Category: Tax Services

Posted on Oct 30, 2015

When you think of robots, you likely conjure up images of C3P0 and R2D2 in “Star Wars,” the cyborgs from the “Terminator” or, closer to reality, the high-tech machines in auto factories.

And now, as costs decline and availability increases, robots are slowly showing up on construction jobs and may soon become commonplace.

It’s About Safety

In the construction industry danger lurks everywhere, whether crews are working on homes or installing girders on skyscrapers. Safety issues are paramount; there are inherent risks every step of the way toward completion of a project.

As a result, industry leaders continually look for ways to promote greater safety, streamline processes and improve efficiency. Enter robots.

According to Inside Unmanned Systems, a magazine that analyzes technology and related developments in construction and other industries, the trend toward robotics in construction can be traced back to the 1990s. At that time, a large Japanese company spent significant amounts of money to develop robots for use in construction. But it had limited success. Consequently, the firm shifted its emphasis to demolition and developed robots that could crush concrete and cut through steel reinforcements.

Improved Demolition Robots

An improved wave of demolition robots recently entered the marketplace. Utilizing new technology, a robot can scan a building, plan for its demolition and essentially flatten it — all without any significant human interaction.

One of the latest innovations is the ERO Concrete Recycling Robot from Sweden. Using water pressure, it separates concrete from rebar and other debris, makes cement slurry, and sends it off to be packed and shipped to concrete precast stations for reuse.

However, these systems can’t autonomously sense, think and act on their own. So the question remains: Can robots be used as independent construction workers?

Taking the Next Step

Many in the construction industry believe that the answer is “yes.” Notably, they point to three new robotic systems:

  1. The Semi-Automated Masonry (SAM) system, developed by Construction Robotics, is generating considerable buzz. SAM is a bricklaying robot that is designed to work with a mason. As the robotic system lifts and places mortared bricks, the mason concentrates on site setup, tooling joints, finishing and quality. SAM can lay roughly 230 bricks an hour and can handle varying brick sizes without difficulty. The machine is being used in the construction of a new high school at The Lab School in Washington, D.C.
  2. FlexBrick, a robotic assembly process for nonstandard brickwork. Developed by ROB

Technologies AG of Switzerland, this device has been licensed to Keller AG Ziegeleien, a Swiss company specializing in structural systems, façades, interiors and tunnels. The machine currently is being used to construct a façade for a winery and three residential blocks in Switzerland, a wall for a stadium in Manchester, England, and acoustically active wall panels for a concert hall in Frankfurt, Germany. ROB Technologies has also rolled out a prefabrication system for masonry façades that is designed to handle every brick differently.

  1. A tiling machine developed by ROB Technologies in partnership with research program Future Cities Laboratory. Future Cities is a part of the Singapore-ETH Centre for Global Environmental Sustainability. The prototype has been tested at a public housing construction site in Singapore. This machine can lay tiles two to three times faster than humans and can increase productivity four-fold because it can work 24/7. FLC says it expects to have a semi-autonomous robotic tiling machine “on the shelves” by the end of 2015. It’s also collaborating with two other partners on a new version of the machine.

Boosting Human Strength

And, of course, there’s the potential of exoskeletons. For an image of a robotic exoskeleton, think of Robert Downey’s “Iron Man” suit or Sigourney Weaver stepping into a power loader in “Aliens.” Exoskeletons are mobile frameworks worn a bit like a suit. They significantly augment a person’s strength.

One exoskeleton is being developed by Ekso Bionics of Richmond, California. It has an unpowered frame that allows it to be used all day (an earlier version could be used only for limited amounts of time due to battery life).

The Ekso product allows the user to lift power tools as if they weigh nothing at all. Similar exoskeletons may be able to be worn by workers in construction jobs that involve extensive lifting, standing and squatting.

As the construction industry grows, the need for innovation and automation increases. With advances in robotics and exoskeleton suits, the industry is likely to become safer and more efficient. Even firms with modest objectives might consider how they could put robotics to good use.

