Tax Services - Page 21 of 22 - The CJ Group

Posted on Mar 4, 2016

manufacturing audit, R&D credit, icdisc, manufacturing tax credits, manufacturing dallas, manufacturing employment

In the past year, manufacturing employment in the Dallas/Fort Worth area has dropped by 2 percent. This statistic alone seems negative, but the overall outlook for manufacturing is trending positive with increased focus on innovation, simplified supply chains, diversification into customer-focused services and creativity with materials performance and fuel sourcing. It’s still a challenging industry, but this real or perceived lull in growth is the perfect time to assess the structure and vision of your company. Strengthen the basics with strategic planning to be ready for what’s next.

Strategic Planning

A slower year or two for revenue may be the opportune time to pursue a transfer of assets to the next generation. If earnings are down 15-20 percent, for example, savings on the transfer and estate tax can be significant if owners act now.

Also, if year-to-year revenue continues to be flat or even less than the previous year, your CPA can help you consider reporting an operating loss and cleaning up the books through carrybacks and refunds from years when revenue was higher.

Even if the company is in good financial health and sustaining a moderate profit, now may be a good time to revisit the company vision, your business model, your KPIs and your tools for tracking them. There are many more integrated solutions that tie the sales side of the house to supply chain, to production and all the way through to realization. Leaders should take time now to explore and demo these various management tools.

Manufacturing Tomorrow

Significant global growth in manufacturing is forecast mainly in Southeast Asia, India, the Middle East and Eastern Europe. By 2025, it is expected that a new global consuming class will have emerged in these developing economies as wages rise and demands for more goods and services increase.

As these manufacturers mature, they will have to focus on reducing costs, appealing to a broader base of customers and finding more skilled workers. In the end, all manufacturers will have to respond faster to market shifts based more on a global pulse than what is happening in their backyards.

In established markets, customers are already dictating variation in products, after-sales customer care and advanced or more environmentally friendly materials. These buyers are doing the majority of research on their own, interacting with the producer only briefly, then hitting the submit button. If they have a bad experience, they report it on social media. Producers are serving increasingly knowledgeable customers who want it their way…or they will go somewhere else.

On the supply side, manufacturers will continue to deal with volatile resource prices and a shortage of highly skilled talent. Difficulty obtaining supplies, regulatory and labor risks and lack of public infrastructure will influence the location and relocation of production facilities.

All of these predictions point to the need for manufacturers to be tech-savvy and globally aware. Even if home base is Dallas/Fort Worth, the market is the world. Work with advisors who recognize this shift. Get your financial and strategic house in order to invest in tomorrow’s opportunities.

If you have any questions about how to add operational efficiencies, reduce taxes or plan for transfer of ownership in your manufacturing operation this year, talk to the manufacturing team at Cornwell Jackson.

Gary Jackson, CPA, is the lead tax partner in the Cornwell Jackson’s business succession 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.

Posted on Feb 17, 2016

manufacturing audit, R&D credit, icdisc, manufacturing tax credits, manufacturing dallas, manufacturing employment

Batten the Hatches

In times of uncertainty in the manufacturing industry, it’s natural to huddle up and think through strategies that protect the short-term while preparing for the long game. Companies will often turn to their advisors between waves of growth to review their operations and make sure they are taking every precaution and advantage.

There is always plenty to talk about in manufacturing. As stated in a previous article, the disruption of oil and gas and energy consumption has impacted companies in the region in direct revenue, but also in their relationships with related industries that rely on the oil and gas industry.

Some of the strategies we’ve seen manufacturers employ have included adjustments to work shifts and right-sizing. However, they are also looking at ways to reduce inventory, improve processes, look for tax breaks and even step up estate planning and succession. The following are areas of the manufacturing business that owners and management can review for savings and efficiency.

Tax Incentives/Deductions

Smaller manufacturers don’t always perceive a qualification for the politically popular R&D credit. They should take another look. Some companies have discovered areas defined as R&D under the tax law that fit them perfectly even if they don’t consider themselves innovative. For example, an improved or proprietary process can qualify even if you don’t have an on-site lab or clean room. Also, think about that customer who asked you to make a small adjustment to the machining of a part. If you engineered it, it may qualify as R&D.

When companies are busy, owners or management aren’t always aware of qualifying innovation happening on the production floor. Consult with your CPA to bring those opportunities to light so they are communicated to staff and recorded regularly.

Other tax reduction strategies can be found in how manufacturers handle personal property taxes. Old assets should be removed from the books when new assets are purchased. Some assets may be improperly classified, resulting in overpayment. Many types of “equipment” can be exempt. In addition, certain idle equipment due to lack of demand may also be factored to reduce the personal property tax.

Of course, bonus depreciation is another go-to tax provision. Manufacturers may qualify under fixed asset expensing or through the Domestic Production Activities Deduction (DPAD). This allows for an additional 9 percent deduction of the lesser of taxable income, or 9 percent of “qualified production activities income” (QPAI). QPAI is equal to the amount by which gross receipts from eligible manufacturing and production activities exceed related expenses.

Activities include, but are not limited to:

Manufacturing, production, growth or extraction of tangible personal property in the U.S.
Construction of real property in the U.S.
Performance of engineering or architectural services in the U.S. in connection with real property construction projects in the U.S.

A manufacturer may also qualify for additional tax rate reduction benefits under the interest-charge domestic international sales corporation (IC-DISC). This tax rate reduction is generated by creating a separate entity organized as a C-Corporation. The C-Corp is deemed to participate in the exporting process of the operating entity and earns a “commission.” That commission is paid by the operating entity, and it is an ordinary deduction, reducing ordinary income. Qualification for this type of tax reduction requires exploration of a manufacturer’s operation and sales chain as well as planning to set up the entity.

