Charitable giving can be a powerful tax-saving strategy: Donations to qualified charities are generally fully deductible, and you have complete control over when and how much you give. Here are some important considerations to keep in mind this year to ensure you receive the tax benefits you desire.
To be deductible on your 2017 return, a charitable donation must be made by Dec. 31, 2017. According to the IRS, a donation generally is “made” at the time of its “unconditional delivery.” But what does this mean? Is it the date you, for example, write a check or make an online gift via your credit card? Or is it the date the charity actually receives the funds — or perhaps the date of the charity’s acknowledgment of your gift?
The delivery date depends in part on what you donate and how you donate it. Here are a few examples for common donations:
Check. The date you mail it.
Credit card. The date you make the charge.
Pay-by-phone account. The date the financial institution pays the amount.
Stock certificate. The date you mail the properly endorsed stock certificate to the charity.
Qualified charity status
To be deductible, a donation also must be made to a “qualified charity” — one that’s eligible to receive tax-deductible contributions.
The IRS’s online search tool, Exempt Organizations (EO) Select Check, can help you more easily find out whether an organization is eligible to receive tax-deductible charitable contributions. You can access EO Select Check at http://apps.irs.gov/app/eos. Information about organizations eligible to receive deductible contributions is updated monthly.
Potential impact of tax reform
The charitable donation deduction isn’t among the deductions that have been proposed for elimination or reduction under tax reform. In fact, income-based limits on how much can be deducted in a particular year might be expanded, which will benefit higher-income taxpayers who make substantial charitable gifts.
However, for many taxpayers, accelerating into this year donations that they might normally give next year may make sense for a couple of tax-reform-related reasons:
1. If your tax rate goes down for 2018, then 2017 donations will save you more tax because deductions are more powerful when rates are higher.
2. If the standard deduction is raised significantly and many itemized deductions are eliminated or reduced, then it may not make sense for you to itemize deductions in 2018, in which case you wouldn’t benefit from charitable donation deduction next year.
Many additional rules apply to the charitable donation deduction, so please contact us if you have questions about the deductibility of a gift you’ve made or are considering making — or the potential impact of tax reform on your charitable giving plans.
Two valuable depreciation-related tax breaks can potentially reduce your 2017 taxes if you acquire and place in service qualifying assets by the end of the tax year. Tax reform could enhance these breaks, so you’ll want to keep an eye on legislative developments as you plan your asset purchases.
Section 179 expensing
Sec. 179 expensing allows businesses to deduct up to 100% of the cost of qualifying assets (new or used) in Year 1 instead of depreciating the cost over a number of years. Sec. 179 can be used for fixed assets, such as equipment, software and real property improvements.
The Sec. 179 expensing limit for 2017 is $510,000. The break begins to phase out dollar-for-dollar for 2017 when total asset acquisitions for the tax year exceed $2.03 million. Under current law, both limits are indexed for inflation annually.
Under the initial version of the House bill, the limit on Sec. 179 expensing would rise to $5 million, with the phaseout threshold increasing to $20 million. These higher amounts would be adjusted for inflation, and the definition of qualifying assets would be expanded slightly. The higher limits generally would apply for 2018 through 2022.
The initial version of the Senate bill also would increase the Sec. 179 expensing limit, but only to $1 million, and would increase the phaseout threshold, but only to $2.5 million. The higher limits would be indexed for inflation and generally apply beginning in 2018. Significantly, unlike under the House bill, the higher limits would be permanent under the Senate bill. There would also be some small differences in which assets would qualify under the Senate bill vs. the House bill.
First-year bonus depreciation
For qualified new assets (including software) that your business places in service in 2017, you can claim 50% first-year bonus depreciation. Examples of qualifying assets include computer systems, software, machinery, equipment, office furniture and qualified improvement property. Currently, bonus depreciation is scheduled to drop to 40% for 2018 and 30% for 2019 and then disappear for 2020.
The initial House bill would boost bonus depreciation to 100% for qualifying assets (which would be expanded to include certain used assets) acquired and placed in service after September 27, 2017, and before January 1, 2023 (with an additional year for certain property with a longer production period).
The initial Senate bill would allow 100% bonus depreciation for qualifying assets acquired and placed in service during the same period as under the House bill, though there would be some differences in which assets would qualify.
If you’ve been thinking about buying business assets, consider doing it before year-end to reduce your 2017 tax bill. If, however, you could save more taxes under tax reform legislation, for now you might want to limit your asset investments to the maximum Sec.179 expense election currently available to you, and then consider additional investments depending on what happens with tax reform.
It’s still uncertain what the final legislation will contain and whether it will be passed and signed into law this year. Contact us to discuss the best strategy for your particular situation.
Currently, a valuable income tax deduction related to real estate is for depreciation, but the depreciation period for such property is long and land itself isn’t depreciable. Whether real estate is occupied by your business or rented out, here’s how you can maximize your deductions.
Segregate personal property from buildings
Generally, buildings and improvements to them must be depreciated over 39 years (27.5 years for residential rental real estate and certain other types of buildings or improvements). But personal property, such as furniture and equipment, generally can be depreciated over much shorter periods. Plus, for the tax year such assets are acquired and put into service, they may qualify for 50% bonus depreciation or Section 179 expensing (up to $510,000 for 2017, subject to a phaseout if total asset acquisitions for the tax year exceed $2.03 million).
If you can identify and document the items that are personal property, the depreciation deductions for those items generally can be taken more quickly. In some cases, items you’d expect to be considered parts of the building actually can qualify as personal property. For example, depending on the circumstances, lighting, wall and floor coverings, and even plumbing and electrical systems, may qualify.
Carve out improvements from land
As noted above, the cost of land isn’t depreciable. But the cost of improvements to land is depreciable. Separating out land improvement costs from the land itself by identifying and documenting those improvements can provide depreciation deductions. Common examples include landscaping, roads, and, in some cases, grading and clearing.
Convert land into a deductible asset
Because land isn’t depreciable, you may want to consider real estate investment alternatives that don’t involve traditional ownership. Such options can allow you to enjoy tax deductions for land costs that provide a similar tax benefit to depreciation deductions. For example, you can lease land long-term. Rent you pay under such a “ground lease” is deductible.
Another option is to purchase an “estate-for-years,” under which you own the land for a set period and an unrelated party owns the interest in the land that begins when your estate-for-years ends. You can deduct the cost of the estate-for-years over its duration.
More limits and considerations
There are additional limits and considerations involved in these strategies. Also keep in mind that tax reform legislation could affect these techniques. For example, immediate deductions could become more widely available for many costs that currently must be depreciated. If you’d like to learn more about saving income taxes with business real estate, please contact us.
If you own a profitable, unincorporated business with your spouse, you probably find the high self-employment (SE) tax bills burdensome. An unincorporated business in which both spouses are active is typically treated by the IRS as a partnership owned 50/50 by the spouses. (For simplicity, when we refer to “partnerships,” we’ll include in our definition limited liability companies that are treated as partnerships for federal tax purposes.)
For 2017, that means you’ll each pay the maximum 15.3% SE tax rate on the first $127,200 of your respective shares of net SE income from the business. Those bills can mount up if your business is profitable. To illustrate: Suppose your business generates $250,000 of net SE income in 2017. Each of you will owe $19,125 ($125,000 × 15.3%), for a combined total of $38,250.
Fortunately, there are ways spouse-owned businesses can lower their combined SE tax hit. Here are two.
1. Establish that you don’t have a spouse-owned partnership
While the IRS creates the impression that involvement by both spouses in an unincorporated business automatically creates a partnership for federal tax purposes, in many cases, it will have a tough time making the argument — especially when:
- The spouses have no discernible partnership agreement, and
- The business hasn’t been represented as a partnership to third parties, such as banks and customers.
If you can establish that your business is a sole proprietorship (or a single-member LLC treated as a sole proprietorship for tax purposes), only the spouse who is considered the proprietor owes SE tax.
