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Tax Briefs

A refresher on the ACA’s tax penalty on individuals without health insurance

Posted by KPC Posted on Aug 01 2017

A refresher on the ACA’s tax penalty on individuals

without health insurance

 

Now that Affordable Care Act (ACA) repeal and replacement efforts appear to have collapsed, at least for the time being, it’s a good time for a refresher on the tax penalty the ACA imposes on individuals who fail to have “minimum essential” health insurance coverage for any month of the year. This requirement is commonly called the “individual mandate.”

Penalty exemptions

Before we review how the penalty is calculated, let’s take a quick look at exceptions to the penalty. Taxpayers may be exempt if they fit into one of these categories for 2017:

Their household income is below the federal income tax return filing threshold.

They lack access to affordable minimum essential coverage.

They suffered a hardship in obtaining coverage.

They have only a short-term coverage gap.

They qualify for an exception on religious grounds or have coverage through a health care sharing ministry.

They’re not a U.S. citizen or national.

They’re incarcerated.

They’re a member of a Native American tribe.

Calculating the tax

So how much can the penalty cost? That’s a tricky question. If you owe the penalty, the tentative amount equals the greater of the following two prongs:

1. The applicable percentage of your household income above the applicable federal income tax return filing threshold, or

2. The applicable dollar amount times the number of uninsured individuals in your household, limited to 300% of the applicable dollar amount.

In terms of the percentage-of-income prong of the penalty, the applicable percentage of income is 2.5% for 2017.

In terms of the dollar-amount prong of the penalty, the applicable dollar amount for each uninsured household member is $695 for 2017. For a household member who’s under age 18, the applicable dollar amounts are cut by 50%, to $347.50. The maximum penalty under this prong for 2017 is $2,085 (300% of $695).

The final penalty amount per person can’t exceed the national average cost of “bronze coverage” (the cheapest category of ACA-compliant coverage) for your household. The important thing to know is that a high-income person or household could owe more than 300% of the applicable dollar amount but not more than the cost of bronze coverage.

If you have minimum essential coverage for only part of the year, the final penalty is calculated on a monthly basis using prorated annual figures.

Also be aware that the extent to which the penalty will continue to be enforced isn’t certain. The IRS has been accepting 2016 tax returns even if a taxpayer hasn’t completed the line indicating health coverage status. That said, the ACA is still the law, so compliance is highly recommended. For more information about this and other ACA-imposed taxes, contact us.

© 2017

Few changes to retirement plan contribution limits for 2017

Posted by KPC Posted on Dec 27 2016

Few changes to retirement plan

contribution limits for 2017

Retirement plan contribution limits are indexed for inflation, but with inflation remaining low, most of the limits remain unchanged for 2017. The only limit that has increased from the 2016 level is for contributions to defined contribution plans, which has gone up by $1,000.

Type of Limit 2017 Limit
Elective deferrals to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans $18,000
Contributions to defined contribution plans $54,000
Contributions to SIMPLEs $12,500
Contributions to IRAs $5,500
Catch-up contributions to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans $6,000
Catch-up contributions to SIMPLEs $3,000
Catch-up contributions to IRAs $1,000

 

Nevertheless, if you’re not already maxing out your contributions, you still have an opportunity to save more in 2017. And if you turn age 50 in 2017, you can begin to take advantage of catch-up contributions.

However, keep in mind that additional factors may affect how much you’re allowed to contribute (or how much your employer can contribute on your behalf). For example, income-based limits may reduce or eliminate your ability to make Roth IRA contributions or to make deductible traditional IRA contributions. If you have questions about how much you can contribute to tax-advantaged retirement plans in 2017, check with us.

© 2016

 

Can you pay bonuses in 2017 but deduct them this year?

Posted by KPC Posted on Dec 06 2016

Can you pay bonuses in 2017 but deduct them this year?

You may be aware of the rule that allows businesses to deduct bonuses employees have earned during a tax year if the bonuses are paid within 2½ months after the end of that year (by March 15 for a calendar-year company). But this favorable tax treatment isn’t always available.

For one thing, only accrual-basis taxpayers can take advantage of the 2½ month rule — cash-basis taxpayers must deduct bonuses in the year they’re paid, regardless of when they’re earned. Even for accrual-basis taxpayers, however, the 2½ month rule isn’t automatic. The bonuses can be deducted in the year they’re earned only if the employer’s bonus liability is fixed by the end of the year.

The all-events test

For accrual-basis taxpayers, the IRS determines when a liability (such as a bonus) has been incurred — and, therefore, is deductible — by applying the “all-events test.” Under this test, a liability is deductible when:

1.    All events have occurred that establish the taxpayer’s liability,
2.    The amount of the liability can be determined with reasonable accuracy, and
3.    Economic performance has occurred.

Generally, the third requirement isn’t an issue; it’s satisfied when an employee performs the services required to earn a bonus. But the first two requirements can delay your tax deduction until the year of payment, depending on how your bonus plan is designed.

For example, many bonus plans require an employee to remain in the company’s employ on the payment date as a condition of receiving the bonus. Even if the amount of the bonus is fixed at the end of the tax year, and employees who leave the company before the payment date forfeit their bonuses, the all-events test isn’t satisfied until the payment date. Fortunately, it’s possible to accelerate deductions with a carefully designed bonus pool arrangement.

How a bonus pool works

In a 2011 ruling, the IRS said that employers may deduct bonuses in the year they’re earned — even if there’s a risk of forfeiture — as long as any forfeited bonuses are reallocated among the remaining employees in the bonus pool rather than retained by the employer. Under such a plan, an employer satisfies the all-events test because the aggregate bonus amount is fixed at the end of the year, even though amounts allocated to specific employees aren’t determined until the payment date.

Additional rules and limits apply to this strategy. To learn whether your current bonus plan allows you to take 2016 deductions for bonuses paid in early 2017, contact us. If you don’t qualify this year, we can also help you design a bonus plan for 2017 that will allow you to accelerate deductions next year.

© 2016

 

Ensure your year-end donations will be deductible on your 2016 return

Posted by KPC Posted on Nov 29 2016

Ensure your year-end donations will be deductible on your 2016 return

Donations to qualified charities are generally fully deductible, and they may be the easiest deductible expense to time to your tax advantage. After all, you control exactly when and how much you give. To ensure your donations will be deductible on your 2016 return, you must make them by year end to qualified charities.

When’s the delivery date?

To be deductible on your 2016 return, a charitable donation must be made by Dec. 31, 2016. According to the IRS, a donation generally is “made” at the time of its “unconditional delivery.” But what does this mean? Is it the date you, for example, write a check or make an online gift via your credit card? Or is it the date the charity actually receives the funds — or perhaps the date of the charity’s acknowledgment of your gift?

The delivery date depends in part on what you donate and how you donate it. Here are a few examples for common donations:

Check. The date you mail it.

Credit card. The date you make the charge.

Pay-by-phone account. The date the financial institution pays the amount.

Stock certificate. The date you mail the properly endorsed stock certificate to the charity.

Is the organization “qualified”?

To be deductible, a donation also must be made to a “qualified charity” — one that’s eligible to receive tax-deductible contributions.

The IRS’s online search tool, Exempt Organizations (EO) Select Check, can help you more easily find out whether an organization is eligible to receive tax-deductible charitable contributions. You can access EO

Select Check at http://apps.irs.gov/app/eos. Information about organizations eligible to receive deductible contributions is updated monthly.

Many additional rules apply to the charitable donation deduction, so please contact us if you have questions about the deductibility of a gift you’ve made or are considering making. But act soon — you don’t have much time left to make donations that will reduce your 2016 tax bill.

© 2016

 

There’s still time to benefit on your 2016 tax bill by buying business assets

Posted by KPC Posted on Nov 29 2016

There’s still time to benefit

on your 2016 tax bill by

buying business assets

In order to take advantage of two important depreciation tax breaks for business assets, you must place the assets in service by the end of the tax year. So you still have time to act for 2016.

Section 179 deduction 

The Sec. 179 deduction is valuable because it allows businesses to deduct as depreciation up to 100% of the cost of qualifying assets in year 1 instead of depreciating the cost over a number of years. Sec. 179 can be used for fixed assets, such as equipment, software and leasehold improvements. Beginning in 2016, air conditioning and heating units were added to the list.

The maximum Sec. 179 deduction for 2016 is $500,000. The deduction begins to phase out dollar-for-dollar for 2016 when total asset acquisitions for the tax year exceed $2,010,000.

Real property improvements used to be ineligible. However, an exception that began in 2010 was made permanent for tax years beginning in 2016. Under the exception, you can claim a Sec. 179 deduction of up to $500,000 for certain qualified real property improvement costs.

Note: You can use Sec. 179 to buy an eligible heavy SUV for business use, but the rules are different from buying other assets. Heavy SUVs are subject to a $25,000 deduction limitation.

First-year bonus depreciation

For qualified new assets (including software) that your business places in service in 2016, you can claim 50% first-year bonus depreciation. (Used assets don’t qualify.) This break is available when buying computer systems, software, machinery, equipment, and office furniture.

Additionally, 50% bonus depreciation can be claimed for qualified improvement property, which means any eligible improvement to the interior of a nonresidential building if the improvement is made after the date the building was first placed in service. However, certain improvements aren’t eligible, such as enlarging a building and installing an elevator or escalator.

Contemplate what your business needs now

If you’ve been thinking about buying business assets, consider doing it before year end. This article explains only some of the rules involved with the Sec. 179 and bonus depreciation tax breaks. Contact us for ideas on how you can maximize your depreciation deductions.

© 2016

 

Beware of income-based limits on itemized deductions and personal exemptions

Posted by KPC Posted on Oct 25 2016

Beware of income-based limits

on itemized deductions and

personal exemptions

Many tax breaks are reduced or eliminated for higher-income taxpayers. Two of particular note are the itemized deduction reduction and the personal exemption phaseout.

Income thresholds

If your adjusted gross income (AGI) exceeds the applicable threshold, most of your itemized deductions will be reduced by 3% of the AGI amount that exceeds the threshold (not to exceed 80% of otherwise allowable deductions). For 2016, the thresholds are $259,400 (single), $285,350 (head of household), $311,300 (married filing jointly) and $155,650 (married filing separately). The limitation doesn’t apply to deductions for medical expenses, investment interest, or casualty, theft or wagering losses.

Exceeding the applicable AGI threshold also could cause your personal exemptions to be reduced or even eliminated. The personal exemption phaseout reduces exemptions by 2% for each $2,500 (or portion thereof) by which a taxpayer’s AGI exceeds the applicable threshold (2% for each $1,250 for married taxpayers filing separately).

The limits in action

These AGI-based limits can be very costly to high-income taxpayers.  Consider this example:

Steve and Mary are married and have four dependent children. In 2016, they expect to have an AGI of $1 million and will be in the top tax bracket (39.6%). Without the AGI-based exemption phaseout, their $24,300 of personal exemptions ($4,050 × 6) would save them $9,623 in taxes ($24,300 × 39.6%). But because their personal exemptions are completely phased out, they’ll lose that tax benefit.