There are many other areas that manufacturers can explore with their CPA to improve their tax position.

Process Improvements for Manufacturing Operations

Manufacturers can look at various ways to improve efficiencies and reduce waste in the production line as well as save on utilities, maintenance and materials. In addition to integrated components and sensors to alert staff to potential breakdown, the design of production floors can improve workflow and move product out the door faster.

Manufacturers are also looking at simplifying the steps in each manufacturing process to speed production and make training and improvements easier later. Again, some of these may qualify for R&D, depending on the complexity of the changes and their impact on a particular product or the industry itself.

A lean process study and revamping of core processes could provide a double benefit of both improved profitability and production qualifications for the R&D credit.

Labor and Benefits

Texas-based manufacturers may experience more frequent inquiries by state and federal authorities regarding citizenship and fair labor practices.

Immigration and Customer Enforcement (ICE) will look at companies with a large workforce and ask for I-9s or proof of U.S. citizenship. If they find violations, they will give the owners a time period to comply or face fines. These inquiries and fines cause a disruption in business and unexpected costs. Manufacturers need to take a careful look at their employment rolls to avoid this turbulence.

The same can be said for trends in class action suits that target large groups of employees to pursue claims for unpaid overtime or unfair labor practices as outlined in the Fair Labor Standards Act. Employers, for example, that incentivize employees with bonuses based on production must also demonstrate compliance with any overtime owed to meet those production goals.

Manufacturers can receive incentives for hiring veterans or other special worker classes, but they must be careful when hiring these workers if reductions in force are required later. They don’t want to be perceived as manipulating the system, keeping employees only until requirements are satisfied.

On the benefits side, some larger manufacturers are setting up captive entities to self-insure the operation and/or employees — essentially paying premiums to their captive entity rather than to a third-party payer. If income is steady at $5 million to $6 million a year, a captive can provide another tool for owners as they plan for succession and retirement.

GJ Headshot Gary Jackson, CPA, is the lead tax partner in the Cornwell Jackson’s business succession 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.

Posted on Jan 22, 2016

At the end of last year, the Protecting Americans from Tax Hikes Act of 2015 was signed into law. Known as the PATH Act, it does more than just extend expired and expiring tax provisions for another year. The new law makes many temporary tax breaks permanent.

This provides some stability in planning. When it comes to certain deductions and credits, taxpayers will no longer have to wait for Congress to pass a temporary tax extenders law — often at the end of the year — in order to plan tax-saving strategies.

Here’s an overview of how individuals and businesses can benefit from the latest tax package.

Tax Breaks for Individuals

American Opportunity education credit. Eligible taxpayers can take an annual credit of up to $2,500 for various tuition and related expenses for each of the first four years of postsecondary education. The credit phases out based on modified adjusted gross income (MAGI) beginning at $80,000 for single filers and $160,000 for joint filers, indexed for inflation. The new law makes this credit permanent.

Tuition and fees deduction. The new law extends through 2016 the above-the-line deduction for qualified tuition and related expenses for higher education. The deduction is capped at $4,000 for taxpayers whose adjusted gross income (AGI) doesn’t exceed $65,000 ($130,000 for joint filers) or, for those beyond those amounts, $2,000 for taxpayers whose AGI doesn’t exceed $80,000 ($160,000 for joint filers).

Small business stock gains exclusion. The PATH Act makes permanent the exclusion of 100% of the gain on the sale or exchange of qualified small business (QSB) stock acquired and held for more than five years. The 100% exclusion is available for QSB stock acquired after September 27, 2010.

A QSB is generally a domestic C corporation that has gross assets of no more than $50 million at any time (including when the stock is issued) and uses at least 80% of its assets in an active trade or business. The law also permanently extends the rule that eliminates QSB stock gain as a preference item for alternative minimum tax (AMT) purposes.

Charitable giving from IRAs. The PATH Act makes permanent the provision that allows taxpayers who are age 70½ or older to make direct contributions from their IRAs to qualified charitable organizations up to $100,000 per tax year. If you take advantage of this opportunity, you can’t claim a charitable or other deduction for the contributions, but the amounts aren’t considered taxable income and can be used to satisfy your required minimum distributions.

To qualify for the exclusion from income for IRA contributions for a tax year, you need to arrange a direct transfer by the IRA trustee to an eligible charity by December 31. Donor-advised funds and supporting organizations aren’t eligible recipients.

Transit benefits. Do you commute to work via a van pool or public transportation? The law makes permanent the requirement that limits on the amounts that can be excluded from an employee’s wages for income and payroll tax purposes be the same for parking benefits and van pooling / mass transit benefits.

For 2015, the monthly limit is $250. Before the PATH Act, the 2015 monthly limit was only $130 for van pooling / mass transit benefits. (The $250 limit increases to $255 for 2016.)

State and local sales tax deduction. Taxpayers can take an itemized deduction for state and local sales taxes, instead of for state and local income taxes. This tax break is now permanent. The deduction is especially valuable for individuals who live in states without income taxes and those who purchase major items, such as a car or boat.

Energy tax credit. The PATH Act extends through 2016 the credit for purchases of residential energy property. Examples include new high-efficiency heating and air conditioning systems, insulation, energy-efficient exterior windows and doors, high-efficiency water heaters and stoves that burn biomass fuel.

The provision allows a credit of 10% of expenditures for qualified energy improvements, up to a lifetime limit of $500.

Mortgage-related tax breaks. Under the new law, you can treat qualified mortgage insurance premiums as interest for purposes of the mortgage interest deduction through 2016. However, the deduction phases out for taxpayers with AGI of $100,000 to $110,000.

