Here is a collection of free and helpful accounting articles I have written for our clients:
2015 Year-End Tax Planning for Individuals (in .PDF format)
2015 Year-End Tax Planning for Businesses (in .PDF format)
Thirteen Ideas to Improve Your Business
Deductions For Your Automobile
Deductions For Your Home Office
YEAR END TAX PLANNING LETTER FOR INDIVIDUALS
Tax planning for the year ahead presents similar challenges to last year due to the unknown fate of the numerous tax extenders that expired at the end of 2014.
These tax extenders, which include the mortgage insurance premium deduction and the sales tax deduction that allows taxpayers to deduct state and local general sales taxes instead of state and local income taxes, may or may not be reauthorized by Congress and made retroactive to the beginning of the year.
In the meantime, let’s take a look at some of the tax strategies that you can use right now, given the current tax situation.
Tax planning strategies for individuals this year include postponing income and accelerating deductions, as well as careful consideration of timing related investments, charitable gifts, and retirement planning.
General tax planning strategies that taxpayers might consider include the following:
•Sell any investments on which you have a gain or loss this year. For more on this, see Investment Gains and Losses, below.
•If you anticipate an increase in taxable income in 2016 and are expecting a bonus at year-end, try to get it before December 31. Keep in mind, however, that contractual bonuses are different, in that they are typically not paid out until the first quarter of the following year. Therefore, any taxes owed on a contractual bonus would not be due until you file a tax return for tax year 2016.
•Prepay deductible expenses such as charitable contributions and medical expenses this year using a credit card. This strategy works because deductions may be taken based on when the expense was charged on the credit card, not when the bill was paid.
For example, if you charge a medical expense in December but pay the bill in January, assuming it’s an eligible medical expense, it can be taken as a deduction on your 2015 tax return.
•If your company grants stock options, you may want to exercise the option or sell stock acquired by exercise of an option this year if you think your tax bracket will be higher in 2016. Exercise of the option is often but not always a taxable event; sale of the stock is almost always a taxable event.
•If you’re self-employed, send invoices or bills to clients or customers this year to be paid in full by the end of December.
Caution: Keep an eye on the estimated tax requirements.
Accelerating Income and Deductions
Accelerating income into 2015 is an especially good idea for taxpayers who anticipate being in a higher tax bracket next year or whose earnings are close to threshold amounts ($200,000 for single filers and $250,000 for married filing jointly) that make them liable for additional Medicare Tax or Net Investment Income Tax (see below).
In cases where tax benefits are phased out over a certain adjusted gross income (AGI) amount, a strategy of accelerating income and deductions might allow you to claim larger deductions, credits, and other tax breaks for 2015, depending on your situation.
The latter benefits include Roth IRA contributions, conversions of regular IRAs to Roth IRAs, child credits, higher education tax credits and deductions for student loan interest.
Caution: Taxpayers close to threshold amounts for the Net Investment Income Tax (3.8 percent of net investment income) should pay close attention to “one-time” income spikes such as those associated with Roth conversions, sale of a home or other large assets that may be subject to tax.
Tip: If you know you have a set amount of income coming in this year that is not covered by withholding taxes, increasing your withholding before year-end can avoid or reduce any estimated tax penalty that might otherwise be due.
Tip: On the other hand, the penalty could be avoided by covering the extra tax in your final estimated tax payment and computing the penalty using the annualized income method.
Here are several examples of what a taxpayer might do to accelerate deductions:
•Pay a state estimated tax installment in December instead of at the January due date. However, make sure the payment is based on a reasonable estimate of your state tax.
•Pay your entire property tax bill, including installments due in year 2016, by year-end. This does not apply to mortgage escrow accounts.
•It may be beneficial to pay 2016 tuition in 2015 to take full advantage of the American Opportunity Tax Credit, an above the line deduction worth up to $2,500 per student to cover the cost of tuition, fees and course materials paid during the taxable year. Forty percent of the credit (up to $1,000) is refundable, which means you can get it even if you owe no tax.
•Try to bunch “threshold” expenses, such as medical and dental expenses–10 percent of AGI (adjusted gross income) starting in 2013–and miscellaneous itemized deductions. For example, you might pay medical bills and dues and subscriptions in whichever year they would do you the most tax good.
Note: There is a temporary exemption of 7.5 percent through December 31, 2016 for individuals age 65 and older and their spouses.
