Wednesday, December 17, 2014

Obamacare and the tax implications!

Here is a listing of various tax effects having to do with the Affordable Care Act...
Taxes-
High wage earners, with a $250,000 threshold for married filing jointly, $125,000 for married filing separately, and $200,000 for all others, must pay a Medicare tax of an additional 0.9%, for a total tax of 2.35%. Those with an income of $200,000 or more have this tax withheld at the payroll level during the year, but adjustments are needed once annual income is determined – which can result in additional taxable income.
Also, Medicare tax of 3.8% is assessed on net investment income of high wage earners, which includes passive gross income from interest, dividends, royalties, rents, annuities, gross income derived from a trade or business, and gain attributable to the disposition of property.

More tax effects....Itemized deductions on Schedule A of Form 1040, which expands the medical expense deduction from 7.5 to 10% for those under age 65.  Further, Flexible Spending Accounts (FSA) have been capped at $2,500. If you sponsor one of these plans you must have all document amendments in place by the end of 2014.

For small businesses (and non profits)
The small business health care credit is available to employers with 25 or fewer full-time equivalents (FTEs) with wages averaging less than $50,000 per year. The employer must pay at least 50% of these employees’ health insurance costs. In 2014, the credit is 50% for for-profit entities and 35% for tax-exempt employersand it is only available if the insurance is purchased through the Marketplace. Tax returns can be amended for previously missed credits.

Individual mandate
The individual mandate is in effect. Those without health insurance coverage will pay a penalty, which in 2014 is the greater of either $95 or 1% of modified adjusted gross income and $47.50 per dependent under the age of 18. For families this can result in a maximum 2014 penalty of $285. For 2015 and 2016, the amounts are $325 or 2% of income and $695 or 2.5% of income respectively. The maximum penalty is equivalent to the national average premium for a bronze plan on the Marketplace.

Employer mandate updates
The U.S. Treasury Department issued an update that gives mid-sized employers an additional year before the employer mandate takes effect. Employers with 50 to 99 FTEs now have until January 2016 to offer health insurance or pay a penalty.
The employer mandate still applies to employers with 100 or more FTEs. These employers must offer insurance effective Jan. 1, 2015 or pay a penalty. The percentage of FTEs required to be covered has been reduced to 70% for 2015, but will increase to 95% in 2016.
Part-time and variable hour employees are converted to FTEs in order to determine how many employees a company has under the employer mandate. Calculated on monthly hours, the formula is the total working hours of all FTEs for a month divided by 120. Seasonal employees with less than 120 days a year can be excluded. Employers who already offer affordable coverage need to consider that variable hour part-time employees could transition to a FTE and be eligible for coverage. Measurement periods under ACA regulations should be utilized to consider both variable hour employees as well as the overall employer mandate.

Obamacare Fees
If your client sponsors a fully insured health plan, the health insurance carrier is required to pay the Patient Centered Outcomes Research Institute (PCORI) fee directly. However, if your client self-funds their health plan, they were required to pay the $2 fee by July 31, 2014 on Form 720. With annual fee increases, there is a sunset provision for plan years ending Oct. 1, 2019.
If your company has an FSA that isn’t affiliated with a medical program, this account is considered to be self-funded and could be subject to PCORI fees for employees. Health reimbursement arrangements should be integrated with health insurance, and are still considered self-funded for the PCORI fee requirement.
Reinsurance fee due in January 2015
Sponsors of self-funded health insurance plans should have reported the number of people covered by their plans to the Department of Health and Human Services for the 2014 plan year by Nov. 15, 2014. This includes employees, spouses and dependents covered under the plan.
The IRS has specified four specific counting methods for this purpose: Actual count, Snapshot dates, Snapshot factor, Form 5500 method.
Pay.gov is the reporting site for employers to report their count. After reporting, the employer will receive a notice regarding the reimbursement fees due, which will equal $63 per covered life for 2014. The first installment will be due to HHS by Jan. 15, 2015. Fully insured plans will collect these fees through the insurance premiums paid. The reimbursement fee applies to each medical plan sponsored by the employer and must be submitted on a per plan basis.

Implications for 2015 and 2016
New reasons employees can change their health care coverage
With the issuance of IRS Notice 2014-55, there are now two reasons employees covered under a Section 125 plan can change health care options: 1) an employee can cease participation in an employer-sponsored plan in order to enroll in the Marketplace without an otherwise qualified change in status, and  2) variable-hour employees (those who may work less than 30 hours a week but were determined to be full-time during a measurement period and are otherwise enrolled in the employer-sponsored plan) can also cease participation in order to enroll in the Marketplace when their employment status drops below 30 hours a week.
Employers must adopt an amendment allowing these elections on or before the last day of the plan year. For 2014, the amendment must be adopted by Dec. 31, 2015. Participants must be notified of these changes. An election to revoke coverage on a retroactive basis cannot be allowed under any circumstance.

Reporting requirements
Forms 1094-B, 1095-B, 1094-C and 1095-C, for the 2015 plan years will be due to the IRS in 2016. These forms will be used to report:
1) the different types of insurance offered
2) which employees are covered
 and
3) various other details of health plans.
The IRS will use the data to compute both the individual and employer mandates under the ACA. As these reporting forms are detailed and complex (and we might not be bright enough -according to the ACA architect), I recommend employers consult with their benefits professional and accounting specialist before completing them.

Thursday, December 11, 2014

Art Work tax break working through Congress

Original Art work valued at over $1,000 could become exempt from Florida sales taxes.  To be eligible, works can't be numbered, must cost at least $1,000, and be sold by the artist.  HB:89 is the proposed bill and will be voted on in 2015.

Monday, December 08, 2014

Required Mimimum Distributions....