In addition, the PATH Act extends through 2016 the exclusion from gross income for mortgage loan forgiveness. It also modifies the exclusion to apply to mortgage forgiveness that occurs in 2017 as long as it’s granted pursuant to a written agreement entered into in 2016.

Educator expense deductions. Qualifying elementary and secondary school teachers can claim an above-the-line deduction for up to $250 per year of expenses paid or incurred for books, certain supplies, computer and other equipment, and supplementary materials used in the classroom. Under the new law, beginning in 2016, the deduction is indexed for inflation and includes professional development expenses.

Tax Breaks for Businesses

Section 179 deduction. Tax law allows businesses to elect to immediately deduct — or expense — the cost of certain tangible personal property acquired and placed in service during the tax year. The Section 179 deduction is in lieu of recovering the costs more slowly through depreciation deductions. Keep in mind the election can only offset net income — it can’t reduce it below $0 to create a net operating loss. There are also other restrictions.

The election is also subject to annual dollar limits. For 2014, businesses could expense up to $500,000 in qualified new or used assets, subject to a dollar-for-dollar phaseout once the cost of all qualifying property placed in service during the tax year exceeded $2 million. Without the PATH Act, the expensing limit and the phaseout amounts for 2015 would have sunk to $25,000 and $200,000, respectively.

The new law makes the higher limits permanent and indexes them for inflation beginning in 2016. It also makes permanent the ability to apply Sec. 179 expensing to qualified real property, reviving the 2014 limit of $250,000 on such property for 2015 but raising it to the full Sec. 179 limit beginning in 2016. Qualified real property includes qualified leasehold-improvement, restaurant and retail-improvement property.

Finally, the new law permanently includes off-the-shelf computer software on the list of qualified property. And, beginning in 2016, it adds air conditioning and heating units.

Bonus depreciation. Bonus depreciation allows businesses to recover the costs of depreciable property more quickly by claiming bonus first-year depreciation for qualified assets. It’s been extended, but only through 2019 and with declining benefits in the later years. For property placed in service during 2015, 2016 and 2017, the bonus depreciation percentage is 50%. It drops to 40% for 2018 and 30% for 2019.

The provision continues to allow businesses to claim unused AMT credits in lieu of bonus depreciation. Beginning in 2016, the amount of unused AMT credits that may be claimed increases.

Qualified assets include new tangible property with a recovery period of 20 years or less (such as office furniture and equipment), off-the-shelf computer software, water utility property and qualified leasehold-improvement property. Beginning in 2016, qualified improvement property doesn’t have to be leased to be eligible for bonus depreciation.

Accelerated depreciation of qualified real property. The PATH Act permanently extends the 15-year straight-line cost recovery period for qualified leasehold improvements (building alterations to suit the needs of a tenant), qualified restaurant property and qualified retail-improvement property. These expenditures are now exempt from the normal 39-year depreciation period.

This is beneficial for restaurants and retailers because they tend to remodel periodically. If eligible, they may first apply Section 179 expensing and then enjoy this accelerated depreciation on qualified expenses in excess of the applicable Section 179 limit.

Research credit. This valuable credit provides an incentive for businesses to increase their investments in research. However, the temporary nature of the credit deterred some businesses from pursuing critical innovations.

The PATH Act permanently extends the credit. Additionally, beginning in 2016, businesses with $50 million or less in gross receipts can claim the credit against AMT liability, and certain start-ups (generally, those with less than $5 million in gross receipts) that haven’t yet incurred income tax liability can use the credit against their payroll tax.

Work Opportunity tax credit. Employers that hire individuals who are members of a “target group” can claim this credit, which has been extended through 2019. The new law also expands the credit beginning in 2016 to apply to employers that hire qualified individuals who have been unemployed for 27 weeks or more.

The credit amount varies depending on:

The target group of the individual hired;
Wages paid to the employee; and
Hours worked by the new hire during the first year of employment.

The maximum credit that can be earned for each qualified adult employee is generally $2,400. The credit can be as high as $9,600 per qualified veteran. Employers aren’t subject to a limit on the number of eligible individuals they can hire.

You must obtain certification that an employee is a member of a target group from the appropriate State Workforce Agency before claiming the credit. The certification must be requested within 28 days after the employee begins work. For 2015, the IRS may extend the deadline as it did for 2014, when legislation reviving the credit for that year wasn’t passed until late in the year — meaning that the 28-day period had already expired for many covered employees hired in 2014.

Food inventory donations. The PATH Act makes permanent the enhanced deduction for contributions of food inventory for non-corporate business taxpayers. Under the enhanced deduction (which is already permanently available to C corporations), the lesser of basis plus one-half of the item’s appreciation or two times basis can be deducted, rather than only the lesser of basis or fair market value. Beginning in 2016, the limit on deductible contributions of inventory increases from 10% to 15% of the business’s AGI per year.

S corporation recognition period for built-in gains tax. S corporation income generally is passed through to its shareholders, who pay tax on their pro-rata shares. If a C corporation elects to become an S corporation, the newly created S corporation is taxed at the highest corporate rate (currently 35%) on all gains that were built-in at the time of the election and recognized during the “recognition period.”

Generally, this period is 10 years. But, under the new law, it’s only five years, beginning on the first day of the first tax year for which the corporation was an S corporation.

Commuting benefits. The PATH Act makes permanent the provision that established equal limits for the amounts that can be excluded from an employee’s wages for income and payroll tax purposes for parking fringe benefits and van-pooling / mass transit benefits. The limits for both types of benefits are now $250 per month for 2015. Without the parity extension, the limit for van-pooling / mass transit would be only $130.

Tax Planning with More Certainty

Many of these tax breaks may seem familiar, because they’re continuations from previous years. Under the PATH Act, there are now significant tax planning opportunities for individuals and businesses. The permanent extensions of some valuable tax breaks will make it easier for taxpayers to plan ahead. Keep in mind that this article only touches on some of the new law’s provisions. There may be extensions and enhancements that can benefit you as an individual taxpayer and your company if you’re a business owner or executive.

