Category: Tax Services

Posted on Jun 21, 2016

1. You can roll over funds from one IRA to another tax-free as long as you complete the rollover within 60 days. But what if you miss the deadline? You may owe tax and an early distribution penalty if you’re under age 59 1/2. The IRS may waive the penalty if there are extenuating circumstances. In one recent private letter ruling (PLR 201617016), the IRS waived the 60-day requirement after a taxpayer failed to roll over the proceeds received from his IRA on time because he was the primary caregiver for his mother. He needed to attend to her daily medical needs and financial affairs. Waivers were also granted to two other taxpayers. In PLR 201621020, the deadline was missed due to mistakes made by the taxpayer’s employer. In PLR 201621022, errors by a financial institution caused the missed deadline.

2. You must PROVE your child is a dependent to claim him or her on your tax return. In one case, the U.S. Tax Court denied a married couple’s dependency exemption deductions for a son who earned very little and lived at home. They didn’t show his age, if he was student, whether he lived with them, if they provided over half of his support during the years at issue, or otherwise establish that he met the tax code’s “qualifying child” tests. The couple also failed to prove that the husband’s father was a “qualifying relative” and could be claimed as a dependent. Although they offered evidence that the father stayed with them, the taxpayers didn’t show they provided more than half of his support or prove that his gross income was below the applicable exemption amount. (Ogamba, TC Memo 2016-105)

3. Attention fit workplaces: Does your business provide extra inducements to encourage employees to participate in a wellness program? Cash awards for partaking in wellness programs must be included in an employee’s gross income. In guidance from the Office of Chief Counsel (CCA 201622031), the IRS stated that an employer’s payments of gym memberships must also be included. And so must the reimbursement of an employee’s cafeteria plan pretax salary reduction used to pay for participation in such a program. (Benefits defined as medical care or other “de minimis” benefits, such as T-shirts, can be excluded.)

4. More scrutiny for museums? Many private museums do “good work,” Sen. Orrin Hatch wrote in a letter to the IRS Commissioner, but the ability for them to receive tax-exempt status may be “ripe for exploitation.” Hatch, chairman of the Senate Finance Committee, said some museums aren’t readily accessible to the public, are often closed and require reservations weeks or months in advance. In addition, their collections mainly come from one donor or family and some museums sit on land owned by the founding donor or are adjacent to the donor’s private residence. These factors alone aren’t cause for revoking tax-exempt status or imposing tax on self-dealing, but Hatch wrote that they raise questions about the donor-museum relationship that “perhaps merit further scrutiny.”

5. Potentially costly ruling for financial services firms. The IRS has ruled that the Financial Industry Regulatory Authority (FINRA) is a “corporation or other entity serving as an agency or instrumentality” of the government. In other words, FINRA is effectively a government agency when enforcing securities regulations. Thus, if FINRA imposes a fine on one of its members for violating securities laws and regulations, it isn’t deductible as an ordinary and necessary business expense. Reason: Tax law bars deductions for fines or similar penalties paid to the government for violating laws. FINRA is a registered self-regulatory organization under the Securities Exchange Act of 1934. It has the authority to create and enforce rules for its members in order to provide regulatory oversight of securities firms that do business with the public. (CCA 201623006)

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Posted on Jun 13, 2016

Succession Planning and Strategic Planning

Many small businesses prepare — and regularly update — a strategic plan, but many overlook this important task.

Whether your business falls into the “have” or a “have-not” category, a strategic plan can be an invaluable resource to help your company accomplish its ultimate objectives. And part of this process involves having a succession or exit plan.

The Anatomy of a Strategic Plan

First, let’s review some basics about strategic planning. Fundamentally, it is an activity that helps:

  • Set priorities;
  • Focus energy and resources;
  • Strengthen operations;
  • Ensure that employees and management work toward common goals;
  • Establish agreement around intended outcomes; and
  • Adjust direction as the business environment changes.

The best way to start is to skip to the ultimate goal: What do you want your business to accomplish? This amounts to your company’s mission statement. Once that is clear, flip the process around to the beginning and ask: What steps will help my company achieve its goal(s)?

You don’t need a large number of goals in a strategic plan. You could have ten or more, but you also may have only four or five. For a strategic plan to have the most impact, the goals should be clear and concise. Setting goals outlines the course your business will take. If the goals miss the mark, other efforts will probably be useless.

Once you set the goals and management is on board, you must set objectives for reaching each goal. Objectives are rather broad in nature and should be concise. They guide employees toward making decisions that are in line with helping your business achieve its goals.

Under each objective list a series of action steps. These are more specific than the objectives they support and should note who is responsible for the action and when it should be completed.

The final step is to regularly evaluate the status of each action step, noting:

  • When it is completed;
  • Whether it resulted in reaching the objective; and
  • If the cumulative completion of objectives resulted in reaching the goal.

There are many variations to this scheme, but this is a common format in strategic planning. Keep in mind that goals are likely to change over time to account for the economy, the industry and other factors involved with the business.

A Road Map for Succession

Developing a succession plan should be a part of your strategic plan. Successful succession is one of the most important goals for any business. Other goals might deal with profitability, expansion or operational issues, but none is more important than succession. Think about it — is any other goal genuinely valid without a road map for succession?

A succession plan or exit strategy typically begins by establishing a team to focus on it. While the team will deal with the broad issues of the strategic plan, it will not be involved with how that plan is accomplished. Instead it focuses on the steps needed to position you and your partners for the ultimate succession. This may include assessing health issues — especially related to senior managers.

In effect, the business will get its marching orders from the succession planning or exit strategy team. That is where the business and its managers take the ball and kick it across the goal line. All existing goals should be reviewed to ensure they support the overarching succession or exit goal.

It is often helpful to have a facilitator. Your CPA is likely to be on the succession planning team and is often a good choice to play this role.

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Posted on May 6, 2016

Small Business Legal Structure

One important consideration when starting your business is determining the best legal organizational structure. Why? Because it will affect operating efficiency, transferability, control, the way you report income, the taxes you pay and your personal liability.

Four basic structure types are available:

  • Sole proprietorship
  • Partnership — general and limited
  • Corporation — S corporation, C corporation
  • Limited liability company (LLC)

The choices can be complicated — and errors can be costly. Business legal structures are regulated by state governments, but your county or municipality also may have license requirements. What’s more, current tax laws make it difficult to change your legal structure after you begin operating. Making the right decision before you open for business is very important. How do you decide which legal structure is best for you and avoid potential problems? Consult with a certified public accountant (CPA). A CPA can help you make well-informed choices, explain how business structure affects your organization’s bottom line and file the necessary paperwork to start your business, if you’d like.

