Monday, November 28, 2016

529 Education Savings Plans

529 Education Savings Plans

Do you have a child or grandchild who is going to attend college or trade school in the future? Are you concerned with how to pay for their education? If so, you are like many of us that desire our children or grandchildren to continue their education and are concerned with how to pay for it.

You have may have heard about qualified tuition programs, also known as 529 plans (named for the Internal Revenue Code section that provides for them). 529 plans allow prepayment of higher education costs on a tax-favored basis, by deferring or even completely eliminating the taxes on any earnings of the account. You can think of it as a Roth IRA for education.

Types of 529 Plans

There are two types of programs:

Prepaid plans allow you to buy tuition credits or certificates at present tuition rates, even though the beneficiary may not be starting college for some time. Prepaid plans were popular when first introduced, but have declined in availability; and
Savings plans that allow the account owner to make contributions and earn a return until the funds are withdrawn at a later date.

How 529 Plans Work

Contributions are not deductible for federal income taxes however, many states offer credits and deductions for contributions to state sponsored plans. Using a state sponsored plan doesn’t limit the beneficiary to attending school in that state. Most state plans offer great investment choices with low investment costs. The website publishes information on states offering credits and deductions for 529 contributions. 

The earnings on the account aren't taxed while the funds are in the program. Beneficiaries can be changed on the account and account owners can roll over the funds in the program to another plan for the same or a different beneficiary without income tax consequences.

Distributions from the program are tax-free up to the amount of the student's qualified higher education expenses. These include tuition, fees, books, supplies, and required equipment. Reasonable room and board is also a qualified expense if the student is enrolled at least half-time.

Distributions in excess of qualified expenses are taxed to the beneficiary to the extent that they represent earnings on the account. A 10% penalty tax is also imposed.

Eligible schools include colleges, universities, vocational schools, or other postsecondary schools eligible to participate in a student aid program of the Department of Education. This includes nearly all accredited public, nonprofit, and proprietary (for-profit) postsecondary institutions. A school should be able to tell you whether it qualifies.

Contributions made to the qualified tuition program are treated as gifts to the student, but the contributions qualify for the annual gift tax exclusion, which is currently $14,000. If your contributions in a year exceed the exclusion amount, you can elect to take the contributions into account ratably over a five-year period starting with the year of the contributions. Distributions from a qualified tuition program are not subject to gift tax, but a change in beneficiary or rollover to the account of a new beneficiary may be.


529 Plans are a great way to save for a child or grandchild’s education. These plans can yield tax savings since earnings are not taxed if used for qualified education expenses. Many states offer credits or deductions, so it may be beneficial to start a plan to use for paying current post-secondary education expenses. If you are considering how to pay for college expenses of a child or grandchild, consult a qualified tax professional.

Monday, November 21, 2016

Can I Deduct the Cost of Spouse Business Travel?

Can I Deduct the Cost of Spouse Business Travel?

Have you ever been enticed by professional education or a customer meeting in an exotic destination? Even thought about how nice it might be to bring your spouse along to make the trip more enjoyable? Wouldn’t it be even better if you could write-off that trip? Read on and learn how to maximize those travel costs.

Rules on Spousal Travel Costs

The IRS has some very restrictive rules for deducting a spouse's travel costs. First of all, to qualify, your spouse must be your employee. So unless your spouse is an employee, you can't deduct the travel costs of a spouse, even if his or her presence has a bona fide business purpose. This requirement prevents deductibility in most cases.

If your spouse is your employee and their presence on the trip serves a bona fide business purpose, you can deduct his or her travel costs. Make certain that the spouse’s presence is more than incidental and that it is necessary. For example, attending for customer goodwill isn’t considered necessary. Document the purpose of their travel to support the deduction. This is especially important when there is a vacation element to the trip, i.e., if your spouse will be spending time sightseeing, etc.

If your spouse's travel satisfies these tests, the normal deductions for business travel away from home can be claimed. These include the costs of transportation, meals, lodging, and incidental costs such as dry cleaning, phone calls, etc.

Deductible Costs When a Spouse’s Travel Doesn’t Qualify

If your spouse's travel doesn't satisfy the requirements, you may still be able to deduct a substantial portion of the trip's costs. The rules don't require you to allocate 50% of your travel costs to your spouse. You need only allocate to any additional costs you incur for your spouse. In many hotels the cost of a single room isn't that much lower than the cost of a double. If a single costs you $150 a night and a double costs you and your spouse $200, the disallowed portion of the cost allocable to your spouse would only be $50. And if you drive your own car or rent a car, the cost will be fully deductible even if your spouse is along. Of course, separate transportation, meals or other costs, incurred by your spouse wouldn't be deductible.

Discuss these rules with a qualified tax advisor before planning a business trip that includes your spouse. Hopefully, you can have a successful business trip while enjoying time with your spouse and getting to benefit from the tax deduction.


Monday, November 14, 2016

Installment Sales of Business Property

Installment Sales of Business Property

Entrepreneurs build businesses and hopefully reap the benefits of their hard work when they can ultimate sell the business.

