
From the Desk of Thad Toal:
Many of our clients have called our firm concerning calls from alleged IRS Agents and the IRS Criminal Investigation Division demanding money. These individuals even leave messages about monies owed and criminal activity that they purport was committed, along with a number to return the call. They are a sophisticated and bold operation. This is why we felt it was extremely important to write a blog, and to be included in our newsletter, regarding this or any other phone scam.
First, the IRS never calls anyone without first sending out numerous notices and letters. Everyone here at Toal, Griffith + Ragula wants to be supportive should you receive some type of menacing phone call. Please inform them that you will be calling the FBI and your accountant with their message. Google the number given. Often times there is a blog regarding the number indicating it is a scam.
The State of Maryland very rarely calls an individual. You can use the state employee directory to verify a name by going to www.maryland.gov. Then click on the Phone Directory in the upper right hand corner, then enter the person’s name. We can also call the Maryland Practitioner’s Priority Line to verify the individual. The Commonwealth of Virginia also has a state employee directory so that you can verify the Employees names and department. Just go to www.employeedirectory.virginia.gov, and enter the person’s name.
I strongly urge you to read the article in our newsletter that is more in depth and presents more facts on this situation. Another thought is that you might want to discuss this situation with older parents and relatives advising them to let you know if they receive any such calls.
DEBRA S. HERMAN is a partner in the New York City office of the law firm of Hodgson Russ, LLP. She thanks K. Craig Reilly for his contributions to this column.
Court Will Hear Resident Income Tax Credit Commerce Clause Challenge
The U.S. Supreme Court has agreed to review a Maryland high court decision, Comptroller of the Treasury of Maryland v. Wynne, which held that a credit against the state's individual income tax for income taxes Maryland residents paid to other states was unconstitutional because the credit was not available to offset county-level income taxes. The Court's opinion could impact not only Maryland, which stands to forgo millions of dollars annually in lost revenue and face disastrous county-level tax refund claims for prior years if the decision is upheld, but also other states with similar tax regimes. An overview of the case is set forth below.
Also, as noted in our last column, the Court issued its decision in U.S. v. Quality Stores, Inc., holding that severance payments made to employees who were terminated against their will in connection with a company's Chapter 11 Bankruptcy Plan, where such payments were not linked to the receipt of state unemployment benefits, were taxable wages under the Federal Insurance Contributions Act (FICA). As a result of this decision, the federal government will not have to pay the over $1 billion of refund claims filed by employers based on the lower courts' rulings in this case. Employers that implemented a supplemental unemployment compensation benefits plan that links severance pay to the receipt of state unemployment insurance benefits will also be relieved to learn that the Court expressly declined to consider whether the IRS's current position that allows such payments to be exempt from FICA is consistent with the broad definition of FICA wages found in this case. The Court's opinion is reviewed in more detail below.
In addition, the Court has received four new petitions for certiorari, two of which directly involve state and local taxes, while the other two concern federal taxation but with state and local implications.
As we go to press, we still await the Court's decision on whether to grant three previously filed requests for certiorari. And finally, the Court declined to review three other state and local tax cases.
Court Grants State's Petition in Wynne; Solicitor General Urges Reversal
The U.S. Supreme Court has agreed to hear Comptroller of the Treasury of Maryland v. Wynne, Docket No. 13-485, cert. granted 5/27/14, ruling below at 431 Md. 147, 64 A3d 453 (2013). Previously, in response to the Court's invitation to express the views of the federal government, on 4/4/14 the U.S. Solicitor General filed an amicus brief with the Court (2014 WL 1348934). According to the Solicitor General, "[t]he decision below is incorrect," and thus the Court should grant the petition for writ of certiorari, reverse the Maryland Court of Appeals (the state's highest court), and rule that Maryland's county income tax is constitutional.
In the brief, the Solicitor General argued that the Supreme Court "has long recognized that States have plenary authority to tax the entire income, wherever earned, of their own residents, who directly benefit from the services funded by income taxes, and who collectively have the political power to achieve the repeal of any undesirable tax laws. Although States often choose to grant tax credits to their residents for income taxes paid in other States, nothing in the Commerce Clause compels a State to offer such credits or otherwise defer to other States in the taxation of its own residents' income." The Solicitor General noted that the decision below will have significant financial consequences for Maryland, may lead to challenges in other jurisdictions, and is contrary to decisions made by the highest courts in other states.
The Solicitor General also presented three arguments as to why the Maryland county-level income tax was constitutional. He argued, first, that Maryland's county-level income tax is constitutional inasmuch as jurisdictions have the right to tax all the income of their residents. He further explained that "[a] State does not lose authority to tax its own residents' income simply because the State in which the income was earned also taxes that income." Quoting Oklahoma Tax Commission v. Chickasaw Nation,515 US 450, 132 L Ed 2d 400 (1995), the Solicitor General also argued that "[a]lthough sovereigns ... sometimes elect not to exercise their authority to tax all income of their residents, and thus commonly credit income taxes paid to other sovereigns, that is an independent policy decision and not one compelled by jurisdictional considerations" (internal quotation marks omitted). Next, he argued that "[i]f the Commerce Clause limited a State's authority to tax the income of its own residents, as the Maryland Court of Appeals believed, then a longstanding and significant principle of this Court's state-taxation jurisprudence would be a virtual dead letter," because such ruling would nullify the Court's Due Process Clause holdings that authorize states to tax their residents on all income earned. Third, the Solicitor General argued that "[i]t is far from clear that the Complete Auto test should apply to a State's taxation of its own residents' income."
