employee

Hiring this summer? You may qualify for a valuable tax credit

Is your business hiring this summer? If the employees come from certain “targeted groups,” you may be eligible for the Work Opportunity Tax Credit (WOTC). This includes youth whom you bring in this summer for two or three months. The maximum credit employers can claim is $2,400 to $9,600 for each eligible employee.

10 targeted groups

An employer is generally eligible for the credit only for qualified wages paid to members of 10 targeted groups:

  • Qualified members of families receiving assistance under the Temporary Assistance for Needy Families program,
  • Qualified veterans,
  • Designated community residents who live in Empowerment Zones or rural renewal counties,
  • Qualified ex-felons,
  • Vocational rehabilitation referrals,
  • Qualified summer youth employees,
  • Qualified members of families in the Supplemental Nutrition Assistance Program,
  • Qualified Supplemental Security Income recipients,
  • Long-term family assistance recipients, and
  • Qualified individuals who have been unemployed for 27 weeks or longer.

For each employee, there’s also a minimum requirement that the employee have completed at least 120 hours of service for the employer, and that employment begin before January 1, 2020.

Also, the credit isn’t available for certain employees who are related to the employer or work more than 50% of the time outside of a trade or business of the employer (for example, working as a house cleaner in the employer’s home). And it generally isn’t available for employees who have previously worked for the employer.

Calculate the savings

For employees other than summer youth employees, the credit amount is calculated under the following rules. The employer can take into account up to $6,000 of first-year wages per employee ($10,000 for “long-term family assistance recipients” and/or $12,000, $14,000 or $24,000 for certain veterans). If the employee completed at least 120 hours but less than 400 hours of service for the employer, the wages taken into account are multiplied by 25%. If the employee completed 400 or more hours, all of the wages taken into account are multiplied by 40%.

Therefore, the maximum credit available for the first-year wages is $2,400 ($6,000 × 40%) per employee. It is $4,000 [$10,000 × 40%] for “long-term family assistance recipients”; $4,800, $5,600 or $9,600 [$12,000, $14,000 or $24,000 × 40%] for certain veterans. In order to claim a $9,600 credit, a veteran must be certified as being entitled to compensation for a service-connected disability and be unemployed for at least six months during the one-year period ending on the hiring date.

Additionally, for “long-term family assistance recipients,” there’s a 50% credit for up to $10,000 of second-year wages, resulting in a total maximum credit, over two years, of $9,000 [$10,000 × 40% plus $10,000 × 50%].

The “first year” described above is the year-long period which begins with the employee’s first day of work. The “second year” is the year that immediately follows.

For summer youth employees, the rules described above apply, except that you can only take into account up to $3,000 of wages, and the wages must be paid for services performed during any 90-day period between May 1 and September 15. That means that, for summer youth employees, the maximum credit available is $1,200 ($3,000 × 40%) per employee. Summer youth employees are defined as those who are at least 16 years old, but under 18 on the hiring date or May 1 (whichever is later), and reside in an Empowerment Zone, enterprise community or renewal community.

We can help

The WOTC can offset the cost of hiring qualified new employees. There are some additional rules that, in limited circumstances, prohibit the credit or require an allocation of the credit. And you must fill out and submit paperwork to the government. Contact us for assistance or more information about your situation.

© 2019

Business deductions for meal, vehicle and travel expenses: Document, document, document

Meal, vehicle and travel expenses are common deductions for businesses. But if you don’t properly document these expenses, you could find your deductions denied by the IRS.

A critical requirement

Subject to various rules and limits, business meal (generally 50%), vehicle and travel expenses may be deductible, whether you pay for the expenses directly or reimburse employees for them. Deductibility depends on a variety of factors, but generally the expenses must be “ordinary and necessary” and directly related to the business.

Proper documentation, however, is one of the most critical requirements. And all too often, when the IRS scrutinizes these deductions, taxpayers don’t have the necessary documentation.

What you need to do

Following some simple steps can help ensure you have documentation that will pass muster with the IRS:

Keep receipts or similar documentation. You generally must have receipts, canceled checks or bills that show amounts and dates of business expenses. If you’re deducting vehicle expenses using the standard mileage rate (54.5 cents for 2018), log business miles driven.

Track business purposes. Be sure to record the business purpose of each expense. This is especially important if on the surface an expense could appear to be a personal one. If the business purpose of an expense is clear from the surrounding circumstances, the IRS might not require a written explanation — but it’s probably better to err on the side of caution and document the business purpose anyway.

Require employees to comply. If you reimburse employees for expenses, make sure they provide you with proper documentation. Also be aware that the reimbursements will be treated as taxable compensation to the employee (and subject to income tax and FICA withholding) unless you make them via an “accountable plan.”