Threshold expenses are deductible only to the extent they exceed a certain percentage of adjusted gross income (AGI). By bunching these expenses into one year, rather than spreading them out over two years, you have a better chance of exceeding the thresholds, thereby maximizing your deduction.
Health Care Law
If you haven’t signed up for health insurance this year, do so now and avoid or reduce any penalty you might be subject to. Depending on your income, you may be able to claim the premium tax credit that reduces your premium payment or reduce your tax obligations, as long as you meet certain requirements. You can choose to get the credit immediately or receive it as a refund when you file your taxes next spring. Please contact the office if you need assistance with this.
Additional Medicare Tax
Taxpayers whose income exceeds certain threshold amounts ($200,000 single filers and $250,000 married filing jointly) are liable for an additional Medicare tax of 0.9 percent on their tax returns, but may request that their employers withhold additional income tax from their pay to be applied against their tax liability when filing their 2015 tax return next April.
High net worth individuals should consider contributing to Roth IRAs and 401(k) because distributions are not subject to the Medicare Tax.
If you’re a taxpayer close to the threshold for the Medicare Tax, it might make sense to switch Roth retirement contributions to a traditional IRA plan, thereby avoiding the 3.8 percent Net Investment Income Tax as well (more about the NIIT below).
Alternate Minimum Tax
The Alternative Minimum Tax (AMT) exemption “patch” was made permanent by the American Taxpayer Relief Act (ATRA) of 2012 and is indexed for inflation. It’s important not to overlook the effect of any year-end planning moves on the AMT for 2015 and 2016.
Items that may affect AMT include deductions for state property taxes and state income taxes, miscellaneous itemized deductions, and personal exemptions. Please call if you’re not sure whether AMT applies to you.
Note: AMT exemption amounts for 2015 are as follows:
•$53,600 for single and head of household filers,
•$83,400 for married people filing jointly and for qualifying widows or widowers,
•$41,700 for married people filing separately.
Residential Energy Tax Credits
Non-Business Energy Credits
ATRA extended the non-business energy credit, which expired in 2011, through 2014 (retroactive to 2012); however, it has not been reauthorized by Congress. For years prior to 2015, taxpayers could claim a credit of 10 percent of the cost of certain energy-saving property that was added to their main home.
Residential Energy Efficient Property Credits
The Residential Energy Efficient Property Credit is available through the end of 2016 to individual taxpayers to help pay for qualified residential alternative energy equipment, such as solar hot water heaters, solar electricity equipment and residential wind turbines. In addition, taxpayers are allowed to take the credit against the alternative minimum tax (AMT), subject to certain limitations.
Qualifying equipment must have been installed on or in connection with your home located in the United States.
Geothermal pumps, solar energy systems, and residential wind turbines can be installed in both principal residences and second homes (existing homes and new construction), but not rentals. Fuel cell property qualifies for the tax credit only when it is installed in your principal residence (new construction or existing home). Rentals and second homes do not qualify.
The tax credit is 30 percent of the cost of the qualified property, with no cap on the amount of credit available, except for fuel cell property.
Generally, labor costs can be included when figuring the credit. Any unused portions of this credit can be carried forward. Not all energy-efficient improvements qualify so be sure you have the manufacturer’s tax credit certification statement, which can usually be found on the manufacturer’s website or with the product packaging.
What’s included in this tax credit?
•Geothermal Heat Pumps. Must meet the requirements of the ENERGY STAR program that are in effect at the time of the expenditure.
•Small Residential Wind Turbines. Must have a nameplate capacity of no more than 100 kilowatts (kW).
•Solar Water Heaters. At least half of the energy generated by the “qualifying property” must come from the sun. The system must be certified by the Solar Rating and Certification Corporation (SRCC) or a comparable entity endorsed by the government of the state in which the property is installed. The credit is not available for expenses for swimming pools or hot tubs. The water must be used in the dwelling. Photovoltaic systems must provide electricity for the residence and must meet applicable fire and electrical code requirement.
•Solar Panels (Photovoltaic Systems). Photovoltaic systems must provide electricity for the residence and must meet applicable fire and electrical code requirement.
•Fuel Cell (Residential Fuel Cell and Microturbine System.) Efficiency of at least 30 percent and must have a capacity of at least 0.5 kW.
Property, as well as money, can be donated to a charity. You can generally take a deduction for the fair market value of the property; however, for certain property, the deduction is limited to your cost basis. While you can also donate your services to charity, you may not deduct the value of these services. You may also be able to deduct charity-related travel expenses and some out-of-pocket expenses, however.
