BHB Advisors LLC, CPAs and Consultants

 

Based in Minnesota, BHB Advisors, LLC is a full service tax and accounting practice, offering the following services:

  1. Tax – planning and compliance work for individuals, corporations and partnerships
  2. Accounting Services and Financial Statements
  3. Consulting and Management Advisory Services

Our mission is to communicate, collaborate and cooperate with our clients to help get them where they want to be financially.

Our specialty is working with individuals and small to midsize companies in the Minneapolis and St. Paul area.

We hope that our website will offer you a glimpse of our expertise and help answer tax and accounting questions you may have.

2016 Year End Tax Planning

As the end of the year approaches, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next. Factors that compound the planning challenge this year include turbulence in the stock market, overall economic uncertainty, and Congress's failure to act on a number of important tax breaks that will expire at the end of 2016.

Some of these expiring tax breaks will likely be extended, but perhaps not all, and as in the past, Congress may not decide the fate of these tax breaks until the very end of 2016 (or later). For individuals, these breaks include: the exclusion for discharge of indebtedness on a principal residence, the treatment of mortgage insurance premiums as deductible qualified residence interest, the 7.5% of adjusted gross income floor beneath medical expense deductions for taxpayers age 65 or older, and the deduction for qualified tuition and related expenses. There is also a host of expiring energy provisions, including: the non-business energy property credit, the residential energy property credit, the qualified fuel cell motor vehicle credit, the alternative fuel vehicle refueling property credit, the credit for 2-wheeled plug-in electric vehicles, the new energy efficient homes credit, and the hybrid solar lighting system property credit.

Higher-income earners have unique concerns to address when mapping out year-end plans. They must be wary of the 3.8% surtax on certain unearned income and the additional 0.9% Medicare tax.

The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over an unindexed threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case). As year-end nears, a taxpayer's approach to minimizing or eliminating the 3.8% surtax will depend on his estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than NII, and other individuals will need to consider ways to minimize both NII and other types of MAGI.

The 0.9% additional Medicare tax also may require year-end actions. It applies to individuals for whom the sum of their wages received with respect to employment and their self-employment income is in excess of an unindexed threshold amount ($250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in any other case). Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed persons must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. For example, if an individual earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year, he would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don't exceed $200,000. Also, in determining whether they may need to make adjustments to avoid a penalty for underpayment of estimated tax, individuals also should be mindful that the additional Medicare tax may be over withheld. This could occur, for example, where only one of two married spouses works and reaches the threshold for the employer to withhold, but the couple's combined income won't be high enough to actually cause the tax to be owed.

We have compiled a checklist of additional actions based on current tax rules that may help you save tax dollars if you act before year-end. Not all actions will apply in your particular situation, but you (or a family member) will likely benefit from many of them.  Please review the following list that pertains to you and contact your tax advisor at your earliest convenience so that they can advise you on which tax-saving moves to make:

Year-End Individual Planning

Year-End Business Planning

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Year-End Planning: Taking Advantage of Employee Benefits

With the year-end approaching, employees can take the opportunity to revisit some of their benefits.  The following is a list explaining some of the common benefits and their potential tax ramifications.

  1. Do you have the opportunity to participate in a Health Savings Account (HSA) or a Health Flexible Spending Account (FSA)? If enrolled through your employer, you may contribute to these plans pre-tax up to certain limits annually, and spend the money on qualified healthcare expenses such as deductibles, copays, and prescriptions.  If your employer offers both an HSA and FSA, you may want to consult your tax advisor to decide which is best for you.
  2. Your employer may also offer a dependent care FSA. Similar to a Health FSA, this account permits pre-tax contributions that can be withdrawn to pay for child care.  The maximum annual contribution limit is $5,000.
  3. Have you asked about your employer's qualified transportation benefits? This permits the employer to reimburse you tax free for transportation.  This includes transit passes, parking, vanpooling, and bicycle commuting.
  4. Year end is a good time to evaluate your retirement plans, and set goals for the future. The contribution limit to a 401(k) in 2016 is $18,000.  This is tax deferred income that can grow exponentially by retirement.  If you're nearing retirement, there are options too; the IRS permitted an extra contribution of $6,000 to your 401(k) in 2016 if you are 50 or older by year-end.
  5. Finally, it may be worth taking a look at your pay stub and seeing at what rate you are withholding. If you are not withholding enough, you may be subject to interest and penalties when you file your tax return.  If you are withholding too much, you are granting the IRS an interest free loan.  These are funds you could have put towards an FSA or retirement, which could in turn generate further tax savings.  In order to change your withholding, ask your employer for a Form W-4.