Contact your Cornwell Jackson tax advisor to determine how you can make the most of this tax relief.

Posted on Jan 18, 2016

manufacturing audit, R&D credit, icdisc, manufacturing tax credits, manufacturing dallas, manufacturing employment

Oil drives Texas. It’s no surprise that the manufacturers we talk to are concerned
about the drop in oil and gas prices. Many of them are tied to the industry as suppliers, fabricators and general contractors. Still, other manufacturers that are dependent on freight and shipping costs are more than happy to see fuel prices drop.

Then we have the valuation of the dollar against foreign currencies that affects trade. Manufacturers trying to compete against materials and products shipped cheaply from other countries must look for efficiencies besides price reduction. China’s economic slowdown does not seem to have helped the cause of U.S. based manufacturing, with weak performance reported around the world.

Although the Dallas/Fort Worth area outpaced many other states in overall economic growth in 2015, rather flat manufacturing performance did not help the cause. This fact was predictably offset by positive gains in hospitality, business and professional services, utilities and transportation, according to an economic update by the Federal Reserve Bank of Dallas.

Flat growth is not the final word. A pause in business is sometimes the perfect opportunity to review the vision, business model, processes and procedures, technology and other foundational contributors to growth. Let’s take a look at the current state of manufacturing and what manufacturers should focus on this year to prepare for the next wave of growth. If you clean house now and invest in the foundation of your business, you will be in a better position to seize opportunities when growth resumes.

Manufacturing Now

Manufacturing in developing countries continues to provide a path to rising incomes and living standards. In advanced economies, it is a source of innovation and competitive strength for exports and productivity. When the Recession hit the industry hard, employment fell with it, delaying the demand for skilled labor.

Well, the demand for labor isn’t necessarily back to the fever pitch of pre-Recession times simply because manufacturers have looked for ways to offset labor with equipment and automation. Manufacturers that have invested in automation since 2010 have survived and even thrived. They are crediting the investment — along with the trend in the Internet of Things (IoT) — to help them efficiently monitor inventory and productivity. Automation has also helped them anticipate and head off problems on the line or in the supply chain — reducing outages and downtime.

In fact, U.S. manufacturers may spend more than $5 billion on new robotic orders by the end of 2016, according to the Freedonia Group. In turn, the demand for labor has shifted to the types of employees who are skilled at both hardware and software. Manufacturers investing in IoT units to reduce maintenance costs and risk of outages will be ahead of their competitors as that industry ramps up in the next five years.

A strong base of defense and aerospace firms in Texas does support this move to what some are calling “advanced manufacturing.” Leaders are calling for the state to continue to create policies and make investments in higher education to support advanced manufacturing infrastructure.

An article in the December 2015 Dallas Business Journal also noted that Dialexa, a consulting firm for technology start-ups, planned to expand its hardware lab, which includes the company’s electrical engineering, embedded software, mechanical design, 3D printing and electrical assembly research and development. This is one example of a company working in emerging technologies that will incubate new types of manufacturing in the Dallas/Fort Worth region.

Manufacturing At Your Service

Another interesting shift in the industry is the expansion of services offered by manufacturers. Rather than strict product manufacturing, some industries employ half of their workforce in non-production roles. This includes R&D engineers, logistics staff and after-sales support and maintenance services. A report from the McKinsey Global Institute predicts that the role of manufacturing in advanced economies leans toward innovation, productivity and trade more than growth and employment. These advanced manufacturers also consume and provide more services than manufacturing facilities in developing countries.

A survey by Grant Thornton on technology trends found that the majority of more than 300 manufacturers surveyed in the U.S. believed that new technologies would bring new opportunities. The top five technologies cited were: robotics, advanced materials, IoT (sensors, interconnected machinery), 3D printing and big data (analytics).

The use of real-time data and analytics, for example, allows manufacturers to run more “what if” testing, according to the report. It can reduce risk and materials costs while improving quality and accelerating new product development.

What is holding back many manufacturers from taking the leap into all of these new technologies? The biggest reason cited in the Grant Thornton report was economic uncertainty, followed by the perceived risks of adopting technology that isn’t completely proven.

Manufacturers are entrepreneurial, but when it comes to capital outlay they’ve learned to be cautious. Still, a move toward diversification seems to be a natural evolution. Manufacturing can now encompass proprietary customer designs, production and implementation and also after-care services. This diversification is already paying dividends for the job shops whose saavy owners realized the potential for value-added services. More services per customer leads to more loyalty and profit.

Posted on Jan 12, 2016

Businesses got some good news recently from the IRS. Some employers and other entities, which are required to file information returns for 2015 on Forms 1094 and 1095, now have an extension on the deadlines.

This gives employers extra time to complete two tasks:

1. Provide the forms to recipients; and

2. File the forms with the IRS.

Background information. Under Internal Revenue Code Section 6055, health coverage issuers, certain employers, and others that provide “minimum essential coverage” to individuals are required to file information returns containing the type and period of coverage. They’re also required to furnish related information statements to covered individuals, beginning with calendar year 2015.

What’s the Difference Between the Forms?

Providers of health coverage, including insurers, some self-insuring employers and others must file IRS Forms 1094-B, “Transmittal of Health Coverage Information Returns,” and 1095-B, “Health Coverage.”

Applicable large employers (ALEs) are required to file Form 1094-C, “Transmittal of Employer Provided Health Insurance Offer and Coverage Information Returns,” and Form 1095-C, “Employer Provided Health Insurance Offer and Coverage,” with information about the health care coverage, if any, they offered to full-time employees.

