However, if stockholders also work in the business, they are supposed to take reasonable compensation for their services in the form of wages, and of course, wages are subject to FICA (Social Security and Medicare) and other payroll taxes. This is where some owner-shareholders err by not paying themselves a reasonable compensation for the services they provide, some out of unfamiliarity with the requirements and some purposely to avoid the payroll taxes.
The Internal Revenue Code establishes that any officer of a corporation, including S corporations, is an employee of the corporation for federal employment tax purposes. S corporations should not attempt to avoid paying employment taxes by having their officers treat their compensation as cash distributions, payments of personal expenses, and/or loans rather than as wages.
If the S corporation does not pay its working stockholders a reasonable compensation for their services, then the IRS generally will treat a portion of the S corporation's distributions as wages and impose Social Security taxes on the deemed wages.
There is no specific method for determining what constitutes reasonable compensation, and it is based upon facts and circumstances. Generally, it is an amount that unrelated employers would pay for comparable services under like circumstances and based upon the cost of living in the area where the business is located. The following are just some of the many factors that would be taken into account in making this determination:
The IRS has a long history of examining S corporation tax returns to ensure that reasonable compensation is being paid, particularly if no compensation is shown being paid to employee-stockholders.
Reasonable Compensation in the Spotlight – With the passage of tax reform, reasonable compensation will be in the spotlight because of the new deduction for 20% of pass-through income. This new Sec. 199A deduction is equal to 20% of qualified business income (QBI) and will figure intro the shareholder’s income tax return. The QBI for the stockholder of an S-corporation is the amount of net income passed through to the stockholder and designated as QBI on the K-1, but the stockholder may not include the reasonable compensation (wages) he or she was paid as QBI. Thus, wages paid to stockholders actually reduce the QBI because the S corporation deducts the wages as a business expense, therefore reducing the corporation’s net income and QBI. But that does not mean wages can be arbitrarily adjusted to maximize the Sec. 199A deduction.
IRC Sec. 199A Deduction – Here are some details about how the 199A deduction works and the impact of the reasonable compensation wages on the Sec. 199A deduction.
If you want additional information related to reasonable compensation, please give this office a call.
Legislative changes and other tax concerns that may affect planning...
This guide reflects the tax considerations and developments that we believe may create risk or opportunity for businesses in 2018 and beyond. It is not a holistic list of all tax issues that may affect your business, but it is designed to help you make informed decisions related to year-end tax planning.
The end of 2017 was filled with uncertainty as Congress worked on significant tax law changes, finalized and signed into law H.R. 1 (PL 115-97) on Dec. 22, 2017, commonly known as the Tax Cuts and Jobs Act (TCJA). As the end of 2018 approaches, taxpayers are still waiting on administrative guidance for some measures passed into law as part of the TCJA, while Congress considers additional changes under Tax Reform 2.0.
Even though taxpayers anticipate administrative guidance or legislative changes to eliminate uncertainty, action may be required before year-end to fully take advantage of benefits or mitigate unintended consequences enacted as part of the TCJA.
The following is a list of major tax law changes enacted as part of the TCJA that impact 2018 and beyond:
Additionally, in response to changes in federal tax law, 2018 has brought about significant changes at the state and local level as states move to conform or decouple from these changes.
We have compiled to these guides to help companies make informed decisions related to year-end tax planning. In a year with many changes, many introducing additional complexities, planning becomes all the more important. Contact us anytime for further assistance at (209) 230-9015
Checking on your taxes for the year and reviewing tax reform is so important, even the IRS is sending out reminders! The “Get Ready” campaign launched on IRS.gov this week, which encourages taxpayers to gear up for a successful tax season.
The number one trick the IRS is promoting: Do a paycheck checkup! But what is that, anyway? Let’s break it down.
Covering your withholding bases. For most employee paychecks, your employer calculates how much you’ve earned, shaves off a bit to cover your tax obligation, and sends you the rest. You are ultimately responsible for how much gets sent to the IRS, though: If too much is sent, you’ll get a refund after you file. If too little is sent, you’ll owe taxes after you file.
Why is this important to review? Well, with the Tax Cuts and Jobs Act of 2017 officially in effect, many people’s taxes have changed quite a bit. A withholding amount that covered your taxes last year might not this year, or you may be withholding much more than necessary.
With the end of the year coming up quickly, it’s more important than ever to take a second look at your paychecks—if you haven’t been withholding enough money throughout the year, you still have enough time to set aside the taxes you owe before you’re surprised with a bill after you file in a few months.
So how can I tell if my withholding amount needs adjusting? JP Income Tax can calculate your withholding amount, and there are several different tools available. We have an estimator that not only calculates your taxes owed or refund amount, but we can also explains how tax reform affected you this year. The IRS also has a withholding calculator on their website to help taxpayers determine if they need to adjust their Form W-4.
Turns out my withholding is way off. What should I do? No need for alarm! If you haven’t had enough taxes withheld from your paychecks over the year, put a plan in place to save up the remainder of your taxes owed by mid-April next year. If you’ve had too much withheld, you’ll be getting that back in a refund when you file—hooray!
Either way, you should have us check your Form W-4, update your withholding allowances, and turn it in to your employer. That way, the last paychecks you receive for the year will have accurate numbers, and you’ll have a fresh start in the new year. So what else can you do to get ready for your tax return? Ask us about Tax Reform - you can then come back in January to get this thing done!