The AGI-based itemized deduction reduction can also be expensive. Steve and Mary could lose the benefit of as much as $20,661 [3% × ($1 million − $311,300)] of their itemized deductions that are subject to the reduction — at a tax cost as high as $8,182 ($20,661 × 39.6%).
These two AGI-based provisions combined could increase the couple’s tax by $17,805!

Year-end tips

If your AGI is close to the applicable threshold, AGI-reduction strategies — such as contributing to a retirement plan or Health Savings Account — may allow you to stay under it. If that’s not possible, consider the reduced tax benefit of the affected deductions before implementing strategies to accelerate deductible expenses into 2016. If you expect to be under the threshold in 2017, you may be better off deferring certain deductible expenses to next year.

For more details on these and other income-based limits, help assessing whether you’re likely to be affected by them or more tips for reducing their impact, please contact us.

© 2016

 

Are you timing business income and expenses to your tax advantage?

Posted by KPC Posted on Oct 12 2016

Are you timing business income

and expenses to your tax advantage?

Typically, it’s better to defer tax. One way is through controlling when your business recognizes income and incurs deductible expenses. Here are two timing strategies that can help businesses do this:

1.    Defer income to next year. If your business uses the cash method of accounting, you can defer billing for your products or services. Or, if you use the accrual method, you can delay shipping products or delivering services.

2.    Accelerate deductible expenses into the current year. If you’re a cash-basis taxpayer, you may make a state estimated tax payment before Dec. 31, so you can deduct it this year rather than next. Both cash- and accrual-basis taxpayers can charge expenses on a credit card and deduct them in the year charged, regardless of when the credit card bill is paid.

But if you think you’ll be in a higher tax bracket next year (or you expect tax rates to go up), consider taking the opposite approach instead — accelerating income and deferring deductible expenses. This will increase your tax bill this year but can save you tax over the two-year period.

These are only some of the nuances to consider. Please contact us to discuss what timing strategies will work to your tax advantage, based on your specific situation.

© 2016

 

Get 2 tax benefits from 1 donation: Give appreciated stock instead of cash

Posted by KPC Posted on Oct 04 2016

Get 2 tax benefits from 1 donation:

Give appreciated stock instead of cash

If you’re charitably inclined, making donations is probably one of your key year-end tax planning strategies. But if you typically give cash, you may want to consider another option that provides not just one but two tax benefits: Donating long-term appreciated stock.

More tax savings

Appreciated publicly traded stock you’ve held more than one year is long-term capital gains property. If you donate it to a qualified charity, you can enjoy two benefits: 1) You can claim a charitable deduction equal to the stock’s fair market value, and 2) you can avoid the capital gains tax you’d pay if you sold the stock. This will be especially beneficial to taxpayers facing the 3.8% net investment income tax (NIIT) or the top 20% long-term capital gains rate this year.

Let’s say you donate $10,000 of stock that you paid $3,000 for, your ordinary-income tax rate is 39.6% and your long-term capital gains rate is 20%. If you sold the stock, you’d pay $1,400 in tax on the $7,000 gain. If you were also subject to the 3.8% NIIT, you’d pay another $266 in NIIT.
By instead donating the stock to charity, you save $5,626 in federal tax ($1,666 in capital gains tax and NIIT plus $3,960 from the $10,000 income tax deduction). If you donated $10,000 in cash, your federal tax savings would be only $3,960.

Tread carefully

Beware that donations of long-term capital gains property are subject to tighter deduction limits — 30% of your adjusted gross income for gifts to public charities, 20% for gifts to nonoperating private foundations (compared to 50% and 30%, respectively, for cash donations).

And don’t donate stock that’s worth less than your basis. Instead, sell the stock so you can deduct the loss and then donate the cash proceeds to charity.

If you own appreciated stock that you’d like to sell, but you’re concerned about the tax hit, donating it to charity might be right for you. For more details on this and other strategies to achieve your charitable giving and tax-saving goals, contact us.

© 2016

 

Are frequent flyer miles ever taxable?

Posted by KPC Posted on Aug 30 2016

Are frequent flyer miles ever taxable?

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.”

Exceptions

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.

© 2016

 

Now’s the time to start thinking about “bunching”

Posted by KPC Posted on Aug 25 2016

Now’s the time to start thinking

about “bunching” — miscellaneous

itemized deductions, that is

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:

•    Deductible investment expenses, including advisory fees, custodial fees and publications
•    Professional fees, such as tax planning and preparation, accounting, and certain legal fees
•    Unreimbursed employee business expenses, including vehicle costs, travel, and allowable meals and entertainment.

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.

© 2016

 

Don’t roll the dice with your taxes if you gamble this year

Posted by KPC Posted on Aug 02 2016

Don’t roll the dice with your taxes

if you gamble this year

For anyone who takes a spin at roulette, cries out “Bingo!” or engages in other wagering activities, it’s important to be familiar with the applicable tax rules. Otherwise, you could be putting yourself at risk for interest or penalties — or missing out on tax-saving opportunities.

Wins

You must report 100% of your wagering winnings as taxable income. The value of complimentary goodies (“comps”) provided by gambling establishments must also be included in taxable income because comps are considered gambling winnings. Winnings are subject to your regular federal income tax rate, which may be as high as 39.6%.

Amounts you win may be reported to you on IRS Form W-2G (“Certain Gambling Winnings”). In some cases, federal income tax may be withheld, too. Anytime a Form W-2G is issued, the IRS gets a copy. So if you’ve received such a form, keep in mind that the IRS will expect to see the winnings on your tax return.

Losses

You can write off wagering losses as an itemized deduction. However, allowable wagering losses are limited to your winnings for the year, and any excess losses cannot be carried over to future years. Also, out-of-pocket expenses for transportation, meals, lodging and so forth don’t count as gambling losses and, therefore, can’t be deducted.

Documentation

To claim a deduction for wagering losses, you must adequately document them, including:

1.    The date and type of specific wager or wagering activity.
2.    The name and address or location of the gambling establishment.
3.    The names of other persons (if any) present with you at the gambling establishment. (Obviously, this is not possible when the gambling occurs at a public venue such as a casino, race track, or bingo parlor.)
4.    The amount won or lost.

The IRS allows you to document income and losses from wagering on table games by recording the number of the table that you played and keeping statements showing casino credit that was issued to you. For lotteries, your wins and losses can be documented by winning statements and unredeemed tickets.

Please contact us if you have questions or want more information. If you qualify as a “professional” gambler, some of the rules are a little different.


© 2016

 

To deduct business losses, you may have to prove “material participation”

Posted by KPC Posted on July 19 2016

To deduct business losses, you may have to prove “material participation”

You can only deduct losses from an S corporation, partnership or LLC if you “materially participate” in the business. If you don’t, your losses are generally “passive” and can only be used to offset income from other passive activities. Any excess passive loss is suspended and must be carried forward to future years.

Material participation is determined based on the time you spend in a business activity. For most business owners, the issue rarely arises — you probably spend more than 40 hours working on your enterprise. However, there are situations when the IRS questions participation.

Several tests

To materially participate, you must spend time on an activity on a regular, continuous and substantial basis.

You must also generally meet one of the tests for material participation. For example, a taxpayer must:

1. Work 500 hours or more during the year in the activity,

2. Participate in the activity for more than 100 hours during the year, with no one else working more than the taxpayer, or

3. Materially participate in the activity for any five taxable years during the 10 tax years immediately preceding the taxable year. This can apply to a business owner in the early years of retirement.

There are other situations in which you can qualify for material participation. For example, you can qualify if the business is a personal service activity (such as medicine or law). There are also situations, such as rental businesses, where it is more difficult to claim material participation. In those trades or businesses, you must work more hours and meet additional tests.

Proving your involvement

In some cases, a taxpayer does materially participate, but can’t prove it to the IRS. That’s where good recordkeeping comes in. A good, contemporaneous diary or log can forestall an IRS challenge. Log visits to customers or vendors and trips to sites and banks, as well as time spent doing Internet research. Indicate the time spent. If you’re audited, it will generally occur several years from now. Without good records, you’ll have trouble remembering everything you did.

Passive activity losses are a complicated area of the tax code. Consult with your tax adviser for more information on your situation.


© 2016

 

Awards of RSUs can provide tax deferral opportunity

Posted by KPC Posted on June 30 2016

Awards of RSUs can provide

tax deferral opportunity

 

Executives and other key employees are often compensated with more than just salary, fringe benefits and bonuses: They may also be awarded stock-based compensation, such as restricted stock or stock options. Another form that’s becoming more common is restricted stock units (RSUs). If RSUs are part of your compensation package, be sure you understand the tax consequences — and a valuable tax deferral opportunity.

RSUs vs. restricted stock

RSUs are contractual rights to receive stock (or its cash value) after the award has vested. Unlike restricted stock, RSUs aren’t eligible for the Section 83(b) election that can allow ordinary income to be converted into capital gains.

But RSUs do offer a limited ability to defer income taxes: Unlike restricted stock, which becomes taxable immediately upon vesting, RSUs aren’t taxable until the employee actually receives the stock.

Tax deferral

Rather than having the stock delivered immediately upon vesting, you may be able to arrange with your employer to delay delivery. This will defer income tax and may allow you to reduce or avoid exposure to the additional 0.9% Medicare tax (because the RSUs are treated as FICA income).

However, any income deferral must satisfy the strict requirements of Internal Revenue Code Section 409A.

Complex rules

If RSUs — or other types of stock-based awards — are part of your compensation package, please contact us. The rules are complex, and careful tax planning is critical.

 

© 2016

 

Throw a company picnic for employees this summer and enjoy larger deductions

Posted by KPC Posted on June 22 2016

Throw a company picnic for employees this summer and enjoy larger deductions

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.

Deduction limits

Generally, businesses are limited to deducting 50% of allowable meal and entertainment expenses. But certain expenses are 100% deductible, including expenses:

•    For recreational or social activities for employees, such as summer picnics and holiday parties,
•    For food and beverages furnished at the workplace primarily for employees, and
•    That are excludable from employees’ income as de minimis fringe benefits.

There is one caveat for a 100% deduction: The entire staff must be invited. Otherwise, expenses are deductible under the regular business entertainment rules.

Recordkeeping requirements 

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.

© 2016

 

Combine business travel and a family vacation without losing tax benefits

Posted by KPC Posted on June 07 2016

Combine business travel and a family

vacation without losing tax benefits

Are you thinking about turning a business trip into a family vacation this summer? This can be a great way to fund a portion of your vacation costs. But if you’re not careful, you could lose the tax benefits of business travel.

Reasonable and necessary

Generally, if the primary purpose of your trip is business, expenses directly attributable to business will be deductible (or excludable from your taxable income if your employer is paying the expenses or reimbursing you through an accountable plan). Reasonable and necessary travel expenses generally include:

•    Air, taxi and rail fares,
•    Baggage handling,
•    Car use or rental,
•    Lodging,
•    Meals, and
•    Tips.

Expenses associated with taking extra days for sightseeing, relaxation or other personal activities generally aren’t deductible. Nor is the cost of your spouse or children traveling with you.

