We often hear about issues with personal identity theft, and the havoc it can wreak on your credit and reputation. Less discussed, though, is small business identity theft, and how it can affect your company. Here are five things business owners need to know.
Small businesses are liable for their bank accounts
If someone steals money out of your personal account, chances are your bank is going to cover that. But if a small business account gets drained, small business owners are on their own.
Banks typically won’t cover these types of losses. Sometimes, a computer crime endorsement on your business insurance policy is available, and may cover some of your losses. With nearly all banks offering online access to account information, experts recommend you regularly monitor your accounts.
Most hacks take a year or more to discover
In nearly all cases, it’s going to take over a year for a business owner to discover they’ve been hacked. Too many business owners take the stance of “wait and see,” assuming if they don’t see anything wrong, everything’s okay.
The fact is, nearly all hacks targeting small companies are stealthy - the truly effective ones don’t announce their presence.
Security assessments don’t find human mistakes
In many cases, the security assessment process is broken. Consider this example: A government contractor is working remotely at a coffee shop. The user left his system to visit the restroom, leaving his screen visible.
The confidential information, accessed through a secure VPN, was open and accessible while he was away. Assessments don’t find these kinds of breaches, although they happen every day.
The good stuff is in the trash
Hacking can be low tech, too. Someone ravaging through a trash recepticle outside your office can use unshredded documents, mail, and other items to convince banks and other creditors that they are the legitimage business owner.
Once the bank is on board, criminals can take out loans and open other accounts using the business owner’s identity.
60% of identity theft happens at the small business level
Fifty percent of these hacked companies will go out of business either from the financial damage done by the theft, or the disclosure and negative publicity once they disclose the breach (which is something they most likely will have to do, particularly if the breach involves credit card or health information). If you don’t disclose it and the media gets word – the damage to your business’ reputation multiplies.
Thomas Fox is president of Tech Experts, southeast Michigan's leading small business computer support company.
Windows 10 Updates Are Now Mandatory
For those who have made the switch to Windows 10, there are some changes to how the new operating system updates are handled.
While users were previously notified of the availability of updates and were prompted to install them, these changes are now made automatically. Most Windows 10 users are likely unaware of this change because the only notification from Microsoft is a brief line in the licensing agreement that states users will “receive automatic downloads without additional notice.”
Microsoft doesn’t have any nefarious intentions (or at least we hope they don’t) by making this change; its intent seems to keep the most up-to-date version of the operating system on users’ devices.
There are, however, some potential drawbacks to having automatic updates without user knowledge. While the updates make it easier for Microsoft to keep up with changing technology, knowing its users are basically all on the same page and developers have a consistent target audience, these updates can potentially cause systems to interact differently with other hardware devices that aren’t part of the updates.
A particular printer’s driver, for instance, may lose functionality with an automatic update, and affected users would just be dumbfounded as to what happened, ultimately having to replace that hardware device.
Although Microsoft isn’t making any settings changes widely known, there is a way to configure your device to only install security updates automatically. This keeps your PC or tablet safe from the latest security threats while keeping your computer system as stable as possible.
Unfortunately, this option is not available to users running the Home version of Windows 10. Thus far, only the Enterprise Edition provides this capability, which is an important consideration for business owners.
Thomas Fox is president of Tech Experts, southeast Michigan's leading small business computer support company.
Earn 5% or more on liquid assets
Yes, that is too good to be true, but we got your attention. As you are painfully aware, it is extremely difficult to earn much, if any, interest on savings, money market funds, or CDs these days. So, what are we to do? Well, one way to improve the earnings on those idle funds is to pay down debt. Paying off a home loan having an interest rate of 5% with your excess liquid assets is just like earning 5% on those funds. The same goes for car loans and other installment debt. But, the best return will more likely come from paying off credit card debt! We are not suggesting you reduce liquid assets to an unsafe level, but examine the possibility of paying off some of your present debt load with your liquid funds. Paying down $100,000 on a 5% home loan is like making more than $400 per month on those funds.
Seniors age 70 1/2 take your required retirement distributions before year end
The tax laws generally require individuals with retirement accounts to take annual withdrawals based on the size of their account and their age beginning with the year they reach age 70 1/2. Failure to take a required withdrawal can result in a penalty of 50% of the amount not withdrawn.
If you turned age 70 1/2 in 2015, you can delay your 2015 required distribution to 2016. Think twice before doing so, though, as this will result in two distributions in 2016 — the amount required for 2015 plus the amount required for 2016, which might throw you into a higher tax bracket or trigger the 3.8% net investment income tax. On the other hand, it could be beneficial to take both distributions in 2016 if you expect to be in a substantially lower bracket in 2016.
Education planning: It’s best to start early
The increasing costs of higher education have made education planning an important aspect of personal financial planning. However, because the actual expenditure will not be incurred for many years, it is often given a low current priority. Also, some parents are counting on scholarships to cover the cost of their children’s education. Unfortunately, this tendency to postpone the issue may eliminate several education planning strategies that must be implemented early to be effective.
Escalating costs. Although the increase in the cost of attending college has slowed down to its lowest escalation rate in years, the College Board reports that 2014—2015 tuition and fees continue to rise at a rate faster than the consumer price index
(www.collegeboard.com). All told, the cost of a college education is staggering, and this is unlikely to change.
According to the College Board report, for one year of full-time study, private four-year colleges rose 3.7% (to an average cost of $31,231) from 2013—2014 for tuition and fees alone. Average total charges with room and board are $42,419. Public four-year colleges are up 2.9% (to an average of $9,139) from last year for in-state tuition and fees — room and board adds on another $9,804. Public four-year colleges are up 3.3% (to an average of $22,958) from last year for out-of-state tuition and fees. Average total charges with room and board are $32,762. Even tuition and fees at public two-year schools are up 3.3% (to an average of $3,347).
The report indicates that the subsidies provided to full-time undergraduates at public universities through the combination of grant aid and federal tax benefits averaged $6,110 in 2014—2015 —far below the actual cost of attending.
Six methods to pay for college. In general, the six basic methods of paying for a child’s higher education include a child working his or her way through school; obtaining financial aid (scholarships and federal loans); paying college expenses out of the parents’ current income or assets; using education funds accumulated over time; obtaining private loans; and grandparents (or others) paying college costs.
The first method (child pays) can work, and many successful persons have obtained a good education while working to pay their way. But this often limits the student’s choice of schools and can adversely affect grades. Planning to rely on financial aid (the second method) is risky, and the family may not qualify for enough. The third method (parents paying out of current income or assets) works for some, but many parents will not know if their current income and/or assets will be sufficient until it is too late. In addition, this method is not as tax-efficient as some strategies used to accumulate separate education funds (the fourth method). However, these strategies are not without risks. Poor investment choices could prove costly. The fifth method (private loans) can result in a serious debt burden. Obviously, the sixth method is ideal, but it is not available to many.
How grandparents can help. . Grandparents, as well as other taxpayers, have a unique opportunity for gifting to Section 529 college savings plans by contributing up to $70,000 at one time, which currently represents five years of gifts at $14,000 per year. ($14,000 is the annual gift tax exclusion amount for 2015.) A married couple who elects gift-splitting can contribute up to double that amount ($140,000 in 2015) to a beneficiary’s 529 plan account(s) with no adverse federal gift tax consequences. As an added feature, money in a 529 plan owned by a grandparent is not assessed by the federal financial aid formula when qualifying for student aid.
Conclusion. The key to effective education planning is to start planning and saving early to create future options. In addition, the use of tax-sheltered investment and savings vehicles like a 529 plan can help ensure adequate funds are available when a child enters college.
Providing tax-free fringe benefits to employees
One way you can find and keep valuable employees is to offer the best compensation package possible. An important part of any compensation package is fringe benefits, especially tax-free ones. From an employee’s perspective, one of the most important fringe benefits you can provide is medical coverage. Disability, life, and long-term care insurance benefits are also significant to many employees. Fortunately, these types of benefits can generally be provided on a tax-free basis to your employees. Let’s look at these and other common fringe benefits.
· Medical coverage. If you maintain a health care plan for your employees, coverage under that plan isn’t taxable to them. Employee contributions are excluded from income if pretax coverage is elected under a cafeteria plan; otherwise, such amounts are included in their wages, but are deductible on a limited basis as itemized deductions.
Caution: Employers must meet a number of new requirements when providing health insurance coverage to employees. For instance, benefits must be provided through a group health plan (either fully insured or self-insured). Reimbursing an employee for individual policy premium payments can subject the employer to substantial penalties.
· Disability insurance. Your disability insurance premium payments aren’t included in your employee’s income, nor are your contributions to a trust providing disability benefits. The employees’ premium payments (or any other contribution to the plan) generally are not deductible by them or excludable from their income. However, they can make pretax contributions to a cafeteria plan for their disability benefits; such contributions are excludable from their income.
· Long-term care insurance. Plans providing coverage under qualified long-term care insurance contracts are treated as health plans. Accordingly, your premium payments under such plans aren’t taxable to your employees. However, long-term care insurance can’t be provided through a cafeteria plan.
· Life insurance. Your employees generally can exclude from gross income premiums you pay on up to $50,000 of qualified group term life insurance coverage. Premiums you pay for qualified coverage exceeding $50,000 is taxable to the extent it exceeds the employee’s contributions toward coverage.
· Retirement plans. Qualified retirement plans that comply with a host of requirements receive favorable income tax treatment, including (1) current deduction by you, the employer, for contributions to the plan; (2) deferral of the employee’s tax until benefits are paid; (3) deferral of taxes on plan earnings; and (4) in the case of 401(k) plans and SIMPLE plans, the employee’s ability to make pretax contributions.
· Dependent care assistance. You can provide your employees with up to $5,000 ($2,500 for married employees filing separately) of tax-free dependent care assistance during the year. The dependent care services must be necessary for the employee’s gainful employment.
· Adoption assistance. Generally, in 2015, employees can exclude from income qualified adoption expenses of up to $13,400 for each eligible child paid or reimbursed by you under an adoption assistance program.
· Educational assistance. You can help your employees with their educational pursuits on a tax-free basis through educational assistance plans (up to $5,250 per year), job-related educational assistance, and qualified scholarships.
Benefits provided to self-employed individuals. Generally, different and less favorable tax rules apply to certain fringe benefits provided to self-employed individuals, including sole proprietors (including farmers), partners, members of limited liability companies (LLCs) electing to be treated as partnerships, and more-than-2% S corporation shareholders. However, except in the case of a more-than-2% S corporation shareholder, if the owner’s spouse is a bona fide employee of the business, but not an owner, the business may be able to provide tax-free benefits to the spouse just like any other employee.
What you should know about capital gains and losses
When you sell a capital asset, the sale results in a capital gain or loss. A capital asset includes most property you own for personal use (such as your home or car) or own as an investment (such as stocks and bonds). Here are some facts that you should know about capital gains and losses:
· Gains and losses. A capital gain or loss is the difference between your basis and the amount you get when you sell an asset. Your basis is usually what you paid for the asset.
· Net investment income tax (NIIT). You must include all capital gains in your income, and you may be subject to the NIIT. The NIIT applies to certain net investment income of individuals who have income above statutory threshold amounts — $200,000 if you are unmarried, $250,000 if you are a married joint-filer, or $125,000 if you use married filing separate status. The rate of this tax is 3.8%.
· Deductible losses. You can deduct capital losses on the sale of investment property. You cannot deduct losses on the sale of property that you hold for personal use.
· Long- and short-term. Capital gains and losses are either long-term or short-term, depending on how long you held the property. If you held the property for more than one year, your gain or loss is long-term. If you held it one year or less, the gain or loss is short-term.
