Category: Tax Services

Posted on Sep 7, 2017

Hurricane Harvey has devastated parts of Texas, with many victims are left unable to fulfill tax responsibilities and perform tax-related tasks. The IRS is responding by offering victims of Hurricane Harvey additional time to complete those tasks.

“This has been a devastating storm, and the IRS will move quickly to provide tax relief to hurricane victims,” said IRS Commissioner John Koskinen.

“The IRS will continue to closely monitor the storm’s aftermath, and we anticipate providing additional relief for other affected areas in the near future.”

Hurricane Harvey victims in affected parts of Texas now have until January 31, 2018, to file certain individual and business tax returns and make certain tax payments, the IRS announced. This includes an additional filing extension for taxpayers with valid extensions that run out on October 16, 2017, and businesses with extensions that run out on September 15, 2017.

The IRS is now offering this expanded relief to any area designated by the Federal Emergency Management Agency, as qualifying for individual assistance. Click here for a current list of counties. However, taxpayers in localities added later to the disaster area will automatically receive the same filing and payment relief.

IRS Relaxes Retirement Plan Rules

The IRS announced that employer-sponsored retirement plans (such as 401(k)s) can make loans and hardship distributions to Hurricane Harvey victims and their families.

Participants in 401(k) plans, employees of public schools and tax-exempt organizations with 403(b) tax-sheltered annuities, as well as   state and local government employees with 457(b) deferred-compensation plans may be eligible to take advantage of streamlined loan procedures and liberalized hardship distribution rules. IRA participants are barred from taking out loans, but they may be eligible to receive distributions under liberalized procedures.

Retirement plans can provide this relief to employees and certain family members who live or work in disaster area localities affected by Hurricane Harvey and designated for individual assistance by the Federal Emergency Management Agency. To see a list of affected counties in Texas, visit this IRS page. Qualified hardship withdrawals must be made by January 31, 2018.

The IRS is also relaxing procedural and administrative rules that normally apply to retirement plan loans and hardship distributions. As a result, eligible retirement plan participants can access their money more quickly with a minimum of red tape.

This broad-based relief means that a retirement plan can allow a Hurricane Harvey victim to take a hardship distribution or borrow up to the specified statutory limits from the victim’s plan. It also means that a person who lives outside the disaster area can take a plan loan or hardship distribution and use it to assist a son, daughter, parent, grandparent or other dependent who lived or worked in the disaster area.

Plans will be allowed to make loans or hardship distributions before the plan is formally amended to provide for such features. In addition, a plan can ignore the reasons that normally apply to hardship distributions, thus allowing them, for example, to be used for food and shelter. Plans that require certain documentation before a distribution is made can relax this requirement as described in IRS Announcement 2017-11.

The IRS emphasized that the tax treatment of loans and distributions remains unchanged. Ordinarily, retirement plan loan proceeds are tax-free if they’re repaid over a period of five years or less. Under current law, hardship distributions are generally taxable and subject to a 10% early-withdrawal tax.

Relief for Affected Individuals

The tax relief postpones various tax filing and payment deadlines that occurred starting on August 23, 2017. As a result, affected individuals and businesses will have until January 31, 2018, to file returns and pay any taxes that were originally due during this period. This includes the September. 15, 2017 and January. 16, 2018 deadlines for making quarterly estimated tax payments.

For individual tax filers, it also includes 2016 income tax returns that received a tax-filing extension until October. 16, 2017. The IRS noted, however, that because tax payments related to these 2016 returns were originally due on April 18, 2017, those payments are not eligible for this relief.

Relief for Affected Businesses

A variety of business tax deadlines are also affected including the October. 31 deadline for quarterly payroll and excise tax returns. In addition, the IRS is waiving late-deposit penalties for federal payroll and excise tax deposits normally due on or after August 23 and before September 7, if the deposits are made by September 7, 2017. Details on available relief can be found on the disaster relief page on IRS.gov.

The IRS automatically provides filing and penalty relief to any taxpayer with an IRS address of record located in the disaster area. Thus, taxpayers need not contact the IRS to get this relief. However, if an affected taxpayer receives a late filing or late payment penalty notice from the IRS that has an original or extended filing, payment or deposit due date falling within the postponement period, the taxpayer should call the number on the notice to have the penalty abated.

In addition, the IRS will work with any taxpayer who lives outside the disaster area but whose records necessary to meet a deadline occurring during the postponement period are located in the affected area.

Taxpayers qualifying for relief who live outside the disaster area need to contact the IRS at 866-562-5227. This also includes workers assisting the relief activities who are affiliated with a recognized government or philanthropic organization.

A Choice on When to Claim

Individuals and businesses who suffered uninsured or unreimbursed disaster-related losses can choose to claim them on either the return for the year the loss occurred (in this instance, the 2017 return normally filed next year), or the return for the prior year (2016).

The tax relief is part of a coordinated federal response to the damage caused by severe storms and flooding and is based on local damage assessments by FEMA. For information on disaster recovery, visit disasterassistance.gov.

For information on government-wide efforts related to Hurricane Harvey, please visit: https://www.usa.gov/hurricane-harvey.

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Posted on Sep 5, 2017

The Affordable Care Act established the health insurance premium tax credit (PTC). It first became available to taxpayers in the 2014 tax year. If you or a loved one is eligible for this refundable credit, it can be claimed even if the taxpayer doesn’t owe federal income tax for the year.

Here’s what you need to know about the credit and its eligibility requirements.

PTC Basics

The PTC is intended to make health insurance coverage more affordable for folks with modest incomes who don’t receive qualifying employer-sponsored coverage. Individuals and families are potentially eligible for the credit if they:

  • Meet the applicable income-level requirement, and
  • Enroll in a qualified health plan through a state-operated individual insurance marketplace, a federally-operated state marketplace or a state marketplace operated by a federal-state partnership.

Taxpayers with lower incomes receive larger credits to help cover the cost of their insurance, and those with higher incomes receive lower credits. For lower-income individuals, the credit can potentially pay for a big chunk of health insurance costs, so it can be an important tax break.