There were several important updates to the tax code in 2017, which could affect your Federal income tax return preparation. From tax bracket adjustments to higher available standard deductions, these new laws could mean a larger tax refund check in 2018.
What's new about Federal Income Tax Returns
1) Increase in Standard Deductions
The standard deduction is changing on your 2017 Federal income tax return. The increase will put a modest amount of money back in the pockets of anyone who chooses this method of paying taxes.
2) Higher Personal-Exemption Allowance
If you choose to itemize your taxes, you will also receive a higher threshold for deductions. The personal-exemption allowance has been increased $4,050 to $4,150.
3) Removal of Seniors’ Medical Expense Exemption
Senior citizens could be negatively impacted by changes to this year’s tax code. On past itemized Federal income tax returns, seniors were permitted to deduct medical expenses that totaled more than 7.5 percent of their adjusted gross income (AGI). This exemption ends this year, which will allow seniors to only claim the deduction for expenses over 10 percent of their AGI.
4) Alternative Minimum Tax Exemption Amounts Rise with Inflation
The Alternative Minimum Tax (AMT) is designed to ensure that wealthier Americans pay their fair share of taxes. Its income exemption limits are rising this year, too.
5) Tax Bracket Updates
Each year, the government adjusts tax brackets based on fluctuations in inflation. Since inflation is relatively low, there is only a modest increase in the thresholds for each tax bracket.
These five tax code adjustments are just a few of the many changes that could affect your tax return. If you would like to know more this year’s Federal tax laws, contact us today.
The Congressional Budget Office just released a new analysis of the Senate's tax bill. The CBO examined the combined effect of changes in tax law with reductions in federal spending, like changes in "Medicaid, cost-sharing reduction payments, the Basic Health program, and Medicare."
The agency subtracted changes in federal spending for different income groups from the change in federal revenues allocated to each group. Essentially, the analysis looked at how much effect increased taxes from a group and decreased spending on the same group had on overall deficit estimates.
The groups hit hardest — the ones providing a reduction to federal deficits — are the poorest .
According to the estimates, anyone making less than $30,000 a year would feel the pinch starting in 2019, with the greatest "savings" to the government (again, a combination of either increases in payments or decreases in money spent on a group in services) coming from those who make less than $10,000 a year.
By 2020, everyone making $40,000 or less a year would also be contributing to lowering the deficit by paying more in taxes and/or receiving less in services, creating a net savings for the federal government. In that year, the groups making between $10,000 and $20,000 and between $20,000 and $30,000 would each be contributing double what the under-$10,000 group did in savings.
By 2027, everyone making less than $75,000 would provide a net savings to the government, whether through higher taxes, lower amounts spent on services, or both.
Congressional Budget Office Reconciliation Recommendations of the Senate Committee on Finance
Positive numbers in the table mean savings to the government and a loss to the people in a group. Negative numbers mean a loss to the government or a net gain for those in the group.
The groups getting the most are those making between $100,000 and $500,000. Groups above that will get less in total, but there will also be fewer in each group, so their average benefit could be (and likely will be) significantly higher.
Just in case you thought the tax bill was designed to help everyone. (Here's the full table from the CBO report below.
As we approach the end of 2017, it’s once again time to explore strategies for reducing your company’s tax bill.
Because every business is different, it’s important to work directly with your Enrolled Agent, CPA and/or Tax Professional to determine the right moves for you. Nonetheless, here are some key areas to explore when looking for savings.
Deferrals and accelerations
If you expect your tax rate to be the same or lower in 2018, you’ll likely benefit by deferring income to next year and accelerating deductions into this year. There are several ways to do so, including:
On the other hand, if you expect to be in a higher tax bracket next year, you may be better off shifting some income to this year by accelerating income or deferring deductions. Keep in mind that tax reform may affect your tax rate or other tax attributes this year or next, so be sure to monitor congressional developments in the coming months. (See “How will tax reform impact year-end planning?”)
The 10% solution
If your construction company uses the percentage-of-completion method to account for long-term contracts, consider electing the “10% method” on your 2017 return (if you haven’t already done so on a previous return).
This method allows you to defer recognition of gross profits on jobs that are less-than-10% complete as of the last day of the tax year. Be aware that, once you make the election, you’re required to defer profits on all eligible jobs, this year and in future years, unless you apply to the IRS for a change in accounting method.
A good strategy for generating deductions in 2017 may be to take advantage of depreciation-related tax breaks. It’s a particularly opportune time to acquire assets that qualify for “bonus depreciation.” Currently, this tax break allows you to deduct 50% of the cost of certain depreciable assets, on top of regular depreciation deductions. This percentage is scheduled to drop to 40% in 2018 and to 30% in 2019, after which the deduction faces elimination.
Bonus depreciation is available for new assets that fall into one of four categories:
Qualified improvement property includes any improvement to the interior of a nonresidential building that’s placed in service after the building was first placed in service (other than elevators, escalators or internal structural framework).
Another option is Section 179 expensing, which allows you to deduct 100% of the cost of qualified depreciable assets, such as equipment and vehicles. One advantage it has over bonus depreciation is that Sec. 179 expensing is available for both new and used assets. On the other hand, there’s a cap on expensing ($510,000 in 2017) and the deduction is phased out once a company’s total purchases exceed a certain threshold ($2.03 million in 2017).