Below we have listed the pros and cons to each structure type in an overview and comparison grid that will help you consider the right structure for your new business.

Business Structure Pros and Cons

Structure Type

Pros

Cons

Sole Proprietorship
  • Inexpensive to start and simple to run
  • One level of tax on net income
  • No separate tax return
  • Unlimited personal liability
  • Ownership limited to one person

Partnership
  • Ownership not limited to one person
  • One level of tax on net income
  • Income and expenses allocation can be unrelated to percentage of ownership
  • Unlimited personal liability
  • Each partner legally responsible for the business acts of other partners
  • Requires separate tax returns

S Corporation
  • Limited personal liability for shareholders
  • Business net income taxed as personal income of shareholders
  • Requires separate tax returns
  • Restrictions on adding investors
  • Net income must be allocated according to percentage of ownership

C Corporation
  • Limited personal liability for shareholders
  • Easy to transfer ownership and add investors
  • Perpetual continuity presumed
  • Requires separate tax returns
  • Net income may be double taxed
  • More costly to set up and maintain

Limited Liability Company (LLC)
  • Limited personal liability for members
  • Income and expenses can be allocated in a manner unrelated to percentage of ownership
  • Not automatically perpetual like S or C corps
  • More costly than a sole proprietorship to set up and maintain

 

Your CPA can help you decide what type of entity and structure is best for your particular situation and type of business. There are situations where forming multiple entities may better accomplish your objectives. For example, a family
business may want to separate its land, buildings or other fixed assets from the operating business and lease them back to the operating business to have a different equity ownership by family members who may not be active in the
business’s day-to-day operations. You should evaluate the decision to choose an entity in which the tax attributes pass through to the owners in light of the
other income or losses that you and other owners have and the extent to which you will have a tax basis in the entity. Other considerations include your objectives for an exit strategy or transitioning the business ownership on to the next generation.

Pages from SB Legal Structure Selection Guide - Publish

For more information on which legal structure is right for your business, download our Whitepaper – Guide to Selecting Your Small Business Legal Structure, which includes entity type comparisons of the following topics:

  • Operational and Control
  • Investment
  • Continuity and Transferability
  • Legal Liability
  • Compensation and Payroll Taxes
  • Tax Years

Contact the Cornwell Jackson Business Services team for more information. We’re small business experts.

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Posted on May 2, 2016

DCEO-Accounting_MNS2965
In May 2016, we were honored to participate in the D-CEO Magazine Accounting Roundtable. Our newest partner, Mike Rizkal, CPA sat down with other leaders from accounting firms in the Dallas area to discuss the current state of business accounting, economic variables, and the various trends that affect our clients.

To read the full article on DCEO’s website, click here.

How is the location of a CPA firm office relevant to the decision to work with them?

Location is still a big factor, but no longer a deal breaker. Due to advancements in technology, we can now serve more clients that aren’t geographically located in our backyard while still maintaining the efficiency and personal touch of a face-to-face meeting. The advancements in online collaboration and meeting tools have changed our industry significantly and will continue to play an important role in how we service our clients. We invest in technology that matches our clients’ desire for convenience, and then we address their preferences for communication to deliver the best service possible. For traditional tax and audit compliance, those services are built around collaboration and often work best with a local CPA. However, a firm that has the capability to work remotely through cloud-based technologies can bridge the gap of geographical distance.

Is bigger better? How does the size of firm impact clients?

In our experience, going with a bigger firm doesn’t always guarantee better services or solutions. It is all about balance. Certainly for some larger entities and public companies a “name” firm carries weight with investors. However, in the middle market segment in which we serve, service is paramount and our competitive fees create more flexibility for ownership. Clients should focus on finding a firm with a solid reputation within the financial community that directly impacts them. When searching for an accounting firm, companies should consider: direct and easy access to partners, the capabilities of the firm to help solve their problems or provide referrals to other trusted service providers.  The most common reason for change to a new CPA firm is that the client felt “lost in the shuffle.” Therefore, it is important to find a firm that can deliver on the level of service offered during the proposal process. Don’t  buy based on size alone.

Do your clients rely on their CPA firm to make recommendations of trusted advisors in other service areas?

We spend a lot of time making sure we have strong alliances so we can refer clients to someone we trust. If we are not confident in the level of service they will provide, we do not refer them. The key to a successful recommendation is to know the needs of your client first, then match them with a specific service provider with experience that meets those needs at a value-based cost. Matching the personality of the client with the potential service provider is also an important factor in the referral selection. We go beyond simply providing a recommendation. It is our hope to provide a referral that leads to a successful relationship.

We spend a significant amount of time in the business community developing relationships that we believe can benefit our clients. Even after the referral, our team stays involved to ensure our client has a positive experience and the desired results are achieved.

How are your clients balancing the importance of providing strong earnings for banking needs versus reducing the amount of taxes paid?

All clients are looking for opportunities to reduce the tax burden while continuing to produce strong financial results that attract capital. We have found the answer to this question to be a combination of strategic tax and financial planning. This is often achieved through balance and communication.

There are several strategic tax planning opportunities that do not negatively impact the company’s earnings or common financial measurements. Banks are not purely concerned with earnings, but instead focus on the overall stability and financial health of the company.

We feel that it is important to help our clients through strategic planning to reduce the tax burden while maintaining strong financial performance. Then we work with our clients to communicate these strategies to their financial institution. We have often found that communication helps manage surprises and keeps our clients and their lenders on the same page regarding specific tax planning strategies and expected earnings.

How do tax laws and incentives in Texas benefit your clients?

Texas undoubtedly is one of the most business friendly states in the nation and has one of the lowest tax burdens in the country. Clearly, based on current economic performance of the state, Texas has done a good job incentivizing companies to do business in the Lone Star state. Unlike many other states, Texas does not impose a personal income tax or a corporate income tax. Texas’ margins tax was established to provide a broader, fairer tax assessed at a lower rate. There are numerous other tax incentives and laws that make Texas a business friendly state, including property tax incentives, sales and use tax exemptions for manufacturing, research and development and business relocation deductions, just to name a few. We look at every advantage and weigh it against the goals and financial results of every client before recommending a solution.

What unique marketing programs have you implemented to grow your business?

