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Throw a company picnic for employees this summer and enjoy larger deductions 06-22-2016

Many businesses host a picnic for employees in the summer. It’s a fun activity for your staff and you may be able to take a larger deduction for the cost than you would on other meal and entertainment expenses.

Deduction limits

Generally, businesses are limited to deducting 50% of allowable meal and entertainment expenses. But certain expenses are 100% deductible, including expenses:

  • For recreational or social activities for employees, such as summer picnics and holiday parties,
  • For food and beverages furnished at the workplace primarily for employees, and
  • That are excludable from employees’ income as de minimis fringe benefits.

There is one caveat for a 100% deduction: The entire staff must be invited. Otherwise, expenses are deductible under the regular business entertainment rules.

Recordkeeping requirements

Whether you deduct 50% or 100% of allowable expenses, there are a number of requirements, including certain records you must keep to prove your expenses.

If your company has substantial meal and entertainment expenses, you can reduce your tax bill by separately accounting for and documenting expenses that are 100% deductible. If doing so would create an administrative burden, you may be able to use statistical sampling methods to estimate the portion of meal and entertainment expenses that are fully deductible.

For more information about deducting business meals and entertainment, including how to take advantage of the 100% deduction, please contact us rsibley@abcpa.com, bbailey@abcpa.com, dchandler@abcpa.com, or cmozingo@abcpa.com.

© 2016

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An Introduction To IC-DISCs 06-20-2016

In today’s global economy, sales from the United States (“US”) to foreign countries are more common than ever before. What may not be as commonly known are certain tax advantages that might allow US entities to reduce and defer paying taxes on its foreign sales.

US entities that sale into foreign markets can utilize something known as an interest-charge domestic international sales corporation (“IC-DISC”). Basically, it is a separate, incorporated entity established by a US company for the purpose of receiving commissions. The commissions paid into the IC-DISC are not subject to Federal Income Tax, but rather when distributions are made to the IC-DISC owners, the owners pay taxes at the current dividend rate.

The following chart illustrates the difference in cash flow to the owners as a result of the tax advantages that may be available through an IC-DISC.

How-an-IC-DISC-can-reduce-Taxes

Generally, the commission has to be paid to the IC-DISC within 60 days of the close of the taxable year. Since commissions paid to an IC-DISC are not taxable until they are distributed to the owners, considering certain limitations, the IC-DISC may retain the commissions and thereby defer payment of taxes. After a year, however, the owners are subject to interest payments on the commissions retained in the IC-DISC.

In summary, an IC-DISC can be an extremely effective means of reducing federal taxes for a US company doing business internationally. As is the case with anything tax-related, however, it requires crossing all t’s and dotting all i’s. Because of that, it is imperative to seek out tax professionals with experience in these types of transactions to determine eligibility and ensure compliance.

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More Adult Children Opting to Live with Parents 06-20-2016

Plans to remodel your kid's bedroom into an exercise room or walk-in closet after he or she completes school may have to be put on hold. A recent study reveals that more young adults are opting to live with their parents as opposed to moving out on their own or with friends. Surprisingly, the uncertain economy isn't always the reason and many parents and live-in adult children are happy with the set-up. Here's more on this emerging trend. Continue reading


Finding the right tax-advantaged account to fund your health care expenses 06-15-2016

With health care costs continuing to climb, tax-friendly ways to pay for these expenses are more attractive than ever. Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs) and Health Reimbursement Accounts (HRAs) all provide opportunities for tax-advantaged funding of health care expenses. But what’s the difference between these three accounts? Here’s an overview:

HSA. If you’re covered by a qualified high-deductible health plan (HDHP), you can contribute pretax income to an employer-sponsored HSA — or make deductible contributions to an HSA you set up yourself — up to $3,350 for self-only coverage and $6,750 for family coverage for 2016. Plus, if you’re age 55 or older, you may contribute an additional $1,000.

You own the account, which can bear interest or be invested, growing tax-deferred similar to an IRA. Withdrawals for qualified medical expenses are tax-free, and you can carry over a balance from year to year.