Tax credits are always a worthy area of exploration. There are a couple of noteworthy ones to look into.
First, consider the research credit (sometimes called the R&D credit). It isn’t limited to pharmaceutical, biotech, software and manufacturing companies. If you commit resources to developing new construction techniques, improving business processes or other innovations, you may be eligible for the credit — which can reach as high as 6.5% of qualified research expenditures.
Second, don’t overlook the domestic production activities deduction. It allows you to deduct up to 9% of your income from “qualified production activities,” including many activities related to constructing or substantially renovating real property located in the United States.
The big tax picture
These are just a few of many year-end strategies to consider. Again, work with your Enrolled Agent, CPA and/or Tax Professional to develop a comprehensive strategy based on your company’s overall situation. In addition to year-end moves, discuss longer-term strategies that may improve your tax picture. These include re-evaluating your entity choice and changing your accounting method.
How will tax reform impact year-end planning?
As you review your year-end tax planning options, be sure to consider the potential impact of tax reform. As of this writing, both the White House and members of Congress have proposed reducing corporate and individual tax rates and revising a variety of deductions, credits, exemptions and other tax benefits.
If it appears that your tax rate will drop in 2018, for example, the benefits of deferring income and accelerating deductions will be even greater. On the other hand, if you believe your effective tax rate will go up next year, it may make sense to shift some income into 2017.
But don’t assume that lower tax rates automatically translate into lower taxes. Some proposals would reduce the number of individual income tax brackets from seven to three, while reducing the top rate from 39.6% to 33%. As a result, many taxpayers would enjoy lower tax rates, but some would experience an increase. For example, taxpayers currently near the top of the 28% bracket would find themselves in the 33% bracket under the proposed tax table, an increase of 5%.
Year-end planning for mutual funds
If you’ve sold mutual fund shares at a gain during the year, there are some year-end moves you can make to soften the tax blow. One strategy is to “harvest” capital losses (by selling investments that have declined in value) and using those losses to offset the gain. You can even buy back the investments after deducting the loss, so long as you wait at least 31 days.
Another strategy is to ensure that mutual fund shares with the highest cost basis are sold first, minimizing your gains. To do this, use the “specific identification” method for calculating basis and inform your broker which shares you wish to sell. Absent such instructions, the first-in, first-out method will be applied by default, which may increase your capital gains.
Beware deduction limits
A basic precept of year-end tax planning is to defer income to next year and accelerate deductions into the current year. But as you consider your options, keep in mind that deduction limitations for high-income taxpayers may reduce the effectiveness of this strategy.
The limits apply to deductions for taxes paid, interest paid, charitable gifts, job expenses and certain miscellaneous deductions. They don’t apply to medical expenses, investment interest expense, or casualty, theft and gambling losses.
Tax-free capital gains?
For taxpayers in the middle and upper ordinary-income tax brackets, long-term capital gains are taxed at rates ranging from 15% to 23.8% (including the 3.8% tax on net investment income). Taxpayers in the 10% and 15% ordinary-income brackets, however, enjoy a 0% tax rate on long-term capital gains. One way to take advantage of tax-free capital gains is to transfer stock or other investments to family members in the two lowest tax brackets — for instance, single filers with taxable income of $37,950 or less in 2017 ($75,900 for married couples filing jointly).
A few caveats:
On July 18, 2017, the Internal Revenue Service issued final and temporary regulations that updated the due dates and rules for extensions of time to file for certain tax returns and information returns. These regulations are applicable for returns filed on or after July 20, 2017, however, many of the statutory changes were effective
December 31, 2015, and those statutory changes supersede these final regulations.
These final regulations reflect the statutory changes of several bills passed by Congress late in 2015 that contained provisions that affect items that aren’t related to the main bill. The “Surface Transportation and Veteran’s Health Care Choice Improvement Act of 2015” and the “Protecting Americans from Tax Hikes Act of 2015” both contained such items.
Whenever a regular tax filing date falls on a Saturday, Sunday, or a legal observed holiday in the District of California, the due date for returns is pushed to the next business day. In 2018, several due dates will be adjusted because of this rule: the Individual and FBAR due date; the C Corporation due date; the Form 1041 due date and extended due date; and the Partnership extended due date.
For calendar year tax returns reporting 2017 information that are due in 2018, the following due dates will apply.
Forms 2018 Filing Due Date (Tax Year 2017)
Forms 2018 Extended Due Dates
For fiscal year filers:
It is important to check when tax returns are due for all states in which taxpayers operate, because individual states may not conform to the Federal filing dates.
If you have any questions about these new due dates and the impact on your tax filings, please contact one of our qualified tax professionals for further assistance.
When Filing a Tax Return Immediately May Make Sense
The 2017 tax filing season officially begins this week as the IRS starts accepting tax returns. There are many reasons to consider filing your tax return early. Here are some of the most common:
Get your refund. There's no reason to let the government hold your funds interest-free, so file early and get your refund as soon as possible. While new legislation delays receiving refunds for tax returns claiming The Earned Income Credit and the Additional Child Tax Credit until after February 15th, the sooner your tax return is in the queue, the sooner you will receive your refund.
