tax

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.

3 midyear tax planning strategies for business

Tax reform has been a major topic of discussion in Washington, but it’s still unclear exactly what such legislation will include and whether it will be signed into law this year. However, the last major tax legislation that was signed into law — back in December of 2015 — still has a significant impact on tax planning for businesses. Let’s look at three midyear tax strategies inspired by the Protecting Americans from Tax Hikes (PATH) Act:

  1. Buy equipment. The PATH Act preserved both the generous limits for the Section 179 expensing election and the availability of bonus depreciation. These breaks generally apply to qualified fixed assets, including equipment or machinery, placed in service during the year. For 2017, the maximum Sec. 179 deduction is $510,000, subject to a $2,030,000 phaseout threshold. Without the PATH Act, the 2017 limits would have been $25,000 and $200,000, respectively. Higher limits are now permanent and subject to inflation indexing.

Additionally, for 2017, your business may be able to claim 50% bonus depreciation for qualified costs in excess of what you expense under Sec. 179. Bonus depreciation is scheduled to be reduced to 40% in 2018 and 30% in 2019 before it’s set to expire on December 31, 2019.

  1. Ramp up research. After years of uncertainty, the PATH Act made the research credit permanent. For qualified research expenses, the credit is generally equal to 20% of expenses over a base amount that’s essentially determined using a historical average of research expenses as a percentage of revenues. There’s also an alternative computation for companies that haven’t increased their research expenses substantially over their historical base amounts.

In addition, a small business with $50 million or less in gross receipts may claim the credit against its alternative minimum tax (AMT) liability. And, a start-up company with less than $5 million in gross receipts may claim the credit against up to $250,000 in employer Federal Insurance Contributions Act (FICA) taxes.

  1. Hire workers from “target groups.” Your business may claim the Work Opportunity credit for hiring a worker from one of several “target groups,” such as food stamp recipients and certain veterans. The PATH Act extended the credit through 2019. It also added a new target group: long-term unemployment recipients.

Generally, the maximum Work Opportunity credit is $2,400 per worker. But it’s higher for workers from certain target groups, such as disabled veterans.

One last thing to keep in mind is that, in terms of tax breaks, “permanent” only means that there’s no scheduled expiration date. Congress could still pass legislation that changes or eliminates “permanent” breaks. But it’s unlikely any of the breaks discussed here would be eliminated or reduced for 2017. To keep up to date on tax law changes and get a jump start on your 2017 tax planning, contact us.

© 2017

3 breaks for business charitable donations you may not know about

Donating to charity is more than good business citizenship; it can also save tax. Here are three lesser-known federal income tax breaks for charitable donations by businesses.

  1. Food donations

Charitable write-offs for donated food (such as by restaurants and grocery stores) are normally limited to the lower of the taxpayer’s basis in the food (generally cost) or fair market value (FMV), but an enhanced deduction equals the lesser of:

  • The food’s basis plus one-half the FMV in excess of basis, or
  • Two times the basis.

To qualify, the food must be apparently wholesome at the time it’s donated. Your total charitable write-off for food donations under the enhanced deduction provision can’t exceed:

  • 15% of your net income for the year (before considering the enhanced deduction) from all sole proprietorships, S corporations and partnership businesses (including limited liability companies treated as partnerships for tax purposes) from which food donations were made, or
  • For a C corporation taxpayer, 15% of taxable income for the year (before considering the enhanced deduction).
  1. Qualified conservation contributions

Qualified conservation contributions are charitable donations of real property interests, including remainder interests and easements that restrict the use of real property. For qualified C corporation farming and ranching operations, the maximum write-off for qualified conservation contributions is increased from the normal 10% of adjusted taxable income to 100% of adjusted taxable income.

Qualified conservation contributions in excess of what can be written off in the year of the donation can be carried forward for 15 years.

  1. S corporation appreciated property donations

A favorable tax basis rule is available to shareholders of S corporations that make charitable donations of appreciated property. For such donations, each shareholder’s basis in the S corporation stock is reduced by only the shareholder’s pro-rata percentage of the company’s tax basis in the donated asset.