Business vs. pleasure

How do you determine if your trip is “primarily” for business? One factor is the number of days spent on business vs. pleasure. But some days that you might think are “pleasure” days might actually be “business” days for tax purposes. “Standby days,” for example, may be considered business days, even if you’re not engaged in business-related activities. You also may be able to deduct certain expenses on personal days if tacking the days onto your trip reduces the overall cost.

During your trip it’s critical to carefully document your business vs. personal expenses. Also keep in mind that special limitations apply to foreign travel, luxury water travel and certain convention expenses.
Maximize your tax savings

For more information on how to maximize your tax savings when combining business travel with a vacation, please contact us. In some cases you may be able to deduct expenses that you might not think would be deductible.

© 2016

 

Stock market volatility can cut tax on a Roth IRA conversion

Posted by KPC Posted on May 31 2016

Stock market volatility can

cut tax on a Roth IRA conversion

This year’s stock market volatility can be unnerving, but if you have a traditional IRA, this volatility may provide a valuable opportunity: It can allow you to convert your traditional IRA to a Roth IRA at a lower tax cost.

Traditional IRAs 

Contributions to a traditional IRA may be deductible, depending on your modified adjusted gross income (MAGI) and whether you participate in a qualified retirement plan, such as a 401(k). Funds in the account can grow tax-deferred.

On the downside, you generally must pay income tax on withdrawals, and, with only a few exceptions, you’ll face a penalty if you withdraw funds before age 59½ — and an even larger penalty if you don’t take your required minimum distributions (RMDs) after age 70½.

Roth IRAs 

Roth IRA contributions, on the other hand, are never deductible. But withdrawals — including earnings — are tax-free as long as you’re age 59½ or older and the account has been open at least five years. In addition, you’re allowed to withdraw contributions at any time tax- and penalty-free.

There are also estate planning advantages to a Roth IRA. No RMD rules apply, so you can leave funds growing tax-free for as long as you wish. Then distributions to whoever inherits your Roth IRA will be income-tax-free as well.

The ability to contribute to a Roth IRA, however, is subject to limits based on your MAGI. Fortunately, anyone is eligible to convert a traditional IRA to a Roth. The catch? You’ll have to pay income tax on the amount you convert.

Saving tax

This is where the “benefit” of stock market volatility comes in. If your traditional IRA has lost value, converting to a Roth now rather than later will minimize your tax hit. Plus, you’ll avoid tax on future appreciation when the market stabilizes.

Of course, there are more ins and outs of IRAs that need to be considered before executing a Roth IRA conversion. If your interest is piqued, discuss with us whether a conversion is right for you.

© 2016

 

How many employees does your business have for ACA purposes?

Posted by KPC Posted on May 27 2016

How many employees does your

business have for ACA purposes?

It seems like a simple question: How many full-time workers does your business employ? But, when it comes to the Affordable Care Act (ACA), the answer can be complicated.

The number of workers you employ determines whether your organization is an applicable large employer (ALE). Just because your business isn’t an ALE one year doesn’t mean it won’t be the next year.

50 is the magic number

Your business is an ALE if you had an average of 50 or more full time employees — including full-time equivalent employees — during the prior calendar year. Therefore, you’ll count the number of full time employees you have during 2016 to determine if you’re an ALE for 2017.

Under the law, an ALE:
•    Is subject to the employer shared responsibility provisions with their potential penalties, and
•    Must comply with certain information reporting requirements.

Calculating full-timers

A full-timer is generally an employee who works on average at least 30 hours per week, or at least 130 hours in a calendar month.

A full-time equivalent involves more than one employee, each of whom individually isn’t a full-timer, but who, in combination, are equivalent to a full-time employee.

Seasonal workers

If you’re hiring employees for summer positions, you may wonder how to count them. There’s an exception for workers who perform labor or services on a seasonal basis. An employer isn’t considered an ALE if its workforce exceeds 50 or more full-time employees in a calendar year because it employed seasonal workers for 120 days or less.

However, while the IRS states that retail workers employed exclusively for the holiday season are considered seasonal workers, the situation isn’t so clear cut when it comes to summer help. It depends on a number of factors.

We can help

Contact us for help calculating your full-time employees, including how to handle summer hires. We can help ensure your business complies with the ACA.


© 2016

 

How summer day camp can save you taxes

Posted by KPC Posted on May 23 2016

How summer day camp can

save you taxes

Although the kids might still be in school for a few more weeks, summer day camp is rapidly approaching for many families. If yours is among them, did you know that sending your child to day camp might make you eligible for a tax credit?

The power of tax credits

Day camp (but not overnight camp) is a qualified expense under the child and dependent care credit, which is worth 20% of qualifying expenses (more if your adjusted gross income is less than $43,000), subject to a cap. For 2016, the maximum expenses allowed for the credit are $3,000 for one qualifying child and $6,000 for two or more.

Remember that tax credits are particularly valuable because they reduce your tax liability dollar-for-dollar — $1 of tax credit saves you $1 of taxes. This differs from deductions, which simply reduce the amount of income subject to tax. For example, if you’re in the 28% tax bracket, $1 of deduction saves you only $0.28 of taxes. So it’s important to take maximum advantage of the tax credits available to you.

Rules to be aware of

A qualifying child is generally a dependent under age 13. (There’s no age limit if the dependent child is unable physically or mentally to care for him- or herself.) Special rules apply if the child’s parents are divorced or separated or if the parents live apart.

Eligible costs for care must be work-related, which means that the child care is needed so that you can work or, if you’re currently unemployed, look for work. However, if your employer offers a child and dependent care Flexible Spending Account (FSA) that you participate in, you can’t use expenses paid from or reimbursed by the FSA to claim the credit.
Are you eligible?

These are only some of the rules that apply to the child and dependent care credit. So please contact us to determine whether you’re eligible.


© 2016

 

QSB stock offers 2 valuable tax benefits

Posted by KPC Posted on May 03 2016

QSB stock offers 2 valuable tax benefits

By investing in qualified small business (QSB) stock, you can diversify your portfolio and enjoy two valuable tax benefits:

1. Tax-free gain rollovers. If within 60 days of selling QSB stock you buy other QSB stock with the proceeds, you can defer the tax on your gain until you dispose of the new stock. The rolled-over gain reduces your basis in the new stock. For determining long-term capital gains treatment, the new stock’s holding period includes the holding period of the stock you sold

2. Exclusion of gain. Generally, taxpayers selling QSB stock are allowed to exclude up to 50% of their gain if they’ve held the stock for more than five years. But, depending on the acquisition date, the exclusion may be greater: The exclusion is 75% for stock acquired after Feb. 17, 2009, and before Sept. 28, 2010, and 100% for stock acquired on or after Sept. 28, 2010. The acquisition deadline for the 100% gain exclusion had been Dec. 31, 2014, but Congress has made this exclusion permanent.
The taxable portion of any QSB gain will be subject to the lesser of your ordinary-income rate or 28%, rather than the normal long-term gains rate. Thus, if the 28% rate and the 50% exclusion apply, the effective rate on the QSB gain will be 14% (28% × 50%).

Keep in mind that these tax benefits are subject to additional requirements and limits. For example, to be a QSB, a business must be engaged in an active trade or business and must not have assets that exceed $50 million.

Consult us for more details before buying or selling QSB stock. And be sure to consider the nontax factors as well, su


© 2016

 

Unexpected retirement plan disqualification can trigger serious tax problems

Posted by KPC Posted on Apr 26 2016

Unexpected retirement plan

disqualification can trigger

serious tax problems

It’s not unusual for the IRS to conduct audits of qualified employee benefit plans, including 401(k)s. Plan sponsors are expected to stay in compliance with numerous, frequently changing federal laws and regulations.

For example, have you identified all employees eligible for your 401(k) plan and given them the opportunity to make deferral elections? Are employee contributions limited to the amounts allowed under tax law for the calendar year? Does your 401(k) plan pass nondiscrimination tests? Traditional 401(k) plans must be regularly tested to ensure that the contributions don’t discriminate in favor of highly compensated employees.

If the IRS uncovers compliance errors and the plan sponsor doesn’t fix them, the plan could be disqualified.


What happens if qualified status is lost?

Tax law and administrative details that may seem trivial or irrelevant may actually be critical to maintaining a plan’s qualified status. If a plan loses its tax-exempt status, each participant is taxed on the value of his or her vested benefits as of the disqualification date. That can result in large (and completely unexpected) tax liabilities for participants.

In addition, contributions and earnings that occur after the disqualification date aren’t tax-free. They must be included in participants’ taxable incomes. The employer’s tax deductions for plan contributions are also at risk. There are also penalties and fees that can be devastating to a business.

Finally, withdrawals made after the disqualification date cannot be rolled over into other tax-favored retirement plans or accounts (such as IRAs).
Voluntary corrections

The good news is that 401(k) plan errors can often be voluntarily corrected. We can help determine if changes should be made to your company’s qualified plan to achieve and maintain compliance. Contact us for more information.


© 2016

 

Entrepreneurs: What can you deduct and when?

Posted by KPC Posted on Apr 01 2016

Entrepreneurs:

What can you deduct and when?

Starting a new business is an exciting time. But before you even open the doors, you generally have to spend a lot of money. You may have to train workers and pay for rent, utilities, marketing and more.

Entrepreneurs are often unaware that many expenses incurred by start-ups can’t be deducted right away.

How expenses are handled on your tax return

When planning a new enterprise, remember these key points:

•    Start-up costs include those incurred or paid while creating an active trade or business — or investigating the creation or acquisition of one. Organizational costs include the costs of creating a corporation or partnership.

•    Under the federal tax code, taxpayers can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs. The $5,000 deduction is reduced dollar-for-dollar by the amount by which your total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized over 180 months on a straight-line basis.

•    No deductions or amortization write-offs are allowed until the year when “active conduct” of your new business commences. That usually means the year when the enterprise has all the pieces in place to begin earning revenue. To determine if a taxpayer meets this test, the IRS and courts will generally ask: Did the taxpayer undertake the activity intending to earn a profit? Was the taxpayer regularly and actively involved? Has the activity actually begun?

An important decision

Time may be of the essence if you have start-up expenses that you’d like to deduct this year. You need to decide whether to take the elections described above. Recordkeeping is important. Contact us about your business start-up plans. We can help with the tax and other aspects of your new venture.


© 2016

 

2 benefits-related tax credits just for small businesses

Posted by KPC Posted on Mar 03 2016

2 benefits-related tax credits just for small businesses

 

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.


© 2016

 

Deduct home office expenses - if you’re eligible

Posted by KPC Posted on Feb 09 2016

Deduct home office expenses —

if you’re eligible

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.

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 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’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.


© 2016

 

File early to avoid tax identity theft

Posted by KPC Posted on Jan 26 2016

File early to avoid tax identity theft

If you’re like many Americans, you may not start thinking about filing your tax return until the April 15 deadline (this year, April 18) is just a few weeks — or perhaps even just a few days — away. But there’s another date you should keep in mind: January 19. That’s the date the IRS began accepting 2015 returns, and filing as close to that date as possible could protect you from tax identity theft.