Don’t re-create expense logs at year end or when you receive an IRS deficiency notice. Take a moment to record the details in a log or diary at the time of the event or soon after. The IRS considers timely kept records more reliable, plus it’s easier to track expenses as you go than try to re-create a log later. For expense reimbursements, require employees to submit monthly expense reports (which is also generally a requirement for an accountable plan).

Addressing uncertainty

You’ve probably heard that, under the Tax Cuts and Jobs Act, entertainment expenses are no longer deductible. There’s some debate as to whether this includes business meals with actual or prospective clients. Until there’s more certainty on that issue, it’s a good idea to document these expenses. That way you’ll have what you need to deduct them if Congress or the IRS provides clarification that these expenses are indeed still deductible.

For more information about what meal, vehicle and travel expenses are and aren’t deductible — and how to properly document deductible expenses — please contact us.

© 2018

2 tax law changes that may affect your business’s 401(k) plan

When you think about recent tax law changes and your business, you’re probably thinking about the new 20% pass-through deduction for qualified business income or the enhancements to depreciation-related breaks. Or you may be contemplating the reduction or elimination of certain business expense deductions. But there are also a couple of recent tax law changes that you need to be aware of if your business sponsors a 401(k) plan.

1. Plan loan repayment extension

The Tax Cuts and Jobs Act (TCJA) gives a break to 401(k) plan participants with outstanding loan balances when they leave their employers. While plan sponsors aren’t required to allow loans, many do.

Before 2018, if an employee with an outstanding plan loan left the company sponsoring the plan, he or she would have to repay the loan (or contribute the outstanding balance to an IRA or his or her new employer’s plan) within 60 days to avoid having the loan balance deemed a taxable distribution (and be subject to a 10% early distribution penalty if the employee was under age 59½).

Under the TCJA, beginning in 2018, former employees in this situation have until their tax return filing due date — including extensions — to repay the loan (or contribute the outstanding balance to an IRA or qualified retirement plan) and avoid taxes and penalties.

2. Hardship withdrawal limit increase

Beginning in 2019, the Bipartisan Budget Act (BBA) eases restrictions on employee 401(k) hardship withdrawals. Most 401(k) plans permit hardship withdrawals, though plan sponsors aren’t required to allow them. Hardship withdrawals are subject to income tax and the 10% early distribution tax penalty.

Currently, hardship withdrawals are limited to the funds employees contributed to the accounts. (Such withdrawals are allowed only if the employee has first taken a loan from the same account.)

Under the BBA, the withdrawal limit will also include accumulated employer matching contributions plus earnings on contributions. If an employee has been participating in your 401(k) for several years, this modification could add substantially to the amount of funds available for withdrawal.

Nest egg harm

These changes might sound beneficial to employees, but in the long run they could actually hurt those who take advantage of them. Most Americans aren’t saving enough for retirement, and taking longer to pay back a plan loan (and thus missing out on potential tax-deferred growth during that time) or taking larger hardship withdrawals can result in a smaller, perhaps much smaller, nest egg at retirement.

So consider educating your employees on the importance of letting their 401(k) accounts grow undisturbed and the potential negative tax consequences of loans and early withdrawals. Please contact us if you have questions.

© 2018

TCJA changes to employee benefits tax breaks: 4 negatives and a positive

The Tax Cuts and Jobs Act (TCJA) includes many changes that affect tax breaks for employee benefits. Among the changes are four negatives and one positive that will impact not only employees but also the businesses providing the benefits.

4 breaks curtailed

Beginning with the 2018 tax year, the TCJA reduces or eliminates tax breaks in the following areas:

1. Transportation benefits. The TCJA eliminates business deductions for the cost of providing qualified employee transportation fringe benefits, such as parking allowances, mass transit passes and van pooling. (These benefits are still tax-free to recipient employees.) It also disallows business deductions for the cost of providing commuting transportation to an employee (such as hiring a car service), unless the transportation is necessary for the employee’s safety. And it suspends through 2025 the tax-free benefit of up to $20 a month for bicycle commuting.

2. On-premises meals. The TCJA reduces to 50% a business’s deduction for providing certain meals to employees on the business premises, such as when employees work late or if served in a company cafeteria. (The deduction is scheduled for elimination in 2025.) For employees, the value of these benefits continues to be tax-free.

3. Moving expense reimbursements. The TCJA suspends through 2025 the exclusion from employees’ taxable income of a business’s reimbursements of employees’ qualified moving expenses. However, businesses generally will still be able to deduct such reimbursements.

4. Achievement awards. The TCJA eliminates the business tax deduction and corresponding employee tax exclusion for employee achievement awards that are provided in the form of cash, gift coupons or certificates, vacations, meals, lodging, tickets to sporting or theater events, securities and “other similar items.” However, the tax breaks are still available for gift certificates that allow the recipient to select tangible property from a limited range of items preselected by the employer. The deduction/exclusion limits remain at up to $400 of the value of achievement awards for length of service or safety and $1,600 for awards under a written nondiscriminatory achievement plan.

