THE OUTLOOK FOR INTERNSHIPS IS LOOKING UP

042318 Blog Posting.jpg

In early January, the U.S. Department of Labor (DOL) published a fact sheet that lays out how the agency is aligning its policy on intern employment status with new rulings by several U.S. appellate courts. Previously, it would've been much harder to bring interns on board without having to pay them minimum wage and overtime. Employers had to satisfy several tests to prove that interns weren't subject to Fair Labor Standards Act (FLSA) protections.

The new standard relies instead on a "primary beneficiary" test that's grounded in "economic reality," according to the DOL. If an unpaid intern (or one whose pay was less than that dictated by the FLSA) asserts that he or she should be covered by the FLSA, the Labor Department's Wage and Hour Division would weigh the following seven factors.

The extent to which:

1. The intern and the employer clearly understand that there's no expectation of compensation. Any promise of compensation, expressed or implied, suggests that the intern is an employee — and vice versa.

2. The internship provides training such as that would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions.

3. The internship is tied to the intern's formal education program by integrated coursework or the receipt of academic credit.

4. The internship accommodates the intern's academic commitments by corresponding to the academic calendar.

5. The internship's duration is limited to the period in which the internship provides the intern with beneficial learning.

6. The intern's work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern.

7. The intern and the employer understand that the internship is conducted without entitlement to a paid job after the conclusion of the internship.

Unique Circumstances

Also, under the above test, "no single factor is determinative," the DOL explains. Rather, a determination will be made based on "the unique circumstances of each case."

Clearly, under these guidelines, an internship still must be a two-way street. And as a practical matter, an internship program — particularly an unpaid one — will need to appeal to prospective interns based on what they'll learn from it. Otherwise, they won't apply.

This begs the question: Why have an internship program in the first place? If it's not just a source of free or low-cost labor, how do internships benefit your organization? Here are the most important additional benefits, according to the Society for Human Resource Management (SHRM). An internship program allows you to:

  • Tap into a pool of potential future full-time employees about whom you'll know much more than can be derived from resumes or job applications,

  • Generate your brand recognition as an employer, including recognition as an employer that helps launch careers of young people,

  • Gain an impetus to evaluate your human resource functions in terms of where there might be gaps in training support, both for interns and regular employees,

  • Advance your workforce diversity initiatives, and

  • Enhance the loyalty of employees whose own children and relatives are selected as interns.

Not Just for the Young

Keep in mind that while the typical internship involves students, interns can also include working-age people who are seeking a career change. Retirees and pre-retirees may wish to take on an internship to stay engaged in the working world, learn new skills and interact with others.

SHRM recommends that internship programs be created and assessed with the same degree of rigor as other important organizational initiatives. That means establishing a set of goals that are specific, measurable, attainable, relevant and time-bound, also called "SMART goals." Examples of SMART goals could include enhancing or building a reputation as a "best local place to work." Another goal, suggested by SHRM, might be "obtaining candid feedback about organizational problems and overlooked opportunities and talents."

Caveats

Finally, here are a pair of internship caveats. First, be careful not to bump up against any child labor laws. Federal requirements are relatively minimal. However, state child labor laws vary widely and must be reviewed prior to launching an internship program.

The second caveat is that interns, particularly when they're not paid, sometimes consider themselves exempt from the workplace policies applicable to regular employees (such as an existing dress code). Generally, interns should be held to the same standards that you expect from employees. Just be sure to spell out those standards from the beginning.

As noted, the DOL's new flexibility with respect to internships doesn't give you carte blanche to ignore interns' needs and expectations about the benefits they'll derive from the program. But the value proposition of an internship from an employer perspective may be stronger than ever. You can improve your chances of avoiding legal challenges if you consult a qualified attorney before launching an internship program.

REMEMBER BUSINESS BASICS WHEN PAYING RELATIVES

040218 Blog Photo.jpg

Paying family members wages, salaries and bonuses and dividing profits among them can be tricky.

It's not uncommon for some employees to feel they're underpaid, but the same complaints are more personal in a family business. Different siblings may make different salaries or one relative may actually work more than another, even though they both earn the same compensation.

Although some complaints will always exist, family business owners can ease some of these tensions and discrepancies — real or imagined — by looking critically at the company's compensation policies. They may need to be reworked to reflect the true value of managers and employees.

Salaries are best handled by matching them to industry guidelines. Determine local salary ranges for various jobs and use them as a guide for paying both family and non-family personnel. When you tie salary to a job description, you recognize the value the industry puts on positions and you treat all employees more equitably. If you pay above, below or at market norms, make sure everyone is paid at those levels.