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Posted on Sep 1, 2015

The leaders of the manufacturing clients that populate our firm’s client base are by their very nature – innovators. Innovators that are constantly experimenting, refining processes, and trying to determine how to do things better, faster, and cheaper. In particular they are interested in how to create innovations that can bring long-term value to their organizations and their customers.

This value creation from innovation creates jobs and is the main reason that the R&D credit exists in our tax code. So why aren’t more middle market manufacturers claiming this credit? – It seems to me that is likely for one of the four reasons explained below:

  1. Lack of Knowledge

Many manufacturers are third or fourth generation businesses, which could mean a third or fourth generation CPA relationship that may have not kept pace with innovation and current tax law and regulatory changes. Another possibility is that perhaps many years ago you re- engineered your own company tax returns to be performed by an internal department that gets no reward for taking any risks or innovating with new ideas. Sorry to be that blunt, but if the shoe fits- at least take a look at it.

  1. Fear, YES I said Fear

A fear that claiming any credit or incentive is jumping the shark with the IRS and certainly most of my manufacturing clients have enough scrutiny and regulations, that they certainly aren’t prone to invite more regulatory oversight unnecessarily. The fear thing, well it’s natural and is developed in all of us to govern behavior and preserve our lives, so we are by nature created with this emotion for a reason. That being said, this isn’t a fight or flight situation. So it should not freeze us like Elsa from Frozen (blatant Disney grandkid reference) in a business situation that can be assessed, measured, reasoned, and controlled to benefit our company and the families that work in it. Remember, middle market manufacturers create most of the jobs in your respective communities. So our government is helping you help them, which should not be a reason for fear.

  1. Cost/Benefit Uncertainty

This seems to be the main reason that clients don’t embrace the credit. To combat this, our firm has aligned with several engineering firms and specialty tax consulting firms that specifically do an upfront cost/benefit analysis to help clients assess the credit, do a rough estimate, and propose a plan to file and claim the credits. Generally, a rough estimate of the tax benefit can be attained before you start spending any consulting dollars with us or one of our specialists. If you are a Texas manufacturer- beginning in 2014 you also get to add to the analysis a bonus of a 5% credit against your Texas Franchise tax or margin tax on your gross margin. This can be used to offset up to 50% of your franchise tax in any year. Even my smaller manufacturers are seeing significant Texas credits in 2014 and 2015. Also, once you build the model you can repeat it in future years.

  1. Ignorance of the Law

Many leaders of manufacturing firms come from an engineering background, and they just want to know how things work before they dive in. They want to understand what it takes to qualify and how the credit is calculated. So to help with this natural curiosity- here is an example of the basic calculation of the Alternative Simplified Credit:

It’s the sum of your qualified expenses in the current year less (the average of the three years previous qualified expenses multiplied by 50%), which gives you the amount subject to the credit multiplied by 14% to get the actual credit amount.

Assuming you spent $280,000 of qualified activities costs( which is really easy to accumulate if you have any engineers and other smart guys on your management team, ( see the qualifiers below ) in 2014, and the average of your three prior years was say $100,000, then the delta would be $180,000 of qualified expense multiplied by 14% which equals $25,200. If you add the Texas credit to the federal credit that’s an additional $9,000 resulting in$34,200 in tax savings in one year. Better than a poke in the eye with a sharp stick.

So what kind of qualified expenses qualify- I found this great summation of the rules written for manufacturers in this article written by FreedMaxick CPA’s, a New York State firm that does quite a bit of R&D credit work. Here’s their summary and examples of the four qualifiers for the credit.