ALEs are generally defined as employers with at least 50 full-time employees (including “full-time equivalent” employees) in the previous year.

How Much Extra Time Do You Get?

The original deadlines for filing 2015 ACA information returns were the same as for filing W-2 and 1099 forms. In other words, they were required be filed with the IRS no later than February 29, 2016 (March 31, 2016, if filed electronically). Employers could apply for a 30-day extension of the deadline by filing an IRS form.

In addition, employers were originally required to provide 2015 ACA statements to employees no later than February 1, 2016 (because January 31, 2016 is a Sunday).

If you’re not filing electronically, the IRS has now extended the due date:

To March 31, 2016 for furnishing to individuals 2015 Forms 1095-B and 1095-C (from February 1, 2016).
To May 31, 2016 for filing with the IRS 2015 Forms 1094-B, 1095-B, 1094-C, and Form 1095-C (from February 29, 2016). If you’re filing electronically, the deadline is now June 30, 2016 (from March 31, 2016)

The IRS is prepared to accept the information returns on Forms 1094-B, 1095-B, 1094-C, and 1095-C beginning in January 2016. However, following consultation with stakeholders, the U.S. Department of the Treasury and the IRS determined that some employers, insurers, and other providers of minimum essential coverage need additional time to adapt and implement systems and procedures to gather and report the required information.

Will There Be Further ACA Filing Deadlines Extensions after these Deadlines?

In view of the extensions announced recently by the IRS, the provisions regarding automatic and permissive extensions of time for filing information returns and permissive extensions of time for furnishing statements won’t apply to the extended due dates. In other words, there will be no further extensions.

Are There Penalties for Not Filing?

Employers or other coverage providers that don’t comply with the new deadlines will be subject to penalties for failure to timely furnish and file. However, employers and other coverage providers that don’t meet the extended due dates are still encouraged to furnish and file, and the IRS will take such furnishing and filing into consideration when determining whether to abate the penalties for reasonable cause.

In addition, the IRS will take into account whether an employer or other coverage provider made reasonable efforts to prepare for reporting the required information to the IRS and furnishing it to employees and covered individuals. These efforts include gathering and transmitting the necessary data to an agent to prepare the data for submission to the IRS, or testing an employer’s ability to transmit information to the IRS. The tax agency will also consider the extent to which the employer or other coverage provider is taking steps to ensure that it’s able to comply with the reporting requirements for 2016.

What about Individual Taxpayers?

The new IRS notice also provides guidance to individuals who might not receive Form 1095-B or Form 1095-C by the time they file their 2015 personal income tax returns (because their employers took advantage of the extension opportunity).

In these cases, according to the IRS Notice, “individuals who rely upon other information received from employers about their offers of coverage for purposes of determining eligibility for the premium tax credit when filing their income tax returns need not amend their returns once they receive their Forms 1095-C or any corrected Forms 1095-C.” Individuals don’t need to send this information to the IRS when filing their returns but should keep it with their tax records.

Need Help?

Contact your Cornwell Jackson tax adviser if you need more information or assistance to comply with the Form 1094/1095 filing requirements.

Posted on Dec 17, 2015

Congressional leaders are lauding the agreement on a large extenders package that revives over 50 provisions—some permanently, such as the research credit, Code Sec. 179 expensing, and the child credit; some for five years, such as bonus depreciation, and over 25 other provisions through 2016. The $650-billion Protecting Americans from Tax Hikes (PATH) Bill of 2015 also includes over 60 other provisions on miscellaneous topics, including real estate investment trusts, tax administration and more.

“I think this is one of the biggest steps toward a rewrite of our tax code that we have made in many years, and it will help us start a pro-growth bold tax reform agenda in 2016,” House Speaker Paul Ryan, R-Wis., said during a press conference on December 16. “In addition to all of that, we are ending Washington’s days of extending tax policies one year at a time.”

Senate Finance Committee Chairman Orrin G. Hatch, R-Utah, said that the 52 separate provision have, on a relatively frequent basis, faced expiration and require Congress to reach agreements on further extensions. “Our bill would reduce that number down to 33 provisions, still far too many, but a significant relief in terms of the on-going extenders pressure,” said Hatch in a speech on the Senate floor.

A House vote on the PATH Bill is scheduled to take place on December 17 with the Senate vote expected to follow. The $1.1-trillion omnibus spending package is slated for House and Senate votes on December 18. Lawmakers are expected to approve both bills. Following the votes, Congress will adjourn for the remainder of the year.

Tax Extenders

The extenders package calls for making permanent over 20 tax-extender benefits, split 50-50 between business and individuals. Among the extenders that the package makes permanent are:

the research and development credit, with special utilization by small businesses;
Code Sec. 179expensing, at an indexed $500,000 level/$2 million limit (and eliminating the $250,000 cap beginning in 2016);
state and local sales tax deductions;
special 15-year, straight-line cost recovery for qualified leasehold improvements, and qualified restaurant and retail improvement property;
an enhanced Earned Income Tax Credit;
an enhanced Child Tax Credit;
a modified classroom-expense deduction;
parity for exclusion of employer-provided mass transit and parking benefits;
tax-free distributions of up to $100,000 from IRAs for charitable purposes (among other incentives for charitable giving); and
an enhanced American Opportunity Tax Credit.

The extenders package also extends and modifies through 2019:

bonus depreciation, at 50 percent for 2015-2017 and phased down to 40 percent in 2018 and 30 percent in 2019;
the Work Opportunity Tax Credit, modified and enhanced for employers who hire long-term unemployed individuals to 40 percent of the first $6,000 of wages;
the New Markets Tax Credit, with a $3.5-billion allocation; and
certain look-through treatment between related controlled foreign corporations.