Most Retirees Need to Take Required Retirement Plan Distributions by Dec. 31
 
The Internal Revenue Service today reminded taxpayers born before July 1, 1944, that they generally must receive payments from their individual retirement arrangements (IRAs) and workplace retirement plans by Dec. 31.
Known as required minimum distributions (RMDs), these payments normally must be made by the end of 2014. But a special rule allows first-year recipients of these payments, those who reached age 70½ during 2014, to wait until as late as April 1, 2015 to receive their first RMDs. This means that those born after June 30, 1943 and before July 1, 1944 are eligible for this special rule. Though payments made to these taxpayers in early 2015 can be counted toward their 2014 RMD, they are still taxable in 2015.    
The required distribution rules apply to owners of traditional IRAs but not Roth IRAs while the original owner is alive. They also apply to participants in various workplace retirement plans, including 401(k), 403(b) and 457(b) plans.
An IRA trustee must either report the amount of the RMD to the IRA owner or offer to calculate it for the owner. Often, the trustee shows the RMD amount on Form 5498 in Box 12b. For a 2014 RMD, this amount was on the 2013 Form 5498 normally issued to the owner during January 2014.
The special April 1 deadline only applies to the RMD for the first year. For all subsequent years, the RMD must be made by Dec. 31. So, for example, a taxpayer who turned 70½ in 2013 (born after June 30, 1942 and before July 1, 1943) and received the first required payment on April 1, 2014 must still receive the second RMD by Dec. 31, 2014.
The RMD for 2014 is based on the taxpayer’s life expectancy on Dec. 31, 2014, and their account balance on Dec. 31, 2013. The trustee reports the year-end account value to the IRA owner on Form 5498 in Box 5. Use the online worksheets on IRS.gov or find worksheets and life expectancy tables to make this computation in the Appendices to Publication 590.
For most taxpayers, the RMD is based on Table III (Uniform Lifetime) in the IRS publication on IRAs. So for a taxpayer who turned 72 in 2014, the required distribution would be based on a life expectancy of 25.6 years. A separate table, Table II, applies to a taxpayer whose spouse is more than 10 years younger and is the taxpayer’s only beneficiary.
Though the RMD rules are mandatory for all owners of traditional IRAs and participants in workplace retirement plans, some people in workplace plans can wait longer to receive their RMDs. Usually, employees who are still working can, if their plan allows, wait until April 1 of the year after they retire to start receiving these distributions. See Tax on Excess Accumulations in Publication 575. Employees of public schools and certain tax-exempt organizations with 403(b) plan accruals before 1987 should check with their employer, plan administrator or provider to see how to treat these accruals.

Wednesday, November 26, 2014

Expiring Tax Breaks for individual filers being considered...

According to the Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act Committee Report the following provisions are under consideration:

1. Deduction for expenses of elementary and secondary school teachers
The bill extends for two years the $250 tax deduction for teachers and other school professionals for expenses paid or incurred for books, supplies (other than non-athletic supplies for courses of instruction in health or physical education), computer equipment (including related software and service), other equipment, and supplementary materials used by the educator in the classroom.

2. Mortgage debt forgiveness
If you experienced mortgage debt cancellation or forgiveness on your personal residence after 2013, you may be required to pay taxes on that amount as taxable income unless the exclusion is renewed by Congress. Under this provision, up to $2 million of forgiven debt is eligible to be excluded from income ($1 million if married filing separately) through tax year 2015. This provision was created in the Mortgage Debt Relief Act of 2007 to shield taxpayers from having to pay taxes on cancelled mortgage debt stemming from mortgage loan modifications, through 01/01/2010. It was extended through 01/01/2013 by the Emergency Economic Stabilization Act of 2008; and extended through 01/01/2014 by the American Taxpayer Relief Act of 2012.

3. Deduction for mortgage interest premiums
The bill extends the ability to deduct the cost of mortgage insurance, also known as PMI on a qualified personal residence. This deduction is driven by income levels. Depending upon how much you make, the deduction may be ratably reduced and is unavailable for a taxpayer with an AGI in excess of $110,000.

4. Deduction for state and local general sales taxes
The bill extends the election to take an itemized deduction for State and local general sales taxes in lieu of the itemized deduction permitted for state and local income taxes for two years. The original passage of this bill leveled the playing field for those who lived in a state that did not levy a state income tax. 

5. Above-the-line deduction for higher education expenses
The Economic Growth and Tax Relief Reconciliation Act (EGTRRA) created an above-the-line tax deduction for qualified higher education expenses. Taxpayers could enjoy the deduction rather than take the American Opportunity Credit or the Lifetime Learning Credit. The maximum deduction was $4,000 for taxpayers with AGI of $65,000 or less ($130,000 for joint returns) or $2,000 for taxpayers with AGI of $80,000 or less ($160,000 for joint returns).

6. Tax-free distributions from individual retirement plan for charitable purposes
The bill extends for two years the provision that permits an Individual Retirement Arrangement (“IRA”) owner who is age 70-1/2 or older generally to exclude from gross income up to $100,000 per year in distributions made directly from the IRA to certain qualified charities. This deduction is beneficial for seniors that no longer itemize deductions. It essentially allows for a charitable deduction in addition to the standard deduction. 

7. Credit for energy efficient improvements to existing homes
The bill extends for two years, through 2015, the 10% credit for purchases of energy efficient improvements to existing homes. Homeowners can claim up to $200 for energy efficient windows, up to $150 for an efficient furnace or boiler, and up to $300 for other improvements, including insulation. The total credit is capped at $500 per taxpayer. The bill also allows energy efficient roofing products to qualify.