Four-Part R&D Credit Qualifier Test per FreedMaxick CPA’s:

  1. Permitted Purpose
    The activity must result in a new or improved process, function, product, performance, reliability, quality, or significant reduction in cost. Probably the most common type of activity overlooked by companies regarding these specific criteria involves significant improvements made to production-line operations. A very common example of this sort of improvement would be the updating of production-line capabilities by a manufacturer that ultimately improved efficiency, increased production capacity, and eventually yielded an overall reduction in costs. An example of this type of activity would be a company that manufactures heavy equipment, and relied upon a labor-intensive approach to production. If that company were to implement improvements in its manufacturing process, by way of automation or some other means that required investment in new equipment for the plant floor, then it’s very possible that the costs associated with the implementation of the new production process could be eligible for the R&D tax credit.
  1. Elimination of Uncertainty
    Were the activities conducted and intended to eliminate uncertainty concerning the development or improvement of a product? This criterion specifically involves the identification of information that is uncertain at the onset of the project or activity. Such uncertainty can relate to the capability of the product, the method used to produce it, or the appropriate design of the product. The examples that we typically encounter when consulting with clients in this arena deal with issues such as: Will the new or improved manufacturing process integrate with our current system, on any level? Will our new product development meet the customer specifications? Will the potential benefits outweigh the potential risks? Or will the new or improved product or activity even work?
  1. Technical in Nature
    Does the research fundamentally rely on the principals of, engineering, physical or biological science, or computer science? This criterion is usually a fairly easy one to deal with. What it really does is eliminate the soft sciences from the formal definition of technology. In other words, products or activities that are predicated upon literary, historical or social sciences do not qualify for the R&D Tax Credit. In all of our experiences, this technology criterion has never been an issue when performing an R&D study for a manufacturing company.
  1. Process of Experimentation
    Does the activity involve developing one or more hypotheses for specific design decisions, testing and analyzing those hypotheses, and refining and discarding the hypotheses? A key factor regarding the Process of Experimentation hurdle was recently crystallized, when Treasury Regulations changed the wording to evaluation of one or more alternatives. Previous language defined the process as evaluation of more than one alternative.

So now that you know the rules, you can quantify and control the risk, and you can rest assured you are in the fairway not in the rough. So, now it’s time to see if you have created enough innovation recently to qualify for the credit.

Alright then, my innovative bunch of manufacturers, we have one more year of certainty with the R&D credit and we have the ability to amend and claim up to three years of credits until you slide past your extended filing deadline. So as part of your yearend planning, capital expenditure budgeting, and tax forecasting for 2015 and projecting for 2016, please consider the R&D credit and look at the improvements you made to your business in 2014 and 2015. You more likely than not manufactured an R&D credit along with that bazillion widgets you produced for ACME Industries last year!

To find out more about R&D credits and other tools in the manufacturing tool box, or if you would just like to talk some things over about your manufacturing business, contact Gary Jackson, CPA at Cornwell Jackson, PLLC.

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

 

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Posted on Jul 10, 2015

The Supreme Court of the United States recently ruled on a case that may have a profound impact on a number of Americans.  No, not that one, or that one.  We’re talking about the case Texas Department of Housing and Community Affairs v. The Inclusive Communities Project (ICP).  Not quite the sizzle of other recent cases, but the effect it could have on businesses involved in real estate and mortgage lending is significant.  The ruling in this case held that disparate impact claims are recognized under the Fair Housing Act.  Unless you’ve been following this case closely, you probably don’t know what disparate impact is or what the significance of it is (until recently I counted myself in that group as well).  Let’s start by defining disparate impact and understanding how it applies to housing.

What is Disparate Impact?

The Fair Housing Act “prohibits discrimination in the sale, rental, and financing of dwellings, and in other housing-related transactions based on race, color, national origin, religion, sex, familial status, and disability”.  The simple interpretation of this is that it is illegal to intentionally discriminate against (or have policies that discriminate against) a person when it comes to housing.  Disparate impact is the idea that a policy can have a discriminatory effect even if it wasn’t created with an intent to discriminate.  Simply, it is the theory that an individual or organization can be held liable for unintentional discrimination when it comes to housing or mortgage lending.  This means that if someone can show statistical evidence of discrimination against a protected class, they can bring an anti-discrimination lawsuit against your business.  You then have to prove in a court of law that there is an important business objective to the policy that is causing the disparate impact.  If that sounds like guilty until proven innocent to you, then you have a good understanding of the new ruling.