Minimize your tax identity fraud risk. Once you file your tax return the window of opportunity for tax identity thieves closes. Tax identity thieves work early in the tax-filing season because your paycheck's tax withholdings are still in the hands of the IRS. If they can file a tax return before you do, they may be able to steal these withholdings.
Avoid a dependent dispute. One of the most common reasons an e-file is rejected is when you submit a dependent’s Social Security number that has already been used by someone else. If you think there is a chance an ex-spouse may do this, you should file as early as possible.
Deliver your return to someone who needs it. If you are planning to buy a house or anticipate any other transaction that will require proof of income you may wish to file early. This is especially important if you are self-employed. You can then make your filed tax return available to your bank or other financial institution.
Beat the rush. As the tax filing deadline approaches, the ability to get help becomes more difficult. So get your documentation together and schedule a time to get your tax return filed. It can be a relief to have this annual task in the rearview mirror.
One of the most common tax-deductible charitable contributions encountered is that of household goods and used clothing. The major complication of this type of contribution is establishing the dollar value of the contribution. According to the tax code, this is the fair market value (FMV), which is defined as the value that a willing buyer would pay a willing seller for the item. FMV is not always easily determined and varies significantly based upon the condition of the item donated. For example, compare the condition of an article of clothing you purchased and only wore once to that of one that has been worn many times. The almost-new one certainly will be worth more, but if the hardly worn item had been purchased a few years ago and become grossly out of style, the more extensively used piece of clothing could actually be worth more. In either case, the clothing article is still a used item, so its value cannot be anywhere near as high as the original cost. Determining this value is not an exact science. The IRS recognizes this issue and in some cases requires the value to be established by a qualified appraiser.
Remember that when establishing FMV, any value you claim can be challenged in an audit and that the burden of proof is with you (the taxpayer), not with the IRS. For substantial noncash donations, it might be appropriate for you to visit your charity’s local thrift shop or even a consignment store to get an idea of the FMV of used items.
The next big issue is documenting your contribution. Many taxpayers believe that the doorknob hanger left by the charity’s pickup driver is sufficient proof of a donation. Unfortunately, that is not the case, as a recent United States Tax Court case (Kunkel T.C. Memo 2015-71) pointed out. In that case, the court denied the taxpayer’s charitable contributions, which were based solely upon doorknob hangers left by the drivers who picked up the donated items for the charities. The court stated that “these doorknob hangers are undated; they are not specific to petitioners; they do not describe the property contributed; and they contain none of the other required information.”
The IRS requires the following documentation for noncash contributions based on the total value of the donation:
2. The date and location of the charitable contribution, and
3. A reasonably detailed description of the property.
Note: The taxpayer is not required to have a receipt if it is impractical to get one (for example, if the property was left at a charity’s unattended drop site).
2. The date and location of the charitable contribution,
3. A reasonably detailed description of any property contributed (but not necessarily its value), and
4. Whether or not the qualified organization gave the taxpayer any goods or services as a result of the contribution (other than certain token items and membership benefits).
If the charitable organization provided goods and/or services to the taxpayer, the acknowledgement must include a description and a good-faith estimate of the value of those goods or services. If the only benefit received was an intangible religious benefit (such as admission to a religious ceremony) that generally is not sold in a commercial transaction outside the donative context, the acknowledgment must say so, and in this case, the acknowledgment does not need to describe or estimate the value of the benefit.
To help you document some of these noncash contributions, you can download a fillable Noncash Charitable Contribution statement (http://images.client-sites.com/NonCash_Contribution2010.pdf). The statement includes an area for the charity’s agent to verify the contribution and a check box denoting whether the qualified organization provided any goods or services as a result of the contribution. Although not specifically blessed by the IRS, this statement includes everything needed for noncash contributions of up to $500—provided, of course, that you and the charitable organization’s representative accurately complete the form.
Do not include items of de minimis value, such as undergarments and socks, in the deductible amount of your contribution, as they specifically are not allowed.
Please call this office with any questions about documenting or valuing your noncash contributions.
March 10 - Report Tips to Employer
If you are an employee who works for tips and received more than $20 in tips during February, you are required to report them to your employer on IRS Form 4070 no later than March 10.
Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.
March 15 - Time to Call for Your Tax Appointment
It is only one month until the April due date for your tax returns. If you have not made an appointment to have your taxes prepared, we encourage you do so before it becomes too late.
Do not be concerned about having all your information available before making the appointment. If you do not have all your information, we will simply make a list of the missing items. When you receive those items, just forward them to us.
Even if you think you might need to go on extension, it is best to prepare a preliminary return and estimate the result so you can pay the tax and minimize interest and penalties. We can then file the extension for you.
We look forward to hearing from you.
March 2016 Business Due Dates
March 15 - S-Corporation Election
File Form 2553, Election by a Small Business Corporation, to choose to be treated as an S corporation beginning with calendar year 2016. If Form 2553 is filed late, S treatment will begin with calendar year 2017.
March 15 - Electing Large Partnerships
Provide each partner with a copy of Schedule K-1 (Form 1065-B), Partner’s Share of Income (Loss) From an Electing Large Partnership, or a substitute Schedule K-1. This due date applies even if the partnership requests an extension of time to file the Form 1065-B by filing Form 7004.
March 15 - Social Security, Medicare and Withheld Income Tax
If the monthly deposit rule applies, deposit the tax for payments in February.
