PPP Loan Update: Payroll Protection Program Flexibility Act

On June 82020, President Trump signed The Payroll Protection Program Flexibility Act into law, which allows the following changes to the PPP loan program. The SBA, in consultation with Treasury, will issue rules and guidance, a modified borrower application form, and a modified loan forgiveness application implementing the amendments to the PPP made in the new law. In addition confirms that June 30, 2020, remains the last date on which a PPP loan application can be approved, the new rules will implement the following changes:

Extended Covered Period

The covered period may be extended from 8 weeks to 24 weeks: businesses with existing PPP loans may elect to keep the 8 week covered period, or may extend the covered period to 24 weeks. New borrowers who are approved after June 3, 2020 will automatically have 24 weeks to use the loan proceeds.

Payroll Percentage

The percentage of the loan that is used to determine forgiveness that must go toward payroll costs was decreased from 75% to 60%. Prior to H.R. 7010, the requirement was only that 75% of the loan that was used had to be on payroll costs. This is an important point to note, but with the generous extension of the covered period, most businesses should easily reach 60% on payroll costs.

Full Time Equivalents and Restoring Wage Levels

You now have until December 31, 2020 to restore the level of FTEs and restore their wages. This was extended from the original date of June 30, 2020.

Additionally, there is an exemption added to the FTE reduction calculation if the borrower can document the inability to hire employees who were employed as of February 15, 2020 and the inability to hire other employees with similar qualifications as of December 31, 2020. If you are unable to hire other employees by December 31, 2020 due to compliance requirements with the CDC, OSHA, or the Secretary of Health and Human Services, you will also be allowed an exemption for these employees.

Loan Terms

All PPP loans issued after June 3, 2020 will have a loan term with of a minimum of 5 years. Borrowers that have a 2 year term with their PPP loan may renegotiate the terms to follow the terms for new loans if the lender and borrower mutually agree.

H.R. 7010 also allows the deferral of payment until the date the lender receives the forgiveness amount from the SBA, which will likely be longer than the initial deferral period of 6 months.

Deferral of Payroll Taxes

Employers can now defer all of its 2020 Social Security (50% to 2021 and 50% to 2022), even if the loan is forgiven before December 31, 2020. The original Act only allowed deferral until the loan was forgiven.

Taxability of PPP Loan

There is still a major issue with the taxability of the PPP loans.  Although the PPP states that the forgivable loan amount is not taxable, the IRS has taken the position that employers cannot deduct expenses like payroll and rent that are paid with PPP funds.  The IRS claims not allowing the deductions will prevent employers from receiving a “double tax benefit.”  Members of Congress have already spoken out that it was their intent to have the forgiven loan amount be tax free while still allowing the deductions.  Without a legislative fix to this issue, employers should plan for the additional tax ramifications from the PPP loan.

Still unclear? If you have any questions, please feel free to contact us and we’ll sit down and discuss!

Kiddie tax: New hazards, new opportunities

Despite its name, the “kiddie tax” is far from child’s play. And a change made by the Tax Cuts and Jobs Act (TCJA) puts some adult teeth into the tax. Now, children with unearned income may find themselves in a tax bracket higher than that of their parents. At the same time, the TCJA creates new opportunities for family income shifting.

Income shifting discouraged

At one time, parents could substantially reduce their families’ tax bills by transferring investments or other income-producing assets to their children in lower tax brackets. To discourage this strategy, Congress established the kiddie tax in 1986. The tax essentially eliminated the advantages of income shifting by taxing all but a small portion of a child’s unearned income at his or her parents’ marginal rate.

When the kiddie tax was first enacted, it applied only to children under 14, but in 2007 Congress raised the age threshold to 19 (24 for full-time students). Note that the kiddie tax doesn’t apply to children who reach 19 (or 24, if applicable) by the last day of the tax year. In addition, the tax doesn’t apply to children who either 1) are married and file joint returns, or 2) are 18 or older and have earned income that exceeds half of their living expenses.

Tax bite bigger

Now the kiddie tax applies according to the tax brackets for trusts and estates, rather than at the parents’ marginal rate. In previous years, the kiddie tax essentially undid the benefits of shifting investment income to one’s children. By applying the parents’ marginal rate to that income, the tax result was about the same as if the parents had retained ownership of the assets. 

But the TCJA’s approach can push children into a tax bracket higher than that of their parents in many cases. That’s because, for 2019, the highest marginal tax rate for trusts and estates — currently, 37% — kicks in when taxable income exceeds $12,750. For individuals, that rate doesn’t apply until taxable income reaches $510,300 ($612,350 for joint filers).

Planning opportunity

Although the new kiddie tax rules can lead to harsh consequences for many families, they may create tax-saving opportunities for higher-income taxpayers. Because the tax is now applied using the progressive rate structure for trusts and estates, rather than the parents’ marginal rate, parents can shift a limited amount of investment income to their children at lower tax rates. For example, parents in the 37% tax bracket can shift income up to $14,950 (the $2,200 unearned income threshold plus $12,750) before the 37% rate applies.

There are also several ways to shift income to your kids without triggering kiddie tax issues. For example, you can:

  • Transfer investments that emphasize capital appreciation over current income, allowing the child to defer income until the kiddie tax no longer applies,
  • Transfer tax-deferred savings bonds,
  • Transfer tax-exempt municipal bonds,
  • Contribute to 529 college savings plans, and
  • Hire your kids.