How filing early helps

In this increasingly common scam, thieves use victims’ personal information to file fraudulent tax returns electronically and claim bogus refunds. When the real taxpayers file, they’re notified that they’re attempting to file duplicate returns.

Tax identity theft can cause major headaches to straighten out and significantly delay legitimate refunds. But if you file first, it will be the thief who’s filing the duplicate return, not you.

Another key date

Of course you need to have your W-2s and 1099s to file. So another key date to be aware of is February 1 — the deadline for employers to issue 2015 W-2s to employees and, generally, for businesses to issue 1099s to recipients of any 2015 interest, dividend or reportable miscellaneous income payments.

An added bonus

Let us know if you have questions about tax identity theft or would like help filing your 2015 return early. An added bonus of filing early, if you’ll be getting a refund, is enjoying that refund sooner.


© 2016

Could you save more by deducting state and local sales taxes?

Posted by KPC Posted on Jan 12 2016

Could you save more by deducting state and local sales taxes?

For the last several years, taxpayers have been allowed to take an itemized deduction for state and local sales taxes in lieu of state and local income taxes. This break can be valuable to those residing in states with no or low income taxes or who purchase major items, such as a car or boat. But it had expired December 31, 2014. Now the Protecting Americans from Tax Hikes Act of 2015 (PATH Act) has made the break permanent.

So see if you can save more by deducting sales tax on your 2015 return. Don’t worry — you don’t have to have receipts documenting all of the sales tax you actually paid during the year to take full advantage of the deduction. Your deduction can be determined by using an IRS sales tax calculator that will base the deduction on your income and the sales tax rates in your locale plus the tax you actually paid on certain major purchases.

Questions about this or other PATH Act breaks that might help you save taxes on your 2015 tax return? Contact us — we can help you identify which tax breaks will provide you the maximum benefit.


© 2016

 

2 extended credits can save businesses taxes on their 2015 returns

Posted by KPC Posted on Jan 05 2016

2 extended credits can save businesses taxes on their 2015 returns

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

No changes to retirement plan contributions for 2016

Posted by KPC Posted on Dec 29 2015

No changes to retirement plan contributions for 2016

Retirement plan contribution limits are indexed for inflation, but with inflation remaining low, the limits remain unchanged for 2016:

Type of limit

2016 Limit 

Elective deferrals to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans $18,000
Contributions to defined contribution plans $53,000
Contributions to SIMPLEs  $12,500
Contributions to IRAs $5,500
Catch-up contributions to 401(k), 403(b), 457(b)(2) and 457(c)(1) plans $6,000
Catch-up contributions to SIMPLEs $3,000
Catch-up contributions to IRAs $1,000

Nevertheless, if you’re not already maxing out your contributions, you still have an opportunity to save more in 2016. And if you turn age 50 in 2016, you can begin to take advantage of catch-up contributions.

However, keep in mind that additional factors may affect how much you’re allowed to contribute (or how much your employer can contribute on your behalf). For example, income-based limits may reduce or eliminate your ability to make Roth IRA contributions or to make deductible traditional IRA contributions. If you have questions about how much you can contribute to tax-advantaged retirement plans in 2016, check with us.


© 2015

Congress passes “extenders” legislation reviving expired tax breaks for 2015

Posted by KPC Posted on Dec 22 2015

Congress passes “extenders” 

legislation reviving expired

tax breaks for 2015

Many valuable tax breaks expired December 31, 2014. For them to be available for 2015, Congress had to pass legislation extending them — which it now has done, with the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), signed into law by the President on December 18. The PATH Act not only revives expired breaks for 2015 but also makes many breaks permanent, generally extends the rest through either 2016 or 2019, and enhances some breaks.

Here is a sampling of extended breaks that may benefit you or your business:

•    The deduction for state and local sales taxes in lieu of state and local income taxes (extended permanently),
•    Tax-free IRA distributions to charities (extended permanently),
•    Bonus depreciation (extended through 2019, but with reduced benefits for 2018 and 2019),
•    Enhanced Section 179 expensing (extended permanently and further enhanced beginning in 2016),
•    Accelerated depreciation for qualified leasehold-improvement, restaurant and retail improvement property (extended permanently),
•    The research tax credit (extended permanently and enhanced beginning in 2016),
•    The Work Opportunity credit (extended through 2019 and enhanced beginning in 2016), and
•    Various energy-related tax incentives (extended through 2016).

Please contact us for more information on these and other breaks under the PATH Act. Keep in mind that, for you to take maximum advantage of certain extended breaks on your 2015 tax return, quick action may be required.

© 2015

 

7 last-minute tax-saving tips

Posted by KPC Posted on Dec 16 2015

7 last-minute tax-saving tips

The year is quickly drawing to a close, but there’s still time to take steps to reduce your 2015 tax liability — you just must act by December 31:

1.    Pay your 2015 property tax bill that’s due in early 2016.

2.    Make your January 1 mortgage payment.

3.    Incur deductible medical expenses (if your deductible medical expenses for the year already exceed the applicable floor).

4.    Pay tuition for academic periods that will begin in January, February or March of 2016 (if it will make you eligible for a tax credit).

5.    Donate to your favorite charities.

6.    Sell investments at a loss to offset capital gains you’ve recognized this year.

7.    Ask your employer if your bonus can be deferred until January.

Keep in mind, however, that in certain situations these strategies might not make sense. For example, if you’ll be subject to the alternative minimum tax this year or be in a higher tax bracket next year, taking some of these steps could have undesirable results.

If you’re unsure whether these steps are right for you, consult us before taking action.

© 2015

 

Avoid a 50% penalty: Take retirement plan RMDs by December 31

Posted by KPC Posted on Dec 08 2015

Avoid a 50% penalty: 
Take retirement plan RMDs by December 31

 

 

After you reach age 70½, you must take annual required minimum distributions (RMDs) from your IRAs (except Roth IRAs) and, generally, from your defined contribution plans (such as 401(k) plans). You also could be required to take RMDs if you inherited a retirement plan (including Roth IRAs).

If you don’t comply — which usually requires taking the RMD by December 31 — you can owe a penalty equal to 50% of the amount you should have withdrawn but didn’t.

So, should you withdraw more than the RMD? Taking only RMDs generally is advantageous because of tax-deferred compounding. But a larger distribution in a year your tax bracket is low may save tax.
Be sure, however, to consider the lost future tax-deferred growth and, if applicable, whether the distribution could: 1) cause Social Security payments to become taxable, 2) increase income-based Medicare premiums and prescription drug charges, or 3) affect other tax breaks with income-based limits.

Also keep in mind that, while retirement plan distributions aren’t subject to the additional 0.9% Medicare tax or 3.8% net investment income tax (NIIT), they are included in your modified adjusted gross income (MAGI). That means they could trigger or increase the NIIT, because the thresholds for that tax are based on MAGI.

For more information on RMDs or tax-savings strategies for your retirement plan distributions, please contact us.

© 2015

 

PTO contribution arrangements can help prevent the year-end vacation-time scramble

Posted by KPC Posted on Nov 24 2015

PTO contribution arrangements can help

prevent the year-end vacation-time scramble

From the Thanksgiving kick-off of the holiday season through December 31, many businesses find themselves short-staffed as employees take time off to spend with family and friends. But if you limit how many vacation days employees can roll over to the new year, you might find your workplace to be nearly a ghost town as employees scramble to use their time off rather than lose it.

A paid time off (PTO) contribution arrangement may be the solution. It allows employees with unused vacation hours to elect to convert them to retirement plan contributions. If the plan has a 401(k) feature, it can treat these amounts as a pretax benefit, similar to normal employee deferrals. Alternatively, the plan can treat the amounts as employer profit sharing, converting the excess PTO amounts to employer contributions.

A PTO contribution arrangement can be a better option than increasing the number of days employees can roll over. Why? Larger rollover limits can result in employees building up large balances that create a significant liability on your books.

To offer a PTO contribution arrangement, you simply need to amend your plan. However, you must still follow the plan document’s eligibility, vesting, rollover, distribution and loan terms, and additional rules apply.
To learn more about PTO contribution arrangements, including their tax implications, please contact us.

© 2015

 

Reduce taxes on your investments with these year-end strategies

Posted by KPC Posted on Nov 18 2015

Reduce taxes on your investments with these year-end strategies

While tax consequences should never drive investment decisions, it’s critical that they be considered — especially by higher-income taxpayers, who may be facing the 39.6% short-term capital gains rate, the 20% long-term capital gains rate and the 3.8% net investment income tax (NIIT).

Holding on to an investment until you’ve owned it more than one year so the gains qualify for long-term treatment may help substantially cut tax on any gain. Here are some other tax-saving strategies:

•    Use unrealized losses to absorb gains.
•    Avoid wash sales.
•    See if a loved one qualifies for the 0% rate (or the 15% rate if your rate is 20%).

Many of the strategies that can help you save or defer income tax on your investments can also help you avoid or defer NIIT liability. And because the threshold for the NIIT is based on modified adjusted gross income (MAGI), strategies that reduce your MAGI — such as making retirement plan contributions — can also help you avoid or reduce NIIT liability.

These are only a few of the year-end strategies that may help you reduce taxes on your investments. For more ideas, contact us.

© 2015

 

 

The 529 savings plan: A tax-smart way to fund college expenses

Posted by KPC Posted on Nov 04 2015

The 529 savings plan: A tax-smart way to fund college expenses

 

If you’re saving for college, consider a Section 529 plan. Although contributions aren’t deductible for federal purposes, plan assets can grow tax-deferred. (Some states do offer tax incentives for contributing.)

Distributions used to pay qualified expenses (such as tuition, mandatory fees, books, equipment, supplies and, generally, room and board) are income-tax-free for federal purposes and typically for state purposes as well, thus making the tax deferral a permanent savings.
529 plans offer other benefits as well:

•    They usually offer high contribution limits, and there are no income limits for contributing.

•    There’s generally no beneficiary age limit for contributions or distributions.

•    You can control the account, even after the child is of legal age.

•    You can make tax-free rollovers to another qualifying family member.

Finally, 529 plans provide estate planning benefits: A special break for 529 plans allows you to front-load five years’ worth of annual gift tax exclusions and make up to a $70,000 contribution (or $140,000 if you split the gift with your spouse).

The biggest downside may be that your investment options — and when you can change them — are limited. Please contact us for more information on 529 plans and other tax-smart strategies for funding education expenses.

© 2015

Save tax — or at least defer it — by carefully timing business income and expenses

Posted by KPC Posted on Oct 28 2015

Save tax — or at least defer it — by carefully timing business income and expenses

The first step to smart timing is to project your business’s income and expenses for 2015 and 2016. With this information in hand, you can determine the best year-end timing strategy for your business.


If you expect to be in the same or lower tax bracket in 2016, consider:
Deferring income to 2016. If your business uses the cash method of accounting, you can defer billing for your products or services. Or, if you use the accrual method, you can delay shipping products or delivering services.