Keep in mind that a written record of your charitable contributions–including travel expenses such as mileage–is required in order to qualify for a deduction. A donor may not claim a deduction for any contribution of cash, a check or other monetary gift unless the donor maintains a record of the contribution in the form of either a bank record (such as a cancelled check) or written communication from the charity (such as a receipt or a letter) showing the name of the charity, the date of the contribution, and the amount of the contribution.
Tip: Contributions of appreciated property (i.e. stock) provide an additional benefit because you avoid paying capital gains on any profit.
Investment Gains and Losses
This year, and in the coming years, investment decisions are likely to be more about managing capital gains than about minimizing taxes per se. For example, taxpayers below threshold amounts in 2015 might want to take gains; whereas taxpayers above threshold amounts might want to take losses.
Caution: In recent years, extreme fluctuations in the stock market have been commonplace. Don’t assume that a down market means investment losses. Your cost basis may be low if you’ve held the stock for a long time.
If your tax bracket is either 10 or 15 percent (married couples making less than $74,900 or single filers making less than $37,450), then you might want to take advantage of the zero percent tax rate on qualified dividends and long-term capital gains. If you fall into the highest tax bracket (39.6 percent), the maximum tax rate on long-term capital gains is capped at 20 percent for tax years 2013 and beyond.
Minimize taxes on investments by judicious matching of gains and losses. Where appropriate, try to avoid short-term capital gains, which are usually taxed at a much higher tax rate than long-term gains–up to 39.6 percent in 2015 for high-income earners ($413,200 single filers, $464,850 married filing jointly).
Where feasible, reduce all capital gains and generate short-term capital losses up to $3,000.
Tip: As a general rule, if you have a large capital gain this year, consider selling an investment on which you have an accumulated loss. Capital losses up to the amount of your capital gains plus $3,000 per year ($1,500 if married filing separately) can be claimed as a deduction against income.
Tip: After selling a securities investment to generate a capital loss, you can repurchase it after 30 days. This is known as the “Wash Rule Sale.” If you buy it back within 30 days, the loss will be disallowed. Or you can immediately repurchase a similar (but not the same) investment, e.g., and ETF or another mutual fund with the same objectives as the one you sold.
Tip: If you have losses, you might consider selling securities at a gain and then immediately repurchasing them, since the 30-day rule does not apply to gains. That way, your gain will be tax-free; your original investment is restored, and you have a higher cost basis for your new investment (i.e., any future gain will be lower).
Net Investment Income Tax (NIIT)
The Net Investment Income Tax, which went into effect in 2013, is a 3.8 percent tax that is applied to investment income such as long-term capital gains for earners above certain threshold amounts ($200,000 for single filers and $250,000 for married taxpayers filing jointly). Short-term capital gains are subject to ordinary income tax rates as well as the 3.8 percent NIIT. This information is something to think about as you plan your long-term investments. Business income is not considered subject to the NIIT provided the individual business owner materially participates in the business.
Please call if you need assistance with any of your long term tax planning goals.
Mutual Fund Investments
Before investing in a mutual fund, ask whether a dividend is paid at the end of the year or whether a dividend will be paid early in the next year but be deemed paid this year. The year-end dividend could make a substantial difference in the tax you pay.
Example: You invest $20,000 in a mutual fund at the end of 2015. You opt for automatic reinvestment of dividends. In late December of 2015, the fund pays a $1,000 dividend on the shares you bought. The $1,000 is automatically reinvested.
Result: You must pay tax on the $1,000 dividend. You will have to take funds from another source to pay that tax because of the automatic reinvestment feature. The mutual fund’s long-term capital gains pass through to you as capital gains dividends taxed at long-term rates, however long or short your holding period.
The mutual fund’s distributions to you of dividends it receives generally qualify for the same tax relief as long-term capital gains. If the mutual fund passes through its short-term capital gains, these will be reported to you as “ordinary dividends” that don’t qualify for relief.
Depending on your financial circumstances, it may or may not be a good idea to buy shares right before the fund goes ex-dividend. For instance, the distribution could be relatively small, with only minor tax consequences. Or the market could be moving up, with share prices expected to be higher after the ex-dividend date.
Tip: To find out a fund’s ex-dividend date, call the fund directly.
Please call if you’d like more information on how dividends paid out by mutual funds affect your taxes this year and next.
Year-End Giving To Reduce Your Potential Estate Tax
The federal gift and estate tax exemption, which is currently set at $5.43 million is projected to increase to $5.45 million in 2016. ATRA set the maximum estate tax rate set at 40 percent.