· Net capital gain. . If your long-term gains are more than your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss, you have a net capital gain.
· Tax rate. The capital gains tax rate, which applies to long-term capital gains, usually depends on your taxable income. For 2015, the capital gains rate is zero to the extent your taxable income (including long-term capital gains) does not exceed $74,900 for married joint-filing couples ($37,450 for singles). The maximum capital gains rate of 20% applies if your taxable income (including long-term capital gains) is $464,850 or more for married joint-filing couples ($413,200 for singles); otherwise a 15% rate applies. However, a 25% or 28% tax rate can also apply to certain types of long-term capital gains. Short-term capital gains are taxed at ordinary income tax rates.
· Limit on losses. If your capital losses are more than your capital gains, you can deduct the difference as a loss on your tax return. This loss is limited to $3,000 per year, or $1,500 if you are married and file a separate return.
· Carryover losses. If your total net capital loss is more than the limit you can deduct, you can carry over the losses you are not able to deduct to next year’s tax return. You will treat those losses as if they happened in that next year.
Health Care Law: Tax Considerations for Employers with Fewer than 50 Employees
Some of the tax provisions of the Affordable Care Act apply only to employers with fewer than 50 full-time or full-time equivalent employees.
Employers with fewer than 50 employees should take note of these tax considerations:
· More than 95 percent of employers have fewer than 50 full-time employees or equivalents and are not subject to the employer shared responsibility provision.
· Calculating the number of employees is especially important for employers that have close to 50 employees or whose workforce fluctuates throughout the year.
· If an employer has 50 or fewer employees, it can purchase health insurance coverage for its employees through the Small Business Health Options Program.
· Employers that have fewer than 25 full-time equivalent employees with average annual wages of less than $50,000 may be eligible for the small business health care tax credit. These employers are eligible for this credit if they cover at least 50 percent of their full-time employees’ premium costs, and the coverage is purchased through the SHOP.
All employers, regardless of size, that provide self-insured health coverage must annually file information returns for individuals they cover. The first returns are due to be filed in 2016 for the year 2015.
The cost of these health care benefits will be reported in box 12 of the Form W-2, with Code DD to identify the amount. In general, the amount reported should include both the portion paid by the employer and the portion paid by the employee. In the case of a health FSA, the amount reported should not include the amount of any salary reduction contributions.
For more information, see the Affordable Care Act Tax Provisions for Small Employers page on IRS.gov/aca.
Answers to Five of Your Questions about the Premium Tax Credit
The premium tax credit is a refundable credit that helps eligible individuals and families with low or moderate income afford health insurance purchased through a Health Insurance Marketplace. To get this credit, you must meet certain eligibility requirements and file a tax return.
Here are five questions the IRS is hearing from taxpayers, along with answers and where to go for more information.
1. What is included in household income?
For purposes of the PTC, household income is the modified adjusted gross income of you and your spouse if filing a joint return, plus the modified AGI of each individual in your tax family whom you claim as a dependent and who is required to file a tax return because their income meets the income tax return filing threshold. Household income does not include the modified AGI of those individuals you claim as dependents and who are filing a return only to claim a refund of withheld income tax or estimated tax. For this and other detailed premium tax credit questions and answers visit IRS.gov/aca.
2. The IRS is asking to see my 1095-A. What should I do?
You should follow the instructions on the correspondence that you received from the IRS. You may be asked for a copy of Form 1095-A in order to verify information that has been entered on your tax return. Visit our Health Insurance Marketplace Statements webpage for more information about Form 1095-A and how to obtain a copy,
3. If I got advance payments of the PTC, do I have to file even if I never had a filing requirement before?
Yes. If you received the benefit of advance payments of the premium tax credit, you must file a tax return to reconcile the amount of advance credit payments made on your behalf with the amount of your actual premium tax credit. You must file a return and submit a Form 8962 for this purpose even if you are otherwise not required to file a return.
4. Marketplace says I did not file, but I did file before the extended due date. What should I do?
In advance of the open enrollment period that runs through January 31, 2016, the Marketplace sent Marketplace Open Enrollment and Annual Redetermination letters to individuals who might not have filed a tax return. Follow the instructions in the letter you received.
· Log in to your Marketplace account to update your 2016 Marketplace application.
· Check the box telling the Marketplace you reconciled your premium tax credits by filing a 2014 tax return and Form 8962.
· Update your Marketplace application by December 15, 2015.
· If you don't update your Marketplace application, any help with costs you currently get will stop on December 31, 2015 and you'll be responsible for the full upfront costs of your Marketplace plan and covered services.
· For more help visit HealthCare.gov or call your Marketplace.
5. What are my options to receive help with filing a return and reconciling?
Filing electronically is the easiest way to file a complete and accurate tax return as the software guides you through the filing process. Electronic filing options include free Volunteer Assistance, IRS Free File, commercial software, and professional assistance. For information about filing a return and reconciling advance credit payments, visit IRS.gov/aca.
Six Steps for Making Identity Protection Part of Your Routine
The theft of your identity, especially personal information such as your name, Social Security number, address and children’s names, can be traumatic and frustrating. In this online era, it’s important to always be on guard.
The IRS has teamed up with state revenue departments and the tax industry to make sure you understand the dangers to your personal and financial data. Taxes. Security. Together. Working in partnership with you, we can make a difference.
Here are seven steps you can make part of your routine to protect your tax and financial information:
1. Read your credit card and banking statements carefully and often – watch for even the smallest charge that appears suspicious. (Neither your credit card nor bank – or the IRS – will send you emails asking for sensitive personal and financial information such as asking you to update your account.)
2. Review and respond to all notices and correspondence from the Internal Revenue Service. Warning signs of tax-related identity theft can include IRS notices about tax returns you did not file, income you did not receive or employers you’ve never heard of or where you’ve never worked. 3. Review each of your three credit reports at least once a year. Visit annualcreditreport.com to get your free reports.
3. Review your annual Social Security income statement for excessive income reported. You can sign up for an electronic account at www.SSA.gov.
4. Read your health insurance statements; look for claims you never filed or care you never received.
5. Shred any documents with personal and financial information. Never toss documents with your personally identifiable information, especially your social security number, in the trash.
6. If you receive any routine federal deposit such as Social Security Administrator or Department of Veterans Affairs benefits, you probably receive those deposits electronically. You can use the same direct deposit process for your federal and state tax refund. IRS direct deposit is safe and secure and places your tax refund directly into the financial account of your choice.
Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are your Taxpayer Bill of Rights. Explore your rights and our obligations to protect them on IRS.gov.
Why the Number of Your Employees Matters
Employer benefits, opportunities and requirements under the health care law are dependent upon the employer’s workforce size.
The vast majority of employers fall below the workforce size threshold for applicable large employers. Generally, an employer with 50 or more full-time employees or equivalents will be considered an applicable large employer. Applicable large employers can find a complete list of resources and the latest news at the Applicable Large Employer Information Center on IRS.gov/aca.
If you have:
· Fifty or more full-time equivalent employees, you will need to file an annual information return reporting whether and what health insurance you offered your full-time employees. In addition, you are subject to the Employer Shared Responsibility provisions.
· Fifty or fewer employees, you are generally eligible to buy coverage through the Small Business Health Options Program. Learn more at HealthCare.gov.
· Fewer than 25 full-time equivalent employees, you may be eligible for a Small Business Health Care Tax Credit to help cover the cost of providing coverage.
Regardless of size, all employers that provide self-insured health coverage to their employees must file an annual return reporting certain information for each employee they cover.
More information for employers of all sizes is available on IRS.gov/aca.
BY MICHAEL COHN
Wesley Snipes, the actor who fought an unsuccessful battle against the Internal Revenue Service over his unpaid taxes and ultimately served a nearly three-year prison term, is now in a fresh dispute with the agency.
Snipes has reportedly petitioned the U.S. Tax Court to allow the actor to enter the IRS’s Fresh Start initiative and lower the amount of unpaid taxes that the IRS is assessing him. The IRS denied Snipes’ offer to pay $842,000 and is instead demanding the actor pay $17.5 million, according to Bloomberg BNA.
Snipes was convicted in 2008 on three misdemeanor counts of failing to pay his taxes for three years for 1999, 2000 and 2001, although he was acquitted of felony charges (seeSnipes Sentenced to Three Years for Tax Charges). He had followed the advice of a tax protester organization that claimed income taxes were illegal, but ultimately acknowledged his errors.
Snipes served his prison term from December 2010 to April 2013, according to Forbes. The IRS issued him a $24 million tax lien in April 2013, assessing his unpaid taxes for 1999 to 2006 at $24 million. This past February, the IRS estimated his reasonable collection potential to be just $6.4 million, however. On the day that a conference call was scheduled with the IRS, Snipes claims the IRS increased the collection potential to over $18 million. The figure was based on some recent acting jobs that Snipes has landed, including a starring role in the NBC series "The Player."
He objected to the IRS’s estimate, and the IRS is now asking for $17.5 million. But Snipes’s attorneys are disputing that amount, saying, “Petitioner is trying to put his life back together after being led astray by unscrupulous advisors, and he desperately needs the fresh start which Respondent's ‘Fresh Start Initiative' offers.”
BY MICHAEL COHN
The National Society of Accountants has released some suggested year-end tax tips for individuals, courtesy of Wolters Kluwer Tax & Accounting US.
Individual income tax rates of 10, 15, 25, 28, 33, 35 and 39.6 percent remain in place for filing next April. (The more you made, the greater your percentage.) The standard deduction for 2016 income will stay the same: $6,300 if you file your taxes using the status single or married filing separately. Married joint filers still receive a $12,600 deduction; head of household filers’ deduction jumps $50, to $9,300.
Year-end tax-saving tactics include spreading recognition of your income between years by postponing year-end bonuses and maximizing both deductible retirement contributions and allowable retirement distributions for this calendar year, coordinating capital losses against the sale of appreciated assets, postponing redemption of U.S. Savings Bonds, and delaying your year-end billings and collections.
You may also want to defer corporate liquidation distributions (full cash-value payment for all a company’s stock you hold) until 2016, pay your last state estimated tax installment in 2015 and pre-pay real estate taxes or mortgage interest.
Life changes: Did you get married or divorced? Have a child? Buy a home? Change jobs or retire? A change in employment, for example, may bring severance pay, sign-on bonuses, stock options, moving expenses and COBRA health benefits, among other changes that affect your taxes.
Additionally, try to predict any life events in 2016 that might trigger significant income or losses, as well as a change in your filing status.
Retirement savings: You can contribute up to $5,500 to an individual retirement account or Roth IRA for 2015 and, if you’re 50 or older, $1,000 more in catch-up contributions. You also have until April 15, 2015, to make an IRA contribution for 2015. One tax move in this area: Delay until 2016 converting your traditional IRA to a Roth IRA, which incurs taxes.
Giving: You can still make tax-free gifts of $14,000 per recipient (a total of $28,000 in the case of married couples).
Tax-free distributions, up to a maximum of $100,000 per taxpayer each year from IRAs to public charities, have been allowed as an alternative to reporting the income and taking an itemized deduction. You must be 70½ or older to do this.
If your income is six figures or more, you should anticipate possible liability for the 3.8 percent net investment income (NII) tax calculated on net investment income in excess of your modified adjusted gross income (MAGI). Threshold MAGIs for the NII tax are $250,000 in the case of joint returns or a surviving spouse, $125,000 for a married taxpayer filing a separate return, and $200,000 in any other case.
Keeping income below the thresholds is worth exploring, as is spreading income out over a number of years or offsetting the income with both above-the-line and itemized deductions. Of course, planning for the NII tax requires a very personalized strategy.