Calculating the PTC

Your allowable PTC amount for the tax year is actually calculated on a monthly basis using “coverage months” (the number of months during the year that you have and pay for qualified coverage). Generally, you can’t count months that you are eligible to enroll in minimum essential coverage that’s provided by a non-state-marketplace plan, such as a government plan or employer-sponsored plan.

To determine the allowable PTC amount for the year, you must compare the actual premiums paid for coverage to a calculated affordable premium amount, based on your household income and adjusted monthly premiums for a so-called “benchmark plan.” The difference between your actual premiums and the calculated affordable premium amount is the allowable PTC amount for the year.

Each state marketplace is required to send the IRS copies of Form 1095-A, Health Insurance Marketplace Statement, which supplies information about taxpayers who enrolled in its coverage. Taxpayers also get a copy of Form 1095-A, which is used to complete their tax returns and to reconcile any advance payments received with the actual PTC amount to which they’re entitled.

PTC Eligibility Rules

Because the PTC is a federal tax credit, eligibility and the allowable credit amount are calculated based on the applicable tax year. To qualify, you can’t be eligible to enroll in minimum essential coverage under a government-sponsored program, such as Medicare, Medicaid, Children’s Health Insurance Program (CHIP) or the U.S. military’s TRICARE program.

You also must demonstrate that you don’t have access to affordable employer-sponsored minimum essential coverage. Employers that offer coverage must disclose if it meets this definition. For 2016, employer-sponsored minimum essential coverage is considered “affordable” if the employee’s required contribution for the lowest-cost, self-only coverage doesn’t exceed 9.66% of household income (up from 9.56% for 2015).

Computing household income starts with the employee’s modified adjusted gross income (MAGI). Then, add the MAGI of every other individual in his or her family for whom the employee can properly claim a personal exemption deduction and who’s required to file a federal income tax return.

Finally, to be eligible for the PTC, you must be an applicable taxpayer by meeting the following requirements:

  1. Your household income for the year is between 100% and 400% of the federal poverty line for your family size.
  2. You can’t be claimed as a dependent by another taxpayer for the year.
  3. You file a joint tax return for the year if you’re married. (Special rules allow using married-filing-separate status for victims of domestic abuse and spousal abandonment.)

Advance PTC Payments

If you’re eligible for the PTC, you don’t have to wait until you file a Form 1040 for the year to benefit. Instead, you can choose to have the estimated credit amount paid directly to the insurance company in monthly installments to lower your monthly premiums. These are called “advance PTC payments.”

Eligibility for advance PTC payments is established during the process of determining if you’re eligible to purchase coverage through the state marketplace. The marketplace must verify that you aren’t eligible for minimum essential coverage through another source, such as Medicaid or an employer-sponsored plan.

The marketplace will also:

  • Determine if your projected income for the year meets the criteria for advance PTC payments,
  • Calculate the monthly advance PTC payment amount, and
  • Generally, obtain income information for the most recently available tax year from the IRS and use it to calculate your projected income for advance PTC payment purposes.

Because your eligibility to receive advance PTC payments is based on projected information, it may turn out that your actual allowable PTC amount for the year is less than the advance payments sent to your insurance company. In that event, the difference is treated as an addition to your federal income that must be paid when you file your return for that year. That will increase your tax bill or reduce your refund.

If it turns out that your allowable PTC amount exceeds the advance payments sent to your insurance company, the difference is refunded to you. That will decrease your tax bill or increase your refund.

Important note: Every taxpayer who benefits from advance PTC payments must file a federal income tax return for the year the advance payments were made, regardless of whether the taxpayer would otherwise be required to file a return.

Professional Guidance

This article only scratches the surface of the complicated PTC rules. Your tax advisor can help you understand if you’re eligible, crunch the numbers and handle the paperwork. Moreover, if you (or a loved one) inadvertently missed out on this credit on last year’s tax return, your tax advisor can file an amended tax return.

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Posted on Aug 30, 2017

BY AMY KOTHMANN

Our friends at Richard P. Slaughter Associates, Inc. recently published an article in Worth Magazine that answers the question What’s the best thing to do when you receive a large inheritance? To read the full article, click here.

Trillions of dollars are now changing hands as older parents transfer their significant wealth to baby boomer children. Ideally, that older generation’s estate planning has protected assets and ensured a smooth handover. Now, however, as a beneficiary, it is your responsibility to ensure this familial wealth is maintained. The decisions you make following an inheritance will directly impact how that wealth is preserved for you and future generations.

Here are five issues to consider to ensure the desired outcome:

1. DON’T MAKE IMMEDIATE CHANGES.

Fight the urge to make immediate large purchases with the funds. Rash decisions can be costly and difficult to remedy. Also realize that receiving an inheritance can be an emotional time, likely linked to the loss of a close loved one. Give yourself time to process the change and create a strategy before making any big spending decisions.

2. SEEK PROFESSIONAL ADVICE.

A large inheritance changes your overall wealth picture, affecting your household budget, investment tactics, tax implications and risk-management needs. Find an advisor who has the credentials and expertise in serving these needs, to help map the appropriate strategies for your new wealth level. This should include coordination across your team of professionals: your CPA, attorney, insurance specialist and, of course, your wealth-management advisor.

3. PROPERLY TITLE ASSETS.

Be wary of consolidating inherited assets into existing accounts merely for the sake of simplicity. Draining a trust or commingling inherited funds into jointly titled accounts can cause the funds to lose their separate property character. This would give a spouse (and his or her beneficiaries) potential claim to a portion of those assets in the event of death or divorce, negating the protection mechanisms your predecessors worked hard to create.

4. CONSIDER TAXES.

Taxation concerns don’t cease once the estate has been settled. Revisiting your personal tax outlook after an inheritance is essential to ensure you are maximizing both your current and long-term trajectory. This is particularly true when the bulk of an inheritance is in retirement accounts from a nonspouse. In this case , you will be required to take minimum withdrawals from the accounts that are taxable as ordinary income. This could cause unintended tax consequences, especially if you are still working and earning wages; those consequences, however, can be mitigated by using other income-deferral strategies. Conversely, beneficiaries already in retirement may benefit from realizing more than the minimum of the inherited monies now, either through withdrawals or Roth conversions. This could smooth out their tax bills down the road when their own minimum distributions begin. All in all, carefully planned timing of how and when your income is realized can lead to significant tax savings; so any plan you already have needs to be revised to include your inherited funds.