If you opt for a combination of salary or hourly wages plus bonuses, look carefully at the justification for additional payments. Holiday or similar bonuses that go to all employees are a relatively simple matter. However, performance bonuses should reflect actual benefits to the company, as well as the company's stated and practiced policies.

For example, a family-owned construction company might pay bonuses to employees who finish work ahead of schedule, but not if the work is done poorly because the business prides itself on quality.

Carefully Examine Bonus Plans

Bonuses for the sake of bonuses don't benefit the company, nor do they provide incentives for better performance from family or non-family employees. Of course, some family members may have done more than work in the business. They may have also put money into the company, particularly in the early years.

You can recognize that equity, and perhaps some of the sweat equity put in before the company expanded outside the family, with dividends paid out of the company's profits. The dividends can go up or down with the success of the company and can be paid on a periodic or one-time basis.

Profits Fuel Growth and Future Success

Be careful how much you pay out, both in terms of wages, benefits and dividends. How the profit pie is divided is vital to growth in a small business. If you don't feed your business, eventually it won't feed you.

Profits are the seedbed for expansion. If you don't reinvest some earnings in equipment, training and expansion, the business may eventually falter. Family members should realize the importance of retaining some of the earnings each year. In addition to providing funds for growth, profits funneled back into the business provide a cushion for downturns and show financial prudence to lenders.

ONE TEAM'S APPROACH TO RETAINING EMPLOYEES

032118 Blog Photo.jpg

Keeping top-notch employees in a high turnover field can be a real challenge.

What to do? Consider strategies employed by one business. The two owners started their home and commercial repair business because, as landlords of rental properties, they were frustrated when they had to call three different people in order to get a job done. The drywaller was always waiting on the electrician, and the electrician was always waiting on the plumber — and nobody was satisfied.

So they created a company that coordinated skilled services for other commercial and residential businesses. They have found that keeping quality, dependable employees is essential to their success.

Before they started their repair business, the two owners had several decades of experience being on the other end as employees. They had some bad bosses and some great bosses. As employers, they wanted their own employees to feel they were trusted to handle problems without micromanaging.

Here are several tips from the owners for retaining employees:

  • Give them as much independence as you can. When it comes to experienced employees, you need to give them leeway in how to do their jobs. The repair business owners know their workers are more experienced than they are in carpentry, plumbing, electricity and other skilled trades. So they believe it's insulting and unwise to tell skilled employees how to do certain parts of their jobs.

  • Treat employees with respect. Set expectations and make them clear. Most employees will meet or exceed them. In the rare cases where employees don't meet expectations, deal with it in private. Don't put anybody down in front of others.

  • Be flexible when you can, and let employees know they're valued. One employee of the repair business asked to leave early on Fridays so he could volunteer on a rescue team. The owners not only let the employee leave early, they made it clear they were proud of him.

  • Focus on being team players. Don't create an environment where employees compete with each other. Be a team. If staff members have a problem or don't know how to do something, they should feel free to get on the phone and call another team member to ask for help. Emphasize that each person has areas of special skill and they should lean on each other for advice or assistance.

And the payoff for the repair business? One of the owners explained it this way: "We believe the employees are more productive, happier and more willing to give the extra effort when we need it. If I tell them that we have a job that we can only do on Saturday or Sunday, they readily pitch in to get it done."

HOW THE NEW LIMIT ON 'SALT' DEDUCTIONS AFFECTS HOMEOWNERS

031218 Blog Photo.jpg

The ability to deduct state and local taxes (SALT) has historically been a valuable tax break for taxpayers who itemize deductions on their federal income tax returns. Unfortunately, the Tax Cuts and Jobs Act (TCJA) limits SALT deductions for 2018 through 2025. Here's important information that homeowners should know about the new limitation.

Old Law, New Law

Under prior law, in addition to being allowed to deduct 100% of state and local income (or sales) taxes, homeowners could deduct 100% of their state and local personal property taxes.

In other words, there was previously no limit on the amount of personal (nonbusiness) SALT deductions you could take, if you itemized. You also had the option of deducting personal state and local general sales taxes, instead of state and local income taxes (if you owed little or nothing for state and local income taxes).

Under the TCJA, for 2018 through 2025, itemized deductions for personal SALT amounts are limited to a combined total of only $10,000 ($5,000 if you use married filing separately status). The limitation applies to state and local 1) income (or sales) taxes, and 2) property taxes.

Moreover, personal foreign real property taxes can no longer be deducted at all. So, if you're lucky enough to own a vacation villa in Italy, a cottage in Canada or a beach condo in Cancun, you're out of luck when it comes to deducting the property taxes.