The tax rate on net capital gain is no higher than 15 percent for most taxpayers. Net capital gain may not be taxed if you’re in the 10 or 15 percent income tax brackets. A 20 percent rate on net capital gain can apply if your taxable income exceeds the thresholds set for the 39.6 percent rate ($413,200 if you file single, $464,850 for married filing jointly or as a qualifying widow[er], $439,000 for head of household and $232,425 for married filing separately).
Wash sale rules: These cover sales of stock or securities in which your losses are realized but not recognized for tax purposes because you acquire substantially identical stock or securities within 30 days before or after the sale.
Alternative minimum tax: The AMT is now “patched,” which permanently increases the exemption amounts and indexes those amounts for inflation. For 2015, the exemption amounts are $53,600 for single individuals and heads of household, $83,400 for married couples filing a joint return and surviving spouses and $41,700 for married couples filing separate returns.
You can take several steps to reduce the AMT’s effect on your tax liability. Avoid certain deductions, including the accelerated depreciation deduction on real property or expensed research, among others. You might also avoid exercising incentive stock options in a year in which you’re subject to AMT.
Pease limitation: This reduces a higher-income taxpayer's allowable itemized deductions by 3 percent of the amount (up to 80 percent), with the reduction kicking in after certain income thresholds. For 2015, Pease thresholds are $309,900 for married couples and surviving spouses, $284,050 for heads of households, $258,250 for unmarried taxpayers and $154,950 for married taxpayers filing separately.
Related to the Pease limitation is the personal exemption phase-out (PEP). The threshold income amounts for the PEP are the same as those for the Pease limitation.
The Affordable Care Act requires that you have minimum essential health coverage or make a shared responsibility payment, unless you’re exempt. On 2014 returns filed in 2015, taxpayers reported if they had minimum essential coverage; that reporting requirement will again be on 2015 returns filed in 2016.
If you may be liable for a shared responsibility payment, carefully review the significant number and variety of exemptions available. You may also be able to project the amount of any payment. Closely related are changes to the medical expense deduction, health flexible spending arrangements (and similar arrangements), insurance coverage for children, and more.
As of mid-November, tax bills pending in Congress included a package of tax extenders, revisions to the Affordable Care Act and more. Lawmakers might renew them either before year-end or early in 2016. Incentives include:
Exclusion of cancellation of indebtedness on principal residence: Allows you to exclude from income the cancellation of mortgage debt of up $2 million on a qualified principal residence.
Higher education tuition and fees deduction: Provides a maximum $4,000 deduction for qualified tuition and fees at post-secondary institutions of learning, subject to income phase-outs.
Classroom expense deduction. Primary and secondary education professionals may take an above-the-line deduction for qualified unreimbursed expenses up to $250 paid during the year.
Stay tuned to see which of these and other extenders continue or end. In the meanwhile, planning for their potential renewal is key.
BY MICHAEL COHN
The National Society of Accountants is offering some year-end tax tips for businesses, courtesy of Wolters Kluwer Tax & Accounting US.
Consider several general strategies, such as use of traditional timing techniques for income and deductions and the role of the tax extenders, as well as strategies targeted to your particular business. As in past years, planning is uncertain because of the Affordable Care Act and the expiration of many popular but temporary tax breaks.
Recent legislation changed filing deadlines for some entity tax returns for 2016: Partnership tax returns will be due on March 15, not April 15 (for calendar year partnerships), and c-corporation returns will be due on April 15, not March 15 (for calendar year C Corporations). Returns for s-corporation will continue to be due on March 15.
Expensing and Bonus Depreciation
Many businesses use enhanced Code Sec. 179 expensing as a key component of year-end tax planning. Sec. 179 property is generally defined as new or used depreciable tangible property purchased for use in a trade or business. Software was also recently included, as was qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property.
(Congress has not renewed the enhancements to Sec. 179 expensing for 2015, but they likely will be renewed. Year-end planning should reflect both the likely extension and the possibility of no extension.)
Similarly, bonus depreciation has been a valuable incentive for many businesses. Fifty percent bonus depreciation generally expired after 2014 (with limited exceptions for certain types of property).
Qualified property for bonus depreciation must be depreciable under the Modified Accelerated Cost Recovery System (MACRS) and have a recovery period of 20 years or less for a wide variety of assets.
Year-end placed-in-service strategies can provide an almost immediate cash discount for qualifying purchases.
Although you should factor a bonus-depreciation election into year-end strategy, you don’t have to make a final decision on the matter until you file a tax return. Also, bonus depreciation isn’t mandatory: you might want to elect out of bonus depreciation to spread depreciation deductions more evenly across future years.
Another potentially useful strategy involves maximizing benefits under Sec. 179 by expensing property that doesn’t qualify for bonus depreciation, such as used property, and property with a long MACRS depreciation period.
Section 199 Deduction
Year-end planning benefits from the release of guidance on the Code Sec. 199 domestic production activities deduction is an often under-utilized potential break. The guidance provides many examples of what business activities qualify; recent Internal Revenue Service guidance highlights manufacturing, construction, oil-related work, film production, agriculture, and many other pursuits.
Work Opportunity Tax Credit
If your business is considering expanding payrolls before 2015 ends, take a look at the Work Opportunity Tax Credit (WOTC). (Although the WOTC, under current law, expired after 2014, Congress is expected to renew the WOTC for 2015 and possibly for 2016).
Generally, the WOTC rewards employers that hire individuals from certain groups, including veterans, families receiving certain government benefits, and individuals who receive supplemental Social Security Income or long-term family assistance. The credit is generally equal to 40 percent of the qualified worker's first-year wages up to $6,000 ($3,000 for summer youths and $12,000, $14,000, or $24,000 for certain qualified veterans). For long-term family-aid recipients, the credit is equal to 40 percent of the first $10,000 in qualified first-year wages and half of the first $10,000 of qualified second-year wages.
Currently, a de minimis safe harbor under the so-called “repair regs” allows you to deduct certain items costing $5,000 or less that are deductible in accordance with your company’s accounting policy reflected on your applicable financial statement (AFS). IRS regulations also provide a $2,500 de minimis safe harbor threshold if you don’t have an AFS.
Routine Service Contracts
If you’re an accrual-basis taxpayer (meaning you have a right to receive income as soon as you earn it), you have a new tool for planning. The IRS has provided a safe harbor under which accrual-basis taxpayers may treat economic performance as occurring on a ratable basis for ratable service contracts—perhaps particularly useful in connection with your regular services that extend into 2016. If your business meets the safe harbor for ratable service contracts, you may be able take a full deduction in the current tax year for certain 2015 payments even though you may not perform the services until next year.
Affordable Care Act
For large businesses, the ACA imposes many new requirements, including the employer shared responsibility provision (also known as the employer mandate). Small businesses, although generally exempt from this mandate, need to review how they deliver employee health insurance.
Many small businesses have provided a health benefit to employees through a health reimbursement arrangement (HRA). Following passage of the ACA, the IRS described certain types of HRAs as employer payment plans – therefore subject to the ACA’s market reforms, including the prohibition on annual limits for essential health benefits and the requirement to provide certain preventive care without cost sharing. Failure to comply with these reforms triggers excise taxes under Code Sec. 4980D.
Pending legislation in Congress would allow small employers (that is, those with fewer than 50 full-time and full-time equivalent employees) to have stand-alone HRAs and reimburse expenses without violating the ACA’s market reforms.
Small employers also should review the Code S
ec. 45R credit. If your business has no more than 25 full-time equivalent employees, you may qualify for a special tax credit to help offset your costs of employee health insurance. You must pay average annual wages of no more than $50,000 per employee (indexed for inflation) and maintain a qualifying health care insurance arrangement. (Generally, health insurance for employees must be obtained through the Small Business Health Options Program, part of the Health Insurance Marketplace.)
Taxpayers who have been sitting on the sidelines due to the lack of certainty on the expanded Section 179 deduction, bonus depreciation, the R&D credit and other items normally renewed in an extender package need to take action soon, according to Michael Silvio, director of tax services at Hall & Co. CPAs.
“They may have been waiting for legislative action up to now, but if the extenders are passed in December they need to take advantage of it, and if it is not passed before the end of the year, they still need to decide whether to make a move before the end of the year,” he said. “Now is a good time to look at new equipment purchases, because the expanded Section 179 expensing provision is likely to come back in. Also, businesses need to look at credits and incentives.”
The R&D credit will likely be extended as well, according to Silvio. “Even if nothing happens on the federal side, many of the states have an R&D credit,” he noted.
And of course, traditional tax planning moves are in order for those who may be in a higher tax bracket next year. “If you think you will be in a higher bracket next year, you need to be accelerating income into this year and deferring deductions so they are available next year when you’re in a higher bracket,” he said.
If the taxpayer owns an S corporation, they should be looking at whether or not they have been taking estimated tax payments, Silvio said. “If you feel like you haven’t made an estimated payment on time, we suggest taking a bonus on the last paycheck and withholding the amount. It’s deemed to have been paid pro rata throughout the entire year.”
For those who accelerate deductions by paying both halves of their property tax in December, Silvio cautions them to consider the Alternative Minimum Tax. “State taxes and property taxes are not deductible for AMT purposes, so accelerated deductions may put them into AMT territory,” he said. “If they pay both halves in December, so they get a deduction on Schedule A, it’s good for regular tax purposes but it has to be added back and will increase AMT income.”
It’s easy for taxpayers, and their advisors, to overlook the required minimum distribution, Silvio observed. “Be sure that if the taxpayer is 70-½ or over they take the RMD from their retirement account,” he said. “The penalty is 50 percent of the amount required to be distributed. It’s not the responsibility of the custodian; it’s up to the taxpayer.”
Silvio always makes sure to inform clients that they can make gifts up to $14,000 in an annual gift to anyone, to save on gift and estate taxes.
One often-overlooked deduction is the Domestic Production Activities Deduction, Silvio said: “Many don’t realize they qualify for this. For example, if a construction or an architectural or engineering company is involved in the design or development or managing of real estate, they qualify. A lot in that space are missing this deduction.”
A HIERARCHY OF PLANNING
Last-minute tax issues could be things that can be done by the end of the year before it’s too late to do them, or could be things that can still be done up to the time you file the tax return or later, to get a better result for that prior year, according to Matthew Frooman, a member at the Atlanta office of Top 100 Firm Warren Averett.
“For the most part, CPAs know the tools and tricks that are available. What we don’t see is actual implementation,” he said. “It’s amazing to me how many new clients we’re introduced to for whom we see so many opportunities that have not been addressed. In the Internet age, there’s very little that you can’t find and read up on, so it’s either a question of time, or inclination, or the ability to absorb and be creative in your thinking that inhibits the implementation.”
“It helps to have an industry focus,” said Frooman. “That way, there’s a better chance of knowing the tools that apply to a client in that industry.”
“It helps to have a process, a mental or written checklist of how to approach the planning opportunities in that industry,” he said. “So you have a hierarchy of tax planning which starts with a tax-free way to have income. If you can’t figure out a way to have tax-free income, then you go to offsets in terms of deductions from basis or deferral. Then you look at the tax rate itself, the character of the income as to capital gains or ordinary income, and finally you get down to the tax itself. After that, you consider additional offsets in the form of credits.”
“You can approach every engagement with that structure and work through what are the ways of making something tax-free, offsetting income, deferring income, getting a lower tax rate and generating a credit, and then the possibility of buying a credit,” Frooman said. ”Every tax technique should fall into at least one of those categories. For myself, there are too many tools to think through without some sort of structure, so the solution is to prioritize, and decide which tool has the highest impact and is the easiest to apply.”
NEW DUE DATES
End-of-year tax planning provides the opportunity to review the past year and also generate an overall approach going into 2016, according to Jo Anna Fellon, senior tax manager at Top 100 Firm Friedman LLP in East Hanover, N.J.