Wednesday, November 19, 2014

Year- End indecision caused by expiring tax benefits

Year-end uncertainty highlights need for reform

Once again we find ourselves in an a all too common position! Many popular tax planning opportunities, such as the R&D credit and bonus depreciation, expired at the end of 2013. As of the publish date for this article, the Expiring Provisions Improvement Reform and Efficiency Act has been drafted but not yet voted on. As rumor has it, it won’t be voted on until after the November elections. This act addresses 62 business and individual provisions that have already expired.
As a tax practitioner for the past 20-plus years, the best advice I can offer to my clients and to other practitioners for 2014 year-end planning is to assume the Act will pass and plan accordingly. The Act seeks to extend the following most  commonly used provisions:
Business:
  • 50% bonus depreciation
  • Section 179 expense at the $500,000 level with phase-outs starting at $2 million of additions
  • 15-year life for qualified leasehold improvements
  • R&D credit
  • 1202 stock
  • Work Opportunity Tax Credit
  • Renewable Energy tax credits
  • New Markets Tax Credit
  • Reduction in S Corporation built-in gain period
Individuals:
  • Above-the-line $250 deduction for teachers
  • Deducting sales tax in lieu of income tax
  • Above-the-line deduction for higher education expenses
  • Tax-free distributions from IRAs for charitable purposes
  • PMI deductions
But the real issue is how do we plan to move forward beyond 2014? Over the last decade, the tax rules have consisted of many short-lived opportunities that, while beneficial to many taxpayers, have passed very late in the year. If you recall, the last time we went through this cycle was at the end of 2012 when we were on a crash course with the fiscal cliff, but, at the very last minute, the American Taxpayer Relief Act was passed. Even though that tax act did give us certainty as it related to the individual tax rates, AMT exemption, and gift and estate tax rates, it offered many commonly used provisions for business and individuals that were only extended for another two years.
I find it very interesting how our tax policy has evolved into two-year extensions of popular tax provisions. Then every other year we wait with baited breath to see if an extender package is passed. This cycle creates uncertainty and makes it difficult for practitioners to plan. Our current situation makes it clear that we need tax reform now, yet it begs the question: is that even possible in the current political environment?
Maybe and maybe not. The Senate does, however, set broad expectations for reform in its introduction to the provisions of the EXPIRE Act, saying that “reform efforts should eliminate temporary provisions from the tax code, boost the economy through the tax code, broaden the tax base by lowering tax rates and ensure an appropriate baseline is used.” The Act also states that “comprehensive tax reform will begin in the next Congress and conclude prior to the expiration of tax extenders.”
So, in an optimistic moment, we can start to envision what a reform package might look like. In Congress’ initial iterations, reform for C Corporations could include reducing the corporate tax rate to 25%, but eliminating benefits such as the production deduction, like-kind exchanges and LIFO inventory. Bonus depreciation could become a thing of the past, and net operating loss utilization could be altered. For individuals, tax reform could include a simplified rate structure with only 10% and 25% brackets (taking us from seven to two brackets); the elimination of AMT, as well as most deductions; and the elimination of personal exemptions in lieu of a generous standard deduction.
Regardless of the path the final reform package may take, getting there will be a long and challenging road and will take strong bi-partisan support to overhaul a tax code that hasn’t seen major reform in 30 years. However, considering the global perspective that our corporate tax rate is not competitive and the insanely complicated rules individuals must navigate to comply with their tax obligations, it is becoming clearer with each passing day that reform is not only necessary, but critical to a stable tax and business environment.

For much of this well written article, I would like to thank Tracy Monroe, CPA, MT, who is a partner with Cohen & Company.

Wednesday, October 15, 2014

Effets of Obamacare on S corps and their shareholders

S Corporations, Health Insurance and Obamacare

Churches depreciate assets just like everyone else!

Common Question, should our church record depreciation on its fixed asset purchases? We have been advised to do so in order to remain compliant with Generally Accepted Accounting Principles (GAAP). We see the benefit of having a record of our fixed assets and their values (original values or replacement cost), but don't see much value at all in recording depreciation.

Our annual budget is around $350,000. We have approximately 30 families and 150 people in regular attendance.

Answer:

In order to provide users of financial statements a GAAP presentation, building, equipment and other long-lived asset purchases must not be recorded as expenditures in the year of purchase. Rather, their costs are allocated to expenses over the years of their useful lives. Accountants call this allocation process depreciation. Some churches are required to present GAAP reports for purposes of bank financing or donor expectations. Generally, this is limited to ministries larger than the one cited in the above question.

I have found that most members of a congregation better understand reports presented on a cash or modified cash basis. For financial statements reported on a cash basis, church members should be able to clearly see that the beginning of year cash balance, plus total receipts, less total disbursements, equals end of year cash. This means that all receipts, even loan proceeds, show up as receipts on a Statement of Receipts and Disbursements (note, not an income / profit or loss statement). All disbursements, including purchase of long-lived assets and principal payments on debt, are reported on this Statement as well.

Statements that use a modified cash basis generally include assets and debts that are current in nature. For example, expenses are reported on the Statement of Receipts and Disbursements even though they are paid a few days after the reporting period is over (e.g. the December utility bill that gets paid in January, after the budget year is over, shows up in December disbursements).

One caveat. I believe that all ministries should employ the use of a balance sheet beyond simple reporting of a cash balance. The reason? Designated gifts. A cash-basis church that never receives designated gifts will present a balance sheet with cash, no liabilities, and an amount equal to the cash balance in its equity section (more appropriately called the Fund Balance section).

But most churches do receive designated gifts and do not spend 100 percent of these gifts before their budget years are over. These unspent amounts will be forgotten without one key modification to the balance sheet. Since I know a lot of churches use QuickBooks, I'll explain my common suggestion using its features.

When a designated gift is received, the Record Deposit window must include a Split entry. General offerings should be posted to an Income account type. But the designated portion of the total deposit should be posted to an Equity account type. QuickBooks will "remember" this contribution and not close it out to zero at the end of the year.

When a check is written (Write Checks window) to spend monies received from donors who put these stipulations on their gifts, then the check must be posted to the Equity account type that was established when the gift was deposited.

One additional benefit of this technique for designated gifts received and disbursed: the church's general fund budget receipts and disbursements are not inflated by this non-budget activity.

Friday, September 26, 2014

Health Insurance Credits and the tax effect of those credits

If you purchased health insurance through any of the exchanges, there will be a new form you will get from your insurance exchange.  This form must be included with your other tax forms (i.e. W-2, 1099-Misc, 1099-R, 1098) before you can file your tax return. The form, Form 1095-A, lists everyone in the household who has coverage and what the government paid for each person health credits.
In addition to this form, the standard Form 1040 is going to have a few changes to it, as follows:
  • Line 46: You will need to report the excess of any premium tax credit received throughout the year.
  • Line 62: You will need to report whether your client has the minimum essential coverage or owes a penalty.
  • Line 69: You will need to report the amount of the Premium Tax Credit
Form 8962 is the Premium Tax Credit Form. This form is to be used to claim the premium tax credit or reconcile any PTC amounts received in advance during the year to cover health care premiums.
Finally, Form 8965 is the health coverage exemption form. This form is used to report exemptions from insurance requirements.
Many organizations are predicting a delay to the tax season due to the need for Form 1095-A before filing tax returns.