In the case below, the Maryland court had analyzed the taxpayers' challenge to the statute under the dormant Commerce Clause test announced in Complete Auto Transit, Inc. v. Brady,430 US 274, 51 L Ed 2d 326 (1977), whereby a state tax will pass constitutional muster if the tax: (1) applies to an activity with a substantial nexus with the taxing state; (2) is fairly apportioned; (3) does not discriminate against interstate or foreign commerce; and (4) is fairly related to the services provided by the state. Focusing on the requirements of fair apportionment and no discrimination against interstate commerce, the Maryland court found that the lack of a credit against the county tax resulted in the tax's failing under both prongs.
The Solicitor General argued in the alternative that even if the test applies, all four prongs are satisfied and therefore the tax does not violate the Commerce Clause of the U.S. Constitution. With respect to discrimination, the Solicitor General argued that the Supreme Court "has consistently distinguished laws that regulate evenhandedly with only incidental effects on interstate commerce from those that discriminate against interstate commerce" (quoting Hughes v. Oklahoma,441 US 322, 60 L Ed 2d 250 (1979), internal quotation marks omitted), and concluded that the law at issue permissibly incidentally discriminates. The Solicitor General further argued that the fair apportionment prong was satisfied because a state has the power to tax all income of its residents, not simply a "slice of the taxable pie." According to the Solicitor General, the "[r]espondents do not contend that, whenever a Maryland resident earns income in other States, Maryland may tax only a fixed portion of that income. Such a rule would saddle Maryland (and the other States) with the infeasible task of making an apples-to-oranges comparison-between the strength of Maryland's interest in taxing such income based on the recipient's residence and the strength of another State's interest in taxing the income based on the place where it was earned-in order to decide how much of the 'taxable pie' is fairly allocable to Maryland. Such a rule would also mean that some percentage of a Maryland resident's out-of-state income is beyond Maryland's power to tax even if the State in which the income is earned does not impose any tax upon it." (Emphasis in original.) The Solicitor General found that such a "rationale, which makes the taxing authority of Maryland and its counties contingent on taxing decisions of other States, cannot be reconciled with this Court's dormant Commerce Clause jurisprudence."
As noted above, the Supreme Court has granted Maryland's petition for writ of certiorari. Thus, the Court will consider whether the state's providing a credit against Maryland state income tax, but not against county-level income taxes, for incomes taxes paid to other states violates the Commerce Clause of the U.S. Constitution.
The charts cover entity-level taxes, state conformity with the federal entity classification rules, and potential entity-level withholding or composite return requirements, as well as various nontax elements, such as restrictions on the availability of entity forms for certain professionals.
Author: BRUCE P. ELY, WILLIAM T. THISTLE, II, AND J. SIMS RHYNE III
The owners of multistate businesses must consider a multitude of factors when deciding how to structure their business ventures, and, of course, state taxation cannot be overlooked. The following pages contain the most recent (as of 1/1/14) edition of our LLC/LLP state tax charts, which were last published in The Journal in the May 2013 issue. These charts can assist in evaluating the use of limited liability companies (LLCs) and limited liability partnerships (LLPs), particularly in a multistate context.
Over the years, LLCs and, to a lesser extent, LLPs have become popular choices for structuring or re-structuring multistate business entities. The accompanying charts set out the various differences in the way the 50 states and the District of Columbia treat LLCs and LLPs that do not elect to be taxed as either "C" corporations or "S" corporations.
The first chart discusses state tax considerations, such as conformity with the federal entity classification rules for income tax purposes, entity-level taxes, and potential entity-level withholding or composite return requirements, as well as certain nontax elements, such as restrictions on the availability of entity forms for certain professionals and the extent of liability protection afforded to partners of LLPs.
The second chart lists the states that impose a net-worth- or debt-based corporate franchise tax, and which of those states either subject LLCs, LPs, and LLPs to such tax or exempt those entities, as of 1/1/14. While we hope that each of these charts is a useful research tool, they are only a starting point.
We trust that readers also will find the footnotes to be useful, in particular the one noting the growing number of states that now officially recognize qualified investment partnerships and exempt them and/or their nonresident partners from state income tax and nonresident partner withholding. A qualified investment partnership (QIP) generally is a pass-through entity substantially all of whose income is derived from investments that produce income that would not be taxable to a nonresident individual if the investments were held or owned individually (i.e., investments in intangible property not used in a trade or business). (For more on QIPs, see, e.g., Gotlinger and Mahon, "State Tax Exemptions for Investment Partnerships and Their Nonresident Partners," 17 JMT 22 (February 2008) .)
Like LLCs, the use of series LLCs to structure a multistate business has grown in popularity in recent years. To that end, the last column of the first chart now highlights which states have enacted series LLCs statutes and which state taxing authorities have issued guidance on how their states will tax these odd creatures. It reflects helpful input from the AICPA's State Tax Resource Panel (TRP).
A series LLC allows for the establishment of separate LLC interests with regard to, e.g., specified LLC property or obligations, thus facilitating separate liability exposure without creating separate legal entities. (For more on series LLCs, see, e.g., McLoughlin and Ely, "The Series LLC Raises Serious State Tax Questions but Few Answers Are Yet Available," 16 JMT 6 (January 2007) .)