March 15 - Non-Payroll Withholding
If the monthly deposit rule applies, deposit the tax for payments in February.
March 15 - Corporations
File a 2015 calendar year income tax return (Form 1120 or 1120-A) and pay any tax due. If you need an automatic 6-month extension of time to file the return, file Form 7004, Application for Automatic Extension of Time to File Certain Business Income Tax, Information and Other Returns, and deposit what you estimate you owe. Filing this extension protects you from late filing penalties but not late payment penalties, so it is important that you estimate your liability and deposit it using the instructions on Form 7004.
March 31 - Electronic Filing of Forms 1098, 1099 and W-2G
If you file forms 1098, 1099, or W-2G electronically with the IRS, this is the final due date. This due date applies only if you file electronically (not paper forms). Otherwise, February 29 was the due date. The due date for giving the recipient these forms was February 1.
March 31 - Electronic Filing of Forms W-2
If you file forms W-2 for 2015 electronically with the IRS, this is the final due date. This due date applies only if you electronically file. Otherwise, the due date was February 29. The due date for giving the recipient these forms was February 1.
March 31 - Large Food and Beverage Establishment Employers
If you file forms 8027 for 2014 electronically with the IRS, this is the final due date. This due date applies only if you file electronically. Otherwise, February 29 was the due date.
The IRC also says that, in the case of an individual, deductions are allowed for all of the ordinary and necessary expenses paid or incurred during the taxable year:
As you can see, determining which legal expenses are deductible is complicated, and even if allowed, a deduction may not provide any tax benefit. As every circumstance is unique, you are encouraged to call this office to determine if you will derive any tax benefit from your legal expenses.
December 2015 Individual Due Dates
December 1 - Time for Year-End Tax Planning
December is the month to take final actions that can affect your tax result for 2015. Taxpayers with substantial increases or decreases in income, changes in marital status or dependent status, and those who sold property during 2015 should call for a tax planning consultation appointment.
December 10 - Report Tips to Employer
If you are an employee who works for tips and received more than $20 in tips during November, you are required to report them to your employer on IRS Form 4070 no later than December 10. Your employer is required to withhold FICA taxes and income tax withholding for these tips from your regular wages. If your regular wages are insufficient to cover the FICA and tax withholding, the employer will report the amount of the uncollected withholding in box 12 of your W-2 for the year. You will be required to pay the uncollected withholding when your return for the year is filed.
December 31 - Last Day to Make Mandatory IRA Withdrawals
Last day to withdraw funds from a Traditional IRA Account and avoid a penalty if you turned age 70½ before 2015. If the institution holding your IRA will not be open on December 31, you will need to arrange for withdrawal before that date.
December 31 - Last Day to Pay Deductible Expenses for 2015
Last day to pay deductible expenses for the 2015 return (doesn’t apply to IRA, SEP or Keogh contributions, all of which can be made after December 31, 2015). Taxpayers who are making state estimated payments may find it advantageous to prepay the January state estimated tax payment in December (Please call the office for more information).
December 31 - Caution! Last Day of the Year
If the actions you wish to take cannot be completed on the 31st or a single day, you should consider taking action earlier than December 31st.
December 2015 Business Due Dates
December 1 - Employers
During December, ask employees whose withholding allowances will be different in 2016 to fill out a new Form W4 or Form W4 (SP).
December 15 - Social Security, Medicare and Withheld Income Tax
If the monthly deposit rule applies, deposit the tax for payments in November.
December 15 - Nonpayroll Withholding
If the monthly deposit rule applies, deposit the tax for payments in November.
December 15 - Corporations
The fourth installment of estimated tax for 2015 calendar year corporations is due.
December 31 - Last Day to Set Up a Keogh Account for 2015
If you are self-employed, December 31 is the last day to set up a Keogh Retirement Account if you plan to make a 2015 Contribution. If the institution where you plan to set up the account will not be open for business on the 31st, you will need to establish the plan before the 31st. Note: there are other options such as SEP plans that can be set up after the close of the year. Please call the office to discuss your options.
December 31 - Caution! Last Day of the Year
If the actions you wish to take cannot be completed on the 31st or a single day, you should consider taking action earlier than December 31st.
It is very important to remember that the PTC is based on the actual family income when your tax return is filed in 2017—not on the estimate you provided when you enrolled—and if the APTC you received during 2016 was more than the PTC you are entitled to based upon your household income, you may be required to repay all or part of the APTC you received during 2016. Thus, it is important to correctly estimate your family’s household income when applying for the insurance and to report any significant income changes during the year on the insurance marketplace.
Household income includes the modified adjusted gross income (MAGI) of everyone in your family who is required to file a tax return. Your family includes you, your spouse, and everyone you are entitled to claim as a dependent on your tax return. MAGI is your family’s adjusted gross income (AGI) plus nontaxable social security, nontaxable interest and excluded foreign earned income.
As an example, say that you are married with one child. You have a W-2 income of $35,000 and nontaxable interest income of $150. Your spouse does not work, but your 16-year-old child works at a fast food restaurant and has a W-2 income of $4,000 for the year. Your AGI would be $35,000, which includes only your W-2 income. However, your MAGI would be $35,150 because it includes the nontaxable interest income. Since your child’s W-2 income is less than $6,300 (the standard deduction for 2016), your child is not required to file a tax return, and your child’s income (MAGI) is not included in the household income. Thus, your household income would be $35,150.