Let’s assume the same facts as in the previous example, except that your business is a sole proprietorship operated by one spouse. Now you have to calculate SE tax for only that spouse. For 2017, the SE tax bill is $23,023 [($127,200 × 15.3%) + ($122,800 × 2.9%)]. That’s much less than the combined SE tax bill from the first example ($38,250).
2. Establish that you don’t have a 50/50 spouse-owned partnership
Even if you do have a spouse-owned partnership, it’s not a given that it’s a 50/50 one. Your business might more properly be characterized as owned, say, 80% by one spouse and 20% by the other spouse, because one spouse does much more work than the other.
Let’s assume the same facts as in the first example, except that your business is an 80/20 spouse-owned partnership. In this scenario, the 80% spouse has net SE income of $200,000, and the 20% spouse has net SE income of $50,000. For 2017, the SE tax bill for the 80% spouse is $21,573 [($127,200 × 15.3%) + ($72,800 × 2.9%)], and the SE tax bill for the 20% spouse is $7,650 ($50,000 × 15.3%). The combined total SE tax bill is only $29,223 ($21,573 + $7,650).
> More-complicated strategies are also available.
> Contact us to learn more about how you can reduce your spouse-owned business’s SE taxes.
If your business offers health insurance benefits to employees, there’s a good chance you’ve seen a climb in premium costs in recent years — perhaps a dramatic one. To meet the challenge of rising costs, some employers are opting for a creative alternative to traditional health insurance known as “captive insurance.” A captive insurance company generally is wholly owned and controlled by the employer. So it’s essentially like forming your own insurance company. And it provides tax advantages, too.
Potential benefits of forming a captive insurance company include:
- Stabilized or lower premiums,
- More control over claims,
- Lower administrative costs, and
- Access to certain types of coverage that are unavailable or too expensive on the commercial health insurance market.
You can customize your coverage package and charge premiums that more accurately reflect your business’s true loss exposure.
Another big benefit is that you can participate in the captive’s underwriting profits and investment income. When you pay commercial health insurance premiums, a big chunk of your payment goes toward the insurer’s underwriting profit. But when you form a captive, you retain this profit through the captive.
Also, your business can enjoy investment and cash flow benefits by investing premiums yourself instead of paying them to a commercial insurer.
A captive insurance company may also save you tax dollars. For example, premiums paid to a captive are tax-deductible and the captive can deduct most of its loss reserves. To qualify for federal income tax purposes, a captive must meet several criteria. These include properly priced premiums based on actuarial and underwriting considerations and a sufficient level of risk distribution as determined by the IRS.
Recent U.S. Tax Court rulings have determined that risk distribution exists if there’s a large enough pool of unrelated risks — or, in other words, if risk is spread over a sufficient number of employees. This is true regardless of how many entities are involved.
Additional tax benefits may be available if your captive qualifies as a “microcaptive” (a captive with $2.2 million or less in premiums that meets certain additional tests): You may elect to exclude premiums from income and pay taxes only on net investment income. Be aware, however, that you’ll lose certain deductions with this election.
Also keep in mind that there are some potential drawbacks to forming a captive insurance company. Contact us to learn more about the tax treatment and other pros and cons of captive insurance. We can help you determine whether this alternative may be right for your business.
With an employee stock ownership plan (ESOP), employee participants take part ownership of the business through a retirement savings arrangement. Meanwhile, the business and its existing owner(s) can benefit from some potential tax breaks, an extra-motivated workforce and potentially a smoother path for succession planning.
How ESOPs work
To implement an ESOP, you establish a trust fund and either:
- Contribute shares of stock or money to buy the stock (an “unleveraged” ESOP), or
- Borrow funds to initially buy the stock, and then contribute cash to the plan to enable it to repay the loan (a “leveraged” ESOP).
The shares in the trust are allocated to individual employees’ accounts, often using a formula based on their respective compensation. The business has to formally adopt the plan and submit plan documents to the IRS, along with certain forms.
Among the biggest benefits of an ESOP is that contributions to qualified retirement plans such as ESOPs typically are tax-deductible for employers. However, employer contributions to all defined contribution plans, including ESOPs, are generally limited to 25% of covered payroll. In addition, C corporations with leveraged ESOPs can deduct contributions used to pay interest on the loan. That is, the interest isn’t counted toward the 25% limit.
Dividends paid on ESOP stock passed through to employees or used to repay an ESOP loan, so long as they’re reasonable, may be tax-deductible for C corporations. Dividends voluntarily reinvested by employees in company stock in the ESOP also are usually deductible by the business. (Employees, however, should review the tax implications of dividends.)
In another potential benefit, shareholders in some closely held C corporations can sell stock to the ESOP and defer federal income taxes on any gains from the sale, with several stipulations. One is that the ESOP must own at least 30% of the company’s stock immediately after the sale. In addition, the sellers must reinvest the proceeds (or an equivalent amount) in qualified replacement property securities of domestic operation corporations within a set period of time.
Finally, when a business owner is ready to retire or otherwise depart the company, the business can make tax-deductible contributions to the ESOP to buy out the departing owner’s shares or have the ESOP borrow money to buy the shares.
More tax considerations
There are tax benefits for employees, too. Employees don’t pay tax on stock allocated to their ESOP accounts until they receive distributions. But, as with most retirement plans, if they take a distribution before they turn 59½ (or 55, if they’ve terminated employment), they may have to pay taxes and penalties — unless they roll the proceeds into an IRA or another qualified retirement plan.
Also be aware that an ESOP’s tax impact for entity types other than C corporations varies somewhat from what we’ve discussed here. And while an ESOP offers many potential benefits, it also presents risks. For help determining whether an ESOP makes sense for your business, contact us.
Here are some of the key tax-related deadlines affecting businesses and other employers during the third quarter of 2017. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
- Report income tax withholding and FICA taxes for second quarter 2017 (Form 941), and pay any tax due. (See exception below.)
- File a 2016 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension.
- Report income tax withholding and FICA taxes for second quarter 2017 (Form 941), if you deposited on time and in full all of the associated taxes due.
- If a calendar-year C corporation, pay the third installment of 2017 estimated income taxes.
- If a calendar-year S corporation or partnership that filed an automatic six-month extension:
> File a 2016 income tax return (Form 1120S, Form 1065 or Form 1065-B) and pay any tax, interest and penalties due.
> Make contributions for 2016 to certain employer-sponsored retirement plans.
If you would like to receive more orientation towards this issue you can rely on us. Fell free to contact us and let us assist!
If you recently filed your 2016 income tax return (rather than filing for an extension) you may now be wondering whether it’s likely that your business could be audited by the IRS based on your filing. Here’s what every business owner should know about the process.
Catching the IRS’s eye
Many business audits occur randomly, but a variety of tax-return-related items are likely to raise red flags with the IRS and may lead to an audit. Here are a few examples:
- Significant inconsistencies between previous years’ filings and your most current filing,
- Gross profit margin or expenses markedly different from those of other businesses in your industry, and
- Miscalculated or unusually high deductions.
An owner-employee salary that’s inordinately higher or lower than those in similar companies in his or her location can also catch the IRS’s eye, especially if the business is structured as a corporation.
If you’re selected for an audit, you’ll be notified by letter. Generally, the IRS won’t make initial contact by phone. But if there’s no response to the letter, the agency may follow up with a call.
The good news is that many audits simply request that you mail in documentation to support certain deductions you’ve taken. Others may ask you to take receipts and other documents to a local IRS office. Only the most severe version, the field audit, requires meeting with one or more IRS auditors.
More good news: In no instance will the agency demand an immediate response. You’ll be informed of the discrepancies in question and given time to prepare. To do so, you’ll need to collect and organize all relevant income and expense records. If any records are missing, you’ll have to reconstruct the information as accurately as possible based on other documentation.
If the IRS selects you for an audit, our firm can help you:
- Understand what the IRS is disputing (it’s not always crystal clear),
- Gather the specific documents and information needed, and
- Respond to the auditor’s inquiries in the most expedient and effective manner.