Thursday, September 18, 2014

Completing form 990! Part by part...

Parts I through VI of form 990 EZ must be completed by all filing organizations and require reporting on the organization’s exempt and other activities, finances, compliance with certain federal tax filings and requirements, and compensation paid to certain persons. Additional schedules are required to be completed depending upon the activities engaged in and the type of the organization. The entire completed Form 990-EZ as filed with the IRS, except for certain contributor information on Schedule B (Schedule of Contributors), is required to be made available to the public by the IRS and the filing organization, and may be required to be filed with state governments to satisfy state reporting requirements.
Some general rules to follow in filing out Form 990 EZ:
  • Complete all applicable line items
  • Unless instructed to skip a line, answer each question on the return
  • Make an entry (including a zero when appropriate) on all lines requiring an amount or other information to be reported
  • Provide required explanations as instructed.
Schedule B to the 990 EZ can be a tricky one. The IRS wants to know if your organization received large contributions from the same donor or donors, and Schedule B is where that issue is probed. The good news for many small bluegrass organizations which receive lots of small donations but no large ones is that if your organization received no contribution of $5,000 or more from the same person, and received no contribution that was 2% or more of what you report on line 1 of your 990 EZ, then you can check a box in Section H and need not complete Schedule B.
Non-profit bluegrass organizations report income from member dues on line 3 of the 990 EZ but only when the amount of the dues reasonably approximates the value of membership to the member—for example when the amount paid for dues roughly equals the value of newsletters and other perks of membership.  If the amount of dues exceeds the reasonable value of membership, then the excess is reported on line 1 as a “contribution”. Depending on your dues structure, you may have to report part of the dues received on line 3 and part on line 1.
The Form 990 and 990 EZ also distinguish between “program service revenue” and “special event revenue,” which can be an issue for bluegrass organizations conducting concerts and other special events. Generally, “program service revenue” is income generated from one of the primary purposes of the organization, while “special event revenue” is from an activity that only indirectly furthers the organization’s purposes and which is designed primarily to raise funds. The IRS instructions for form 990 EZ give the following example which directly applies to many bluegrass organizations:
Example: An organization formed to promote and preserve folk music and related cultural traditions holds an annual folk music festival featuring concerts, handcraft demonstrations and similar activities. Because the festival directly furthers the organization’s exempt purpose, income from ticket sales should be reported on line 2 as program service revenue.
Part II.  Balance Sheet
Every organization is required to complete columns (A) and (B) of Part II of the 990 EZ which calls for a balance sheet, and your organization may not submit a substitute balance sheet. If there is no amount to report in column (A), Beginning of year, enter a zero in that column.
Part III: Programs and Services
Part III of the 990 EZ is where the organization describes its programs and services. A program service is a major (usually ongoing) objective of an organization. All organizations must describe their exempt purpose achievements for each of their three largest program services (as measured by total expenses incurred). If there were three or fewer of such activities, you should describe each program service activity.  Here are some guidelines provided by the IRS:
  • Describe program service accomplishments through measurements such as clients served, days of care, number of sessions or events held, or publications issued.
  • Describe the activity’s objective, for both this time period and the longer-term goal, if the output is intangible, such as in a research activity.
  • Give reasonable estimates for any statistical information if exact figures are not readily available. Indicate that this information is estimated.
  • Be clear, concise, and complete in the description. Avoid attaching brochures, newsletters, newspaper articles about the organization, etc.
Part IV: Officers, Directors and Employees
Part IV of the 990 EZ calls for listing the officers, key employees and directors of the organization. This section also calls for disclosure of the compensation paid to these individuals. New in 2008, the filing organization has two options for how it reports this compensation. Option 1 is similar to the 2007 Form 990 method of compensation reporting but is somewhat simplified. It is based on the calendar year, and also on income reported on a W-2 and/or 1099-MISC. Option 2 is essentially the 2007 Form 990-EZ method of compensation reporting which can be based on the organization’s fiscal year. Whichever option is selected for 2008 must be used consistently from year to year, and must be used for all officers, directors, trustees and key employees (and, for 501(c)(3) organizations, for their five highest compensated employees in Part VI). There are detailed instructions on what must be reported under each option, so read the directions carefully.
Unrelated Business Income
Part V asks a series of straight forward questions that must be answered. Line 35 requires a “yes” if your organization’s “unrelated business income” exceeds $1,000, net, i.e., the excess of gross revenues less the cost of goods sold. The rules on what qualifies as “unrelated business income” are complex and the reader is referred to the instructions. Note also that if your organization’s unrelated business income tax liability will exceed $500, estimated taxes must be paid. Use Form 990-W for this purpose.
Part V also asks questions about “disqualified persons” and “excess benefit transactions.” Again, the rules are complex on these topics and the reader is referred to the instructions or to other source materials. Generally, though, a “disqualified person” is someone in your organization who has substantial ability to influence what the organization does. This includes your board members, the executive director, and can include certain donors or contractors and others depending on the circumstances. An “excess benefit transaction” is generally one in which the organization pays a “disqualified person” more in value than the worth of services rendered by the disqualified person. In other words, the IRS wants to know if your organization is slipping extra money to key players and insiders. For most organizations compensation paid to staff and others is presumed reasonable if three requirements are met: (1) the board approves it and the board is free of conflict of interest, (2) your organization relied on comparable pay information from three or more comparable other organizations providing similar services, and (3) the decision is properly documented.
Schedule A is an important part of your 990 EZ.  It calls for the compensation amounts paid to your highest paid employees and contractors (Parts 1 and II), asks a series of “yes” or “no” questions about your activities, where a “yes” requires explanation (Part III), and asks under what section of the code your organization claims it is qualified as a non-profit (Part IV).
In Part IVA there is, in effect, a finance work sheet that requires you to provide running totals for the most recent four years on a variety of items concerning your organization. This information is used to see if your organization passes the “public support” test which is one way to avoid being re-characterized as a “Private Foundation”.  The reader is advised to read the instructions carefully on this issue and to be careful in filling out the worksheet in Part IVA. Basically, the form walks you though a bunch of financial numbers and then concludes with what percent of your support is “public”–-if it is at least 33% you are OK; if not you may be reclassified as a private foundation.