FSA. Regardless of whether you have an HDHP, you can redirect pretax income to an employer-sponsored FSA up to an employer-determined limit — not to exceed $2,550 in 2016. The plan pays or reimburses you for qualified medical expenses.

What you don’t use by the plan year’s end, you generally lose — though your plan might allow you to roll over up to $500 to the next year. Or it might give you a 2 1/2-month grace period to incur expenses to use up the previous year’s contribution. If you have an HSA, your FSA is limited to funding certain “permitted” expenses.

HRA. An HRA is an employer-sponsored account that reimburses you for medical expenses. Unlike an HSA, no HDHP is required. Unlike an FSA, any unused portion typically can be carried forward to the next year. And there’s no government-set limit on HRA contributions. But only your employer can contribute to an HRA; employees aren’t allowed to contribute.

Questions? We’d be happy to answer them — or discuss other ways to save taxes in relation to your health care expenses.  For more information contact us rsibley@abcpa.com, bbailey@abcpa.com, dchandler@abcpa.com, or cmozingo@abcpa.com.

© 2016

 

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With Employee Benefit Plan Audits, the Numbers and the Risk Are Big 06-06-2016

$696.3 million. That’s a big number. It represents the money the Employee Benefits Security Administration (EBSA) restored to plans for FY 2015. How did they do it? By conducting almost 2,500 civil investigations, with over 67% of them resulting in monetary results or other corrective action. It also includes amounts restored in connection with the informal resolution of over 200,000 individual complaints.

275. That’s not a very big number. It happens to be the number of criminal investigations closed in FY 2015 by EBSA, which led to the indictment of 61 individuals – including plan officials, corporate officers, and service providers – for offenses related to employee benefit plans.

That small number looks a lot bigger when you realize it could include you. It looks even bigger when you consider that under the Sarbanes-Oxley Act, ERISA violations by individuals can result in fines up to $100,000 and jail terms up to 10 years, while companies may face up to $500,000 in fines.

So why am I telling you all of this? Because it is preventable, and because too many accounting firms continue to make errors, putting their clients – YOU – at risk.

In 2015, EBSA published a report detailing their assessment of the quality of over 81,000 CPA-prepared audits of employee benefit plans. The results were frightening:

  • 61% fully complied with professional auditing standards or had minor deficiencies
  • 39% contained major deficiencies that would lead to rejection of Form 5500 filing

Nearly four in ten were so bad they would have been rejected. That means roughly 32,000 plans, as well as the corporate officers responsible for them, were open to possible civil and criminal liability. According to the report, those out-of-compliance plans represent $653 billion and 22.5 million plan participants and beneficiaries.

But there is some good news. By working with a CPA firm that has a robust employee benefits practice, you can greatly reduce your exposure, because the study also found:

  • CPA firms performing the fewest EBP audits = 76% deficiency rate
  • CPA firms performing the most EBP audits = 12% deficiency rate
  • Members of the AICPA Employee Benefit Plan Audit Quality Center tended to produce audits with fewer deficiencies
  • Members of the AICPA Employee Benefit Plan Audit Quality Center have fewer audits with multiple deficiencies
  • As the level of employee benefit plan-specific training increased, the percentage of deficient audits decreased

Regulations are constantly changing, and many people still have not firmly grasped all the implications of Sarbanes-Oxley. What is easy to grasp, however, is the exposure of individuals and companies if they fail to comply with all applicable regulations.  Care should be taken by the plan administrator to select a CPA who possesses the requisite knowledge of plan audit requirements and expertise to perform the audit in accordance with professional auditing standards.

Selecting a qualified CPA is a critical responsibility in safeguarding your plan’s assets and ensuring compliance with ERISA’s reporting and fiduciary requirements.  If you do not already know, ask how many other employee benefit plans your CPA firm audits on an annual basis, including the types of plans. Also ask if they are members of the AICPA Employee Benefit Plan Audit Quality Center and inquire about the extent of the specific annual training your CPA firm receives in auditing employee benefit plans.

If you do not get satisfactory answers to those questions, it may be time to explore your options. The numbers facing you are too big – and the potential consequences too significant – to ignore the risk.

