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.

Do I need to report gifts on my taxes? The answer and other facts about taxable gifts.

Recipients of gifts have often wondered if the receipt of the gift is taxable and reportable on their individual tax return. The answer is typically no.  Depending on the property received and in general, the recipient of a gift is not required to pay tax or report the gift on their individual tax return.

On the other hand…

The giver of a gift is sometimes required to pay tax and file a specific Gift Tax Return after making a gift.  The following types of gifts are non taxable:

  1. Gifts that in total are valued at less than $14,000. This $14,000 threshold is known as the annual exclusion and is subject to change from year to year. The giver may gift up to $14,000 per person in 2016 without being subject to gift tax or filing requirements.
  2. Tuition paid directly to an educational institution.
  3. Medical expenses paid directly to a medical institution.
  4. Gifts to your spouse.
  5. Gifts to charities.
  6. Gifts to political organizations.

A gift can also be non-taxable if spouses decide to combine their annual exclusions. In essence the gift would be considered to be half from one spouse and half from the other.  With this strategy, couples can gift up to $28,000 in 2016 without causing a gift to be taxable.  Any time a couple splits a gift there is a reporting requirement, even if the gift is non taxable.

Other situations that trigger a filing requirement:

  1. Gifts over the annual exclusion that are not specifically excluded.
  2. Gifts of a future interest that can't be possessed, used, or produce income until a later date. (Spouses excluded)
  3. Gifts of property to spouses that will expire due to an event in the future.

Gifts that are taxable or trigger a filing requirement must be reported on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return by April 15th of the year following the gift. The state of Minnesota does not have a gift tax, so there is no filing requirement in Minnesota.

Even if you are required to file a gift tax return, each person has a lifetime limit of $5,450,000 (in 2016) that they may gift before paying tax.  However the $5,450,000 lifetime exemption is for both gift and estate tax so any amount that you use on your gift tax return will reduce the amount that you may use on your estate return in the future.

Gift giving can be tricky once the dollar amount begins to rise and different situations have different outcomes. For example, a personal loan or debt that is forgiven could be considered a gift but when a parent throws a wedding for a child, the party may not be a gift.  If you are considering giving a gift over the annual exclusion contact your tax preparer and discuss any tax consequences. Or at a minimum, make sure to tell your tax preparer about any large gifts during the tax year so they may advise you on any filing requirements.

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Salary & Overtime? Oh Boy! : New Overtime Rules from the Department of Labor

Minimum wage and overtime pay is protected under The Fair Labor Standards Act (FLSA). However only workers who are not exempt from the act will qualify for this protection.   Workers that are exempt from the act generally meet three requirements:

  • Receipt of a predetermined and fixed salary.
  • The salary must be over a threshold determined by the Department of Labor.
  • Job duties must primarily involve executive, administrative, or professional duties defined by the regulations. The Department of Labor has "duties tests" to determine if you fall into the executive, administrative, or professional categories.

Last month, the Department of Labor revised the FLSA, which made an estimated 4.2 million workers eligible for overtime.  The changes center on increasing the threshold amount for exempt employees from $455 per week to $913 per week or $47,476 annually.  This means that if you are a salaried executive, administrative, or professional employee earning less than $913 a week you may be eligible for overtime pay.

Some of the other changes include an allowance of up to ten percent of nondiscretionary bonus and incentive pay to count towards the $913 per week standard salary level, and automatically updating these thresholds every three years.

These new rules will be effective on December 1st, 2016 which will leave time for employers to evaluate positions and to make any necessary changes.  For more information, go to the Overtime Pay page on the Department of Labor website.

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Second Quarter Estimated Tax Payment Due- June 15

If you are required to pay quarterly estimated tax payments to the IRS or state, your second payment is due on or before June 15, 2016.

If you are not sure about your need to pay in quarterly tax estimates for the current year, here is some more information.

All taxpayers must pay a “required annual payment” to the IRS as their income is earned.   This payment in total is equal to the lesser of 90% of tax shown on their current year return, or 100% of tax shown on their prior year return.  (Taxpayers with an adjusted gross income of greater than $150,000 must pay the lesser of 90% of tax shown on their current year return, or 110% of tax shown on their prior year return). It is due in 25% installments by Apr. 15, June 15, Sept 15, and Jan 15, to avoid underpayment penalties.