“As we get closer to year end, we should be more concerned about where we are in closing out 2015,” she said. “From an individual perspective, why not assess current gains and losses for the year? The market adjusts daily, and individuals should do the same,” she said. Because of the complexity of the Tax Code, Fellon recommends getting the financial advisor and the client in the same room with the CPA to talk. “Looking into 2016, practitioners need to be aware of the filing deadline changes that will take effect for the 2016 period,” she advised.
For tax years beginning after Dec. 31, 2015, the due dates for partnership tax returns will change from April 15 for calendar-year partnerships to March 15, and the fifteenth day of the third month after the end of the fiscal year for fiscal-year partnerships. The due date for C corporations will be April 15, or the fifteenth day of the fourth month after the close of their year. S corporation return due dates continue to be March 15, or the third month following the close of the taxable year.
For this year’s filing season, the due date for individuals is April 18, 2016 (due to Emancipation Day falling on Friday, April 15), while taxpayers in Maine and Massachusetts will have until April 19, 2016 (due to Patriot’s Day falling on April 18).
The tax extenders have historically been passed, so we have to plan for the fact that they will be passed, advised Gary Fox, managing partner of tax services at Top 100 Firm Crowe Horwath.
“But there’s no guarantee,” he cautioned, “So you have to go into year-end pretty flexible in case they are not passed. You really have to look at estimates based on whether the extenders are passed versus not passed. Since last year’s extenders were not passed until January of this year, there was a lot of uncertainty because so much of year-end planning is based on what happens to the extenders.”
The other big issue, according to Fox, is the Affordable Care Act. “There are a lot of reporting requirements and some pretty significant penalties,” he said.
Individuals who do not have health coverage will pay the higher of 2 percent of their yearly household income, up from 1 percent in 2014. Applicable large employers with 100 or more full-time employees in 2014 are subject to the employer shared responsibility provisions in 2015 and will owe an employer shared responsibility payment if they do not offer minimal essential coverage to at least 70 percent of their full-time employees and their dependents and at least one full-time employee receives the premium tax credit for purchasing coverage through the exchange.
“We continue to find people who are surprised by the Alternative Minimum Tax, so a lot of planning goes into the break-even point for individuals between the AMT and the regular tax,” said Fox. “They’re two separate tax systems. A lot of times, planning works for the regular tax but not for the AMT, so our planning encompasses both.”
HOPING FOR BETTER
Next filing season can’t be as bad as the previous one, according to Rick Wojciechowski of Top 100 Firm The Bonadio Group: “Provided the extenders get passed earlier than they did for 2014, it should be better. Plus, the tangible property regs are better understood now. But we do have layering of the ACA, which affects business clients. CPAs need to communicate the rules to their clients.”
“Many CPAs focus on the big projects first and save the smaller returns until later,” Wojciechowski observed. Instead of postponing the smaller projects until the end of the busy season, he recommends that tax pros take work that would normally fall in the worst time — February 15 to April 15 — and complete it by January 28. “If you set a date for yourself to complete the tax returns for family and friends, you’re more likely to actually complete them on time,” he said. “In addition, completing these returns first will help you refine your process. If any mistakes are made, your family is inclined to be more forgiving than a client.”
“Usually you can look to cash basis entities that have no reason not to be ready,” he said. “Try to get them done early so they won’t clog up the pipeline at a later date.”
As we went to press, the extenders had not yet been acted on by Congress. However, this past July, the Senate Finance Committee renewed more than 50 recently expired provisions, noted Matt Becker, regional managing partner for tax services at Top 10 Firm BDO USA. “While the broader tax environment may be uncertain, this year’s tax extenders package contains no surprises,” he explained. “It includes the extension of the Work Opportunity Tax Credit, the look-through treatment of payments between related [controlled foreign corporations], and bonus depreciation. To accererate bonus depreciation deductions, businesses should consider cost-segregation studies to identify qualified personal property.”
“The federal R&D credit has yet to be authorized for 2015,” he observed. “While the future of the federal R&D tax credit for 2015 is still to be determined, the credit can be claimed for prior open tax years,” he said. “Most states also offer businessess their own version of the R&D tax credit. For taxpayers with insufficient liability, a growing number of states are offering methods of monetization for these types of tax credits — for example, refundable or salable credits.”
By Michael Cohn
North American employees and managers are missing out on more than $10.7 billion of unclaimed expenses every year, according to new estimates.
Enterprise resource planning software provider Unit4 surveyed senior and middle-management professionals in the U.S. and Canada and found that 17 percent of them regularly don’t expense all they could, while the percentage is even higher in Canada, at 23 percent.
Unit4 estimates that U.S. employees lose out on an average of $390 per year, while Canadian employees miss out on $284 per year, both in U.S. dollars.
Unit4 surveyed senior and middle management professionals who are employed full and part-time, and who submit expense claims in the U.S., Canada, as well as the United Kingdom, Spain, France, Netherlands, Germany, Belgium and Sweden. The findings are based on responses from almost 2,000 employees with at least 200 responses from each country.
Survey respondents gave a number of reasons for failing to claim expenses, including low value, forgetting to ask for receipts, losing receipts or simply forgetting to submit the expense claim. One out of three employees said they refrain from submitting expense claims because the process is too frustrating and time consuming. The same amount have to wait for more than one month for their expenses to be paid after making a claim, though overall most expenses are paid within a month.
Corporate expense claim processes do not support employee engagement initiatives to the extent that companies are leaving employees short of money. Two out of five (37 percent) U.S. professionals who regularly claim expenses say this is the case, with those in France (24 percent), Spain (23 percent), the U.K. (23 percent) and Canada (20 percent) reporting they find themselves short of money.
Many North American professionals feel they are being financially taken advantage of by their employers. When asked if they feel their employer is gaining a financial advantage over them through the expense claim process, 42 percent of U.S. respondents said yes. In Spain (29 percent) and Sweden (26 percent), the UK (25 percent), France (23 percent), Canada (21 percent) and Belgium (20 percent) agreed, compared to only 10 percent in Germany and the Netherlands.
Of the employees surveyed who said yes, 28 percent (average across countries) feel this has a negative influence on their feelings towards their company.
BY MICHAEL COHN
Congress has passed highway-funding legislation that includes two tax provisions that would allow the State Department to revoke the passports of long-term tax delinquents who owe more than $50,000 in tax debts and revive a program requiring the IRS to hire private debt collection agencies.
The House and the Senate passed differing versions of the highway funding bill last month containing the provisions despite warnings from an expatriate group known as American Citizens Abroad and the National Treasury Employees Union, which represents IRS employees (see Expats Worried over Passports Being Revoked for Tax Debts andHighway Bill Would Revive Private Collection of Tax Debts). The Senate and the House both passed the conference committee’s bill Thursday by a vote of 83 to 16 in the Senate and 359 to 65 in the House. It was signed into law Friday by President Obama, providing five years of funding for highways and other transportation infrastructure. The two provisions were included as “pay-fors” or “offsets” under the assumption that they would raise extra revenue for infrastructure spending.
However, the provisions remain controversial. “Title XXXII of the 2015 FAST Act opens the door for turning a federal tax dispute into an infringement on an individual’s ability to travel abroad,” said Jim Ferguson, tax law editor at Bloomberg BNA. “There are some minimal procedural safeguards, but like any law, those will be subject to future amendments. You could be denied a passport, or have your issued one revoked. The U.S. government thinks this will raise $400 million over the next decade. The trigger is a $50,000 disputed tax bill. That seems like a lot to most individuals, in the context of a single year of income tax. But many income tax problems build up over several years, and it doesn’t take much of a valuation dispute to reach that level in estate tax returns.”
The $50,000 threshold can include penalties and interest. The passport revocation would only occur after the IRS issues a lien or levy. If a taxpayer enters into a payment agreement with the IRS, the passport won't be revoked.
On the matter of using private debt collectors, the IRS has tried using outside contractors in the past, but the program has been discontinued twice because it did not bring in the revenue anticipated and provoked complaints that the debt collectors were harassing mostly low-income taxpayers. The National Treasury Employees Union has also pointed out that it is not a good idea to revive the program at a time when criminals are posing as IRS agents and calling taxpayers threatening them to send in money to settle fictitious tax debts.
“Congress should not be giving the green light to debt collectors,” NTEU national president Tony Reardon said in a statement.
In July my column for this space asked whether it was too early to start thinking about tax extenders. Now, the question might better be phrased whether it is too late.
Back then, the wisdom was that extenders would eventually pass, but nothing is certain.
As far as advising business clients on the purchase of new equipment, Kathleen King, managing director of Alvarez & Marshall Taxand’s Washington office, said, “You have to look at the business needs first. If they need equipment, then they should go ahead and buy it. Some companies are getting used to these extenders, and by and large they are counting on them to pass.”
Whatever is passed will be “a fairly vanilla extension,” she predicted. “When it gets to crunch time, they’re not going to get any new things into the legislation. The pressure will be to extend what’s already on the books.”
However, businesses need to be able to plan and that takes time, according to Grafton “Cap” Wiley, managing director of the CBIZ Tofias New England office.
“If you purchase a large piece of equipment, that’s a major decision,” he said. “I have people postponing their decisions because of questions as to whether the enhanced Section 179 deduction will still be there. And usually, an R&D project [the R&D Credit is one of the expired provisions up for extension] is a multi-year endeavor.”
“I would be surprised if an extenders bill doesn’t pass this year,” said Moss Adams partner Tom Sanger. “My guess is December 18. They go on holiday after that. The House pushed through a bill with the R&D credit and it’s still there. Earlier this week, Chairman Brady came out with a backup extenders bill. Both parties want to make the R&D credit permanent, but any time you make something permanent you need to account for the cost of it over a ten-year period of time. The cost is estimated at $11 billion a year or over $100 billion if they make it permanent. The effort to make it permanent is bipartisan and noncontroversial, but it’s hard to do because of the cost.”
The bills currently in play all make the R&D credit more lucrative by adjusting the alternative simplified calculation from 14 percent to 20 percent and allow the credits to offset Alternative Minimum Tax for small businesses, Sanger noted. “In some cases the alternative has been the better answer, but in some it has not,” he said.
If the extenders are not passed until January, those companies that have a year end of December 31 won’t be able to claim the R&D credit benefit on their financial statements, Sanger said. “When the credit was extended in January a couple of years ago, it caused a lot of chaos, so I would be shocked if it’s not extended by December 18.”
Swiss Bank Fines Top $1 billion
BY DAVID VOREACOS AND GILES BROOM (BLOOMBERG)
Five more Swiss banks, including one owned by Brazilian billionaire Joseph Safra, agreed to pay penalties to avoid prosecution for helping U.S. clients evade taxes, pushing the number of accords to 73 and total payments to more than $1 billion.
Bank J. Safra Sarasin AG agreed to pay $85.8 million, Coutts & Co. $78.5 million and Banque Cantonale Vaudoise $41.7 million under non-prosecution agreements released last week by the U.S. Justice Department. The government is nearing the end of a disclosure program that requires firms to say how they helped Americans cheat the Internal Revenue Service and where their money went.
The program has generated leads that prosecutors and the IRS will pursue around the world in 2016, Caroline Ciraolo, acting assistant attorney general of the Justice Department’s Tax Division, said in a statement.
The largest settlement this year was BSI SA’s payment of $211 million announced on March 30. Dozens of smaller accords preceded a flurry of larger penalties in recent weeks. Credit Agricole SA’s Swiss unit agreed to pay $99.2 million and BNP Paribas SA’s Swiss unit reached a $59.8 million settlement. While the U.S. has signed 73 accords, they cover 75 banks.