Can you give me an example?
Laurie Goodman, director of the Housing Finance Policy Center gives a good explanation as it relates to the mortgage industry:

“You can only hold a business responsible for what they can control. For example, if a lender applies uniform underwriting standards to all applicants, it will likely result in more mortgage denials for black and Hispanic applicants than for white applicants, because there is a difference in income, wealth and credit experience between the groups. Businesses certainly have a responsibility to support, and at the minimum, not to stand in the way of government programs that push for greater equality of opportunity. But that is different than the disparate impact doctrine, which could hold the private sector guilty of discrimination if their policies resulted in a differential impact on different racial and ethnic groups, despite the fact that these groups have differences in income, wealth and credit experience.”

So let’s be reasonable.

If someone brought a disparate impact suit for the above reason, the mortgage lender could show that there is an important business objective to requiring a minimum credit score in determining whether an applicant is eligible for a loan.  It would be easy to show historical data proving a higher rate of default for customers with lower credit scores which negatively affects the profitability of the business.  The business could feel confident they would win this suit, but the issue is the fact that they would have to defend that suit in the first place, and that is what has business owners nervous.  One more example is the case of Magner v. Gallagher.  In this case, Multi-family property owners in the city of St. Paul argued that the city’s housing code which requires that landlords to maintain minimum maintenance standards for all structures and premises for basic equipment and facilities for light, ventilation, heating and sanitation; for safety from fire; for crime prevention; for space, use and location; and for safe and sanitary maintenance of all structures and premises caused them to raise rents and decrease the number of units available to African-American tenants (which were the majority of people renting their properties currently).  A district court granted a summary judgement for the City (Magner), but the Eighth Circuit held the respondents (Gallagher) should be allowed to proceed to trial because they presented sufficient evidence of a disparate impact on African-Americans.  Yes, the court just ruled that policies put in place to require landlords to maintain adequate living standards in their apartments in St. Paul were discriminatory under disparate impact.  This case was later settled, but it just goes to show how crazy disparate impact cases could be.  A policy whose sole goal was to provide better and safer living conditions for tenants could be made illegal because it theoretically discriminated against the tenants it was trying to help.

So now what?

No one is really sure.  It could turn out to not really be that big of a deal, or we could see a flood of lawsuits.  It is possible that if you own an apartment complex in a neighborhood that is 20% African-American, and only 5% of your tenants are African-American, then you could be slapped with a disparate impact lawsuit.  In the case that was before the Supreme Court, it was concluded that disparate impact was established based on the fact that the Housing Department approved low-income housing credits for 49.7% of units in neighborhoods that were 90 – 100% non-Caucasian while it only approved credits for 37.4% of units in neighborhoods that were 90 – 100% Caucasian.  The ICP asserted that the allocation of these credits caused “continued segregated housing patterns by its disproportionate allocation of tax credits, granting too many credits for housing in predominantly black inner-city areas and too few in predominantly white suburban neighborhoods”.  You can’t be sued on statistics alone, there has to be some evidence to suggest that the statistical discrepancy is caused by a policy you have in place.  That being said, the lack of evidence does not preclude someone from filing a disparate impact suit, it just means the case will be dismissed if the party bringing the suit can’t prove that “a challenged practice caused or predictably will cause a discriminatory effect”.  All we know for sure is that the boundaries of this law and its definitions will most likely be tested in the courts over the next few years.  If anything, it should be interesting.

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.

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Posted on Jun 29, 2015

Why are we hearing more about Captive Insurance Companies at happy hours, networking deals and professional conferences? Well, it’s simple… people are more open now to new ideas to lessen their tax burden than they were in 2011.

It doesn’t take an Ivy League education to figure out that out of the top 5% of taxable income earners in America – (the vast majority being hard working successful business owners like you) have watched their effective tax rate increase from the low 30’s to an effective rate of almost 40% in the last couple of years. Between our wars in Iraq and Afghanistan, and the “sucking sound” created by promises in the Affordable Care Act – there is no relief in sight from these higher tax rates in the foreseeable future.

