‘Tis The Season for Giving

by Nicole Oeltjen

Tax Senior at Atchley & Associates, LLP

 

The holidays are approaching and with the spirit of giving all around you may be inspired to donate to a local charity. Charitable giving makes you feel good, and bonus-you can save on your tax liablity! There are several ways to donate to a charitable organization which can help those in need or to further a cause you are passionate about. You can donate good old fashion cash or non-cash items such as food, clothing, toys, as well as donations of stock and vehicles. When donating non-cash items, the deductible value is the fair market value of the item-generally the value at which the item would be exchanged between a willing buyer and a willing seller where both have reasonable knowledge of all the relevant facts. Best practice is to document the donation either with bank records, written acknowledgement from the organization, or a telephone bill if donating by text. If you donate similar non-cash items valued at more than $5,000, generally, you will need a qualified appraisal in order to claim a deduction. When donating a vehicle, the organization should issue you a Form 1098-C.

Although purchasing raffle tickets from an organization is helping the organization raise money, the cost of the raffle ticket is not considered a charitable contribution to the buyer, but rather a ticket purchase to gamble. You do not receive a deduction for buying charitable raffle tickets. However, donating items to an organization for a raffle or an auction is considered a non-cash donation to the extent of its fair market value.  If you purchase an item from an auction that the organization is holding then the charitable contribution is the amount that is in excess of the fair market value of the item purchased. Generally, you will want to obtain a written acknowledgement letter from the organization stating the fair market value along with the amount paid for the item purchased at the auction.

In order to receive a tax benefit you must file Form 1040 and itemize using Schedule A instead of using the standard deduction. This means your personal expenses such as medical, real estate and sales tax, mortgage interest, charitable contributions, and other qualified personal deductible expenses are greater than the standard deduction.

Be sure that your charitable donation is to a qualified 501(c)(3) organization. If you do not know, usually the organization’s website or acknowledgement letter will inform you of the type of non-profit organization. You can also check the IRS website to confirm.

Happy Giving!!

 

DOES YOUR PARTNERSHIP OR LLC AGREEMENT NEED TO BE AMENDED BY DECEMBER 31, 2017?

by Harold F. Ingersoll, CPA/ABV/CFF, CVA, CM&AA

Partner at Atchley & Associates, LLP

 

Partnerships and many LLCs file partnership income tax returns.  As a result of the Bipartisan Budget Act of 2015 (“BBA”), the IRS has new audit rules for entities that file partnership income tax returns beginning January 1, 2018.  These audit rules significantly change the regime that currently governs partnership tax audits, assessments and collections.

The condensed version of the changes is, in the past when a partnership was audited, the IRS pushed the adjustments through to the partners of the partnership who were partners in the year under audit.  The new rules allow the IRS to charge the tax, due to audit adjustments, directly to the partnership and the current partners.

Your first thought may be, why could this be a problem?  Well, let’s assume you bought into a partnership in 2017, and shortly thereafter the partnership is audited by the IRS for 2015 and there is an adjustment that causes there to be more taxes paid.  Under the new rules you would likely be paying the tax for the partners that were owners in 2015.

To solve this problem, you can make changes to your partnership or LLC member agreement.  Partnerships with 100 or fewer partners that meet certain other requirements may be eligible to elect to opt out of these rules.  For partnerships or LLCs that qualify for this “opt out”, the partnership agreements could be modified to make the “opt out” mandatory.

Another change with the BBA is the term of “Tax Matters Partner” is eliminated.  The new term is “Partnership Representative”.  The partnership or LLC agreement could be changed to reflect how the Partnership Representative will be selected, removed or replaced.  You may also consider limiting the Partnership Representative’s authority over certain tax matters, such as extending a statute of limitations or settling the dispute.

There is also a new election labeled the “Push Out Election”.  As it sounds this allows the partnership or LLC to push out any audit adjustments to prior year partners.  This election is not automatic and must be elected within 45 days of receiving the final notice of partnership adjustment.  The requirement to make this election can be documented in the partnership or LLC agreement.

The IRS has put us on notice that we can expect to see more partnership and LLC audits than in the past.  Consulting your advisors about the issues raised in the BBA will leave you prepared for any audit in which your partnership may be involved.