Series LLC guidance at the federal level. In September 2010, the U.S. Treasury Department issued, in the form of proposed regulations, its long-awaited guidance explaining how a series LLC would be treated for federal income tax purposes. (See REG-119921-09, filed 9/13/10, published 9/14/10 (F.R. Doc. 2010-22793; 75 Fed. Reg. 55699 et seq.), adding Prop. Treas. Regs. §§301.6011-6 , 301.6071-2 , and 301.7701-1(a)(5) , and amending §§301.7701-1(e) and (f). For a detailed analysis of the proposed series LLC regulations and the related state tax implications, see McLoughlin and Ely, "IRS Issues Long-Awaited Guidance on Series LLCs; Will the States Soon Follow?," 20 JMT 8 (January 2011) .)
Consistent with previous rulings by the IRS, the proposed regulations generally treat each series of an LLC as a separate entity and apply the check-the-box entity classification provisions to each series. Once Treasury finalizes these regulations (and we expect that to occur by this summer), we anticipate that a number of states will enact legislation authorizing the formation or qualification of these relatively new hybrid entities, and that a large number of states will publish some form of guidance on how each series and the "mother ship" LLC itself are to be treated for purposes of a variety of state taxes, including unemployment compensation taxes or premiums. In that regard but not waiting for further Treasury/IRS action, as we went to press Alabama enacted a new LLC law (Alabama Limited Liability Company Law of 2014 (H.B. 2, 3/11/14; Act. No. 2014-144; generally eff. 1/1/15)) that, in new Ala. Code §10A-5A-11.01 et seq., provides for the formation and recognition of series LLCs. This legislation also is noted in the accompanying chart.
Another of our senior associates at Bradley Arant Boult Cummings LLP, James E. Long, Jr., co-chairs a joint task force of the American Bar Association (ABA) Tax Section's Partnerships Committee and State and Local Tax Committee that has prepared a comprehensive report summarizing the responses of approximately 30 states to a questionnaire the task force prepared to facilitate that guidance to taxpayers and practitioners and to the Internal Revenue Service. The official report was released by the ABA Tax Section on 4/30/13. A summary of the Series LLC Task Force's report is available via the ABA website at: http://meetings.abanet.org/meeting/tax/MAY13/media/slt_curdev_summary.pdf.
Finally, the state legislatures and departments of revenue always try to be one step ahead of the authors. We therefore welcome and always appreciate updates from our readers.
Exhibit 1. State Tax Treatment of Limited Liability Companies and Limited Liability Partnerships (as of 1/1/14)
Exhibit 2. Tax Treatment of LLCs/LLPs/LPs (LLEs) by States Imposing Net Worth- or Debt-Based Corporate Franchise Taxes (as of 1/1/14)
© 2014 Thomson Reuters/Tax & Accounting. All Rights Reserved.
Popular expired tax breaks may be revived. A number of popular tax breaks expired at the end of 2013. For individuals, these expired items include, among others, the deduction for state and local sales taxes, the deduction for qualified tuition and related expenses, tax-free distributions from IRAs for charitable purposes, the deduction for mortgage insurance premiums, the exclusion for discharged principal residence debt, and the provision allowing a higher exclusion for employer-provided transit benefits. Work has begun in Congress to revive these provisions and extend them through 2015. Some key business breaks might also be brought back, including the research credit, higher expensing, bonus depreciation, employer wage credit for activated military reservists, work opportunity tax credit, and 15-year straight line cost recovery for qualified leasehold, restaurant, and retail improvements, among other items.
© 2014 Thomson Reuters/Tax & Accounting. All Rights
IRS Tax Tip 2013-58, April 18, 2013
April 15 is the annual deadline for most people to file their federal income tax return and pay any taxes they owe. By law, the IRS may assess penalties to taxpayers for both failing to file a tax return and for failing to pay taxes they owe by the deadline.
Here are eight important points about penalties for filing or paying late.
1. A failure-to-file penalty may apply if you did not file by the tax filing deadline. A failure-to-pay penalty may apply if you did not pay all of the taxes you owe by the tax filing deadline.
2. The failure-to-file penalty is generally more than the failure-to-pay penalty. You should file your tax return on time each year, even if you’re not able to pay all the taxes you owe by the due date. You can reduce additional interest and penalties by paying as much as you can with your tax return. You should explore other payment options such as getting a loan or making an installment agreement to make payments. The IRS will work with you.
3. The penalty for filing late is normally 5 percent of the unpaid taxes for each month or part of a month that a tax return is late. That penalty starts accruing the day after the tax filing due date and will not exceed 25 percent of your unpaid taxes.
4. If you do not pay your taxes by the tax deadline, you normally will face a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes. That penalty applies for each month or part of a month after the due date and starts accruing the day after the tax-filing due date.
5. If you timely requested an extension of time to file your individual income tax return and paid at least 90 percent of the taxes you owe with your request, you may not face a failure-to-pay penalty. However, you must pay any remaining balance by the extended due date.
6. If both the 5 percent failure-to-file penalty and the ½ percent failure-to-pay penalties apply in any month, the maximum penalty that you’ll pay for both is 5 percent.
7. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.
8. You will not have to pay a late-filing or late-payment penalty if you can show reasonable cause for not filing or paying on time.
Note: The IRS recently announced special penalty relief to many taxpayers who requested an extension of time to file their 2012 federal income tax returns and some victims of the recent severe storms in parts of the South and Midwest. For details about these relief provisions, see IRS news releases IR-2013-31 and IR-2013-42. The IRS has also provided individual tax filing and payment extensions to those affected by the Boston explosions tragedy. See IR-2013-43 for more information.