Who's Hit Hardest?

These changes unfavorably affect individuals who pay high property taxes because:

  • They live in high-property-tax jurisdictions,

  • They own expensive homes (resulting in a hefty property tax bill), or

  • They own both a primary residence and one or more vacation homes (resulting in bigger property tax bills due to owning several properties).

People in these categories can now deduct a maximum $10,000 of personal state and local property taxes — even if they deduct nothing for personal state and local income taxes or general sales taxes.

Tax Planning Considerations

Is there any way to deduct more than $10,000 of property taxes? The only potential way around this limitation is if you own a home that's used partially for business. For example, you might have a deductible office space in your home, lease your basement to a full-time tenant or rent your house on Airbnb during the winter months.

In those situations, you could deduct property taxes allocable to those business or rental uses, on top of the $10,000 itemized deduction limit for taxes allocable to your personal use. The incremental deductions would be subject to the rules that apply to deductions for those uses.

For example, home office deductions can't exceed the income from the related business activity. And deductions for the rental use of a property that's also used as a personal residence generally can't exceed the rental income.

Important: If you pay both state and local 1) property taxes, and 2) income (or sales) taxes, trying to maximize your property tax deduction may reduce what you can deduct for state and local income (or sales) taxes.

For example, suppose you have $8,000 of state and local property taxes and $10,000 of state and local income taxes. You can deduct the full $8,000 of property taxes but only $2,000 of income taxes. If you want to deduct more state and local property taxes, your deduction for state and local income taxes goes down dollar-for-dollar.

AMT Warning

Years ago, Congress enacted the alternative minimum tax (AMT) rules to ensure that high-income individuals pay their fair share of taxes. When calculating the AMT, some regular tax breaks are disallowed to prevent taxpayers from taking advantage of multiple tax breaks.

If you're liable for the AMT, SALT deductions — including itemized deductions for personal income (or sales) and property taxes — are completely disallowed under the AMT rules. This AMT disallowance rule was in effect under prior law, and it still applies under the TCJA.

More Limits on Homeowners

The new limits on property tax deductions will affect many homeowners. But that's just the tip of the iceberg. If you have a large mortgage or home equity debt, your interest expense deductions also may be limited under the new law. For more information about how the TCJA affects homeowners, contact your tax advisor.

HELP US MAKE 10,000 MEALS IN TWO HOURS!

022618 Blog Photo.png

Generosity Feeds is working to feed hungry children in every county across America so all children have the opportunity to thrive.   Right here in Johnson County, KS, over 26% of children struggle with hunger. 

On Saturday, April 7th from 10am-noon, along with MOD Pizza, OP Church, and The Barefoot Mission, Fulling Management & Accounting will be partnering with Generosity Feeds to prepare and package 10,000 meals.   You can see more details at: www.generosityfeeds.org/ks   

We can't do it alone.  We need your help!    If you have been looking for an event for you and your team to serve, this is it!      Contact us at info@fullingmgmt.com to sign up. 

Thanks for making a difference in the lives of children right here in our own community.

-Rusty Fulling

KEEPING GOOD RECORDS IS GOOD BUSINESS

022018 Blog Photo.jpg

Maintaining good records is important to help meet your tax and legal obligations. The right record-keeping system not only helps satisfy these obligations, but it may save you money and time. Here's what to consider for your record-keeping system.

What Records Do You Need to Keep?

The first step is identifying the records you need to maintain. The obvious examples include leases, contracts, payroll and personnel records and a range of accounting and finance information, such as invoices, receipts, checks, payables and inventory. Please consult a professional with tax expertise regarding your individual situation.¹

How Do You Want to Keep Them?

Record maintenance can take three basic forms:

  • Paper-based: It's old school, but maintaining records in file folders stored in a metal cabinet may be sufficient, though at the risk of files being damaged or destroyed with no backup.
  • Computer-based: Maintaining records on computers save space and make records management easier. Consider backing up files and keeping them off-site.
  • Cloud computing: Records are stored and managed on the internet, offering possible savings on software, reducing the risk of lost data and providing access from any location.

What Software Should You Use?

The right software can make life more productive; the wrong software may cost you time and money.

When shopping for software, consider:

  • The size of your organization. Do you want an easy-to-use package, or are you able to hire a dedicated employee to take advantage of a more sophisticated alternative?
  • What sort of training and support is provided? Without the right measure of either, your software may not be the productivity tool you envisioned.
  • Is specialized software available? The needs of different professions can vary greatly. Specialized software may have capabilities not available with more generic software.
  • What are its mobile capabilities? If you operate your business from the road, you may want your software to have robust mobile features.