Accelerating deductible expenses into 2015. If you’re a cash-basis taxpayer, you may make a state estimated tax payment before December 31, so you can deduct it this year rather than next. Both cash- and accrual-basis taxpayers can charge expenses on a credit card and deduct them in the year charged, regardless of when the credit card bill is paid.


If you expect to be in a higher tax bracket in 2016, accelerating income and deferring deductible expenses may save you more tax over the two-year period (though it will increase your 2015 tax liability).
For help projecting your income and expenses or for more ideas on how you can effectively time them, please contact us.


© 2015

 

2 tax consequences to consider if you’re refinancing a home

Posted by KPC Posted on Oct 21 2015

2 tax consequences to consider if you’re refinancing a home

Now may be a great time to refinance, because mortgage rates are still low but expected to increase. Before deciding to refinance, however, here are a couple of tax consequences to consider:

1. Cash-out refinancing. If you borrow more than you need to cover your outstanding mortgage balance, the tax treatment of the cash-out portion depends on how you use the excess cash. If you use it for home improvements, it’s considered acquisition indebtedness, and the interest is deductible subject to a $1 million debt limit. If you use it for another purpose, such as buying a car or paying college tuition, it’s considered home equity debt, and deductible interest is subject to a $100,000 debt limit.

2. Prepaying interest. “Points” paid when refinancing generally are amortized and deducted ratably over the life of the loan, rather than being immediately deductible. If you’re already amortizing points from a previous refinancing and you refinance with a new lender, you can deduct the unamortized balance in the year you refinance. But if you refinance with the same lender, you must add the unamortized points from the old loan to any points you pay on the new loan and then deduct the total over the life of the new loan.

Is your head spinning? Don’t worry; we can help you understand exactly what the tax consequences of refinancing will be for you. Contact us today!

© 2015

 

Your exec comp could be subject to the 0.9% additional Medicare tax or the 3.8% NIIT

Posted by KPC Posted on Oct 14 2015

Your exec comp could be subject to the 0.9% additional Medicare tax or the 3.8% NIIT

The additional Medicare tax and net investment income tax (NIIT) apply when certain income exceeds the applicable threshold: $250,000 for married filing jointly, $125,000 for married filing separately, and $200,000 for other taxpayers.

The following types of executive compensation could be subject to the 0.9% additional Medicare tax if your earned income exceeds the applicable threshold:

•    Fair market value (FMV) of restricted stock once the stock is no longer subject to risk of forfeiture or it’s sold

•    FMV of restricted stock when it’s awarded if you make a Section 83(b) election

•    Bargain element of nonqualified stock options when exercised

•    Nonqualified deferred compensation once the services have been performed and there’s no longer a substantial risk of forfeiture

And the following types of gains from exec comp will be included in net investment income and could be subject to the 3.8% NIIT if your modified adjusted gross income (MAGI) exceeds the applicable threshold:

•    Gain on the sale of restricted stock if you’ve made the Sec. 83(b) election

•    Gain on the sale of stock from an incentive stock option exercise if you meet the holding requirements

Concerned about how your exec comp will be taxed? Please contact us. We can help you assess the potential tax impact and implement strategies to reduce it.

© 2015

 

Gearing up for the ACA’s information reporting requirements

Posted by KPC Posted on Oct 09 2015

 

Gearing up for the ACA’s information reporting requirements

 

Starting in 2016, applicable large employers (ALEs) under the Affordable Care Act (ACA) will have to file Forms 1094-C and 1095-C to provide information to the IRS and plan participants regarding their health care benefits for the previous year. Both the forms and their instructions are now available for ALEs to study and begin preparations for required filings. In addition, organizations that expect to file Forms 1094 and 1095 electronically can peruse two final IRS publications setting out specifications for using the new ACA Information Returns system.


Keep in mind that ALEs are employers with 50 or more full-time employees or the equivalent. And even ALEs exempt from the ACA’s shared-responsibility (or “play or pay”) provision for 2015 (that is, ALEs with 50 to 99 full-timers or the equivalent who meet certain eligibility requirements) are still subject to the information reporting requirements in relation to their 2015 health care benefits.


If your company is considered an ALE, please contact us for assistance in navigating the ACA’s complex requirements for avoiding penalties and properly reporting benefits. If you’re not an ALE, we can still help you understand how the ACA affects your small business and determine whether you qualify for a tax credit for providing coverage.


© 2015

 

Should you “bunch” medical expenses into 2015?

Posted by KPC Posted on Oct 07 2015

Should you “bunch” medical

expenses into 2015?

 

Medical expenses that aren’t reimbursable by insurance or paid through a tax-advantaged account (such as a Health Savings Account or Flexible Spending Account) may be deductible — but generally only to the extent that they exceed 10% of your adjusted gross income.


Taxpayers age 65 and older can enjoy a 7.5% floor through 2016. The floor for alternative minimum tax purposes, however, is 10% for all taxpayers.


By “bunching” nonurgent medical procedures and other controllable expenses into alternating years, you may increase your ability to exceed the applicable floor. Controllable expenses might include prescription drugs, eyeglasses and contact lenses, hearing aids, dental work, and elective surgery.


If it’s looking like you’re close to exceeding the floor in 2015, consider accelerating controllable expenses into this year. But if you’re far from exceeding it, to the extent possible (without harming your or your family’s health), you might want to put off medical expenses until next year, in case you have enough expenses in 2016 to exceed the floor.


For more information on how to bunch deductions or exactly what expenses are deductible, please contact us.


© 2015

 

Selling rather than trading in business vehicles can save tax

Posted by KPC Posted on Sept 30 2015

Selling rather than trading in business vehicles can save tax

Although a vehicle’s value typically drops fairly rapidly, the tax rules limit the amount of annual depreciation that can be claimed on most cars and light trucks. Thus, when it’s time to replace a vehicle used in business, it’s not unusual for its tax basis to be higher than its value.


If you trade a vehicle in on a new one, the undepreciated basis of the old vehicle simply tacks onto the basis of the new one (even though this extra basis generally doesn’t generate any additional current depreciation because of the annual depreciation limits). However, if you sell the old vehicle rather than trading it in, any excess of basis over the vehicle’s value can be claimed as a deductible loss to the extent of your business use of the vehicle.


For example, if you sell a vehicle with an adjusted basis of $20,000 for $12,000, you’ll get an immediate write-off of $8,000 ($20,000 – $12,000). If you trade in the vehicle rather than selling it, the $20,000 adjusted basis is added to the new vehicle’s depreciable basis and, thanks to the annual depreciation limits, it may be years before any tax deductions are realized.


For more ideas on how to maximize your vehicle-related deductions, contact us.


© 2015

 

Why you should contribute more to your 401(k) in 2015

Posted by KPC Posted on Sept 22 2015

Why you should contribute more to your 401(k) in 2015


Contributing to a traditional employer-sponsored defined contribution plan, such as a 401(k), 403(b) or 457 plan, offers many benefits:

•    Contributions are pretax, reducing your modified adjusted gross income (MAGI), which can also help you reduce or avoid exposure to the 3.8% net investment income tax.

•    Plan assets can grow tax-deferred — meaning you pay no income tax until you take distributions.

•    Your employer may match some or all of your contributions pretax.

For 2015, you can contribute up to $18,000. If your current contribution rate will leave you short of the limit, consider increasing your contribution rate through the end of the year. Because of tax-deferred compounding, boosting contributions sooner rather than later can have a significant impact on the size of your nest egg at retirement.

If you’ll be age 50 or older by December 31, you can also make “catch-up” contributions (up to $6,000 for 2015). So if you didn’t contribute much when you were younger, this may allow you to partially make up for lost time. Even if you did make significant contributions before age 50, catch-up contributions can still be beneficial, allowing you to further leverage the power of tax-deferred compounding.

Have questions about how much to contribute? Contact us. We’d be pleased to discuss the tax and retirement-saving considerations with you.

© 2015

 

How to determine if you need to worry about estate taxes

Posted by KPC Posted on Sept 15 2015

How to determine if you need to worry about estate taxes

Here’s a simplified way to project your estate tax exposure. Take the value of your estate, net of any debts. Also subtract any assets that will pass to charity on your death.

Then, if you’re married and your spouse is a U.S. citizen, subtract any assets you’ll pass to him or her. Those assets qualify for the marital deduction and avoid potential estate tax exposure until the surviving spouse dies. The net number represents your taxable estate.

You can transfer up to your available exemption amount at death free of federal estate taxes. So if your taxable estate is equal to or less than the estate tax exemption (for 2015, $5.43 million) reduced by any gift tax exemption you used during your life, no federal estate tax will be due when you die. But if your taxable estate exceeds this amount, it will be subject to estate tax. Many states, however, now impose estate tax at a lower threshold than the federal government does, so you’ll also need to consider the rules in your state.

If you’re not sure whether you’re at risk for the estate tax or if you’d like to learn about gift and estate planning strategies to reduce your potential liability, please contact us.

© 2015

 

When will Congress pass “extenders” legislation to revive expired tax breaks for 2015?

Posted by KPC Posted on Sept 08 2015

When will Congress pass “extenders”  legislation to revive expired tax breaks for 2015?

With Congress returning from its August recess, this is the question on tax-savvy Americans’ minds. Many valuable tax breaks aren’t permanent, so Congress has to pass legislation extending them to keep them in effect. Unfortunately, Congress often waits until the last minute to do so.


For example, Congress didn’t pass 2014 extenders until December 2014, making the legislation retroactive to January 1, 2014 — but not extending the breaks to 2015. So we’re again in a waiting game to see what will happen with extenders legislation. Some believe Congress will act soon, while others think we’ll again be waiting until December.
Here are several expired breaks that may benefit you or your business if extended:

•    The deduction for state and local sales taxes in lieu of state and local income taxes,

•    Tax-free IRA distributions to charities,

•    100% bonus depreciation,

•    Enhanced Section 179 expensing,

•    Accelerated depreciation for qualified leasehold improvement, restaurant and retail improvement property,

•    The research tax credit,

•    The Work Opportunity tax credit, and

•    Various energy-related tax incentives.


Please check back with us for the latest information. Keep in mind that quick action after extenders legislation is passed may be required in order to take maximum advantage of the extended breaks.


© 2015

 

All income investments aren’t alike when it comes to taxes

Posted by KPC Posted on Sept 01 2015

 

All income investments aren’t alike when it comes to taxes

 

 


The tax treatment of investment income varies, and not just based on whether the income is in the form of dividends or interest. Qualified dividends are taxed at the favorable long-term capital gains tax rate (generally 15% or 20%) rather than at the applicable ordinary-income tax rate (which might be as high as 39.6%). Interest income generally is taxed at ordinary-income rates. So stocks that pay qualified dividends may be more attractive tax-wise than other income investments, such as CDs and taxable bonds.


But there are exceptions. For example, some dividends aren’t qualified and therefore are subject to ordinary-income rates, such as certain dividends from:

  • •    Real estate investment trusts (REITs),

  • •    Regulated investment companies (RICs),

  • •    Money market mutual funds, and

  • •    Certain foreign investments.

Also, the tax treatment of bond income varies. For example:

  • •    Interest on U.S. government bonds is taxable on federal returns but exempt on state and local returns.