Gonet & Cie also agreed to pay $11.5 million, while Banque Cantonale du Valais will pay $2.3 million, the Justice Department said Wednesday.
Like other Swiss firms, Safra Sarasin signed a statement of facts admitting steps that it took to help U.S. clients hide assets from the IRS, like holding them in entities created in Panama, Liechtenstein, the British Virgin Islands and the Cayman Islands. The bank had 1,275 U.S. accounts with a maximum value of $2.2 billion after 2008.
One lawyer in Geneva helped clients open undeclared accounts in the names of Panama corporations with assets of about $250 million, according to the accord.
Safra Sarasin admitted it processed at least 20 withdrawals of cash or precious metals valued at $100,000 or more. The bank helped one client, whose account was held in the name of a Panama company, to withdraw $2.9 million in gold at account closing.
The accord “removes all uncertainty linked to Banque Cantonale du Valais’s relations with its American customers,” the company said in an e-mailed statement. A spokeswoman for Safra Sarasin declined to comment.
Switzerland’s Union Bancaire Privee agreed to buy Coutts International’s client assets from Royal Bank of Scotland Group Plc in March, but is exempt from liability for the fine.
RBS noted the settlement in an e-mailed statement, calling it a “legacy matter.”
“The signature of this agreement removes a source of uncertainty and allows Gonet & Cie. to dedicate itself fully and confidently to its future development,” the bank said in an e- mailed statement.
Banque Cantonale Vaudoise said in an e-mailed statement that the U.S. fine is totally covered by existing provisions and the settlement won’t have any impact on the bank’s dividend policy.
The pacts are part of a Justice Department program that spares participants criminal liability in the U.S. if they disclose their wrongdoing. To reduce their penalties, Swiss banks have prodded thousands of their U.S. clients to reveal hidden accounts to the IRS.
A recent case in Michigan has created an unexpected twist in the brave new world of taxing software and services online.
The Michigan Court of Appeals has decided against the Michigan Department of Treasury in a case involving the taxation of the sales or use of services provided over the Internet. The case itself has broad application to a number of states that are weighing the taxation of Software-as-a-Service without changing their law to say that they are specifically taxing a service, according to June Haas, tax partner at Honigman Miller Schwartz and Cohn LLP.
The Court of Appeals, in Auto-Owner’s v. Department of Treasury, held that a variety of services provided via the Internet are not subject to sales or use tax. The department had asserted that such services involved the “use” of prewritten, canned software on the basis that the taxpayer was accessing the functionality of the software on the third-party service provider’s network through computers and the Internet, and that such use was taxable. The services included, among other things, data analysis services, information services, secure data transmission, electronic research services, hardware and software maintenance, and Web conferencing.
The Court of Appeals found that the majority of services at issue did not involve the delivery of any prewritten, canned software, Haas indicated. “The case was watched nationally because many states impose sales and use tax only on tangible personal property,” she said. “They have not updated their laws to cover electronic and digital delivery of software. Michigan was trying to tax accessing the functionality of software. They wanted to say that if you access the functionality, then it’s the same thing as buying the software. It transforms Software-as-a-Service into the purchase of tangible personal property that is taxable.”
“In a number of the transactions, the taxpayer merely electronically transmitted data and received back analyzed data. In others, the taxpayer electronically transmitted data to be securely transmitted to a third party,” she said. “In each of these cases, the court held that the taxpayer never had access to any of the third-party vendors’ computer codes, and thus there was no use of prewritten computer software.” The court also rejected the department’s argument that “accessing the functionality” of software constitutes delivery of prewritten software and a taxable use. The court held that sending requests into another’s system does not constitute an exercise of a right or power of control of the vendor’s software incident to ownership of the software that constitutes a taxable use. Thus, the delivery of the results of electronic research services or electronic analysis services that used the software to perform the service was not an exercise of control over the software. Accessing a Web site is not the use of software.
The Court of Appeals held that the evidence proved that the maintenance contracts at issue did not include delivery of prewritten software. In addition, when the taxpayer purchased software and separately purchased software maintenance in transactions where the cost for the maintenance and support were separately stated, the maintenance fees were nontaxable fees for services.
Finally, the court also held that for the transactions where property was delivered, the “incidental to the services” test set forth in the Michigan Supreme Court’s decision in Catalina Marketing must be applied. Under these tests, the court held that these were service transactions and not sales of tangible personal property.
IT STARTED AS PROPERTY …
“The taxation of SaaS is a very hot area right now,” said Peter Stathopoulos, lead partner at the state and local tax practice at Atlanta-based Bennett Thrasher. “For a long time, states have struggled with how to treat SaaS, because state tax laws typically lag behind technology,” he said. “In the late 1970s and in the 1980s, state sales tax codes were designed for the most part to deal with tangible property. When software came along, the question was whether it was tangible property or was it a service. The states decided back then that because software was encoded on a tangible medium, it was tangible personal property.”
“So they had this idea that software is the same as any other piece of tangible personal property because you got it on a disk,” he said. “When technology moved along and people started to download software instead of buying it on a disk, the states split. Some decided if it was not on a floppy disk there was no property, so there was no sales tax. Others went the other way, and decided to do away with the distinction of how the software is delivered. So in the 1990s, if you downloaded from a computer they would treat it as the sale of property. Now that the software stays on the vendor’s computer, states are being asked if there’s really a transfer of tangible personal property.”
A number of states have addressed this issue, according to Stathopoulos: “The Michigan court said there is no transfer of property here. The software stayed on the vendor’s computer, and the user never got to control it like an owner or lessee. Since they had access to the software but never had the right to control it, there was never any taxable sale or use of the software in question.”
Other states have gone a different way, Stathopoulos said: “New York has issued a letter ruling saying that when you get on the Internet, you are getting constructive use of the software. It’s the same as leasing the software, and in New York the sale or lease of software is a taxable transaction.”
“That it the great divide now,” he said. “States will have to decide when there is hosted software or SaaS and it comes as part of a broader service offering, is it being leased to customers. Some will say there is no sale or lease of tangible personal property, while others like New York will say the ability to access the software from a computer is a form of constructive possession, so there is a sale or lease of tangible personal property.”
“Only a handful of states have addressed this,” he said. “Other states are watching. The Michigan decision will probably have a chilling effect on state departments of revenue that are trying to tax these kinds of SaaS transactions.”
COMMENT – The Department of Treasury is infamous for wanting to tax any and everything. I personally like this case very much.
Tips for Using Credit Bureaus to Help Protect Your Financial Accounts
IRS Security Awareness Tax Tip Number 6
If you believe you are a victim of identity theft, you should contact one of the three major credit bureaus to place a “fraud alert” on your credit account.
This critically important step makes it harder for identity thieves to open additional financial accounts, such as a bank account, in your name. This helps prevent identity thieves from directing fraudulent tax refunds into bank accounts they created or opening additional credit cards in your name.
The IRS has teamed up with state revenue departments and the tax industry to make sure you understand the dangers to your personal and financial data. Taxes. Security. Together. Working in partnership with you, we can make a difference.
Contacting a credit bureau if you think you are an identity theft victim can help you in many ways, including helping protect your tax information.
The three main credit bureaus:
If you are an identity theft victim, you need contact only one of the three to request a fraud alert. One bureau must notify the others when a fraud alert is requested. You’ll get a letter from each credit bureau. It will confirm that they placed a fraud alert on your file.
A fraud alert is free, and it lasts for 90 days. You can renew it. It provides a red flag to other businesses where the thieves may be trying to open accounts and legitimate businesses may take additional steps to verify identities.
Three types of fraud alerts are available:
Initial Fraud Alert. If you're concerned about identity theft, but haven't yet become a victim, this fraud alert will protect your credit from unverified access for at least 90 days. You may want to place a fraud alert on your file if your wallet, Social Security card, or other personal, financial or account information are lost or stolen.
Extended Fraud Alert. For victims of identity theft, an extended fraud alert will protect your credit for seven years.
Active Duty Military Alert. For those in the military who want to protect their credit while deployed, this fraud alert lasts for one year.
Also, you should get your free credit report right away to ensure identity thieves have not opened additional accounts. Go to annualcreditreport.com, which is operated by the three major bureaus, or call 877-322-8228.
If you want even stronger protections or if you were part of a large-scale data breach, you might consider a “credit freeze” which applies even stronger protections but often times for a fee that varies by state.
A credit freeze, also known as a security freeze, lets you restrict access to your credit report, which in turn makes it difficult for identity thieves to open new accounts in your name. You must contact each of the three credit bureaus to establish a credit freeze.
What’s the difference between a credit freeze and a fraud alert? A credit freeze locks down your credit. A fraud alert allows creditors to get a copy of your credit report as long as they take steps to verify your identity.
After receiving your freeze request, each credit reporting company will send you a confirmation letter containing a unique PIN (personal identification number) or password. Keep the PIN or password in a safe place. You will need it if you choose to lift the freeze.
If you apply for credit, a home mortgage or a job, you will have to temporarily lift the freeze so that the businesses may confirm your credit record. There is a fee for lifting a freeze as well.
Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are your Taxpayer Bill of Rights. Explore your rights and our obligations to protect them on IRS.gov.
Traps in Tax Harvesting for Short Sellers
It’s the time of year when investors examine their portfolio and seek to harvest built-in tax losses. But short sellers who wish to harvest their losses should keep a close eye on the calendar.
“Investors looking to sell securities by year end should be aware of the trade date rules,” according to John Kaufmann, of counsel at Greenberg Traurig and a leading authority on the tax aspects of financial instruments.
The trade date rule governs whether the gain or loss from the disposition of a security is taken into account on the trade date – when the seller clicks “sell” or the buyer clicks “buy” – or on the settlement date. For securities traded on U.S. equity exchanges, the settlement date is usually three business days after the trade date, while for bonds, the settlement date is usually one business day after the trade date, explained Kaufmann. Although gain or loss is locked in as of the trade date, the transaction does not close until the settlement date.
While money and property do not exchange hands immediately when you click “buy” or “sell,” the Internal Revenue Service has taken the position that for regular trades placed on an exchange, the securities are treated as being disposed of and a gain or loss is recognized on the trade date, rather than the settlement date.
However, that general rule does not apply to short sales, warned Kaufmann. “Since a short seller’s obligation to deliver shares to a securities lender is not extinguished until the shares are actually delivered, a short position is not closed until the settlement date of the covering trade,” he said. “This means that in contrast to the treatment of long sales, gain or loss from a short sale is generally not recognized until the settlement date.”
Congress changed the rule in 1997 and, as a result, a gain on a short sale is recognized on the trade date, whereas a loss on a short sale is recognized on the settlement date, explained Kaufmann. With January 1 quickly approaching, he cautioned, it behooves investors with short positions seeking to harvest a loss to watch the calendar closely.
The Force Awakens and the Truth Behind ‘Hollywood Accounting’
BY STEPHEN L CARTER (BLOOMBERG)
It’s too early to tell whether Star Wars: The Force Awakens will become the biggest grossing film of all time, but it’s already shattered box office records, earning over $500 million globally during its first weekend. The really interesting question, however, is whether the movie will ever go into profit. After all,Return of the Jedi (now known as Star Wars: Episode VI) never turned a profit, although its worldwide unadjusted gross is over $475 million.
Now, don’t worry. This isn’t another column dumping on Hollywood accounting. (Easy though that would be.) What I actually want to do is offer a partial defense of the contract practices that so often send news reporters into a tizzy.
The cases get a lot of hype. An actor, director, writer or producer -- let’s call him a star -- sues the studio, claiming that he’s earned nothing from his net profit position in a blockbuster. The studio responds that there are no net profits to distribute. There’s bad publicity for the studio -- “How can a movie that made that much money never break even?” -- and, sometimes, a quiet settlement. Now and then there’s a trial. And then things calm down for a while.