SIX LAST-CHANCE TAX BREAKS: DO YOU QUALIFY?

021318 Blog Photo.jpg

The new Tax Cuts and Jobs Act (TCJA) significantly changes some parts of the tax code that relate to personal tax returns. In addition to lowering most of the tax rates and increasing the standard deduction, the TCJA repeals, suspends or modifies some valuable tax deductions. As a result, millions of Americans who have itemized deductions in the past are expected to claim the standard deduction for 2018 through 2025.

The TCJA provisions for individuals generally take effect for the 2018 tax year and "sunset" after 2025. That means that they technically expire in eight years unless Congress takes further action. In the meantime, you still have a shot at several key tax deductions on your 2017 return before they're scheduled to expire. This is the return you must file or extend by April 17, 2018.

Here are six popular federal income tax breaks that will be suspended or modified by the new law. Generally, prior law continues to apply to these deductions for your 2017 tax year, so you can write off the expenses with little or no limitation for 2017.

1. State and Local Taxes (SALT)

The SALT deduction was a hot-button issue in tax reform talks. Eventually, Congress made a concession to residents of high-tax states, but it may be a hollow victory for some people.

Under prior law, if you itemized deductions you could generally deduct the full amount of your 1) state and local property taxes, and 2) your state and local income taxes orstate and local general sales taxes. Now the TCJA limits the deduction to $10,000 annually for any combination of these taxes, beginning in 2018. But the deduction does you no good if you don't itemize.

On your 2017 return, you can still opt to deduct the full amount of 1) property taxes, and 2) state and local income taxes or sales taxes. The income tax deduction is usually preferable to the sales tax deduction to those who reside in states with high income tax rates. Conversely, you can elect to deduct general state and local sales tax if your state and local income tax bill is small or nonexistent. If you opt for the sales tax deduction, you can deduct your actual expenses or a flat amount based on an IRS table, plus additional actual sales tax amounts for certain big-ticket items (such as cars and boats).

2. Mortgage Interest

Home mortgage interest can still be deducted after 2017, but new limitations will result in smaller deductions for some taxpayers.

For 2017 returns, you can deduct mortgage interest paid on the first $1 million of acquisition debt (typically, a loan to buy a home) and interest on the first $100,000 of home equity debt for a qualified residence. It doesn't matter how the proceeds for a home equity loan are used.

Under the new law, the threshold for acquisition debt is generally reduced to $750,000 for loans made after December 15, 2017. In addition, the deduction for home equity debt is repealed. However, interest on home equity debt that is used to make home improvements might still be deductible if it can be characterized as acquisition debt. We'll have to wait for IRS guidance on this issue to know for sure. In addition, if home equity debt is used to fund a pass-through business that the taxpayer owns (such as a partnership or S corporation or sole proprietorship), the interest expense may qualify as a deductible business expense (subject to new restrictions on business interest expense deductions under the TCJA).

Homeowners with existing mortgages are "grandfathered" under the new rules, even if the loan is refinanced (up to the existing debt amount). But you can't deduct any interest on home equity debt that's used for personal expenditures (such as a new car, a vacation or your child's college costs) after 2017.

3. Casualty and Theft Losses

For 2018 through 2025, the TCJA suspends the deduction for casualty and theft losses except for damage suffered in certain federal disaster areas. Under prior law — which applies to your 2017 tax return — unreimbursed casualty losses are deductible in excess of 10% of your adjusted gross income (AGI), after subtracting $100 for each casualty or theft event.

For example, suppose you have an AGI of $100,000 in 2017 and incur a single casualty loss of $21,100. You can deduct $11,000 [$21,100 – $100 – (10% of $100,000)]. In addition, this loss must be caused by an event that is "sudden, unexpected or unusual."

The new law suspends this deduction except for losses incurred in an area designated by the President as a federal disaster area under the Stafford Act. Special rules may come into play if a taxpayer realizes a gain on an involuntary conversion.

4. Miscellaneous Expenses

Under prior law, deductions for most miscellaneous expenses were subject to an annual floor based on 2% of AGI. From 2018 through 2025, this deduction won't be available at all.

For your 2017 return, you can still deduct miscellaneous expenses for the year above 2% of your AGI. These expenses typically relate to production of income, including:

  • Tax advisory and return preparation fees,

  • Investment fees,

  • Hobby losses, and

  • Unreimbursed employee business expenses.