Gift Tax. For many, sound estate planning begins with lifetime gifts to family members. In other words, gifts that reduce the donor’s assets subject to future estate tax. Such gifts are often made at year-end, during the holiday season, in ways that qualify for exemption from federal gift tax.
Gifts to a donee are exempt from the gift tax for amounts up to $14,000 a year per donee.
Caution: An unused annual exemption doesn’t carry over to later years. To make use of the exemption for 2015, you must make your gift by December 31.
Husband-wife joint gifts to any third person are exempt from gift tax for amounts up to $28,000 ($14,000 each). Though what’s given may come from either you or your spouse or both of you, both of you must consent to such “split gifts.”
Gifts of “future interests”, assets that the donee can only enjoy at some future time such as certain gifts in trust, generally don’t qualify for exemption; however, gifts for the benefit of a minor child can be made to qualify.
Tip: If you’re considering adopting a plan of lifetime giving to reduce future estate tax, don’t hesitate to call the office for assistance.
Cash or publicly traded securities raise the fewest problems. You may choose to give property you expect to increase substantially in value later. Shifting future appreciation to your heirs keeps that value out of your estate. But this can trigger IRS questions about the gift’s true value when given.
You may choose to give property that has already appreciated. The idea here is that the donee, not you, will realize and pay income tax on future earnings and built-in gain on sale.
Gift tax returns for 2015 are due the same date as your income tax return. Returns are required for gifts over $14,000 (including husband-wife split gifts totaling more than $14,000) and gifts of future interests. Though you are not required to file if your gifts do not exceed $14,000, you might consider filing anyway as a tactical move to block a future IRS challenge about gifts not “adequately disclosed.”
Tip: Call if you’re considering making a gift of property whose value isn’t unquestionably less than $14,000.
Income earned on investments you give to children or other family members are generally taxed to them, not to you. In the case of dividends paid on stock given to your children, they may qualify for the reduced child tax rate, generally 10 percent, where the first $1,050 in investment income is exempt from tax and the next $1,050 is subject to a child’s tax rate of 10 percent (0 percent tax rate on long-term capital gains and qualified dividends).
Caution: In 2015, investment income for a child (under age 18 at the end of the tax year or a full-time student under age 24) that is in excess of $2,100 is taxed at the parent’s tax rate.
Other Year-End Moves
Retirement Plan Contributions. Maximize your retirement plan contributions. If you own an incorporated or unincorporated business, consider setting up a retirement plan if you don’t already have one. It doesn’t actually need to be funded until you pay your taxes, but allowable contributions will be deductible on this year’s return.
If you are an employee and your employer has a 401(k), contribute the maximum amount ($18,000 for 2015), plus an additional catch-up contribution of $6,000 if age 50 or over, assuming the plan allows this and income restrictions don’t apply.
If you are employed or self-employed with no retirement plan, you can make a deductible contribution of up to $5,500 a year to a traditional IRA (deduction is sometimes allowed even if you have a plan). Further, there is also an additional catch-up contribution of $1,000 if age 50 or over.
Health Savings Accounts. Consider setting up a health savings account (HSA). You can deduct contributions to the account, investment earnings are tax-deferred until withdrawn, and amounts you withdraw are tax-free when used to pay medical bills.
In effect, medical expenses paid from the account are deductible from the first dollar (unlike the usual rule limiting such deductions to the excess over 10 percent of AGI). For amounts withdrawn at age 65 or later, and not used for medical bills, the HSA functions much like an IRA.
To be eligible, you must have a high-deductible health plan (HDHP), and only such insurance, subject to numerous exceptions, and must not be enrolled in Medicare. For 2015, to qualify for the HSA, your minimum deductible in your HDHP must be at least $1,250 for single coverage or $2,500 for a family.
Call Arthur Lander, CPA, PC with any questions
These are just a few of the steps you might take. Please contact us for assistance with implementing these and other year-end planning strategies that might be suitable to your particular situation.
YEAR END TAX PLANNING LETTER FOR BUSINESSES
While the fate of several business-related tax extenders such as Research & Development tax credits, bonus depreciation, and Section 179 expensing that expired at the end of 2014 is uncertain, there are still a number of end of year tax planning strategies businesses can use to reduce their tax burden for 2015.
Businesses using the cash method of accounting can defer income into 2016 by delaying end-of-year invoices so payment is not received until 2016. Businesses using the accrual method can defer income by postponing delivery of goods or services until January 2016.