Employing your children can be beneficial because earned income isn’t subject to kiddie tax; plus, your business can deduct the expense.

Look before leaping

Depending on your circumstances, shifting income to your children may reduce your tax bill. But given the risk that income-shifting may increase it, look closely at the kiddie tax before you attempt this strategy.

Do you need to file gift tax returns?

Avoid these common mistakes

For 2019, the lifetime gift and estate tax exemption has reached a whopping $11.40 million ($22.80 million for married couples). As a result, few people will be subject to federal gift taxes. If your wealth is well within the exemption amount, does that mean there’s no need to file gift tax returns? Not necessarily. There are many situations in which it’s necessary (or desirable) to file Form 709, “United States Gift (and Generation-Skipping Transfer) Tax Return” — even if you’re not liable for any gift taxes.

All gifts are taxable, except . . .

The federal gift tax regime begins with the assumption that all transfers of property by gift (including below-market sales or loans) are taxable, and then sets forth several exceptions. Nontaxable transfers that need not be reported on Form 709 include:

  • Gifts of present interests (as opposed to future interests; see below) within the gift tax annual exclusion amount ($15,000 per recipient in 2019),
  • Direct payments of qualifying medical or educational expenses on behalf of an individual (see “Medical and educational expenses: Direct payments only”),
  • Gifts to political organizations and certain tax-exempt organizations,
  • Deductible charitable gifts, and
  • Gifts to your U.S.-citizen spouse, either outright or to a trust that meets certain requirements, or gifts to your noncitizen spouse within a special annual exclusion amount ($155,000 for 2019).

If all your gifts for the year fall into these categories, no gift tax return is required. But gifts that don’t meet these requirements are generally considered taxable — and must be reported on Form 709 — even if they’re shielded from tax by the lifetime exemption.

Traps to avoid

If you make gifts during the year, consider whether you’re required to file Form 709. And watch out for these common traps:

Future interestsGifts of future interests, such as transfers to a trust, aren’t covered by the gift tax annual exclusion, so you’re required to report them on Form 709 even if they’re less than $15,000. Be aware, however, that it’s possible to have gifts in trust meet the present interest requirement by giving beneficiaries Crummey withdrawal powers (the right to withdraw a contribution for a limited time after it’s made).

Spousal giftsIf you make a gift to a trust for your spouse’s benefit and want the gift to qualify as a nontaxable transfer, the trust must 1) provide that your spouse is entitled to all the trust’s income for life, payable at least annually, 2) give your spouse a general power of appointment over its assets and 3) not be subject to any other person’s power of appointment. Otherwise, the gift must be reported. And be careful with gifts to a noncitizen spouse: If they exceed the $155,000 annual exclusion, they must be reported regardless of whether they’re outright gifts or gifts in trust.

Gift splittingSpouses may elect to split a gift to a child or other donee, so that each spouse is deemed to have made one-half of the gift, even if one spouse wrote the check. This allows married couples to combine their annual exclusions and give up to $30,000 to each recipient in 2019. To make the election, the donor spouse must file Form 709, and the other spouse must sign a consent or, in some cases, file a separate gift tax return. Keep in mind that, once you make this election, you and your spouse must split all gifts to third parties during the year.

529 plansIf you make gifts to a 529 college savings plan, you have the option of bunching five years’ worth of annual exclusions into the first year. So, for example, you can contribute $75,000 to the plan ($150,000 if you and your spouse split the gift) and treat the gift as if it were made over the next five years for annual exclusion purposes. To take advantage of this benefit, you must file an election on Form 709.

Consider filing voluntarily

It may be a good idea to file a gift tax return even if it’s not required. For example, if you make annual exclusion gifts of difficult-to-value assets, such as interests in a closely held business, a gift tax return that meets “adequate disclosure” requirements will trigger the three-year limitations period for audits.

Suppose you transfer business interests valued at $10 million over a period of years, through a combination of tax-free gifts to your spouse and annual exclusion gifts to your children. If the IRS finds that the interests were worth $15 million, which exceeds the lifetime exemption amount, it can assess gift taxes plus penalties and interest. If you don’t file regular gift tax returns, the IRS has unlimited time to challenge the values of your gifts.

Stay on the right side of the IRS

A smart gifting strategy continues to offer significant benefits for you and your loved ones. However, to keep from running afoul of the IRS, it’s critical to know when you need to file a gift tax return. We can help you in that determination.

Sidebar: Medical and educational expenses: Direct payments only

Paying tuition or unreimbursed medical expenses on behalf of a child or other loved one is a great strategy for making unlimited tax-free gifts without using up any of your $15,000 annual exclusion or $11.40 million lifetime exemption. But it works only if you make the payments directly to a qualifying educational institution or medical provider.

A common mistake is for a parent or grandparent to advance the child the funds he or she needs to pay the expenses or to reimburse him or her for expenses that have already been paid. These payments are treated as gifts to the child, which must be reported on Form 709 if they exceed the annual exclusion amount.

Have questions? Contact us and we’ll talk it through!

Charitable IRA rollover eases tax pain of RMDs

One downside of contributing to a traditional IRA is that, once you reach age 70½, you must begin taking required minimum distributions (RMDs) — and pay taxes on those distributions — whether you need the money or not. But if you’re charitably inclined, you can use a qualified charitable distribution (QCD) to avoid taxes on up to $100,000 in RMDs per year. 