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Stock market volatility can cut tax on a Roth IRA conversion 06-01-2016

This year’s stock market volatility can be unnerving, but if you have a traditional IRA, this volatility may provide a valuable opportunity: It can allow you to convert your traditional IRA to a Roth IRA at a lower tax cost.

Traditional IRAs

Contributions to a traditional IRA may be deductible, depending on your modified adjusted gross income (MAGI) and whether you participate in a qualified retirement plan, such as a 401(k). Funds in the account can grow tax-deferred.

On the downside, you generally must pay income tax on withdrawals, and, with only a few exceptions, you’ll face a penalty if you withdraw funds before age 59½ — and an even larger penalty if you don’t take your required minimum distributions (RMDs) after age 70½.

Roth IRAs

Roth IRA contributions, on the other hand, are never deductible. But withdrawals — including earnings — are tax-free as long as you’re age 59½ or older and the account has been open at least five years. In addition, you’re allowed to withdraw contributions at any time tax- and penalty-free.

There are also estate planning advantages to a Roth IRA. No RMD rules apply, so you can leave funds growing tax-free for as long as you wish. Then distributions to whoever inherits your Roth IRA will be income-tax-free as well.

The ability to contribute to a Roth IRA, however, is subject to limits based on your MAGI. Fortunately, anyone is eligible to convert a traditional IRA to a Roth. The catch? You’ll have to pay income tax on the amount you convert.

Saving tax

This is where the “benefit” of stock market volatility comes in. If your traditional IRA has lost value, converting to a Roth now rather than later will minimize your tax hit. Plus, you’ll avoid tax on future appreciation when the market stabilizes.

Of course, there are more ins and outs of IRAs that need to be considered before executing a Roth IRA conversion. If your interest is piqued, discuss with us whether a conversion is right for you. For more information contact us rsibley@abcpa.com, bbailey@abcpa.com, dchandler@abcpa.com, or cmozingo@abcpa.com.

© 2016

 

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How many employees does your business have for ACA purposes? 05-31-2016

It seems like a simple question: How many full-time workers does your business employ? But, when it comes to the Affordable Care Act (ACA), the answer can be complicated.

The number of workers you employ determines whether your organization is an applicable large employer (ALE). Just because your business isn’t an ALE one year doesn’t mean it won’t be the next year.

50 is the magic number

Your business is an ALE if you had an average of 50 or more full time employees — including full-time equivalent employees — during the prior calendar year. Therefore, you’ll count the number of full time employees you have during 2016 to determine if you’re an ALE for 2017.

Under the law, an ALE:

  • Is subject to the employer shared responsibility provisions with their potential penalties, and
  • Must comply with certain information reporting requirements.

Calculating full-timers

A full-timer is generally an employee who works on average at least 30 hours per week, or at least 130 hours in a calendar month.

A full-time equivalent involves more than one employee, each of whom individually isn’t a full-timer, but who, in combination, are equivalent to a full-time employee.

Seasonal workers

If you’re hiring employees for summer positions, you may wonder how to count them. There’s an exception for workers who perform labor or services on a seasonal basis. An employer isn’t considered an ALE if its workforce exceeds 50 or more full-time employees in a calendar year because it employed seasonal workers for 120 days or less.

However, while the IRS states that retail workers employed exclusively for the holiday season are considered seasonal workers, the situation isn’t so clear cut when it comes to summer help. It depends on a number of factors.

We can help

Contact us for help calculating your full-time employees, including how to handle summer hires. We can help ensure your business complies with the ACA. For more information contact us rsibley@abcpa.com, bbailey@abcpa.com, dchandler@abcpa.com, or cmozingo@abcpa.com.

© 2016

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How summer day camp can save you taxes 05-19-2016

Although the kids might still be in school for a few more weeks, summer day camp is rapidly approaching for many families. If yours is among them, did you know that sending your child to day camp might make you eligible for a tax credit?

The power of tax credits

Day camp (but not overnight camp) is a qualified expense under the child and dependent care credit, which is worth 20% of qualifying expenses (more if your adjusted gross income is less than $43,000), subject to a cap. For 2016, the maximum expenses allowed for the credit are $3,000 for one qualifying child and $6,000 for two or more.