Purchase New Business Equipment
Section 179 Expensing. Business should still take advantage of Section 179 expensing this year for a couple of reasons. First, is that in 2015 businesses can elect to expense (deduct immediately) the entire cost of most new equipment up to a maximum of $25,000 for the first $200,000 of property placed in service by December 31, 2015. Keep in mind that the Section 179 deduction cannot exceed net taxable business income. In addition, unless Congress reauthorizes it, the bonus depreciation expired at the end of 2014 and is not available for 2015.
While most businesses follow a calendar year, for those that don’t there is an exception to the $25,000 cap that allows those businesses to take advantage of the $500,000 Section 179 benefit. However, only businesses whose calendar year begins in 2014 and ends in 2015 can take advantage of this.
Qualified property is defined as property that you placed in service during the tax year and used predominantly (more than 50 percent) in your trade or business. Property that is placed in service and then disposed of in that same tax year does not qualify, nor does property converted to personal use in the same tax year it is acquired.
Note: Many states have not matched these amounts and, therefore, state tax may not allow for the maximum federal deduction. In this case, two sets of depreciation records will be needed to track the federal and state tax impact.
Please contact the office if you have any questions regarding qualified property.
Timing. If you plan to purchase business equipment this year, consider the timing. You might be able to increase your tax benefit if you buy equipment at the right time. Here’s a simplified explanation:
Conventions. The tax rules for depreciation include “conventions” or rules for figuring out how many months of depreciation you can claim. There are three types of conventions. To select the correct convention, you must know the type of property and when you placed the property in service.
1. The half-year convention: This convention applies to all property except residential rental property, nonresidential real property, and railroad gradings and tunnel bores (see mid-month convention below) unless the mid-quarter convention applies. All property that you begin using during the year is treated as “placed in service” (or “disposed of”) at the midpoint of the year. This means that no matter when you begin using (or dispose of) the property, you treat it as if you began using it in the middle of the year.
Example: You buy a $40,000 piece of machinery on December 15. If the half-year convention applies, you get one-half year of depreciation on that machine.
2. The mid-quarter convention: The mid-quarter convention must be used if the cost of equipment placed in service during the last three months of the tax year is more than 40 percent of the total cost of all property placed in service for the entire year. If the mid-quarter convention applies, the half-year rule does not apply, and you treat all equipment placed in service during the year as if it were placed in service at the midpoint of the quarter in which you began using it.
3. The mid-month convention: This convention applies only to residential rental property, nonresidential real property, and railroad gradings and tunnel bores. It treats all property placed in service (or disposed of) during any month as placed in service (or disposed of) on the midpoint of that month.
If you’re planning on buying equipment for your business, call the office and speak to a tax professional who can help you figure out the best time to buy that equipment and take full advantage of these tax rules.
Other Year-End Moves to Take Advantage Of
Small Business Health Care Tax Credit. Small business employers with 25 or fewer full-time-equivalent employees (average annual wages of $51,600 in 2015) may qualify for a tax credit to help pay for employees’ health insurance. The credit is 50 percent (35 percent for non-profits).
Business Energy Investment Tax Credit. Business energy investment tax credits are still available for eligible systems placed in service on or before December 31, 2016, and businesses that want to take advantage of these tax credits can still do so.
Business energy credits include solar energy systems (passive solar and solar pool-heating systems excluded), fuel cells and microturbines, and an increased credit amount for fuel cells. The extended tax provision also established new credits for small wind-energy systems, geothermal heat pumps, and combined heat and power (CHP) systems. Utilities are allowed to use the credits as well.
Repair Regulations. Where possible, end of year repairs and expenses should be deducted immediately, rather than capitalized and depreciated. Small businesses lacking applicable financial statements (AFS) are able to take advantage of de minimis safe harbor by electing to deduct smaller purchases ($500 or less per purchase or per invoice). Businesses with applicable financial statements are able to deduct $5,000. Small business with gross receipts of $10 million or less can also take advantage of safe harbor for repairs, maintenance, and improvements to eligible buildings. Please call if you would like more information on this topic.
Partnership or S-Corporation Basis. Partners or S corporation shareholders in entities that have a loss for 2015 can deduct that loss only up to their basis in the entity. However, they can take steps to increase their basis to allow a larger deduction. Basis in the entity can be increased by lending the entity money or making a capital contribution by the end of the entity’s tax year.
Caution: Remember that by increasing basis, you’re putting more of your funds at risk. Consider whether the loss signals further troubles ahead.