For example, suppose you have AGI of $100,000 in 2017 and incur $5,000 of qualified unreimbursed employee business expenses. You can deduct any expenses over 2% of your AGI ($2,000). So, you can claim $3,000 ($5,000 – $2,000) of unreimbursed business expenses on Schedule A, absent any other limits.

Important note: Under the new law, taxpayers also can't deduct miscellaneous expenses, including investment fees, for purposes of calculating net investment income. As a result, some taxpayers may pay more net investment income tax (NIIT), starting in 2018.

5. Job-Related Moving Expenses

Under prior law, you could claim qualified job-related moving expenses as an "above-the-line" deduction. Under the new law, this deduction is suspended for 2018 through 2025, except for expenses incurred by active duty military personnel.

To qualify for a deduction for moving expenses on your 2017 return, you must meet a two-part test involving distance and time:

Distance. Your new job location must be at least 50 miles farther from your old home than your old job location was from your former home.

Time. If you're an employee, you must work full-time for at least 39 weeks during the first 12 months after you arrive in the general area of the new job. The time requirement is doubled for self-employed taxpayers.

Assuming you pass the test, you can deduct the reasonable costs of moving your household goods and personal effects to a new home in 2017, as well as the travel expenses (including lodging, but not meals) between the two locations. In lieu of actual vehicle expenses, you may use a flat rate of $0.17 per mile for 2017.

6. Alimony

Currently, alimony paid under a divorce or separation agreement is deductible by the spouse who pays it and taxable to the spouse who receives it. The TCJA repeals the alimony deduction and the corresponding rule requiring inclusion in income for the recipient.

In addition, unlike most of the other tax law changes for individuals, this provision doesn't go into effect right away. It's effective for agreements entered into after December 31, 2018. In other words, taxpayers with agreements executed before that cutoff date are allowed to follow the old rules. But payers under post-2018 agreements get no deduction. This change is permanent for post-2018 agreements; it doesn't sunset after 2025.

More Information

This list isn't complete. But it's a good starting point for preparing your 2017 income tax return. If you have questions or concerns, contact your tax advisor.

YEAR-END BUSINESS TAX PLANNING STRATEGIES

121217 Blog Photo.jpg

Year-End Business Tax Planning Strategies in Light of Tax Reform

It's not too late! You can still take steps to significantly reduce your business's 2017 income tax bill and possibly lay the groundwork for tax savings in future years.

Here are five year-end tax-saving ideas to consider, along with proposed tax reforms that might affect your tax planning strategies.

1. Juggle Income and Deductible Expenditures

If you conduct business using a so-call "pass-through" entity, your share of the business's income and deductions is passed through to your personal tax return and taxed at your personal tax rates. Pass-through entities include sole proprietorships, S corporations, limited liability companies (LLCs) and partnerships.

If the current tax rules still apply in 2018, next year's individual federal income tax rate brackets will be about the same as this year's (with modest increases for inflation). Here, the traditional strategy of deferring income into next year while accelerating deductible expenditures into this year makes sense if you expect to be in the same or lower tax bracket next year. Deferring income and accelerating deductions will, at a minimum, postpone part of your tax bill from 2017 until 2018. (See "How to Defer Income" at right.)

On the other hand, you should take the opposite approach if your business is healthy and you expect to be in a significantly higher tax bracket in 2018. That is, accelerate income into this year (if possible) and postpone deductible expenditures until 2018. That way, more income will be taxed at this year's lower rate instead of next year's higher rate.

Tax reform considerations for pass-through business entities. The House tax reform bill that passed on November 16 — known as the Tax Cuts and Jobs Act of 2017 — would lower federal income tax rates for most individual taxpayers. However, some upper-middle-income and high-income individuals could pay a higher rate under the proposal.

The House bill would also install a maximum 25% federal income tax rate for passive business income from a pass-through entity. And it would tax the capital percentage of active business income from a pass-through entity at the preferential 25% maximum rate. The capital percentage would be either 30% or a higher percentage for capital-intensive businesses. The preferential 25% rate wouldn't be available for personal service businesses, such as medical practices, law offices and accounting firms. Pass-through business income that doesn't qualify for the preferential 25% rate would be taxed at the regular rates for individual taxpayers.

The Senate tax reform proposal — also called the Tax Cuts and Jobs Act of 2017 — would also lower federal income tax rates for most individuals. And it would generally allow an individual taxpayer to deduct 17.4% of domestic qualified business income from a pass-through entity. However, the deduction would be phased out for income that's passed through from specified service businesses starting at taxable income of $500,000 for married joint-filers and $250,000 for individuals.