Most taxpayers receiving the majority of their income through wages will satisfy these requirements through tax withheld on their paycheck by their employers.  However taxpayers involved in flow through entities such as sole proprietorships, partnerships, S corporations, or trusts and estates need to be proactive in paying these installments in full and in a timely manner.

Failure to make these required payments may result in underpayment penalties.  The penalty is the interest rate charged by the IRS (currently an approx 3.52%), multiplied by the amount underpaid.

Penalties can be avoided if you meet specific exemptions:

The first exception to avoid penalties is Small Balance Due.  If the tax due after reducing federal withholding is less than $1,000 then no penalty will be incurred.

A taxpayer will avoid a penalty with the second exception if there was no tax liability in the prior year.

The third exception to the penalty is if the taxpayer paid, through withholding and estimated tax payments, 100% of their prior year tax liability (110% for those with an AGI above $150,000).

The fourth exception would be to pay, through withholding and estimated tax payments, 90% of the current tax liability.  This would be most commonly done with a tax projection and making estimated tax payments based on the projected liability.

For taxpayers who do not receive their income evenly throughout the year, an annualization option is available.  This would most commonly affect taxpayers with businesses of a seasonal nature.  An annualization exception comprises of a calculation to determine what estimated tax is due by quarter based on income as earned. The calculation will still compute the total amount to be the same as the lesser of 90% of tax shown on their current year return, or 100% of tax shown on their prior year return in a more reasonable distribution.  Taxpayers that think this might apply should consult their tax preparer to calculate the appropriate payment per quarter.

Do not forget that the same rules apply to the Minnesota Department of Revenue for your state tax liability.

It is important that taxpayers make their payments to both the IRS and Minnesota Department of Revenue in full and on time.  An overpayment in a later quarter does not eliminate underpayment penalties for previous quarters.  Penalties are computed from the date the quarterly payment was due until it is paid.

If you are unsure whether or not you need to make estimated tax payments or what amount you should pay, please contact your tax advisor.

IRS Penalties

Paying taxes and filing the annual tax return is not most people's favorite activity.  Sometimes life gets a little crazy and taxpayers forget their obligation to file or pay the tax due on their return.  However understandable this situation may be, it is not without consequences. There are two penalties that apply to a late or unpaid return.

Late Filing Penalty

April 15th is normally the deadline to file a personal tax return, however taxpayers can file for a 6-month extension if necessary.  Should a taxpayer fail to file by April 15th without filing an extension, or exceed the extension by filing after October 15th, they will be subject to a late filing penalty.  The penalty for failing to file your tax return is normally 5% of your unpaid tax for each month or part of a month that the return is late.  There is a limit to the penalty and it will not exceed 25% of the unpaid tax.  However, if the return is more than 60 days late the minimum penalty is the lesser of $135 or 100% of the unpaid tax.

For example, Carlton did not file for an extension and did not file his tax return until April 30th.  The total unpaid tax was $500.  His failure to file penalty would be $25 ($500 x 5% x 1 Month). If Carlton had not file his return until June 30th his failure to file penalty would be $135.  Because he filed the return more than 60 days after the due date, penalty minimum rules apply. If there was not a minimum rule his penalty would have been $75 ($500 x 5% x 3 Months).

If a taxpayer does not have a balance due, then even if the return is late, there is no late filing penalty.

Late Payment Penalty

Even if a taxpayer files an extension, if they owe tax on their return they may be subject to a late payment penalty on any unpaid tax after April 15th.  An extension gives a taxpayer more time to file NOT more time to pay the tax.  The late payment penalty is .5% per month or part of a month that the tax is unpaid.  It is limited to 25% of the unpaid taxes. If a taxpayer requests an extension and has paid 90% of the total taxes owed, they may not be subject to the penalty.

Let's assume in our above scenario that Carlton did file an extension and then filed his return with a payment for the unpaid tax on April 30th.  The late payment penalty would be $3 ($500 x .5% x 1 Month rounded up). IF his unpaid tax was $3,000 and he paid on June 30th his penalty would be $45 ($3,000 x .5% x 3 Months).

Our example, only includes the penalty for a late payment. Be aware that late payments will also be subject to interest.