Also known as a “charitable IRA rollover,” a QCD is a direct transfer from your IRA to an eligible charity. It counts as a distribution for RMD purposes, but it’s excluded from your income. And it has certain tax advantages over traditional charitable contributions. 

Advantage of QCDs over ordinary donations

When you receive an RMD, it’s taxable to the extent it’s attributable to deductible contributions and earnings on those contributions. (Amounts attributable to nondeductible contributions are tax-free.) 

One strategy for reducing these taxes is to donate the taxable portion (or an equivalent amount) to charity. If the donation is fully deductible, it will offset the taxable income that’s generated by the distribution. Depending on your tax situation, however, this strategy may be less effective than a QCD:

  • A charitable deduction will benefit you only if you itemize. And that’s less likely now that the Tax Cuts and Jobs Act (TCJA) has nearly doubled the standard deduction.
  • Even if you itemize, adjusted gross income (AGI) limits may reduce your charitable deductions. For instance, deductions for cash gifts to public charities are currently limited to 60% of AGI. 
  • By boosting your income, IRA distributions may trigger AGI-based rules that punch up certain taxes or deflate the benefits of certain tax breaks.

A QCD avoids these issues because it bypasses your income altogether. It allows you to take the equivalent of a charitable deduction — regardless of your income level or whether you itemize — and it won’t increase your AGI. Another advantage of QCDs is that they’re deemed to come from the taxable portion of your IRA first, increasing the portion of the remaining balance that’s nontaxable.

QCD requirements

If you’re considering a QCD, you must meet several requirements:

  • You must be at least 70½ at the time of the distribution. (Reaching that age during the tax year isn’t enough.)
  • The IRA must distribute the funds directly to an eligible charity — generally, a public charity, private operating foundation or “conduit” private foundation.
  • The donation must be “otherwise deductible.” In other words, it would have been fully deductible (disregarding AGI limits) had you funded it with non-IRA assets. If you receive something of value in exchange for your gift (tickets to an event, for example), it’s not a QCD.
  • The distribution must be “otherwise taxable.” It’s not a QCD to the extent it would be tax-free if distributed to you directly.

In addition, QCDs are subject to the same substantiation requirements as other charitable donations.

A tax-efficient strategy

If you don’t need your IRA funds for living expenses and you plan to donate to charity anyway, a QCD offers a tax-efficient strategy for satisfying your RMD requirements. The TCJA may enhance the advantages of QCDs because it increased standard deduction amounts, but keep in mind that these amounts are scheduled to return to their previous levels in 2026. Contact us for help determining the best RMD and charitable giving strategies for you.

Could Client Accounting Services improve your business?

In a small or growing business, you most likely wear many hats. You’re the leader, you’re the HR department, you could be the entire sales team and you may also be managing the books. A study done by Wasp Barcode stated that the top accounting challenges facing small businesses today are: Accounts Receivable, Cash Flow, Paperwork, Closing the books each month, and Payroll Management.  

Did you know? More than 50% of small businesses have the CFO or Controller as the one managing all of these accounts! In order to ensure accuracy in these areas, segregation of duties and timeliness is key.  Handling all these duties, all while running the business, can be daunting. More often than not, the accounting gets pushed to the wayside, leaving companies scrambling at year end to get everything put together.

Are you a candidate?
Before you think about making a change or adding another service, it’s important to see if what you’re doing right now could be streamlined, automated or outsourced. 

  • Do you have difficulty monitoring your payables or receivables?
  • Are you struggling to keep up with compliance and financial reporting?
  • Are you looking for improved financial forecasting and strategic planning?

Our Client Accounting Services (CAS) program will utilize the latest technology and cloud based solutions to streamline your accounting functions, providing you real-time access to your information.   Every business is different, so we know there is no “one size fits all” CAS plan. We personalize our services to fit you and your distinct business needs.  

What exactly is CAS? Some of the services provided in our CAS package can include:

  • Keeping track of your receivables→  Know what’s owed to you and get notified when income is past due
  • Transaction processing and bill payment
  • Go Paperless→  Our cloud based storage software will link receipts to transactions, reducing the risk of missing/misplaced documents
  • Timely account reconciliations and financial statement preparation→   Know how much cash/credit you really have available
  • Payroll and payroll compliance
  • Periodic tax payments (Sales Tax, CAT Tax, etc.)
  • Outsourced CFO and business advisory services

Client Accounting Services will make strategic tax planning easier, as you will always have up-to-date access to your information.  Included in your custom CAS package is a review of your financial information by a CPA who will be analyzing the data to uncover trends, anomalies, new areas to pursue (if desired) and to provide input on possible strategies to help improve your business.

We’ll help you improve your segregation of duties, reduce the risk of misappropriation of assets and make for a better overall internal control structure.  With Client Accounting Services, leave the back office work to us, so you can focus on moving your business forward. As you grow, we are here to grow with you, every step of the way.

Ready to learn more or get started now? Contact us for a free review to see if your business would benefit.

How the sweeping tax reform will affect you or your business.

On December 22nd, 2017, the most sweeping tax reform in more than 30 years was signed by President Trump.  There are many updates to both individual and business tax law. Below are summaries of the Act’s major tax provisions and changes that will impact individuals, businesses and foreign operations. If you have any questions or concerns as to your household or business, please give us a call at 216.524.8900.