Because of the wide coverage accorded a handful of cases, the availability heuristic might make the casual observer imagine that Hollywood is rife with accounting fraud. This seems unlikely. Had the existing studios so completely squandered their reputational capital, others playing by different rules would have arisen by now, and the talent would have flocked to them. Moreover, if the challenged accounting methods were regularly struck down by the courts, the studios would have come up with new ones.
They haven’t. And there’s a reason for that.
Most of us, when we hear references to net profit, think about revenue minus expenses, and that’s what studio heads have in mind when they discuss the profitability of their movies. For purposes of the star’s contract, however, net profit means something else entirely. Typically, the agreement with the studio will reference something called the “Standard Profit Definition.” The SPD spells out the method by which net profits will be calculated, and the studio will insist upon a clause making its SPD a part of the contract.
A lot of the fun that is poked at Hollywood accounting is really an attack on the SPD. For example, when a studio pays itself a large “distribution fee” -- essentially, profit -- or adds a 15 percent overhead charge for its marketing expenses -- essentially, more profit -- the studio is doing exactly what the SPD allows it to do. In other words, the studio is enforcing the contract.
That’s why, as the financial analyst Harold L. Vogel points out, “net profit” in the star’s contract is really what in any other industry it would be termed a bonus. The contract makes the bonus subject to definitions in the SPD. Most complaints about Hollywood accounting, he argued, are really second thoughts about the contract to which the star has already agreed -- a star who is usually represented by an agent and a lawyer.
In court, the record of the SPDs is mixed. Certainly plaintiffs win the occasional big victory. But it’s getting harder for industry insiders to claim that they were snookered. Even in California, where the law is skeptical of adhesive contracts, the SPD can survive charges of unconscionability, at least when the plaintiffs are familiar with industry practices. When the producers of the cult hit Napoleon Dynamite brought suit against Fox Searchlight, claiming that they were unaware of the studio’s definition of net profits when they signed the preliminary agreement, the court ruled that incorporation of the definition by reference was sufficient to bind them.
That’s not to say that no plaintiff ever has a good case. No doubt the motion picture industry, like any other, is sometimes in the wrong. But scholars who’ve studied the structure of compensation in Hollywood tend to find it surprisingly rational.
The Harvard economist Richard E. Caves, in his book Creative Industries: Contracts Between Art and Commerce, reminds us that a rational individual can reasonably decide to trade fixed income now for the chance of greater income later. Of course that later income might never arise -- studies suggest that something like one film out of seven will pay net profit participants -- but the willingness of the talent to accept that risk lowers the risk for the studio, thus enabling a greater investment in production and marketing. (And probably allowing the studio to make more films.)
Columbia law professor Victor Goldberg contends that too much income at the front rather than the back end can distort the incentives of the participants whose joint efforts create the motion picture. One of those participants is the studio, which knows that its distribution fee goes up as gross receipts go up. When actors accept net positions, moreover, they make it easier for the studio to hire a big star (actor or director) who will take a gross position. The big star increases the likelihood of the film’s success, a prospect that typically adds to the long-term compensation of the other participants.
Rational doesn’t mean perfect, and the studio’s joint role as profit participant and profit calculator raises serious questions about moral hazard. Yet it’s hard to argue that industry regulars are the victims of systematic advantage-taking. Studio profit margins aren’t huge, and typically there are investors waiting to be paid back. As Vogel puts it: “To survive over the long term, studios must have sizable financial buffers that can easily support the capital costs, cushion the risks incurred in the normal course of operations, and also provide for a degree of flexibility when selecting from competing potential projects.” The narrow definition of net profit -- which, again, is really a bonus -- helps provide that buffer.
So when The Force Awakens earns its gazillion dollars, and the inevitable stream of article arrives noting that the film has never gone into profit, let’s take a deep breath and remember that the studio is most likely just enforcing the contracts as written. Negotiating with sharp elbows isn’t always pleasant, but it might also be what keeps the studios afloat.
Internal Revenue Service Reminds Taxpayers to Plan Ahead If You Need a Tax Transcript
The IRS reminds taxpayers that the quickest way to get a copy of their tax transcript is to order it online using the Get Transcript application on IRS.gov. By planning ahead, they should receive their transcript in the mail within five to 10 days from the time the IRS receives the request online.
The IRS continues to work to bring the viewable/printable functionality of the application back online in the near future with enhanced identity protection security features. In the meantime, taxpayers can still request a mailed transcript by going online to Get Transcript.
Though taxpayers should always keep a copy of their tax return for their records, some may need the information from filed tax returns for many reasons. This includes college financial aid applicants or taxpayers who have applied for a loan to buy a home or start a business.
If a taxpayer is returning to college this January and applying for financial aid, they should check with their financial aid department at school to see if they will need a copy of their transcript before they start classes. Frequently, students get all the tax return information they need on the FAFSA application via the IRS Data Retrieval Tool.
Similarly, if a taxpayer plans to apply for a loan, they should ask their financial institution if a transcript will be necessary so they can plan ahead and have it at the appropriate time.
The fastest way to get a transcript is through the Get Transcript tool on IRS.gov. Although the IRS temporarily stopped the online viewing and printing of transcripts, Get Transcript still allows taxpayers to order their transcript online and receive it by mail. Taxpayers simply click the "Get a Transcript by Mail" button to order the paper copy of their transcript and have it sent to their address of record. Among the options available:
To order a transcript online and have it delivered by mail, go to IRS.gov and use the Get Transcript tool.
To order by phone, call 800-908-9946 FREE and follow the prompts.
To request an individual tax return transcript by mail or fax, complete Form 4506T-EZ, Short Form Request for Individual Tax Return Transcript. Businesses and individuals who need a tax account transcript should use Form 4506-T, Request for Transcript of Tax Return.
The IRS will mail the transcript to the address of record entered on the prior year’s tax return. The mailed transcript is an official document. It does not need to be a “certified” copy as is the case with some other documents. If a taxpayer has moved since they last filed a tax return with the IRS, they need to first submit a Form 8822, the Change of Address form, to ensure that the transcript is mailed to the correct address. Allowing time for the Form 8822 is another reason for taxpayers to plan ahead for their transcript needs.
If a taxpayer is applying for financial aid, they are encouraged to use the IRS Data Retrieval Tool on the FAFSA website to easily import their tax return information to their financial aid application. The temporary shutdown of the Get Transcript tool does not affect the Data Retrieval Tool. Taxpayers may also click on the FAFSA help page for more information.
If they are applying for a mortgage, most mortgage companies only require a tax return transcript for income verification purposes. Most of these companies participate in our IVES (Income Verification Express Service) program and can request (with the taxpayer’s consent) to have a transcript sent directly to the financial institution. If a taxpayer needs to order a transcript, they should follow the process described above and have it mailed to the address the IRS has on file for them.
Remember, ordering a transcript online is the quickest option. For more information, read the IRS How Do I Get My Transcript? Fact Sheet.
Tips for Teaching Kids about Money Management
BY DIANA SPATOULAS
By now our kids are well into the school year taking part in daily classroom activities. Whether they are learning their A-B-C’s or studying advanced calculus, as parents it is up to us to teach our kids one of life’s many great lessons: money management.
We are the primary influence on our kids’ financial behaviors. Teaching them about money management will help them develop the skills they need to be smart with their finances and wise spenders. It will also help shape them into self-sufficient adults equipped with the important financial skills needed to navigate life.
According to 360financialliteracy.org, children realize at a young age that money is used to buy the things that they want, even though they do not necessarily understand where the money really comes from. The best time to start teaching them how to handle money sensibly is as soon as they become interested in it. Every day brings an opportunity for simple money-teaching moments. The sooner we start incorporating those lessons into everyday life, the better off our kids will be.
A simple way to introduce the concept of saving money is to create three jars for each child labeled “Saving,” “Spending” and “Sharing.” Every time your kids receive money that is not for a specific purpose, divide it among the three jars. You can determine how much goes into each jar. With older children, you can decide the amounts together. Let your child use the money in the spending jar for small purchases. Money in the sharing jar can be used to donate to a cause of their choice.
To help them avoid spontaneous purchases, have them set a financial goal. Every time your kids add money to the savings jar, help them count up how much they have, talk with them about how much more they need to reach their goal, and how soon they will reach it. Beth Kobliner, author of “Get a Financial Life,” says, “Make sure it is a goal they can reach within a reasonable timeframe and not too far out in the future. Young children may lose interest in goals that take longer than a week or two to reach. Then it just gets frustrating, and it gets hard for them to wrap their head around. It is really more about her being cognizant that she is saving for a goal than, ‘Oh, I really need her to scrape together those $10 to buy the tutu.’ You want to set them up for success. All those behaviors are really fun for kids. It gives them a sense of the importance of waiting and being patient and saving.”
As they get older they will begin to understand the difference between long-term and short-term saving and will be able to set goals further out in the future, such as saving for a remote control car next summer versus new ear buds this month. Take them to the bank to open an account to help them learn how a savings account works. Many banks have programs that provide activities and incentives designed to help children learn financial basics.
In addition to learning how to save, your kids need guidance on how to make good spending decisions. Children are not born with the ability to spend money wisely, yet they are constantly tempted via advertising and peer pressure. To help your kids become smart spenders, help them do their research on what they really want and compare prices before they spend. Help them understand the importance and value of finding the best quality and deal. Have them think about whether they really want an item before they part with their money.
Take your kids with you when you go grocery shopping. As you shop, point out an item, help them find the price, and explain why you are choosing to buy one brand and size rather than another. This will teach them how to compare quality and prices. When all is said and done, even if you think your kids are about to waste their money on a fad that will soon become unpopular, you might want to let them go ahead and buy the item anyway, because it might just teach a lasting lesson.
“It is okay to let your kids make mistakes,” says 360financialliteracy.org. “If the toy your child insists on buying breaks, or turns out to be less fun than it looked on the commercials, eventually your child will learn to make good choices even when you are not there to give advice.”
Personal financial expert Suze Orman suggests that when you sit down to pay the bills, have your kids sit down with you. Share with them how much it costs to live in the house. This will not only help them understand that parents actually pay money to watch satellite channels and log on to the Internet, but it will also give them clear, concrete examples of what it really does cost for basic every day needs—it may surprise them to learn that running water and electricity are not automatic, we get them because we pay for them.
As parents, talking to our kids about how we make everyday financial decisions and using real-life examples will not only help raise them to be more in-touch with money than out-of-touch, but it will also help build in them a firm foundation and confidence about money management that will help them make responsible financial choices as they grow up and navigate life—lessons that cannot be taught in a classroom.
Diana Spatoulas is a senior accountant at Kessler Orlean Silver & Co. PC, in Deerfield, Ill.
Eight Facts about New ACA Information Statements
Many individuals will receive new ACA information statements for the first time in 2016:
Form 1095-B, Health Coverage
Here are eight facts about these forms:
While the information on these forms may help you complete your tax return, they are not needed to file. You can file your federal tax return even if you have not received one of these statements.
Form 1095-B, Health Coverage, is used by coverage providers to report certain information to the IRS and to taxpayers about individuals who are covered by minimum essential coverage and therefore aren't liable for the individual shared responsibility payment.
Form 1095-C, Employer-Provided Health Insurance Offer and Coverage is used by employers with 50 or more full-time employees, including full-time equivalent employees, in the previous year use, to report the information required about offers of health coverage and enrollment in health coverage for their employees.
Form 1095-C is also used by employers that offer employer-sponsored self-insured coverage to report information to the IRS and to employees about individuals who have minimum essential coverage under the employer plan and therefore are not liable for the individual shared responsibility payment for the months that they are covered under the plan.