  • •    Interest on state and local government bonds is excludable on federal returns. If the bonds were issued in your home state, interest also might be excludable on your state return.

  • •    Corporate bond interest is fully taxable for federal and state purposes.

While tax treatment shouldn’t drive investment decisions, it’s one factor to consider — especially when it comes to income investments. For help factoring taxes into your investment strategy, contact us.

© 2015

 

Exporters and others: Save taxes with an IC-DISC

Posted by KPC Posted on Aug 28 2015

Exporters and others:

Save taxes with an IC-DISC

If your business exports American-made goods or performs architectural or engineering services for foreign construction projects, an interest-charge domestic international sales corporation (IC-DISC) can help slash your tax bill.

An IC-DISC is a “paper” corporation you set up to receive commissions on export sales, up to the greater of 50% of net income or 4% of gross receipts from qualified exports. Your business deducts the commission payments, while distributions received from the IC-DISC are treated as qualified dividends, not capital gains.

Essentially, an IC-DISC allows you to convert ordinary income taxed at rates as high as 39.6% into dividends taxed at 15% or 20%. An IC-DISC also allows you to defer taxes on up to $10 million in commissions held by the IC-DISC by paying a modest interest charge to the IRS.

Think an IC-DISC might be right for you? Contact us for more information.

© 2015

 

What you need to know before donating collectibles

Posted by KPC Posted on Aug 18 2015

What you need to know before donating collectibles


If you’re a collector, donating from your collection instead of your bank account or investment portfolio can be tax-smart. When you donate appreciated property rather than selling it, you avoid the capital gains tax you would have incurred on a sale. And long-term gains on collectibles are subject to a higher maximum rate (28%) than long-term gains on most long-term property (15% or 20%, depending on your tax bracket) — so you can save even more taxes.


But choose the charity wisely. For you to receive a deduction equal to fair market value rather than your basis in the collectible, the item must be consistent with the charity’s purpose, such as an antique to a historical society.

Properly substantiating the donation is also critical, and this may include an appraisal. If you donate works of art with a collective value of $5,000 or more, you’ll need a qualified appraisal, and if the collective value is $20,000 or more, a copy of the appraisal must be attached to your tax return. If an individual item is valued at $20,000 or more, you may also be required to provide a photograph of that item.

If you’re considering a donation of artwork or other collectibles, contact us for help ensuring you can maximize your tax deduction.

© 2015

 

Teens in your family with summer jobs? Set up IRAs for them!

Posted by KPC Posted on Aug 11 2015

Teens in your family with summer jobs? Set up IRAs for them!


Teenagers’ retirement may seem too far off to warrant saving now, but IRAs can be perfect for teens precisely because they’ll likely have many years to let their accounts grow tax-deferred or tax-free.


The 2015 contribution limit is the lesser of $5,500 or 100% of earned income. A teen’s traditional IRA contributions typically are deductible, but distributions will be taxed. Roth IRA contributions aren’t deductible, but qualified distributions will be tax-free.

Choosing a Roth IRA is typically a no-brainer if a teen doesn’t earn income that exceeds the standard deduction ($6,300 for 2015 for single taxpayers), because he or she will likely gain no benefit from deducting a traditional IRA contribution. Even above that amount, the teen probably is taxed at a low rate, so the Roth will typically still be the better answer.

How powerful can an IRA for a teen be? Here’s an example: Both Madison and Noah contribute $5,500 per year to their IRAs through age 66 and earn a 6% rate of return. But Madison starts contributing when she gets her first job at age 16, while Noah waits until age 23, after he’s graduated from college and started his career. Madison’s additional $38,500 of early contributions results in a nest egg at full retirement age of 67 that’s nearly $600,000 larger than Noah’s — $1,698,158 vs. $1,098,669!

Contact us for more ideas on helping teens benefit from tax-advantaged saving.

© 2015

 

Act soon if you want to help your child buy a home

Posted by KPC Posted on Aug 04 2015

Act soon if you want to help your child buy a home

Mortgage interest rates are still at historically low levels, but they’re expected to go up by year end. So if you’ve been thinking about helping your child — or grandchild — buy a home, consider acting soon. There also are some favorable tax factors that will help:


0% capital gains rate.

If the child is in the 10% or 15% tax bracket, instead of giving cash to help fund a down payment, consider giving long-term appreciated assets such as stock or mutual fund shares. The child can sell the assets without incurring any federal income taxes on the gain, and you can save the taxes you’d owe if you sold the assets yourself. As long as the assets are worth $14,000 or less (when combined with any other 2015 gifts to the child), there will be no federal gift tax consequences — thanks to the annual gift tax exclusion.


Low federal interest rates.

Another tax-friendly option is lending funds to the child. Now is a good time for taking this step, too. Currently, Applicable Federal Rates — the rates that can be charged on intrafamily loans without causing unwanted tax consequences — are very low by historical standards. But these rates are also expected to increase by year end.


If you have questions about these or other tax-efficient ways to help your child or grandchild buy a home, please contact us.


© 2015

 

Tread carefully when determining compensation for S corp. shareholder-employees

Posted by KPC Posted on July 28 2015

Tread carefully when determining compensation for S corp. shareholder-employees


By distributing profits in the form of dividends rather than salary, an S corporation and its owners can avoid payroll taxes on these amounts. Because of the additional 0.9% Medicare tax on wages in excess of $200,000 ($250,000 for joint filers and $125,000 for married filing separately), the potential tax savings may be even greater than it once would have been. (S corporation dividends paid to shareholder-employees generally won’t be subject to the 3.8% net investment income tax.)

But paying little or no salary to S corporation shareholder-employees is risky. The IRS has targeted S corporations, assessing unpaid payroll taxes, penalties and interest against companies whose owners’ salaries are unreasonably low. To avoid such a result, S corporations should establish and document reasonable salaries for each position using compensation surveys, company financial data and other evidence.

Do you have questions about compensating S corporation shareholder-employees? Contact us — we can help you determine the mix of salary and dividends that can keep tax liability as low as possible while standing up to IRS scrutiny.

© 2015

 

Tax treatment of NQSOs differs from that of their better-known counterpart

Posted by KPC Posted on July 21 2015

 

Tax treatment of NQSOs differs from that of their better-known counterpart


With nonqualified stock options (NQSOs), if the stock appreciates beyond your exercise price, you can buy shares at a price below what they’re trading for. This is the same as for the perhaps better-known incentive stock options (ISOs).


The tax treatment of NQSOs, however, differs from that of ISOs: NQSOs create compensation income — taxed at ordinary-income rates — on the “bargain element” (the difference between the stock’s fair market value and the exercise price) when exercised. This is regardless of whether the stock is held or sold immediately. Also, NQSO exercises don’t create an alternative minimum tax (AMT) preference item that can trigger AMT liability.


When you exercise NQSOs, you may need to make estimated tax payments or increase withholding to fully cover the tax. Keep in mind that an exercise could trigger or increase exposure to top tax rates, the additional 0.9% Medicare tax and the 3.8% net investment income tax.


Have tax questions about NQSOs or other stock-based compensation? Let us know — we’d be happy to answer them.


© 2015

 

How to begin collecting your 2015 tax refund now

Posted by KPC Posted on July 14 2015

 

How to begin collecting your 2015 tax refund now

If you usually receive a large federal income tax refund, you’re essentially making an interest-free loan to the IRS. Rather than wait until you file your 2015 tax return in 2016, why not begin enjoying your “refund” now by reducing your withholdings or estimated tax payments for the remainder of 2015?


It’s particularly important to review your withholdings, and adjust them if necessary, when you experience a major life event, such as marriage, divorce, birth or adoption of a child, or a layoff suffered by you or your spouse.


If you’d like help determining what your withholding or estimated tax payments should be for the second half of the year, please contact us.


© 2015

Tax impact of the Supreme Court’s same-sex marriage decision

Posted by KPC Posted on July 10 2015

Tax impact of the Supreme Court’s same-sex marriage decision


On June 26, the U.S. Supreme Court ruled that same-sex couples have a constitutional right to marry, making same-sex marriage legal in all 50 states. For federal tax purposes, same-sAex married couples were already considered married, under the Court’s 2013 decision in United States v. Windsor and subsequent IRS guidance — even if their state of residence didn’t recognize their marriage.


From a tax planning perspective, the latest ruling means that, in states where same-sex marriage hadn’t been recognized, same-sex married couples no longer will need to deal with the complications of being treated as married for federal tax purposes but not married for state tax purposes. So their tax and estate planning will be simplified and they can take advantage of state-level tax benefits for married couples. But in some cases, these couples will also be subject to some tax burdens, such as the “marriage penalty.”


Same-sex married couples should review their tax planning strategies and estate plans to determine what new opportunities may be available to them and whether there are any new burdens they should plan for. Employers will need to keep a close eye on how these developments will affect their tax obligations in relation to employees who have same-sex spouses. Please contact us if you have questions.


© 2015

 

 

Large employers: Time to start planning for ACA information reporting

Posted by KPC Posted on June 30 2015

Large employers: Time to start planning for ACA information reporting


With the U.S. Supreme Court’s June 25 decision upholding the Affordable Care Act (ACA) yet again, employers subject to the act’s information reporting provision can no longer afford to put off planning in the hope that the requirements might go away.


Beginning in 2016, “large” employers as defined by the act (generally employers with 50 or more full-time employees or the equivalent) must file Forms 1094 and 1095 to provide information to the IRS and plan participants about health coverage provided in the previous year (2015).


Fortunately, recent IRS guidance helps clarify the reporting requirements. And a new IRS Q&A document addresses more specific issues that may arise while completing the forms.
Keep in mind that, while some “midsize” employers (generally employers with 50 to 99 full-time employees or the equivalent) can qualify for an exemption from the play-or-pay provision in 2015 if they meet certain requirements, these employers still will be subject to the information reporting requirements.


If your organization is among those required to file Forms 1094 and 1095 and you need help complying with the requirements, please contact us.


© 2015

 

 

Opening the “back door” to a Roth IRA

Posted by KPC Posted on June 24 2015

Opening the “back door” to a Roth IRA

A potential downside of tax-deferred saving through a traditional retirement plan is that you'll have to pay taxes when you make withdrawals at retirement. Roth plans, on the other hand, allow tax-free distributions; the tradeoff is that contributions to these plans don't reduce your current-year taxable income.

Unfortunately, modified adjusted gross income (MAGI)-based phaseouts may reduce or eliminate your ability to contribute:

•    For married taxpayers filing jointly, the 2015 phaseout range is $183,000–$193,000.

•    For single and head-of-household taxpayers, the 2015 phaseout range is $116,000–$131,000.

You can make a partial contribution if your MAGI falls within the applicable range, but no contribution if it exceeds the top of the range.

If the income-based phaseout prevents you from making Roth IRA contributions and you don't already have a traditional IRA, a "back door" IRA might be right for you. How does it work? You set up a traditional account and make a nondeductible contribution to it. You then wait until the transaction clears and convert the traditional account to a Roth account. The only tax due will be on any growth in the account between the time you made the contribution and the date of conversion.

