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.

9 Things to Know When Settling a Loved One’s Estate

by Joe Ben Combs, CPA

Tax Supervisor @ Atchley & Associates, LLP

 

Handling the estate of a family member or friend who has passed away can be one of the most difficult things you may be asked to do, both emotionally and logistically. You have to navigate a complex tax system, a treacherous legal system and a bureaucratic financial system all while managing relationships with beneficiaries eager for their inheritance, not to mention the task of dealing with your own personal loss.

Our team has walked many people through this process and we thought it would be helpful to share a few items that our clients often need to be reminded of.

  1. Notifications. There are a number of individuals, businesses and institutions that are impacted when someone passes away and will need to be notified. Depending on the situation, these can include the Social Security Administration, heirs, beneficiaries, creditors, financial institutions, insurance companies, and utilities providers, among others.
  2. Obtain an EIN. The employer identification number is the tax ID used by an estate or trust. This will be required to open an estate or trust bank account as well as for any tax filings.
  3. Change of address. The United States Postal Service allows you to request a change of address online at usps.com. This is important in order to avoid a pile of mail in the decedent’s mailbox which can pose a security risk but it also allows you as the person responsible for the estate to stay on top of bills and identify businesses or financial institutions with which the decedent may have had accounts.
  4. Taxes. As the personal representative, you may be responsible for filing a number of tax returns for the decedent. These might include an estate tax return (form 706) an income tax return for the estate (form 1041) and the individual’s final income tax return (form 1040) or gift tax return (form 709) as well as unfiled returns from prior years. With all of these come a host of possible tax elections and post-mortem planning opportunities that should be discussed with a tax professional. And while Texas does not have any corresponding state returns for these federal filings, many decedents will have filing obligations in other states.
  5. Search for unclaimed property. One of the primary responsibilities of the executor, administrator or trustee handling an estate is to identify, collect, value, manage, and dispose of or distribute the decedent’s assets. An often overlooked source of assets is the state itself. In Texas, the Comptroller provides a website (https://mycpa.cpa.state.tx.us/up/Search.jsp) where individuals and business can search for unclaimed property by name.
  6. Value all assets. This was alluded to above but it is worth repeating. Even if the value of a decedent’s estate is below the threshold to generate any estate tax, obtaining date-of-death values (or values as of the alternate valuation date if applicable) is crucial to ensure correct income tax reporting when that property is subsequently disposed of. This is because the basis (tax-speak for the starting point in a gain or loss calculation) of an asset gets stepped up to the date of death value and is often difficult to track down later on when the asset is sold.
  7. Disclaiming an inheritance. Many beneficiaries find it advantageous for various reasons to allow assets that they would have otherwise inherited to pass to someone else. This can be an effective post-mortem planning technique. Keep in mind however that the assets must then be distributed as if the beneficiary had predeceased the decedent. In order to be effective for tax purposes a disclaimer generally must be made within 9 months of the date of death and the original beneficiary must not have received any benefit from the disclaimed assets.
  8. IRAs. Decedents’ assets at death will often include retirement accounts, particularly IRAs. The full range of options available for handling IRAs is beyond the scope of this piece and it is often not the executor’s decision what happens to these accounts but simply keep in mind that withdrawing the funds immediately is often the least advantageous option. Consulting a CPA or financial advisor is highly recommended when making these decisions.
  9. Hire professionals. At the risk of sounding self-serving, we could not in good conscience omit this simple piece of advice. There are simply too many moving pieces and too much at stake to not at least consult with a CPA and/or attorney who is experienced in dealing with estates.

Combining business and vacation travel: What can you deduct?

If you go on a business trip within the United States and tack on some vacation days, you can deduct some of your expenses. But exactly what can you write off?

Transportation expenses

Transportation costs to and from the location of your business activity are 100% deductible as long as the primary reason for the trip is business rather than pleasure. On the other hand, if vacation is the primary reason for your travel, then generally none of your transportation expenses are deductible.

What costs can be included? Travel to and from your departure airport, airfare, baggage fees, tips, cabs, and so forth. Costs for rail travel or driving your personal car are also eligible.