 

 

 

How to maximize deductions for business real estate

Currently, a valuable income tax deduction related to real estate is for depreciation, but the depreciation period for such property is long and land itself isn’t depreciable. Whether real estate is occupied by your business or rented out, here’s how you can maximize your deductions.

Segregate personal property from buildings

Generally, buildings and improvements to them must be depreciated over 39 years (27.5 years for residential rental real estate and certain other types of buildings or improvements). But personal property, such as furniture and equipment, generally can be depreciated over much shorter periods. Plus, for the tax year such assets are acquired and put into service, they may qualify for 50% bonus depreciation or Section 179 expensing (up to $510,000 for 2017, subject to a phaseout if total asset acquisitions for the tax year exceed $2.03 million).

If you can identify and document the items that are personal property, the depreciation deductions for those items generally can be taken more quickly. In some cases, items you’d expect to be considered parts of the building actually can qualify as personal property. For example, depending on the circumstances, lighting, wall and floor coverings, and even plumbing and electrical systems, may qualify.

Carve out improvements from land

As noted above, the cost of land isn’t depreciable. But the cost of improvements to land is depreciable. Separating out land improvement costs from the land itself by identifying and documenting those improvements can provide depreciation deductions. Common examples include landscaping, roads, and, in some cases, grading and clearing.

Convert land into a deductible asset

Because land isn’t depreciable, you may want to consider real estate investment alternatives that don’t involve traditional ownership. Such options can allow you to enjoy tax deductions for land costs that provide a similar tax benefit to depreciation deductions. For example, you can lease land long-term. Rent you pay under such a “ground lease” is deductible.

Another option is to purchase an “estate-for-years,” under which you own the land for a set period and an unrelated party owns the interest in the land that begins when your estate-for-years ends. You can deduct the cost of the estate-for-years over its duration.

More limits and considerations

There are additional limits and considerations involved in these strategies. Also keep in mind that tax reform legislation could affect these techniques. For example, immediate deductions could become more widely available for many costs that currently must be depreciated. If you’d like to learn more about saving income taxes with business real estate, please contact us.

© 2017

Timing strategies could become more powerful in 2017, depending on what happens with tax reform

Projecting your business income and expenses for this year and next can allow you to time when you recognize income and incur deductible expenses to your tax advantage. Typically, it’s better to defer tax. This might end up being especially true this year, if tax reform legislation is signed into law.

Timing strategies for businesses

Here are two timing strategies that can help businesses defer taxes:

1. Defer income to next year. If your business uses the cash method of accounting, you can defer billing for your products or services. Or, if you use the accrual method, you can delay shipping products or delivering services.

2. Accelerate deductible expenses into the current year. If you’re a cash-basis taxpayer, you may make a state estimated tax payment before December 31, so you can deduct it this year rather than next. Both cash- and accrual-basis taxpayers can charge expenses on a credit card and deduct them in the year charged, regardless of when the credit card bill is paid.

Potential impact of tax reform

These deferral strategies could be particularly powerful if tax legislation is signed into law this year that reflects the nine-page “Unified Framework for Fixing Our Broken Tax Code” that President Trump and congressional Republicans released on September 27.

Among other things, the framework calls for reduced tax rates for corporations and flow-through entities as well as the elimination of many business deductions. If such changes were to go into effect in 2018, there could be a significant incentive for businesses to defer income to 2018 and accelerate deductible expenses into 2017.

But if you think you’ll be in a higher tax bracket next year (such as if your business is having a bad year in 2017 but the outlook is much brighter for 2018 and you don’t expect that tax rates will go down), consider taking the opposite approach instead — accelerating income and deferring deductible expenses. This will increase your tax bill this year but might save you tax over the two-year period.

Be prepared

Because of tax law uncertainty, in 2017 you may want to wait until closer to the end of the year to implement some of your year-end tax planning strategies. But you need to be ready to act quickly if tax legislation is signed into law. So keep an eye on developments in Washington and contact us to discuss the best strategies for you this year based on your particular situation.

© 2017

Should your business use per diem rates for travel reimbursement?

Updated travel per diem rates go into effect October 1. To simplify recordkeeping, they can be used for reimbursement of ordinary and normal business expenses incurred while employees travel away from home.