© 2015

 

Married with a large estate? Why you still need a credit shelter trust

Posted by KPC Posted on June 16 2015

Married with a large estate? Why you still need a credit shelter trust

Even though portability now allows married couples to use up both spouses' estate tax exemptions without having to make lifetime asset transfers or set up trusts, this “easier” path isn't necessarily the better path. For couples with large estates, making lifetime asset transfers and setting up trusts can provide benefits that exemption portability doesn’t offer.

With portability, if one spouse dies and part (or all) of his or her estate tax exemption is unused at death, the estate can elect to permit the surviving spouse to use the deceased spouse’s remaining estate tax exemption. But making the portability election doesn’t protect future growth on assets from estate tax like applying the exemption to a credit shelter trust does.

Also, the portability provision doesn’t apply to the GST tax exemption, and some states don’t recognize exemption portability. Credit shelter trusts offer GST and state estate tax planning opportunities, as well as creditor and remarriage protection.

If you’d like to learn more about credit shelter trusts or other estate planning strategies for your situation, please let us know.

© 2015

 

Why the details matter when selling investments

Posted by KPC Posted on June 10 2015

Why the details matter when selling investments

If you don’t pay attention to the details, the tax consequences of a sale may be different from what you expect. For example, if you bought the same security at different times and prices and want to sell high-tax-basis shares to reduce gain or increase a loss to offset other gains, be sure to specifically identify which block of shares is being sold.

And when it gets close to year end, keep in mind that the trade date, not the settlement date, of publicly traded securities determines the year in which you recognize the gain or loss.


Finally, consider the transaction costs, such as broker fees. While of course such costs aren’t taxes, like taxes they can have a significant impact on your net returns, especially over time, because they also reduce the amount of money you have available to invest. 

If you have questions about the potential tax impact of an investment sale you’re considering — or all of the details you should keep in mind to minimize it — please contact us.

© 2015

 

Watch out for tax consequences when hiring telecommuters outside your state

Posted by KPC Posted on June 02 2015

 

Watch out for tax consequences when hiring telecommuters outside your state

If you allow employees to telecommute, be sure to consider the potential tax implications. Hiring someone in another state, for example, might create sufficient nexus to expose your company to that state’s income, sales and use, franchise, withholding, or unemployment taxes. 

And the employee might be subject to double taxation if both states attempt to tax his or her income — the recent Supreme Court ruling in Comptroller of the State of Maryland v. Wynne addressed a similar issue, although in that case the taxpayers weren’t telecommuters but owners of an S corporation that earned income in other states. 

The rules vary by state and also by type of tax — and become even more complicated for international telecommuters. So it’s a good idea to review the rules before you approve a cross-border telecommuting arrangement. If you’re considering hiring employees to telecommute from outside your state, we can help you assess the potential tax impact. 

© 2015

Before donating a vehicle, find out the charity’s intent

Posted by KPC Posted on May 26 2015


Before donating a vehicle, find out the charity’s intent

If you donate your vehicle, the value of your deduction can vary greatly depending on what the charity does with it. You can deduct the vehicle’s fair market value (FMV) if the charity:

  • • Uses the vehicle for a significant charitable purpose (such as delivering meals-on-wheels to the elderly),
  • • Sells the vehicle for substantially less than FMV in furtherance of a charitable purpose (such as a sale to a low-income person needing transportation), or
  • • Makes “material improvements” to the vehicle.

But in most other circumstances, if the charity sells the vehicle, your deduction is limited to the amount of the sales proceeds.

You also must obtain proper substantiation from the charity, including a written acknowledgment that:

  • • Certifies whether the charity sold the vehicle or retained it for use for a charitable purpose,
  • • Includes your name and tax identification number and the vehicle identification number, and
  • • Reports, if applicable, details concerning the sale of the vehicle within 30 days of the sale.

For more information on these and other rules that apply to vehicle donation deductions, please contact us.

© 2015

Expect to be paying elementary or secondary school costs in the future? Consider an ESA.

Posted by KPC Posted on May 19 2015
Expect to be paying elementary or secondary school costs in the future? Consider an ESA.

As the school year draws to a close, it’s a good time to think about Coverdell Education Savings Accounts (ESAs) — especially if you have young children.

One major advantage of ESAs over another popular education saving tool, the Section 529 plan, is that tax-free ESA distributions aren't limited to college expenses; they also can fund elementary and secondary school costs. That means you can use ESA funds to pay for such qualified expenses as tutoring and private school tuition.

Here are some other key ESA benefits:

Although contributions aren't deductible, plan assets can grow tax-deferred.
You remain in control of the account — even after the child is of legal age.
You can make rollovers to another qualifying family member.

The annual contribution limit is $2,000 per beneficiary. However, the ability to contribute is phased out based on income.

Would you like more information about ESAs or other tax-advantaged ways to fund your child’s — or grandchild’s — education expenses? Contact us!

© 2015

You're a real estate investor, but are you a "professional"?

Posted by KPC Posted on May 12 2015
You're a real estate investor, but are you a "professional"?

Income and losses from investment real estate or rental property are passive by definition — unless you're a real estate professional. Why is this important? Passive income may be subject to the 3.8% net investment income tax (NIIT), and passive losses are deductible only against passive income, with the excess being carried forward.

To qualify as a real estate professional, you must annually perform:

More than 50% of your personal services in real property trades or businesses in which you materially participate, and
More than 750 hours of service in these businesses during the year.

Each year stands on its own, and there are other nuances. If you're concerned you'll fail either test and be subject to the 3.8% NIIT or stuck with passive losses, consider increasing your hours so you'll meet the test. (Special rules for spouses may help.) Also be aware that the IRS has successfully challenged claims of real estate professional status in instances where the taxpayer didn't keep adequate records of time spent.

If you're not sure whether you qualify as a real estate professional, please contact us. We can help you make this determination and guide you on how to properly document your hours.

© 2015

100% deduction for certain M&E expenses!

Posted by KPC Posted on May 06 2015
100% deduction for certain M&E expenses!

Generally, businesses are limited to deducting 50% of allowable meal and entertainment (M&E) expenses. But certain expenses are 100% deductible, including expenses:

For food and beverages furnished at the workplace primarily for employees,
Treated as employee compensation,
That are excludable from employees’ income as de minimis fringe benefits,
For recreational or social activities for employees, such as holiday parties, or
Paid or incurred under a reimbursement or similar arrangement in connection with the performance of services.

If your company has substantial M&E 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 M&E expenses that are fully deductible. For more information on how to take advantage of the 100% deduction, please contact us.

© 2015

Got ISOs? You need to understand their tax treatment

Posted by KPC Posted on Apr 29 2015

Got ISOs? You need to understand their tax treatment

Incentive stock options allow you to buy company stock in the future at a fixed price equal to or greater than the stock's fair market value on the grant date. If the stock appreciates, you can buy shares at a price below what they're then trading for.

ISOs must comply with many rules but receive tax-favored treatment:

You owe no tax when ISOs are granted.

You owe no regular income tax when you exercise ISOs.

If you sell the stock after holding the shares at least one year from the exercise date and two years from the grant date, you pay tax on the sale at your long-term capital gains rate. You also may owe the 3.8% net investment income tax.

If you sell the stock before long-term capital gains treatment applies, a “disqualifying disposition” occurs and any gain is taxed as compensation at ordinary-income rates.

There also might be alternative minimum tax consequences in certain situations. If you've received ISOs, contact us. We can help you determine when to exercise them and whether to immediately sell shares received from an exercise or to hold them.

© 2015

Now is the time to begin your 2015 tax planning

Posted by KPC Posted on Apr 21 2015

Now is the time to begin your 2015 tax planning

Whether you filed your 2014 income tax return by the April 15 deadline or filed for an extension, you may think that it's a good time to take a break from thinking about taxes. But doing so could be costly. Now is actually the time you should begin your 2015 tax planning — if you haven't already.

A tremendous number of variables affect your overall tax liability for the year, and starting to look at these variables early in the year can give you more opportunities to reduce your 2015 tax bill. For example, the timing of income and deductible expenses can affect both the rate you pay and when you pay. By regularly reviewing your year-to-date income, expenses and potential tax, you may be able to time income and expenses in a way that reduces, or at least defers, your tax liability.

In other words, tax planning shouldn't be just a year end activity. To get started on your 2015 tax planning, contact us. We can discuss what strategies you should be implementing now and throughout the year to minimize your tax liability.

© 2015

Facing an unexpected bill for the additional 0.9% Medicare tax?

Posted by KPC Posted on Apr 15 2015

Facing an unexpected bill for the additional 0.9% Medicare tax?

The additional 0.9% Medicare tax applies to FICA wages and self-employment income exceeding $200,000 per year ($250,000 for married filing jointly and $125,000 for married filing separately). Unfortunately, the withholding rules have been tripping up some taxpayers, causing them to face an unexpected tax bill — plus interest and penalties — when they file their returns. 

Employers must withhold the additional tax beginning in the pay period when wages exceed $200,000 for the calendar year — without regard to an employee’s filing status or income from other sources. So if your wages don’t exceed $200,000, your employer won’t withhold the tax — even if you’re liable for it. This might occur because you and your spouse’s combined wages exceed the $250,000 threshold for joint filers or because you have wages from a second job or have self-employment income.

If you expect to be in the same situation in 2015, consider filing a W-4 form to request additional income tax withholding, which can be used to cover the shortfall and avoid interest and penalties. Or you can make estimated tax payments. If you have questions about the additional 0.9% Medicare tax, please contact us.

© 2015

A net operating loss on your 2014 tax return isn't all bad news

Posted by KPC Posted on Apr 08 2015

A net operating loss on your 2014 tax return isn't all bad news

When a company's deductible expenses exceed its income, generally a net operating loss (NOL) occurs (though of course the specific rules are more complex). If when filing your 2014 income tax return you've found that your business had an NOL, there is an upside: tax benefits.

When a business incurs a qualifying NOL, the loss can be carried back up to two years, and then any remaining amount can be carried forward up to 20 years. The carryback can generate an immediate tax refund, boosting cash flow.
However, there is 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.

In the case of flow-through entities, owners might be able to reap individual tax benefits from the NOL.

Please contact us if you'd like more information on the NOL rules and how you can maximize the tax benefit of an NOL.


© 2015

Still filing a paper return? Be sure you understand the “timely mailed = timely filed” rule

Posted by KPC Posted on Mar 31 2015

Still filing a paper return?  Be sure you understand the “timely mailed = timely filed” rule

The IRS considers a paper return that’s due April 15 to be timely filed if it’s postmarked by midnight on April 15. But dropping your return in a mailbox on the 15th may not be sufficient.

For example, let’s say you mail your return with a payment on April 15, but the envelope gets lost. You don’t figure this out until a couple of months later when you notice that the check still hasn't cleared. You then refile and send a new check. Despite your efforts to timely file and pay, you’re hit with failure-to-file and failure-to-pay penalties totaling $1,500.