We are being very segment focused and promoting thought leaders in the industries we serve. We are increasing our web presence to encourage online leads, because a lead indicator among growing firms is website visits. We haven’t prioritized our website in the past, and I think the industry in general has underestimated buyer behaviors toward online search and comparison shopping.

We are promoting technologies that reduce client fees and improve operational efficiencies. Especially in services where we are experts, we are looking at solutions that make us attractive to clients for outsourcing such as payroll services.

What are obstacles that impede the growth of your clients’ businesses?

The biggest obstacles to growth are often corporate governance and finding and attracting talent. There are many issues that affect our clients’ businesses. Few owners can solve them all on their own. Many business owners are top-line focused and struggle to address the other challenges affecting the company primarily due to lack of time. Business owners need to invest inside the company as much as focus on new business development in order to remain competitive on all fronts. Keeping talent, investing in the right technologies and managing a diverse and mobile workforce are the biggest challenges to growth.

What is the best formula for creating a valuable and successful relationship between you and your client?

The key to creating a valuable and successful relationship is proactive involvement and communication. We strive to be actively involved in our clients’ businesses through tax planning and regular interaction throughout the year. Every client wants to feel attended to on a professional and personal level. We have leveraged internal resources, technology and our team to ensure follow-up with clients so they are well informed during every stage of the engagement. Our focus as professionals, then, is to exceed expectations with our attention and value-added services.

How should companies evaluate the effectiveness of their accounting firm?

Companies can evaluate the effectiveness of their accounting firm by assessing whether they feel the firm goes above and beyond to meet their expectations.

  • Is the team simply completing the task they’ve been assigned or are they spending time proactively planning for the engagement to ensure the best client results in the most efficient manner?
  • Is the accounting firm providing the right level and type of communication as to the status of the project and the expected delivery date?

Proactive service means showing clients what they want before they know they want it. Clients need to hold their accounting firm to a standard of meeting promises and expectations. A CPA must be engaged in the relationship to know what can make a difference.

As a trusted advisor, what are you doing differently today to provide additional value to your clients?

We are striving to be more than just a service provider. We want our clients to view us as a resource to help with their business challenges. We encourage communication by offering an unlimited phone calls and meetings retainer to every client.  We want our clients to know that simply calling us to discuss a solution is not going to cost them.  These conversations often uncover opportunities and needs and enhance our client relationships.

Our professional team brings value to the table from a background of various industries and experiences, which can often be translated into a unique solution for our clients’ needs.

How has the use of technology impacted how clients run their business — are they willing to make the investment in this economy?

The advancements in technology and increases in efficiency it creates are often too big to ignore. During the recent downturn of the economy, companies sought out opportunities to leverage technology to decrease overhead and increase profitability. Although there has been some economic improvement, companies continue to look for new ways to increase efficiency. This is often achieved by leveraging new technology. We focus on making technology recommendations that fit our clients’ needs and help our clients assess the cost/benefit of their technology investments. It can be as simple as setting up ACH bill payment through their bank or investing in an ERP system. We live in a technology-based world at a time of high competition and increased demand for efficiency. Our clients are willing to invest in solutions that reduce overhead costs, increase efficiencies and help them remain competitive in today’s economy.

What are the most important issues impacting your client base today?

There are numerous issues impacting our clients, including increased competition, pricing, talent retention, taxes, succession planning, changes in healthcare regulation, increased compliance complexity and demand for efficiency.

We take pride in helping our clients navigate these challenges by being proactively involved in their business. Clients need an advisor to help prioritize and weigh their decisions, provide insight based on experience in their industry, and assess the financial impact of these decisions. Our goal is to help our clients make the best decision they can to provide a solution they can be confident in.

How do you keep up to date on issues that impact your clients?

We attend trade shows and conferences within our industry and the industries in which our client operate. Spending time with our clients is how we get the first-hand information on issues and trends affecting their industry. We see it as part of our job to stay in contact and be experts in our clients’ segments. We want to give clients a head start on what’s coming — and it’s constantly changing.

Often the concerns of here and now outweigh what’s coming in the future. It’s natural. Attending these conferences helps our professionals stay aware of upcoming changes in the industry, which allows us to provide knowledge to our clients regarding the latest trends, and in turn this helps our clients succeed in today’s competitive market.

What keeps your clients up at night?

The issues that keep our clients up at night are numerous and often different based on the industry in which they operate and the lifecycle stage of their business. Companies are always balancing the long-term decisions to remain competitive with the short-term concerns about payoff. What’s the short-term reward for the long-term investment? It’s human nature to worry about that. Are we on the right track? Can we keep the key people we need to succeed? Not to mention the normal concerns all business owners face, such as meeting revenue targets, maintaining healthy cash flow, technology investment and managing increased regulation. During these times of increased complexity it is important to find a trusted advisor that can help navigate the ever-changing business environment.

 

MR Headshot

Mike Rizkal, CPA has been with Cornwell Jackson for over ten years, and leads the firm’s benefit plan and financial statement audit practice. He specializes in providing a variety of services to privately-held middle market businesses, with a focus in the construction, real estate, manufacturing, distribution, professional services and technology industries.

View Mike Rizkal’s full bio here.

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Posted on Apr 27, 2016

Alternative Minimum Tax

Congress originally devised the alternative minimum tax (AMT) rules to ensure that high-income individuals who take advantage of multiple tax breaks will owe something to Uncle Sam each year. In recent years, however, that concept has eroded. Now, even upper-middle-income taxpayers are likely to owe the AMT. Here’s an overview of how the AMT works and possible ways to minimize it.

Don’t Overlook the AMT Credit

If you owed the AMT last year, you may have earned an AMT credit that will reduce your regular federal income tax bill in the current tax year. Many taxpayers who pay the AMT fail (or forget) to claim their rightful AMT credits the following year.

There are two reasons you earn an AMT credit for a tax year:

1. If you owed the AMT from exercising in-the-money incentive stock options, or

2. If your AMT bill was caused by claiming accelerated depreciation write-offs.

The first situation is common, especially with employees of start-ups and high-tech firms. The second typically happens only if you own an interest in a business with significant investments in depreciable assets.

Ask your tax adviser if you earned an AMT credit. But, be advised that you can claim it only if your regular federal income tax liability exceeds your AMT liability for the tax year. That’s because you’re allowed to use the credit to reduce only regular federal income taxes (not the AMT). Put another way, you can’t claim the AMT credit on your current return if you owe the AMT again this year.