However, if your child’s W-2 income had been $7,000 (exceeding the standard deduction for the year), the child would have to file a tax return, and the child’s income would have to be included when determining your household income, which in this case would be $42,150 ($35,150 + $7,000). The addition of the child’s income to the household will significantly reduce the amount of PTC you are entitled to, and not including it when estimating your income will most likely result in you having to repay a significant amount of APTC on your 2016 tax return.
The computation of household income can become complicated when dependent children are working and when one or more forms of nontaxable income are received by a family member. It may be appropriate to consult with this office for assistance when determining household income.
Action May Be Needed Before Year-End
The new regulations now define a de minimis amount, but it is not a specific amount nor is it automatic. To utilize the de minimis safe harbor, business taxpayers must have an accounting procedure in place before the beginning of the tax year that specifies the de minimis safe harbor amount adopted by the business.
If your business has not previously adopted an accounting policy, it may be appropriate to do so before the beginning of your business’s next tax year, which would be January 1, 2016, for calendar year businesses.
In general, a small business, one without an Applicable Financial Statement, can adopt a de minimis safe harbor up to $500.
Without an accounting procedure adopting a de minimis safe harbor, a small business can only expense the cost of items with a life of one year or less and would be required to capitalize (depreciate) all other items regardless of cost (however, these items may be eligible for Section 179 expensing).
If you have questions related to adopting a policy for 2016, please contact this office before year’s end.
Don't Be Scammed By Fake Charities
But you should be aware that it is also the time of year when scammers show up in force, pretending to be legitimate charities in hopes of deceiving you into giving them your hard-earned money.
When making a donation, you should take a few extra minutes to ensure your gifts are going to legitimate charities.IRS.gov has a search feature, Exempt Organizations Select Check, which allows people to find legitimate, qualified charities to which donations may be tax-deductible.
Here are some tips to make sure your contributions are going to legitimate charities.
Scammers may also attempt to get personal financial information or Social Security numbers that can be used to steal the victims' identities or financial resources. Disaster victims with specific questions about tax relief or disaster-related tax issues may call a special IRS toll-free disaster assistance telephone number (1-866-562-5227) for information.
Don't be scammed; make sure you are donating to recognized charities. Deductions to charities that are not legitimate are not tax deductible. If you have questions, please give this office a call.
Have You Taken Your Required Minimum IRA Distribution?
What is an RMD, you ask? The tax code does not allow IRA owners to keep funds in a traditional IRA indefinitely. Eventually, assets must be distributed and taxes paid. If there are no distributions, or if the distributions are not large enough, the IRA owner may have to pay a 50% penalty on the amount not distributed as required.
Generally, required distribution begins in the year the IRA owner attains the age of 70½. If 2015 is the year you reached 70½, you can avoid a penalty by taking that distribution no later than April 1, 2016. However, delaying the first distribution means you must take two distributions in 2016, one for 2015, when you reached age 70½, and one for 2016. If an IRA owner dies after reaching age 70½ but before April 1st of the next year, no minimum distribution is required because death occurred before the required beginning date. If you became 70½ in an earlier year, you are required to take a distribution no later than December 31 of each year.
The amount you are required to withdraw is based upon the value of the IRA account on December 31 of the prior year multiplied by your life expectancy from the Uniform Lifetime Table illustrated below. If you have more than one IRA, the RMD for each one is figured separately, but you may add up all the RMDs and take the total amount required for the year from any one or a combination of the IRAs.
Not illustrated, because of the size, are the Joint and Last Survivor Table, which is used to determine RMDs when the sole beneficiary is a spouse who is more than 10 years younger than the IRA owner, and the Single Life Table, used for certain beneficiary RMD determinations. For table values not illustrated, please call this office.
Example: The IRA account owner is age 75 in 2015, and the value of his IRA account on December 31, 2014, was $120,000. His 73-year-old wife is the sole beneficiary of the IRA. From the table, we determine the owner’s life expectancy to be 22.9. Thus his RMD for 2015 is $5,240 ($120,000/22.9) and must be withdrawn no later than December 31, 2015.
If in the preceding example the taxpayer had not withdrawn the $5,240, he would be subject to a 50% penalty (additional tax) of $2,620 ($5,240 x 50%). Under certain circumstances, the IRS will waive the penalty if the taxpayer can demonstrate reasonable cause and makes up the withdrawal soon after discovering there was a shortfall in the distribution. However, the hassle and extra paperwork involved in asking the IRS to waive the penalty makes it something you want to avoid by taking the correct amount of distribution timely. Some states also penalize under-distributions.
There is no maximum limit on distributions from a Traditional IRA, and as much can be withdrawn as the owner wishes. However, if more than the required distribution is taken in a particular year, the excess cannot be applied toward the minimum required amounts for future years.
Prior to 2015, there was a provision of the tax code that allowed a taxpayer to use up to $100,000 of IRA funds to contribute to a charity by directly transferring the IRA funds to the charity via a trustee-to-charity transfer. In doing so, (1) the transfer counted toward the RMD requirement, (2) the amount transferred did not have to be reported as income, and (3) no charity deduction was claimed. The advantages of that provision allowed a taxpayer to take the standard deduction and still benefit from the charitable donation. It also kept the IRA distribution from being included in the taxpayer’s AGI, potentially causing less of their Social Security income to be taxed and reducing the effect of higher AGI phaseouts. NOTE: There is a chance that the provision will be extended, so to achieve any tax benefit from it, you would need to act now as if it were in effect.