The Sisyphean task of tax reform should be tried only by someone who will not flinch from igniting some highly flammable people - those who believe that whatever wrinkle in the tax code benefits them is an eternal entitlement. Tax reform's Senate champion is Ron Wyden, the affable, cerebral and tall Oregon Democrat who once wanted to be the NBA's greatest Jewish power forward since . . . never mind.
Anyway, a serious Republican reform plan has been produced by Rep. Dave Camp, who is retiring from Congress but will probably be succeeded as chairman of the tax-writing Ways and Means Committee by Paul Ryan, who has a wholesome monomania about promoting economic growth. Conservatives should rejoice that the Senate"s most important chairmanship, that of the Finance Committee, has come to Wyden, whose progressive credentials are impeccable but who says: "We like expanding the winners' circle." And who believes that economic growth of 4 percent is not only feasible but urgent.
Furthermore, the Congressional Budget Office might do "dynamic scoring" rather than "static scoring" of tax reform. That is, the CBO would consider probable behavioral changes — by workers, business executives, investors, savers and consumers - when projecting the revenue results of reforms that change incentives. If the reforms were likely to increase economic growth, the CBO would estimate increased government revenues, reducing resistance to tax cuts.
Although Wyden, 64, is in only his third full term, in January he will be the Senate's seventh-most senior Democrat. If Republicans then control the Senate, Wyden will be the ranking Democrat on Finance, which probably will be chaired by Utah's Orrin Hatch, who is the most senior Republican and second-most (behind Vermont Democrat Pat Leahy) senior senator. Wyden comes from Portland, the Vatican of progressivism, so Democrats may tolerate him collaborating with Hatch and Ryan - adult supervision for the congressional sandbox - in crafting tax reforms that respond to the CBO's recent ominous economic outlook for 2014 to 2024.
It projects growth through this year of about 3 percent. This would be "the largest rise in nearly a decade" but would be anemia continued, considering that the unprecedentedly weak recovery from the recession has left median household income 3.3 percent lower than when the recovery began almost five years ago. The CBO says that after 2017, "growth will diminish to a pace that is well below the average seen over the past several decades." It cites “long-term trends - particularly, slower growth in the labor force" as the population ages.
The CBO also mentions other reasons the growth potential is “much slower than the average since 1950": "Changes in people's economic incentives caused by federal tax and spending policies set in current law are expected to keep hours worked and potential output . . . lower than they would be otherwise."
Growth-igniting tax reform is required to rescue the nation from a "new normal" of appalling underemployment. Wyden, whose state produces wood products, says "housing is a very real economic multiplier - it cannot be outsourced," so do not expect him to favor substantial curtailment of the deductibility of mortgage interest payments, a $70 billion benefit disproportionately benefiting affluent homeowners. Wyden's party will insist on preserving the deductibility of state and local taxes, a nearly $80 billion benefit that encourages state and local spending. Unions, especially, will fight for the $260 billion benefit of not taxing as compensation, which it obviously is, employer-provided health insurance. "You never," says Wyden equably, "get to start from scratch in Washington."
Of the nation's embarrassing down-at-the-heels infrastructure - roads, airports, harbors - Wyden says, "You can't have a big-league quality of life and big-league economic growth with little-league infrastructure.” He has a plan ("Build America Bonds") for getting "billions of private dollars off the sidelines" and into infrastructure investments.
In addition to minimizing growth-suppressing economic distortions, tax simplification would reform politics by shrinking opportunities for transactions between private factions and the political class. This class confers favors as much with the tax code as with appropriations. "You can drain the swamp," says Wyden. "They did it in '86."
Yes, Congress simplified the code, eliminating preferences to pay for lower rates, but the swamp was unimpressed: Since then, the code has been re-complicated more than 15,000 times. Still, Wyden, ebullient in the face of daunting evidence, will, like Sisyphus, roll the reform boulder up the mountain, challenging the axiom that tax reform cannot be done in an election year or the year before one, which are the only years we have.
Amid much fanfare, on February 26 The House Committee on Ways and Means introduced a proposed Discussion Draft entitled "Tax Reform Act of 2014.” This 979-page document seeks to simplify the Internal Revenue Code and would cause sweeping reform of the current code. The proposed legislation will affect individuals, businesses, and tax-exempt organizations. Summarized below are a few of the items that tax-exempt organizations should know about the Tax Reform Act of 2014:
1. Unrelated Business Income Tax. There are numerous proposed changes concerning unrelated business income tax.
Royalties - The proposal modifies the unrelated business income tax treatment of the licensing of an organization's name or logo. Specifically, the proposal provides that any sale or licensing by an organization of any name or logo of the organization (including any trademark or copyright related to a name or logo) is treated as unrelated trade or business that is regularly carried on by the organization.
Separate computations of unrelated business taxable income for each trade or business - For an organization with more than one unrelated trade or business, the proposal requires that unrelated business taxable income be calculated separately with respect to each trade or business. The result would be that a loss from one trade or business would not be able to offset a gain from a different trade or business activity during the same taxable year. Special transition rules would apply for net operating losses arising before enactment.
Increase in the specific deduction against unrelated business taxable income - The proposal would increase the specific deduction from $1,000 to $10,000. Therefore, fewer organizations may need to file a Form 990-T.