Tuesday, August 19, 2014

Benefits of operating an LLC as an S corp

Combining the Benefits of the LLC and the S Corporation
If you think you can benefit from the combined features of an LLC and an S corporation, the surprising possibility exists to establish your business as an LLC, but then make the election to have it treated as an S corporation by the IRS for tax purposes. You'll have to make the special election with the IRS using Form 2553. It's no more difficult that setting up a corporation and then electing S corporation status. But it may have some added benefits. Let's take a look.
  • From a legal standpoint, your enterprise will be an LLC rather than a corporation. Therefore, you will have the benefit of ease of administration--fewer filings, fewer forms, fewer start-up costs, fewer formal meetings and record keeping requirements. I can hear your sigh of relief!
  • From a tax perspective, your enterprise will be treated as an S corporation. You'll still have the pass-through of income, avoiding double taxation, same as if your LLC was treated as a proprietorship or partnership.
  • Without the administrative hassles of actually being a corporation, you will still benefit from the IRS treating your business as one. To the IRS, your business will exist separate and independent from you--its owner. Therefore, the business entity can pay wages and salaries to you or to other owners. This amount will be subject to FICA tax and other withholding requirements. But then, it can distribute the remaining net earnings to you and the other owners as passive dividend income, not subject to SECA tax.
  • Being treated as an S corporation may provide opportunities for tax planning to minimize the overall tax liability for your business and you. It may allow your business to take advantage of better tax treatment for certain fringe benefits, too.
Obviously, you need to carefully consider the pros and cons of different forms of business organization. Be sure to consider how all the aspects--legal, tax and operational--of each organizational form will impact your unique business enterprise. Seeking professional advice from a CPA or tax attorney is always a wise practice when making choices like this that can affect your business for many years to come.
But setting up an LLC and then electing treatment as an S corporation may just give you the best of both worlds--the ease of administration of the LLC and the tax planning opportunities of the S corporation. Talk to your professional advisor today.

Saturday, August 16, 2014

Closing the books on the sale of an LLC

Normally, an LLC closes its books at the end of its tax year.  However, under certain circumstances a LLC partner who sells all of his share may "close the books on the LLC tax year upon sale to the new owner.  This is from the Internal Revenue Code and you can read more if it sounds like a strategy that may help your position.  Note, it wasn't in the Code below, but I have read elsewhere that it is good to have a signed document from all of those involved in the sale deeming that the books are closed upon the sale date and that the selling partner has no ownership beyond that date.
Reference: 26 CFR 1.706-1 (11) (c)(2)(i)

c) Closing of partnership year—
(1) General rule. Section 706(c) and this paragraph provide rules governing the closing of partnership years. The closing of a partnership taxable year or a termination of a partnership for Federal income tax purposes is not necessarily governed by the “dissolution”, “liquidation”, etc., of a partnership under State or local law. The taxable year of a partnership shall not close as the result of the death of a partner, the entry of a new partner, the liquidation of a partner's entire interest in the partnership (as defined in section 761(d)), or the sale or exchange of a partner's interest in the partnership, except in the case of a termination of a partnership and except as provided in subparagraph (2) of this paragraph. In the case of termination, the partnership taxable year closes for all partners as of the date of termination. See section 708(b) and paragraph (b) of § 1.708-1.
            
(2) Partner who retires or sells interest in partnership—
(i) Disposition of entire interest. A partnership taxable year shall close with respect to a partner who sells or exchanges his entire interest in a partnership, and with respect to a partner whose entire interest is liquidated. However, a partnership taxable year with respect to a partner who dies shall not close prior to the end of such partnership taxable year, or the time when such partner's interest (held by his estate or other successor) is liquidated or sold or exchanged, whichever is earlier. See subparagraph (3) of this paragraph.
(ii) Inclusions in taxable income. In the case of a sale, exchange, or liquidation of a partner's entire interest in a partnership, the partner shall include in his taxable income for his taxable year within or with which his membership in the partnership ends, his distributive share of items described in section 702(a), and any guaranteed payments under section 707(c), for his partnership taxable year ending with the date of such sale, exchange, or liquidation. In order to avoid an interim closing of the partnership books, such partner's distributive share of items described in section 702(a) may, by agreement among the partners, be estimated by taking his pro rata part of the amount of such items he would have included in his taxable income had he remained a partner until the end of the partnership taxable year. The proration may be based on the portion of the taxable year that has elapsed prior to the sale, exchange, or liquidation, or may be determined under any other method that is reasonable. Any partner who is the transferee of such partner's interest shall include in his taxable income, as his distributive share of items described in section 702(a) with respect to the acquired interest, the pro rata part (determined by the method used by the transferor partner) of the amount of such items he would have included had he been a partner from the beginning of the taxable year of the partnership. The application of this subdivision may be illustrated by the following example:
 
Example.
Assume that a partner selling his partnership interest on June 30, 1955, has an adjusted basis for his interest of $5,000 on that date; that his pro rata share of partnership income up to June 30 is $15,000; and that he sells his interest for $20,000. Under the provisions of section 706(c)(2), the partnership year with respect to him closes at the time of the sale. The $15,000 is includible in his income as his distributive share and, under section 705, it increases the basis of his partnership interest to $20,000, which is also the selling price of his interest. Therefore, no gain is realized on the sale of his partnership interest. The purchaser of this partnership interest shall include in his income as his distributive share his pro rata part of partnership income for the remainder of the partnership taxable year.

Tuesday, August 12, 2014

Tax effects of Obamacare!

Thanks to my CPA colleague, Jim Newland in Ohio, for this update on the forthcoming Obamacare tax issues:
In 2010, when Congress passed the Affordable Care Act (commonly called Obamacare), the effects seemed far away to many of us. Now that 2014 is here, there will be several direct effects upon every American, with the requirement that all Americans of all ages obtain qualified health insurance for the entire year. The requirement to obtain health insurance applies to you individually as well as to anyone you claim as a dependent on your return.