Section 199 Deduction. Businesses with manufacturing activities could qualify for a Section 199 domestic production activities deduction. By accelerating salaries or bonuses attributable to domestic production gross receipts in the last quarter of 2015, businesses can increase the amount of this deduction. Please call to find out how your business can take advantage of Section 199.
Retirement Plans. Self-employed individuals who have not yet done so should set up self-employed retirement plans before the end of 2015. Call today if you need help setting up a retirement plan.
Dividend Planning. Reduce accumulated corporate profits and earnings by issuing corporate dividends to shareholders.
Budgets. Every business, whether small or large should have a budget. The need for a business budget may seem obvious, but many companies overlook this critical business planning tool.
A budget is extremely effective in making sure your business has adequate cash flow and in ensuring financial success. Once the budget has been created, then monthly actual revenue amounts can be compared to monthly budgeted amounts. If actual revenues fall short of budgeted revenues, expenses must generally be cut.
Tip: Year-end is the best time for business owners to meet with their accountants to budget revenues and expenses for the following year.
If you need help developing a budget for your business don’t hesitate to call.
What Employers Need to know about the ACA
The healthcare law contains tax provisions that affect employers. The size and structure of a workforce–small or large–helps determine which parts of the law apply to which employers. Calculating the number of employees is especially important for employers that have close to 50 employees or whose workforce fluctuates during the year.
The number of employees an employer has during the current year determines whether it is an applicable large employer for the following year. Applicable large employers (ALEs) are generally those with 50 or more full-time employees or full-time equivalent employees. Under the employer shared responsibility provision, ALEs are required to offer their full-time employees and dependents affordable coverage that provides minimum value. Employers with fewer than 50 full-time or full-time equivalent employees are not applicable large employers.
Employers with Fewer than 50 Employees
SHOP Marketplace Eligibility
Employers with fewer than 50 employees can purchase insurance through the Small Business Health Options Program (SHOP) Marketplace.
Information Reporting–Self-Insured Employers
All employers, regardless of size, that provide self-insured health coverage must file an annual return for individuals they cover, and provide a statement to responsible individuals.
The first information reporting returns are due to be filed in 2016 for 2015.
Employers may be eligible for the small business health care tax credit if they:
1. cover at least 50 percent of employees’ premium costs
2. have fewer than 25 full-time equivalent employees with average annual wages of less than $50,000
3. purchase their coverage through the Small Business Health Options Program.
Employers with fewer than 50 full-time employees or full-time equivalent employees are not subject to the employer shared responsibility provisions.
Employers with 50 or More Employees
SHOP Marketplace Eligibility
Employers with exactly 50 employees can purchase insurance through the Small Business Health Options Program (SHOP) Marketplace.
All employers including applicable large employers that provide self-insured health coverage must file an annual return for individuals they cover, and provide a statement to responsible individuals.
Applicable large employers must file an annual return–and provide a statement to each full-time employee–reporting whether they offered health insurance, and if so, what insurance they offered their employees.
The first information reporting returns are due to be filed and furnished in 2016 for 2015.
In general, an applicable large employer will be subject to a payment if the employer does not offer affordable coverage that provides “minimum” value to its full-time employees and their dependents, and one or more full-time employees gets a premium tax credit.
Various forms of transition relief are available for 2015, including for applicable large employers with fewer than 100 full-time employees, including full-time equivalent employees. For additional details, please call the office.
How the Health Care Law Affects Aggregated Companies
The Affordable Care Act applies an approach to common ownership that also applies for other tax and employee benefit purposes. This longstanding rule generally treats companies that have a common owner or similar relationship as a single employer.
These are aggregated companies. The law combines these companies to determine whether they employ at least 50 full-time employees including full-time equivalents.
If the combined employee total meets the threshold, then each separate company is an applicable large employer. Each company–even those that do not individually meet the threshold–is subject to the employer shared responsibility provisions.
These rules for combining related employers do not determine whether a particular company owes an employer shared responsibility payment or the amount of any payment. The IRS will determine payments separately for each company.
Questions? Don’t hesitate to call.
Individual Shared Responsibility Provision
The Affordable Care Act includes the individual shared responsibility provision that requires you, your spouse, and your dependents to have qualifying health insurance for the entire year, report a health coverage exemption, or make a payment when you file.
Who is subject to this provision?
All U.S. citizens living in the United States, including children, senior citizens, permanent residents and all foreign nationals are subject to the individual shared responsibility provision.