Don’t let an IRS audit ruin your year — be it this year, next year or whenever that letter shows up in the mail. By taking a meticulous, proactive approach to how you track, document and file your company’s tax-related information, you’ll make an audit much less painful and even decrease the chances that one happens in the first place.
Private companies with more than one owner should have a buy-sell agreement to spell out how ownership shares will change hands should an owner depart. For businesses structured as C corporations, the agreements also have significant tax implications that are very important to understand.
- Buy-sell basics
A buy-sell agreement sets up parameters for the transfer of ownership interests following stated “triggering events,” such as an owner’s death or long-term disability, loss of license or other legal incapacitation, retirement, bankruptcy, or divorce. The agreement typically will also specify how the purchase price for the departing owner’s shares will be determined, such as by stating the valuation method to be used.
Another key issue a buy-sell agreement addresses is funding. In many cases, business owners don’t have the cash readily available to buy out a departing owner. So insurance is commonly used to fund these agreements. And this is where different types of agreements — which can lead to tax issues for C corporations — come into play.
Under a cross-purchase agreement, each owner buys life or disability insurance (or both) that covers the other owners, and the owners use the proceeds to purchase the departing owner’s shares. Under a redemption agreement, the company buys the insurance and, when an owner exits the business, buys his or her shares.
Sometimes a hybrid agreement is used that combines aspects of both approaches. It may stipulate that the company gets the first opportunity to redeem ownership shares and that, if the company is unable to buy the shares, the remaining owners are then responsible for doing so. Alternatively, the owners may have the first opportunity to buy the shares.
- C corp. tax consequences
A C corp. with a redemption agreement funded by life insurance can face adverse tax consequences. First, receipt of insurance proceeds could trigger corporate alternative minimum tax.
Second, the value of the remaining owners’ shares will probably rise without increasing their basis. This, in turn, could drive up their tax liability if they later sell their shares.
Heightened liability for the corporate alternative minimum tax is generally unavoidable under these circumstances. But you may be able to manage the second problem by revising your buy-sell as a cross-purchase agreement. Under this approach, owners will buy additional shares themselves — increasing their basis.
Naturally, there are downsides. If owners are required to buy a departing owner’s shares, but the company redeems the shares instead, the IRS may characterize the purchase as a taxable dividend. Your business may be able to mitigate this risk by crafting a hybrid agreement that names the corporation as a party to the transaction and allows the remaining owners to buy back the shares without requiring them to do so.
For more information on the tax ramifications of buy-sell agreements, contact us. And if your business doesn’t have a buy-sell in place yet, we can help you figure out which type of funding method will best meet your needs while minimizing any negative tax consequences.
Here are some of the key tax-related deadlines affecting businesses and other employers during the second quarter of 2017. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.
- If a calendar-year C corporation, file a 2016 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004), and pay any tax due. If the return isn’t extended, this is also the last day to make 2016 contributions to pension and profit-sharing plans.
- If a calendar-year C corporation, pay the first installment of 2017 estimated income taxes.
- Report income tax withholding and FICA taxes for first quarter 2017 (Form 941), and pay any tax due. (See exception below.
- Report income tax withholding and FICA taxes for first quarter 2017 (Form 941), if you deposited on time and in full all of the associated taxes due.
- If a calendar-year C corporation, pay the second installment of 2017 estimated income taxes.
The Internal Revenue Service (IRS) issued final regulations that affect U.S. taxpayers who transfer property to foreign corporations in nonrecognition transactions.
The regs are aimed at preventing taxpayers from avoiding recognition of gains or income attributable to high-value intangible property by claiming that a large share of the transferred property’s value is foreign goodwill or of going concern value.
The regulations contain the following changes to Section 367 of the Internal Revenue Code. They:
1. Eliminate the favorable treatment of goodwill and going concern value by narrowing the scope of the active trade or business exception and eliminating the exception that provides that foreign goodwill and going concern value aren’t subject to Section 367(d).
2. Allow taxpayers to apply the special rules relating to transfers of intangibles to certain property that would otherwise be subject to the provisions relating to transfers from the United States.
3. Remove the 20-year limitation on useful life.
4. Remove the exception that permits certain property denominated in a foreign currency to qualify for the active trade or business exception.
The rules include a retroactive effective date for transfers on or after September 14.
Please contact us for more information on this subject!
Many businesses receive payment in advance for goods and services. Examples include magazine subscriptions, long-term supply contracts, organization memberships, computer software licenses and gift cards.
Generally, advance payments are included in taxable income in the year they’re received, even if you defer a portion of the income for financial reporting purposes. But there are exceptions that might provide you some savings when you file your 2016 income tax return.
> Deferral opportunities
The IRS allows limited deferral of income related to advance payments for:
- Goods or services
- Intellectual property licenses or leases
- Computer software sales, leases or licenses
- Warranty contracts
- Certain organization memberships
- Eligible gift card sales
- Any combination of the above
In the year you receive an advance payment (Year 1), you may defer the same amount of income you defer in an “applicable financial statement.” The remaining income must be recognized in the following year (Year 2), regardless of the amount of income you recognize in Year 2 for financial reporting purposes. Let’s look at an example.
Fred and Ginger are in the business of giving dance lessons. On November 1, 2016, they receive an advance payment from Gene for a two-year contract that provides up to 96 one-hour lessons. Gene takes eight lessons in 2016, 48 lessons in 2017 and 40 lessons in 2018.
In their applicable financial statements, Fred and Ginger recognize 1/12 of the advance payment in their 2016 revenues, 6/12 in their 2017 revenues and 5/12 in their 2018 revenues. For federal income tax purposes, they need to include only 1/12 of the advance payment in their 2016 gross income. But they must include the remaining 11/12 in their 2017 gross income.
> The applicable financial statement
An applicable financial statement is one that’s audited by an independent CPA or filed with the SEC or certain other government agencies. If you don’t have this statement, it’s still possible to defer income; you simply need a reasonable method for determining the extent to which advance payments are earned in Year 1.
Suppose, for example, that a company issues gift certificates but doesn’t track their use and doesn’t have an applicable financial statement. The company may be able to defer income based on a statistical study that indicates the percentage of gift certificates expected to be redeemed in Year 1.
If your business receives advance payments, consult your tax advisor to determine whether you can reduce your 2016 tax bill by deferring some of this income to 2017. And make sure you abide by the IRS’s rules on these payments.
President-elect Donald Trump’s elections win moves Apple, Pfizer, Microsoft and other big U.S. corporations much closer than they have been in years to winning a big tax break on approximately $2.6 trillion in foreign profits.
This article explains the mechanics of taxing foreign-source income, the 2004 repatriation holiday, proposals for another holiday, and the prospects of enacting a repatriation holiday under the Republican-controlled government.
U.S. Corporations are taxed on a worldwide basis, meaning that they’re generally taxed on income that’s earned within and outside of the U.S. subject to certain exceptions; income earned outside the U.S. isn’t subject to U.S. tax until it’s brought back to the United States — in other words, until it’s repatriated. At that point, it’s included in the corporation’s gross income. To mitigate double taxation, U.S. corporations may elect to either deduct or claim a foreign tax credit for the foreign income taxes that were paid or accrued on the foreign earnings.
Most developed countries, on the other hand, have adopted a territorial tax system. Such countries generally only tax income derived from sources within their borders.
The U.S. tax system has come under fire. Given the increasingly international nature of businesses today, many U.S. multinationals now earn most of their income overseas. Critics argue that the current U.S. tax system, coupled with the country’s high corporate income tax rate, renders U.S. multinationals uncompetitive, discourages repatriation, and encourages more aggressive tax planning (such as corporate inversions).
2004 repatriation holiday
In an effort to stimulate the U.S. economy by triggering the repatriation of foreign earnings that otherwise likely would have remained abroad, Congress enacted a provision in the tax code in 2004 that let U.S. companies repatriate earnings at a reduced tax rate if they met several conditions. Specifically, they could elect, for one tax year, an 85% dividends received deduction for eligible dividends from their foreign subsidiaries.