So, you still must calculate your AMT liability for the current year. The difference between your AMT liability and your regular federal income tax liability is the maximum amount of AMT credit you can claim on your current-year return. In other words, you can use the AMT credit to equalize your regular federal income tax and the AMT for the current year, but that’s it. After taking this limitation into account, any leftover AMT credit is carried forward to next year.

AMT Basics

Think of the AMT as an alternate set of tax rules that are similar to the regular federal income tax system. But there are key differences. For example, under the AMT rules, certain types of income that are tax-free under the regular federal income tax system are taxable. The AMT rules also disallow certain deductions and credits that are allowed under the regular federal income tax system. And the maximum AMT rate is only 28% compared to the 39.6% maximum rate that applies under the regular federal income tax system.

In addition, taxpayers are allowed a relatively large inflation-adjusted AMT exemption, which is deducted when you calculate AMT income. Unfortunately, the exemption is phased out when your AMT income surpasses certain levels.

If your AMT liability exceeds your regular federal income tax liability for the tax year, you must pay the higher AMT amount.

Why Upper-Middle-Income Taxpayers Get Hit

After repetitive tax law changes, the AMT often doesn’t apply to the wealthiest taxpayers in the highest tax bracket. That’s because many of their tax breaks are already cut back or eliminated under the regular federal income tax rules before getting to the AMT calculation.

For instance, the passive activity loss rules greatly restrict the tax benefits that can be reaped from “shelter” investments, including rental real estate and limited partnerships. And, if your income exceeds certain levels, phaseout rules are likely to reduce or eliminate various tax breaks, such as personal and dependent exemption deductions, itemized deductions, higher-education tax credits and deductions for college loan interest.

Moreover, individuals in the 35% or 39.6% tax brackets are less likely to be hit with the AMT, which has a maximum tax rate of 28%. Finally, the AMT exemption — which is deducted when you calculate AMT income — is phased out as income goes up. This phaseout has little or no impact on individuals with the highest incomes, but it increases the likelihood that upper-middle-income taxpayers will owe the AMT.

AMT Risk Indicators

Various inter-related factors make it hard to pinpoint who will be hit by the AMT. But taxpayers are generally more at risk if they have:

    • Substantial (but not necessarily huge) salary income (more than $250,000 per year).
    • Significant long-term capital gains and/or dividends.
    • Large deductions for state and local income and property taxes.
    • A spouse and several children (e.g., at least four) who provide personal and dependent exemption deductions for regular federal income tax purposes. (These deductions are disallowed under the AMT rules.)
    • Significant miscellaneous itemized deductions, such as investment expenses, fees for tax advice and unreimbursed employee business expenses.
    • Interest from private activity bonds. This income is tax-free for regular federal income tax purposes, but it’s taxable under the AMT rules.
  • Significant depreciation write-offs for personal property assets, such as machinery, equipment, computers, furniture, and fixtures from your own business or from investments in S corporations, LLCs or partnerships. These assets must be depreciated over longer periods under the AMT rules.

Another noteworthy factor that’s likely to trigger the AMT is exercising in-the-money incentive stock options (ISOs) during the tax year. The so-called “bargain element” — the difference between the market value of the shares on the exercise date and the exercise price — doesn’t count as income under regular federal income tax rules, but it counts as income under the AMT rules.

A significant spread between a stock’s current market value and an ISO’s exercise price can result in an unexpected AMT liability. Consult your tax professional before exercising your options. Depending on current and anticipated market conditions, it may be advantageous to exercise them over several years to minimize the adverse AMT effects.

Possible Ways to Minimize the AMT

Any strategy that reduces your adjusted gross income (AGI) might help to reduce or avoid the AMT. AGI includes all taxable income items and certain non-itemized deductions, such as moving expenses and alimony paid.

By lowering AGI, you may be able to claim a higher AMT exemption. Here are some considerations that may help reduce your AGI:

    • Contribute as much as you can to your tax-favored retirement plan, such as a 401(k) plan, profit-sharing plan or SEP.
    • Contribute to your cafeteria benefit plan at work. Contributions lower your taxable salary and AGI. Most cafeteria plans include healthcare and dependent care flexible spending account arrangements.
    • Harvest losses from investments held in taxable brokerage firm accounts. Then use the capital losses to offset any capital gains. Any leftover capital losses up to $3,000 are deductible against income from salary, interest, dividends, self-employment and other sources.
    • Defer the sale of appreciated investments held in taxable brokerage firm accounts until next year. Doing so will defer the resulting taxable gains.
  • Prepay deductible business expenses near year end if you run a business as a sole proprietorship, limited liability company, partnership or S corporation. The resulting business deductions will be “passed through” to you, thereby lowering AGI. Similarly, postpone the receipt of business income until next year to reduce your AGI in the current tax year.

Important note: Lowering AGI will also slash your state and local income taxes, which are disallowed for AMT purposes and, therefore, increase your AMT exposure. Likewise, if you’re likely to be hit with the AMT, the traditional tax year-end strategy of prepaying state and local income and property taxes that are due early next year won’t help you. Those taxes aren’t deductible under the AMT rules. So prepay them in a year when you have a chance of not being in the AMT mode.

Address the AMT Head-On

Taxpayers can’t automatically assume they’re exempt from the AMT. Most individuals in the higher tax brackets probably have some risk factors. The IRS has trained auditors to find unsuspecting folks who owe the AMT. If you’re not careful, you could owe back taxes, interest and potential penalties under the AMT rules.

Consult with your tax adviser about your specific situation. Cornwell Jackson’s tax team can identify whether you’re at risk and help find ways to reduce your exposure to the AMT that also factor in current market conditions and other personal investment goals.

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Posted on Apr 26, 2016

Tax Developments for Partnerships

 

In recent months, there have been several significant tax developments for partnerships. They also apply to multi-member limited liability companies (LLCs) that are treated as partnerships for federal tax purposes. (For simplicity, we’ll use the terms “partnership” and “partner” to refer to all entities and owners that are affected by the developments.)

Here are quick summaries of what’s brewing on the partnership tax front.

Accelerated Due Dates

The long-standing due dates for filing partnership federal income tax returns (Form 1065) were changed by the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015.

For partnership tax years beginning after December 31, 2015, partnerships must file Form 1065 one month earlier than before. That means they’re due two and one-half months after the close of the partnership’s tax year — or March 15 for calendar-year partnerships. As before, six-month extensions are allowed. The deadline is adjusted for weekends and holidays until the next business day.