Children are subject to the individual shared responsibility provision.
• Each child must have minimum essential coverage or qualify for an exemption for each month in the calendar year. Otherwise, the adult or married couple who can claim the child as a dependent for federal income tax purposes will generally owe a shared responsibility payment for the child.
Senior citizens are subject to the individual shared responsibility provision.
• Both Medicare Part A and Medicare Part C (also known as Medicare Advantage) qualify as minimum essential coverage.
All permanent residents and all foreign nationals who are in the United States long enough during a calendar year to qualify as resident aliens for tax purposes are subject to the individual shared responsibility provision.
• Foreign nationals who live in the United States for a short enough period that they do not become resident aliens for federal income tax purposes are not subject to the individual shared responsibility payment even though they may have to file a U.S. income tax return.
•Individuals who are not U.S. citizens or nationals and are not lawfully present in the United States are exempt from the individual shared responsibility provision. For this purpose, an immigrant with Deferred Action for Childhood Arrivals status is considered not lawfully present and therefore, is eligible for this exemption even if he or she has a social security number. Claim coverage exemptions on Form 8965, Health Coverage Exemptions.
•U.S. citizens living abroad are subject to the individual shared responsibility provision.
•However, U.S. citizens who are not physically present in the United States for at least 330 full days within a 12-month period are treated as having minimum essential coverage for that 12-month period. In addition, U.S. citizens who are bona fide residents of a foreign country or countries for an entire taxable year are treated as having minimum essential coverage for that year.
•All bona fide residents of the United States territories are treated by law as having minimum essential coverage.
Call Arthur Lander, CPA, PC with any questions
These are just a few of the year-end planning tax moves that could make a substantial difference in your tax bill for 2015. If you’d like more information about tax planning for 2016, please call to schedule a consultation to discuss your specific tax and financial needs, and develop a plan that works for your business.
THIRTEEN IDEAS TO IMPROVE YOUR BUSINESS
by Arthur Lander
1.Payment on delivery.
Having a large accounts receivable balance can be reassuring, but the reality is that some of those accounts will be uncollectible. Trying to sue for collection is time consuming and costs money with no assurance of being paid. As the dean of my law school would say, “You can paper your walls with uncollected judgments.”
2.Concentrate on what you do best.
Yes, it looks like a great opportunity, but what do you know about that industry? You own a nursing home and decide to open up a medical testing laboratory. It seems like a close enough fit, but it is an entirely different business. Even if you have great managers, how do you know they are doing the right thing?
3.Make allocations for taxes.
You’re having a great year, but don’t forget the estimated payments during the year. Come tax time you may have made the mistake of using the tax money for business expansion.
4.Avoid partnerships as a form of doing business
, or, for that matter, corporations where the stock is held 50/50. Everything is great now, but what happens when there are disagreements? And there will be. Consider a third person on the Board of Directors or a buy-out agreement.
5.Have adequate staffing.
Try and keep your employees; high turnover is a killer because of the cost of training. And for a small company, the owner has to do the training, which takes you away from what you do best.
Be very careful of major projects. Say you decide you have a great tax preparation package, and, yes, everyone agrees it is. The only problems is that your marketing effort cannot compete with the existing businesses, and so no one knows about your tax package. Leave room in the budget for marketing or don’t undertake the idea.
Sales are what drive the ship.
8.Meet your deadlines.
Your customers want to have confidence in your product or service. Missing a deadline is a sure confidence killer.
9.Look for tax savings.
Everyone wants to keep their accounting costs low and nobody wants to go to the doctor, either. But projections and tax planning on transactions can save accounting fees many times over.
10.Document as much as you can.
In the litigious society that we live, having adequate documentation can be a great protector. Write the contract down, and limit the potential for misunderstanding. If you want to change the contract write on it what the terms are. There is nothing sacred about pre-printed forms.
11.Invest your profits wisely
–after all you worked hard for them.
12.Set up a line of credit.
Check with your local banks to see if they will give you a line of credit that costs nothing unless you use it. Say you are expecting a check on Thursday and it does not come, and you have payroll the next day. A line of credit for one payroll period can ease the stresses of life.
13.Update your paperwork.
Take a look at your corporate documents, your dental plans, pension plans, etc. It doesn’t take that long to update these documents, and it gives your a chance to review the area.
I hope these suggestions help you and good luck in your business. Give me a call if you have any questions (703) 486-0700.