There wasn’t an intent to make the holiday permanent, extend it, or enact it again in the future. Some reports on the 2004 measure have been largely critical of its overall effectiveness. In particular, critics question:
1. The extent (if any) to which the measure actually stimulated the U.S. economy or furthered jobs growth,
2. Whether it has encouraged corporate taxpayers to hoard money overseas and wait for Congress to pass another repatriation holiday, and
3. If it disproportionately benefited the companies that are the most aggressive in shifting their income overseas.
There have been subsequent proposals for similar repatriation holidays or other tax measures to minimize the impact of repatriating overseas funds, often floated as a way to jumpstart economic growth in the U.S.
Tax reform is likely to be among the most fruitful areas for cooperation between President-elect Trump and his fellow Republicans. Trump and congressional Republicans have separate, but similar, tax reform plans. Both would slash tax rates on businesses, simplify and cut individual taxes, and let companies bring overseas profits into the country at a low tax rate.
The plan envisioned in the House of Representatives, which Speaker Paul Ryan (R-WI) and other leading Republicans promoted throughout the campaign, would:
- Lower the corporate tax rate from 35% to 20%,
- Force multinationals to repatriate existing foreign earnings, and
- Adopt a territorial system that would largely end taxation of U.S. companies’ foreign income.
Trump is calling for a steeper corporate tax rate cut to 15%, and he has proposed a 10% tax rate for repatriated overseas profits held in cash, payable over a decade.
Trump and Ryan would still need to agree on how to pay for lower corporate tax rates and on whether U.S.-based multinationals should pay U.S. taxes on future foreign profits.
Some are optimistic that those differences can be overcome. “In the end, there are no differences that can’t be solved on the tax issue,” said Representative Tom Cole (R-OK). They would also need support for tax reform from Democrats if they intend to present the package as a benefit for the country as a whole, analysts say.
Such proposals have stumbled before on Democrats’ objections that they are corporate giveaways, and on Republicans’ insistence that they be paired with a cut in the corporate income tax rate. Democrats could still block legislation from reaching the floor of the Senate, which requires a supermajority of 60 votes to advance a measure, but there are procedural maneuvers Republicans could use to bypass them.
What repatriation might fund
The one-time surge in revenue that would result from repatriation could help fund another cornerstone of Trump’s campaign platform — a pledge to boost the economy through big investments in U.S. highways, roads, bridges, airports and seaports. Infrastructure spending was not a campaign priority for congressional Republicans, but a new job-creating program could appeal to Democrats and be valuable to lawmakers in the 2018 midterm elections.
Within the first 100 days after his inauguration, President-elect Trump plans to introduce various tax reforms to Congress. It’s uncertain which of these proposals will be made into law — or when the changes might go into effect. But, with Republicans retaining control of both chambers of Congress, some sort of overhaul of the U.S. tax code is likely.
If creating a family legacy of charitable giving is important to you, a private foundation might be the right estate planning vehicle. And this option isn’t just for billionaires. You may be able to effectively establish a foundation with an initial contribution as low as $250,000.
- Tax impact
A private foundation is a tax-exempt entity that’s typically structured as a not-for-profit trust or corporation and established to accept charitable contributions. It’s private because it doesn’t solicit public contributions. One of its primary benefits is that it allows you to control your giving. As a member of the foundation’s board of directors, you manage the foundation’s assets and direct grants to charities.
Contributions to a private foundation are deductible for federal income tax purposes. You can deduct cash contributions to a nonoperating foundation (the most common type) up to 30% of your adjusted gross income (AGI). For noncash contributions, the limit typically is 20% of AGI. The deduction for any contribution in excess of AGI limits may be carried forward and used for up to five years.
- Know the drawbacks
Setting up a foundation can be costly — between $5,000 and $10,000. Annual administrative costs can be high, too, depending on factors such as the size of the foundation and whether you plan to hire staff to operate it.
Private foundations also are highly regulated. For example, though tax exempt, a foundation’s net investment income is subject to an excise tax of 1% if all required distributions to charity have been made; otherwise 2%. And foundations that fail to make qualified distributions of at least 5% of their net assets each year must pay a 15% excise tax on the shortfall.
The biggest risk for private foundations, however, is the prohibition against self-dealing. This forbids transactions between a foundation and “disqualified persons,” such as the founder and members of his or her family.
The self-dealing rule is tricky because a person can violate it unknowingly and despite the best intentions. A violation can result in significant penalties and even the loss of the foundation’s tax-exempt status.
- Weigh the costs
Although complex rules and regulations govern private foundations, these entities also have their perks.
Contact us for additional details on this subject!
Tax professionals are often more comfortable with amending a return than the average taxpayer – but even they can sometimes use a refresher on the subject. With that in mind, we offer these 10 tips from the Internal Revenue Service on when, why and how to change a previously filed tax return.
1. Use the right form: That would be the Form 1040X, Amended U.S. Individual Income Tax Return. It must be paper-filed, and the box at the top showing which year is being amended needs to be checked off. The three columns on the front of the form show the original amounts, the net increase or decrease for the amounts being changed, and the corrected amounts – the back is for explaining what’s being changed, and why.
2. Know when to amend: Possibly the best reason to amend a return is to claim a deduction or credit that wasn’t claimed on the original return. Among the other common reasons for amending a return are correcting filing status, changing a taxpayer’s number of dependents, or changing their total income. More reasons are included in the Form 1040X.
3. Know when not to amend: Not everything requires an amended return. The IRS will make some corrections – such as fixing math errors – for the taxpayer. And if a required form or schedule isn’t included, they’ll mail out a notice about the missing item.
4. Each year on its own: If returns from more than one year are being amended, each one should appear on a separate 1040X – and they should be mailed in separate envelopes.
5. More is more: If the changes on the amended return involve other tax forms or schedules, they should be attached to the Form 1040X when it’s filed.
6. Refund first, amend later: If the expected refund from the original return hasn’t arrived yet, don’t file an amended return until after the refund shows up. Amended returns take up to 16 weeks to process, after which the taxpayer will receive any extra refund that’s due.
7. Feel free to pay now: If an amended return will mean the taxpayer will owe more, the IRS recommended paying as soon as possible – and not just because it wants the revenue: It will also help limit interest and penalty charges.
8. Double-checking Obamacare: The IRS suggests considering an amended return for taxpayers who incorrectly claimed an Affordable Care Act Premium Tax Credit, or if they received a corrected or voided Form 1095-A.
9. Filing deadlines: Amended returns can be filed up to three years from the date of the original filing – or up to two years from the date the tax was paid, if that’s later than the original filing date.
10. Follow the return: Most amended returns can be tracked through the “Where’s My Amended Return?” tool or by phone at (866) 464-2050.
With more and more people expected to be self-employed and working from home, knowing the ins and outs of the home office deduction can make all the difference between a refund – or an audit.
The Illinois CPA Society offered a number of helpful tips to help home-business-owners (and their advisors) be sure they’re getting everything back that they can.
- Business-only: One of the most important things to be sure of before you try to claim the deduction is that some part of the home has to be exclusively and regularly used as the principal place of business. A mixed-use area, like a kitchen, won’t qualify.
- The simplified option: Self-employed folks with an office in their home don’t need to do a lot of calculations and add up all their home-office-related expenses – the IRS now offers a simplified option based on the size of the office: You take a standard deduction of $5 per square foot of workspace, up to 300 square feet. You can go with individual expenses or the simplified option, whichever is larger, and you can change from year to year.
- Common deductions: Some of the business owner’s heating, electric and utility bills can be deducted, and phone, Internet and other information services may qualify, too. The ISCPA notes that separate Internet connections and phone numbers can help keep track of expenses. An office isn’t an office without office supplies -- which is why computers, printers, toner, paper, paper clips, staplers, staples, staple removers and other critical equipment may also qualify. Furniture and upgrades to the home itself, if related to the office, may also be deductible.
- Leaving home: Many of those with home offices will find themselves travelling for business purposes – even if it’s just driving across town to a client. Parking, tolls and mileage (at 54 cents a mile for business-related travel) may all be deductible, to say nothing of airfare and hotel rooms.