Even though an IRA owner whose total income is less than the return filing threshold is not required to file a tax return, he or she is still subject to the minimum required distribution rules and could be liable for the under-distribution penalty even if no income tax would have been due on the under-distribution.
In many cases, advance planning can minimize or even avoid taxes on Traditional IRA distributions. Often, situations will arise in which a taxpayer’s income is abnormally low due to losses, extraordinary deductions, etc., where taking more than the minimum in a year might be beneficial. This is true even for those who may not need to file a tax return but can increase their distributions and still avoid any tax. If you need help with planning, please call this office for assistance.
Will Your Favorite Tax Benefit Expire?
For 2014, Congress waited almost to the end of the year to apply many of the provisions to the 2014 tax year. This was not only a problem for taxpayers but also for the IRS, which needed to adjust its forms and tax filing software at the last minute and actually had to delay the start of the tax season.
Although there were serious discussions among some members of Congress in the spring related to passing an extender bill, those discussions withered away with the summer heat and little has been discussed recently about either making some of the provisions permanent or extending some or all of them for another year. So whether we will have extender legislation and, if we do, what will be included in that legislation is up in the air.
So you may wish to review the expiring provisions to see how you will be affected if they are not extended. Each of these tax benefits expired at the end of 2014 and will not apply in 2015 unless Congress acts. Although more than 50 provisions are expiring, the list below only includes those that most likely will impact individuals and small businesses:
o Qualified restaurant property, and
o Qualified retail improvement property
Thus, without an extension, these properties will no longer qualify for the Sec 179 expense deduction.
If you have any questions, please call.
When to Claim a Disaster Loss
By taking the deduction for a 2015 disaster area loss on the prior year (2014) return, you may be able to get a refund from the IRS before you even file your tax return for 2015, the loss year. You have until the unextended due date of the 2015 return to file an amended 2014 return to claim the disaster loss. Before making the decision to claim the loss in 2014, you should consider which year’s return would produce the greater tax benefit, as opposed to your desire for a quicker refund.
If you elect to claim the loss on either your 2014 original or amended return, you can generally expect to receive the refund within a matter of weeks, which can help to pay some of your repair costs.
If the casualty loss, net of insurance reimbursement, is extensive enough to offset all of the income on the return, whether the loss is claimed on the 2014 or 2015 return, and results in negative income, you may have what is referred to as a net operating loss (NOL). When there is an NOL, the unused loss can be carried back two years and then carried forward until it is all used up (but not more 20 years), or you can elect to only carry the unused loss forward.
Determining the more beneficial year in which to claim the loss requires a careful evaluation of your entire tax picture for both years, including filing status, amount of income and other deductions, and the applicable tax rates. The analysis should also consider the effect of a potential NOL.
Ordinarily, casualty losses are deductible only to the extent they exceed $100 plus 10% of your adjusted gross income (AGI). Thus, a year with a larger amount of AGI will cut into your allowable loss deduction and can be a factor when choosing which year to claim the loss.
For verification purposes, keep copies of local newspaper articles and/or photos that will help prove that your loss was caused by the specific disaster.
As strange as it may seem, a casualty might actually result in a gain. This sometimes occurs when insurance proceeds exceed the tax basis of the destroyed property. When a gain materializes, there are ways to exclude or postpone the tax on the gain.
If you need further information on casualty and disaster losses, your particular options for claiming the loss, or if you wish to amend your 2014 return to claim your 2015 loss, please give this office a call.
6 Steps to Get Your Business Startup on Track For Long Term Success
It’s easy to think about startup businesses and consider the success or horror stories, but what about the average startups? The hard and bleak reality is that the majority of small business startups fail. So, to avoid being like the average startup, you need to create a plan for success.
Choose the Right Entity
One of the first steps to forge a solid start includes selecting the right entity for your business. This legal structure will affect the amount of paperwork you need to do and the legal ramifications you will face.
The right entity will help you reduce your liability exposure and minimize your taxes. You need to ensure your business can be financed and run efficiently with a method that helps ensure the business operations will continue after the death of the owner. Along with making the startup process more organized in an official capacity for the company, the formalization process will also solidify the ownership of participants who are participating in the venture.
To choose your entity, you will first need to consider what personal level of risk you face from liabilities that could arise from your business. You will then need to consider what the best angle is for taxation, finding ways to avoid layers of taxation that can increase unnecessary expenses. Then, you will have to consider what kind of ability you have to attract investors and what ownership opportunities will need to be offered to key stakeholders. Finally, you will have to consider the overall costs of operating and maintaining whatever business entity you choose.
There isn’t necessarily only one entity that can fit your business. The key in this process is looking at how each entity will alter your business’s future to select the one that is right for you. You might choose a sole proprietor, corporation or limited liability company if you are a single owner. If your business is going to be owned by two or more individuals, then you might choose a corporation, limited liability, limited partnership, general partnership or a limited liability partnership.
Sole Proprietorship: The most common entity type where a single owner is personally liable for financial obligations. This is the easiest type of business entity to form and offers complete control to you as the managerial owner.