Without this provision, a shareholder’s basis reduction would equal the passed-through write-off for the donation (a larger amount than the shareholder’s pro-rata percentage of the company’s basis in the donated asset). This provision is generally beneficial to shareholders, because it leaves them with higher tax basis in their S corporation shares.

If you believe you may be eligible to claim one or more of these tax breaks, contact us. We can help you determine eligibility, prepare the required documentation and plan for charitable donations in future years.

© 2017

2017 Q3 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 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.

July 31

  • Report income tax withholding and FICA taxes for second quarter 2017 (Form 941), and pay any tax due. (See exception below.)
  • File a 2016 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension.

August 10

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

September 15

  • If a calendar-year C corporation, pay the third installment of 2017 estimated income taxes.
  • If a calendar-year S corporation or partnership that filed an automatic six-month extension:
    • File a 2016 income tax return (Form 1120S, Form 1065 or Form 1065-B) and pay any tax, interest and penalties due.
    • Make contributions for 2016 to certain employer-sponsored retirement plans.

© 2017

Accounting Services: Should I consider this service for my business?

by Liana Ellison, CPA

Accounting Services Manager at Atchley & Associates, LLP

 

Atchley & Associates, LLP provides accounting services of various levels to many of our clients. The levels of services vary from consulting with startup companies about their accounting set up all the way to outsourcing their accounting department to us. We are able to provide a custom level of service to meet our client’s needs. Some of the accounting services we provide at Atchley & Associates include:

  • Outsourced payroll, set up, reporting, support and consulting
  • Outsourced bookkeeping, reconciliations of accounts such as bank, credit cards, loans and lines of credit, and preparation of any adjusting journal entries
  • Review of systems utilized and internal processes, and make recommendations of accounting platforms and ancillary applications
  • Customized Financial Statement preparation
  • Preparation or support for various compliance such as personal property renditions, Forms 1099, and Sales Tax
  • Year-end accounting analysis and clean-up in preparation for tax return

In addition, our team can take the pressure off business owners or executive directors that may not have the expertise or time to review and supervise the work performed by their accounting department.  These leaders may not want to deal with having to worry about turnover or fraud in this critical position, and often engage us to support them in this area of their business or organization.

Our services are not specific to any one industry, therefore we are able to support various types of service industries including a number of non-profit clients.

I’ve put together some recent questions that our group has received and compiled them into a True or False Quiz as examples of how we support our client. As in every case, that correct answer is- “it depends”. However, you may find some helpful information for your business or line of work.

  1. A client inquired, I receive a cell phone allowance with my payroll of $50 a month, this taxable compensation to me- true or false?

False- this can be considered non-taxable compensation, as a non-tax fringe benefit IF

– The employer has an accountable plan and

– There is a business connection for the cell phone use and

– The allowance does not exceed the cost of employee’s monthly plan (requires substantiation). Any excess allowance would be considered taxable compensation.

  i. IRS Notice 2011-72

  1. I had the privilege to attend the Rotary scholarship luncheon last month with our partner, Harold Ingersoll, where Rotarians gave out over $43K in scholarships towards recipient’s tuition and higher learning. The Rotary Club of Austin is not required to issue a 1099 to these recipients for the amount received- true or false?

True- the Rotary Club of Austin is not required to issue scholarship recipients a 1099 since these funds were not in connection with any services performed for teaching, research or other services as a condition for receiving the scholarship. It may not prevent the recipient from picking it up as income on their personal return, but nothing is required to be reported to the IRS by the Rotary Club of Austin.

  i. Sec 117(b) and Regulations section 1.6041-3(n), Tax Topic 421

  1. I have an hourly (non-exempt) employee therefore I am only required to pay them at least once a month in the state of Texas- True or False?

False- per Texas Pay Day Law hourly (non-exempt) employees must be paid at least twice a month.

  i. Texas Payday Law section 61.011

  1. I bought a used iPad mini for my business for $199. Since the cost is less than $250, I don’t need to report this property on the Personal Property Rendition for Travis County– true or false?

False- per Travis County Appraisal District, ALL business personal property that is used in business must be rendered on the form, regardless of the amount.