Modification of the rules concerning qualified sponsorship payments - The proposal modifies the definition of "qualified sponsorship payment" to exclude from the permitted substantial return benefit the use or acknowledgement of the sponsor's product lines. In other words, if in exchange for a payment from a sponsor the exempt organization uses or acknowledges the sponsor's product lines, the payment is not a qualified sponsorship payment and is therefore subject to unrelated business income tax.
2. Compliance Changes. There are numerous proposed changes concerning unrelated business income tax.
Increase in information return penalties - The proposed tax reform doubles many of the daily penalty amounts currently in place. The daily penalty for failure to file an exempt organization or political organization annual information return will increase for most organizations from $20 to $40 and for organizations with gross receipts exceeding $1 million, from $100 to $200. Both failure to make annual returns available for public inspection and failure to make the application for exemption or notice of status available for public inspection would also increase penalties from $20 to $40 a day.
Substantial understatement penalty imposed on organization managers – The proposal would impose a new penalty on organization managers when a substantial understatement penalty attributable to unrelated business income is imposed on the organization. The penalty would be five percent of the underpayment up to a maximum penalty of $20,000.
Extensions - Proposed tax reform would allow for an exempt organization to receive an automatic maximum extension of six months by filing only one extension. This is similar to other types of extensions.
E-filing will be mandatory - The proposed reform extends the requirement to e-file to all tax-exempt organizations required to file statements or returns in the Form 990 series (This includes Form 990T, which previously has not been e-filed). The proposal also requires the IRS to make the information provided on the forms available to the public in a machine-readable format as soon as practicable. It is intended that the information be provided to the public in a format that would permit extraction and the performance of computations on the data, but would not alter or manipulate the statements or returns from which the data was extracted.
3. Charitable Giving Provision. There are numerous proposed changes concerning unrelated business income tax.
Extension of time to file - Under the proposed tax reform, individual taxpayers would be permitted to deduct charitable contributions made after the close of the tax year but before the due date of the return (April 15 for calendar year taxpayers) for the tax year covered by the return.
Two-percent floor – The tax law proposes that an individual's charitable contributions could only be deducted to the extent that they exceed two percent of the individual's adjusted gross income (AGI).
Value of deduction generally limited to adjusted basis - The rules for determining the value of the deduction for contributions of property (e.g., fair market value or adjusted basis) would be simplified. The amount of charitable deduction generally would be equal to the adjusted basis of the contributed property.
The proposed law changes would have a significant effect on all tax-exempt organizations. Although it is widely believed that congressional action is unlikely in the near future, the Discussion Draft is sure to be a starting point for future discussions. Tax-exempt organizations should be familiar with these potential changes and the impact they may have on their organization.
Affordable Care Act 90-day Waiting Period for Coverage: Beginning 1/1/2015, the Affordable Care Act prohibits group health plans and group health insurance issuers from applying waiting periods exceeding 90 days. Under newly issued final regulations (see TD 9656), (1) the phrase "waiting period" means the period that must pass before coverage can begin for an individual who is otherwise eligible to enroll under the terms of a group; (2) eligibility conditions based solely on the lapse of time are permissible for no more than 90 days, while other conditions for eligibility (not based solely on the lapse of time) are generally permissible unless designed to avoid compliance with the 90-day rule; (3) a plan's waiting period can begin on the first day after the employee satisfies a cumulative hours-of-service requirement, if the requirement does not exceed 1,200 hours; and (4) a requirement to successfully complete a reasonable and bona fide employment-based orientation period may be imposed as a condition for eligibility for coverage under a plan. According to the preamble, nothing in the regulations "requires a plan or issuer to have any waiting period, or prevents a plan or issuer from having a waiting period that is shorter than 90 days."
Affordable Care Act Employer Mandate: Beginning 1/1/2015, the employer requirement (mandate) to provide affordable health coverage applies to employers that employed an average of at least 50 full-time employees on business days during the preceding calendar year. Under newly issued final regulations, midsized businesses, those with 50 to 99 full-time employees, may provide the certification described in the regulations to exempt themselves from the employer mandate until 1/1/2016. To avoid a penalty for failing to provide health insurance, employers subject to the mandate must offer coverage to 70% of their full-time employees in 2015 and 95% in 2016. The final regulations also allow employers to use an optional look-back measurement method to determine whether employees with varying hours or seasonal schedules are full-time, as well as safe harbors (e.g., using wages paid or hourly rates) to verify whether employer coverage is affordable. See Regs. 54.4980H-1 through 54.4980H-5 , which can be found in TD 9655.
Foreign Account Tax Compliance Act (FATCA): The IRS issued the last substantial batch of regulations (see TDs 9657 and 9658) necessary to implement FATCA, which targets individuals who use offshore accounts that are not reported to the IRS or other tax authorities to evade taxes. [ Editor's Note: FATCA uses a withholding regime as a backstop to its main objective, which is to obtain information on accounts held by U.S. taxpayers overseas.] Among the revisions and clarifications to the FATCA regulations issued in 1/2013 are ones addressing (1) direct reporting to the IRS, rather than to withholding agents, by certain entities regarding their substantial U.S. owners; (2) the treatment of special-purpose debt securitization vehicles; (3) the treatment of disregarded entities as branches of foreign financial institutions; (4) the definition of an expanded affiliated group ; and (5) transitional rules for collateral arrangements prior to 2017. The regulations also coordinate FATCA with pre-existing reporting and withholding rules; for example, the regulations remove inconsistencies in the documentation requirements, ensure that payments are not subject to multiple withholding rules, and coordinate the information reporting for U.S. accounts.