If you have questions on how these benefits may impact your individual tax situation, please contact your tax advisor.

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Can You Deduct the Cost of Tickets?

A business is permitted to deduct the ordinary and necessary expenses it incurs for carrying on the business.  Is it possible to write off the cost of tickets to a sporting event?  The short answer is yes, but certain conditions must be met. This is an area that is often challenged by the IRS.  Proper documentation and some planning ahead of time can make it much easier to prove the eligibility of the expense upon examination.

The first condition to make the tickets deductible is that the event be directly related to the conduct of business.  This means that you must actively engage in a business meeting, negotiation, discussion, or other bona fide business transaction during the event.  This is not the most difficult condition to meet, and the IRS realizes that so there are two other requirements to meet.  First, tickets cannot be provided to an existing or prospective client without a company representative being present.  Without a representative of the company, the tickets are considered a gift which is only deductible up to $25 per person per year.  Second, the environment must be suitable for conducting business. Substantial distractions can lead the IRS to determine that no business transactions could be conducted there.  It can be debated otherwise, but this generally means that general admission tickets do not qualify.  The noise and distraction of the crowd are not favorable to business being conducted.  It is recommended that you use a more secluded section, such as a suite.  No matter which tickets are purchased you need to document which business transactions occurred before, during, and/or after the event.

The cost of a luxury suite is limited to the face value of tickets for non-luxury seats.  You can use the highest priced non-luxury seats that are available to the general public in figuring the amount that is deductible.  Any amount above this price level is not deductible.  Most suite rentals have additional components, other than the cost of the ticket, including advertising, food and beverage, and other fees for use of the suite.  You can work with the venue to determine amounts for each.

The amount recognized for the tickets and food and beverage are subject to a 50% limit.  This is generally applied to all business meals and entertainment expenses.  Any amount determined to be advertising is fully deductible as a business expense.  Generally, any other costs are considered non-deductible.

Businesses regularly take clients to sporting events to develop new or existing relationships.  Start a conversation with your tax advisor to determine the possible tax deduction for sporting event tickets.

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Rules for Claiming a Dependent

Taxpayers who can claim dependents are permitted a substantial reduction of taxable income.  The two types of dependents are qualifying child and qualifying relative, and each have four tests to satisfy.  To be a qualifying child, the taxpayer must meet the relationship test, meaning that the potential dependent is a son, daughter, stepson, stepdaughter, brother, sister, stepbrother, stepsister, or any descendants of this group.  Second, the dependent must be under age 19 or a full-time student under age 24, and a full-time student means that the dependent was enrolled full-time for 5 months during the tax year.  Third, the dependent must have the same principal residence for more than half a year (an individual living in college is considered a "temporary absence").  Fourth, the dependent cannot have provided more than half of his or her support in the tax year.

The other type of dependent is the qualifying relative, and must meet four similar tests.  First the dependent must satisfy either the relationship test or the residence tests.  The relationship test is satisfied if the individual is a parent, child, sibling, grandparent, uncle or aunt, or niece and nephew.  A cousin does not qualify.  If the dependent does not fulfill this test, he or she can satisfy the residence test if the dependent lived with the taxpayer for the full tax year.  Second, the dependent must satisfy the income test, which requires that the dependent's taxable income for the year to be less than the personal exemption for the year—$4,050 in 2016.  Finally, the support test must be met, and this requires the taxpayer claiming the exemption to have provided over half of the dependent's support in the tax year.

If the qualifying relative or qualifying child tests are met, then the taxpayer may claim the personal exemption of the dependent.  In 2016, the exemption amount is $4,050, meaning an individual could reduce their taxable income by $4,050.

For further information or questions on whether an individual would qualify as your dependent, contact your tax advisor.

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IRA Distributions to Charity

Last December Congress passed a tax package that made permanent a tax break for IRA distributions contributed directly to qualified charities for taxpayers aged 70 ½ and over. This is called a “qualified charitable distribution.”