Regardless of the reasons or your political persuasion, – John or Jane business owner operating in North Texas, whether in a growing service business, a construction company, a small manufacturer, or a franchisee with 10 dry cleaners, are getting taxed… and taxed hard.

When these business owners become tax “stunned” they become both more creative, more resilient, and more receptive to ideas to help them save on their tax bill. When that occurs certain ideas that were previously reserved for a few (the fortune 500 or fortune 1000 size companies)…. start having traction with middle market companies that may have revenues of 10MM to 200MM, have a strong cash flow, or a fairly predictable earnings history year over year.

So, enough about the why. How do captives work for the common business owner? What does he need to be aware of?  Where is the sizzle in the steak? And finally… What risks do you need to avoid if you are a 5%-er that wants to explore Captives?

 

How They Work

The operating or income producing company (your company) forms a captive and basically pays annual premiums to ensure against risks and pays the premiums to a newly formed insurance company that you own and/or control…

By paying premiums of $500K and you will receive a $500K deduction. Your insurance company receives the $500,000, pays $70k to $100k in operating expenses, small claims settlements and maintenance costs, and assuming no major claims occur- your insurance company makes a profit of around $400K per year.

A specific code section and available election under Sec. 831b, available only to small closely held captives with premiums of less than $1.2 MM annually, keeps the captive from having to pay tax on the premiums it receives at the insurance company level, and it only has to pay tax on its investment earnings.

Meaning, you are getting a deduction for 500K, and your captive is not paying tax on the $400K on the other side.

If your business does this for ten years with no major claims- then your insurance company and its owners has amassed $4,000,000 inside the insurance company which they can dividend or liquidate at 20 to 24% tax rates to the owners of the Captive (you and your family).

If you and your spouse’s net worth exceeds 10MM, you can also, with careful planning, set up your Captive ownership outside of your estate, saving your family an additional 50% of that 4 million in estate taxes that can be passed on to your heirs instead of the IRS.  Over ten years you have likewise saved $2,000,000 in your operating company from ten years of getting $200,000 a year in tax benefit (500,000 x 40%).

In other words, you are getting a 40% deduction and accumulating wealth on a deferred tax advantaged basis over time, which lets you accumulate faster and achieve greater returns.

So friends that’s where the SIZZLE in the steak comes from – the tax rate arbitrage and the estate planning you can accomplish by having your kids own the shares of the captive. Keeping your captive outside of your estate makes for a nifty tax advantaged structure for building wealth transfer to future generations.

 

So, that’s The Good News. What’s the Downsides- or Things to Avoid?

  1. First and foremost – illegitimate or thinly veneered promoters that are selling captives as promoted tax shelters versus an experienced risk management insurance company or Captive management company that operates in the fairway and will advise you correctly on insurable risks and doing it right, with real actuaries that have been doing this a long time.
  2. Insuring faux (not legitimate) or real risks inside your company. For example, anti-terrorism insurance for a small group of doctors versus real risks like malpractice.
  3. Not evaluating your liquidity needs, knowing what is reasonably possible regarding funding of premiums, and how realistic it will be annually to manage your premium levels and payments. While it is possible to change your risks that you cover to toggle or increase or decrease your premiums actuarially, it may reduce the efficacy of your insurance company.
  4. Making sure under your accounting method you can properly deduct the premiums, kind of a bad deal if you go through all this and then remember your cash basis business has to write a 500K check by 12/31 and it doesn’t have the funds to make this happen.
  5. IRS scrutiny- Captives primarily because of the promoters mentioned in #1 above have received a jaundiced eye by our friends at the IRS, and captives even made the dirty dozen list published by the IRS annually for targeted tax scams.
  6. So there are some of our clients that would not be comfortable with this kid of exposure legitimate or not , and then there are some clients that are ok with it because they have done the right things by having the right kind of advisors and captive operators that don’t deal in the fringe element.
  7. Claims- if your captive is legitimate – you will have claims and occasionally some of those could be expensive. How your operating company manages its risks as well as how your Captive manages its reserves and risk can be a difference maker in this area.