Finally, most other tax provisions that were in the last extenders package and had expired retroactively after December 31, 2014, are revived for two years, through 2016. Notably, these provisions include: an extension and modification of the exclusion of mortgage debt discharge; an extension of the above-the-line deduction for qualified tuition and related expenses; and over a dozen incentives for energy production and conservation.

Many other miscellaneous tax provisions were also added to the extenders package under the headings:

Program Integrity—safeguards surrounding ITNs, information returns, and restrictions regarding education incentives, among others;
Family Tax Relief—exclusions under the Work College Program, improvements toCode Sec. 529 accounts, and rollovers into simple retirement accounts, among others;
Real Estate Investment Trusts—restrictions on tax-free spinoffs, limitations on designation of dividends, hedging provisions, and over 10 other REIT-related provision;
Tax Administration—rules for IRS employees, truncated Social Security Numbers for Form W-2, clarification of enrolled agent credentials, and tweaks to the new partnership audit rules, among others); and
S. Tax Court—rules regarding taxpayer access to the Tax Court and additional rules and clarifications.

IRS Budget

The Consolidated Appropriations Bill, 2016, provides $11.235 billion for funding of IRS operations, $290 million (3 percent) more than the fiscal year 2015 level. The agreement directs that the funds provided above the fiscal year 2015 level be devoted to making measurable improvements in the customer service representative level of service rate, improving the identification and prevention of refund fraud and identity theft and enhancing cyber security to safeguard taxpayer data.

Press Release provided by Wolters Kluwer. More information to come, please check back to our blog.

To learn more, please reach out to Derek Northup at 972-202-8000 or Derek.Northup@cornwelljackson.com.

Posted on Dec 4, 2015

Welcome to uncertainty. The age of information has brought an unprecedented requirement for people, processes and technology to evolve quickly. Real estate must provide the same level of flexibility to adapt to or even anticipate the next big economic or social change. Therefore, investors as well as developers are attracted to opportunities that cover as many variables as possible.

Dallas was ranked among the best cities to work in technology in 2015, according to data on 200 locations by financial advice tech start-up SmartAsset. Cost of living is reasonable and the city’s three tech incubator organizations that emerged post-recession have accelerated tech start-ups and acquisitions. According to data analyst CB Insights, Texas had 22 tech companies in the IPO pipeline in addition to acquisition activity.

Nationally, firms employing fewer than 50 people are showing job growth outpacing larger firms by nearly five to one, according to the Urban Land Institute. Many of those firms are in the TAMI industry, defined as technology, advertising, media and information. Tech industry employees, about 4 percent of the workforce in Dallas, make 73 percent higher wages than the city’s average compensation, which bodes well for housing investment.

Smart Buildings Go Beyond ‘Nice to Have’

As consumers grow more technologically savvy (or dependent?), expecting to connect wherever they are, the building infrastructure and envelope itself needs to flex and accommodate next-generation technologies. Beyond that, the need to conserve resources is at play. Analysts are already recommending that technology and sustainability be factored into current asset valuations. A bad sustainability rating could result in valuation “brown discounts” for things like energy inefficiency or technology obsolescence.

With energy and water demands increasing globally, The Global Smart Building Market 2015-2019 report noted that the smart building market is expected to grow from $7 billion in 2015 to $36 billion by 2020, at a CAGR of 38% from 2015 to 2020.

Tied into the smart systems of buildings is the prediction that devices and platforms begin to learn the preferences of people and create a preferred “experience” for users…whether real or virtual. The potential for speaking to your home or office to get what you want — and having it speak back intelligently — is no longer just science fiction.

In the short term, developers of both residential and commercial real estate can anticipate continued requests for features and affiliated services that include physical and data security, multi-channel communications capabilities, climate controls and similar automated options. Real estate technologies must deliver on higher expectations for safety, efficiency and productivity.

Want more real estate trends? Download the full Whitepaper or read this post: Low Debt Supports Positive Cycle of Development

If you would like to learn more about how this topic might affect your business, please contact Gary Jackson, CPA at Gary.Jackson@cornwelljackson.com or call 972.202.8000.

Posted on Dec 3, 2015

Developers and investors are looking for opportunities to get the most flexible bang for their buck, either in real estate zoning and use or in location aligned with a variety of amenities and attractions. They are steering clear of developments that focus on just one class or type in order to reduce volatility long-term.

The Dallas/Fort Worth area is part of this flexible multi-use communities trend. The Central Business District population is predicted to grow to 59,337 by 2030. Young people and some Baby Boomers are choosing city cores in Dallas, Atlanta, Charlotte, Nashville and Portland, according to a 2016 report co-published by the Urban Land Institute and PwC US. Young people are waiting longer to get married and have families. Boomers want an active cultural and social life. Both lend themselves to vibrant, downtown or uptown neighborhoods with smaller, maintenance-free residences. They want to be close to work, dining, recreation and shopping with the option to walk, bike or use public transit. Housing types tailored to demographics are becoming a necessity to match these evolving lifestyle and environmental demands.

NAIOP, the national commercial real estate association, considers what they call walkable mixed use or flexible multi-use communities as “the future of commercial real estate development.” In a spring 2015 article, NAIOP defined “walkability” as a relationship between people and the streetscape. It must be inviting, comfortable, fun and safe, which means that the buildings aren’t the main focal point, but are instead designed to shape the pedestrian experience.

NAIOP predicts this type of mixed use will be in high demand with “appreciation in land values and rents.” You may see this playing out in West Dallas at Trinity Groves, where 1,000 new apartments are in development in the midst of a foodie’s haven of restaurants along the Trinity River.