INDIVIDUAL PROVISIONS

PROVISION SUMMARY EXPLANATION
Individual Tax Rates Seven tax rates of 10%, 12%, 22%%, 24%, 32%, 35%, and a new top rate of 37%. The 37% top rate is slightly lower than the current top tax rate.

Rate          Joint Return                       Single

10%          $0 – $19,050                   $0 – $9,525

12%          $19,050 – $77,400         $9,525 – $38,700

22%          $77,400 – $165,000       $38,700 – $82,500

24%          $165,000 – $315,000     $82,500 – $157,500

32%          $315,000 – $400,000     $157,500 – $200,000

35%          $400,000 – $600,000    $200,000 – $500,000

37%          Over $600,000                Over $500,000

Standard Deduction $24,000 for married couples filing joint, $12,000 for single taxpayers and $18,000 for head of household.
Pass-Through Tax Rates Adds a new business deduction of 20% of qualified pass-through business income subject to a number of limitations and qualifications.
Child/Non-Child Dependent $2,000 per child credit with up to $1,400 being refundable. Credit begins to be phased-out for families making over $400,000.  Additionally, a $500 nonrefundable credit is available for certain non-child dependents.
Itemized Deduction for State Income Taxes and Property Taxes The bill sets an overall cap on these deductions at $10,000 annually and allows taxpayers to decide between property taxes, income taxes, or sales tax for this $10,000 limit.  Additionally, a provision was added so there could be no prepayment of future year’s income taxes in 2017.
Mortgage Interest Limits the mortgage interest deduction for mortgages exceeding $750,000 on new mortgages of principal residences or second homes.  The effective date is for loans on or after 12/15/2017.Deduction for “home equity interest” is repealed for tax years after 2017.
Charitable Contributions Increases the AGI threshold for charitable contributions to 60% from 50%.Repeals the 80% deduction for amounts paid for the seating rights for college sporting events.
Casualty Losses Itemized deduction repealed in 2018, except for losses in declared disaster areas.
Medical Expenses Medical expense deduction retained. 7.5% of AGI applies for 2017 and 2018, and rises to 10% of AGI thereafter.Also, eliminates individual ACA mandate for health insurance. Effective after 12/31/2018.
Alimony Repeals the alimony deduction for the payer and inclusion in income for the recipient.Effective date would be for divorce decrees executed after 12/31/2018.
AMT AMT would be retained but the exemption would be increased to $109,400 for married couples and to $70,300 for single taxpayers.Additionally, the AMT exemption would begin to phase-out at $1,000,000 for married couples and $500,000 for single filers.Applies in 2018.
401(k)/IRA Contributions Retains current law regarding 401K and IRA plans.
ROTH IRA Eliminates the option to re-characterize a ROTH IRA conversion back to a traditional IRA.  Effective for 2018.
Personal Exemptions The deduction for personal exemptions is suspended for tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026.
Capital Gains Retains current treatment and rate structure for capital gains and qualified dividends.
Miscellaneous Itemized Deductions The deduction for miscellaneous itemized deductions subject to the 2% floor is suspended for tax years beginning after Dec. 31 2017 and before Jan. 1, 2026.  These deductions include employee business expenses, tax preparation fees and investment advisory fees.
Moving Expenses For tax years beginning after Dec. 31, 2017 and before Jan. 1, 2026, the deduction for moving expenses is suspended, except for members of the Armed Forces on active duty who move pursuant to a military order and incident to a permanent change of station.
529 Plans For distributions after Dec. 31, 2017, “qualified higher education expenses” also includes tuition at an elementary or secondary public, private, or religious schools up to a $10,000 limit per tax year.
FIFO Stock Sale Proposal The proposed law on first-in-first-out stock sales has not been enacted.  Taxpapyers can still specifically identify stock lots when selling their shares to take advantage of potential losses
Estate Tax Exemption Estate tax exemption doubled from current levels. Effective for decedents dying after 12/31/2017.