1 new break

For 2018 and 2019, the TCJA creates a tax credit for wages paid to qualifying employees on family and medical leave. To qualify, a business must offer at least two weeks of annual paid family and medical leave, as described by the Family and Medical Leave Act (FMLA), to qualified employees. The paid leave must provide at least 50% of the employee’s wages. Leave required by state or local law or that was already part of the business’s employee benefits program generally doesn’t qualify.

The credit equals a minimum of 12.5% of the amount of wages paid during a leave period. The credit is increased gradually for payments above 50% of wages paid and tops out at 25%. No double-dipping: Employers can’t also deduct wages claimed for the credit.

More rules, limits and changes

Keep in mind that additional rules and limits apply to these breaks, and that the TCJA makes additional changes affecting employee benefits. Contact us for more details.

© 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.

 

Meals, entertainment and transportation may cost businesses more under the TCJA

Along with tax rate reductions and a new deduction for pass-through qualified business income, the new tax law brings the reduction or elimination of tax deductions for certain business expenses. Two expense areas where the Tax Cuts and Jobs Act (TCJA) changes the rules — and not to businesses’ benefit — are meals/entertainment and transportation. In effect, the reduced tax benefits will mean these expenses are more costly to a business’s bottom line.

Meals and entertainment

Prior to the TCJA, taxpayers generally could deduct 50% of expenses for business-related meals and entertainment. Meals provided to an employee for the convenience of the employer on the employer’s business premises were 100% deductible by the employer and tax-free to the recipient employee.

Under the new law, for amounts paid or incurred after December 31, 2017, deductions for business-related entertainment expenses are disallowed.

Meal expenses incurred while traveling on business are still 50% deductible, but the 50% limit now also applies to meals provided via an on-premises cafeteria or otherwise on the employer’s premises for the convenience of the employer. After 2025, the cost of meals provided through an on-premises cafeteria or otherwise on the employer’s premises will no longer be deductible.

Transportation

The TCJA disallows employer deductions for the cost of providing commuting transportation to an employee (such as hiring a car service), unless the transportation is necessary for the employee’s safety.

The new law also eliminates employer deductions for the cost of providing qualified employee transportation fringe benefits. Examples include parking allowances, mass transit passes and van pooling. These benefits are, however, still tax-free to recipient employees.

Transportation expenses for employee work-related travel away from home are still deductible (and tax-free to the employee), as long as they otherwise qualify for such tax treatment. (Note that, for 2018 through 2025, employees can’t deduct unreimbursed employee business expenses, such as travel expenses, as a miscellaneous itemized deduction.)

Assessing the impact

The TCJA’s changes to deductions for meals, entertainment and transportation expenses may affect your business’s budget. Depending on how much you typically spend on such expenses, you may want to consider changing some of your policies and/or benefits offerings in these areas. We’d be pleased to help you assess the impact on your business.

© 2018

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

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.

Use qualified auditors for your employee benefit plans

Employee benefit plans with 100 or more participants must generally provide an audit report when filing IRS Form 5500 each year. Plan administrators have fiduciary responsibilities to hire independent qualified public accountants to perform quality audits.

Select a qualified auditor

ERISA guidelines require employee benefit plan auditors to be licensed or certified public accountants. They also require auditors to be independent. In other words, they can’t have a financial interest in the plan or the plan sponsor that would bias their opinion about a plan’s financial condition.

But specialization also matters. The more training and experience that an auditor has with plan audits, the more familiar he or she will be with benefit plan practices and operations, as well as the special auditing standards and rules that apply to such plans. Examples of audit areas that are unique to employee benefit plans include contributions, benefit payments, participant data, and party-in-interest and prohibited transactions.

Ask questions

Employee benefit plan audits are a matter of more than just compliance. The auditor’s report highlights any problems unearthed during the audit, which can serve as a springboard for improving plan operations. The conclusion of audit work is a good time to ask such questions as the following:

  • Have plan assets covered by the audit been fairly valued?
  • Are plan obligations properly stated and described?
  • Were contributions to the plan received in a timely manner?
  • Were benefit payments made in accordance with plan terms?
  • Did the auditor identify any issues that may impact the plan’s tax status?
  • Did the auditor identify any transactions that are prohibited under ERISA?

Experienced auditors can also suggest ways to improve your plan’s operations based on their audit findings.

Protect yourself

Employee benefit plan audits offer critical protection to plan administrators and employees. Your company can’t afford to skimp when it comes to hiring an auditor who is unbiased, experienced and reliable. Contact us for more information on hiring a plan auditor.

© 2017