If a taxpayer owes both the failure to file and the failure to pay penalty, the maximum amount charged in those months is 5%.

It is recommended that taxpayers make sure to file on time even if they cannot pay the tax.  The failure to file penalty is 10 times more than the failure to pay penalty.  If a taxpayer cannot pay the whole amount of tax due they should pay as much as they can to reduce penalties.  After their initial payment, taxpayers may use IRS online resources to apply for a short extension to pay, set up an installment agreement, or suggest an offer in compromise.  If you can show reasonable cause for late filing and payment the IRS may waive your penalties.

No one likes to pay penalties, so it is a good idea to stay organized and plan ahead.  If you think you may owe tax and want to avoid surprises or start planning for any additional tax due, consider contacting your tax preparer for a tax plan.  A little time and money now could save you a lot latter.

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What to do if you receive an IRS letter

First of all don't panic, the IRS sends millions of notices and letters to taxpayers every year.  An IRS notice will typically be about your federal tax return or tax account.   Most of the letters will ask you to address a specific issue, however they may also send a letter requesting additional information.

If an IRS letter informs you that they have made a change or correction on your tax return, it is important to review the change carefully and it may even be necessary to discuss the matter with your tax advisor.  Typically, if you agree with the change, then you should follow the instructions in the letter if they guide you to take action.  If you do not agree with the change, then you or your tax advisor should write a letter to explain why you disagree.  You should also include any documents that support your conclusion.  There should be an address on a tear off portion of the IRS letter that will help you to send your response to the right location.

Most notices will not require a trip to the IRS or even a phone call.  If you have a question and wish to call them there should be a phone number in the upper right hand corner of the notice with the phone number of the correct department.

Please note that it is unlikely that the IRS will call you without sending a letter first. They will not contact you by email or social media to ask for personal or financial information.  If you are contacted and you are unsure if the request is legitimate you should contact your tax advisor before giving out any personal or financial information.  If you and your advisor deem that the contact is suspicious you should report the suspicious activity based on the IRS guidance here.

Remember that receiving an IRS letter does not automatically mean you did something wrong.  Take the time to carefully read the notice and most importantly follow up, as requested, in a timely matter.  Don't be afraid to utilize your tax advisor and make sure to send them a copy of any letters when you receive them.

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S-corporations and the Home Office Deduction

When you are a shareholder of an S-corp but also work for the company you are considered an employee.  Having employee status means that any home office deductions must be reported on Schedule A which requires that the deduction be greater than 2% of your adjusted gross income in order to have any tax benefit. This is generally not the case.  However there is another way to get a business deduction for the cost of your home office.   If you are not aware if you are eligible for the home office deduction please see our article “Work from Home? A Possible Deduction…

For S-Corp owners that are eligible for the home office deduction, the IRS allows the S-Corp to reimburse the owner and employees for ordinary and necessary business expenses including expenses directly related to keeping an office in their home as a "working condition fringe benefit."

The following steps must be followed to take advantage of this reimbursement plan and business deduction:

  1. The employer must adopt an accountable plan for business expense reimbursements and follow the substantiation rules.  Example
  2. The employee must provide an accounting (expense report with supporting documents) of the following expenses and apply a business use percentage based on the square footage of the area used exclusively for business to the entire home.

The following expenses are allowed (subject to the business use "square footage" percentage):

  1. Utilities
  2. Insurance
  3. Repairs and maintenance

The following "direct" expenses are allowed 100%:

  1. Office supplies
  2. Computer equipment
  3. Cell phone charges

The following expenses are NOT allowed for reimbursement:

  1. Depreciation of home
  2. Mortgage interest
  3. Property taxes

Mortgage interest and property taxes may be deductible elsewhere on your personal tax return so they do not qualify for reimbursement by the employer.  If you rent your home, you may also be able to deduct the business percentage of the rent paid as well.  Please contact your tax advisor if you have any questions and to discuss your specific situation.

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Work from Home? Possible Tax Deduction:

If you work from home you may be entitled to a tax deduction.  This deduction ordinarily benefits self-employed persons, but is available to employees as well.  Though it is available to employees, most will not see a tax benefit as the deduction is subject to a 2% of adjusted gross income reduction.  A future article will explain a way for certain employees (S-corp shareholders) to take advantage of the home office deduction.