To avoid this risk, use certified or registered mail or one of the private delivery services designated by the IRS to comply with the timely filing rule, such as:

FedEx Priority Overnight
FedEx Standard Overnight
FedEx 2Day
UPS Next Day Air Saver
UPS 2nd Day Air
UPS 2nd Day Air A.M.

Beware: If you use an unauthorized delivery service, your return isn't “filed” until the IRS receives it. For example, DHL is no longer an authorized delivery service.

If you’re concerned about meeting the April 15 deadline, another option is to file for an extension. We can help you determine if that makes sense for you.


© 2015

Yes, there's still time to make a 2014 IRA contribution!

Posted by KPC Posted on Mar 25 2015

Yes, there’s still time to make a 2014 IRA contribution!

The deadline for 2014 IRA contributions is April 15, 2015. The limit for total contributions to all IRAs generally is $5,500 ($6,500 if you were age 50 or older on Dec. 31, 2014).

If you haven't already maxed out your 2014 limit, consider making one of these types of contributions by April 15:

1. Deductible traditional. If you and your spouse don't participate in an employer-sponsored plan such as a 401(k) — or you do but your income doesn't exceed certain limits — the contribution is fully deductible on your 2014 tax return. Account growth is tax-deferred; distributions are subject to income tax.

2. Roth. The contribution isn't deductible, but qualified distributions — including growth — are tax-free. Income-based limits may reduce or eliminate your ability to contribute, however.

3. Nondeductible traditional. If your income is too high for you to fully benefit from a deductible traditional or a Roth contribution, you may benefit from a nondeductible contribution to a traditional IRA. The account can still grow tax-deferred, and when you take qualified distributions you’ll be taxed only on the growth. Alternatively, shortly after contributing, you may be able to convert the account to a Roth IRA with minimal tax liability.

Want to know which option best fits your situation? Contact us.


© 2015

Do you need to file a 2014 gift tax return by April 15?

Posted by KPC Posted on Mar 17 2015

Do you need to file a 2014 gift tax return by April 15?

Generally, you'll need to file a gift tax return for 2014 if, during the tax year, you made gifts:

That exceeded the $14,000-per-recipient gift tax annual exclusion (other than to your U.S. citizen spouse),
That you wish to split with your spouse to take advantage of your combined $28,000 annual exclusions, or
Of future interests — such as remainder interests in a trust — regardless of the amount.

If you transferred hard-to-value property, such as artwork or interests in a family-owned business, consider filing a gift tax return even if you're not required to. Adequate disclosure of the transfer in a return triggers the statute of limitations, generally preventing the IRS from challenging your valuation more than three years after you file.
There may be other instances where you'll need to file a gift tax return — or where you won't need to file one even though a gift exceeds your annual exclusion. Contact us for details.

© 2015

Taking advantage of tangible property safe harbors

Posted by KPC Posted on Mar 10 2015

Taking advantage of tangible property safe harbors

If your business has made repairs to tangible property, such as buildings, machinery, equipment and vehicles, you may be eligible for a deduction on your 2014 income tax return. But you must make sure they were truly “repairs,” and not actually “improvements.”

Why? Costs incurred to improve tangible property must be depreciated over a period of years. But costs incurred on incidental repairs and maintenance can be expensed and immediately deducted. Distinguishing between repairs and improvements can be difficult, but a couple of IRS safe harbors can help:

Routine maintenance safe harbor. Recurring activities dedicated to keeping property in efficient operating condition can be expensed. These are activities that your business reasonably expects to perform more than once during the property’s “class life,” as defined by the IRS.

Small business safe harbor. For buildings that initially cost $1 million or less, qualified small businesses may elect to deduct the lesser of $10,000 or 2% of the unadjusted basis of the property for repairs, maintenance, improvements and similar activities each year. (A qualified small business is generally one with gross receipts of $10 million or less.)

Contact us to ensure that you’re taking all of the repair and maintenance deductions you’re entitled to.

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You might benefit from deducting investment interest expense on your 2014 tax return

Posted by KPC Posted on Mar 03 2015

You might benefit from deducting investment interest expense on your 2014 tax return

Investment interest — interest on debt used to buy assets held for investment, such as margin debt used to buy securities — generally is deductible for both regular tax and alternative minimum tax purposes. But special rules apply that can make the deduction less beneficial than you might think.

Your investment interest deduction is limited to your net investment income, which, for the purposes of this deduction, generally includes taxable interest, nonqualified dividends and net short-term capital gains, reduced by other investment expenses. In other words, long-term capital gains and qualified dividends aren't included. However, any disallowed interest is carried forward, and you can deduct it in a later year if you have excess net investment income.

You may elect to treat net long-term capital gains or qualified dividends as investment income in order to deduct more of your investment interest. But if you do, that portion of the long-term capital gain or dividend will be taxed at ordinary-income rates.

If you're wondering whether you can claim the investment interest expense deduction on your 2014 return, please contact us. We can run the numbers to calculate your potential deduction — or to determine whether you could benefit from treating gains or dividends differently to maximize your deduction.

© 2015

Make sure you have proper substantiation for your 2014 donations.

Posted by KPC Posted on Feb 25 2015

Make sure you have proper substantiation for your 2014 donations

If you don't meet IRS substantiation requirements, your charitable deductions could be denied. To comply, generally you must obtain a contemporaneous written acknowledgment from the charity stating the amount of the donation, whether you received any goods or services in consideration for the donation, and the value of any such goods or services.

If you haven't yet received substantiation for all of your 2014 donations, you may still have time to obtain it: "Contemporaneous" means the earlier of 1) the date you file your tax return, or 2) the extended due date of your return. So as long as you haven't filed your 2014 return, you can contact the charity and request a written acknowledgement — you'll just need to wait to file your return until you receive it. (But don't miss your filing deadline; consider filing for an extension if needed.)

Be aware that certain types of donations are subject to additional substantiation requirements. To learn what requirements apply to your donations, please contact us.

© 2015

Should you forgo a personal exemption so your child can take the American Opportunity credit?

Posted by KPC Posted on Feb 18 2015

Should you forgo a personal exemption so your child can take the American Opportunity credit?

If you have a child in college, you may not qualify for the American Opportunity credit on your 2014 income tax return because your income is too high (modified adjusted gross income phaseout range of $80,000–$90,000; $160,000–$180,000 for joint filers), but your child might. The maximum credit, per student, is $2,500 per year for the first four years of postsecondary education.

There's one potential downside: If your dependent child claims the credit, you must forgo your dependency exemption for him or her — and the child can't take the exemption.

But because of the exemption phaseout, you might lose the benefit of your exemption anyway. The 2014 adjusted gross income thresholds for the exemption phaseout are $254,200 (singles), $279,650 (heads of households), $305,050 (married filing jointly) and $152,525 (married filing separately).

If your exemption is fully phased out, there likely is no downside to your child taking the credit. If your exemption isn't fully phased out, compare the tax savings your child would receive from the credit with the savings you'd receive from the exemption to determine which break will provide the greater overall savings for your family.

We can help you run the numbers and can provide more information about qualifying for the American Opportunity credit.


© 2015

The "manufacturers’ deduction": It's not just for manufacturers

Posted by KPC Posted on Feb 10 2015

The "manufacturers' deduction": It's not just for manufacturers


The manufacturers' deduction, also called the "Section 199" or "domestic production activities" deduction, is 9% of the lesser of qualified production activities income or taxable income. The deduction is also limited to 50% of W-2 wages paid by the taxpayer that are allocable to domestic production gross receipts. 

Yes, the deduction is available to traditional manufacturers. But businesses engaged in activities such as construction, engineering, architecture, computer software production and agricultural processing also may be eligible.

The deduction isn't allowed in determining net self-employment earnings and generally can't reduce net income below zero. But it can be used against the alternative minimum tax. 

Contact us to learn whether this potentially powerful deduction could reduce your business’s tax liability when you file your 2014 return.

© 2015

Be sure to deduct all of the mileage you're entitled to

Posted by KPC Posted on Feb 03 2015

Be sure to deduct all of the mileage you're entitled to


You probably know that miles driven for business purposes can be deductible. But did you know that you might also be able to deduct miles driven for other purposes? The rates vary depending on the purpose and the year:

Business: 56 cents (2014), 57.5 cents (2015)

Medical: 23.5 cents (2014), 23 cents (2015)

Moving: 23.5 cents (2014), 23 cents (2015)

Charitable: 14 cents (2014 and 2015)

The rules surrounding the various mileage deductions are complex, however. Some are subject to floors and some require you to meet specific tests in order to qualify. There are also substantiation requirements, which include tracking miles driven. And, in some cases, you might be better off deducting actual expenses rather than using the mileage rates.

So contact us to help ensure you deduct all the mileage you’re entitled to on your 2014 tax return — but not more. (You don’t want to risk back taxes and penalties later.) And if you drove potentially eligible miles in 2014 but can’t deduct them because you didn't track them, then start tracking your miles now so you can potentially take advantage of the deduction when you file your 2015 return next year.

© 2015

Why you shouldn’t procrastinate on filing your 2014 income tax return

Posted by KPC Posted on Jan 27 2015

Why you shouldn't procrastinate on filing your 2014 income tax return


If you’re like many Americans, you may not start thinking about filing your tax return until the April 15 deadline is just a few weeks — or perhaps even just a few days — away. But there’s another date you should keep in mind: Jan. 20. That’s the date the IRS began accepting 2014 returns, and filing as close to that date as possible could protect you from tax return fraud. 

In this increasingly common scam, thieves use victims’ personal information to file fraudulent tax returns electronically and claim bogus refunds. When the real taxpayers file, they’re notified that they’re attempting to file duplicate returns. 
Tax return fraud can cause major headaches to straighten out and significantly delay legitimate refunds. But if you file first, it will be the thief who’s filing the duplicate return, not you.

Of course you need to have your W-2s and 1099s to file. So another key date to be aware of is Feb. 2 — the deadline for employers to issue 2014 W-2s to employees and, generally, for businesses to issue 1099s to recipients of any 2014 interest, dividend or reportable miscellaneous income payments. 

Let us know if you have questions about tax return fraud or would like help filing your 2014 return early.

© 2015

Have you had your annual estate plan checkup?

Posted by KPC Posted on Jan 22 2015

Have you had your annual estate plan checkup?


An annual estate plan checkup is critical to the health of your estate plan. Because various exclusion, exemption and deduction amounts are adjusted for inflation, they can change from year to year, impacting your plan:

Lifetime gift and estate tax exemption
2014: $5.34 million
2015: $5.43 million

Generation-skipping transfer tax exemption
2014: $5.34 million
2015: $5.43 million

Annual gift tax exclusion
2014: $14,000
2015: $14,000

Marital deduction for gifts to noncitizen spouse
2014: $145,000
2015: $147,000

You may need to update your estate plan based on these changes. But the beginning of the year isn’t the only time for an estate plan checkup. Whenever there are significant changes in your family — such as births, deaths, marriages or divorces — it’s a good idea to revisit your estate plan. Your plan also merits a look any time your financial situation changes significantly.

If you haven’t yet had your annual estate plan checkup, please contact us. Or, if you don’t yet have an estate plan, we can help you create one.

© 2015

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