- Record-keeping: The Illinois society recommends keeping expense records for at least three years after filing, or two years after paying taxes, whichever is later. Among the records home-business-owners should be holding onto are cancelled checks, bank statements, vendor invoices, bills, receipts and mileage logs. More information on having a home office is available in IRS Publication 587.
With the start of school just around the corner, taxpayers should be aware of the following tax breaks and deductions available for qualifying expenses, according to the audit defense service TaxAudit.com.
- Private School Tuition and School Uniforms: The cost of private school or parochial school tuition is not deductible. However, the child care component costs of private school tuition for children under 13 may qualify the taxpayer for a tax credit. School uniforms are also not deductible even if they are required.
- Before and After School Care Can Be Deducted: For a child under the age of 13, the cost of before or after school care may qualify the taxpayer for a tax credit if it is a qualifying expense.
- Tax Deductions for School Fundraisers are Limited: You are required to reduce your deduction by the market value of any goods or services received in return for your charitable donation.
- Moving Expenses to Go to College are Not Deductible: Going away to college is not moving for a job and is not considered a moving expense deduction by the IRS. However, the expenses for moving from college for that first job may be eligible for the moving expenses deduction.
- Earnings in 529 Plans are Not Federally Taxable: The earnings in 529 plans are not taxable. The money grows tax-free and withdrawals are not taxable as long as the money is used for eligible college expenses.
- Use Tax-Deferred Accounts to Pay for Educational Expenses: You can use tax-deferred accounts (i.e., an Educational Savings Account) to pay for qualified educational expenses including books and computers for elementary, high school and college expenses.
- Student Loan Interest is Deductible Above the Line: Student loan interest is generally deductible as an above the line deduction, meaning you do not have to itemize in order to claim the deduction. There is a student loan interest deduction of up to $2,500 for paying interest on a student loan used for higher education. The amount of the student loan interest deduction is gradually reduced if the taxpayer’s modified adjusted gross income is within a certain range.
- American Opportunity Tax Credit: The American Opportunity Tax Credit can amount to $2,500 in tax credits per eligible student and is available for the first four years of post-secondary education at a qualified education institution. Up to 40% of the credit is refundable, which means that the taxpayer may be able to receive up to $1,000, even if they have no tax liability. Eligible expenses include tuition at an eligible institution, books and required supplies, but not room and board, medical expenses, insurance, etc. Income limits apply. The taxpayer is now required to have the 1098-T from the qualified educational institution to take the AOTC, and the credit has to be based on amount paid and not billed.
- Lifetime Learning Credit: Up to a maximum of $2,000 credit for qualified education expenses paid for a student enrolled in an eligible educational institution. The credit is a nonrefundable credit of 20% of a maximum $10,000 in qualified education expenses. There is currently no limit on the number of years a taxpayer can claim the credit. Income limits apply. Please keep in mind, this credit does not allow for some of the items that are allowed for the AOTC. This credit is generally based on tuition and fees.
- Tuition and Fees Deduction: The Tuition and Fees Deduction applies to qualified education expenses for higher education for an eligible student taking undergraduate, graduate or post graduate courses. The deduction gradually phases out after a certain income range. There is no limit to the number of years the credit can be claimed.
- Tuition and Fees Deduction: The Tuition and Fees Deduction applies to qualified education expenses for higher education for an eligible student taking undergraduate, graduate or post graduate courses. The deduction gradually phases out after a certain income range. There is no limit to the number of years the credit can be claimed.
Along with establishing a good work ethic and building time and financial management skills, a summer job also means learning about the obligatory duty of paying taxes. Here are some tips for parents with children working summer jobs:
1. Understand the Rules for Claiming Dependents
You may be wondering, since your child has a summer job, if you will still be able to claim him or her as a dependent on your own return. The answer is, "Yes." A child under the age of 19 (or under the age of 24 and a full-time student) can make any amount of income and still be claimed as a dependent as long as you are still providing more than half their support. This includes food, shelter, clothing, entertainment, school expenses, vehicle expenses, etc. As “independent” as your child may feel now that they are taking on some responsibilities of their own, when you add up all of the expenses, it may be surprising to see how “dependent” working children still are on the support of their wonderful parents!
2. Filling Out Form W-4: Determine How Much To Withhold
Before your child begins a summer job, he or she will be required to fill out a federal and state Form W-4 to instruct the employer how much to withhold for federal and state income taxes. To determine how much, if any, should be withheld, it is important to note the thresholds of when your child will need to file an income tax return. Estimate how much they will earn this summer based on their wages and expected hours to be worked. Regardless of amounts withheld for income taxes, Social Security and Medicare tax will be withheld at the regular 6.2 and 1.45 percent rate and is never available for refund.
3. If No Taxes are Withheld, Set Money Aside to Be Prepared for Tax Time
Your child may have a summer job when the employer does not take your child on as an official employee, but, rather, as an independent contractor for their temporary summer work. In this instance, your child's paycheck will not include any deductions for Social Security and Medicare tax, nor will there be any withholdings for federal or state income tax. If $600 or more is earned from this employer, your child should receive a 1099-MISC at the end of the year. Most likely the income will be shown as "Non-employee Compensation" in box 7 of the 1099-MISC. This is treated as self-employment income and is subject to self-employment taxes. In this case, your child must file a return if earnings were at least $400. Be aware that because the employer did not withhold and pay any taxes on behalf of your child, taxes may be owed when tax returns are filed the following spring. It will be a good idea for your child to set aside money from each pay check so that he or she can pay the tax when the returns are filed.
4. Know the Tax Implications of Employing your Child
Many of you may be exploring the idea of hiring your child for the summer. Giving your child a summer job may provide an opportunity for tax savings for you as the employer as well as for your child. There are tax benefits of having your child as an employee if your trade or business is a sole proprietorship or partnership in which you and/or your spouse are the sole owners or partners. Wages paid to your child who is under the age of 18 are not subject to Social Security and Medicare taxes, or Federal Unemployment Tax (FUTA). Wages paid to your child who is 18 years or older, but under 21, are not subject to FUTA. Your child's wages are a deductible business expense to your company, as long as your child is treated as a regular employee, wages are paid in dollars, and a W-2 is filed. According to "Tax Dos and Don'ts for Hiring Your Child", on wsj.com, Laura Saunders reports that a Tax Court judge in Washington disallowed a business owner from deducting $15,000 in wages to her three children ages 15, 11, and 8 who helped their mom with tasks such as stuffing envelopes. The business owner's method of payment was regularly expected parenting expenses such as food, lodging and tutoring services. In other words, you cannot use pizza as a form of payment to your employee-child and use the value as a business deduction for wages. The IRS recommends you pay your employee-child via paycheck and have him or her deposit it into his or her own bank account. This will verify that your child received the funds.
5. Understand How Taxes Work With an Out-Of-State Summer Job
If you reside for example in Illinois and your dependent child gets a summer job out-of-state, your child is considered an Illinois resident and will need to file an Illinois return based on Tip #2 above. If the job is in Iowa, Kentucky, Michigan, or Wisconsin, a reciprocity agreement exists with Illinois. This means the out-of-state employer will withhold and pay Illinois taxes and no taxes should be paid to that employer’s state. In most other states, taxes will be withheld and paid to the state of employment. In those cases, an Illinois return and a non-resident return for the state of employment will need to be filed. The good news is, any taxes paid in the other state will be a credit on the Illinois return. Tax rules differ from state to state so it is a good idea to do your homework and understand the income tax filing requirements for the employer's state.
6. Understand Roth IRA Eligibility and Benefits
Something else to think about if your child gets a summer job is that he or she will be eligible to start making Roth IRA contributions. While retirement may seem like eons away for your newly working teen, the power of compounding is amazing. In addition, the contributions can be withdrawn tax-free and penalty-free at any age and the earlier they begin contributing, the greater the earnings potential. There is a lot to keep-in-mind as your child—or the child of one of your clients—begins exploring summer job opportunities since the tax implications can be complex. For more information: http://www.irs.gov/pub/irs-pdf/p17.pdf.
Source: accounting today.