BUSINESS PROVISIONS 

Corporate Tax Rates Regular corporate rate reduced to a flat 21%,Personal Service Corporation rate reduced to flat 21%.Effective in 2018.
Corporate AMT Corporate AMT is repealed. Effective in 2018. 
Interest Deduction for Companies with over $25 million Limited in their interest deduction based on 30% of adjusted taxable income. Any unused interest expense above 30% threshold would be disallowed, and would carry forward for an unlimited amount of years. There are exceptions that apply for “real estate businesses” and for “floor plan financing” for auto dealers.Effective in 2018.
Bonus Depreciation 100% bonus depreciation for additions placed in service after September 27, 2017. Applies to new and used property.
Section 179 Expensing Limitation would be increased from $500,000 to $1,000,000.Phase-out amount for annual additions would be increased from $2,000,000 up to $2,500,000.Effective in 2018.
Net Operating Losses (NOLs) Disallows NOL carrybacks except for a special 2 year carryback for farming.NOLs can be carried forward indefinitely but will be limited to 80% of taxable income.Effective in 2018.
Accounting Method Reforms for Small Businesses ($25 million or less of annual gross receipts) Permits use of the cash method (even if the small business had inventories).Removes the Uniform Cost Capitalization for Inventory (UNICAP) rules for small businesses.Permits use of the completed contract method or other method for long-term contracts for contractors.Effective in 2018.
Like-Kind Exchanges (§1031 Exchanges) Limits the use of like-kind exchanges to real property and eliminates the use of like-kind exchanges with personal property.Applies to exchanges after December 31, 2017.
Luxury Auto Limits For passenger automobiles placed in service after Dec. 31, 2017, in tax years ending after that date, for which the additional first-year bonus depreciation deduction not claimed, the maximum amount of allowable depreciation is increased to: $10,000 for the year in which the vehicle is placed in service, $16,000 for the second year, $9,600 for the third year, and $5,760 for the fourth and later years in the recovery period.
Domestic Production Activities Deduction For tax years beginning after Dec. 31, 2017, the DPAD is repealed.
Employer Fringe Benefits For amounts incurred or paid after Dec. 31, 2017, deductions for entertainment expenses are disallowed, eliminating the subjective determination of whether such expenses are sufficiently business related; the current 50% limit on the deductibility of business meals is expanded to meals provided through an in-house cafeteria or otherwise on the premises of the employer; and deductions for employee transportation fringe benefits (e.g., parking and mass transit) are denied, but the exclusion from income for such benefits received by an employee is retained.
Excessive Employee Compensation For tax years beginning after Dec. 31, 2017, the exceptions to the $1 million deduction limitation for commissions and performance-based compensation are repealed. The definition of “covered employee” is revised to include the principal executive officer, the principal financial officer, and the three other highest paid officers. If an individual is a covered employee with respect to a corporation for a tax year beginning after Dec. 31, 2016, the individual remains a covered employee for all future years.Under pre-Act law, exceptions applied for: (1) commissions; (2) performance-based remuneration, including stock options; (3) payments to a tax-qualified retirement plan; and (4) amounts that are excludable from the executive’s gross income.

Employer-Paid Family and Medical Leave

For wages paid in tax years beginning after Dec. 31, 2017, but not beginning after Dec. 31, 2019, the Act allows businesses to claim a general business credit equal to 12.5% of the amount of wages paid to qualifying employees during any period in which such employees are on family and medical leave if the rate of payment is 50% of the wages normally paid to an employee. The credit is increased by 0.25 percentage points (but not above 25%) for each percentage point by which the rate of payment exceeds 50%.

Dividends-Received Deduction

For tax years beginning after Dec. 31, 2017, the 80% dividends received deduction is reduced to 65%, and the 70% dividends received deduction is reduced to 50%.

Partnership Technical Termination

For partnership tax years beginning after Dec. 31, 2017, the Code Sec. 708(b)(1)(B) rule providing for the technical termination of a partnership is repealed. The repeal doesn’t change the pre-Act law rule of Code Sec. 708(b)(1)(A) that a partnership is considered as terminated if no part of any business, financial operation, or venture of the partnership continues to be carried on by any of its partners in a partnership. (Code Sec. 708(b), as amended by Act Sec. 13504)

FOREIGN OPERATIONS

Repatriation/Foreign Source Dividends

Under pre-Act law, U.S. citizens, resident individuals, and domestic corporations generally were taxed on all income, whether earned in the U.S. or abroad. Foreign income earned by a foreign subsidiary of a U.S. corporation generally was not subject to U.S. tax until the income was distributed as a dividend to the U.S. corporation.For tax years of foreign corporations that begin after Dec. 31, 2017, and for tax years of U.S. shareholders in which or with which such tax years of foreign corporations end, the current-law system of taxing U.S. corporations on the foreign earnings of their foreign subsidiaries when these earnings are distributed is replaced. The Act provides for an exemption by means of a 100% deduction for the “foreign-source portion” of dividends received from specified 10% owned foreign corporations by domestic corporations that are U.S. shareholders of those foreign corporations.No foreign tax credit or deduction is allowed for any taxes paid or accrued with respect to a dividend that qualifies for the deduction. There is also a provision in the Act that disallows the deduction if the domestic corporation did not hold the stock in the foreign corporation for a long enough period of time.

Taxation of Foreign Earnings and Profits

Under the Act, U.S. shareholders owning at least 10% of a foreign subsidiary generally must include in income, for the subsidiary’s last tax year beginning before 2018, the shareholder’s pro rata share of the net post-86 historical E&P of the foreign subsidiary to the extent such E&P has not been previously subject to U.S. tax.The portion of the E&P comprising cash or cash equivalents is taxed at a reduced rate of 15.5%, while any remaining E&P is taxed at a reduced rate of 8%.At the election of the U.S. shareholder, the tax liability is payable over a period of up to eight years The payments for each of the first five years equals 8% of the net tax liability. The amount of the sixth installment is 15% of the net tax liability, increasing to 20% for the seventh installment and the remaining balance of 25% in the eighth year.

 

 

You should utilize these tax-saving strategies before it’s too late!

by: Franco DiLiberto, CPA

Time is flying, and the end of the year is quickly upon us.  With distractions like the holiday season, it can be easy for individuals to lose focus on opportunities to reduce your tax bill in the spring.  To assist you, we have compiled a list of our Top 7 tax saving strategies for you to consider before the end of the year.  Do not miss out on these opportunities!