Return Preparer Regulations: Affirming a 2013 District Court decision, the District of Columbia Court of Appeals held that the IRS does not have the statutory authority to regulate persons who "practice" before it. Thus, the Circular 230 rules requiring registered tax return preparers to pass competency tests and meet certain continuing education standards remain unenforceable. [ Editor's Note: On 2/1/2013, the District Court clarified that its decision did not require the IRS to suspend its Preparer Tax Identification Number (PTIN) program; however, the IRS could not require tax return preparers to complete any testing or continuing education.] Loving v. IRS , 113 AFTR 2d 2014-XXXX (Dist. of Columbia Cir.).
Applicable Federal Rates for March: The Section 7520 rate for March 2014 is 2.2%, while the Applicable Federal Rates (AFRs) are as follows (Rev. Rul. 2014-8, 2014-11 IRB):
Estate Tax—Valuation of Decedent's Property: Decedent's estate was liable for tax deficiencies and accuracy-related penalties for improperly valuing decedent's interest in a family-owned holding company, consisting primarily of common stock. Due to the significant appreciation of the securities held by the company, 87.5% of the value of the company's portfolio consisted of unrealized capital gains at the time of the decedent's death. The estate used a capitalization-of-dividends approach to determine the value of her interest in the holding company stock (approximately $3.1 million). Since the company's primary assets were marketable securities with ascertainable market values, the Tax Court concluded that a discounted Net Asset Valuation (NAV) method reflecting the expected dividend stream should have been used, which would have yielded a $6.5 million valuation. Estate of Helen Richmond, TC Memo 2014-26 (Tax Ct.).
Estate Tax—Valuation of Decedent's Property: The estate of a CPA who was killed on 8/26/2009 in a small plane crash filed a petition in the Tax Court challenging the IRS's $13.5 million increase in the valuation of substantial real estate investments, as well as the accounting firm and other businesses, owned by the CPA. Most of the properties were mortgaged, and some were vacant or generating little or no rental income. In its petition, the estate claims that the IRS appraiser did not "adequately consider the effects of the Great Recession of 2008, the housing crisis of 2008 and 2009, and the mortgage debt associated with the subject properties that adversely affected their marketability on the valuation date." The petition also challenges the IRS's $1.05 million gross valuation misstatement penalty under IRC Sec. 6662(h). Estate of James Lovins v. Comm., TC No. 2071-14 (Tax Ct.).
Income Tax—Alimony Deduction: Under IRC Sec. 71, an alimony obligation must terminate at the payee's death in order to be deductible. The taxpayer in this case paid 11 months of spousal support to his former spouse in the year that she died, and deducted those payments on his 2008 tax return. The IRS disallowed the deduction and hit him with an accuracy-related penalty. The taxpayer's divorce decree was silent as to whether the spousal support obligation ended upon his ex-wife's death. Therefore, the Tax Court had to review state statutory and common law to decide whether the obligation ended by operation of law. Upon its review, the Court held that Oregon common law did establish the termination of spousal support payments at the time of the payee's death. Thus, the taxpayer was entitled to his deduction and did not face a penalty. Bradley Wignal, TC Memo 2014-22 (Tax Ct.).
Income Tax—Completed Contract Method of Accounting: Taxpayer developed planned residential communities and reported the resulting income under the completed contract method of accounting. Taxpayer contended that final completion and acceptance under Reg. 1.460-1(c)(3) did not occur until the last road was paved and the final bond was released, while the IRS countered that the final completion took place upon the sale of each home. In concluding that the subject matter of the contracts included the larger development, with its amenities and common improvements, the Tax Court agreed with taxpayer that homebuyers were "consciously purchasing more than the bricks and sticks of the home." They were purchasing a lifestyle and understood that the price included the amenities of the development. A purchaser who did not want the accompanying amenities likely would have gone elsewhere for a lower priced dwelling not in a planned development. Shea Homes, Inc., 142 TC No. 3 (Tax Ct.).
Income Tax—Damages Unrelated to Injury or Sickness: The taxpayer sued her former employer under civil rights statutes and the Americans with Disabilities Act. The settlement agreement allocated damages to wages and emotional distress. The taxpayer received a Form W-2 for the portion allocated to wages, but did not report any of the settlement proceeds on her tax return, claiming the proceeds were received due to personal injury and so were excludible from income under IRC Sec. 104(a)(2) . The Tax Court held for the IRS because the settlement proceeds were clearly allocated to damages that did not include physical injury or physical sickness. In addition, taxpayer was liable for the accuracy-related penalty because she consented to withholding on a Form W-2, and did not provide reasonable cause for believing the damages were due to personal injury. Mazie Green, TC Memo 2014-23 (Tax Ct.).
Income Tax—Deducting Excise Tax Credits as Cost of Sales: The Office of Chief Counsel issued a memo advising that for federal income tax purposes, excise tax credits allowed under IRC Sec. 6426(a) are treated as a reduction in a taxpayer's federal excise tax liability under IRC Secs. 4081 and 4041 . The taxpayer seeking assistance regularly deducted its excise tax liability as part of cost of goods sold. The memo reiterated the IRS position that when a credit "satisfies an otherwise deductible liability. . .the deduction is reduced by the amount of the credit." [ Editor's Note: The IRS has similarly ruled that a state tax credit is not includible in gross income but rather reduces the taxpayer's state income tax deduction for federal income tax purposes.] The credit is not includible in gross income, but instead reduces the cost of goods sold deduction attributable to the excise taxes on taxpayer's federal tax return. CCA 201406001.
