Monday, March 27, 2017

Deducting Business Meals and Entertainment

Business Meals and Entertainment are part of every small business. If you incur business meals and entertainment keep in mind that you’ll need to follow these rules to support the deduction and even then the business meals and entertainment expenses will be limited:

Ordinary and necessary - All business expenses must meet the general deductibility requirement of being "ordinary and necessary" in carrying on the business. Another way to look at it is to ask if the expenses are customary or usual, and appropriate or helpful to the conduct of your business. Thus, if it is reasonable in your business to entertain clients or other business people you should be able to pass this general test.
 
"Directly related" or "associated with" – In addition to being ordinary and necessary, meals and entertainment expenses must be either "directly related to" or "associated with" the business. 

To be directly related, the expense needs to involve an active discussion aimed at getting immediate revenue. These expenses need to have an objective of getting additional business and not just general goodwill. It also requires that you discuss business actively during the event. If the expense takes place in a clear business setting, it is easy to meet the directly related test. But when the discussion takes place at a sporting event, night club or party, it doesn’t meet this test. However the expense may qualify as "associated with" the active conduct of business if the meal or entertainment event precedes or follows (i.e., takes place on the same day as) a substantial and bona fide business discussion. Under these circumstances, the event will be considered associated with the active conduct of the business if its purpose is to get new business or encourage the continuation of a business relationship. For meals, you (or an employee of yours) must be present for the expense to qualify.

Substantiation. There’s an old saying in the accounting field that “if it wasn’t documented, it didn’t happen.” Almost as important as qualifying for the deduction are the requirements for proving that it qualifies. Using a reasonable estimate isn't sufficient to stand up to the IRS. To substantiate the expenses, keep documentation that establishes the amount spent, the time and place, the business purpose, and the business relationship of the individuals involved. For expenses of $75 or more, you will also need a copy of the receipt to go along with the documentation. There are several apps that make it easy to meet these requirements from the convenience of your smart phone.
Deduction limitations. Now you have jumped through the first three hurdles just to learn that additional limitations may apply. First, expenses that are "lavish or extravagant" aren't deductible. There’s no hard and fast rule about what is lavish or extravagant, but most of us have enough common sense to understand what would raise additional scrutiny. More importantly, however, once the expenditure qualifies, it is only 50% deductible, reducing the tax benefit.
 
Summary
 
When it comes to business meals and entertainment here’s a quick list to keep in mind:
  • Is it an ordinary and necessary part of our business?
  • Is it directly related or associate with the prospect of obtaining immediate new business?
  • Did I document amount spent, the time and place, the business purpose, and the business relationship of the individuals involved?
  • If the expense was over $75, did I keep the receipt?
  • Could the expenditure be considered as lavish or extravagant?
Answer these questions and document your business meals and entertainment to support the deductions. As always, consult a qualified tax professional with any questions you have regarding your business.

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.