 

So If This Is Something You Want To Explore Further, What Are Your Steps?

First, a business owner through his insurance company, financial advisor, or CPA is referred in to a company that can help him form and organize a new Captive Insurance Company and manage its operations going forward.

The CPA works with the captive management company, the business management team, their existing insurance agents or risk manager to come up with a team approach to risk management and evaluate the overall feasibility of using a Captive as a part of the overall risk management plan of the business.

A captive insurance company is a fully licensed insurance company owned by the business or the business owners. It is a unique entity and is a standalone insurance company with policies, policy holders, risks, claims, and a license to do business in various domiciles – some domestic and some off shore.

What does this cost – well of course it varies – but the set up seems to run somewhere between $50K and $70K – with some variability to this figure if you use a domestic captive (with higher initial capital formation requirement), or a foreign captive that may have less stringent initial capitalization requirements.

Done well, a CIC strategy can be a great tool for tax-advantaged risk management and wealth preservation- the veritable combo pack that most of us are looking for. To learn more about it contact Gary Jackson or Cornwell Jackson’s strategic alliances and advisors in this area.

Blog post written by: Gary Jackson, Tax and Advisory Partner

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Posted on Jun 4, 2015

fAILURE TO FILE PENALTY

The S corporation is a popular business structure that’s available only to privately held businesses. In fact, approximately 44 percent of small employer firms — generally defined as companies with fewer than 500 employees — have elected to operate as S corporations, according to the U.S. Small Business Administration’s Office of Advocacy. (By comparison, only 22 percent of small employer firms operate as C corporations.)

The primary reasons for electing S status are:

  1. To retain the limited liability of a corporation; and
  2. To pass corporate income, losses, deductions, and credit through to shareholders for federal tax purposes.

In other words, S corporations generally avoid double taxation of corporate income. Instead, S corporation shareholders report the pass-through of these tax items on their personal tax returns and pay tax at their individual income tax rates.

However, if you operate a business as an S corporation, there’s a relatively steep penalty for failure to file a timely federal return each year using Form 1120S. One recent U.S. Tax Court decision illustrates the point. A parallel failure-to-file penalty applies to partnership returns that aren’t filed on time using Form 1065.

S Corp Failure-to-File Penalty

The penalty for failure to file a federal S corporation tax return on Form 1120S — or failure to provide complete information on the return — is $195 per shareholder per month. The penalty can be assessed for a maximum of 12 months.

For example, the monthly penalty for failing to file a calendar-year 2014 Form 1120S for an S corporation with three shareholders is $585 ($195 times three). If the return remains unfiled for 12 months or more, the maximum penalty equals the monthly penalty multiplied by 12. So the maximum failure-to-file penalty for a three-owner S corporation would be $7,020 ($585 times 12).

Important Note: Many federal tax penalties are assessed based on the amount of tax owed. So these penalties cannot be assessed if the taxpayer doesn’t have positive taxable income and a resulting tax bill. However, the S corporation failure-to-file penalty can be assessed whether the S corporation produces positive taxable income or not. Therefore, filing S corporation returns can’t be ignored because no tax is owed.

Facts of the Recent Case

Babak Roshdieh was the sole shareholder of a California medical services S corporation, which was the taxpayer in this case. The corporation had a history of filing its federal income tax returns late. This case specifically involves the 2010 return, which was due on March 15, 2011. The corporate secretary claimed that he sent in a request for an extension to file the return by regular first-class mail. The IRS claimed the extension request was never received.

According to a certified transcript, the Form 1120S for 2010 was received by the IRS via regular first-class mail on January 31, 2012. The IRS then assessed a $2,145 failure-to-file penalty based on the return being filed 11 months late ($195 times 11 equals $2,145).