Health care costs keep rising, so tax-friendly ways to pay for these expenses are more attractive than ever. Health Savings Accounts, Flexible Spending Accounts and Health Reimbursement Accounts, all provide opportunities for tax-advantaged funding of health care expenses. But what’s the difference between these 3 accounts? Here’s an overview:
· HSA = Health Savings Accounts. If you’re covered by a qualified high-deductible health plan (HDHP), you can contribute pretax income to an employer-sponsored HSA — or make deductible contributions to an HSA you set up yourself — up to $3,350 for self-only coverage and $6,750 for family coverage for 2016. Plus, if you’re age 55 or older, you may contribute an additional $1,000.
You own the account, which can bear interest or be invested, growing tax-deferred similar to an IRA. Withdrawals for qualified medical expenses are tax-free, and you can carry over a balance from year to year.
· FSA = Flexible Spending Accounts. Regardless of whether you have an HDHP, you can redirect pretax income to an employer-sponsored FSA up to an employer-determined limit — not to exceed $2,550 in 2016. The plan pays or reimburses you for qualified medical expenses.
What you don’t use by the plan year’s end, you generally lose — though your plan might allow you to roll over up to $500 to the next year. Or it might give you a 2 1/2-month grace period to incur expenses to use up the previous year’s contribution. If you have an HSA, your FSA is limited to funding certain “permitted” expenses.
· HRA = Health Reimbursement Accounts. An HRA is an employer-sponsored account that reimburses you for medical expenses. Unlike an HSA, no HDHP is required. Unlike an FSA, any unused portion typically can be carried forward to the next year. And there’s no government-set limit on HRA contributions. But only your employer can contribute to an HRA; employees aren’t allowed to contribute.
If you would like to receive more orientation towards this issue or to discuss other ways to save taxes regarding your health care expenses, feel free to contact us.
International taxation includes the study of many countries´ tax laws and the international agreements among those countries affecting tax liabilities. U.S. International taxation involves 2 major types of activities crossing national borders: Inbound and Outbound transactions.
- Inbound transactions occur when foreign persons conduct business in the United States or make U.S. investments.
- Outbound transactions occur when U.S. persons conduct business abroad or make foreign investments.
Globalization and the constantly changing economic environment provides a number of challenges and opportunities for foreign-based Multinational Corporations with investments in the U.S. as well as those considering U.S. investments. Expanding your business to the United States or investing in the United States requires thorough and careful planning.
The complexity of U.S. tax laws and regulations has significant impact on U.S. investments and, importantly, the return on investment. The complexity of the U.S. tax system, coupled with the comparatively high U.S. corporate income tax rate, have led foreign Multinational Corporations to look for opportunities to efficiently manage their U.S. businesses while ensuring that their effective tax rate remains competitive. Companies must focus on cross-border tax planning strategies to help efficiently align their commercial and tax objectives.
Our firm specializes in the area of International Tax. We have vast experience in advising foreign investors in all tax aspects of their United States investment or business activities. So whether you are planning to open a business or invest in the United States, our dedicated international tax advisors can assist you with all your international accounting and tax needs. We will perform a detailed assessment of internal tax issues related to your specific operations and make sure you stay up to date on new tax, legislative and regulatory developments. Feel free to contact us!
In a new International Practice Unit, IRS outlines the audit steps for its examiners to follow in reviewing the transfer pricing documentation of a U.S. taxpayer that provides tangible property, intangible property, and/or services to foreign affiliates in exchange for payment (i.e., outbound transactions). This review is an integral part of an IRS examiner’s analysis of the taxpayer’s transfer pricing risks and its assessment of any transfer pricing penalties.
· International Practice Unit (IPU):
IPUs generally identify strategic areas of importance to IRS and can provide insight as to how IRS examiners may approach a particular issue or transaction on audit. However, they are not official pronouncements of law or directives and cannot be used, cited, or relied upon as such.
· Transfer Pricing Documentation:
Transfer pricing generally refers to the methodologies used to price transactions in tangible property, intangible property, and services between related parties. These methodologies must establish a price that is arm’s length—that is, the price that would be agreed upon by unrelated parties.
IRS is authorized to adjust the results of certain related-party (i.e., controlled) transactions to clearly reflect the income of the parties in accordance with the arm’s length standard and, in the case of the transfer of intangible property, to be commensurate with the income attributable to the intangible property.
For U.S. multinational enterprises (MNEs), an important element of transfer pricing planning and compliance is the preparation of appropriate documentation of a MNE’s related-party arrangements, including the agreements that document the terms of these arrangements and the economic support for the pricing policy adopted.
In this regard, IRS has been given significant authority to obtain transfer pricing documentation from taxpayers and to impose significant penalties on taxpayers that fail to maintain or provide such documentation. The rate of the transfer pricing penalty may be as high as 40%.
Contemporaneous transfer pricing documentation may be provided to IRS to show that a taxpayer’s related-party arrangements are priced in accordance with the arm’s length standard. Such documentation must be in existence by the time that the taxpayer files its U.S. tax return and must be provided to IRS within 30 days of their request in order for the taxpayer to avoid the penalties.
If a taxpayer has not maintained contemporaneous transfer pricing documentation, or if its documentation is deemed deficient, the taxpayer may be subject to the aforementioned transfer pricing penalties to the extent that IRS concludes that a transfer pricing adjustment is appropriate. However, meeting certain reasonable cause and good faith requirements may exempt the taxpayer from these transfer pricing penalty provisions.
· Review of Transfer Pricing Documentation by Outbound Taxpayers:
The new IPU provides that a taxpayer’s transfer pricing documentation should show that the chosen transfer pricing methodology is reasonable and meets the best method rule—that is, it provides the most reliable measure of an arm’s length result and is the most reliable application of the method. IRS examiners are instructed to consult another IPU, entitled “Overview of IRC 482,” on how to select the best method.
The IPU instructs IRS examiners to request 10 "principal documentation” items with respect to the taxpayer under audit, via the issuance of an “IRC 6662(e) Mandatory Transfer Pricing Information Document Request” that is included with the initial IRS examination contact letter.
For additional guidance, the IPU asks IRS examiners to consult the “Transfer Pricing Audit Roadmap”, a 26-page set of guidance issued by IRS’s Large Business & International division. The IPU cautions that the use of such guidance requires judgement as every transfer pricing case is unique.
After receiving the requested transfer pricing documentation from a taxpayer, IRS examiners are instructed to compare any related-party information reflected in the following types of U.S. returns to the transfer pricing documentation provided and identify any missing controlled transactions.
In addition, the IPU instructs IRS examiners to confirm that the taxpayer’s financial statements (including income statements and balance sheets) match the transfer pricing documentation provided.
Finally, the IPU spells out additional details and steps for IRS examiners to consider and analyze with respect to each of the 10 principal documentation items received from the taxpayer.
If you would like to receive more orientation towards this issue, feel free to 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. So you need to find out if you are eligible or not.
- Eligibility requirements:
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 home office 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.
- More considerations:
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 have covered only a few of the rules and limits here. If you think you may be eligible for the home office deduction or if you would like to receive more orientation towards this issue, feel free to contact us.
>Source: Jim Streets<
When it comes to deducting charitable gifts, all donations are not created equal. As you file your 2015 return and plan your charitable giving for 2016, it’s important to keep in mind the available deduction…
Cash: This includes not just actual cash but gifts made by check, credit card or payroll deduction. You may deduct 100%.
Ordinary-income property: Examples include stocks and bonds held one year or less, inventory, and property subject to depreciation recapture. You generally may deduct only the lesser of fair market value or your tax basis.
Long-term capital gains property: You may deduct the current fair market value of appreciated stocks and bonds held more than one year.
Tangible personal property: Your deduction depends on the situation...
• If the property isn’t related to the charity’s tax-exempt function (such as an antique donated for a charity auction), deduction is limited to your basis.
• If the property is related to the charity’s tax-exempt function (such as an antique donated to a museum for its collection), then you can deduct the fair market value.
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.