Partnership: When two or more people want to share the profits and losses of a business, they can benefit in a shared entity that does not pass along the tax burdens of their profits or benefits of the losses. In this entity form, however, both partners are personally liable for the financial obligations of the business.
Corporation: A corporation is an entity that is separated from the founders and handles the responsibilities of the organization for which it bears responsibility. The corporation can be taxed and held legally liable for its actions, just like a person. The corporate status allows you to avoid personal liability, but you will have to provide the funds to form a corporation and keep extensive records to keep the corporation status. Double taxation can also be seen as a downside to the corporate status, but a Subchapter corporation can avoid this situation by using individual tax returns to show profits and losses.
Limited Liability Company (LLC): This is a hybrid form of a partnership entity that allows owner to benefit from aspects of the corporation and partnership forms of the business. Both profits and losses can be passed to the owners without taxing the business and while shielding owners from the personal liability factor.
Plan for Growth
Even though the number one reason startups fail is due to the production of a product no one wants, you can’t just stop with a great product. As an entrepreneur, you have to know about every aspect of your business. Even if you are not an expert in the process of business and aspects of your company, failure in those areas can still cost you your success. You have to know enough to catch key problems in your company’s startup process.
Too segmented, and your company will struggle with gaps and overlap. If the CEO believes it is his or her job to lead, but not to market, then he or she may miss an important connection between target audience and company direction. If the marketer believes it is his or her job to market, but not to develop the website, then he or she might find the website design does not appeal to the right audience. Each individual needs to be both responsible and organic in their approach to helping the company move in the right direction.
While you want growth, you need to be prepared to sustain it. In order to get your venture capital secured, you need accelerated growth; grow too slow and you won’t be eligible for the funds you need to keep growing. Yet, your company will have to be equipped for that growth. The shifting size will alter your ability to work as an agile startup, will force you to reconsider a variety of your tools and may even make you update your physical headquarters. This is just one more reason your current company leaders and employees need to be flexible in the nature of their coverage and thorough in the application of their talents.
The second major reason that companies fail is due to a shortage of funds. These companies run out of cash because their growth stalls. Stalling growth can kill a startup by making them lose to the competition, lose customers, lose employees and lose passion.
Once you’ve gotten your business prepared for substantial growth at a very rapid pace, you will need to focus your attention on increasing that growth. A relatively new term, growth-hackers are professionals that are specifically focused on the rapid growth of startups. Since the second largest reason startups fail is directly related to money shortages (and indirectly related to growth), you will want to focus a lot of your initial attention on increasing growth in creative ways.
The growth hacker job is usually done by a professional who stands in the place of a marketer. The growth hacker has to understand your startup’s audience and how to appeal to them for faster growth. The growth hacker will also break your large end goal (increased growth at a rapid rate) into smaller, actionable and achievable tasks, like doubling your content creation, to reach that end goal.
Watch the Money
In order to help manage the funds that you do have, you will want to establish financial controls to provide your startup with a solid foundation. The internal controls will include accounting, auditing, damage control planning and cash flow. You will need to have disciplined controls to ensure solid growth and help you never run out of cash.
You will want to adjust and re-adjust your projections for cash flow, never allowing the cash to run dry. This also means you need to set maximum limits of purchasing authority to keep partners or employees from overspending. You will need to require all payments to be recorded on invoices to support audits and keep spending on track. Additionally, you will want to use an inventory control system and use an edit log to track changes made to your website. Don’t overlook your suppliers as sources of financing or assume that all shipments are accurate or in good condition. Ask for term discounts, pay on time and always create purchasing contracts to ensure your goods are delivered.
Measure Your Achievements
Key Performance Indicators (KPIs) are ways to measure the company’s success in achieving key business goals. You will want to establish KPIs on multiple levels in order to monitor your efforts on meeting your objectives.
You will want to use SMART KPIs that are Specific, Measurable, Attainable, Relevant and Timely. Goals that are too general, don’t have an end date and aren’t within your control are goals doomed to fail. To help your startup succeed, you need to discover the core objectives that will really improve your company status.
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Finally, you need to spend more time growing your business than accounting for it. Remember, a misplacement of funds and lack of cash is the second biggest reason why startups fail.
Once you have a product that is worth taking to market and a plan in place to cultivate funding, you will be in a good place with your startup. Don’t let any of these points cause you to lose control of your business with a blind side hit that you could have prepared for.
Family, Income, and Residence Changes Can Affect Your Premium Tax Credit
If you are receiving advance payments of the premium tax credit, it is particularly important that you report changes in circumstances, including moving, to the Marketplace. There’s a simple reason: reporting these income and life changes lets the Marketplace update the information used to determine your eligibility for a Marketplace plan, which may affect the appropriate amount of advance payments of the premium tax credit that the government sends to your health insurer on your behalf.
Reporting the changes will help you avoid having too much or not enough premium assistance paid to reduce your monthly health insurance premiums. Getting too much premium assistance means you may owe additional money or get a smaller refund when you file your taxes. On the other hand, getting too little premium assistance could mean missing out on monthly premium assistance that you deserve.
Changes in circumstances that you should report to the Marketplace include, but are not limited to:
If you have questions about the premium tax credit or the advance payment of the credit, please give this office a call.