Per diem advantages

As long as employees properly account for their business-travel expenses, reimbursements are generally tax-free to the employees and deductible by the employer. But keeping track of actual costs can be a headache.

With the per diem rates, employees don’t have to keep receipts for covered travel expenses. They just need to document the time, place and business purpose of the travel. Assuming that the travel qualifies as a business expense, the employer simply pays the employee the per diem allowance designated for the specific travel destination and deducts the per diem paid.

Although the per diem rates are set by the General Services Administration (GSA) to cover travel by government employees, private employers may use them for tax purposes. The rates are updated annually for the following areas:

  • The 48 states in the continental United States and the District of Columbia (CONUS),
  • Nonstandard Areas (NSAs) that are in CONUS but have per diem rates higher than the standard CONUS rates,
  • Certain areas outside the continental United States, including Alaska, Hawaii, Puerto Rico and U.S. possessions (OCONUS), and
  • Foreign countries.

The rates include amounts for lodging and for meals and incidental expenses (M&IE) but not airfare and other transportation costs.

What’s new?

For October 1, 2017, through September 30, 2018, the per diem standard CONUS rate is $144, an increase of $2 over the prior year. This rate consists of $93 for lodging and $51 for M&IE. Also effective October 1, there are 332 NSAs. The following locations have moved from NSAs into the standard CONUS rate:

  • California: Redding
  • Iowa: Cedar Rapids
  • Idaho: Bonners Ferry / Sandpoint
  • North Dakota: Dickenson / Beulah
  • New York: Watertown
  • Ohio: Youngstown
  • Oklahoma: Enid
  • Pennsylvania: Mechanicsburg
  • Texas: Laredo, McAllen, Pearsall and San Angelo
  • Wyoming: Gillette.

There are no new NSA locations.

What’s right for you?

As noted earlier, the per diem changes go into effect on October 1, 2017. During the last three months of 2017, an employer may switch to the new rates or continue with the old rates. But an employer must select one set of rates for this quarter and stick with it; it can’t use the old rates for some employees and the new rates for others.

Because travel expenses often attract IRS attention, they require careful recordkeeping. The per diem method can help, but it’s not the best solution for all employers. An even simpler “high-low” per diem method is also available. And, in some cases, a policy of reimbursing actual expenses could be beneficial, despite the recordkeeping hassles. If you have questions regarding travel expense reimbursements, please contact us.

© 2017

2017 Q4 tax calendar: Key deadlines for businesses and other employers

Here are some of the key tax-related deadlines affecting businesses and other employers during the fourth quarter of 2017. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

October 16

  • If a calendar-year C corporation that filed an automatic six-month extension:
    • File a 2016 income tax return (Form 1120) and pay any tax, interest and penalties due.
    • Make contributions for 2016 to certain employer-sponsored retirement plans.

October 31

  • Report income tax withholding and FICA taxes for third quarter 2017 (Form 941) and pay any tax due. (See exception below.)

November 13

  • Report income tax withholding and FICA taxes for third quarter 2017 (Form 941), if you deposited on time and in full all of the associated taxes due.

December 15

  • If a calendar-year C corporation, pay the fourth installment of 2017 estimated income taxes.

© 2017

Changes to I-9 Employment Eligibility Verification Form

Effective September 18, 2017, the U.S. Citizenship and Immigration Services (USCIS) released a revised version of Form I-9, Employment Eligibility Verification. Federal law requires that this form be used by any employer to ensure and verify your employee’s identity and employment authorization.

What are some of the revisions made to Form I-9?

  • Instructions for Form I-9 have been updated
  • List C – Documents that Establish Employment Authorization has been changed

Some things to consider with this newest form:

  • Employers must being using this newest version of Form I-9 [Form I-9 07/17/17 N]. All previous versions of I-9 after 09/19/17 will not be valid.
  • For any current employees, the previously completed Form I-9 on file will be valid.

For a complete list of formats and instructions available for I-9, please visit the USCIS website: www.uscis.gov/i-9.

Tax planning critical when buying a business

If you acquire a company, your to-do list will be long, which means you can’t devote all of your time to the deal’s potential tax implications. However, if you neglect tax issues during the negotiation process, the negative consequences can be serious. To improve the odds of a successful acquisition, it’s important to devote resources to tax planning before your deal closes.

