Monday, March 20, 2017

Your Business May Benefit from the Research Tax Credit

Legislation in late 2015, made the Research Tax Credit permanent and not part of the federal tax provisions that were commonly referred to the “extender provisions”.

Basics of the Credit

We are not going to get into many of the specifics of the Research Tax Credit here, but rather just provide you with a quick overview.

Sometimes referred to the Research and Experimentation Tax Credit, this credit can apply to many businesses and industries. It doesn’t require that you have lab and conduct scientific experiments. Many businesses have processes whereby they are modifying and improving existing products and processes and assuming the risk of failure if the improvement is not achieved. While not all businesses are eligible for the credit, it is worth a quick analysis to determine if it does apply and is cost effective to calculate and take the credit. Also, many states have research credits that can be sold to other taxpayers thus, providing the business with a source of capital if the tax credit is not of value to the business. Along these lines, the federal research tax credit may be used in certain situations to offset payroll tax liabilities. This is a big change that can benefit companies, especially those in the startup phase.

The statutory rules for the research tax credit essentially provided for a credit equal to the sum of (1) 20% of the excess of the "qualified research expenses" (QREs) over the greater of (a) 50% of the QREs or (b) an amount based on a formula that takes account of the QREs and gross receipts in certain earlier tax years, (2) 20% of the excess of research payments paid to certain outside organizations over an amount calculated under a complex formula, and (3) 20% of amounts paid or incurred to an energy research consortium for energy research.

The legislation that made the research tax credit permanent also added two features that are especially favorable to small business. First, it provides that beginning in 2016 eligible small businesses ($50 million or less in gross receipts) may claim the credit against alternative minimum tax (AMT) liability. Also, beginning in 2016, the new law provides that the credit can be used by certain even smaller businesses against the employer's portion of the Social Security portion of the employer's payroll tax (i.e., FICA) liability.

Summary

The federal research tax credit is now permanent.
Many businesses may not realize that the research credit can be applicable to their business.
Recent legislation allows the credit to be used to offset payroll taxes in certain situations.
Many states offer a research tax credit, some of which can be sold to other taxpayers.
Utilize tax professionals specializing in the research tax credit to determine if your business qualifies and if the process will be cost effective.
Businesses subject to AMT are no longer limited in their utilization of the tax credit.

As we always advise, seek a qualified tax professional to explain and determine if the research tax credit applies to your business.

Monday, March 13, 2017

Paying Taxes By Credit or Debit Card

Cash or check may be soon replaced with Plastic or App in today’s economy. Even the IRS and several states give you the option to pay your tax bill online via credit or debit card today.

Authorized Service Providers

You will find a list of authorized service providers that accept online payments on behalf of the IRS at
https://www.irs.gov/uac/pay-taxes-by-credit-or-debit-card. The companies have their own fee schedules which are listed on link above. They accept American Express, Discover Card, MasterCard, and VISA credit and debit cards. If you file early, you can still wait until April to make the online payment.

Paying With Your Return

Taxpayers may have the option of making credit card payments for the balance due on Form 1040, 1040A, or 1040EZ through tax software or through professional preparers using certain types of tax software. Some tax preparation software provides combined electronic filing and electronic payment for those who want to pay taxes with a credit card. But some tax preparation software may not allow taxpayers to make partial payments. At this time, our software does not offer the option to pay by card.

Various Tax Payments Available

In addition to balances due on individual returns, taxpayers can pay individual estimated taxes; installment payments; payments with extension of time to file (Form 4868); trust fund recovery penalty; and Form 5329 (IRA taxes) through this service. For forms in the 1040 series, credit card payment options begin in January. However, if you don't pay your full tax liability by the due date in April (see below), you probably will be liable for interest and penalties. Certain business and fiduciary tax payments can also be made using the above methods.

Advantages and Disadvantages

One advantage of using the credit card method, aside from the obvious one of being able to delay paying your tax liability, is that if you participate in any credit card incentive program, such as airline mileage or certain reward programs, you will earn points by charging your taxes. A disadvantage is the convenience fee charged by service providers (both for credit and debit card transactions). This fee, may be deductible on next year’s return as a miscellaneous itemized deduction.

Summary

Like most businesses today, the federal government and some states accept credit and debit card payments. You will have to determine if the convenience and possible card incentives outweigh the fees associated with paying by credit or debit card.