Business days vs. pleasure days

The number of days spent on business vs. pleasure is the key factor in determining if the primary reason for domestic travel is business. Your travel days count as business days, as do weekends and holidays if they fall between days devoted to business, and it would be impractical to return home.

Standby days (days when your physical presence is required) also count as business days, even if you aren’t called upon to work those days. Any other day principally devoted to business activities during normal business hours also counts as a business day, and so are days when you intended to work, but couldn’t due to reasons beyond your control (such as local transportation difficulties).

You should be able to claim business was the primary reason for a domestic trip if business days exceed personal days. Be sure to accumulate proof and keep it with your tax records. For example, if your trip is made to attend client meetings, log everything on your daily planner and copy the pages for your tax file. If you attend a convention or training seminar, keep the program and take notes to show you attended the sessions.

Once at the destination, your out-of-pocket expenses for business days are fully deductible. These expenses include lodging, hotel tips, meals (subject to the 50% disallowance rule), seminar and convention fees, and cab fare. Expenses for personal days are nondeductible.

We can help

Questions? Contact us if you want more information about business travel deductions.

© 2016

To deduct business losses, you may have to prove “material participation”

You can only deduct losses from an S corporation, partnership or LLC if you “materially participate” in the business. If you don’t, your losses are generally “passive” and can only be used to offset income from other passive activities. Any excess passive loss is suspended and must be carried forward to future years.

Material participation is determined based on the time you spend in a business activity. For most business owners, the issue rarely arises — you probably spend more than 40 hours working on your enterprise. However, there are situations when the IRS questions participation.

Several tests

To materially participate, you must spend time on an activity on a regular, continuous and substantial basis.

You must also generally meet one of the tests for material participation. For example, a taxpayer must:

  1. Work 500 hours or more during the year in the activity,
  2. Participate in the activity for more than 100 hours during the year, with no one else working more than the taxpayer, or
  3. Materially participate in the activity for any five taxable years during the 10 tax years immediately preceding the taxable year. This can apply to a business owner in the early years of retirement.

There are other situations in which you can qualify for material participation. For example, you can qualify if the business is a personal service activity (such as medicine or law). There are also situations, such as rental businesses, where it is more difficult to claim material participation. In those trades or businesses, you must work more hours and meet additional tests.

Proving your involvement

In some cases, a taxpayer does materially participate, but can’t prove it to the IRS. That’s where good recordkeeping comes in. A good, contemporaneous diary or log can forestall an IRS challenge. Log visits to customers or vendors and trips to sites and banks, as well as time spent doing Internet research. Indicate the time spent. If you’re audited, it will generally occur several years from now. Without good records, you’ll have trouble remembering everything you did.

Passive activity losses are a complicated area of the tax code. Consult with your tax adviser for more information on your situation.

© 2016

Will your business have a net operating loss? Make the most of it

When the deductible expenses of a business exceed its income, a net operating loss (NOL) generally occurs. If you’re planning ahead or filing your income tax return after an extension request and you find that your business has a qualifying NOL, there’s some good news: The loss may generate some tax benefits.

Carrying back or forward

The specific rules and exact computations to figure an NOL can be complex. But when a business incurs a qualifying NOL, the loss can be carried back up to two years, and any remaining amount can be carried forward up to 20 years. The carryback can generate an immediate tax refund, boosting cash flow during a time when you need it.

However, there’s an alternative: The business can elect instead to carry the entire loss forward. If cash flow is fairly strong, carrying the loss forward may be more beneficial, such as if the business’s income increases substantially, pushing it into a higher tax bracket — or if tax rates increase. In both scenarios, the carryforward can save more taxes than the carryback because deductions are more powerful when higher tax rates apply.

Your situation is unique

Your business may want to opt for a carryforward if its alternative minimum tax liability in previous years makes the carryback less beneficial. In the case of flow-through entities, owners might be able to reap individual tax benefits from the NOL. Also note that there are different NOL rules for farming businesses.

Please contact us if you’d like more information on the NOL rules and how you can maximize the tax benefits of an NOL.