The IRS offered to settle for less than the full amount of the penalty assessment, but the offer was refused. Eventually, the case wound up in U.S. Tax Court. At trial, the taxpayer claimed that a timely request for a six-month filing extension to September 15, 2011, had been filed for the 2010 federal tax return, and that the 2010 return had been filed on October 15, 2011 (one month late). Therefore, the taxpayer claimed that only $195 was owed for the failure-to-file penalty. The IRS position was that no extension request was received, and the 2010 return wasn’t received until January 31, 2012.

The taxpayer’s corporate secretary also claimed that he had filed extension requests for every corporate tax year from 2002 through 2013. But the secretary offered no evidence to support his claim. The IRS provided certified transcripts showing that it had received extension requests for only six of the 12 years. Finally, the taxpayer was unable to offer proof that the 2010 return was filed on October 15, 2011, as claimed.

Tax Court Decision

Based on the available information, the Tax Court concluded that no request to extend the corporation’s 2010 return had been received by the IRS, and that the 2010 return wasn’t received by the IRS until January 31, 2012. Therefore, the full penalty assessment was upheld. (Babak Roshdieh M.D. Corp., T.C. Summary Opinion 2014-113)

Same Thing Can Happen with Late-Filed Partnership Returns

Subject to limited exceptions, unincorporated businesses and investment ventures with two or more participants are treated as partnerships for federal income tax purposes. It doesn’t matter if the venture isn’t formally organized as a partnership under applicable state law. Ventures that are treated as partnerships for federal tax purposes must file annual federal returns using Form 1065. The potential penalty for failure to file a partnership return — or failure to provide complete information on the return — is also $195 per partner per month. The penalty can be assessed for a maximum of 12 months.

Therefore, the same failure-to-file penalty issue can potentially arise with partnerships. But the risk may be even higher in this scenario because business venture participants sometimes don’t realize they have created a partnership for tax purposes, and that federal returns are due.

Bottom Line

S corporations and other business ventures with two or more participants, which are treated as partnerships for tax purposes, must file timely annual federal returns or potentially face steep failure-to-file penalties. These penalties can be assessed even though the S corporation or partnership in question doesn’t produce positive taxable income. Whenever you become involved in a business or investment activity, consult with your tax adviser regarding necessary tax filings and professional tax preparation.

Contemplating a Switch?

Many private businesses elect to operate as S corporations, but not every business is eligible.

In order to make the switch, your business must meet certain requirements, including:

  • Be a domestic corporation;
  • Have no more than 100 shareholders;
  • Have only one class of stock; and
  • Not be an ineligible corporation, including certain financial institutions, insurance companies, and domestic international sales corporations.

All shareholders must consent to the S corporation election by signing an IRS form.

Another important consideration when electing S status is shareholder compensation. The IRS closely monitors how much S corporations pay shareholders who work for the company. Agents are on the lookout for S corporations that underpay shareholders to avoid paying employment taxes. A combination of low salaries and high distributions could become a red flag that elicits unwanted attention from the IRS.

To the extent that a shareholder’s compensation doesn’t reflect the fair market value of the services he or she provides, the IRS may reclassify a portion of earnings as unpaid wages and additional employment tax on the reclassified wages will be owed.

Consider all the pros and cons and consult with your tax and legal advisers before making the switch from C to S corporation status.

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Posted on Jun 4, 2015

How much money do you need to raise a child? According to an estimate from the U.S. Department of Agriculture, it will cost a middle-income couple roughly $245,000 to raise a child born in 2013 to the age of 18. This is up 1.8 percent from the prior year. Plus, the estimated average cost is much higher in certain parts of the country. For example, high-income families living in the urban Northeast United States are projected to spend almost $455,000 to raise a child for 18 years.

These figures cover costs for housing, food, transportation, clothing, health care, education, childcare, and miscellaneous expenses such as cell phones and sports team fees. But they do not include college. That can easily add tens or hundreds of thousands of extra dollars to the tab.

Here is a list of 10 Federal Tax Breaks for Parents.