Several new forms will be issued to taxpayers this year, primarily Form 1095-A, B and C.
In order to complete your 2014 return we must have all copies of Form 1095. These forms provide us with the necessary information to report your health insurance coverage, calculate any credit and calculate any penalty that may apply.

Because much of the reporting for 2014 will be voluntary you may not receive any Forms 1095. We therefore need to also obtain from you the following information in order to complete your return:
 

  1. Health insurer(s) for the year;
  2. Number of months of coverage;
  3. Members of your family covered by the above health insurance throughout the year;
  4. Your county of residence all year;
  5. Signed health insurance information form for our records.

Of equal importance for 2014 are the multiple possibilities of tax mistakes made primarily by your dependent children who may work in 2014. The simplest guidance we can provide you to avoid this mistake is: Do not allow any dependent children to file their own return, particularly college students, and do not file them yourself. Although this guidance appears self-serving for us, let us assure you this guidance is meant to protect you from your children inadvertently costing you literally thousands of dollars in potential health care tax credits. The IRS recently released new Form 8962 to calculate the credit and in our continuing education classes we have learned how difficult it is to calculate the credit and how easy it is to make a mistake and lose the credit. We are estimating this new form will require substantially more preparation time for this year’s return which means, as expected, that we will be once again raising your fee. We are sorry about the fee increase but this is one of the costs of compliance with these new requirements.

For those of you who have received an advance payment of the Health Care credit by purchasing insurance through the Exchange we also need to warn you in advance that if you received a greater credit than allowed you will be forced to repay the excess with this year’s return.

We also encourage you to visit www.Healthcare.gov when you have a chance just to see what is available to you in the form of insurance, and what premiums will really cost for your family so that you have a clear idea of the facts without a political or media based bias.

The other aspects of the Affordable Care Act that no one is talking about are the two new surtaxes. Many people incorrectly believe that only high income Americans pay these surtaxes, but because the tax is not adjusted for inflation, within a few years all Americans will pay the additional surtaxes. You need to take steps now to plan for this event and our advice is to utilize every fringe benefit your employer offers, maximize 401-k deferrals and call us if you are expecting a big bonus, stock or asset sale or other major income change so that we can work with you to minimize the effects of these new taxes.

Wednesday, July 02, 2014

New, easier, way to become a non-profit organiazation!

New 1023-EZ Form Makes Applying to be Tax-Exempt Easier; Most Charities Qualify

The Internal Revenue Service today introduced a new, shorter application form, Form 1023-EZ, to help small charities apply for 501(c)(3) tax-exempt status more easily. Most organizations with annual gross receipts of $50,000 or less and assets of $250,000 or less are eligible. See news release for details.

The change will allow the IRS to speed the approval process for smaller groups and free up resources to review applications from larger, more complex organizations while reducing the application backlog.

The new 1023-EZ form must be filed on www.pay.gov, accompanied by a $400 user fee. The instructions include an eligibility checklist that organizations must complete before filing the form.

Wednesday, June 25, 2014

Estate Tax Changes in 2014

2014 Changes to Estate Tax, Gift Tax, and Generation-Skipping Transfer Tax Laws

  1. New and more favorable estate tax, gift tax and generation-skipping transfer tax exemptions and less favorable tax rates have gone into effect. Under the provisions of ATRA, the federal estate tax exemption  (Definition: The amount that is excluded from calculating the amount of estate taxes owed at the federal level.) has been indexed for inflation and therefore increased to $5.12 million in 2012, $5.25 million in 2013, and $5.34 million in 2014, but the estate tax rate for estates valued over this amount was increased from 35% in 2012 to 40% in 2013 and future years. In addition, the lifetime gift tax exemption has also been indexed for inflation and therefore increased to $5.12 million in 2012, $5.25 million in 2013, and $5.34 million in 2014, and the maximum gift tax rate was increased from 35% in 2012 to 40% in 2013 and future years. Finally, the generation skipping transfer tax exemption has also been indexed for inflation and therefore increased to $5.12 million in 2012, $5.25 million in 2013, and $5.34 million in 2014, and the maximum generation skipping transfer tax rate was increased from 35% in 2012 to 40% in 2013 and future years. These unified exemptions will continue to be indexed for inflation in 2015 and later years but the tax rate will remain at 40%.  In addition, the annual exclusion from gift taxes will remain at $14,000 for 2014.

  2. "Portability" of the federal estate tax tax exemption between married couples has become permanent. In 2009 and prior years, married couples could pass on up to two times the federal estate tax exemption by including "AB Trusts" in their estate plan. TRA 2010 eliminated the need for AB Trust planning for federal estate taxes in 2011 and 2012 by allowing married couples to add any unused portion of the estate tax exemption of the first spouse to die to the surviving spouse's estate tax exemption, which is commonly referred to as "portability of the estate tax exemption." ATRA makes portability of the estate tax exemption between married couples permanent for 2013 and beyond, which means that in 2014 a married couple can pass on $10.68 million to their heirs free from federal estate taxes with absolutely no planning at all. Note, however, that even if the deceased spouse's estate will not be taxable (in other words, is valued less than $5.34 million in 2014), the surviving spouse will nonetheless be required to file IRS Form 706, United States United States Estate (and Generation-Skipping Transfer) Tax Return, in order to take advantage of the deceased spouse's unused estate tax exemption, otherwise the deceased spouse's exemption will be lost.

  3. The "pick up tax" was not resurrected. In 2005 the "pick up tax" was phased out under federal law. The pick up tax was a state estate tax that was equal to a portion of the federal estate tax bill and was collected by state taxing authorities. If the estate tax laws were allowed to revert back to the laws that were in effect in 2001, then the pick up tax would have suddenly reappeared in 2013, which would have meant that states such as California, Florida and Texas would have once again collected a state estate tax in the form of a pick up tax. Unfortunately for states without a freestanding estate tax, ATRA did not resurrect the pick up tax, so it continues to remain dormant and will not reappear any time soon. Refer to the State Estate Tax and Exemption Chart for the list of states which currently have a freestanding estate tax.