In order to qualify for the home office deduction you must meet certain criteria.  The office space must be used exclusively and regularly as a principal place of business.  Let's break down these components separately.  Exclusive use means that the home office is not used for personal matters.  So an office that doubles as a spare bedroom does not qualify.  The regular use condition is satisfied if you use the space continually and in the normal course of business.  Occasionally meeting clients at home does not qualify.  Meeting the principal place of business requirement is more ambiguous but there are two main factors used to determine eligibility.  First, the importance of activities performed must be essential to the business.  The second factor, used if the first one is not clear, is the time spent in/at each place.

If you are an employee there is an additional requirement that the home office must be for the convenience of the employer.  This is a difficult test to meet, and lots of employees will not qualify.  Each situation should be evaluated specifically as there are exceptions but here is a quick reference that answers the basic question.  If you have space to conduct your business (i.e. office space) provided by your employer, you do not qualify.  The opposite is also true, if your employer does not provide office space; the home office is for the convenience of the employer.

If you meet the criteria and are eligible for a home office deduction how much is it worth?  As with most situations with the IRS there isn't just one solution.  There are two possible ways to calculate what your deduction may be.

  • Simplified Method – You receive a $5 deduction per square foot of office space; with a maximum of 300 square feet. With this method the record keeping requirements and allocations discussed below are eliminated.
  • Standard Home Office Deduction – There are three main components to the home office deduction
    1. Indirect expenses – these are taken based on the business use square footage percentage; the percentage of your home that the office occupies. These expenses impact the entire home.
      1. Utilities
      2. Insurance
      3. Repairs & maintenance
      4. Property taxes
      5. Landscaping & snow removal
    2. Direct expenses – related to the home office only.
      1. Repairs & maintenance for the office only
    3. Depreciation –this is a deduction for the decrease in value of your home over time. This deduction is allowed on the same percentage basis as indirect expenses.

As you can see, the amount of work to calculate and maintain the records for the standard home office deduction are quite substantial.  Also keep in mind that when you eventually sell the home any depreciation allowed for the period used for business must be taken into account for the purpose of determining taxable gain on the sale.  You can determine each year whether to take the simplified or the standard home office deduction.

We recommend taking advantage of every tax deduction available to you.  Not everyone qualifies for the home office deduction but if you do, it can be very advantageous.  With a little planning it is much easier to track and record everything needed.  If you have questions related to your specific situation, please contact your tax advisor.House2

2015 Tax Season Resources

Welcome to another tax season!  To make this busy time a little easier, you can download all the necessary documents right here.

We ask all of our clients to fill out and return a signed Engagement Letter, and Questionnaire. We also have an Organizer that you can fill out to help gather your tax information.

Individual Engagement Letter

Fiduciary Engagement Letter

Individual Questionnaire – This is a “fill in” PDF form, but will need to be either printed to .pdf or paper to record your answers.

Fiduciary Questionnaire  – Print and record your answers on paper.

Individual Organizer (Not available for Fiduciary)

If we did your return in 2014, you will receive an Organizer with your prior year information.  If you need a new Organizer, please contact Carrie to have one sent to you.

If you are a new client, please download and complete the blank Organizer that pertains to your situation.

  • Basic – For taxpayers without Schedule C business income or rental property.
  • Business Income – For taxpayers with self-employment income. Please make sure to fill out this Organizer AND the Basic Organizer.
  • Rental Income – For taxpayers with rental properties. Please make sure to fill out this Organizer AND the Basic Organizer.
  • Complete – This is the complete version for taxpayers with multiple activities such as business, rental, or farm income.

If you have Adobe Acrobat see our instructions for filling out your organizer in Adobe.

2015 Tax Planning

It is time to consider your end of year tax plans.  The laws for 2015 have not yet been finalized, however, most analysts expect the expiring provisions to be reinstated for 2015.  Some may be made permanent or extended for multiple years giving certainty to future years.  Following is a letter that we provide to clients detailing some of the opportunities for tax planning.  The letter specifies which provisions are up for extension and the rules in effect should they not be reinstated.

Consult your tax advisor for any tax planning considerations and check back here for any updates.

2015 Tax Planning Letter

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