Individuals who worked for multiple employers that are required to file Form 1095-C may receive a Form 1095-C from each employer.
The Form 1095-B and 1095-C sent to you may include only the last four digits of your social security number or taxpayer identification number, replacing the first five digits with asterisks or Xs.
In general, 1095-B and 1095-C must be sent on paper by mail or hand delivered, unless you consent to receive the statement in an electronic format.
Health coverage providers should furnish a copy of Form 1095-B, to you if you are identified as the “responsible individual.”
2016 Tax Season Opens Jan. 19 for Nation’s Taxpayers
Following a review of the tax extenders legislation signed into law last week, the Internal Revenue Service announced today that the nation’s tax season will begin as scheduled on Tuesday, Jan. 19, 2016.
The IRS will begin accepting individual electronic returns that day. The IRS expects to receive more than 150 million individual returns in 2016, with more than four out of five being prepared using tax return preparation software and e-filed. The IRS will begin processing paper tax returns at the same time. There is no advantage to people filing tax returns on paper in early January instead of waiting for e-file to begin.
“We look forward to opening the 2016 tax season on time,” IRS Commissioner John Koskinen said. “Our employees have been working hard throughout this year to make this happen. We also appreciate the help from the nation’s tax professionals and the software community, who are critical to helping taxpayers during the filing season.”
As part of the Security Summit initiative, the IRS has been working closely with the tax industry and state revenue departments to provide stronger protections against identity theft for taxpayers during the coming filing season.
The filing deadline to submit 2015 tax returns is Monday, April 18, 2016, rather than the traditional April 15 date. Washington, D.C., will celebrate Emancipation Day on that Friday, which pushes the deadline to the following Monday for most of the nation. (Due to Patriots Day, the deadline will be Tuesday, April 19, in Maine and Massachusetts.)
Koskinen noted the new legislation makes permanent many provisions and extends many others for several years. "This provides certainty for planning purposes, which will help taxpayers and the tax community as well as the IRS," he said.
The IRS urges all taxpayers to make sure they have all their year-end statements in hand before filing, including Forms W-2 from employers, Forms 1099 from banks and other payers, and Form 1095-A from the Marketplace for those claiming the premium tax credit.
“We encourage taxpayers to take full advantage of the expanding array of tools and information on IRS.gov to make their tax preparation easier,” Koskinen said.
Although the IRS begins accepting returns on Jan. 19, many tax software companies will begin accepting tax returns earlier in January and submitting them to the IRS when processing systems open.
Choosing e-file and direct deposit for refunds remains the fastest and safest way to file an accurate income tax return and receive a refund. The IRS anticipates issuing more than nine out of 10 refunds in less than 21 days. Find free options to get tax help, and to prepare and file your return on IRS.gov or in your community if you qualify. Go to IRS.gov and click on the Filing tab to see your options.
Seventy percent of the nation’s taxpayers are eligible for IRS Free File. Commercial partners of the IRS offer free brand-name software to about 100 million individuals and families with incomes of $62,000 or less;
Online fillable forms provides electronic versions of IRS paper forms to all taxpayers regardless of income that can be prepared and filed by people comfortable with completing their own returns.
The Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) offer free tax help to people who qualify. Go to irs.gov and enter “free tax prep” in the search box to learn more and find a VITA or TCE site near you, or download the IRS2Go app on your smart phone and find a free tax prep provider.
The IRS also reminds taxpayers that a trusted tax professional can provide helpful information and advice about the ever-changing tax code. Tips for choosing a return preparer and details about national tax professional groups are available on IRS.gov.
COMMENT – those with health insurance coverage will have to wait until they receive form 1095 from their health insurance company. This year (2015 tax year) form 1095 is as mandatory as a W-2.
2016 Standard Mileage Rates for Business, Medical and Moving Announced
The Internal Revenue Service today issued the 2016 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.
Beginning on Jan. 1, 2016, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:
54 cents per mile for business miles driven, down from 57.5 cents for 2015
19 cents per mile driven for medical or moving purposes, down from 23 cents for 2015
14 cents per mile driven in service of charitable organizations
The business mileage rate decreased 3.5 cents per mile and the medical, and moving expense rates decrease 4 cents per mile from the 2015 rates. The charitable rate is based on statute.
The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.
These and other requirements for a taxpayer to use a standard mileage rate to calculate the amount of a deductible business, moving, medical or charitable expense are in Rev. Proc. 2010-51. Notice 2016-01 contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan.
Health Insurance Providers Must Report Certain Information to the IRS and Covered Individuals
Taxpayers will use this information, which will be provided on Form 1095-B, Health Coverage Information Return or Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, when they file their tax returns to verify the months that they had minimum essential coverage and satisfied the individual shared responsibility provision. The IRS will use the information on the statements to verify the months of the individual’s coverage.
Employers that sponsor self-insured group health plans are subject to information reporting requirements, with respect to the self-insured group health plan coverage. This means employers of any workforce size that sponsor a self-insured group health plan must comply with these information reporting requirements. An employer that is an applicable large employer must use Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and Form 1095-C to report information for employees who enrolled in the employer-sponsored self-insured health coverage. An employer that is not an applicable large employer should not file Forms 1094-C and 1095-C, but should instead file Forms 1094-B and 1095-B to report information for employees who enrolled in the employer-sponsored self-insured health coverage. The deadlines for reporting about 2015 coverage are the same as those provided above: February 29, 2016 for filing this information with the IRS – or March 31, 2016 if filing el ectronically – and February 1, 2016 for sending the form to the employee.
Other providers of minimum essential coverage will file Form 1094-B, Transmittal of Health Coverage Information Returns, and Form 1095-B, Health Coverage Information Return, with the IRS. For entities that provided minimum essential coverage in 2015, the deadline is February 29, 2016 – or March 31, 2016 if filing electronically. The Form 1095-B must contain the name and taxpayer identification numbers for each covered individual. It must also include the months that each covered individual was enrolled in coverage and entitled to receive benefits for at least one day of that month.
Coverage providers also must send the Form 1095-B to the person identified as the responsible individual on the form. The responsible individual generally is the person who enrolls one or more individuals, which may include him or herself, in minimum essential coverage. For 2015 coverage, the deadline for providing this form to individuals is February 1, 2016.
It's been about five months since the Department of Labor's (DOL's) Wage and Hour Division issued its proposed update on overtime rules. Specifically, the agency has suggested revisions to the definition of which employees are exempt from overtime pay requirements and which are not (referred to as the "white collar exemption").
The proposal elicited 264,093 responses during the two-month comment period. There's no way to know how much, if any, of this feedback will find its way into the final rules, which should go into effect sometime next year. So it's prudent to plan ahead.
Duties vs. Titles
A key element of the proposal is to set the white collar salary threshold at the 40th percentile of "weekly earnings for full-time salaried workers." The DOL estimated this would be $970/week ($50,440 annualized) in 2016 with annual adjustments for inflation. That standard figure is more than double what it is today, at $455 per week.
Even employees earning higher amounts would generally be entitled to overtime pay unless they also come under the "white collar exemption" for jobs with "executive, administrative or professional duties." But the DOL cautioned that, "Job titles do not determine exempt status … for an exemption to apply, an employee's specific job duties and salary must meet all of the applicable requirements provided in the Department's regulations."
In the proposal, the DOL also asked for comments on whether the standard duties tests are working as intended to screen out employees who aren't bona fide "white collar exempt employees." So, be aware that there could be changes to the job duties tests coming in addition to any changes to the salary standard.
Consider Your Options
What should you do now? While keeping in mind that the final rules could be somewhat less aggressive than the proposed ones, it's a good idea to have a plan in place for dealing with the extra costs your company may incur.
Start by reviewing your payroll and identifying which nonexempt employees are paid above the current $455 per week standard, but less than the projected standard of $970 per week. Are any of them putting in more than 40 hours a week? If so, you need to determine:
Whether these jobs can be adjusted to reduce the exposure you may have to paying time-and-a-half, and
How much your payroll will go up if the overtime hours are unavoidable.
If you intend to adjust the duties of nonexempt employees to avoid overtime pay, there are various ways to handle the adjustment. You could, for example, bring part-time help on board to work the additional hours.
You could also "zero-base" each job. This means you start from the ground up and rigorously review every task that an employee handles. Is each job task truly necessary, and is the amount of time the employee takes to do each one justified?
Yet another possibility, at least on a temporary basis, would be to judiciously reassign any "exempt" (that is, executive, administrative or professional) job tasks to a worker whose exempt status is beyond question. But be careful not to overload exempt employees, as doing so could diminish their productivity.
Is a Raise More Economical?
You might also analyze whether you'd save money by giving raises to any nonexempt employees whose earnings are close to the threshold. Doing so may prevent these workers from becoming eligible for overtime pay.
For example, let's assume the proposed $970/week threshold sticks. What would happen with employees making $940/week for a 40 hour workweek while working eight hours per week of overtime?
Answer: Their $940 weekly regular earnings would be $23.50 per hour. In addition, they'd earn $282 in overtime pay ($23.50 × 8 hours × 1.5), for total earnings of $1,222.
Suppose, instead, that you raise these employees' pay to exceed the $970/week standard by giving them a $35/week raise. At $975/week, these workers would be exempt from overtime pay. So their total earnings, at $975/week, would represent a savings to the company of $247/week.
In another calculation involving the same employees, you could take the view that the nature of the job really does require 48 hours per week, and the workers are being paid appropriately. Therefore, you could translate that to a lower hourly rate.
So instead of dividing earnings of $940 by 40 hours, divide the earnings by 48 hours. That equals an hourly rate of $19.58, which would be the rate you'd use to calculate overtime pay.
Eight hours of overtime at $19.58, multiplied by 1.5, equals $235 in overtime pay. That, added to the $940 in regular earnings, would equal $1,175 per week. And if you raised the wages for those employees above $970 but below $1,175, you'd still come out ahead.
As noted, the $970 per week threshold was based on an estimate of the 40th percentile of salaried workers. The DOL could, in the face of strong pushback by employer groups that have severely criticized the proposal, change this standard. The National Federation of Independent Business, for example, predicted that the proposed regulations would "have a substantial negative impact on small employers and their employees."
There's always the chance that the DOL could implement a lower threshold, for instance, the 35th or 30th percentile. Those would lower the dollar limits to an estimated $852 and $773 per week, respectively. But you can still apply the same math principles to determine how much you'd have to pay.
Whatever approach you decide to take when the final regulations are out, communicate it clearly and carefully to employees. Otherwise, depending on how you proceed, workers may greatly overestimate the overtime they could earn — potentially leading to conflicts and a drastic drop in morale. An HR professional can assist you with both the analysis and planning for any required changes to your overtime policy.
© 2015 Maner Costerisan
Talk to Your Family about Security Online and at Home
For families with children and aging parents, it’s important to make sure everyone guards their personal information online and at home.
It may be time for “the conversation.”
The IRS, state revenue departments and the tax industry have teamed up to combat identity theft in the tax arena. Our theme: Taxes. Security. Together. Working in partnership with you, we can make a difference.
Especially in families that use the same computer, students should be warned against turning off any security software in use or opening any suspicious emails. They should be instructed to never click on embedded links or download attachments of emails from unknown sources.
Identity thieves are just one of many predators plying the Internet. And, actions by one computer user could infect the machine for all users. That’s a concern when dealing with personal financial details or tax information.
Kids should be warned against oversharing personal information on social media. But oversharing about home addresses, a new family car or a parent’s new job gives identity thieves a window into an extra bit of information they need to impersonate you.
Aging parents also are prime targets for identity thieves. If they are browsing the Internet, they made need to the same conversation about online security, avoiding spam email schemes and oversharing on social media.