  1. I just started a new business and have chosen QuickBooks Online as the application to provide record keeping for my business because I have heard it’s the best in the market- True or False?

Trick question- You might receive a different answer depending on who you ask. There are several new applications on the market that compare to QuickBooks Online. However, QuickBooks still retains a large portion of the small business market.

  i. Contact us to find out what might be the right fit for your business.

You can leverage our services for more answers to these types of questions in addition to receiving accurate reporting and record keeping.  Contact us for more information on how we can help your business.

 

3 financial statements you should know

Successful business people have a solid understanding of the three financial statements prepared under U.S. Generally Accepted Accounting Principles (GAAP). A complete set of financial statements helps stakeholders — including managers, investors and lenders — evaluate a company’s financial condition and results. Here’s an overview of each report.

1. Income statement

The income statement (also known as the profit and loss statement) shows sales, expenses and the income earned after expenses over a given period. A common term used when discussing income statements is “gross profit,” or the income earned after subtracting the cost of goods sold from revenue. Cost of goods sold includes the cost of labor, materials and overhead required to make a product.

Another important term is “net income.” This is the income remaining after all expenses (including taxes) have been paid.

2. Balance sheet

This report tallies the company’s assets, liabilities and net worth to create a snapshot of its financial health. Current assets (such as accounts receivable or inventory) are reasonably expected to be converted to cash within a year, while long-term assets (such as plant and equipment) have longer lives. Similarly, current liabilities (such as accounts payable) come due within a year, while long-term liabilities are payment obligations that extend beyond the current year or operating cycle.

Net worth or owners’ equity is the extent to which the book value of assets exceeds liabilities. Because the balance sheet must balance, assets must equal liabilities plus net worth. If the value of your liabilities exceeds the value of the assets, your net worth will be negative.

Public companies may provide the details of shareholders’ equity in a separate statement called the statement of retained earnings. It details sales or repurchases of stock, dividend payments and changes caused by reported profits or losses.

3. Cash flow statement

This statement shows all the cash flowing into and out of your company. For example, your company may have cash inflows from selling products or services, borrowing money and selling stock. Outflows may result from paying expenses, investing in capital equipment and repaying debt.

Although this report may seem similar to an income statement, it focuses solely on cash. It’s possible for an otherwise profitable business to suffer from cash flow shortages, especially if it’s growing quickly.

Typically, cash flows are organized in three categories: operating, investing and financing activities. The bottom of the statement shows the net change in cash during the period. To remain in business, companies must continually generate cash to pay creditors, vendors and employees. So watch your statement of cash flows closely.

Ratios and trends

Are you monitoring ratios and trends from your financial statements? Owners and managers who pay regular attention to these three key reports stand a better chance of catching potential trouble before it gets out of hand and pivoting, when needed, to maximize the company’s value.

© 2017

Can the WOTC save tax for your business?

Employers that hire individuals who are members of a “target group” may be eligible for the Work Opportunity tax credit (WOTC). If you made qualifying hires in 2016 and obtained proper certification, you can claim the WOTC on your 2016 tax return. Whether or not you’re eligible for 2016, keep the WOTC in mind in your 2017 hiring, because the credit is also available for 2017.

In fact, the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act) extended the WOTC through 2019. The PATH Act also expanded the credit beginning in 2016 to apply to employers that hire qualified individuals who have been unemployed for 27 weeks or more.

What are the “target groups’?

Besides the long-term unemployed, target groups include:

  • Designated community residents who live in Empowerment Zones or rural renewal counties,
  • Long-term family assistance recipients,
  • Qualified ex-felons,
  • Qualified recipients of Temporary Assistance for Needy Families (TANF),
  • Qualified veterans,
  • Summer youth employees,
  • Supplemental Nutrition Assistance Program (SNAP) recipients,
  • Supplemental Security Income benefits recipients, and
  • Vocational rehabilitation referrals for individuals who suffer from an employment handicap resulting from a physical or mental handicap.

How much is the credit worth?