On the other hand, if your business operates as a C corporation, the 2017 corporate tax rates are the same as in recent years. If you don't expect tax law changes and you expect the business will pay the same or lower tax rate in 2017, the appropriate strategy would be to defer income into next year and accelerate deductible expenditures into this year. If you expect the opposite, try to accelerate income into this year while postponing deductible expenditures until next year.

Tax reform considerations for C corporations. Under the House tax reform proposal, income from C corporations would be taxed at a flat 20% rate for tax years beginning in 2018 and beyond. A flat tax rate of 25% would apply to personal service corporations. If you think that these rate changes will happen, C corporations should consider deferring some income into 2018, when it could be taxed at a lower rate. Accelerating deductions into this year would have the same beneficial effect.

The Senate proposal would also install a flat 20% corporate rate, but it wouldn't take effect until tax years beginning in 2019. The 20% tax rate would also be available to personal service corporations under the Senate bill.

Tax reform considerations for all businesses. Both the House and Senate tax reform proposals would eliminate some business tax breaks that are allowed under current law. So, try to maximize any tax breaks in 2017 that might be eliminated for 2018. Doing so will help reduce your tax bill for 2017.

2. Buy a Heavy Vehicle

Large SUVs, pickups and vans can be useful if you haul people and goods for your business. They also have major tax advantages.

Thanks to the Section 179 deduction privilege, you can immediately write off up to $25,000 of the cost of a new or used heavy SUV that is placed in service by the end of your business tax year that begins in 2017 and is used over 50% for business during that year.

If the vehicle is new, 50% first-year bonus depreciation allows you to write off half of the remaining business-use portion of the cost of a heavy SUV, pickup or van that's placed in service in calendar year 2017 and used over 50% for business during the year.

After taking advantage of the preceding two breaks, you can follow the "regular" tax depreciation rules to write off whatever's left of the business portion of the cost of the heavy SUV, pickup or van over six years, starting with 2017.

To cash in on this favorable tax treatment, you must buy a "suitably heavy" vehicle, which means one with a manufacturer's gross vehicle weight rating (GVWR) above 6,000 pounds. The first-year depreciation deductions for lighter SUVs, trucks, vans, and passenger cars are much skimpier. You can usually find a vehicle's GVWR specification on a label on the inside edge of the driver's side door where the hinges meet the frame.

To highlight how the tax savings can add up, let's suppose your calendar-year business purchases a new $65,000 heavy SUV today and uses it 100% for business between now and December 31, 2017.

What's your write-off for 2017?

1. You can deduct $25,000 under Sec. 179.

2. You can use the 50% first-year bonus depreciation break to write off another $20,000 (half the remaining cost of $40,000 after subtracting the Section 179 deduction).

3. You then follow the regular depreciation rules for the remaining cost of $20,000. For 2017, this will usually result in an additional $4,000 deduction (20% x $20,000).

So, the total depreciation write-off for 2017 is $49,000 ($25,000 + $20,000 + $4,000). This represents roughly 75% of the vehicle's cost.

In contrast, if you spend the same $65,000 on a new sedan that you use 100% for business between now and year end, your first-year depreciation write-off will be only $11,160.

Important note: Estimate your taxable income before considering any Sec. 179 deduction. If your business is expected to have a tax loss for the year (or to be close to a loss), you might not be able to use this tax break. The so-called "business taxable income limitation" prevents businesses from claiming Sec. 179 write-offs that would create or increase an overall business tax loss.

3. Cash in on Other Depreciation Tax-Savers

There are more Section 179 breaks, beyond those that apply to heavy vehicle purchases. For the 2017 tax year, the maximum Section 179 first-year depreciation deduction is $510,000. This break allows many smaller businesses to immediately deduct the cost of most or all of their equipment and software purchases in the current tax year.

This can be especially beneficial if you buy a new or used heavy long-bed pickup (or a heavy van) and use it over 50% in your business. Why? Unlike heavy SUVs, these other heavy vehicles aren't subject to the $25,000 Sec. 179 deduction limitation. So, you can probably deduct the full business percentage of the cost on this year's federal income tax return.

You can also claim a first-year Sec. 179 deduction of up to $510,000 for qualified real property improvement costs for the business tax year beginning in 2017. This break applies to the following types of real property:

  • Certain improvements to interiors of leased nonresidential buildings,

  • Certain restaurant buildings or improvements to such buildings, and

  • Certain improvements to interiors of retail buildings.

Deductions claimed for qualified real property costs count against the overall $510,000 maximum for Section 179 deductions.