Vehicle: Unless it’s being used by the charity, you generally may deduct only the amount the charity receives when it sells the vehicle.
Services: In this case 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.
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, or if you would like to receive more orientation towards this issue, feel free to contact us.
>Source: Jim Streets<
When looking at the financial health of an organization many zero in on net income, but little do they know that this number is just the beginning. You need to go past net income and evaluate other key financial information and ratios to get the whole financial story of an organization. By evaluating the following 4 areas, you can start to fill in the gaps:
EBITDA stands for “Earnings before interest, taxes, depreciation and amortization.” By adding these four key items back to net income, you can get a more clear depiction of operating results and provide better comparability to other companies. Financing decisions and tax rates can vary significantly from Company to Company and impact net income and make comparison difficult. For example, if you are comparing the financial statements of two companies in the same industry and one is taxed as a corporation and one is taxed as a partnership, the partnership will most likely have a higher net income as the income tax is paid by the individual partners, but their EBITDA may show the corporation has better operating results.
Gross Margin Percentage
The gross margin percentage is sales minus cost of goods sold divided by sales. This shows financial statement readers the percentage of the sales price that is available to go toward all remaining costs of the company and net income. The gross margin percentage should be reviewed against historical results and can provide indications of trends. Significant changes up or down in the gross margin percentage could indicate issues and should be investigated further.
Accounts Receivable Ratios
There are several important ratios to consider when evaluating accounts receivable as it is one of the more common places to hide expenses and inflate revenue. By recording sales and receivables that have not occurred, or leaving receivables on the balance sheet that are no longer considered collectible, management can inflate earnings and make the operating results better than they are. The following are key ratios to evaluate when looking at AR:
• Accounts Receivable Aging Schedule
• Average collection period = Current AR / (Annual Sales / 365)
• AR Turnover ratio = Annual Sales / Average AR
• Days of Receivables = 365 / AR Turnover ratio
In many industries, standard terms for invoices are 30 days to pay. In this case, you would expect the majority of receivables to be outstanding for 30 days or less, the average collection period to be close to 30, the AR turnover to be near 12 and the days of receivables to be about 30. The further the ratios get from these expectations, the more investigation and understanding is needed.
Similar to accounts receivable, inventory can also be another place on the balance sheet management can hide expenses they do not want to hit the income statement. Inventory also ties of up cash and can be a huge factor when evaluating a company’s cash flow and needs for financing. Consider looking at the following ratios:
• Inventory Turnover = Cost of Goods Sold / Average Inventory
• Days Sales of Inventory = (Average Inventory / Cost of Goods Sold) x 365
Management should aim to increase the turnover of its inventory and reduce its days of inventory on-hand. By reducing the days sales of inventory that are held, the company can free up cash flow and reduce its need for financing. If a company notices an upward trend of its days sales of inventory, this could be an indication of obsolete inventory on hand, the purchasing department over buying or other poor inventory management.
The Bottom Line... Evaluating these key ratios will help you understand the current operating results of an organization and put you down the right path to investigate any irregularities further. If you would like to receive more orientation towards this issue, you can rely on us. Feel free to contact us.
For tax year 2016, the Internal Revenue Service (IRS) had announced annual inflation adjustments for more than 50 tax provisions, including the tax rate schedules, and other tax changes. Some benefits will increase slightly due to inflation adjustments, others, are unchanged.
The tax items of greatest interest to most taxpayers include the following dollar amounts:
- For tax year 2016, the 39.6 percent tax rate affects single taxpayers whose income exceeds $415,050 ($466,950 for married taxpayers filing jointly), up from $413,200 and $464,850, respectively. The other marginal rates – 10, 15, 25, 28, 33 and 35 percent – and the related income tax thresholds for tax year 2016 are described in the revenue procedure.
- The standard deduction for heads of household rises to $9,300 for tax year 2016, up from $9,250, for tax year 2015.The other standard deduction amounts for 2016 remain as they were for 2015: $6,300 for singles and married persons filing separate returns and $12,600 for married couples filing jointly.
- The limitation for itemized deductions to be claimed on tax year 2016 returns of individuals begins with incomes of $259,400 or more ($311,300 for married couples filing jointly).
- The personal exemption for tax year 2016 rises $50 to $4,050, up from the 2015 exemption of $4,000. However, the exemption is subject to a phase-out that begins with adjusted gross incomes of $259,400 ($311,300 for married couples filing jointly). It phases out completely at $381,900 ($433,800 for married couples filing jointly.)
- The Alternative Minimum Tax exemption amount for tax year 2016 is $53,900 and begins to phase out at $119,700 ($83,800, for married couples filing jointly for whom the exemption begins to phase out at $159,700). The 2015 exemption amount was $53,600 ($83,400 for married couples filing jointly). For tax year 2016, the 28 percent tax rate applies to taxpayers with taxable incomes above $186,300 ($93,150 for married individuals filing separately).
- The tax year 2016 maximum Earned Income Credit amount is $6,269 for taxpayers filing jointly who have 3 or more qualifying children, up from a total of $6,242 for tax year 2015. The revenue procedure has a table providing maximum credit amounts for other categories, income thresholds and phase-outs.
- For tax year 2016, the monthly limitation for the qualified transportation fringe benefit remains at $130 for transportation, but rises to $255 for qualified parking, up from $250 for tax year 2015.
- For tax year 2016 participants who have self-only coverage in a Medical Savings Account, the plan must have an annual deductible that is not less than $2,250, up from $2,200 for tax year 2015; but not more than $3,350, up from $3,300 for tax year 2015. For self-only coverage the maximum out of pocket expense amount remains at $4,450. For tax year 2016 participants with family coverage, the floor for the annual deductible remains as it was in 2015 — $4,450, however the deductible cannot be more than $6,700, up $50 from the limit for tax year 2015. For family coverage, the out of pocket expense limit remains at $8,150 for tax year 2016 as it was for tax year 2015.
- For tax year 2016, the adjusted gross income amount used by joint filers to determine the reduction in the Lifetime Learning Credit is $111,000, up from $110,000 for tax year 2015.
- For tax year 2016, the foreign earned income exclusion is $101,300, up from $100,800 for tax year 2015.
- Estates of decedents who die during 2016 have a basic exclusion amount of $5,450,000, up from a total of $5,430,000 for estates of decedents who died in 2015.
More details about these annual adjustments are available at IRS.gov.
In the blink of an eye, all of your internal, client, product, and legal information can immediately be put in jeopardy. In an interconnected world, the threat of a cyber attack is more real than ever. So whether it's a business or your personal information being threatened from hackers, Cyber-Security has emerged as a top priority nowadays.
Are you a Target?
Most of the businesses or individuals do not see themselves as potential targets, but the reality is that…
- If you store personal financial information, you are a target.
- If your company uses online banking (payroll account transfers, wire transfers, ACH transactions, etc.), you are a target.
- If your business relies on network and system uptime to generate revenue or keep client records, you are a target.
The scary truth is that many small to medium sized businesses owners do not consider IT security in their risk management plans. In fact, many business owners mistakenly believe that this issue only affects large enterprise.
Don’t let your business fall victim!
Identifying the issue is a key first step in developing a holistic information security strategy. So make it a priority to take the necessary steps to secure your network, and have a back-up plan should a threat to your businesses information become a reality:
- Train your users to properly handle suspicious email
- Harden your network from its initial default condition
- Remove administrator privileges from end users
- Review your online banking relationship with your banker
- Consider cyber liability insurance
Considering Cyber-Security Insurance
This kind of insurance is designed to mitigate losses from a variety of cyber incidents, including data breaches, business interruption, and network damage. A robust Cyber-Security insurance market could help reduce the number of successful cyber attacks by:
- Promoting the adoption of preventative measures in return for more coverage
- Encouraging the implementation of best practices by basing premiums on an insured’s level of self-protection.
Many companies forego available policies due to the perceived high cost of those policies, confusion about what they cover, and uncertainty that their organizations will suffer a cyber attack. If you would like to receive professional orientation towards this issue you can rely on us. Fell free to contact us and let us assist in protecting your business from a cyber attack.