5. PLAN YOUR OWN LEGACY.

Reevaluation of your own legacy is crucial. This includes such actions as updating estate-planning documents to incorporate the newly inherited assets. You also should reassess your wealth-transfer goals and strategies to ensure the most appropriate tools are utilized for your new wealth level. Mechanisms that were appropriate prior to the inheritance might no longer be your best option, depending on your goals and outlook. This is particularly important when an inheritance puts you near the lifetime estate-tax exclusion, as tax-efficient strategies such as lifetime gifting can be a powerful way to transfer wealth tax-free. Once your plans are established, communicating them to heirs is critical, to ensure your efforts are not in vain. Your wealth manager can help educate future heirs on the skills necessary to manage their future wealth to ensure the family wealth is preserved across generations.

RICHARD P. SLAUGHTER ASSOCIATES IS A LEADING WEALTH-MANAGEMENT FIRM, SPECIALIZING IN DELIVERING TAILORED STRATEGIES AS A FIDUCIARY AND ADVOCATE FOR HIGH NET WORTH INDIVIDUALS, FAMILIES AND BUSINESSES.

Slaughter Associates constructs wealth-management strategies around a financial plan, providing active, diversified and conservative asset management through internal experts. These experts establish a collaborative relationship with clients and all their financial service professionals, helping clients navigate the financial complexities that high net worth individuals and families face. Founded in 1991 in Austin, Texas, by Richard P. Slaughter, Slaughter Associates is one of the original fee-based firms in the nation. Through its subsidiary, RPS Retirement Plan Advisors, Slaughter Associates works with corporate clients by providing 3(38) fiduciary services, which help mitigate risk for plan sponsors and secure retirement readiness for employees. With offices in both Austin and the Dallas-Fort Worth Metroplex, Slaughter Associates has been recognized by the National Association of Board Certified Advisory Practices as a Premier Advisor and has been awarded Exemplary status for expertise in personal risk management.

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Posted on Aug 29, 2017

When you retire or change jobs, it is generally a good idea to roll over your employer-sponsored qualified retirement plan balances into a traditional IRA.

But that advice may change if the employer-qualified plan account holds appreciatedcompany stock. In that case, you could be better off withdrawing the shares, paying the taxes, and holding the stock in a taxable brokerage firm account. Here is why.That way, you avoid an immediate tax hit and continue to benefit from tax-deferred earnings growth until you withdraw money from the IRA.

An Example to Show the Mechanics of the Strategy

Let’s say you retire from your job at age 60. As part of a lump-sum distribution from your company-sponsored, qualified retirement plan, you receive 2,000 shares of employer stock. The shares have a cost basis to the plan of $10,000 and a current market value of $80,000.

You expect the stock to continue to appreciate, so you don’t plan to sell in the near future. Instead of rolling the shares into an IRA, you deposit them in a taxable brokerage house account. You then pay tax at your ordinary rate of, say 25%, on the $10,000 cost basis amount. So the federal income tax hit is $2,500 (25% of $10,000). Since you are older than age 55, you don’t owe the 10% premature withdrawal penalty tax.

Your tax basis in the shares is now $10,000. You can roll over some or all of any other money received in your lump-sum distribution tax-free into a traditional IRA.

Years later, you die after the employer shares have appreciated to $180,000. Your heirs will receive a federal income tax basis step-up equal to the post-distribution appreciation in value ($100,000 in this example).

When your heirs sell the stock, they will owe capital gains tax on the $70,000 worth of net unrealized appreciation ($80,000 market value as of the plan distribution date minus the $10,000 cost basis in the shares). Assuming a 15% capital gains rate, the total federal income tax hit on the $180,000 worth of stock is only $13,000:

  • $2,500 paid by you when you received the shares as part of the lump-sum distribution.
  • $10,500 (15% of the $70,000 of net unrealized appreciation) paid by your heirs when the shares are finally sold.
  • That amounts to an effective federal income tax rate of only 7.22%.
  • In contrast, if you had rolled the employer shares over into an IRA, your heirs would eventually owe tax at ordinary income rates on the entire $180,000. In all likelihood, the resulting federal income tax hit would be at least 25%, or $45,000.

Tax Deferral

The net unrealized appreciation of the shares goes untaxed until you sell them. As long as the shares are part of a lump-sum distribution from your retirement accounts, you pay current tax only on the retirement plan’s cost basis in the stock. The cost basis is generally the value of the shares when they were acquired by the plan. The net unrealized appreciation is the difference between cost basis to the plan and the shares’ market value on the date they are distributed to you.

If the shares have appreciated substantially, the plan’s cost basis could be a relatively small percentage of the shares current market value as of the distribution date. However, the cost basis could still be significant in absolute dollars, so the tax hit may be more than a nominal amount.

In addition, if you are under 55 years of age when you leave your job, you generally have to pay the 10 percent federal tax penalty on premature withdrawals. That might be worth it, though, if the taxable income, which is equal to the cost basis, is small.

Tax Savings

When the net unrealized appreciation is taxed, it automatically qualifies as a long-term capital gain eligible for favorable capital gains rates (see IRS Notice 98-24). As you know, the current maximum federal rate on long-term capital gains is only 20%, compared with a maximum 39.6% on ordinary income.

Additional Tax Savings

Appreciation of the shares after the distribution also qualifies for the favorable capital gains rates, provided you hold the stock for more than 12 months after receiving them from the plan.

Even More Tax Savings

If you own the stock when you die, your heirs are entitled to a federal income tax basis step-up for any post-distribution appreciation. However, when they sell the shares, the net unrealized appreciation will be taxed under the “income in respect of a decedent” rules. The good news is the unrealized appreciation will be taxed at the favorable rates for long-term capital gains. (see IRS Revenue Ruling 75-125)

In contrast, if you roll the employer stock over tax free into an IRA, you pay tax on the stock gains only when the shares are sold and you take withdrawals from the IRA. The net unrealized appreciation and post-distribution appreciation will count as ordinary income, so you or your heirs will owe as much as 39.6% in taxes rather than the favorable capital gains tax. (See right-hand box.)