Monday, March 6, 2017

Employer Reporting of Health Coverage


With the change in administration and current initiative to either abolish, replace or possibly rewrite the Affordable Care Act commonly known as Obamacare, there is much uncertainty regarding the healthcare mandate and how employers are affected by the Act.

Basic Reporting Requirements

Currently, certain employers are required to report information related to their employee's health coverage.

Employers with 50 or more full-time employees also referred to as applicable large employers (ALEs) must use Forms 1094-C and 1095-C to report the information about offers of health coverage and enrollment in health coverage for their employees. Form 1094-C reports summary information for each employee and Form 1095-C is filed with the IRS. Forms 1094-C and 1095-C are also used in determining whether an employer owes payments under the employer shared responsibility provisions, also known as the "employer mandate". Under the employer mandate, an employer can be subject to a penalty if it does not offer affordable minimum essential coverage that provides minimum value to substantially all full-time employees and dependents. Form 1095-C is also used in determining eligibility of employees for premium tax credits.

Part II of Form 1095-C reports the following information for each employee who was an ALE's full-time employee for any month of the calendar year:

Employee's name, social security number (SSN), and address,
Employer contact and Employer Identification Number (EIN), including the contact person's name and phone number,
Description of the offer of coverage (using one of the codes provided in the instructions) and the months of coverage,
Each full-time employee's share of the cost for coverage under the lowest-cost, minimum-value plan offered by the employer, by calendar month, and
Applicable safe harbor (using one of the codes provided in the instructions) under the employer shared responsibility or employer mandate penalty.

Employer-Sponsored Self-Insurance Plans

When an ALE offers health coverage through an employer-sponsored self-insured plan, the ALE is required complete Part III of Form 1095-C. Keep in mind that a self-insured plan also includes a plan that offers some enrollment options as insured arrangements and other options are under self-insured options. Part III reporting includes the name, SSN, and coverage information about each individual employee and dependents covered under the employer's health plan. ALEs also indicate the months for which these individuals were covered in Part III.

Group and Multiemployer Health Plans

When coverage is offered through an insured health plan or a multi-employer health plan, the issuer of the insurance or the sponsor of the plan providing the coverage provides the information about the health coverage to any enrolled employees, and the employer should not complete Form 1095-C, Part III, for those employees.

Employers Not Subject to the Employer Mandate

Employers providing employer-sponsored self-insured health coverage that are not subject to the employer mandate, are not required to file Forms 1094-C and 1095-C and reports instead on Forms 1094-B and 1095-B for employees who enrolled in the employer-sponsored self-insured health coverage. On Form 1094-C, an employer can also indicate whether any certifications of eligibility for relief from the employer mandate apply.

Summary

Employers should be aware of the reporting requirements under ACA and monitor any legislative changes that may change or eliminate current requirements. ALEs have been through two complete reporting cycles at the time of this writing and should understand how ACA affects their business. This is a fairly complex area for even large employers. It is advisable for employers to obtain specific training on the topic and engage a qualified consultant to assist them in the reporting process when necessary. Since this area is a rather complicated and stretches outside of the normal area of taxation, consultation may come from specialists including tax professionals.

Monday, February 27, 2017

Does Your Employer Offer Financial and Retirement Counseling?




Some employers may offer financial counseling services as a benefit to their employees. It is a nice benefit, but keep in mind that the employee receiving the benefit must report value of this benefit as income on their tax return. However, the employee may be entitled to an offsetting deduction that would allowing them avoid tax on some of the benefit.

Benefit is Treated as Income

These employer provided services can often quite extensive, including consideration of your savings and investments, life insurance coverage, real estate, retirement benefits and personal tax and estate planning advice. These services are typically provided by a professional consulting firm that is paid by the employer as a fringe benefit. The value of these services will be reported by your employer as wages on your W-2. The employer is also required to withhold income tax and FICA from the amount it reports as wages. Keep in mind that if your employer provides only minor and infrequent financial services, such as information about your employee benefits and how they affect your tax situation, you wouldn't be taxed on their value.

Taxation of the Benefit

Reporting the benefit as income doesn't necessarily mean that you will be fully taxed on it. You may be entitled to some deductions that can reduce the amount subject to tax.

Individual taxpayers are permitted to deduct investment expenses, such as expenses related to the collection or production of income. They also may deduct expenses related to the determination, collection, or refund of tax. Financial counseling fees included in your income are also deductible as if you had paid them yourself.