Complacency can be costly

During deal negotiations, you and the seller should discuss such issues as whether and how much each party can deduct their transaction costs and how much in local, state and federal tax obligations the parties will owe upon signing the deal. Often, deal structures (such as asset sales) that typically benefit buyers have negative tax consequences for sellers and vice versa. So it’s common for the parties to wrangle over taxes at this stage.

Just because you seem to have successfully resolved tax issues at the negotiation stage doesn’t mean you can become complacent. With adequate planning, you can spare your company from costly tax-related surprises after the transaction closes and you begin to integrate the acquired business. Tax management during integration can also help your company capture synergies more quickly and efficiently.

You may, for example, have based your purchase price on the assumption that you’ll achieve a certain percentage of cost reductions via postmerger synergies. However, if your taxation projections are flawed or you fail to follow through on earlier tax assumptions, you may not realize such synergies.

Merging accounting functions

One of the most important tax-related tasks is the integration of your seller’s and your own company’s accounting departments. There’s no time to waste: You generally must file federal and state income tax returns — either as a combined entity or as two separate sets — after the first full quarter following your transaction’s close. You also must account for any short-term tax obligations arising from your acquisition.

To ensure the two departments integrate quickly and are ready to prepare the required tax documents, decide well in advance of closing which accounting personnel you’ll retain. If you and your seller use different tax processing software or follow different accounting methods, choose between them as soon as feasible. Understand that, if your acquisition has been using a different accounting method, you’ll need to revise the company’s previous tax filings to align them with your own accounting system.

The tax consequences of M&A decisions may be costly and could haunt your company for years. We can help you ensure you plan properly and minimize any potentially negative tax consequences.

© 2017

Grant Funding and the Benefit of Single Audits

by Jeremy Myers, CPA

Audit Senior Manager at Atchley & Associates, LLP

 

Austin has a growing population of non-profit organizations who receive grant funds, which can be federal or state sourced and can come in many different sources: Grants, Loans, usages of land, and food / other commodities.  While the receipt of these funds helps organizations meet the needs of the community and reach their missions/goals, there are a number of other requirements that organizations may face.

Grant Monitoring and Reporting

Once an organization receives grant funds, they are typically subject to monitoring from the grantor.  Most grant contracts include either optional or required monitoring.  This monitoring can be performed by the granting agency or by a third party that the granting agency hires to perform monitoring.  This would be in addition to any reports required by the grantors to fill out.  Grant Reporting can range from monthly reimbursement requests, quarterly or annual performance reporting, or cost reports.

Necessary Non-Grant Funding

Many of the non-profit organizations in Austin have to review the requirements of the grant funds they receive and their own ability to meet those requirements.  These requirements may have limitations on both on a time and financial basis.  While organizations will want to receive grant funding, they have to look at the time required to fill out any reporting, keeping records of how the funds were spent, detailed records of those helped, and any necessary hiring and training of the staff to fulfill the grant’s purpose.  Also many grants do not cover some of these necessary items and the organization may not have the resources on its own to cover the costs of running programs in which the grant does not specifically allow.  Non-profits typically have to depend on public support to fill in the gaps the grants do not cover.

Requirements for Uniform Guidance Audit

If an organization who receives federal or state grant funding and expends $750,000 or more, in one year, of federal or state funding (looking at just federal or just state funds, not combined) is required to have an audit under Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements of Federal Awards, also known as Uniform Guidance.  For example, if an organization receives a $1,000,000 grant from the Department of Health and Human Services and spends $600,000 in year 1 and $400,000 in year 2 – this organization would not be required to have an audit under Uniform Guidance.  But if that same organization spends $800,000 in year 1 and $200,000 in year 2, they would meet the requirements to have an audit performed under Uniform Guidance.  The main trigger is spending the funds, not receiving the funds, which under the accrual method of accounting means that you will need to account for those expense incurred but not reimbursed during the organization’s fiscal year.  If you are unsure if the funds you have received are subject to Uniform Guidance, you should inquire to the granting agency and look for Catalog Of Federal Domestic Assistance (CFDA) numbers associated with the grant you have received.  Each grant should be tracked by their CFDA numbers as that number will be how the grant funds are presented on the Schedule of Expenditures of Federal or State Awards (SEFA or SESA).