Before following this tax-saving strategy, be sure the shares qualify and are part of a lump-sum distribution. The rules are tricky, so consult with your tax adviser if you have questions or want to discuss whether this maneuver will work for you.

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Posted on Aug 29, 2017

Sonic Industries Services, Inc, franchisor of the SONIC drive-through restaurant chain, has entered into a voluntary agreement with the U.S. Department of Labor’s (DOL) Wage and Hour Division (WHD) to help its independently owned and operated franchise locations comply with the federal labor laws.

 

SONIC Drive-In restaurants are the nation’s largest drive-in chain, serving approximately 3 million customers daily. Nearly 94% of its 3,500 drive-in locations are locally owned and operated. SONIC has been the subject of several wage theft lawsuits that involved workers alleging that they didn’t receive overtime after working 40 hours in a week and were required to work “off the clock.”

As part of the agreement, SONIC will provide a forum and the resources needed to assist the WHD in educating its drive-in owners, managers, and employees nationwide.

Fair Labor Standards Act

The FLSA requires that covered, nonexempt  employees be paid at least the federal minimum wage of $7.25 per hour as well as time and one half their regular rates for every hour they work beyond 40 per week. It also requires employers to maintain accurate records of their employees’ wages, hours and other conditions of employment.

The WHD will provide compliance assistance tools designed for the franchise restaurant industry. The package will include video and online training, educational articles for use in internal company publications, and sample training materials for use in company staff meetings. The WHD will also make representatives available to provide training and compliance assistance to SONIC franchisees. In addition, the WHD and SONIC will collaborate using publicly available data to promote franchisee compliance with the Fair Labor Standards Act.

The agreement states that it is not “an admission” by SONIC that it “is a joint employer of the workers employed by its franchisees. WHD recognizes that the existence of a franchise relationship, in and of itself, does not create joint employment.”

The SONIC agreement is similar to an agreement that the WHD entered into with the Subway restaurant chain in 2016.

WHD Deputy Administrator for Program Operations, Patricia Davidson, noted that the WHD will “encourage other franchisors to follow SONIC’s example and take similar steps to benefit their franchises’ employees and owners by complying with the law.” She believes that complying with the wage and hour laws makes good business sense, rather than paying back wages, damages, and penalties for violations.

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Posted on Aug 23, 2017

A “100% penalty” can be assessed against a responsible person when federal income tax and/or federal employment taxes are withheld from employee paychecks but aren’t handed over to the government.

This Trust Fund Recovery Penalty got its informal “100% penalty” moniker from the fact that the entire unpaid amount can be assessed against a responsible person (or several responsible persons). The purpose of the penalty is to collect withheld but unpaid federal taxes from individuals who had control over an employer’s finances.

Often, operating a business as a corporation protects the individual owner from personal liability for some corporate debts. In cases of unpaid payroll taxes, however, the corporate shield or corporate veil is “pierced” and the IRS looks past the corporation to the responsible person to pay the debt.

Determining Who’s Responsible

The 100% penalty can only be assessed against a responsible person. That could be a shareholder, director, officer or employee of a corporation; a partner or employee of a partnership; or a member (owner) or employee of a multi-member LLC. It can also be assessed against an employee of a sole proprietorship or an employee of a single-member (one owner) LLC. To be hit with the penalty, the individual must:

  1. Be responsible for collecting, accounting for, and paying withheld federal taxes, and
  2. Willfully fail to remit those taxes (willful means intentional, deliberate, voluntary and knowing, as opposed to accidental).

The mere authority to sign checks when directed to do so by a superior doesn’t make a person responsible. There must also be knowledge of and control over the finances of the business. However, responsible person status can’t be deflected simply by assigning signature authority over bank accounts to another person in order to avoid the 100% penalty. As a practical matter, the IRS will look first and hard at individuals with check-signing authority.

The courts have examined several factors beyond the authority to sign checks when they determined who had responsible person status. Those factors include whether the individual:

  • Is an officer or director,
  • Owns shares or has an entrepreneurial stake in the company,
  • Is active in managing the day-to-day affairs of the company,
  • Can hire and fire employees,
  • Makes decisions regarding which, when, and in what order debts or taxes will be paid, and
  • Exercises daily control over bank accounts and disbursement records.

Outside Parties Can Be Responsible

In certain circumstances, outside parties such as lenders and advisors can also be responsible persons. For example:

  1. A bank had the authority under a loan agreement with a delinquent corporation to oversee much of the corporation’s operations. It exercised this authority by honoring some checks but dishonoring others and was found by the IRS to be a responsible person.
  2. A volunteer member of a charitable organization’s board of trustees had knowledge of the organization’s tax delinquency and authority to decide whether to pay the taxes. The individual was determined to be a responsible person by the IRS.
  3. The president of a day care center’s board of directors, who wasn’t paid for his work and wasn’t involved in day-to-day operations, was held to be a responsible person because he secured loans for the center, directed its tax payments, and reviewed its financial reports. Therefore, he was found to be sufficiently involved in the center’s financial affairs to make him a responsible person.
  4. The executor of a decedent’s estate was found to be a responsible person when the operators of an inn (which was an asset of the estate) failed to remit withheld federal taxes.

More Real-Life Horror Stories

CEO and CFO Were Responsible Persons. A corporation’s newly hired CFO became aware that the company was several years behind on its payroll taxes and notified the company’s CEO of the situation. The CFO and CEO then informed the company’s board of directors. Although the company apparently had sufficient funds, the taxes weren’t paid. After the CFO and CEO were both fired, the IRS assessed the 100% penalty against them both for withheld but unpaid taxes accrued during their tenures.

The First Circuit Court of Appeals upheld an earlier district court ruling that the two officers were responsible persons who acted willfully by paying other expenses instead of the federal tax liabilities. Therefore, they were both personally liable for the 100% penalty. (Schiffmann, 117 AFTR 2d 2016-386 1st Circuit, 2016)

Vice President and Co-Owner Was Responsible Person. A 40% stockholder and vice president of a corporation had an agreement with the 40% owner and president that the VP wouldn’t exercise independent authority over the corporation’s finances. The VP was responsible for running the shop and field operations but had check-signing authority only if the president was out of the office or unavailable.