>Sources: accountingtoday.com and irs.gov<
As a taxpayer, it is necessary to keep in mind the importance to be protected against a wide range of schemes. It is crucial to be aware not only during tax season when ID thefts jump every year… but also during the rest of the year, when some disasters occur (hurricanes, flood, earthquakes, etc.) because this is when “fake charities” take the leading role.
Scams can be sophisticated and take many different forms. The “Dirty Dozen” listing, compiled by the IRS annually, lists a variety of common scams that taxpayers may encounter anytime. Let’s review the most relevant ones:
> IDENTITY THEFT
ID theft occurs when someone uses your personal information, such as your name, Social Security number (SSN) or other identifying information, without your permission, to commit fraud or other crimes. In many cases, an identity thief uses a legitimate taxpayer’s identity to fraudulently file a tax return and claim a refund.
Taxpayers who believe they are at risk of identity theft due to lost or stolen personal information should contact the IRS immediately so the agency can take action to secure their tax account.
> PERVASIVE TELEPHONE SCAMS
The IRS has seen a recent increase in local phone scams across the country, with callers pretending to be from the IRS in hopes of stealing money or identities from victims.
These phone scams include many variations, ranging from instances from where callers say the victims owe money or are entitled to a huge refund. Some calls can threaten arrest and threaten a driver’s license revocation. Sometimes these calls are paired with followup calls from people saying they are from the local police department or the state motor vehicle department, and the caller ID supports their claim.
Characteristics of these scams can include:
- Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.
- Scammers may be able to recite the last four digits of a victim’s Social Security Number.
- Scammers “spoof” or imitate the IRS tollfree number on caller ID to make it appear that it’s the IRS calling.
- Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.
- Victims hear background noise of other calls being conducted to mimic a call site.
In another variation, one sophisticated phone scam has targeted taxpayers, including recent immigrants, throughout the country. Victims are told they owe money to the IRS and it must be paid promptly through a preloaded debit card or wire transfer. If the victim refuses to cooperate, they are then threatened with arrest, deportation or suspension of a business or driver’s license. In many cases, the caller becomes hostile and insulting.
If you get a phone call from someone claiming to be from the IRS, here’s what you should do: If you know you owe taxes or you think you might owe taxes, call the IRS at 800-829-1040. The IRS employees at that line can help you with a payment issue – if there really is such an issue.
If you know you don’t owe taxes or have no reason to think that you owe any taxes (for example, you’ve never received a bill or the caller made some bogus threats as described above), then call and report the incident to the Treasury Inspector General for Tax Administration.
Is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information. Armed with this information, a criminal can commit identity theft or financial theft.
If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System, report it by sending it to email@example.com.
It is important to keep in mind the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels.
> IMPERSONATION OF CHARITABLE ORGANIZATIONS
Another longstanding type of abuse or fraud is scams that occur in the wake of significant natural disasters.
Following major disasters, it’s common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers. Scam artists can use a variety of tactics. Some scammers operating bogus charities may contact people by telephone or email to solicit money or financial information. They may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds.
They may attempt to get personal financial information or Social Security numbers that can be used to steal the victims’ identities or financial resources. Bogus websites may solicit funds for disaster victims.
The IRS cautions both victims of natural disasters and people wishing to make charitable donations to avoid scam artists by following these tips:
- To help disaster victims, donate to recognized charities.
- Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations. IRS.gov has a search feature, Exempt Organizations Select Check, which allows people to find legitimate, qualified charities to which donations may be tax deductible.
- Don’t give out personal financial information, such as Social Security numbers or credit card and bank account numbers and passwords, to anyone who solicits a contribution from you. Scam artists may use this information to steal your identity and money.
- Don’t give/send cash. For security and tax record purposes, contribute by check, credit card or another way that provides documentation of the gift.
The IRS reminds taxpayers that tax scams can take many forms beyond the “Dirty Dozen”, and people should be on the lookout for many other schemes. More information on tax scams is available at IRS.gov.
The crushing student loan debt or the skyrocketing costs of education at all levels are some issues that concern many families in this new school year, so we have put together the following list of education-related tax tips. Some will save you money and others will save you trouble with the IRS:
- School uniforms are not deductible, even if they are required.
- The cost of private or parochial school tuition isn’t deductible either.
- Moving expenses for college are not deductible. Going away to college is not moving for a job, so the IRS does not allow the moving expenses deduction.
- The earnings in 529 plans are NOT taxable for federal purposes. The money grows tax-free and withdrawals are not taxable as long as the money is used for eligible college expenses.
- There is a student loan interest deduction of up to $2,500 for paying interest on a student loan (also known as an education loan) used for higher education. The amount of the student loan interest deduction is gradually reduced (phased out) if the taxpayer’s modified adjusted gross income is within a certain range.
- If you can separate the educational costs from the child care component of private school tuition, those costs may be deductible for children up to the age of 13.
- For a child up to the age of 13, the cost of before- or after-school care may be deducted if it is a qualifying expense.
- Tax deductions for school fundraisers are limited; among other things, you are required to reduce your deduction by the market value of any goods received in return for your charitable donation.
- You can use tax-deferred accounts (i.e., an Educational Savings Account) to pay for qualified educational expenses including books and computers, for elementary, high school and college expenses.
- The tuition and fees deduction applies to qualified education expenses for higher education on an eligible student. The deduction gradually phases out between a certain income range until no deduction is allowed. The deduction is available for one or more qualified courses and there is no limit to the number of years the deduction can be claimed.
- The American Opportunity Credit can amount to $2,500 in tax credits per eligible student and is available for the first four years of post-secondary education at a qualified education institution. Up to 40% of the credit is refundable, which means that the taxpayer may be able to receive up to $1,000, even if they have no tax liability. Eligible expenses include tuition at an eligible institution, books and required supplies, but not room and board, medical expenses, insurance, etc. Income limits apply.
- Lifetime Learning Credit can be worth up to $2,000 for qualified education expenses paid for a student enrolled in an eligible educational institution. It is a nonrefundable credit of 20% of a maximum $10,000 in qualified education expenses. There is currently no limit on the number of years a taxpayer can claim the Lifetime Learning Credit for an eligible student. Income limits do apply, however.
>Sources: accountingtoday.com and taxaudit.com<
With the revelation that another 220,000 taxpayers may find their identities at risk in the breach of the IRS’s “Get Transcript” application, you may find yourself worried that your identity, your credit scores and maybe your life savings will wind up at the mercy of some free-spending crook.
Hacking generates screaming headlines these days, as once-relatively minor breaches of retail giants’ and insurers’ databases gave way to hacks into the IRS and perhaps every other federal agency. One in four Americans fell victim to information security breaches in the past year, according to a new AICPA (The American Institute of CPAs) survey, more than double the number of respondents who reported being victimized just over a year ago.
The IRS recently joined with representatives of tax prep and software firms, payroll and tax financial product processors and state tax administrators in a new collaborative effort to combat ID theft refund fraud. The agreement includes identifying new steps to validate taxpayer and tax return information at the time of filing.
The IRS Criminal Investigation division has also created a cybercrime unit to combat ID theft-related tax fraud; the agency also recently agreed to change its policy on ID theft and provide victims with copies of the fraudulent tax returns that have been filed under their names by scammers.
Anybody can become an ID victim. Another recent AICPA survey showed that more than a third of adults ages 55 to 64 fell victim to information security breaches in the last year, compared with 22% of Millennials.
- Start by practicing good password hygiene, meaning use a better method in choosing your passwords, especially for banking and other agencies as such. Always enable two factor authentication when it’s available. Visit http://lifehacker.com/four-methods-to-create-a-secure-password-youll-actually-1601854240 for more information.
- If you even suspect that your identity might be compromised… file an identity theft affidavit (Form 14039) and also see the other recommendations posted on IRS.gov.
- Contact your lenders, banks, and insurance companies and let them know the situation. Ask to close accounts. Open new ones with new personal identification numbers (PINs) and passwords.
>Sources: accountingtoday.com and aicpa.org<