Under prior law, a partnership’s Form 1065 was due three and one-half months after the close of the partnership’s tax year — or April 15, adjusted for weekends and holidays, for calendar-year partnerships.

Important note. This change affects the due date for 2016 Forms 1065 for partnerships that use the calendar year for tax purposes. Those returns will now be due on March 15, 2017.

Changes to Varying Interest Rules

In August 2015, the IRS issued new final regulations that modify and finalize the so-called “varying interest rules.” These rules were previously contained in proposed regulations issued in 2009.

The varying interest rules are used to determine partners’ percentage interests in partnership tax items — including income, gains, losses, deductions and credits — when the partners’ interests change during the year. For example, interests can change due to the entrance of new partners or the exit of existing ones.

The new final regs require that 100% of all partnership tax items be allocated among the partners. In addition, no items can be duplicated, regardless of the allocation method adopted by the partnership.

The new final regs allow partnerships to use either of these two methods to determine distributive shares of partnership tax items when partners’ interests vary during the year:

Interim-closing-of-the-books method. Here, a snapshot of the partnership’s income statement from the beginning of the tax year through the date of the ownership change is used to allocate tax items up to that point of the partnership’s tax year.

Annual proration method. Alternately, partnership tax items for the year can be prorated based on the number of days that an entering or exiting partner is a member of the partnership.

Different methods can be used for different variations that occur within the same tax year. The new final regs are effective for partnership tax years that begin on or after August 3, 2015. For calendar-year partnerships, these changes will be effective for the 2016 tax year.

Partnership Audits

The Bipartisan Budget Act of 2015, which was passed in November 2015, changes how the IRS will audit partnerships. However, the new partnership audit rules generally won’t take effect until partnership tax years beginning in 2018. Until then, the current partnership audit rules will remain in effect unless the partnership voluntarily chooses to follow the new rules sooner.

Family Partnerships

The Bipartisan Budget Act also includes some important new tax provisions for family partnerships. For tax purposes, a family partnership is one that’s composed of members of the same family.

For many years, some taxpayers and tax professionals had argued that the existing family partnership rules provided an alternative test for determining who’s a partner in a partnership, without regard to how the terms “partner” or “partnership” are defined under the general partnership tax rules found in the Internal Revenue Code.

As a result, many partnerships have taken the position that if a person holds a capital interest in a partnership that was acquired as a gift, the partnership’s existence must be respected for tax purposes. They took this position regardless of whether the parties had demonstrated that they actually joined together to conduct a business or investment venture.

The new law attempts to eliminate this argument by making several statutory amendments. First, it clarifies that Congress did not intend for the family partnership rules to provide an alternative test for determining whether a person is a partner in a partnership.

Instead, the new law clarifies that the general partnership tax rules regarding who should be recognized as a partner for tax purposes apply equally to interests in partnership capital that are created by gift. Put another way, the determination of whether the owner of a capital interest that was acquired as a gift is a bona fide partner for tax purposes would be made under the generally applicable partnership tax rules.

Additionally, the new law removes statutory language that implied that the owner of an interest in partnership capital could always be treated as a partner if capital was a material income-producing factor for the partnership.

These amendments take effect starting with tax years beginning after December 31, 2015. So, for calendar-year family partnerships, 2016 federal tax returns could be affected.

Disguised Partnership Payments for Services

In July 2015, the IRS issued new proposed regulations that would treat certain arrangements that result in payments to partners as disguised payments for services, rather than as an allocation of partnership profits and a related distribution of cash.

The proposed regulations are mainly aimed at changing the tax treatment of so-called “fee waiver arrangements,” under which partnership service providers give up their right to receive current fees in exchange for an interest in future partnership profits. Such arrangements are common in the private-equity and hedge-fund industries.

Private-equity firms and hedge funds are often classified as partnerships for tax purposes. And they typically charge investors a 2% fee on managed assets. In many cases, such arrangements are accompanied by a fee waiver arrangement in which the private-equity or hedge-fund manager exchanges all or a portion of its not-yet-earned management fee for an interest in the fund’s future profits.

The tax planning objective of such arrangements is to allow the manager to trade current fee income — which would be treated as high-taxed ordinary income and be subject to federal employment taxes — for an interest in future capital gains collected by the fund. These future capital gains would be taxed at lower rates.

The proposed regulations would use a facts-and-circumstances approach to determine if such an arrangement should be treated as a disguised payment for services, rather than as a distribution of partnership profits. The proposed regulations list six non-exclusive factors that may indicate that an arrangement constitutes in whole or in part a disguised payment for services. These proposed rule changes would become effective when and if they’re issued in the form of final regulations.

Navigating the Rules

The tax rules for partnerships and multi-member LLCs are complicated. And they change frequently due to new tax legislation and new or updated IRS guidance. This article summarizes some key partnership taxation developments that have occurred in recent months.

Consult your tax adviser if you have questions or want additional information.

GJ HeadshotGary Jackson, CPA, is the lead tax partner in the Cornwell Jackson’s compliance practice. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience in both managing Cornwell Jackson and in providing consulting services to management teams and business leaders across North Texas. Contact Gary today to learn more about IRS Audits for partnerships, and to see if your business is at risk.

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Posted on Apr 7, 2016

AuditPartnership IRS audits were up 18.6% in 2015 over the previous tax year, according to the agency’s Fiscal Year 2015 Enforcement and Service Results.

That’s the highest audit rate partnerships have experienced since 2006. By comparison, audits of large C corporations decreased by 8.8% in 2015.

The situation is expected to only get worse under the new rules for partnership IRS audits that were enacted last November under the Bipartisan Budget Act of 2015. The new rules also apply to multi-member limited liability companies (LLCs) that are treated as partnerships for federal tax purposes. (For simplicity, we’ll use the terms “partnership” and “partner” to refer to all entities and owners affected by the new partnership audit rules.)

Here’s what owners of these pass-through entities need to know, starting with the current partnership audit rules — which will remain relevant for a while longer.

Delayed Effective Date

The new partnership audit rules will generally apply to partnership tax years beginning after December 31, 2017. Affected partnerships may elect to apply the new rules to returns for partnership tax years beginning after November 2, 2015, and before January 1, 2018. But typically partnerships will be better off forgoing this election, since the new rules could make it easier for the IRS to audit them.

Current Rules for Partnership IRS Audits

Before delving into the new partnership audit rules, it’s important to review the current rules, which will continue to apply until the revised rules go into effect starting with tax years that begin in 2018. The IRS follows three regimes for auditing partnerships under the Tax Equity and Fiscal Responsibility Act (the law that was revised by the Bipartisan Budget Act).