© 2016

Affordable Care Act Compliance for Small Business: Two Pitfalls to Avoid

by John Bolyard, CPA

Tax Senior at Atchley & Associates, LLP

Many small business owners may not be aware that effective June 30, 2015, small businesses, defined as having 50 or fewer full-time equivalent employees (FTEs), can face severe penalties for continuing to have stand-alone health reimbursement arrangements (HRA) or Employer Payment Plans (EPP).  The penalty for having these types of plans in place after June 30th can be up to $100 per day, per employee.  That calculates to a penalty of $36,500 per year, per employee!  Although, under the Affordable Care Act (ACA), small businesses are not required to offer group health plans to their employees, if they do offer health plans, they must be compliant with the ACAs market reforms.  I will briefly describe these types of plans and conclude with some suggestions as to what can be done if your business currently has one of these plans in place.

Stand-Alone HRAs have been used by small businesses for decades because they have been both tax deductible to the employer and are not included in the employee’s gross income.  It is labeled “Stand-Alone” to distinguish it from other HRAs which are accompanied by qualified group plans.  The HRA is funded entirely by the employer and not through employee salary deductions.  The funds can be used to reimburse employees for qualifying medical expenses such as out-of-pocket medical costs or for individual medical insurance premiums.  The employer has more control over the cost because they can determine the amount to fund the HRA.  Because there is a cap on the amount which can be paid, it is regarded as being out of compliance with the ACA market reforms and is subject to the punitive tax.

EPPs are another alternative which small business owners have commonly used in the past.  Under an EPP, the employer will reimburse the employee for the amount they paid for insurance premiums.  Similar to the HRA, the payments would be tax deductible to the employer and excluded from gross income for the employee.   Because the reimbursement amount is limited to a specific sum determined by the employer, it is also considered to not be ACA compliant.

An exception to the excise fees imposed for these two plans exists when the plan has fewer than two participants who are current employees on the first day of the year (IRS Notice 2015-17).  This also applies to more than 2% owners of S Corporations as long as there is only one current employee enrolled in the plan.  Furthermore, as is commonly the case, if both a husband and wife are owners of the S Corporation, the plan is considered to cover only one employee even if they are being reimbursed for a medical plan that covers the entire family.  So if you are a small business owner and you are the only one covered in your plan, then you would not face the $100 per day penalty.

For small business owners that do have a stand-alone HRA or an EPP as described above which covers two or more employees, then there are some options to consider.  Form 8929 allows for the reporting of the excise tax and the amount which attributable to a reasonable cause.  To qualify for a reasonable cause exception, the non compliant plan should be terminated within 30 days of the date you became aware that it was in violation of the ACA.  In the event that you are audited by the IRS, it is strongly recommended that documentation be maintained to substantiate the date which you learned that the plan was not allowed.

Once action has been taken to terminate the plan, then there are three other important decisions to make. The small business can replace the plan with one that is ACA compliant, discontinue offering any health plan at all, or discontinue offering a health plan and increase employee’s wages.  If you decide to increase the employees’ wages, then it is important that restrictions not be placed on how the employee spends the money (i.e. the employee cannot be required to use the money to buy health insurance).

If you would like to do further reading on this topic, I have listed some helpful links below to the IRS and US Department of Labor websites which address this subject.

www.irs.gov/irb/2015-14_IRB/ar07.html

www.dol.gov/ebsa/newsroom/tr13-03.html

www.irs.gov/Affordable-Care-Act/Employers/Affordable-Care-Act-Tax-Provisions-for-Small-Employers

If you have questions or concerns that the type of plan you have is one of those described above, please feel free to give us a call to discuss.  While we are not ACA compliance experts, we do have a strong network of insurance specialists and we would be more than happy to direct you to someone who can answer your specific insurance questions.  Also, if you have other tax or business questions please feel free to reach out to us.  It is our privilege to be your trusted advisors.

Tax-Related Identity Theft

Identity theft is a growing problem, and tax-related identity theft in particular continues to increase each year. In 2015, tax-related identity theft continued to hold a high spot on the IRS’s annual “Dirty Dozen” tax scams list.