These expenses are claimed as miscellaneous itemized deductions, which are allowed only to the extent they exceed 2% of your adjusted gross income. You would add the deductible counseling expenses together with your other deductible investment and employment related expenses and any other miscellaneous deductions you might have, and subtract out 2% of your adjusted gross income. Only the balance, if any, would reduce your income subject to tax.

Retirement Planning Services

Under a special rule, employer provided retirement planning services aren't taxable if the employer maintains a retirement plan. The advice that can be provided tax-free isn't limited to information about the plan, but includes information about your income needs in retirement and how those income goals can be achieved.

Summary

Financial and retirement counselling are great benefits employers may offer to employees. It shows that the employer is concerned for the financial well-being of their employees. From the employee perspective, these are services that they may not otherwise choose to obtain. While the benefits are taxable, the employee should consider as if they are obtaining a valuable benefit for a fraction of the cost they would pay themselves. For example, if the employee has an effective tax rate of 20%, services priced at $2,000 will cost the employee only $400 (in the form of taxes on the benefit). In most cases we’d all like to buy something for an 80% discount. If your employer offers financial and retirement planning as a benefit, you should consider taking advantage of it. The relatively low cost to you in the form of taxes could yield you big benefits in the long run.

Monday, February 20, 2017

Notifying the IRS of an Address Change

Almost all of us will make a move during our lifetime. Whether you are making a move across town or across the country, you need to add the IRS to the list of organizations to notify of an address change.

Notifying the IRS of your address change is important because you’ll want to deposit any refunds the IRS may send you as soon as possible and secondly, failing to respond to a tax notice can be costly.

The IRS doesn't have to prove delivery to meet its responsibilities in many cases. The IRS is only required to send correspondence to your "last known address." The "I never got it" defense is lost if IRS properly sent the notice to your old address.

The IRS won't owe you any interest for the delay, if a refund is delayed due to a change in your address not reported to the IRS.

Similarly, notices of tax deficiency require a 90 day response otherwise you will lose the right to contest the matter in the Tax Court. While you can still wage the battle in federal district court, you will have to pay the tax first, and there may be other tactical disadvantages of doing so. You will also be assessed penalties and interest costs even though you didn't know you had an outstanding tax liability.

There are other notices IRS must send to you before taking certain actions affecting you so it’s in your best interest to keep IRS informed about your current address.

How to Notify the IRS of your Address Change

Filing a tax return showing your new address will make the change of address, but only after the return is processed. This could take many weeks after you file. The U.S. Postal Service will also notify the IRS of any permanent forwarding address, but this also takes time to process. To be safe, you should notify IRS of the change directly.

For your convenience, click on this link for
Form 8822 which you can use to notify IRS of the change. Be sure to sign the form, make a copy for your records, and send the original to the IRS at the address listed in the instructions. If your children file income tax returns, you must file a separate Form 8822 for each.
Also, don’t overlook changing your address with any states that you file income taxes with.

Monday, February 13, 2017

Gain or loss on sale of property received as a gift


Everyone likes to receive gifts, especially if its cash. But if you happen to be considering gifting property or stock or are the lucky recipient of such a gift, there are a few things you’ll need to know. There are tax consequences to the recipient if the property is sold at a later date. And just to clarify, inherited property is not the same a gifted property.

When gifted property is sold, recipient or donee will determine the gain or loss using the “basis” transferred from the donor. For most property you buy yourself, the basis is simply your cost. For property received as a gift, however, special basis rules apply.

General rule-carryover basis

Generally, you receive the same basis in the property that the donor had in it. This is referred to as the "carryover" basis, because the donor's basis carries over to you as donee along with the gift. Taxpayers are often unaware of this rule and mistakenly believe the basis to be the value of the gift when they receive it. Along with the carryover basis, the donor’s holding period also carries over to the done. Thus, gifts of property held for over one year by the donor carry a long-term holding period. If the gifted property was held for less than one year, it carries a short-term holding period unless the donee continues to hold it for over one year from the date it was acquired by the donor.

For Example: Kyle bought shares of stock for $1,000 and gave it to his nephew Allen when the stock was worth $9,000. Allen later sold the stock for $11,000. Allen's basis in the stock is only $1,000-the same basis Kyle had in the stock. Thus, Allen must report a $10,000 of gain on the sale.