Large corporate clients are re-imagining the amenities and design of large-scale campuses, too, moving away from traditionally closed and secure fortresses to a still-secure design that makes the campus look like part of a community. CityLine’s deal with State Farm makes it an anchor tenant for 186 acres of development in Richardson that includes retail, grocery, a movie theater, restaurants and upscale apartments.

In Frisco, plans for a new headquarters and training facility for the Dallas Cowboys has prompted investment interest from around the world. Estimates are more than $5 billion in development along a one-mile stretch between Warren Parkway and Lebanon Road. The area will be a community in itself with entertainment, retail, restaurants, hotels, industrial and office complexes and residential options.

And finally, the industrial market has grown legs, thanks in no small part to e-commerce and retail distribution trends. Foreign investors are very keen on retail-affiliated industrial real estate for distribution of perishable and non-perishable goods. All you have to do is look at consumer options for two-day or same-day delivery through e-commerce sites to realize the potential for distribution center development. NAIOP even cites expansion of the Panama Canal in 2016 as a key indicator of service delivery shaping real estate development.

Fort Worth is home to an Amazon distribution center with another center opening in Dallas, the fourth in the state. The 500,000-square-foot Dallas distribution center will handle small retail items and is slated to open in 2016 along Interstates 45 and 20.

Interiors Must Be Flexible, Too

Focusing on how people work rather than title or tenure at a company is also influencing the layout of interior spaces for collaboration, private focus time and “touching down.” Remote office workers who only visit the office occasionally, for example, as well as the speedy expansion/contraction of labor pools dictate this move toward flexible space.

The traditional big box office space lined with private offices and filled in the center with cubicle workspaces is losing its attraction in favor of open concept and loft interiors that combine work and “play” areas. Employers recognize the need for collaboration as well as focus time throughout the day among different work groups that a traditional office setting no longer accommodates.

Quality pre-builds that anticipate the desires of tech-minded, collaborative tenants are still a valuable investment. This is especially true if they are willing to bank on high-end finishes that attract tenants who prefer move-in-ready, modern spaces.

In residential spaces, city dwellers are opting for less square footage in favor of more amenities, ranging from pool houses and workout facilities to on-site bike repair and community rooms.

The sharing economy is influencing an interest in communal spaces that encourage face-to-face interaction as well as fewer individual parking spaces and more secure bike storage and proximity to transit.

These trends pose a challenge for remote real estate management arrangements. Management companies anticipate not only a move toward on-site management in some cases, but also new methods of staff training and oversight for building exterior and amenity maintenance.

Want more real estate trends? Download the full Whitepaper or read this post: Techy Options Go Beyond ‘Nice to Have’ to ‘Must Have’

If you would like to learn more about how this topic might affect your business, please contact Gary Jackson, CPA atGary.Jackson@cornwelljackson.com or call 972.202.8000.

Posted on Dec 2, 2015

For the last five years, experts in real estate accounting and commercial real estate investment have encouraged people and institutions to buy. Now we are starting to hear whispers as to how long a real estate bull market will last. Are we headed for a bust?

Not so fast. The U.S. economy is in a far different place than it was 10 years ago. Real estate developers, lenders and private equity investors have adopted a more cautious mindset that is demonstrated by bullishness on mixed use and re-use and a focus on mainstream methods of financing.

The Federal Reserve is expected to hold the line on already historically low interest rates. Plus, developers as well as their tenants are keeping more “rainy day” cash reserves for reinvestment. For these reasons and others, private equity investors and real estate analysts are predicting an extended positive cycle of growth in the Dallas/Fort Worth area and elsewhere.

Neither developers nor investors are interested in extending financing any longer than necessary. They also are cautious about higher risk financing. Post-Recession, vehicles such as mezzanine financing are rare for mid-size to large enterprises. In fact, a new version of financing known as “unitranche” is combining senior and subordinated debt into one financing vehicle, making it more attractive and cost-effective for developers and less risky for investors.

Mezzanine’s one sweet spot appears to be among small deals where traditional bank financing comes up short and private equity can’t make up the gap. But the number of dedicated mezzanine players has also dwindled as they adapt their investment strategy to market demand.

There is also more competition. Real estate investment trusts (REITs) are sustaining popularity as a way to fund and invest in real estate while mitigating risk. Since 2009, investors have replaced bonds with investment in REITs and realized returns of 4-6% each year in dividends, according to CNN Money. Although any announcement of raised interest rates affects REIT prices — signaling investment volatility in 2015 right along with the stock market — long-term pragmatists are advising clients to hold onto their REITs and even add to them because a stronger economy equals a stronger real estate market.

The newest form of investment, crowdfunding, is also taking a small portion of the market. Vehicles for crowdfunding satisfy the DIY developer and investor who wants more options and more transparency. With minimum investments of $5,000, more individual investors have access to real estate investments, and can use it as a form of portfolio diversification. More access to cash from diverse sources can support a more stable real estate market, coupled with strategic development. Laws regarding crowdfunding investment vehicles are still evolving with the technology itself, so investors and developers alike need to thoroughly review the pros and cons.

Cautious About ‘Overbuilding’

With interest rates remaining fairly steady and reduction in inventory in both the commercial and residential markets, the National Association of Realtors projected $500 billion in commercial real estate investment closings by the end of 2015. Properties are trading at 6.6 percent higher average prices compared to second quarter 2014.

In the Dallas/Fort Worth area, one of the hotbeds for commercial real estate development is Uptown. Investors are contributing millions for new office development and remodeling, the first of which to open next year is the new $225 million McKinney & Olive office tower. It will connect to The Crescent and Ritz-Carlson Hotel with plans for a major pedestrian area and park as part of Crescent Real Estate’s bullish push in Uptown.

As for the five or six other competing projects planned in Uptown, it makes sense long-term, but may take a while to fill them with tenants. Investors and developers are expected to shy away from projects that focus too much on one type or class of commercial development in order to keep their portfolios properly diversified.

