Archive for the "Business Consulting" Category

2017 Update

Welcome to 2017. The rates and phase-out ranges for tax deductions are subject to change and cost-of-living adjustments on an annual basis.  Some of the new changes to 2017 include:

Mileage Rates

Business – 53.5 cents per mile

Medical or moving – 17 cents per mile

Charitable – 14 cents per mile

 

HSA Contribution

Self-Only – $3,400 (plus an additional $1,000 if 55 or older)

Family – $6,750 (plus an additional $1,000 if 55 or older)

 

Retirement Plan Contribution Limits

Traditional IRA –  The contribution limit remains the same, $5,500 or $6,500 if 50 or older, but the phase out limits have changed.

Single and Head of Household: phase-out begins at $62,000

Married Filing Joint (both spouses covered by employer plans): phase-out begins at $99,000

Married Filing Joint (only one spouse covered by employer plan): phase-out begins at $186,000

Roth IRA – The contribution limit remains the same, $5,500 or $6,500 if 50 or older, but the phase out limits have changed.

Single and Head of Household: phase-out begins at $118,000

Married Filing Joint: phase-out begins at $186,000

 401K and 403b Plans – the contribution limit for employees that participate in these plans remains the same at $18,000 or $24,000 if 50 or older.

Defined Benefit Plans – limited to $54,000 in 2017

 

If you have questions about your individual tax situation, contact your tax advisor.

2017

New Small Employer Health Reimbursement Arrangement

In December of 2016 President Obama signed the 21st Century Cures Act into law.  Included in this law was a provision to allow small employers to establish health reimbursement arrangements (HRAs) for their employees.  Previously, with the passage of the Affordable Care Act, these arrangements were subject to very high penalties as they did not satisfy the minimum essential coverage requirements.  There was relief from these penalties that expired in June of 2015.  The Cures Act now makes that relief effective for all plan years beginning before the end of 2016. Moving forward, a new type of reimbursement arrangement can be implemented.

A qualified small employer health reimbursement arrangement (QSEHRA) can be established.  A few guidelines regarding QSEHRAs:

  1. The definition of a "small employer" is the same as defined in the Affordable Care Act – less than 50 full time equivalent employees
  2. The company does not offer a group health plan
  3. The plan must cover all employees with very limited exceptions
  4. There is a cap to how much each employee can be paid – $4,950 per year for single employees and $10,000 per year for family coverage. Benefits generally must be offered at the same level to all employees
  5. The reimbursement arrangement can pay for medical expenses including health insurance premiums
  6. The amounts paid are deductible by the company but not income to the employee if the employee provides annual proof of minimum essential coverage for them and their family members
  7. Companies must provide an annual notice to eligible employees. The notice states the benefit amount and informs the employee to disclose the benefit to the health insurance exchange if they are receiving advance premium tax credits.

It has been a struggle recently for small employers to offer any assistance with employee health insurance.  The passage of the 21st Century Cures Act provides a valuable option that many small businesses can use to their advantage.  It is likely that in the coming months further guidance will emerge to help with the implementation and administration of QSEHRAs.  For additional information, or to discuss how this could benefit you, please contact your trusted tax advisor.

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2016 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 – Available upon request.

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 2015, 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.

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

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

1099 and W2 Deadline Changes

Tax season and its many deadlines are right around the corner.  The first deadline is the information-reporting forms, and beginning in 2017, there are important deadline changes.  In prior years, both forms W2 and 1099 were due to the recipient on January 31, but not due to the IRS until March 31.  Congress has enacted new legislation closing this gap; both Forms 1099 and W2 will be due to the recipient and the IRS on January 31, 2017.

The filing penalties remain largely unchanged, and can be up to $250 for each late filing both to the recipient and to the IRS.  However, the IRS's ability to assess these penalties will significantly improve in 2017.  In previous years, barring audit, a 1099 filer was unlikely to receive a penalty as long as both recipient and IRS filings were completed by March 31—regardless of when the recipient actually received the 1099.  With these deadline changes, the IRS will have the ability to assess failure to file penalties both with the recipient and with the IRS after January 31.  This penalty could be as high as $500 per 1099 whether missed, incorrect, or late.

Given the stringent requirements this year, it is important to get a head start.  Looking at your prior year filings can be a great place to start.  Additionally, let's go over the basic process for 1099s.  First, look for payments of $600 or greater made for services (not goods) throughout the tax year that were done in connection with your trade or business.  Second, determine whether the business is incorporated.  Many corporations will include the acronym ‘Inc.’ in their title if they are incorporated.  You are not typically required to send a 1099 to corporations, however, there are two major exceptions to keep in mind. Payments for attorney or medical services must be sent a 1099 regardless of corporate status.  Third, if the business is not a corporation or cannot be determined, send the business a Form W9.

For further information on the information-reporting requirements, consult your tax advisor.

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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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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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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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