  1. Contribute to your 401(k), Traditional IRAs, and Other Tax-deferred Retirement Accounts.

It is never too early to start saving for retirement, and tax-deferred retirement accounts are a great way to simultaneously grow your money and lower your tax liability.  If you work for an employer that provides a 401(k), it is highly recommended to contribute as much as you can afford up to a limit of $18,000 in 2016 for individuals under the age of 50.  Individuals aged 50 or older can contribute an additional $6,000, which is known as a catch-up contribution.  If you cannot afford to contribute the maximum, aim for contributing an amount that will be fully matched by your employer.  For employees, the 401(k) deferral due date is the date of the last paycheck for 2016 or December 31, 2016.

Traditional IRAs are another great tax-saving retirement vehicle, and unlike 401(k) plans, anyone is eligible to participate.  For 2016, the maximum contribution is $5,500 for individuals under the age of 50.  For individuals aged 50 or older, an additional catch-up contribution of $1,000 is also permitted for a total deduction of $6,500.  For 2016, the deadline to make this contribution is April 17, 2017, and no extension is permitted.  If you are setting up a new IRA, applications postmarked by April 17, 2017 will be accepted by the IRS.  However, if you or your spouse are covered by a retirement plan at work, exceeding certain income thresholds disallows the deductibility of these traditional IRA contributions.  If you are single or head of household, the deduction is fully disallowed if your modified adjusted gross income reaches $71,000.  If you are married filing jointly, the income phase out level is $118,000.  Finally, if you are married filing separately, the phase out amount is merely $10,000.  You are not required to make regular minimum distributions from a traditional IRA until you reach the age of 70 ½.

For self-employed individuals or small business owners, two additional retirement vehicles to consider are the Simplified Employee Pension (SEP) IRA and the Savings Incentive Match Plan for Employees (SIMPLE) IRA.  An important distinction between these two options is that contributions to a SEP IRA are only permitted by the employer, while a SIMPLE IRA allows employees to contribute as well.  For 2016, the maximum contribution to a SEP IRA is 25% of business income up to a cap of $53,000.  Therefore, SEP IRAs allow much higher contributions than 401(k) or traditional IRAs.  The maximum contribution for an employee in a SIMPLE Plan is $12,500 and a $3,000 catch-up for those employees aged 50 or older.

  1.  Open up a Health Savings Account

Now is a great time to consider opening a health savings account (HSA).  Contributions made to HSAs are fully deductible on your individual tax returns.  However, not everyone is eligible to participate in a HSA.  To be eligible, you must be covered by a high-deductible health plan (HDHP).  A HDHP is a plan with a deductible of at least $1,300 for single coverage and $2,600 for family coverage.  You are not eligible if any of the following applies:

  • Your health insurance plan is not an HDHP
  • You have health coverage in addition to the HDHP, with limited exceptions
  • You are eligible as a dependent on someone else’s tax return
  • You are enrolled in Medicare
  • You or your spouse have health coverage under a flexible spending account (FSA)

If you meet these requirements, you are eligible to open a HSA.  For 2016, the maximum contribution for single coverage is $3,350 and $6,750 for family.  Under the last month rule, if you are eligible and open up your HSA by December 1, then you can contribute the maximum amount for the entire year rather than prorated by month.  The due date for HSA contributions is April 17, 2017 and no extension is permitted.  

  1.  Take Capital Losses in 2016

Tax loss harvesting or selling underperforming investments before year end allows taxpayers to take capital losses in order to lower tax liability.  These losses can used to offset dollar for dollar any capital gains realized throughout the year.  Because December 31st falls on a Saturday in 2016, the deadline to sell investments to lock in losses is December 30th.  If your total capital losses exceed your capital gains, you are allowed to deduct up to a maximum of $3,000, and the remaining loss is carried forward to next year.  Tax loss harvesting is especially helpful to assist higher income taxpayers who are subject to the 3.8% Net Investment Income Tax.  If you are expecting large capital gains for 2016, then be sure to consider taking losses before the calendar turns to 2017.

  1.  Bunch your Schedule A Deductions

Similar to taking your capital losses at the end of the year, another strategy is to make payments before year end to maximize your itemized deductions on Schedule A.  Taxpayers who itemize are aware of deductions such as:

  • Medical costs
  • State and local income taxes
  • Mortgage interest
  • Real estate taxes
  • Charitable contributions
  • Other miscellaneous deductions.

Depending on your income and deduction levels, it may be advantageous for you to push your deductions into one tax year rather than spread evenly over two years.  Alternative minimum tax (AMT) is another area to consider when bunching itemized deductions since state, local, and real estate taxes are not deductible under AMT.  If bunching the deductions in 2016 is beneficial, be sure to issue the checks for real estate taxes and any state and city 4th quarter estimates before the end of the year.

Also, do not forget about charitable contributions.  For all cash and non-cash contributions of $250 or more, the IRS requires a signed letter from the charity specifically stating the name of the organization, the amount of the contribution, and that no goods or services were provided in return for the contribution.  Additionally, the IRS allows taxpayers to donate investments directly from their investment accounts.  If the donated asset was held for more than one year, you will receive the fair market value for the deduction.  In addition, you avoid any capital gains on this investment.  It is important to plan your costs now rather than scramble in late December.

  1.  Pay your 4th Quarter Estimates

If you were set up to pay federal, state, or city estimated taxes for 2016, be sure to make these payments in a timely manner.  The due date for making 4th quarter estimates is January 16, 2017.  However, as previously discussed, if you would like the itemized deduction for state and local income taxes on Schedule A, then the state and local estimates need to be paid by December 30th.  Paying estimates are important to not only reduce tax liability in the spring, but also to avoid any penalties for underpaying estimated tax during the year.  We are ready to assist you with income projections and estimated taxes for your specific tax situation.