Income Tax—Doctor's Business Expenses: A neurosurgeon formed a corporation to conduct her medical practice. The only business income on her tax returns for 2004û2006 was Form W-2 income from the corporation. In 2006, the doctor conducted her medical practice as an employee of an educational institution, and dissolved her corporation in 2007. A dispute arose with a local medical center, resulting in significant legal fees and expenses for storing medical records of patients she had treated while an employee of the corporation. On her 2008 tax return, she deducted the legal and storage fees, travel, and other professional expense on Schedule C. Because the doctor never established that she practiced medicine other than as an employee, the Tax Court held that the expenses were deductible as itemized deductions, not self-employed expenses. Elizabeth Vitarbo, TC Summary Opinion 2014-11 (Tax Ct.).
Income Tax—S Corporation Subsidiary Liquidation: Affirming the Tax Court, the 3rd Circuit held that a Qualified Subchapter S Subsidiary (QSub) election did not produce an "item of income" under IRC Sec. 1366(a)(1)(A) that passed through to the shareholders (10 trusts) under IRC Sec. 1367(a)(1)(A), allowing them to increase their basis in the parent's stock from $15.2 million to $242.5 million and report a loss of more than $12 million from the subsequent sale of the stock for $230 million. The trusts argued that the deemed liquidation following the QSub election was, under IRC Sec. 331, a sale or exchange of property creating a realized gain to the trusts. The appellate court agreed with the Tax Court that IRC Sec. 332, which governs the liquidation of a subsidiary that is 80% or more owned by the parent, applied instead of IRC Sec. 331. The liquidation could not be governed by both provisions, thereby foreclosing the trusts' argument that the gain was first realized under IRC Sec. 331 and then subject to nonrecognition treatment under IRC Sec. 332. R Ball for R Ball III (Ball) v. Comm., 113 AFTR 2d 2014-XXXX (3rd Cir.).
IRS Announces Filing Season Results: As of 2/14/2014, tax return filings were slightly down compared to this time last year, with electronically filed returns accounting for nearly 95% of the returns filed. Almost 19 million returns had been filed by practitioners, down 5.4% from a year ago, while more than 18 million returns had been self-prepared, an increase of 6.6% over last year. News Release IR 2014-17.
IRS Publishes Final Form 1065: The following new items are noted in the instructions to the 2013 Form 1065 : (1) Schedule K-1, box 20, has a new code Y to report information regarding the Net Investment Income Tax (NIIT), which means that former code Y (Other information) is now code Z; and (2) Section 951 inclusions and Section 1293 inclusions can be included in net investment income for Section 1411 NIIT purposes in the same tax year they are included in income for income tax purposes.
IRS Publishes Final Form 1120S: The following new items are noted in the instructions to the 2013 Form 1120S : (1) an S corporation with total receipts of $500,000 or more that claims a deduction for officer compensation should complete Form 1125-E (Compensation of Officers); (2) an S corporation that has a disregarded entity, trust, estate, nominee or similar person as a shareholder (per question 2 of Schedule B) must complete Schedule B-1; (3) Schedule K-1, box 17, has a new code U to report information regarding the Net Investment Income Tax (NIIT), which means that former code U (Other information) is now code V; and (4) Section 951 inclusions and Section 1293 inclusions can be included in net investment income for NIIT purposes in the same tax year they are included in income for income tax purposes.
IRS Releases Dirty Dozen Tax Scams for 2014: The Dirty Dozen, compiled by the IRS each year, lists common scams that taxpayers can encounter throughout the year but seem to be more common during filing season. Unsurprisingly, identity theft tops this year's list. Taxpayers who believe they are at risk because of lost or stolen personal information should contact the IRS Identity Protection Specialized Unit at (800) 908-4490. More information can be found on the special identity protection page on www.irs.gov . Next on the list is telephone scams, with callers pretending to be from the IRS in hopes of stealing money or identities from victims. Taxpayers who owe taxes or think they may owe taxes should call the IRS at (800) 829-1040, while those who don't owe taxes or have no reason to think they owe taxes should report the incident to the Treasury Inspector General for Tax Administration at (800) 366-4484. For more on these items and the other items on the list, see News Release IR-2014-16 .
Procedure—Electronic Return Originator Rules: The Office of Chief Counsel published a memo providing advice on whether certain actions of an Electronic Return Originator (ERO) are violations of IRS e-file rules. Among other things, the advice states that is a violation of the rules for an ERO to share its Electronic Filing Identification Number (EFIN) with others and also for an ERO to electronically originate returns prepared by a subcontractor of the ERO. However, employees of the ERO may prepare returns at a location other than the ERO's business location. The complete set of rules governing participation in IRS e-file may be found in Rev. Proc. 2007-40, 2007-1 CB 1488 . CCA 201407013.
Procedure—Transfer Pricing Audits: The IRS's Large Business and International division has released a roadmap providing detailed guidance on transfer audits, including audit techniques and tools to assist with transfer pricing exams, as well as an estimated timeline for the exam, insights as to how the exams will be conducted, and tips for upfront planning. Transfer pricing audits are conducted by the IRS to review transfers or licenses of intangible property between controlled entities. Under IRC Sec. 482, the IRS can allocate income, deductions, credits, or allowances between the entities to prevent tax evasion and to clearly reflect income. The roadmap is available at www.irs.gov/pub/irs-utl/FinalTrfPrcRoadMap.pdf.