DEDUCTIONS FOR YOUR AUTOMOBILE
By Arthur Lander
The first area I want to go over is to remind you to keep your milage log. You have probably heard this from me a couple of times.
If you have a company car, and there isn’t substantiation of the miles, then the use of the car will be considered personal, just like a salary check, and you risk an unexpected tax bill.
If you bill the company for the use of your personal car, you run the risk of the deduction being disallowed.
To substantiate a travel or transportation item by adequate records, the taxpayer must maintain a diary or account book in which each expense item is recorded at or near the time of the expenditure.
A record is created “at or near the time” of the expense if the taxpayer has full present knowledge of each element of the expense.
Sam keeps a log on a weekly basis in which he accounts for his use of an employer automobile during the week. Sam’s weekly logs are made at or near the time of each use and should satisfy the diary aspect of the substantiation requirement for transportation expenses.
The taxpayer must be able to establish all of the following with respect to each trip away from home:
- the number of miles,
- the dates for each trip,
- the travel destination, described by city name or other designation;
- the business purpose for the travel or nature of the business benefit gained or expected as result of the trip, unless the business purpose is obvious from the circumstances, (e.g., a salesman’s regular sales calls).
Other Sufficient Evidence
A taxpayer who fails to comply with the substantiation requirements described above can deduct an expense if he provides other sufficient evidence for each element of the expense. In order to do so, the taxpayer must establish each element:
- by his own statement, whether written or oral, containing specific information in detail as to each element; and
- by other corroborative evidence sufficient to establish such element.
The standard of proof required is so burdensome that a taxpayer is likely to attempt this method of substantiation only for very large items.
The answer is to keep your milage log. You can download them for free here. A mileage log should be kept for each vehicle.
Give me a call if at (703) 486-0700 if you have any questions.
DEDUCTIONS FOR YOUR HOME OFFICE
By Arthur Lander
The second area I would like to review is commuting from the “office in the home.”
This is a issue that is getting more important as more people are working out of their homes. One of the key issues is whether the home in the office is the principal office. So, the issue of whether the office in the home is the principal office not only bears on the deductibility of office expenses but also on the travel between the office in the home and work locations.
A taxpayer whose principal place of business is located in his residence may deduct the cost of all of his local transportation costs relating to his business.
This rule applies even if the business is not the taxpayer’s sole source of income, as long as the taxpayer’s residence is the principal location for the taxpayer’s secondary business.
Example: Home is Principal Business Location
Betty, a dog trainer, sometimes trains dogs at their owners’ residences, but also trains dogs at her own residence. Betty manages the business from a home office which is her principal office. Betty may deduct all of the local transportation costs connected with the business since she has no commuting costs.
Example: Home is Principal Business Location
Bob is a doctor employed full-time at a hospital. Bob also owns six rental properties which he manages himself from a home office. The local transportation costs Bob incurs in visiting his rental properties from his home office are deductible expenses of his rental property business.
A taxpayer whose primary business is located outside his home cannot deduct his transportation costs between his principal business site and the home business site because the taxpayer is presumed to simply want to go home.
Bob’s principal place of business is at the hospital. Bob cannot deduct the costs of transportation between the hospital and his home because these are commuting costs, notwithstanding his rental business at home.
Ignoring the rental activity, what if Bob’s office in the home is not his principal place of business, but just a regular place of business. Let’s say Bob has an office in the home for his medical practice, but he works at various hospitals in his area.
Here we have a conflict. The Tax Court in Walker allowed a tree cutter to deduct the cost of daily travel to various tree cutting temporary work sites. Mr. Walker had a work shop in his home, which was considered a regular place of business by the Court.
The IRS does not agree with this decision, and the IRS has issued a Revenue Ruling on the subject. To get back to our example of Bob the Doctor, Bob would have to have a regular work location away from his residence, and then he could only deduct the travel between his residence and temporary work locations.
Rev. Rul. 90-23 defines a temporary work location as any location at which the taxpayer performs services on an irregular or short-term (i.e., generally a matter of days or weeks) basis.
So, the IRS is saying that Bob the Doctor has to have a regular work location other than his home. So, if the treecutters case came up again, the treecutter would lose because his only regular place of business was his home. He would have to have a regular place of business other than the home.
I wanted to point this issue out to you, because for those of you with an office in the home, we either need to qualify them as a principal office or make sure we are adhering to this new Revenue Ruling. This may require some adjustments in what you are doing. You may need additional advice depending on your situation. If you have any questions, please call (703) 486-0700.
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