Section 179 tax reform considerations. For tax years beginning in 2018 through 2022, the House tax reform bill would increase the maximum Sec. 179 deduction to $5 million per year, adjusted for inflation. The maximum deduction would start to phase out if your business places in service over $20 million (adjusted for inflation) of qualifying property during the tax year. Qualified energy efficient heating and air conditioning equipment acquired and placed in service after November 2, 2017, would be eligible for the Sec. 179 deduction.

The Senate tax reform bill would increase the maximum annual Sec. 179 deduction to $1 million and increase the deduction phaseout threshold to $2.5 million. (Both amounts would be adjusted annually for inflation.) The Senate bill would also allow Sec. 179 deductions for tangible personal property used in connection with furnishing lodging, as well as for the following improvements made to nonresidential buildings after the buildings are placed in service:

  • Roofs,

  • HVAC equipment,

  • Fire protection and alarm systems, and

  • Security systems.

In addition to Sec. 179, you can claim 50% first-year bonus depreciation for qualified new (not used) assets that your business places in service in calendar year 2017. Examples of qualified asset additions include new computer systems, purchased software, vehicles, machinery, equipment and office furniture.

You can also claim 50% bonus depreciation for qualified improvement property, which means any qualified improvement to the interior portion of a nonresidential building if the improvement is placed in service after the date the building is placed in service. However, qualified improvement costs don't include expenditures for:

  • The enlargement of a building,

  • Any elevator or escalator, or

  • The internal structural framework of a building.

Bonus depreciation tax reform considerations. Under current law, the bonus depreciation percentage is scheduled to drop to 40% for qualified assets that are placed in service in calendar year 2018. However, both the House and Senate tax reform proposals would allow unlimited 100% first-year depreciation for qualifying assets acquired and placed in service after September 27, 2017, and before January 1, 2023.

Under the House bill, qualified property could be new or used, but it couldn't be used in a real property business.

For property placed in service in 2018 and beyond, the Senate bill would shorten the depreciation period for residential rental property and commercial real property to 25 years (vs. 27-1/2 years and 39 years, respectively, under current law). Additionally, a 10-year depreciation period would apply to qualified leasehold improvement property, qualified restaurant property and qualified retail improvement property.

4. Create an NOL

When deductible expenses exceed income, your business will have a net operating loss (NOL). You can create (or increase) a 2017 NOL using the business tax breaks and strategies discussed in this article (with the exception of the Sec. 179 first-year depreciation deduction).

Then you have a choice. You can opt to carry back a 2017 NOL for up to two years in order to recover taxes paid in those earlier years. Or you can opt to carry forward the NOL for up to 20 years. 

Tax reform considerations. Under both the House and Senate tax reform bills, taxpayers could generally use an NOL carryover to offset only 90% of taxable income for the year the carryover is utilized (versus 100% under current law). Under both bills, NOLs couldn't be carried back to earlier tax years, but they could be carried forward indefinitely. Under the House bill, these changes would generally take effect for tax years beginning in 2018 and beyond. Under the Senate proposal, the changes would take effect in tax years beginning in 2023 and beyond. 

 

5. Sell Qualified Small Business Stock

For qualified small business corporation (QSBC) stock that was acquired after September 27, 2010, a 100% federal gain exclusion break is potentially available when the stock is eventually sold. That equates to a 0% federal income tax rate if the shares are sold for a gain.

What's the catch? First, you must hold the shares for more than five years to benefit from this break. Also be aware that this deal isn't available to C corporations that own QSBC stock, and many companies won't meet the definition of a QSBC.

Ready, Set, Plan

This year end, tax planning for businesses is complicated by the possibility of major tax reforms that could take effect next year. The initial proposals set forth in Congress are ambitious in scope and would generally help small businesses and small business owners lower their taxes. However, tax rate cuts and other pro-business changes could be balanced by the elimination of some longstanding tax breaks. Your tax advisor is monitoring tax reform developments and will help you take the most favorable path in your situation.

HIRE YOUR KIDS AND SAVE TAXES

120417 Blog Posting.jpg

Here's a great tax-saving idea for those who have teenagers who can work part-time in the family business. Hire the kids as legitimate employees. This strategy works best if your business operates as:

 

  • A husband-wife partnership (owned only by you and your spouse).

  • A husband-wife Limited Liability Company (LLC), which is treated as a husband-wife partnership for federal tax purposes.

  • A sole proprietorship.

  • A single-member LLC, which is treated as a sole proprietorship for federal tax purposes.

This same strategy also works well (though not quite as favorably) for other types of family business entities, such as a C or S corporation, a partnership or LLC that's not owned strictly by a husband and wife. Businesses organized as corporations do pay Social Security tax on the wages of a child or other relative, both at the individual and corporate level.