They may also need assistance for someone to routinely review charges to their credit cards, withdrawals from their financial accounts. Unused credit cards should be canceled. An annual review should be made of their credit reports at annualcreditreport.com to ensure no new accounts are being opened by thieves, and reviewing the Social Security Administration account to ensure no excessive income is accruing to their account.
Seniors also are especially vulnerable to scam calls and pressure from fraudsters posing as legitimate organizations, including the Internal Revenue Service, and demanding payment for debts not owed. The IRS will never make threats of lawsuit or jail or demand that a certain payment method, such as a debit card, be made.
Fraudsters will try to trick seniors, telling them they have won a grand prize in a contest or that a relative needs money – anything to persuade a person to give up personal information such as their Social Security number or financial account information.
Some simple steps – and a conversation – can help the young and old avoid identity theft schemes and scammers.
Each and every taxpayer has a set of fundamental rights they should be aware of when dealing with the IRS. These are your Taxpayer Bill of Rights. Explore your rights and our obligations to protect them on IRS.gov.
COMMENT – Please take this very seriously. We’ve had a situation this year with a 13 year old child and identity theft. The parents are going crazy trying to straighten things out.
Plaxico Burress Takes Guilty Plea in Tax Evasion Case
BY MICHAEL COHN
Plaxico Burress, a former NFL wide receiver who played for the New York Giants, New York Jets and Pittsburgh Steelers, has pleaded guilty to tax evasion charges.
Burress was indicted in April by a New Jersey grand jury in the first prosecution under a new statute that makes a failed electronic funds transfer the same as a bad check (see Plaxico Burress Indicted in Tax and Electronic Funds Transfer Case). He admitted Monday that he failed to pay $46,000 in taxes to the State of New Jersey on $1 million in income in 2013, according to the Associated Press. Prosecutors in turn agreed to drop the charges related to the electronic funds transfer.
Prosecutors said Burress had tried to pay his 2013 state income taxes, but the money from an electronic funds transfer to cover the tax payment didn’t go through, according to the AP. Although the state tax authority tried to contact Burress about the missed payment, he did not respond.
He faces up to five years of probation when he is sentenced in February. Burress will also need to pay $56,000 in restitution and penalties and could be sentenced to up to 364 days in prison if he does not make the payment by the time his probationary period is finished.
In 2009, Burress pleaded guilty to weapons charges after he accidentally shot himself in the thigh at a New York City nightclub because a pistol he was carrying in his waistband slid down the thigh of his pants and discharged. He was sentenced to two years in prison and two years of supervised release. He served 20 months in prison.
Navigating and Automating Fast-Approaching ACA Deadlines
BY MARK STRICKER AND MARSHAL KUSHNIRUK
Are your clients prepared for the latest round of Affordable Care Act (ACA) compliance deadlines? Many have referred to this as “pay or play”—clients will either comply with the ACA’s rules or they will pay significant penalties.
No matter what you believe, or what your clients may want to do, education and action are a must, but with adherence comes the burden of changing from manual to automated processes. Here’s what you need to know about the ACA; important deadlines and how you can help your corporate clients meet productivity challenges.
ACA Deadlines and Key Components
The deadlines and important parts of the ACA depend on the size of the company and the income of its employees. Employers with 50-99 employees will need to file form 1094-C (Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns) by Feb. 28, 2016, if filing on paper, or March 31, 2016, if filing electronically. These companies also must file form 1095-C (Employer-Provided Health Insurance Offer and Coverage), which must be issued from the employer to the employee by Jan. 31, 2016.
Effective January 1, 2016, businesses with more than 50 full-time employees must offer health insurance to their employees and dependent children. The ACA dictates than an employee must work an average of 30 hours per week to be considered full time.
Businesses of this size must also meet minimum essential coverage (MEC) requirements: they must offer coverage to 95 percent of full-time employees. Under the MEC, self-only coverage is 9.5 percent or less of the employee’s income, and the plan covers at least 60 percent of plan costs.
If your clients have 50 to 99 employees, here is the potential financial impact:
Starting in 2015 – If a business fails to provide employees with the mandated Form 1095-B/1095-C and/or fails to report correct information, the penalty is up to $500 per form.
Starting in 2016 – If the business offers health insurance and does not satisfy the “affordability” or “minimum value requirements,” the company could be subject to an excise tax of up to $3,000 (minimum $250.00/month per employee) per year.
Starting in 2016 – If the business did not make a qualifying offer of insurance to at least 95% of its full-time employees or equivalents, it could be subject to an excise tax of $2,000 per employee.
If you have clients with less than 50 employees – as most firms do – there is no reporting requirement. However, if your clients have a mix of full-time and part-time people, and may reach 50 employees or are planning to be there soon, you should meet with them to assess their situation.
In addition, if a company has less than 50 full-time employees and offers health insurance to its employees, the company may be eligible for a tax credit. To qualify, make sure your clients purchase coverage through the SHOP marketplace or healthcare.gov, and that the average annualized wages of employees does not exceed $51,000. In addition, the business must pay at least 50 percent of the total cost of the insurance premiums. If eligible, the business will file tax credit using Form 8941 as part of its business tax filing. If granted credit, the amount of the credit is 50 percent of premiums paid.
Transparency: Do the Right Thing!
If you or your firm work solely on tax preparation, turning a blind eye to the ACA requirements is not advisable; you cannot sit back and do nothing just because the topic is out of your wheelhouse. Instead, let your clients know about the filing requirements. You’ll be much more admired by your clients for speaking up, and who knows … maybe you’ll even get more referrals.
Most clients are already aware of having to cover employees under the ACA for health insurance, but many businesses do not realize they also have to meet the ACA’s tax filing requirements. Each business should work with its insurance and payroll provider now to begin to gather the necessary information to prepare Forms 1094-C and 1095-C.
Here is a list of all the information required to file both forms:
List of all employees and their Social Security numbers, for which health insurance was offered.
Social Security number or date of birth, if the employee’s spouses or dependents were covered if the employer is self-insured.
The months each employee was offered insurance.
The type of insurance offered, whether the insurance was offered to just the employee, the employee and their spouse, or the employee, spouse and dependents.
The employee’s share of the lowest cost monthly premium for self-only minimum value coverage.
Advice for Clients Unwilling to Comply with ACA Deadlines
Back to the “pay or play” scenario, sometimes, no matter how hard you try, clients are going to be stubborn or hesitant to comply with ACA compliance. In this case, we recommend two approaches.
First, tell your clients why the forms are required to be filed: to help the IRS administer the healthcare tax credits and penalties given or assessed to individual taxpayers. Second, go over the consequences for non-payment. If employers do not comply with the reporting requirements, their employees could potentially file tax returns claiming the health insurance credit, and that could cost the government millions in unwarranted funds.
On top of that, there are harsh penalties if clients fail to comply. The penalty for not offering insurance for companies with more than 100 full-time employees is $2,000 per employee. Also, the penalty for not filing the information returns for forms 1094-C and 1095-C is $250 for each unfiled return.
Automating the Process
In our line of work, time is important, and that’s where automation comes in handy, saving you and your clients a lot of time.
Think about it. The IRS suggests it will take four hours to complete Form 1094-C and 12 minutes to complete each form 1095-C. So, if a company has 50 employees, the IRS suggests it would take 10 hours to complete the filings. This does not even account for gathering the information, so obviously, any automation available would be helpful.
Automation is huge for a firm because it helps clients get through this process, proving to them how valuable the firm is, while getting the firm through a necessary evil at the same time. Now is the time to evaluate ACA automation solutions from established software providers, and implementing the process and tools that will help your clients to meet ACA requirements.
Remember, the best role you can serve is advocacy. Speak up and do what you do best: serve as your clients’ trusted advisor.
Mark Stricker, CPA, is a tax partner with BIK & Co, LLP, in Palatine, Ill. Contact him at firstname.lastname@example.org. Marshal Kushniruk is executive vice president of global business development at Avalara. Contact him email@example.com.
COMMENT –I seldom post articles of this type AIMED at the CPA but felt it would be useful for all to know the issues involved from our end.
The Role of CPAs in Helping Business Clients Succeed
BY BRIAN HAMILTON
Ask any accountant in the country about “client service,” and you’ll be hard pressed to find one who does not consider it to be important.
However, when we speak about placing emphasis on serving our business clients, the conversation tends to be very rudimentary and filled with platitudes. This article is an attempt to convey what it’s really like to be a business owner, based on my own experience running companies and working with entrepreneurs across the country. My hope is that this accurate portrayal might provide some insights into how accountants can use their expertise to truly help their business clients.
People who run businesses are usually very good at a few things: They tend to very good at generating revenue and sales, very good at serving customers and retaining business, or both. Good entrepreneurs focus, rightfully so, in an almost monomaniacal way on getting customers and, once they’re in the door, serving them exceptionally well. Outside of driving revenue and serving customers, entrepreneurs and business owners also usually know their products and services cold.
What they are very rarely good at, however, is understanding finance and accounting. This is understandable. As a business owner, it is crucial to sell and to serve customers day in and day out.
However, there isn’t the same type of demand, on a day-to-day basis, to analyze and dive deep on your business’ finances. In my experience, I’ve seen that most entrepreneurs have an almost instinctual handle on their products and services. For example, if a business has lapses in its products and services or weaknesses in its sales model, most business owners know almost immediately. However, most business owners don’t have the same instinctual knack for identifying problems related to accounting and finance.
Many financial problems tend to be hidden; they lay latent for a period of time, only to come crashing suddenly down with great effect. And while some financial issues that businesses face are relatively simple and easy to diagnose, most entrepreneurs simply don’t have the technical expertise or background to recognize them.
I want to be careful not to give the impression that business owners are unsophisticated; it’s just that they’re not trained in these specific areas and their attentions are, necessarily, focused elsewhere. This is where your role as an accountant is absolutely vital to a business. By sitting with your business clients once a quarter, reviewing their financial performance and helping them to understand their finances, you can help them avoid pitfalls and uncover ways for them to make more profit.
So what are some specific areas that you might talk through with your business clients?
Here’s an example that seems almost self-evident on the surface, despite being a trap that many smart business owners fall into: Every entrepreneur knows, on some level, that they should be turning a profit. However, I’ve seen many business owners (and even people trained in finance) fall into the trap of equating profits with cash flow.
While it’s often true that net profits will eventually yield positive cash flow, this is definitely not always the case, particularly in the short run. How many times have you run into clients who grow their account receivables at such a rapid pace that they cannot pay their bills on a timely basis? I’ve seen extremely smart entrepreneurs get caught on this one. In fact, when I look back on my consulting experience, I estimate that a huge number of business failures are directly attributable to issues with their cash flow cycle.
Another example of what you might emphasize with your business clients is the importance of margin performance over dollar performance. Let’s assume for simplicity purposes that a dollar of profit equals a dollar of cash flow. If this is the case, while it’s true that more dollars of profit are always a good thing, you have to watch the gross margins and net margins as a business to be sure that the business has a reasonable, operational safety net, which is measured by margin performance. This is certainly obvious to you as a trained financial professional, but it’s a trap that many entrepreneurs fall into. And often they won’t bring these issues up without prompting. It might fall on you, as the finance person, to bring these points up proactively.
Business owners rely on you as a trusted business advisor to help them succeed. These concepts and potentially hundreds like them can help your clients succeed and, importantly, differentiate your practice from other accounting firms that don’t provide this type of guidance.
Brian Hamilton is chairman of the financial information company Sageworks.
Disclaimer: This article is for general information purposes only, and is not intended to provide professional tax, legal, or financial advice. To determine how this or other information in this newsletter might apply to your specific situation, contact us for more details and counsel.
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