However, the VP typically signed the field workers’ payroll checks and on one occasion signed the corporation’s federal payroll tax report. The VP also signed an IRS form stating that he was aware of an unpaid liability for withheld federal employment taxes.

Despite the VP’s argument that he had no real control over corporate finances and that he didn’t focus on day-to-day administrative responsibilities, the Federal Court of Claims concluded that he had the authority and responsibility to oversee the company’s financial obligations. Therefore, he was found to be a responsible person and was personally on the hook for the 100% penalty. (Waterhouse, 116 AFTR 2d 2015-5080 Court of Federal Claims, 2015)

Conclusion

If you can be held personally liable for failure to remit withheld employment taxes — whether or not you’re an owner or officer of the company — make sure that Uncle Sam is paid in a timely fashion. And keep in mind that in some cases, the IRS can go after several people.

If you’re tagged, you may ultimately prove that you aren’t a responsible person, but that could be expensive. Consult with your tax advisor about what records you should be keeping to avoid exposure to this expensive penalty.

Not Paying Over Employment Taxes Can Even Lead to Prison

In one 2016 case, the president of a construction company was sentenced to 18 months in prison for employment tax fraud and ordered to pay restitution to the IRS in the amount of $677,350, according to the U.S. Department of Justice (DOJ).

The 52-year-old man failed to collect, account for and pay over employment taxes to the IRS. The DOJ stated in a press release that he “chose to withhold employment tax from his employees, and use those funds for his personal benefit, inflicting substantial harm on the U.S. Treasury and gaining a competitive advantage over his law-abiding competitors.”

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Posted on Aug 18, 2017

Many business owners fail to follow the strict tax rules for substantiating vehicle expenses. But if your business is audited, the IRS will most likely ask for mileage logs if you deducted vehicle expenses — and it tends to be especially critical of the amount deducted if you’re self employed or you employ relatives. While the basics seem simple, there are numerous exceptions.

Mileage Logs

Taxpayers can deduct actual vehicle expenses, including depreciation, gas, maintenance, insurance and other vehicle operating costs. Or they can use the standard mileage method, which allows a deduction based on the standard rate for each mile the vehicle is driven for business purposes. For example, the standard mileage rate is 53.5 cents a mile for 2017 (down from 54 cents per mile for 2016). If you drive 1,000 miles for business purposes in 2017, you could deduct $535 under the standard mileage method.

Regardless of the method used, the recordkeeping requirements for mileage are the same. They’re also the same whether you’re the only employee who uses a vehicle, you employ others who use company vehicles, or an employee uses his or her own vehicle and is reimbursed by the company.

Vehicle logs must provide the following information for each business trip:

  • Date,
  • Destination,
  • Business purpose,
  • Start odometer reading,
  • Stop odometer reading, and
  • Mileage.

Employees who use their own vehicles must provide these details to their employer. If an employer reimburses an employee without the required documentation, the reimbursement is taxable income. If an employee uses a company vehicle, the IRS considers any usage that’s unaccounted for as personal use and the value of unaccounted usage should be included in the employee’s income for the employer to secure a deduction.

The IRS requires “contemporaneous” recordkeeping for mileage. That means a recording at or near the time of the trip. You can record the mileage at the time of the trip and enter the business purpose at the end of the week. But waiting much longer could raise suspicion about the validity of the vehicle log and potentially jeopardize your entire vehicle deduction.

The tax agency requires varying levels of detail, depending on the circumstances. For example, you might be able to list only the customer’s name if you visit someone regularly to demonstrate new products, provide service and take orders. But cold calls to prospective customers may require a more detailed write-up in your vehicle log. A single entry may be enough for visits to several customers in the same day, but you may need to log any detours taken for personal reasons, such as personal errands or lunch with your spouse.

In some cases you may be able to avoid recordkeeping if your company maintains a formal policy forbidding employees from using company vehicles for personal reasons. However, the exception has numerous rules and restrictions. For instance, the policy must be written and meet six conditions, and the exception applies to only employees who aren’t “control” employees, such as:

  • Employees who are appointed by the board or shareholders or an elected officer whose pay is $100,000 or more,
  • Directors,
  • Employees who earn at least $205,000 annually, and
  • Employees who own a 1% or more share of equity, capital or profits in the business.

Exceptions to the Rules

We’ve used the term “vehicle,” because the recordkeeping rules apply to more than just cars. Technically, every vehicle is subject to the rules. But the IRS permits specific exceptions for the following vehicles that are unlikely to have more than a minimum amount of personal use:

  • Delivery trucks with seating only for the driver or only for the driver plus a folding jump seat,
  • Buses with a 20-person minimum seating capacity,
  • Special purpose farm vehicles, and
  • Any vehicle designed to carry cargo with a loaded gross vehicle weight over 14,000 pounds.

Not listed above are more obvious exceptions, such as cement mixers, combines and bucket trucks. In addition, the IRS permits exceptions for trucks or vans that have been specially modified so that they aren’t likely to be used more than a de minimis amount for personal purposes. An example is a van that has only a front bench for seating, has permanent shelving that fills most of the cargo area, constantly carries equipment and has been custom painted with the company’s name and logo.

Simplified Recordkeeping

Complying with the IRS mileage recordkeeping rules can be tedious, especially for workers who drive significant distances for business purposes. Here are some ways you can simplify the process:

Use technology. Mileage logs don’t have to be kept in a written diary or day planner — you can download an app to your tablet or cell phone to track mileage. These apps typically allow you to take a picture of the odometer for the beginning and ending mileage. If you allow this method, require workers to back up their electronic mileage logs regularly to prevent loss of mileage records. Alternatively, you might use GPS tracking of company vehicles to help document mileage.

Apply sampling methods. The IRS allows taxpayers to use the mileage for regular routes — for example, if you visit the same customers on a fixed weekly schedule — and extrapolate the sample mileage over the entire tax year. This can save time, but you’ll have to show that the sample is valid. And if the route changes midyear, you’ll have to show how you updated the sample.