  1. Unified Audit Rules. These rules generally apply to partnerships with more than 10 partners. Under this audit regime, the tax treatment of partnership items of income, gain, loss, deduction and credit, as well as any additions to tax or penalties from IRS-imposed adjustments to partnership items, is generally determined at the partnership level. In other words, the IRS can conduct a single partnership-level audit to resolve all issues for partnership tax items. However, once the partnership-level audit is complete and the resulting adjustments are determined, the IRS must recalculate the tax liability of each partner for the affected tax year.
  2. Small Partnership Audit Rules. Unless the partnership elects to have them apply, the unified audit rules do not apply to a partnership with 10 or fewer partners, each of whom is an individual (other than a nonresident alien), a C corporation or the estate of a deceased partner. For these small partnerships, the IRS generally conducts separate audits of the partnership and each partner.
  3. Electing Large Partnership Audit Rules. These rules provide simplified audit procedures for partnerships with 100 or more partners that choose to be treated as large partnerships for federal income tax reporting and audit purposes. For such electing large partnerships, disputes over the treatment of partnership tax items are resolved at the partnership level. Then any IRS-imposed partnership-level adjustments generally flow through to the partners for the partnership tax year in which the adjustments take effect (the adjustment year), as opposed to the year that was under audit.

New Partnership Audit Rules

The Bipartisan Budget Act of 2015 repeals the current unified partnership audit rules and the current electing large partnership audit rules. They’re replaced by a single streamlined set of rules that call for auditing partnerships and their partners at the partnership level. Small partnerships can elect out of the new rules. (See below.)

Under the new streamlined guidance, any IRS-imposed adjustments to partnership items of income, gain, loss, deduction or credit for the applicable partnership tax year (and partners’ shares of such adjustments) are determined at the partnership level. Subject to the exceptions outlined below, any resulting additions to tax and any related penalties are generally determined, assessed and collected at the partnership level.

Under the new rules, the IRS will audit partnership items and partners’ distributive shares for the applicable partnership tax year (called the “reviewed year”). Any adjustments are taken into account by the partnership (not the individual partners) in the adjustment year.

Partnerships generally must pay tax equal to the imputed underpayment amount, which generally equals the net of all IRS-imposed tax adjustments for the reviewed year multiplied by the highest individual or corporate tax rate in effect for that year.

Partnership Adjustment Options

Under the new audit rules, partnerships will have the option of demonstrating that an adjustment would be lower (more favorable to partners) if it were based on actual partner-level information for the reviewed year, rather than imputed amounts based solely on partnership information for the reviewed year.

Such partner-level information could include amended returns filed by partners, tax rates applicable to specific types of partners (for example, individuals vs. C corporations and tax-exempt entities) and the type of income subject to the adjustment (for example, ordinary income vs. capital gains and qualified dividends).

As an alternative to taking an adjustment into account at the partnership level, the partnership can elect to issue adjusted Schedules K-1 for the reviewed year to its partners. In that case, the partners would take the adjustment into account on their individual returns in the adjustment year through a simplified amended return process. Schedule K-1 is the information return that must be provided to each partner. It shows the recipient partner’s share of all partnership tax items and includes other information needed to prepare that partner’s separate federal income tax return.

Finally, the partnership also has the option of initiating an adjustment for the reviewed year, such as when it believes an additional tax payment is due or a tax overpayment was made. The partnership would generally be allowed to take the adjustment into account either at the partnership level or by issuing adjusted Schedules K-1 to the partners.

As a result of the new rules, partners generally must treat each partnership item of income, gain, loss, deduction or credit in a manner that is consistent with the treatment of the item on the partnership return.

Exception for Small Partnerships

Similar to the provision in the current audit rules that exempts most small partnerships (with 10 or fewer partners) from the unified audit rules, the new rules allow eligible partnerships with 100 or fewer partners to elect out of the revised rules for any tax year. To be eligible for this election, all partners generally must be individuals, C corporations, foreign entities that would be treated as C corporations if they were domestic entities, S corporations or estates of deceased partners.

If the IRS audits a partnership that has elected out of the new rules, the partnership and its partners will be audited separately under the audit rules applicable to individual taxpayers.

Managing Audit Risks

Although the new partnership audit rules are complex, they’re expected to make it easier for the IRS to audit large partnerships. When they go into effect, businesses that are set up as partnerships and multimember LLCs could be at a greater risk of being audited.

The IRS is expected to issue additional guidance on the rules, and it’s currently asking for comments to assist in the development of this guidance. Feedback is due to the IRS by April 15, 2016, and additional guidance is expected to come out during the summer.

GJ HeadshotGary Jackson, CPA, is the lead tax partner in the Cornwell Jackson’s compliance practice. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience in both managing Cornwell Jackson and in providing consulting services to management teams and business leaders across North Texas. Contact Gary today to learn more about IRS Audits for partnerships, and to see if your business is at risk.

 

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Posted on Mar 28, 2016

Form 3115 - Accounting Word CloudOn March 24, 2016, The Internal Revenue Service (IRS) made an announcement regarding the revisions of Form 3115. This was the first update since 2009, and the changes are now required to be used, however the IRS will still accept the previous version of Form 3115 until April 19, 2016. We have summarized the major changes from the IRS below and answered some of the most common questions received by our tax professionals on this subject.

What is new about Form 3115-Application for Change in Accounting Method in 2016?

The new form updates the previous form with formatting changes, allows for multiple change numbers, and adds some new significant questions. Below, we have detailed some of the major changes; however, this is a summary of some of the major changes and should not be considered as an all-encompassing list.

  1. Duplicate Copy: The IRS has always required a duplicate copy of the form to be filed along with the original. Under the old procedures this form was to be filed in Ogden, Utah. As of January 2016 this duplicate copy is to be filed in Covington, Kentucky.
  2. Multiple Changes in Accounting: The IRS has added spacing to allow for multiple changes in accounting to be taken on one form.
  3. Legal Basis: On Page 3, Part II, Lines 16a and 16b the IRS requires that the legal basis supporting the changes be provided. The IRS indicated that in many situations taxpayers had made automatic changes without providing enough legal information to confirm that the taxpayer qualified for the change. Previously this information was only required for non-automatic changes.