If Allen sells the stock for $6,000, he will report a gain of $5,000, even though the stock declined in value in his hands. Allen is only be able to report a loss if he sells the stock for less than $1,000.

Loss property

When the value of property to be gifted decreases while owned by the donee, special rules apply. In this case, the donor's basis is higher than the value of the property and the donee must keep track of two figures for basis purposes. To measure gain on a later sale, the general carryover basis rule applies and the donee’s basis is the same that the donor had. But to measure loss on a later sale, the donee’s basis is limited to the value of the property at the time of the gift.

For example: Lauren bought stock for $12,000 and gave it to her nephew Ted when it was worth $8,000. Ted sold the stock for $6,000 and reports a $2,000 loss ($6,000 less the basis of $8,000).

Assuming the same facts as above, except that Ted sells the stock for $15,000. Ted's basis is $12,000, the same basis Lauren had and Ted’s gain is $3,000.

Under these rules, if a donee sells the gifted property for an amount in between donor’s original cost and the property's date of gift basis and basis, there will be no gain or loss on the sale.

Using the same information as above, except that Ted sells the stock for $10,000. Here, to measure Ted's loss, his basis would be $8,000, so there's no loss on the sale for $10,000. Similarly, to measure Ted's gain, his basis would be $12,000, so there's no gain on a sale for $10,000. Thus, Ted reports no gain or loss on the sale.

Did the donor pay gift tax?

If the value of the gifted property exceeds the annual gift tax exclusion (currently $14,000), the donor may have paid federal gift taxes on it. If so, the donee is able to increase the basis by any federal gift taxes attributable to appreciation in the gifted property. Donee’s will want to ask if the donor paid any gift tax and provide this information to their tax professional to ensure the correct basis is used.

Getting basis information

It's important to get the basis information you need from the donor. Many donors include this in the cover letter that accompanies the gift. If your donor didn't, you may find it awkward to say, "Thanks for the generous gift-what did you pay for it?" In this case, donees may ask their tax professional to contact the donor to explain the need for this information.

Don’t delay in getting the basis information when you receive a gift. It can be difficult to go back and establish basis at a later date and if you can't establish basis, IRS can impose a zero-basis treating the entire sale price as gain. Don't put yourself at risk in this fashion.

If you are considering making a gift of property or are the recipient of a gift, discuss the gift with your tax professional and obtain the documentation that you will need to support your basis in the property when it is eventually sold.

Monday, February 6, 2017

Deducting Local Transportation Costs

If you are in business, you’ll undoubtedly incur local transportation costs and you will want to make sure you can deduct these costs. If you are not deducting the actual costs incurred for a business vehicle, you’ll want to deduct local travel based on mileage.

Local transportation refers to travel in which you aren't away from your tax home (the city or general area in which your main place of business is located) long enough to require sleep or rest. Different rules apply if you are away from your tax home for significantly more than an ordinary work day and need sleep or rest in order to do your work.
 
Commuting Costs

When it comes to local transportation rules, your commuting costs are not deductible. So any fares or transportation costs between your home and business are nondeductible. But maybe you work during your commute, e.g., via a cell phone, or by performing business-related tasks while on the train or bus. Unfortunately for you, this does not change the deductibility of the commuting costs.

However, there is an exception for commuting to a temporary work location that is outside of the metropolitan area in which you live and normally work. A temporary work location is one where your work is realistically expected to last (and does in fact last) for no more than a year.

Local Travel

Now that you have endured the commuting costs and arrived at work, the cost of any local trips you take for business purposes is a deductible business expense. This includes the cost of travel from your office to visit a client, pick up supplies, etc. Also, if you have two business locations, the costs of travel between them is deductible.

Recordkeeping

Save the receipts for taxi or public transportation and make a notation of the expense in a logbook, and record the date, amount spent, destination, and business purpose. If you use your car, note miles driven instead of amount spent along with any tolls paid or parking fees. There are many apps that can be used to track your business mileage. We use and recommend
MileIQ which is available for Apple or Android. MileIQ makes it easy to track mileage for business as well as personal medical and charitable mileage that may be deductible on your individual tax returns. It’s not free, but as the old saying goes – You get what you pay for! Contact us and we’ll refer you to MileIQ for a 20% discount on an annual subscription.
The IRS changes the mileage deduction rate each year, so another advantage to MileIQ is that the app takes care of the change in rates for you.