The easiest way to simplify recordkeeping for vehicle expenses is to use the standard mileage rate, rather than tracking actual expenses. Doing so eliminates the need to save gas receipts and maintenance records. But the downside is that this method tends to understate expenses, particularly if you drive an expensive gas guzzler or pay above-average insurance premiums. If a vehicle’s business use is high but its total use is low, actual fixed costs — such as insurance and depreciation — are likely to be higher on a per-mile basis than with the standard mileage rate.

Ongoing Attention

Vehicle expenses can quickly add up for businesses — as well as for individuals who are tracking mileage for itemized medical or charitable deductions, or supplemental business activities such as managing investments in local businesses or rental properties. But as easily as they add up, so too can vehicle deductions vanish in an IRS inquiry.

The key to preserving your deductions is maintaining up-to-date mileage records. Too often, taxpayers assume they can put together a mileage log the night before the IRS visits. That rarely works. For example, the IRS questioned a situation in which the taxpayer used the same pen over a two-year period. In another case, the IRS noticed that the taxpayer claimed to be at the post office and an hour later was at a client 110 miles away. In cases where there are more than a few discrepancies, the IRS often denies all vehicle expense deductions, claiming the mileage log wasn’t credible. On top of losing your deduction, you also might face penalties and interest for underpaying your tax liability.

When it comes to the recordkeeping requirements for vehicles, the IRS rarely allows exceptions for its strict rules. Don’t assume you qualify for an exception, check with your tax advisor first. He or she can help you navigate the complicated vehicle recordkeeping rules with confidence.

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Posted on Aug 14, 2017

For years, people have questioned the viability of the Social Security system going forward. In July, the Social Security Board of Trustees released its annual report on the long-term financial status of the Social Security Trust Funds.

The report projects that the combined asset reserves of the Old-Age, Survivors and Disability Insurance (OASDI) Trust Funds will become depleted in 2034, unless Congress takes action to reverse the situation.

In general, people approaching retirement age often have other questions about benefits they may be eligible to receive from the Social Security Administration (SSA). Here are common concerns regarding the Social Security system.

What’s My FRA?

Your full retirement age (FRA) depends on the year in which you were born.

Year of Birth

Full Retirement Age
1937 or earlier 65
1938 65 and 2 months
1939 65 and 4 months
1940 65 and 6 months
1941 65 and 8 months
1942 65 and 10 months
1943–1954 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 and later 67

If you were born on January 1 of any year, refer to the previous year. If you were born on the first of the month, the SSA figures your benefit (and your FRA) as if your birthday were in the previous month.

Collecting Retirement Benefits

According to the 2017 report by the Social Security Board of Trustees, roughly 61 million beneficiaries were collecting money from the SSA at the end of 2016, including:

  • 44 million retired workers and dependents of retired workers,
  • 6 million survivors of deceased workers, and
  • 11 million disabled workers and dependents of disabled workers.

In 2016, the SSA’s total income ($957 billion, including interest income) exceeded its total expenditures ($922 billion). So, its asset reserves grew by $35 billion last year.

The reserves of the OASDI Trust Funds together with projected income should be sufficient to cover the SSA’s costs over the next 10 years. However, starting in 2022, the SSA’s total expenditures are expected to start outpacing its total income.

Is it time for you to start collecting retirement benefits? You may apply for benefits as early as age 62. Starting early will reduce your monthly benefits by as much as 30%, but, of course, you’ll receive benefits for more years.

If you want to receive full retirement benefits from the SSA, you must wait until you reach the so-called full retirement age (FRA). See “What’s My FRA?” at right. Your tax advisor can help you determine if you would likely be better off waiting until your FRA to start taking benefits.

Applying for Benefits

Apply for retirement benefits three months before you want your payments to start. The SSA may request certain documents in order to pay benefits, including:

  • Your original birth certificate or other proof of birth,
  • Proof of U.S. citizenship or lawful alien status if you weren’t born in the United States,
  • A copy of your U.S. military service paper(s) if you performed military service before 1968, and
  • A copy of your W-2 Form(s) and/or self-employment tax return for the prior year.

For most retirees, the easiest way to apply for benefits is by using the online application.

Receiving Benefits While You’re Working

If you’re under FRA and earn more than the annual limit (subject to inflation indexing), your benefits will be reduced, as follows:

  • If you’re under FRA for the entire year, you forfeit $1 in benefits for every $2 earned above the annual limit. For 2017, the limit is $16,920.
  • In the year in which you reach FRA, you forfeit $1 in benefits for every $3 earned above a separate limit, but only for earnings before the month you reach FRA. The limit in 2017 is $44,880. But the SSA only counts earnings before the month you reach your FRA.

Beginning with the month in which you reach FRA, you can receive your benefits without regard to your earnings.

Retiring after Your FRA

You can receive increased monthly benefits by applying for Social Security after reaching FRA. The benefits may increase by as much as 32% if you wait until age 70, but of course you’ll receive benefits for fewer years. After age 70, there is no further increase. Your tax advisor can help calculate the payout for waiting to collect your retirement benefits and help you determine if you likely will be better off waiting beyond your FRA to start taking benefits.

Managing Benefits for an Incapacitated Person

If a Social Security recipient needs help managing his or her retirement benefits — perhaps an elderly parent — contact your local Social Security office. You must apply to become that person’s representative payee in order to assume responsibility for using the funds for the recipient’s benefit.

Qualifying for Social Security Survivors Benefits

A spouse and children of a deceased person may be eligible for benefits based on the deceased’s earnings record as follows:

A widow or widower can receive benefits:

  • At age 60 or older,
  • At age 50 or older if disabled, or
  • At any age if she or he takes care of a child of the deceased who is younger than age 16 or disabled.

A surviving ex-spouse might also be eligible for benefits under certain circumstances. In addition, unmarried children can receive benefits if they’re:

  • Younger than age 18 (or up to age 19 if they are attending elementary or secondary school full-time), or
  • Any age and were disabled before age 22 and remain disabled.

Under certain circumstances, benefits also can be paid to stepchildren, grandchildren, stepgrandchildren or adopted children. In addition, dependent parents age 62 or older who get at least one-half of their support from the deceased may be eligible to receive benefits.

A one-time payment of $255 may be made only to a spouse or child if he or she meets certain requirements. Survivors must apply for this payment within two years of the date of death.