State Sales Tax—Substituted Trust Property: The terms of an irrevocable trust included a substitution power that allowed the settler the right to reacquire trust property by substituting property of equal value. [ Editor's Note: A substitution power is frequently used by intentionally defective grantor trusts to cause the trust income to be taxed to the grantor of the trust, rather than the trust. The trust is defective (an incomplete transfer) for income tax purposes, but is effective (a complete transfer) for estate tax purposes so that the trust property is not included in the grantor's gross estate.] Although we typically do not cover state tax developments, according to a New York Advisory Opinion, the substitution of property is considered the transfer of title or possession for consideration, which would cause state sales tax to apply, even though the transaction is a nonevent for income tax purposes. The opinion indicated that consideration is deemed to be present if the "individual receives something of value in the transfer regardless of whether it is supported by negotiation." See www.tax.ny.gov/pdf/advisory_opinions/sales/a14_6s.pdf for more information on this topic. TSB-A-14(6)S..
IRS Releases the "Dirty Dozen" Tax Scams for 2014 On 2/19/2014, the IRS published its annual list of prevalent tax scams that taxpayers may encounter. The list covers a broad range of schemes including identity theft, phone scams, phishing, and return preparer fraud. Although these types of tax scams may be used at any time of year, the IRS has noted that this type of fraudulent activity peaks during the spring filing season. The Dirty Dozen list reminds taxpayers to use caution when preparing their returns and makes them aware of which patterns indicate criminal behavior. News Release IR 2014-16 .
Tax Court Looks to State Law for Alimony Deduction: Under IRC Sec. 71, an alimony obligation must terminate at the payee's death in order to qualify for a deduction. The taxpayer in this case paid 11 months of spousal support to his former spouse in the year that she died, and he claimed those payments as a deduction on his 2008 tax return. The IRS disallowed the deduction and hit him with an accuracy-related penalty. The taxpayer's divorce decree was silent as to whether the spousal support obligation ended upon his ex-wife's death. Therefore, the Court had to review state statute and common law to decide whether the obligation ended by operation of law. Upon its review, the Court held that Oregon common law did establish the termination of spousal support payments at the time of the payee's death. Thus, the taxpayer was entitled to his deduction and did not face a penalty. Bradley W. Wignal, TC Memo 2014-22 (Tax Ct.).
Estate Challenges IRS's Increased Property Valuations: The estate of a CPA who was killed in 2009, along with his wife, in a small plane crash, filed a petition in the U.S. Tax Court challenging the IRS's $13.5 million increase in the valuation of property owned by the decedent. At the time of his death, the CPA owned substantial real estate investments, as well as his accounting firm and other businesses. Most of the properties were mortgaged; some were vacant or generating little or no rental income. In its petition, the estate claims that its appraiser properly "considered the effects of the Great Recession of 2008" and the significant decline in market values. Additionally, the petition challenges the IRS's $1.05 million gross valuation misstatement penalty under IRC Sec. 6662(h). Estate of James D. Lovins v. Comm., T.C. No. 2071-14 (Tax Ct.).
Roadmap for Transfer Pricing Audits: The IRS's Large Business and International division has released a roadmap providing detailed guidance on transfer audits, including audit techniques and tools to assist with transfer pricing exams, as well as an estimated timeline for the exam, insights as to how the exams will be conducted, and tips for upfront planning. Transfer pricing audits are conducted by the IRS to review transfers or licenses of intangible property between controlled entities. Under IRC Sec. 482, the IRS can allocate income deductions, credits, or allowances between the entities to prevent tax evasion and to clearly reflect income. The IRS's "Transfer Pricing Audit Roadmap" is available at http://www.irs.gov/pub/irs-utl/FinalTrfPrcRoadMap.pdf.
To: Clients, Friends & Associates
Date: January 2013
Re: Form 1099-MISC
The IRS is stepping up enforcement of Form 1099 reporting and the penalties for failing to file information returns in a timely fashion. The payee statements are due to the recipient by January 31, 2013, and to the IRS by February 28, 2013. The penalties can be severe for late filing. If the 1099s are filed just after the due date, the penalties are $30 per item. As time passes from the original due date to the time they are filed, the penalties will increase to a maximum of $250 per item. This amount can be quite burdensome to the payer. The Form 1099-MISC reporting rules apply to any business (whether a sole proprietorship, partnership, LLC or corporation) that makes a reportable payment in the operations of its trade or business.
Reportable payments are amounts paid to any individual or business that is not a corporation that are:
Additionally Form 1099-Misc is also required for the following payment amounts:
The exemption from issuing a Form 1099-Misc to a corporation does not apply to payments to attorneys or heath care services providers that operate as a professional corporation. Personal payments for any of the above are not reportable.
Although they do not operate for gain or profit, nonprofit organizations are considered to be engaged in a trade or business and are subject to the Form 1099-MISC reporting requirements. Nonprofit organizations subject to the Form 1099-MISC reporting requirements include trusts of qualified pension or profit-sharing plans of employers and certain organizations exempt from tax under IRC Sec. 501(c).
Please contact any of our staff at our firm should there be any questions or issues that pertain to your situation.