At age 70 ½ taxpayers are subject to “required minimum distributions” (RMD) from their IRA accounts.  The amount required to be distributed is determined by a factor based on age and the total balance in the IRA accounts at the end of the previous year.  These distributions are subject to income tax and may contribute to limitations on itemized deductions, personal exemptions, and rental real estate losses – to name a few.  These distributions can also increase the amount of tax due on social security income.  Qualified charitable distributions count towards a taxpayers RMD total for the year and are not included in taxable income.   However, the maximum that can be excluded from income is $100,000 each year and the donation may not be deducted elsewhere on the return.

In order to qualify for the income exclusion, the organization that received the donation must be a public charity, the payment must also follow the IRS guidelines for qualified charitable contributions (See BHB article for qualified charitable contributions), and it must be a direct transfer from the IRA trustee to the charity.  This last one is very important.  If it is distributed to the IRA account owner and then donated it does not qualify for the exclusion.

This is just one of many options when it comes to making charitable contributions.  A conversation with your tax advisor can determine which option is the best for your overall goals and, of course, to minimize your tax liability come next April.

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Tax Benefits for your Charitable Generosity

With the season of giving almost upon us, let's take a look at receiving a tax deduction for charitable contributions.  Taxpayers who qualify to itemize deductions are eligible to deduct certain donations.  There are two essential components for taxpayers to consider: the receiving organization and the taxpayer's substantiation.  First, with regards to organizations, it should be a non-for-profit and operated only for charitable, religious, scientific, educational or certain other philanthropic purposes.  Such organizations register with the IRS under various sections of tax law permitting them to receive tax-deductible donations—the most common of which is section 501(c)(3).  However, if it is unclear, taxpayers can utilize this tool for further information on organizations.  There are certain donations that are never deductible.  For instance, political donations, raffle tickets, or donations to individuals do not qualify.

The second component is the taxpayer's substantiation.  Regardless of value, the IRS requires documentation for each donation made.  For monetary amounts under $250, this documentation can be a bank record or a written record from the organization, which states the organization name, date, and fair market value.  For amounts over $250, bank records do not suffice, and the written record from the organization must also include a description of the donation and state whether any goods or services were exchanged for the gift.

For noncash donations, the thresholds and substantiation is the same for cash contributions up to $500.  If the total noncash donations exceeds $500, you will have to report the date, amount, and organization on your tax return for each noncash donation.   For noncash donations exceeding $5,000, more rules come in to play depending on the good donated, and an independent appraisal may be required.

For more information on the various rules, consult your tax professional.

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New Investment Opportunities for MN Businesses and Individuals

As of June 20, 2016, Minnesota businesses may use crowdfunding to find investors and raise capital.  The new law MNvest provides a limited exemption from federal and state security laws, making small business investments more accessible to a greater number of investors and investees.

Several qualifications must be met under the new law:

  1. The business must be an entity formed under Minnesota law, and have their principal office located in the state. Additionally, at least 80% of an entity's assets and income must be located/earned in Minnesota.
  2. The investor must be a Minnesota resident, and can invest a maximum of $10,000 in any given offer through MNvest.
    • This limit does not apply to accredited investors.
  3. The transaction must be conducted via a 'MNvest portal', which is registered with the Minnesota Commerce department. A prospective business must complete a notice filing and pay the $300 fee associated.
  4. A business can receive a maximum of $2 million in a 12-month period if a certified public accountant has audited or reviewed the company financial statements.
  5. A business can receive a maximum of $1 million in a 12-month period if no audit or review has been conducted.

For more information, visit mnvest.org.

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Angel Tax Credit

The Angel Tax Credit is a refundable income tax credit on your Minnesota Tax Return created as an incentive for investors to lend money to small business in certain industries primarily in Minnesota.  The credit is 25% of the investment into the qualified business, however it is limited to $125,000 per individual or $250,000 if you file jointly with your spouse.

For a business to qualify to receive funds subject to the Angel Tax credit they must meet certain criteria.  The eligibility criteria includes:

  1. Headquartered in Minnesota
  2. Focus on high technology or new proprietary technology
  3. Fewer than 25 employees
  4. Been operational for fewer than 10 years
  5. Certified by the Minnesota Department of Employment and Economic Development (DEED) before qualifying investments are made

For a full list of criteria see the (DEED) website at http://mn.gov/deed/business/financing-business/tax-credits/angel-tax-credit/for-businesses.jsp.