Paying Income Taxes on Benefits

You’ll be taxed on Social Security benefits if your provisional income (PI) exceeds the thresholds within a two-tier system.

PI between $32,000 and $44,000 ($25,000 and $34,000 for single filers). Recipients in this range are taxed on the lesser of 1) one-half of their benefits or 2) 50% of the amount by which PI exceeds $32,000 ($25,000 for single filers).

PI above $44,000 ($34,000 for single filers). Recipients above this threshold are taxed on 85% of the amount by which PI exceeds $44,000 ($34,000 for single filers) plus the lesser of 1) the amount determined under the first tier or 2) $6,000 ($4,500 for single filers).

PI equals the sum of 1) your adjusted gross income, 2) your tax-exempt interest income, and 3) one-half of the Social Security benefits received.

Need Assistance?

The long-term insolvency of the SSA program underscores the importance of saving for retirement while you’re working. Social Security benefits should be viewed only as a supplement to your other assets.

If you have additional questions about receiving Social Security retirement benefits, contact your Cornwell Jackson advisor. He or she can help you navigate the application process and understand tax issues related to receiving retirement benefits.

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Posted on Aug 13, 2017

Revenue is the top line of your company’s income statement. So, it tends to receive a lot of attention from investors, lenders and other stakeholders. Why? Changes in revenue can tell whether your company is growing or declining. Moreover, changes in the composition of revenue can provide insight into your strategic plans.

If your company enters into contracts, it may need to update the way revenue is reported under new accounting guidance that goes into effect for public companies starting in 2018. Private companies get an extra year to change their reporting practices and systems to comply with this new standard.

Here are the details on what’s changing, including expanded disclosure requirements  that will affect a wide range of businesses.

Prepare to Add Disclosures

What’s the biggest challenge companies encounter when adopting the new revenue  recognition standard? Many companies that have already made the necessary changes report spending a significant amount of resources modifying their recordkeeping practices to comply with the standard’s expanded disclosure requirements.

Under existing U.S. Generally Accepted Accounting Principles (GAAP), most companies disclose limited information about revenue. When it comes to contract revenue, a company’s footnotes typically reveal only its general accounting policies and segment reporting.

The updated revenue recognition guidance requires all companies to provide a cohesive set of disclosures about the nature, amount, timing and uncertainty of revenue and cash flows from contracts with customers.

Specifically, the new standard will require you to:

  • Break down revenue into appropriate categories, such as product lines, geographic markets, contract length and services vs. physical goods.
  • Provide opening and closing balances of receivables, contract assets and contract liabilities.
  • Identify various performance obligations (or promises) in the company’s contracts, including when the reporting organization typically satisfies its performance obligations and the amount allocated to the remaining performance obligations in a contract.
  • Explain significant judgments and changes in judgments made when recognizing contract revenue.

The updated guidance also requires additional information about assets recognized from the costs to obtain or fulfill a contract with a customer.

The Basics

Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, will result in a major shift in the way some companies report revenue. For simple point-of-sale retail transactions, little change is expected: Revenue will continue to be recognized when goods or services are delivered to the customer. The process gets more complicated for long-duration, multi-element contracts, sales that include incentives for customers with poor credit, and contracts with built-in discounts or performance bonuses.

The breadth of change under the new standard depends on your industry. Companies that currently follow industry-specific revenue recognition rules under U.S. Generally Accepted Accounting Principles (GAAP) will feel the biggest effects from these changes. Examples include software manufacturers, telecommunications companies, defense contractors, airlines, hospitality and gaming companies, and health care providers.

Nearly all companies will be affected by the expanded disclosure requirements, which call for more details on the composition of revenues. (See “Prepare to Add Disclosures,” at right.)

Exceptions to the new rules include insurance contracts, leases, financial instruments, guarantees and nonmonetary exchanges between entities in the same line of business to facilitate sales. These transactions remain within the scope of existing industry-specific GAAP.

5 Steps

Compared to current practice, the updated guidance requires management to make more judgment calls based on overriding principles. The new standard calls for five steps to decide how and when to recognize revenue:

  1. Identify a contract with a customer.
  2. Separate the contract’s “performance obligations” (discrete promises to transfer goods or services).
  3. Determine the transaction price.
  4. Allocate the transaction price to each performance obligation.
  5. Recognize revenue when or as the company transfers the promised good or service to the customer, depending on the type of contract.

Essentially, the updated standard requires companies to assign a transaction price to each of a contract’s separate performance obligations and consider whether it’s “probable” they won’t have to make a significant reversal of revenue in the future. They also may need to adjust transaction prices to reflect the time value of money. Different companies may interpret the “probable” threshold differently, however, threatening financial statement comparability among entities.

It’s important to note that the new standard doesn’t change the total amount of revenue your company reports. Rather it’s a matter of timing. Companies may report revenue sooner (or later) under the new standard, depending on the terms of their contracts and management’s application of the “probable” threshold.

Use of Estimates

Recognizing revenue under the new standard will require management to make subjective judgment calls on such issues as:

  • Identifying performance obligations,
  • Estimating standalone transaction prices for distinct goods and services, and
  • Evaluating variable consideration (such as rebates, discounts, bonuses and rights to return) when determining the transaction price.

As the start date approaches, it’s important to assess whether the use of estimates could expose your company to additional financial reporting risks. The Securities and Exchange Commission’s Office of the Chief Accountant is urging public companies to conduct a risk assessment to ensure that they meet their financial reporting responsibilities under the new standard. The implementation process may include adopting new internal controls to help prevent management bias and inadvertent errors that could mislead stakeholders about contract revenue.

In light of the increased risk of potential misstatements, expect more questions from your accountant regarding revenue. If your statements are audited, expect your auditor to request more documentation and perform different auditing procedures than in previous years. Also, understand that the new rule may result in temporary book-to-tax reporting differences. That’s because the tax rules regarding revenue recognition haven’t yet changed to jive with the new accounting standard.

Need Help?

If your company issues comparative financial statements under GAAP, you should have already started the process for adopting the new revenue recognition standard. Most public companies that have already made the changes report that it takes more time and effort than they initially expected.

Contact your accounting professional to determine the extent to which the guidance will affect your company and how to revise your recordkeeping procedures, accounting systems and internal controls to facilitate compliance.