Benefits of a Single Audit

If an organization is subject to a Uniform Guidance audit, then it would be required to go under a full financial and Uniform Guidance audit, also known as a Single Audit.  The term “Single Audit” is used to refer to the idea that an organization would only have to go through one audit versus multiple monitoring by different grantors and could meet any requirements from outside lenders.  The benefits of having a Single Audit performed are:

  • Your organization will have met the requirements of receiving federal or state funding
  • Having an objective view of your organization’s internal controls over both financial and grant programs,
  • Your organization will have audited financial statements that they can use to obtain future funding from both public sources and if necessary from financial institutions.
  • Making sure that your organization is using industry best practices across all aspects of the organization, not just grant or financial reporting
  • Grantors may choose to rely on the results of the Single Audit, the organization may save time from going through additional monitoring.
  • Since one firm can perform a Single Audit, it can be performed in conjunction with your financial audit, there is some dual purpose testing that can be performed that would bring efficiency to the entire Single Audit process.
  • Finally, all Single Audits are uploaded to the Federal Audit Clearinghouse (https://harvester.census.gov/facweb/) and organizations fulfill the requirements of making their financial statements available to the public and to their current and future grantors.

 

If you have any additional questions about Single Audits or requirements under Uniform Guidance, please feel free to reach out to Jeremy Myers (JMyers@atchleycpas.com).

A Simple Technique for Reducing Future Taxes

by Joe Ben Combs, CPA

Tax Manager at Atchley & Associates, LLP

 

If you’ve ever done any sort of investment planning you’re probably familiar with the concept of tax loss harvesting. This is the practice of selling an investment that has decreased in value and purchasing a comparable investment, triggering capital losses which can be deducted against your other income. (There are a number of associated tax and non-tax issues that we will not address in this article so please consult a financial advisor or tax professional. before executing on this strategy.)

While tax loss harvesting is a great tax-saving move for a lot of people, the exact opposite can be even more beneficial for some and is far less often discussed. Tax gain harvesting is the practice of selling appreciated securities and immediately repurchasing the same or similar securities. Now instead of triggering capital losses you have created potentially taxable gains. So why would you do this?

Long term capital gains (gains on the sale of capital assets held for more than a year) are taxed at reduced rates. For people in most tax brackets this means a rate of 15%. However, if you are in the 10% or 15% tax brackets, qualified dividends and long term capital gains are taxed at 0%!

That’s no tax.

So how does this help you? Why is this beneficial when I could just as easily avoid tax by not selling anything? The benefit is not in the selling but in the repurchasing. By purchasing the same assets at a higher price you are now holding the same investment as before but you have increased your cost basis, thereby reducing future gains. All without any current tax cost. While it won’t save you any tax dollars today, your future self will thank you!

So now that we’ve covered the fun part – there are a few things to watch out for.

  1. First and foremost, the preferential rates only apply to assets held for more than one year. If you are selling shares of a security that you have purchased at various dates, make sure to select lots with the requisite holding period.
  2. While the wash sale rule that applies to loss harvesting (aimed at discouraging the repurchase of a security within 30 days of sale) does not apply to gain harvesting, some mutual funds will not allow an investor who has sold out of the fund to buy back in before a certain time period has passed. You will want to review any potential reinvestment restrictions applicable to the assets you intend to sell so that you can plan accordingly.
  3. Beware of state income taxes. Depending on where you live that 0% rate may not apply and state income taxes may cut into the benefit of the increase in basis. If you’re here in Texas that won’t be an issue but if you live in a state that taxes capital gains it may be something to consider.
  4. While a capital gain itself may avoid taxation, it still increases your adjusted gross income (AGI), which can affect the calculation of a number of credits and deductions. On top of this the additional income may increase the amount of Social Security benefits subject to tax.
  5. If you already have realized losses for the year it may defeat the purpose of harvesting gains, depending on the situation. This is certainly something to discuss with an advisor.

There are a number of other planning considerations that we don’t have time to discuss here but needless to say, we highly recommend discussing this or any other tax planning strategy with a qualified advisor.