To claim the credit, investors must obtain certification from the Minnesota Department of Employment and Economic Development (DEED) before making their investment.  The DEED will issue certificates that should be used in filing for the credit by Mid-February of the year following the investment.

Investors must also meet certain criteria to qualify for certification by the DEED before making their investment.  The requirements include:

  1. Net worth in excess of $1,000,000
  2. Are not an officer, principal, 20% owner in the business or a family member of such
  3. A minimum investment of $10,000

A full list of investor criteria can be seen on the DEED website.

It is not required that the investor live in the state of Minnesota, however to receive the tax credit a Minnesota Tax Return is required to be filed.  Because the credit is refundable, you are not required to have a Minnesota tax liability to receive the benefit.

Investors who receive the Angel Tax Credit will have additional tax considerations.  The Minnesota Department of Revenue will issue investors a 1099-Misc that will be required to be reported on the investors federal and state tax returns as income for the year the credit was received.  The credit is considered Minnesota sourced, therefore Minnesota filing requirements will need to be considered for any non-resident investors.

If all the eligibility requirements are met, the Angel Tax Credit could be a nice opportunity for tax savings.  If you are considering making a qualifying investment please consult your financial and tax advisors for specific consideration on your personal financial and tax situation.

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Olympic Medalists & Taxes

US athletes who win medals in Rio may have to pay income tax on their prize winnings as well as the value of their medals.  The International Olympic Committee pays medalists $25,000 for gold, $15,000 for silver, and $10,000 for bronze.  This is included in the athletes' income for tax purposes.  The value of the medal itself is also taxable income under current law.  That could all change soon.  The Senate has passed a bill that will exempt these winnings from income tax.  The House will vote on it in September when they return from their current break.  Bills like this have been brought up in the past but have never made it into law.

Most athletes  may not actually pay any income tax on these winnings, even under current law.  They are allowed deductions for ordinary and necessary expenses if they treat their participation in their sport as a business.  Even as a hobby, they can take deductions against the winnings to reduce income tax on them.

For now, we will have to stay tuned for the final decision.

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Household Employees

If you hire someone to do household work you may have what the IRS refers to as a household employee.  A key issue is whether the worker is actually your employee or a self-employed contractor.  Per the IRS, "The worker is your employee if you can control not only what work is done, but how it is done."  Another point is whether the worker offers their services to the general public.  For example, a landscaping company mowing your lawn is not your employee but a full time nanny is.

Some examples of household work include:

  1. Babysitter/nanny
  2. House keeper
  3. Driver
  4. Maid
  5. Private nurse
  6. Yard worker

If the worker qualifies as your employee and you pay them over $2,000 throughout the year you need to pay employment taxes such as social security and Medicare.  Social security and Medicare both have an employee and an employer component totaling 15.3% – 7.65% from the employee and 7.65% from the employer.  If you pay wages of more than $1,000 in any calendar quarter you also need to pay federal unemployment tax.  The federal unemployment tax rate is 6% of the first $7,000 of wages but depending on your state’s laws you may also be subject to state unemployment tax, which can reduce the federal rate.  In our home state of Minnesota state unemployment insurance for household employees is required.  It can range from 1.59% to 8.44% of the first $31,000 of wages.  The good news is that paying MN unemployment will reduce the federal rate to 0.6%, so the most you will pay into federal unemployment is $42.

In addition to paying the employment taxes there are other tasks that need to be completed when you are a household employer.

  • You must obtain an employer identification number from the IRS – this can be your social security number.
  • You must issue your employee(s) W-2 Wage and Tax statements by January 31 of the following year. The W-2(s) must also be filed with the Social Security Administration and likely with your home state.
  • When you file your individual income tax return you will document your household employee(s) on Schedule H.

You are not required to deposit the employment taxes throughout the year but the balance is due when you file your individual income tax return.  The additional balance due may cause you to be subject to estimated tax penalties if you do not have enough withheld or pay enough in quarterly estimates.

Most payroll processing companies offer a reduced fee arrangement for household employees.  If you utilize one of these services you may only need to submit wages.  All the filings and tax deposits are completed for you.  They also will prepare a Schedule H that you can provide to your tax preparer or use when preparing your own taxes.

This can seem like an issue that is subject to a lot of nuances.  A quick discussion with your tax advisor should answer your questions and make this seem less daunting.

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