Month: March 2018

2018 Q2 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 second quarter of 2018. 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.

April 2

  • Electronically file 2017 Form 1096, Form 1098, Form 1099 (except if an earlier deadline applies) and Form W-2G.

April 17

  • If a calendar-year C corporation, file a 2017 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004), and pay any tax due. If the return isn’t extended, this is also the last day to make 2017 contributions to pension and profit-sharing plans.
  • If a calendar-year C corporation, pay the first installment of 2018 estimated income taxes.

April 30

  • Report income tax withholding and FICA taxes for first quarter 2018 (Form 941), and pay any tax due. (See exception below under “May 10.”)

May 10

  • Report income tax withholding and FICA taxes for first quarter 2018 (Form 941), if you deposited on time and in full all of the associated taxes due.

June 15

  • If a calendar-year C corporation, pay the second installment of 2018 estimated income taxes.

© 2018

Defer tax with a Section 1031 exchange, but new limits apply this year

Normally when appreciated business assets such as real estate are sold, tax is owed on the appreciation. But there’s a way to defer this tax: a Section 1031 “like kind” exchange. However, the Tax Cuts and Jobs Act (TCJA) reduces the types of property eligible for this favorable tax treatment.

What is a like-kind exchange?

Section 1031 of the Internal Revenue Code allows you to defer gains on real or personal property used in a business or held for investment if, instead of selling it, you exchange it solely for property of a “like kind.” Thus, the tax benefit of an exchange is that you defer tax and, thereby, have use of the tax savings until you sell the replacement property.

This technique is especially flexible for real estate, because virtually any type of real estate will be considered to be of a like kind, as long as it’s business or investment property. For example, you can exchange a warehouse for an office building, or an apartment complex for a strip mall.

Deferred and reverse exchanges

Although a like-kind exchange may sound quick and easy, it’s relatively rare for two owners to simply swap properties. You’ll likely have to execute a “deferred” exchange, in which you engage a qualified intermediary (QI) for assistance.

When you sell your property (the relinquished property), the net proceeds go directly to the QI, who then uses them to buy replacement property. To qualify for tax-deferred exchange treatment, you generally must identify replacement property within 45 days after you transfer the relinquished property and complete the purchase within 180 days after the initial transfer.

An alternate approach is a “reverse” exchange. Here, an exchange accommodation titleholder (EAT) acquires title to the replacement property before you sell the relinquished property. You can defer capital gains by identifying one or more properties to exchange within 45 days after the EAT receives the replacement property and, typically, completing the transaction within 180 days.

Changes under the TCJA

There had been some concern that tax reform would include the elimination of like-kind exchanges. The good news is that the TCJA still generally allows tax-deferred like-kind exchanges of business and investment real estate.

But there’s also some bad news: For 2018 and beyond, the TCJA eliminates tax-deferred like-kind exchange treatment for exchanges of personal property. However, prior-law rules that allow like-kind exchanges of personal property still apply if one leg of an exchange was completed by December 31, 2017, but one leg remained open on that date. Keep in mind that exchanged personal property must be of the same asset or product class.

Complex rules

The rules for like-kind exchanges are complex, so these arrangements present some risks. If, say, you exchange the wrong kind of property or acquire cash or other non-like-kind property in a deal, you may still end up incurring a sizable tax hit. If you’re exploring a like-kind exchange, contact us. We can help you ensure you’re in compliance with the rules.

© 2018

Employee Benefit Plan Audits

by Jeremy Myers, CPA

Senior Audit Manager at Atchley & Associates, LLP

 

We are getting closer to the time of the year that human resource professionals in every industry are putting together their employee benefit plan’s census to start the process of filing their annual IRS Form 5500.  Depending on the size of your plan, you may file as a small plan or a large plan.  Plan sponsors can review their prior year Form 5500 which details the number of participants at year end. If that number is greater than 100, then you are likely to file as a large plan.  When filing as a large plan, your employee benefit plan is required to be audited by an independent auditor and that audit must be filed with your Form 5500.

Filing Deadlines

For plans with December 31st year end, IRS Form 5500 has a normal filing deadline of July 31st which is extendable to October 15th using Form 5558.

Employee Benefit Plan Audit Requirements

Once a benefit plan reaches 100 or more eligible participants at the beginning of the plan year, the plan is considered to be a large plan and an audit is required.  Eligibility is defined by the plan adoption agreement and is unique to each plan; it does not matter if the employee decides to enroll in the plan or not.