  1.  File Timely and Apply for Direct Deposit

Be sure to organize your tax documents and send to your accountant as soon as possible in the spring.  The vast majority of forms, including W-2s, 1099s, and 1095s, are due to employees by January 31, 2017.  Getting your documents in early, especially through electronic delivery, assures your taxes will be filed timely, and, if applicable, you will receive your refund quicker.  Also, direct deposit of refunds is another method to ensure quicker processing of your applicable refunds.

Don’t wait until the end of the year to start thinking about these moves!  Whether you’re a current client or prospect, our team of experts will discuss the best options for you and your family.  If you have questions on any of these deductions or would like to discuss your specific individual situation, contact us by email at info@hobe.com or call at 216.524.8900.  

Businesses should utilize these tax-saving strategies before it’s too late!

by: Franco DiLiberto, CPA

The end of the year is quickly approaching and that means businesses and business owners should be thinking about taxes.  Businesses have many money-saving strategies at their disposal and many times it’s just a matter of scheduling a meeting with an advisor to discuss options.  As always, the sooner you can initiate these strategies, the better as the holidays will be here soon.

It’s for this reason, that we have put together our list of the Top 5 tax-saving strategies that businesses should be considering:

  1.  Defer Income and Accelerate Deductions

Businesses need to evaluate their current and future tax situation to decide whether or not to defer income or accelerate deductions. If possible and reasonable, deferring income and accelerating deductions for business owners is an effective way to reduce taxable income for the current year.  If you expect to be in a similar or lower tax bracket in 2017, you may want to consider delaying billings and sending invoices to customers until 2017.  

In addition, paying off and prepaying certain bills for cash basis businesses is another way to lower income in the current year.  

  1.  Make a Purchase to Utilize Section 179 and Bonus Depreciation

Yes, the highly popular accelerated depreciation methods of Section 179 and bonus depreciation offer tremendous tax savings for businesses.  The Section 179 deduction was permanently extended in 2016, and bonus depreciation was extended through 2019.  

Section 179 allows businesses to expense the cost of new and used qualified property that is purchased and placed into service in the current tax year.  Bonus depreciation is a 50% depreciation deduction on qualified new property purchased and placed into service in the current tax year.

The maximum Section 179 deduction allowed for 2016 remains at $500,000 and phase out limitations occur if asset purchases exceed $2 million.  For instance, buying a heavy SUV, pickup truck, or van before year end is an option for business owners to reduce their taxable income.  

To qualify for a full or partial Section 179 expense, the heavy vehicle must weigh over 6,000 pounds and be used at least 50% in the business.  Also, the vehicle can be bought outright or financed with certain leases and loans.

  1.  Utilize the “De Minimis Safe Harbor” Election

For tax year 2016, the IRS allows businesses to immediately expense the cost of tangible property below the threshold of $2,500 for businesses without an audited financial statement.  The threshold is $5,000 for businesses with an audited financial statement.  This threshold reduces the administrative burden for small businesses to comply with capitalization requirements.  In addition, this new tax relief allows businesses to immediately deduct assets that were traditionally capitalized, such as computers and high-end furniture.

Before year end, businesses should review their capitalization policies and consider documenting the $2,500 safe harbor election policy.  Also, assuming the safe harbor election is made, businesses should review their asset purchases to ensure that all items under $2,500 have been properly expensed rather than capitalized or included in Section 179 or bonus depreciation.

  1.  Research & Development Credit

The R&D credit was permanently extended in 2016, and it continues to offer tax incentives to business innovations.  Expenses associated with qualified research is eligible for this credit.  Qualified research is defined as developing or improving a business component with regard to its performance, functionality, reliability and quality.  The business component must be intended for sale, lease, or license.  Business owners should consider this credit and also be aware that, for 2016, small businesses with less than $50 million in sales may claim the credit against alternative minimum tax liability (AMT), which eliminates a major restriction on the use and applicability of this credit in the past.

  1. Ohio Business Deduction and 3% Business Tax Rate

For Ohio businesses, do not forget about the 100% business deduction for 2016.  The deduction is limited to $250,000 for single and married filing joint taxpayers and limited to $125,000 for married filing separate.  Eligible individuals for this deduction are owners and investors in Ohio businesses structured as sole proprietorships and pass-through entities, including partnerships, S-Corporations, and limited liability companies.  

In addition, Schedule E rental properties are eligible for this deduction.  Finally, any potential business income is taxed at a maximum 3% business tax rate, providing further relief to taxpayers.

Don’t wait until the end of the year to identify which options you would like to take for your business!  Whether you’re a current client or prospect, our team of experts will discuss the best options for your business.  If you have questions on any of these deductions or would like to discuss your specific business situation, contact us by email at info@hobe.com or call at 216.524.8900.  

Mid-Year Tax Planning

by: Kassie Armstrong

Summer is here and you’re most likely thinking about upcoming vacations, weddings, and pool parties! What you’re probably not thinking about is taxes–but maybe you should be. Here are a few things that you can do now that will help ease the burden of dealing with taxes at year end:

Adjust your withholding
If you’re getting married, divorced, or having a baby this year, all these life changes can affect your taxes. Changing your W-2 withholding or exemptions is fairly simple, just stop by human resources or your payroll department and submit a new W-4. Many employers allow you to do this online as well.