These are just three of the changes under this new form. Tax preparers that utilize a Form 3115 should make themselves aware of the modifications to this new form. Per the request of the IRS, if a taxpayer has had a form prepared for the 2015 tax year that has not yet been filed, the form should be updated to the new Form 3115 prior to filing.

In addition to a new Form 3115 and instructions, the IRS announced that the filing location for the duplicate form is changing. Previously under Rev Proc 2015-13, taxpayers were required to file a duplicate Form 3115 with the Ogden, Utah, service center. Effective Jan. 1, 2016, taxpayers should file the duplicate form at the Covington, Kentucky, service center. If prior to April 20, 2016, a taxpayer filed their duplicate Form 3115 with the IRS at either the Ogden, Utah, or Covington, Kentucky, locations using the 2009 Form 3115, the taxpayer may file the original Form 3115 with their return using either the 2009 Form 3115 or the 2015 version.

The filing address to be used for the Covington, Kentucky, center is:

Internal Revenue Service
201 West Rivercenter Blvd.
PIN Team Mail Stop 97
Covington, KY 41011-1424

Click here for a link to the updated Form 3115 – Application for Change in Accounting Method.

Types of Accounting Methods Available

What are the different types of accounting methods available?
Cash basis and accrual basis are accounting methods that determine when and how you report income and expenses for tax purposes.  In the U.S., the IRS wants you to use the same method each year when reporting income.  Depending on your specific situation, there may be additional rules around when to use cash or accrual basis.

What is cash basis?
When cash basis is used as the accounting method, income is reported as payments are received, instead of invoices are issued. Expenses are reported when you pay bills. If invoices are used and bills are received to pay later, then this report method will affect the amount reflected in your A/R and A/P accounts.

What is accrual basis?
With accrual basis as the accounting method, income is reported as soon as invoices are sent to a client (instead of when money is received) and expenses are reported when bills are received.
Accrual basis is more accurate than cash basis reporting. It also allows for better business management by revealing trends in income and expenses well in advance of the actual payments being made or received.

Considering a change in accounting method for your business?

If you are considering a change in accounting method for your business, be sure to ask the right questions before making a move.

  1. How often can a company change its accounting method?
  2. What straight-line method changes require IRS approval?
  3. How does the Tax Year and Accounting Method Impact the Tax Picture for my business?
  4. If the total amount of the change is less than $25,000, can I spread the adjustment out over several years?

For guidance on this issue, talk to one of our tax professionals today. We’re here to help. Gary Jackson, CPA is the tax and consulting partner and can help determine if a change in accounting method would benefit your business.

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Posted on Mar 18, 2016

If you plan to hire new employees this year, you’re not alone. Plus, you may qualify to receive the Work Opportunity Tax Credit.

Employment statistics ended 2015 on a positive note. In addition, roughly 242,000work opportunity tax credit new jobs were added in February and the unemployment rate fell to 4.9%, its lowest level in eight years. Several recent studies indicate that the hiring momentum will continue in 2016. Hiring new employees could also earn you a credit on your tax return, if you meet certain requirements. The Work Opportunity tax credit is a tax break for qualified wages paid to new employees from certain targeted groups. This credit has undergone several changes since it was introduced nearly 40 years ago. The most recent extension of this credit — under the Protecting Americans from Tax Hikes (PATH) Act of 2015 — retroactively renews the credit for 2015 and extends it through 2019.

Understand the Mechanics of the Work Opportunity Tax Credit

The Work Opportunity tax credit applies to wages paid to a new hire from a targeted group who works for your business at least 120 hours during the first year. If a new employee works at least 400 hours during the first year, the credit equals 25% of his or her qualified wages, up to the applicable limit. The percentage rises to 40% if the new employee works more than 400 hours.

In general, the credit applies to only the first $6,000 of wages. But there are a number of exceptions, which we’ll discuss a little later. In addition, you may qualify for a credit of 50% of qualified second-year wages (in addition to first-year wages) if you hire someone who’s certified as a long-term family assistance recipient.

Here’s an example illustrating how this credit works: Suppose you hire Fred, a qualified veteran who was unemployed for six months before you hired him. He works for you for nine months and earns $500 per week, which equates to $19,000 in the first year. An added bonus is that Fred falls into a special targeted group of veterans and, based on his circumstances, he qualifies you for a credit on his first $14,000 of wages.

Because Fred worked more than 400 hours at your business, you earn a credit equal to 40% of his wages up to $14,000. In other words, your Work Opportunity credit is $5,600. However, you also must reduce your deduction for wages by the amount of the credit. So, your wage deduction for paying Fred is $13,400, and your credit is $5,600.

Important note. Typically, a credit will provide greater tax savings than a deduction of an equal dollar amount, because a credit reduces taxes dollar for dollar. A deduction reduces only the amount of income that’s subject to tax.

There’s no limit on the number of eligible individuals your business can hire. In other words, if you hire 10 people exactly like Fred, your credit would be $56,000.

Work Opportunity credits generated by pass-through entities, such as S corporations, partnerships and limited liability companies, pass through to the owners’ personal tax returns. If this credit exceeds your tax liability, it may be carried back or forward.

Know the Targeted Groups and Qualified Wage Limits

To determine whether you qualify for this tax break, first determine if a new hire belongs to one of these targeted groups:

  • Long-term family assistance recipients,
  • Qualified recipients of Temporary Assistance for Needy Families (TANF),
  • Qualified veterans,
  • Qualified ex-felons,
  • Designated community residents who live in empowerment zones or rural renewal counties,
  • Vocational rehabilitation referrals for individuals who suffer from an employment handicap resulting from a physical or mental handicap,
  • Summer youth employees,
  • Supplemental Nutrition Assistance Program benefits recipients, or
  • Supplemental Security Income benefits recipients.

Starting in 2016, the list of targeted groups has been expanded to include qualified long-term unemployment recipients, which is defined as people who have been unemployed for at least 27 weeks, including a period (which may be less than 27 weeks) in which the individual received state or federal unemployment compensation.

Special rules apply to summer youth employees, and the first-year qualified wage limit for them is only $3,000. In addition, there are four categories of veterans with qualified wage limits of $6,000, $12,000, $14,000 or $24,000, depending on his or her circumstances. The highest qualified wage limit for veterans ($24,000) goes to those who are entitled to compensation for a service-connected disability and unemployed for a period or periods totaling at least six months in the one-year period ending on the hiring date.

The next step is to evaluate whether a new hire meets the other requirements of the credit. You won’t be eligible for any credit if a new employee:

  • Worked for you fewer than 120 hours during the year,
  • Previously worked for you, or
  • Is your dependent or relative.