When it comes to selling a business or business property, sellers may be confronted with the decision to carry the financing. During times when bank financing for buyers tightens up, seller financing a portion or all of the transaction may be the seller’s only option to complete a transaction. Aside from the seller’s risk associated with carrying the financing, there are tax implications that must be taken into consideration.

Taxable Gain versus Recovery of Basis

When a business or business property is sold, the gross proceeds can generally be broken into two categories, recovery of the seller’s basis with the remaining portion being treated as a taxable gain. In the case of seller financing, there is also be interest income that is received based on the terms of the installment agreement.

General Tax Benefits of an Installment Sales

Generally speaking, an installment sale allows the seller to take taxable gains over the period of the agreement. This most often leads to the seller being taxed at lower rates versus receiving the payment upfront and taxed at higher marginal rates in the year of the sale. Lump sum payments in the year of the sale can also subject the seller to addition taxes such as the net investment income tax and other “high earner” taxes. And there’s always the possibility of Alternative minimum tax that should be considered in the transaction.

Tax Reporting in an Installment Sale

When a seller receives payments from the buyer over time, sellers report the gain on the payments in the year received, rather than reporting the entire gain in the year of the sale. Thus, with each payment received, the seller recognizes a pro rata portion of the gain which is subject to tax. You must use the installment method unless you elect out of it. However, here are some things to be aware of:

Recapture of Depreciation

When using an installment note, any depreciation previously taken on real or business property and equipment must be recaptured in the year of the sale, regardless of the timing of the payments on the note. The portion of the gain related to depreciation recapture is recognized at the time of the sale even if you do not receive any cash at that time. Business owners are often surprised to find out they are taxed on the recapture of depreciation even though they did not collect a significant portion of the sales in the initial year.

Work with your advisor to ensure that the initial year of proceeds are adequate to cover any initial taxes resulting from the recapture of depreciation.

Avoid Constructive Receipts

A seller’s effort to mitigate risk in an installment sale can trigger recognition of the gain and defeat any benefit of taking the gains over the installment period. Receiving payment in an installment sale is not the only trigger for recognizing gains.

The buyer's debt cannot be payable on demand or readily tradable on an established securities market. In addition, the debt cannot be secured directly or indirectly by cash or a cash equivalent, such as a certificate of deposit or a treasury note. If this is the case, the IRS considers the seller to have constructively received payment on the installment note. However, the debt can be backed up by a third party guarantee or secured by a standby letter of credit.

Property Excluded from Installment Sales

The installment method cannot be used for all sales of business property. Sales of property by a dealer or sales of publicly traded property, such as stock or securities that are traded on an established securities market are excluded from installment sales. Thus, the installment method is not available to the extent the gain includes gain on your inventory or gain on publicly traded property.

Transfer of Installment Notes

Selling or discounting the installment note will trigger recognition of gains for the seller. Thus, the advantage of an installment sale is limited if you intend to transfer the note in the future. However, the transfer to a spouse or a transfer at death continue the deferral of the gain.

Plan Your Sale to Minimize Taxes

Often times sellers wait to consult with their tax advisors until the sale has be substantially negotiated. The process of selling a business has been likened to dancing with a bear. Once you are in step with the bear, it is very hard to change the dance. Work with your advisor in advance of negotiating a business sale to avoid any tax surprises and/or the possibility of having to renegotiate a deal.

Monday, November 7, 2016

Explaining College Savings Plan AR 529 Tax Deduction

We all know that college education costs have risen significantly over the past several years and the trend is expected to continue.  We also hope that our children or grandchildren will receive scholarships and financial aid to cover those costs.  Some of you may have even planned ahead by saving for college costs in excess of scholarships and financial aid.  Generally saving for college is done through a Section 529 plan which allows for tax free growth.
If your child or grandchild is ready to attend college and you have not funded a 529 plan, you can still benefit by establishing a state sponsored 529 account.  Taxpayers in Arkansas are allowed a deduction on their state tax return of up to $5,000 for individuals and $10,000 for married couples.  The savings on your Arkansas taxes for making this contribution can be as much as $700 for a married couple. As an Arkansas taxpayer, this opportunity is available even if the student attends an out of state school.
If you have established a 529 plan with a provider other than the state sponsored plan, you can still benefit. Rollovers from outside plans to the Arkansas sponsored plan qualify for the contribution deduction. Under this scenario, we recommend transferring not more than $10,000 per year to the state sponsored plan to maximize the state tax benefit. Please consult us before implementing this strategy, as rollovers from other state sponsored plans may have tax implications from those states.
You can establish the 529 plan for Arkansas on-line at We can assist you at establishing the 529 account at no charge. Once established, you contribute the funds needed to pay the qualified education costs and then use the 529 account to pay such costs.  Provide us with the contribution information when we file your taxes and we will take the appropriate deduction on your Arkansas tax return.
States Other Than Arkansas
Many states offer deductions for education savings accounts and some states even offer credits. Here’s a link to the Saving for College website that lists the plans for each state .
Consult a tax professional before establishing a 529 or other college savings plan. If you have questions about this potential tax savings strategy, please give us a call.