  • 80-120 Rule – There is a specific exemption for plans that have between 80-120 eligible plan participants at the beginning of the plan year to file their Form 5500 the same way it was filed in the previous year. With the 80-120 rule, plans can defer the audit requirement until the plan reaches more than 120 eligible plan participants.  A plan cannot change between a large plan to a small plan unless the plan begins the year with under 100 eligible participants.

Type of Audit – Full-Scope or Limited-Scope

There are two types of audits, Full-Scope or Limited-Scope, based on the certification of plan investments and loan balances.  If the investments are certified by the TPA, typically the Trustee who holds the investments, under 29 CFR 2520.103-8 of the Department of Labor’s Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974, the audit qualifies as a Limited-Scope Audit.  Limited-Scope Audits allow the auditor to rely on the certified investment statements and not perform additional procedures on those investments or loans.  Full-Scope Audits also include an audit of the investment and loan transactions.

What a Limited-Scope Audit Covers

The most common audits are Limited-Scope Audits and we typically test/verify information related to the employees of the plan sponsor(s).  An audit typically consists of the following steps:

  • Insuring that eligibility of participants was determined properly
  • Testing employee and employer contributions for both value and timing in accordance with the plan document and the Department of Labor (DOL) timing guidelines
  • Verifying that loans and distributions were made in accordance with plan documents and vesting schedules
  • Verifying that earnings allocated to plan participants are in line with overall plan investment performance
  • Insuring that the Form 5500 reconciles with the audit, although we do not prepare/provide assurance on the Form 5500, we do review it to insure the required information is presented

Benefits of an Audit

In the case of benefit plan audits, as these can be required once you meet the eligibility criteria mentioned above, I’d like to highlight the benefits you will receive in addition to meeting the DOL requirements:

  • Assurance that your plan is operating in accordance with DOL requirements.
  • If contributions are not being made properly, we can help plan sponsors determine additional funding requirements.
  • We are not the DOL and we will help your plan stay in compliance to limit the impact of a DOL audit.
  • We can make suggestions to help management improve their internal controls, processes, and documentation around plan activities.
  • If forfeitures can be used to pay plan expenses, the audit qualifies to be paid out of the forfeiture account.

If you have any additional questions about Employee Benefit Plan Audits, please feel free to reach out to Jeremy Myers, CPA, Audit Senior Manager via email jmyers@atchleycpas.com or directly at (512) 590-7587.

 

Make sure repairs to tangible property were actually repairs before you deduct the cost

Repairs to tangible property, such as buildings, machinery, equipment or vehicles, can provide businesses a valuable current tax deduction — as long as the so-called repairs weren’t actually “improvements.” The costs of incidental repairs and maintenance can be immediately expensed and deducted on the current year’s income tax return. But costs incurred to improve tangible property must be depreciated over a period of years.

So the size of your 2017 deduction depends on whether the expense was a repair or an improvement.

Betterment, restoration or adaptation

In general, a cost that results in an improvement to a building structure or any of its building systems (for example, the plumbing or electrical system) or to other tangible property must be depreciated. An improvement occurs if there was a betterment, restoration or adaptation of the unit of property.

Under the “betterment test,” you generally must depreciate amounts paid for work that is reasonably expected to materially increase the productivity, efficiency, strength, quality or output of a unit of property or that is a material addition to a unit of property.

Under the “restoration test,” you generally must depreciate amounts paid to replace a part (or combination of parts) that is a major component or a significant portion of the physical structure of a unit of property.

Under the “adaptation test,” you generally must depreciate amounts paid to adapt a unit of property to a new or different use — one that isn’t consistent with your ordinary use of the unit of property at the time you originally placed it in service.

Seeking safety

Distinguishing between repairs and improvements can be difficult, but a couple of IRS safe harbors can help:

1. Routine maintenance safe harbor. Recurring activities dedicated to keeping property in efficient operating condition can be expensed. These are activities that your business reasonably expects to perform more than once during the property’s “class life,” as defined by the IRS.

Amounts incurred for activities outside the safe harbor don’t necessarily have to be depreciated, though. These amounts are subject to analysis under the general rules for improvements.

2. Small business safe harbor. For buildings that initially cost $1 million or less, qualified small businesses may elect to deduct the lesser of $10,000 or 2% of the unadjusted basis of the property for repairs, maintenance, improvements and similar activities each year. A qualified small business is generally one with gross receipts of $10 million or less.

There is also a de minimis safe harbor as well as an exemption for materials and supplies up to a certain threshold. To learn more about these safe harbors and exemptions and other ways to maximize your tangible property deductions, contact us.

© 2018