  4. Special planning will be required for state estate taxes in some states. To date, only one state, Hawaii, has made the state estate tax exemption portable between married couples. This means that in states where there is a difference between the state estate tax exemption and federal estate tax exemption (such as in Maine, where the 2014 estate tax exemption is only $2 million, which leaves a $3.34 million gap between the state and federal exemptions), married couples will need to include special planning in their estate planning documents in order to take advantage of both spouses' state estate tax exemptions. Refer to the State Estate Tax and Exemption Chart for the list of states which currently have a freestanding estate tax.

  5. Special planning will be required for generation skipping trusts. While as mentioned above the estate tax exemption has been made portable between married couples, the generation skipping transfer tax exemption has not. This means that in order for married couples to take advantage of both spouses' generation skipping transfer tax exemptions, special planning will be required in married couples' estate planning documents.

Monday, June 23, 2014

The effects of Obamacare

Obamacare, one word brings such emotion, of both good and bad!  Love them or hate them, there’s one thing everyone can agree upon about the major government-mandated changes sweeping through the world of health care insurance: They’re confusing. And since so many of the changes involves taxes, don’t be surprised if your clients expect you to have all the answers.

The Affordable Care Act, a.k.a. Obamacare, mandates penalties for lack of health insurance: 1 percent of a client’s yearly household income above the tax filing threshold; or $95 per person for the year ($47.50 per child under 18), with the penalty maxing out at $285. The penalty is pro rated based on how many months an individual lacks coverage; annual increases are also built into the law.
Only a little more than half of small businesses understand and are prepared for the changes required by the ACA, according to a recent survey by payroll service provider Paychex.

Nonetheless, clients aren’t exactly beating down doors with questions – yet. “The only questions I have had so far (and they have been very few) center around the tax credits associated with employer provided health insurance,” said Stephen DeFilippis, an EA at DeFilippis Financial Group in Wheaton, Ill.
“For the 2013 year, we haven’t seen too many of these questions in our practice,” said Twila Midwood, an EA at Advanced Tax Centre in Rockledge, Fla. “Most clients are currently covered under a plan. We are advising them, however, that should their coverage change, to contact us or a health insurance provider to ensure that they meet the requirements to maintain minimal essential coverage or to at least be aware of the requirements and possible penalties.”
Clients are “not particularly” asking for health care advice from EA Stephen Jordan, in Salem, N.H., “although it is a popular discussion topic at tax prep meetings. Clients seem to know what they are doing well enough and are accomplishing things on their own. I refer clients to an insurance consultant I work with if they need further help.”

Future points
Chuck McCabe, founder and president of Peoples Income Tax and The Income Tax School, recently spelled out for preparers some of the issues of Obamacare and the nature of help clients might soon expect. Among his points:
  • The next open enrollment for Obamacare begins November 15.
  • Some clients may qualify for the special enrollment period while the ACA insurance marketplace is closed. This applies to people who had a “qualifying life event” such as changes to family size or a “complex situation related to applying in the Marketplace.”
  • Those exempt from the individual responsibility payment include clients uninsured for less than three months; those for whom the lowest-priced available ACA coverage exceeded 8 percent of household income; those who didn’t have to file a return because of low income; and members of federally recognized tribes or those eligible for services through an Indian Health Services provider, among others.
  • Clients who have obtained health care coverage through the Marketplace may be eligible for a premium tax credit.
  • Preparers should bone up on what forms are and will be needed concerning the ACA, how to verify clients’ compliance, and any penalties for preparers who stray from ACA compliance.

Friday, May 30, 2014

Sales & Use Tax Exemption available to Industrial Machinery and Equipment

Sales and Use Tax Exemption for
Purchases of Industrial Machinery and Equipment




Effective April 30, 2014, an exemption from sales and use tax is available for purchases of industrial machinery and equipment used at a fixed location in Florida by an eligible manufacturing business that will manufacture, process, compound, or produce for sale items of tangible personal property. The exemption also includes parts and accessories for the industrial machinery and equipment if they are purchased before the date the machinery and equipment are placed in service.
An "eligible manufacturing business" means any business whose primary business activity at the location where the industrial machinery and equipment are located is within the industries classified under manufacturing NAICS (North American Industry Classification System) codes 31, 32, and 33 published in 2007 by the Office of Management and Budget, Executive Office of the President. The primary business activity of an eligible business is that activity which represents more than 50 percent of the activities conducted at the location where the industrial machinery and equipment are located.
Examples of types of manufacturing establishments represented by the applicable NAICS codes include, but are not limited to, food, apparel, wood, paper, printing, chemical, pharmaceutical, plastic, rubber, metal, transportation, and furniture. A search of qualifying establishments by keyword or NAICS code can be conducted via the internet at http://www.census.gov/cgi-bin/sssd/naics/naicsrch.
The selling dealer (vendor) should obtain a signed certificate from the purchaser certifying the purchaser's entitlement to tax exemption under the exemption statute. The signed certificate will relieve the selling dealer of any potential tax liability on nonqualifying purchases. Below is a suggested certificate the selling dealer can have the purchaser complete to document the exempt nature of the sales transaction.
Qualifying purchases made after the effective date of the exemption are eligible for refund of any tax paid under the refund provisions provided by section 215.26, Florida Statutes (F.S.), Repayment of Funds Paid into State Treasury Through Error, and Rule 12A-1.014, Florida Administrative Code (F.A.C.), Refunds and Credits for Sales Tax Erroneously Paid.
The exemption is scheduled for repeal effective April 30, 2017.
This exemption does not replace the exemption provided for qualifying purchases by a new or expanding business under section 212.08(5)(b) and (d), F.S. Each of these exemptions remains in effect under current statute without change. See also Rule 12A-1.096, F.A.C.
References:  Section 6, Chapter 2013-39, Laws of Florida; and Section 212.08(7)(kkk), Florida Statutes