Tax return identity theft occurs when the taxpayer’s personal information, such as name, Social Security number (SSN), employer identification number, or other identifying information, is used without the taxpayer’s authority to file a fraudulent tax return (usually to claim a fraudulent refund or to obtain tax benefits). This type of identity theft carries serious consequences. It can take victims months just to prove their identity to the IRS, which in turn delays the processing of legitimate refund claims. According to the IRS, individual victims of identity theft “may lose job opportunities, be refused loans, education, housing or transportation, and may even be arrested for crimes they didn’t commit” (IRS Publication 4535, Identity Theft Prevention and Victim Assistance). Businesses may incur significant damage to their reputations, in addition to financial losses and the costs incurred to resolve the issues with numerous agencies.

Scams – Unless you have been in communication with a specific IRS agent regarding a specific matter, the IRS will never contact you via phone or email. Scammers often use these mediums to get personal information or con taxpayers into paying fake taxes/penalties. If the IRS needs to reach a taxpayer they generally do it via U.S. mail. Be suspicious. If you receive a notice that seems suspicious, we recommend that you contact a CPA.

Need help communicating with the IRS because you have been a victim of tax-related identity theft or you have received a suspicious notice? Atchley & Associates LLP may be able to assist you.

See the full article issued by The Tax Adviser on this topic at : http://www.thetaxadviser.com/issues/2015/dec/assisting-clients-with-tax-related-identity-theft.html#sthash.09Lk7sql.dpuf

Changes to Social Security Benefits

by Karen Atchley, CPA

Partner at Atchley & Associates, LLP

 

THIS IS SOMETHING THAT MAY BE OF INTEREST TO YOU.  I am not a social security administration expert by any means but I noticed this law change  may affect you or your spouse based on your ages.  You can contact the social security administration  if you want more information, I can give you the name of a person to consult with who does hold themselves out as having experience in this area.

Under the new Social Security rules included in the Bipartisan Budget Act of 2015, the ability to temporarily claim just spousal benefits is being phased out.  Married people or divorced spouses who are 62 or older by the end of 2015 will retain the right to claim only spousal benefits at age 66, ONLY if their spouse has filed for benefits.  The way I understand it, those 66 or older MUST file for benefits by April 30, 2016, even if they want to immediately suspend getting current benefits until a later time in order for his/her spouse who is or will be 62 years of age by the end of 2015 (or other eligible family member) to claim spousal benefits.  If the spouse who is 66 years of age has not filed for benefits by April 30, 2016, then their spouse will not be able to file for spousal benefits until their spouse starts receiving benefits.

Below is a bullet point of the basics:

  • At age 66 one spouse can file for social security benefits but suspend payment.  This allows their benefits to grow by 8% per year so that when they do begin taking payments later, say at age 70, their benefit will be larger.
  • The alleged “loophole” was that a family member could claim social security benefits based on the earnings of the person who has filed and suspended their benefits, so the household could still receive a benefit payout while at the same time taking advantage of the 8% growth of benefits for the spouse who filed-and-suspended.
  • What’s changing is that after May 1, 2016,  a family member can no longer claim benefits against the file-and-suspend spouse’s social security unless that spouse also receives payment of his/her benefits.  In other words, if the spouse suspends payments, family members cannot collect benefits while payments are suspended.
  • Anyone who is already age 66 and using this strategy/”loophole” will be grandfathered, but anyone who wants to begin implementing this strategy must file-and-suspend by May 1, 2016, assuming they will be at least age 66 by then.
  • Another strategy is the restricted application approach where a spouse who reaches full retirement age at age 66 can file an application to only collect their spouse’s benefits.  This allows their own benefits to essentially be suspended and earn delayed credits (a premium for taking your benefits later, up until age 70).  This is also changing – in order to take advantage of this strategy, if a spouse will turn age 62 before the end of 2015, that spouse can begin collecting his/her benefit while the other spouse files a restricted application and chooses the spousal benefit.  If not 62 before the end of 2015, the “restricted application” strategy will no longer be available.