Remember that tax credits are particularly valuable because they reduce your tax liability dollar-for-dollar — $1 of tax credit saves you $1 of taxes. This differs from deductions, which simply reduce the amount of income subject to tax. For example, if you’re in the 28% tax bracket, $1 of deduction saves you only $0.28 of taxes. So it’s important to take maximum advantage of the tax credits available to you.

Rules to be aware of

A qualifying child is generally a dependent under age 13. (There’s no age limit if the dependent child is unable physically or mentally to care for him- or herself.) Special rules apply if the child’s parents are divorced or separated or if the parents live apart.

Eligible costs for care must be work-related, which means that the child care is needed so that you can work or, if you’re currently unemployed, look for work. However, if your employer offers a child and dependent care Flexible Spending Account (FSA) that you participate in, you can’t use expenses paid from or reimbursed by the FSA to claim the credit.

Are you eligible?

These are only some of the rules that apply to the child and dependent care credit. So please contact us to determine whether you’re eligible. For more information contact us rsibley@abcpa.com, bbailey@abcpa.com, dchandler@abcpa.com, or cmozingo@abcpa.com.

© 2016

 

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QSB stock offers 2 valuable tax benefits 05-12-2016

By investing in qualified small business (QSB) stock, you can diversify your portfolio and enjoy two valuable tax benefits:

1. Tax-free gain rollovers. If within 60 days of selling QSB stock you buy other QSB stock with the proceeds, you can defer the tax on your gain until you dispose of the new stock. The rolled-over gain reduces your basis in the new stock. For determining long-term capital gains treatment, the new stock’s holding period includes the holding period of the stock you sold.

2. Exclusion of gain. Generally, taxpayers selling QSB stock are allowed to exclude up to 50% of their gain if they’ve held the stock for more than five years. But, depending on the acquisition date, the exclusion may be greater: The exclusion is 75% for stock acquired after Feb. 17, 2009, and before Sept. 28, 2010, and 100% for stock acquired on or after Sept. 28, 2010. The acquisition deadline for the 100% gain exclusion had been Dec. 31, 2014, but Congress has made this exclusion permanent.

The taxable portion of any QSB gain will be subject to the lesser of your ordinary-income rate or 28%, rather than the normal long-term gains rate. Thus, if the 28% rate and the 50% exclusion apply, the effective rate on the QSB gain will be 14% (28% × 50%).

Keep in mind that these tax benefits are subject to additional requirements and limits. For example, to be a QSB, a business must be engaged in an active trade or business and must not have assets that exceed $50 million.

Consult us for more details before buying or selling QSB stock. And be sure to consider the nontax factors as well, such as your risk tolerance, time horizon and overall investment goals. For more information contact us rsibley@abcpa.com, bbailey@abcpa.com, dchandler@abcpa.com, or cmozingo@abcpa.com.

© 2016

 

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Putting your home on the market? Understand the tax consequences of a sale 05-11-2016

As the school year draws to a close and the days lengthen, you may be one of the many homeowners who are getting ready to put their home on the market. After all, in many locales, summer is the best time of year to sell a home. But it’s important to think not only about the potential profit (or loss) from a sale, but also about the tax consequences.

Gains

If you’re selling your principal residence, you can exclude up to $250,000 ($500,000 for joint filers) of gain — as long as you meet certain tests. Gain that qualifies for exclusion also is excluded from the 3.8% net investment income tax.

To support an accurate tax basis, be sure to maintain thorough records, including information on your original cost and subsequent improvements, reduced by any casualty losses and depreciation claimed based on business use. Keep in mind that gain that’s allocable to a period of “nonqualified” use generally isn’t excludable.

Losses

A loss on the sale of your principal residence generally isn’t deductible. But if part of your home is rented out or used exclusively for your business, the loss attributable to that portion may be deductible.

Second homes

If you’re selling a second home, be aware that it won’t be eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 exchange. Or you may be able to deduct a loss.

Learn more

If you’re considering putting your home on the market, please contact us to learn more about the potential tax consequences of a sale. For more information contact us rsibley@abcpa.com, bbailey@abcpa.com, dchandler@abcpa.com, or cmozingo@abcpa.com.

© 2016

 

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