Thursday, May 22, 2014

S Corp Revocation

Some times the S corp election just doesn't work out!  Here are the steps to end the election:
Shareholder revocation.
The S corporation election may be revoked with the consent of shareholders holding more than 50%  of the shares of stock of the corporation. A revocation made on or before the 15th day of the third month of the taxable year is effective as of the first day of the taxable year (March 15 for a calendar year corporation).
Revocation made after the 15th day of the third month of the tax year is effective for the following taxable year.
Revocation can be made for a prospective date which is on or after the date the revocation is made. [IRC §1362(d)(1)]
Corporation statement. The corporation files a statement of revocation, signed by an officer who is authorized to sign Form 1120S, with the IRS Service Center where the original election was filed.
Include the following information:
• A statement that the corporation is revoking its S corporation election under IRC Section 1362(a).
• The corporation’s name, address, and EIN.
• The number of shares of outstanding stock.
• The effective date of the revocation.
Shareholder statement. A statement signed by the shareholders, under penalty of perjury, which includes:
• The name, address, and EIN of the consenting shareholder.
• The number of shares owned by the shareholder.
• The date the shareholder acquired the stock.
• The shareholder’s tax year end.
From the CFS Tax Corresponder program:   
Statement to Revoke Sub chapter S Election (IRC Section 1362(d))
To:  Internal Revenue Service
    
Re:  [Client: Taxpayer & Spouse name(s)/Company Name]
[Client: Street address, Apt/Ste/PMB #, plus line 2 (if any)]
    [Client: City, State  Zip]
    ID: [Client: Taxpayer's SSN/Company FEIN]
The above mentioned company hereby revokes its election under IRC Section 1362(a) in accordance with IRC Code Section 1362(d).  As of  , there are shares of issued and outstanding shares of stock in [Client: Taxpayer & Spouse name(s)/Company Name].  Attached are signed consents by all shareholders holding more than one-half of the issued and outstanding stock in [Client: Taxpayer & Spouse name(s)/Company Name].
[Client: Taxpayer & Spouse name(s)/Company Name]
By: ____________________________
             (Title)
Date: _____________________
Attachment of Shareholders to Statement of Consent to Subchapter S Revocation
The undersigned shareholders in accordance with IRC Section 1362(d) hereby consent to the revocation by the [Client: Taxpayer & Spouse name(s)/Company Name], ID# [Client: Taxpayer's SSN/Company FEIN] of its election under IRC Section 1362(a).  Such revocation is effective .
By:  _____________________________________    ___________________
        Date
    
    
    ID:
By:  _____________________________________    ___________________
        Date
    
    
    ID:
By:  _____________________________________    ___________________
        Date
    
    
    ID:
At the time of this revocation, the issued and outstanding shares of the  [Client: Taxpayer & Spouse name(s)/Company Name] are held as follows:
       
       

Monday, May 19, 2014

Summer Time Jobs for the kids, and the tax effects of those jobs....

Tax Information for Students Who Take a Summer Job
Many students take a job in the summer after school lets out. If it’s your first job it gives you a chance to learn about the working world. That includes taxes we pay to support the place where we live, our state and our nation. Here are eight things that students who take a summer job should know about taxes:
1. Don’t be surprised when your employer withholds taxes from your paychecks. That’s how you pay your taxes when you’re an employee. If you’re self-employed, you may have to pay estimated taxes directly to the IRS on certain dates during the year. This is how our pay-as-you-go tax system works.
2. As a new employee, you’ll need to fill out a Form W-4, Employee’s Withholding Allowance Certificate. Your employer will use it to figure how much federal income tax to withhold from your pay. The IRS Withholding Calculator tool on IRS.gov can help you fill out the form.
3. Keep in mind that all tip income is taxable. If you get tips, you must keep a daily log so you can report them. You must report $20 or more in cash tips in any one month to your employer. And you must report all of your yearly tips on your tax return.
4. Money you earn doing work for others is taxable. Some work you do may count as self-employment. This can include jobs like baby-sitting and lawn mowing. Keep good records of expenses related to your work. You may be able to deduct (subtract) those costs from your income on your tax return. A deduction may help lower your taxes.
5. If you’re in ROTC, your active duty pay, such as pay you get for summer camp, is taxable. A subsistence allowance you get while in advanced training isn’t taxable.
6. You may not earn enough from your summer job to owe income tax. But your employer usually must withhold Social Security and Medicare taxes from your pay. If you’re self-employed, you may have to pay them yourself. They count toward your coverage under the Social Security system.
7. If you’re a newspaper carrier or distributor, special rules apply. If you meet certain conditions, you’re considered self-employed. If you don’t meet those conditions and are under age 18, you are usually exempt from Social Security and Medicare taxes.
8. You may not earn enough money from your summer job to be required to file a tax return. Even if that’s true, you may still want to file. For example, if your employer withheld income tax from your pay, you’ll have to file a return to get your taxes refunded

Monday, April 21, 2014

Missed the 4/15 deadline?

The IRS has some advice for taxpayers who may have missed the April 15 tax filing deadline.
According to the service, those who were late should:
  • File soon. Taxpayers who owe taxes should file and pay as soon as they can, to minimize interest and penalty charges. The IRS did note, though, that there is no penalty for late filing if the taxpayer is due a refund.
  • E-file. It’s available through October 15, and is the fastest way to file taxes.
  • Pay as much as they can. If they owe tax but can’t pay it all at once, they should pay as much as they can when they file, and then pay the remainder as soon afterward as they can, to stop further penalties and interest.
  • Make a payment agreement online. If they need more time to pay, the IRS said the easiest way to apply for a payment plan is through its Online Payment Agreement tool. They can also mail in Form 9465, Installment Agreement Request.
The agency also noted that the IRS Free File service was still available, and that taxpayers should be aware that even those who are not required to file may still be eligible for a refund – but only if they file within three years.

Thursday, March 13, 2014

DD in box 12 of your W-2?

What You Need to Know about the Amount of Health Insurance Reported on Form W-2
You may be wondering if you have to report the value of your employer-sponsored health insurance coverage, which may appear on your W-2, Wage and Tax Statement when you file your 2013 federal income tax return.
Here is what you need to know about the value shown on your W-2.
  • The health care law requires certain employers to report the cost of coverage under an employer-sponsored group health plan.
  • The amount of employer-sponsored health insurance coverage appears in Box 12 of the W-2, and has the code letters “DD” next to it.
  • Reporting the cost of health care coverage on the Form W-2 does not mean that the coverage is taxable or that it needs to be reported on your tax return.
  • The amount is only for information, and shows the payments made by you and your employer and is not included in the amount shown in Box 1, which is the amount of taxable earnings.