Want more real estate accounting trends? Download the full Whitepaper or read our next blog post: Dallas Developers Focus on Flexible, Multi-Use “Communities”

If you would like to learn more about how this topic might affect your business, please contact Gary Jackson, CPA at Gary.Jackson@cornwelljackson.com or call 972.202.8000.

Posted on Nov 19, 2015

If you are part of the plant production management team, you are always looking for ways to increase throughput and lower maintenance down times. Of course, one of the go-to year-end capital expenditures strategies is to utilize a CAPEX budget in Q4 to purchase machines, equipment, or do a significant retrofit of existing equipment.

In addition to the return on assets analysis requested by the CEO and CFO, you also have to predict an elusive variable of “the potential tax savings implication in 2015.”

Unfortunately, answering this question has become a variable that might be best handicapped by Vegas and not by a production manager.

The bad news.

There is no definite bright line that will allow you to know with a high degree of certainty if the Sec. 179 dollar limit for expensing will be $25,000 or $500,000 in 2015.

There is also not a definite way to know if 50% bonus depreciation is available or unavailable by the end of the year 2015.

The good news and current status.

In July 2015, the Senate Finance Committee voted to extend bonus depreciation and the enhanced section 179 deduction through 2016. The full Senate has not indicated if or when it will act on this legislation and the House is not scheduled to act on extender legislation until late 2015. However, if passed this will create planning certainty for 2 years.

In addition, in September, the House Ways and Means Committee passed HR 2510, a bill by Congressman Pat Tiberi (R-Ohio) that proposes to go a step further and make 50% bonus deprecation a permanent part of the tax law and not part of a sun setting extender that has to be renewed annually.

There is considerable support for this bill from a strong ally, Representative Paul Ryan. Ryan wields considerable influence in the house as both Chairman of the House Way and Means Committee and as the newly elected Speaker of the House. Ryan has publicly supported the bonus depreciation incentive and its impact on investing in making manufacturers and businesses more productive.

As House Ways and Means Chairman Paul Ryan (R-Wis.) put it at today’s markup, “H.R. 2510 is about small-business people refurbishing their store or manufacturers buying new equipment. They aren’t earning income. They’re investing in our country. They’re investing in our children. They’re creating jobs. This is exactly what our tax code should support.”

So staying fluid and flexible is the name of the game. We are advising our clients to not rely on bonus for 2015, but we give it our personal handicap score of somewhere north of 60% chance of passage over the next 30-40 days before Congress adjourns for the holidays.

Maximizing deductions for a year-end acquisition.

(This is an example from the Congressional Research Center using 2014 tax rules and regulations since we do not yet have the new regulations for 2015.)

In the case of assets that were eligible for both bonus and section 179 expensing allowances, a taxpayer may recover their cost in the following order. The Section 179 expensing allowance would be taken first, lowering the taxpayer’s basis in the asset by that amount. The taxpayer then could apply the bonus depreciation allowance to the remaining basis amount, further reducing their basis in the property. Finally, the taxpayer was allowed to claim a depreciation allowance under the MACRS for any remaining basis, using the double-declining balance method.

A simple example from a 2014 acquisition illustrates how this procedure might work. Assume that a company made an acquisition of a new CNC laser cutter system at a total cost of $700,000. Such a purchase qualified for both the Section 179 expensing and bonus depreciation allowances for that year. Therefore, it was permitted to recover that cost for federal tax purposes as follows:

First, the company could take a Section 179 expensing allowance of $500,000 on its federal tax return for that year, lowering its basis in the property to $200,000 ($700,000 -$500,000).
Then it could claim a bonus depreciation allowance of $100,000 ($200,000 x 0.5), further lowering its basis to $100,000 ($200,000 -$100,000).
Next, the company was allowed a deduction for depreciation under the MACRS on the remaining $100,000. Given that the MACRS recovery period for laser cutters is five years and five-year property is depreciated using the double-declining-balance method, the company could claim an additional depreciation allowance equal to 20% of $100,000, or $20,000, using the half-year convention. ( this presumes no mid-quarter convention issues)
The company could recover the remaining basis of $80,000 ($100,000 -$20,000) by taking MACRS depreciation deductions over each of the next five years at rates of 32%, 19.2%, 11.52%, 11.52%, and 5.76%, respectively. ( this presumes no mid-quarter convention issues)
Thus, the company was able to write off nearly 89% of the cost of the CNC laser cutter in the same year it was purchased and placed in service.

Key Points to Remember for Year-end Planning

This is not an all-inclusive list – instead key points to remember before pulling the trigger on any capital expenditure before year-end.

Only 50% of cost is eligible for bonus depreciation
Bonus is not available for USED equipment
Not all states acknowledge or utilize bonus depreciation or Sec. 179
Newly constructed or original use property with a recovery period of 20 years or less (real or personal), qualified leasehold improvements, certain computer software, and water utility property is eligible for bonus depreciation. The only new property is eligible for bonus depreciation; used property is not eligible.
Qualified leasehold improvements are generally bonus eligible if made under a lease to the interior portion of a building occupied by a tenant and placed in service more than three years after the building was first placed in service.

We generally advise our manufacturing clients during year-end tax planning to avoid making long-term decisions based on tax allowances, but it can be a strong incentive due to the significant cash flow savings in March when the final year-end tax bill is tabulated.

If your current tax advisor hasn’t talked to you this year about bonus deprecation, LIFO, cost segregation or R&D credits and how they could impact your business in 2015 and 2016, then let us help. We’re tax experts.

Blog post written by: Gary Jackson, CPA, Tax and Consulting Partner

Strategic Planning for Manufacturing Tomorrow

Category: Tax Services

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