Qualifying employers can claim the WOTC as a general business credit against their income tax. The amount of the credit depends on the:

  • Target group of the individual hired,
  • Wages paid to that individual, and
  • Number of hours that individual worked during the first year of employment.

The maximum credit that can be earned for each member of a target group is generally $2,400 per employee. The credit can be as high as $9,600 for certain veterans. Employers aren’t subject to a limit on the number of eligible individuals they can hire. In other words, if there are 10 individuals that qualify, the credit can be 10 times the amount listed.

Certification requirement

Before you can claim the WOTC, you must obtain certification from a “designated local agency” (DLA) that the hired individual is indeed a target group member. You must submit IRS Form 8850, “Pre-Screening Notice and Certification Request for the Work Opportunity Credit,” to the DLA no later than the 28th day after the individual begins work for you.

But if you hired long-term unemployment recipients between January 1, 2016, and May 31, 2016, the IRS extended the deadline to June 29, 2016, as long as the individuals started work for you on or after January 1, 2016, and before June 1, 2016.

The WOTC can lower your company’s tax liability when you hire qualified new employees. We can help you determine whether an employee qualifies, calculate the applicable credit and answer other questions you might have.

© 2017

Take small-business tax credits where credits are due

Tax credits reduce tax liability dollar-for-dollar, making them particularly valuable. Two available credits are especially for small businesses that provide certain employee benefits. And one of them might not be available after 2017.
1. Small-business health care credit
The Affordable Care Act (ACA) offers a credit to certain small employers that provide employees with health coverage. The maximum credit is 50% of group health coverage premiums paid by the employer, provided it contributes at least 50% of the total premium or of a benchmark premium.
For 2016, the full credit is available for employers with 10 or fewer full-time equivalent employees (FTEs) and average annual wages of $25,000 or less per employee. Partial credits are available on a sliding scale to businesses with fewer than 25 FTEs and average annual wages of less than $52,000.
To qualify for the credit, online enrollment in the Small Business Health Options Program (SHOP) generally is required. In addition, the credit can be claimed for only two years, and they must be consecutive. (Credits claimed before 2014 don’t count, however.)
If you meet the eligibility requirements but have been waiting to claim the credit until a future year when you think it might provide more savings, claiming the credit for 2016 may be a good idea. Why? It’s possible the credit will go away for 2018 because lawmakers in Washington are starting to take steps to repeal or replace the ACA.
Most likely any ACA repeal or replacement wouldn’t go into effect until 2018 (or possibly later). So if you claim the credit for 2016, you may also be able to claim it on your 2017 return next year (provided you again meet the eligibility requirements). That way, you could take full advantage of the credit while it’s available.
2. Retirement plan credit 
Small employers (generally those with 100 or fewer employees) that create a retirement plan may be eligible for a $500 credit per year for three years. The credit is limited to 50% of qualified start-up costs.
Of course, you generally can deduct contributions you make to your employees’ accounts under the plan. And your employees enjoy the benefit of tax-advantaged retirement saving.
If you didn’t create a retirement plan in 2016, it might not be too late. Simplified Employee Pensions (SEPs) can be set up as late as the due date of your tax return, including extensions.
Maximize tax savings
Be aware that additional rules apply beyond what we’ve discussed here. We can help you determine whether you’re eligible for these credits. We can also advise you on what other credits you might be eligible for when you file your 2016 return so that you can maximize your tax savings.
© 2017

2017 Q1 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 first 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.

January 31

  • File 2016 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees.
  • File 2016 Forms 1099-MISC, “Miscellaneous Income,” reporting nonemployee compensation payments in Box 7 with the IRS, and provide copies to recipients.
  • File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2016. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return. Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944,“Employer’s Annual Federal Tax Return.”
  • File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2016. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.
  • File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2016 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.

February 28

File 2016 Forms 1099-MISC with the IRS and provide copies to recipients. (Note that Forms 1099-MISC reporting nonemployee compensation in Box 7 must be filed by January 31, beginning with 2016 forms filed in 2017.)

March 15

If a calendar-year partnership or S corporation, file or extend your 2016 tax return. If the return isn’t extended, this is also the last day to make 2016 contributions to pension and profit-sharing plans.

© 2016