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Posted on Aug 11, 2017

We’re in the midst of hurricane season now, but the eastern and southern shores aren’t the only parts of the country at risk for catastrophic events. Mudslides, earthquakes and wildfires often plague the West Coast, tornadoes may touch down across the Great Plains and Midwest, and low-lying areas near rivers and tributaries across the country are prone to flooding.

Although nowhere in the United States is safe from Mother Nature, there is a silver tax  lining: If your personal-use property is struck by a natural disaster, damaged by another calamity or stolen, you may be able to obtain some relief by claiming a casualty or theft loss as an itemized deduction on your individual tax return. As with most tax breaks, however, there are important rules and limits you need to be aware of.

Close-Up on Business Casualty Losses

What happens if your business property — rather than your personal-use property — is stolen, vandalized or otherwise damaged by an event? The same basic casualty and theft loss rules generally apply, with a few notable exceptions.

Most important, the limits for individual casualty and theft loss deductions don’t apply. In other words, you don’t have to worry about the $100-per-event reduction or the 10%-of-AGI threshold. Business casualty and theft losses are fully deductible (subject to the other restrictions listed in the main article, such as those related to salvage value and insurance reimbursements).

As with income-producing property, if business property is destroyed, the amount of your loss is your adjusted basis in the property. Any decrease in fair market value doesn’t come into play.

The Basics

To qualify for a casualty loss deduction, the damage or destruction must result from a “sudden, unexpected or unusual” event. Typically, this includes damage or destruction caused by natural disasters, such as hurricanes, tornadoes, fires, earthquakes or volcanic eruptions. But casualty losses may also result from such events as automobile collisions or water pipes bursting during a severe cold snap.

Similarly, losses due to vandalism or theft of property can be deducted. These amounts are combined with casualties for tax purposes.

On the other hand, you aren’t allowed to recoup losses due to normal “wear and tear” or progressive deterioration. For example, damage to shrubbery and plants caused by a long summer drought doesn’t qualify for the casualty loss deduction. Neither does damage to a home from termites or other insect infestations over long periods of time.

Quantifying Your Loss

For personal-use property that’s partially or completely destroyed, your casualty loss is the lesser of:

  • Your adjusted basis in the property, or
  • The decrease in the fair market value of your property as a result of the casualty.

However, if your property is income-producing property, such as rental property, and it’s destroyed, the amount of your loss is limited to your adjusted basis in the property.

The adjusted basis of your property is usually your cost, increased or decreased by certain events, such as improvements or depreciation. For instance, if you bought a home for $500,000 and you’ve added an in-ground swimming pool, deck and finished basement for $150,000, your adjusted basis in the home is $650,000.

For property that’s been stolen, your theft loss is generally your adjusted basis in the property.

For both casualty and theft losses, the deductible loss must be reduced by any salvage value and by any insurance or other reimbursement you receive or expect to receive. For example, suppose you own a barn with an adjusted basis of $25,000. The barn is destroyed by a fire and the insurance company reimburses you $15,000. In this case, $10,000 of damage is eligible for the casualty loss deduction, subject to additional limits. (See “Deduction Limits” below.)

If your property is covered by insurance, you must file a timely insurance claim for loss reimbursement. Otherwise, you can’t deduct the casualty or theft loss.

Deduction Limits

Unfortunately, you can’t deduct your entire casualty or theft loss — and you might not be able to deduct any of it, depending on the size of the loss and your income. The deduction is limited by the following two rules:

  1. The amount of your aggregate casualty and theft losses must be reduced by $100 for each separate casualty or theft loss event.
  2. You can deduct your aggregate casualty and theft losses only to the extent they exceed 10% of your adjusted gross income (AGI).

To better understand how these two rules work together, suppose your AGI for 2017 is $100,000. In July, a hailstorm causes $12,000 in uninsured damage to your home. Then your car is involved in an accident in October, and your out-of-pocket cost to have it fixed is $3,000.

Based on these facts, you may claim a deduction based on the two separate events: the hailstorm and the car accident. After insurance reimbursements, the deductible amount of your loss for damage to the home is $11,900 ($12,000 – $100), while the loss for the car is $2,900 ($3,000 – $100). Thus, the total amount of your casualty losses is $14,800 ($11,900 + $2,900). But, because 10% of your AGI is $10,000, your deduction is limited to $4,800 ($14,800 – $10,000).

If, however, your only casualty loss for the year was from the car accident, you won’t be able to deduct anything because your $2,900 loss is under the 10% of AGI threshold.

Timing of Deductions

Normally, you can deduct a casualty loss on your tax return only for the tax year in which the casualty occurred. This is true even if you don’t repair or replace the damaged property until a later tax year. For example, if your basement floods in late 2017, the resulting loss is deductible on the 2017 return you’ll file in 2018, regardless of when you repair or replace anything that was damaged or destroyed.

However, a special tax election may apply for damage occurring in an area designated by the President as a “federal disaster area,” allowing you to choose to claim the available casualty loss on the tax return for the tax year preceding the year of the event. For example, if you incur a loss in a federal disaster area before the end of 2017, you can choose to amend your 2016 return to obtain faster tax relief. You don’t have to wait until you file your 2017 return.

The timing rules for deducting theft losses are a little different. Generally, you can deduct the loss for the tax year you become aware that the property was stolen; it doesn’t matter when the theft actually occurred. However, you can’t claim a deduction while there’s still a reasonable probability that insurance will reimburse you for the loss.

So if you submit an insurance claim for a theft you discovered in 2017 but don’t find out until 2018 whether the claim will be paid, you can’t deduct a theft loss on your 2017 return. If in 2018 the insurer denies your claim (or reimburses you for less than your adjusted basis in the property), then you can deduct the unreimbursed loss on your 2018 return, provided you meet the other rules for the deduction.

Supporting Your Deduction

If you qualify for casualty and theft loss deductions, be sure to keep accurate records and evidence to support your claims. If the IRS challenges your loss deduction, you may need to supply auditors with such information as appraisals to assess fair market value, correspondence with insurance claims representatives and receipts to support the original purchase price, improvements and repair costs. Your tax advisors can help you collect the appropriate documentation to withstand IRS scrutiny.

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