  1. Dependency Exemptions

You can generally claim a dependency exemption for a child under age 19 or a full-time student under age 24, if you provide more than half of the child’s annual support. Each dependency exemption is $4,000 for 2015. However, you may lose at least part of the benefit of your exemptions if your adjusted gross income (AGI) is above a certain amount.

  1. Child Tax Credit

Parents may be entitled to the child tax credit for each qualifying child under age 17 at the end of the year. The maximum credit for 2015 is $1,000 per child.

You may lose at least part of the benefit of your exemptions if your modified adjusted gross income (MAGI) is above a certain amount. To qualify, you must meet certain criteria regarding the child.

  1. Child and Dependent Care Credit

Another tax credit may be claimed if you pay someone to care for a child under the age of 13, allowing you (and your spouse, if married) to be gainfully employed. The child and dependent care credit is based on a sliding scale. For parents with an AGI of more than $43,000, it’s equal to 20 percent of qualified expenses paid to a qualified caregiver to ensure the child’s well-being and protection. The total expenses that you may use to calculate the credit should not be more than $3,000 for one qualifying child or $6,000 for two or more qualifying children.

  1. Earned Income Tax Credit (EITC)

This credit is only available to certain lower-income families. On a 2015 return, the maximum EITC amount available is $3,359 for taxpayers filing jointly with one child; $5,548 for two children; and $6,242 for three or more children. You may be eligible for the EITC without a qualifying child, but the credit is higher for families with children. If you can claim the EITC on your federal income tax return, you may be able to take a similar credit on your state or local income tax return, where available.

  1. Adoption Credit

If you adopt a child, you may be eligible for a special tax credit for qualifying expenses. On a 2015 return, the maximum adoption credit is equal to $13,400 of the qualified expenses incurred to adopt an eligible child. However, credit amounts are phased out for upper-income taxpayers based on MAGI. The adoption credit begins to phase out for taxpayers with MAGI of $201,010 and is eliminated for those with MAGI of $241,010 or more.

  1. Higher Education Credits

If you pay higher education costs for yourself or an immediate family member, including a child, you may qualify for one of two education tax credits (but you can’t claim both). The maximum American Opportunity Tax Credit is $2,500 per student while the maximum Lifetime Learning Credit is $2,000 per taxpayer. Both higher education credits are phased out for upper-income taxpayers based on MAGI.

  1. Tuition Deduction

The deduction for qualified tuition and fee expenses, which had expired after 2013, was retroactively extended for 2014 by new legislation. It’s on the list of tax breaks Congress will address extending in 2015. Depending on your MAGI, the deduction on a 2014 return is either $4,000 or $2,000 before it’s completely phased out. Note that you can’t deduct tuition expenses if you claim one of the higher education credits.

  1. Student Loan Interest

You may be able to deduct interest you paid on a qualified student loan up to a maximum of $2,500 for 2015. This “above the line” deduction can be claimed whether or not you itemize deductions on your tax return. You can only claim the deduction if your MAGI is less than a specified amount, which is set annually. The amount of student loan interest is phased out if your MAGI is between $65,000 and $80,000 ($130,000 and $160,000 if you are married and file jointly).

  1. Self-Employed Health Insurance Deduction

If you’re self-employed and pay for health insurance, you may be able to deduct premiums paid to cover your child, as well as yourself and your spouse, if married. This tax break, which was authorized by the Affordable Care Act, applies to children who are under age 27 at the end of the year, even if the child isn’t your dependent.

  1. Potential Lower Tax Rates

Last but not least, parents may be able to benefit from shifting income-generating assets to children. As a result, income that is normally taxed to the parents in their high tax bracket is taxed to the children in their lower tax brackets. Of course, this means you must give up control over the assets.

However, remember that this strategy may be mitigated by the Kiddie Tax. Under the “Kiddie Tax,” the unearned income received by a dependent child under age 19, or a full-time student under age 24, is taxed at the top rate of the child’s parents to the extent that it exceeds $2,100 in 2015.

For more information about any of the above 10 child tax breaks — including limitations, detailed rules, and exceptions — contact our tax advisor.

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