Evaluate estimated taxes
Since the year is almost half over already you should have a good idea of what your total income will be for the year. If you think your income will change significantly from prior year, you should adjust your estimated tax to prevent a big over payment or underpayment and penalties at tax time.

Get organized
Set up a tax folder and start gathering all your relevant tax documents in one place so you won’t have to hunt for them later. Keep charitable contribution receipts, unreimbursed medical expenses, business expenses, and other pertinent tax information. This will assist you in filling out that tax organizer at the beginning of next year.

Hire a tax professional
Summer is typically a little slower than during the busy filing season and tax professionals are more willing to take on new clients and spend some time on tax planning strategies.

Feeling overwhelmed or don’t have the time to take a quick peek? Give us a call at 216.524.8900 or fill out our contact form. One of our tax experts can get you organized and put a plan together to make sure you’re not scrambling at the end of the year!

Important rules that every non-profit volunteer should know

by: Melissa Love, CPA

Most non-profit organizations, regardless of size, couldn’t operate successfully without volunteers.  Sure, some of the larger ones have paid employees too, but many have governing bodies made up entirely of volunteers.   Without relying on these individuals, many organizations simply could not afford to present programs, raise funds or properly serve their members or community in a way that serves the intended purpose or mission.  According to the IRS, 85% of all charities operate with no paid employees and rely solely on volunteers.

Are there downsides to drawing from this well of free labor?  Unfortunately, yes.  Charities are often victims of theft, fraud, and improper governance due to the acts of dishonest, careless or unqualified volunteers.  So it’s very important to be selective and maintain a responsible governing body.

Even the best volunteers have limited availability.  Life happens.  People are contributing their spare time, which is sometimes scarce when also managing a job or family. Because of this, we often see issues arise during periods of Board transition. Lack of communication between incoming and outgoing members coupled with the possibility of key positions being left vacant can cause gaps in proper governance.

Non-profit organizations are often left scrambling to pick up the pieces after the IRS has notified them of a revoked charitable status, improperly classified employee, non-deductible expense, or taxable income resulting from an unrelated business activity.  While some non-profit organizations are blessed with volunteers who are well suited to navigate the necessary applications, filing requirements and ongoing compliance required to keep their non-profit status with the IRS, many are not.

Are you currently a volunteer?  Here are some specific areas of concern regarding the governance of non-profit organizations that you should be aware of when serving as a volunteer or on a Board:

Maintain your compliance

Each state has different filing requirements to maintain non-profit status.  Ohio requires that all charitable organizations file the Articles of Incorporation with the Ohio Secretary of State along with a code of regulations under which the organization will govern.  After the initial filing, a Statement of Continued Existence must be filed with the Ohio Secretary of State every 5 years to avoid cancellation of the Articles of Organization.  Many Ohio charities are also required to file an annual report with the Ohio Attorney General to ensure their compliance with various requirements.

Stay organized   

Keep on file all organization documents of the non-profit, including the Articles of Organization, Charter, application for tax-exempt status with the IRS (Form 1023 or 1024) and the Determination Letter from the IRS.  For many public charities, these items must be available for public inspection.

Be aware of Form 990

Form 990 (990-EZ, 990-N, 990-PF, etc.) is the annual Return of Organizations Exempt from Income Tax.  The return is due the 15th day of the 5th month following the end of the organization’s taxable year.  If the organization fails to file Form 990 for three consecutive years, the IRS will revoke the tax-exempt status.

Keep your records

Proper recordkeeping should be maintained for all activities of the non-profit organization.  This includes detail for all funds travelling into and out of the non-profit, along with any employment records, donor information and amounts, etc.  Especially important are receipts for reimbursed expenses to volunteers and employees.  Improper recordkeeping could lead to the IRS disallowing the deductions and treating the reimbursement as taxable compensation to the volunteer.  These records should be kept for a minimum of 3 years following the filing of the Form 990 return with the IRS.

Understand taxable income

Although a group is deemed a non-profit organization by the IRS, this does not mean it avoids paying income tax altogether.  Income earned by the organization not substantially related to its exempt purpose may be taxable to the organization as unrelated business taxable income.  There are additional filing requirements to the IRS and the entity could be required to make estimated tax payments.

Know volunteer tax deductions

Expenses not reimbursed by the non-profit organization to its volunteers may be deductible on the volunteer’s personal income tax return as a charitable donation.  The value of the volunteer’s time and services is not deductible, but other non-reimbursed expenses, such as mileage and other travel/meal costs could be deductible.  Careful consideration must be given to ensure gifts/reimbursements to volunteers do not constitute compensation.

Both the Ohio Attorney General and the IRS have resources available on their websites to assist non-profit organizations and their board members to adopt sound governing practices to maintain their tax-exempt status and continue providing their charitable purpose in the most effective manner.

Navigating the rules of operating a non-profit organization can be a daunting task.  Our team of experts can work with you if you require any of the following:

  • Financial recordkeeping assistance
  • Help maintaining (or reinstating) non-profit status with the IRS or Ohio Attorney General
  • Guidance determining what expenses are deductible
  • How to determine an employee from a volunteer or what constitutes unrelated business taxable income

Contact us at 216.524.8900 or info@hobe.com to set up a time to discuss your group’s situation.