You also can’t claim a credit on wages paid while you received payment for the employee from a federally funded on-the-job training program. And you can take the credit only if more than 50% of the wages you paid an employee were attributable to working in your trade or business.

Obtain State Certification

Last but not least, to take this credit, you must be able to show proof from your state’s employment security agency that the employee is a member of a targeted group. In order to do this, you must either:

  1. Receive the certification from the state agency by the day the individual begins work, or
  2. Complete IRS Form 8850 on or before the day you offer the individual a job and receive the certification before you claim the credit.

If you use Form 8850, it must be submitted by the 28th calendar day after the individual begins work. On March 7, the IRS extended the deadline until June 29, 2016, for employers to apply for certification for members of targeted groups (other than qualified long-term unemployment recipients) hired (or to be hired) between January 1, 2015, and May 31, 2016. Qualifying new hires must start work for that employer on or after January 1, 2015, and on or before May 31, 2016.

June 29 is also the extended deadline for employers that hired (or hire) long-term unemployment recipients between January 1, 2016, and May 31, 2016, as long as the individuals start work for that employer on or after January 1, 2016, and on or before May 31, 2016. For long-term unemployment recipients hired on or after June 1, Form 8850 must be submitted by the 28th calendar day after the individual begins work.

The IRS is currently modifying the forms and instructions for employers that apply for certifications for hiring long-term unemployment recipients. But it’s expected that the modified forms will require new hires to attest that they meet the requirements to qualify them as long-term unemployment recipients. Guidance from the U.S. Department of Labor states, “In the interim, employers and their representatives are encouraged to postpone certification requests for the New Target Group until the revised forms are available.”

Timing Is Critical

If you’re planning to hire new employees in 2016, the Work Opportunity credit offers a simple way to lower your tax liability. It doesn’t require much red tape, except for obtaining a timely certification of the employee from your state employment security agency. Your tax adviser can help you determine whether an employee qualifies, calculate the applicable credit and answer other questions you might have. But, if you postpone applying for certification, you could lose out.

 

If you have questions about the Work Opportunity Tax Credit, ask Gary Jackson, tax partner at Cornwell Jackson. We’re here to help.

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Posted on Mar 10, 2016

The shackles are off. The expanded Section 179 deduction and first-year bonus Manufacturer PATH Act Tax Breaksdepreciation deductions are restored, with certain modifications, retroactive to the beginning of 2015. You can combine these two tax breaks with your company’s regular depreciation for a generous write-off of business assets.

The Protecting Americans from Tax Hikes- PATH Act which was signed into law on December 18, 2015, allows your business recover the cost of qualified business assets placed in service during the tax year within generous limits. These are the three main types of write-offs now available.

  1. Section 179 deduction. Your business can expense the cost of new or used business property up to the maximum threshold for the tax year (see the article in the box below). The expanded limits provide a near-instant tax break for most small and midsize manufacturers. But the property must be placed into service during the year, not just purchased by year end. The PATH Act retained and made permanent the 2014 maximum $500,000 allowance for qualified property. This limit will be indexed for inflation beginning in 2016.
  1. Bonus depreciation. The PATH Act restores the 50% first-year bonus depreciation retroactive to the beginning of 2015. It also extends the tax break for several years, along with a few technical modifications, under this schedule:
50% through 2017
40% for 2018
30% for 2019

Bonus depreciation applies to only new assets, not used ones. The bonus depreciation program is set to expire in 2019, unless Congress reinstates it.

  1. Regular depreciation. For federal tax purposes, depreciation deductions for business assets placed in service are typically calculated under the Modified Accelerated Cost Recovery System (MACRS). That method uses a graduated percentage based on the useful life of the property that lets you write off the cost earlier than the straightline method. Most types of business equipment are considered to have a seven-year useful life. Computers are classified as five-year property.

MACRS treats property placed in service at any point during the year as being placed in service on July 1 under a “midyear convention.” This allows your business to benefit from a half-year’s deduction even on property placed in service late in the year.

Important note. Deductions may be reduced if more than 40% of the cost of the property (excluding real estate) is placed in service in the final quarter.

Three PATH Act Breaks in Action

This is how you can combine the three tax breaks:

  1. Claim the Section 179 allowance,
  2. Take first-year bonus depreciation on any purchases that haven’t been written off, and
  3. Depreciate the remainder using traditional MACRS tables.

For example, an auto parts manufacturer placed $1 million of new machinery in service in 2015. The machinery has a seven-year useful life. Assuming the company didn’t make any other qualified purchases, it can maximize the combined deductions in 2015:

Section 179 deduction. It would first claim an immediate Section179 deduction of $500,000, or half of the cost, leaving a balance of $500,000.

Bonus depreciation. Then, it would take a bonus depreciation deduction equal to 50% of the remaining balance, or $250,000.

MACRS deduction. Finally, using the table for seven-year property, it could write off 14.29% of the remaining $250,000 cost of the property, or $35,725.

The total deduction for all three tax breaks is $785,725. Only $214,275 of the $1 million cost remains to be depreciated over the next six years.

Also, note that the MACRS percentage for seven-year property jumps to 24.9% of the cost in the second year. In the example provided, the company would be able to deduct another $62,250 in the second year. In other words, you can essentially depreciate almost 40% of the remaining cost (14.29% plus 24.9%) in the first two years.

Two Key Limits under Section 179

While the PATH Act permanently preserves the generous $500,000 Section 179 allowance, it encompasses two other important provisions:

Income limit. The Section 179 deduction can’t exceed your net taxable income from business activities. For example, if your business generates $400,000 a year in net taxable income and it places $450,000 of business property in service, the deduction is limited to $400,000. Bonus depreciation can be used to reduce your taxable income below zero, however.

Spending threshold. If the cost of assets exceeds an annual threshold, the maximum Section 179 deduction is reduced on a dollar-for-dollar basis. This threshold was moved in lockstep with the allowance, but now the PATH Act retains a $2 million limit, retroactive to 2015 (subject to indexing starting in 2016). If you placed in service $2.1 million of assets last year, for example, the Section 179 deduction is reduced to $400,000. The bonus depreciation program isn’t subject to a spending limit, however.

Professional Advice

Factor these enhanced tax breaks into your plans for purchasing equipment and you likely can substantially reduce your company’s tax liability. Contact your Cornwell Jackson tax adviser for more details on these tax-saving opportunities, including any rules and restrictions.

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