The best-case scenario is when the business operates as a husband-wife partnership or sole proprietorship.

As long as your employee-children are under age 18, wages paid to them by the family business are not subject to Social Security, Medicare or federal unemployment (FUTA) taxes.

The news gets better. In 2018, a child can also shelter up to $6,500 (up from $6,350 in 2017) of wages from federal income tax with his or her standard deduction. Bottom line: Your child will probably owe little or no federal income tax at the end of the year.

Your Side of the Deal Is Equally Appealing:

  • You get a business deduction for money that, as a parent, you probably would have given your child anyway.

  • This write-off reduces both your federal income tax and self‑employment tax bills.

  • Your adjusted gross income (AGI) is lowered, which means there is less chance that you'll be subject to unfavorable AGI-based phase-out rules.

Meanwhile, your child can save some or all of the wage money and invest it. The investment earnings and gains will be taxed at your child's low rates. This assumes the "kiddie tax" doesn't apply to your child's investment income.

With good planning, some of this investment income can eventually be used to pay part of your child's college expenses, which means the savings can stretch far into the future.

NAVIGATING THE SOCIAL MEDIA MINEFIELD

112917 Blog Photo.jpg

Social media sites such as Twitter, Facebook, LinkedIn, YouTube, Imgur and blogs can be powerful business tools. But they also carry risks, including inadvertently disclosing corporate trade secrets or engaging in behavior that can harm your company's reputation.

As social networking has grown, so has the number of cyber-criminals using the sites to spread viruses and engage in phishing attacks. Keep your company's IT team current on emerging threats and how to fight them.


These concerns, combined with obligations to maintain confidentiality and worries about employee productivity, have prompted some businesses to block or severely limit access to social networks on the job. Other companies, however, are embracing the new technology and urging employees to use it to its fullest.

At the same time, employees need to understand that their employers are increasing their social network presence and that workplace rules of conduct apply online.

There's good reason for that caveat: One survey showed that about one-third of employees who post comments online never consider what colleagues, managers or customers are going to think about what they say.

If your organization is grappling with this issue, here are some recommendations to help develop a policy that can leverage the power of social networking while limiting the risks.

Assess the benefits and threats. Determine how employee online networking can help or hinder your company's brand, reputation and growth as well as how it can cause damage. This will help you decide what activities, language and behaviors you want to allow or prohibit.
 
Weigh boundaries. Imposing a total lock-out could do more harm than good. It could prompt technically savvy employees to come up with workarounds that could open holes and threaten the security of your computer network. Just as damaging, it could suggest to staff members they aren't trusted, which could damage morale, lower productivity and prompt some employees to post derogatory remarks about your organization. 

Consider a compromise. Put reasonable limits on the frequency or duration of social networking during the workday. Some IT departments have installed software that blocks access after certain thresholds have been reached, such as visiting 20 sites in one day or networking for 45 minutes. Also, consider blocking social media sites that contain inappropriate or potentially inflammatory content. There is also software that will search publicly accessible areas of social sites for mentions of your company so that you can monitor what employees or others are saying.

Get legal advice. Staff members may view limiting and monitoring of social networking as a violation of privacy rights, but courts have generally ruled that employees have no expectation of privacy when using workplace computers. Nevertheless, it's a good idea to get legal advice to answer questions such as: 
  • How does social networking affect corporate policies on confidentiality, trade secrets, proprietary information, product or service introductions, discrimination, harassment and other issues?
  • What are the legal implications of imposing controls on social networking while employees are at home and off work?
Have employees agree to the policy in writing. Once your business crafts an actual policy, be sure each employee reads, agrees to and signs off on it. The policy should:

 

  • Explain clearly what is and is not acceptable.
  • Inform employees to follow all corporate policies when they are identifiable as being affiliated with your organization.
  • Outline the consequences for violations.

When it comes to social networking, the lines between personal and professional activities are often unclear. Should a manager "friend" an employee on Facebook? What about employees becoming online friends with customers? Engaging in online discussions in which they mention your company's name and become aggressive or insulting? These are just some of the questions facing businesses today. Having a policy in place can help your organization balance the benefits of social networking with the risks.

RECENT INCIDENTS FUEL CONCERNS OVER BREACH RESPONSE

110717 Blog Photo.jpg

Could your data be hacked? Unfortunately, every organization — including for-profit businesses, not-for-profits and government agencies — is vulnerable to cyberattacks today.

Examples abound. In September, Equifax reported a data breach that exposed the credit histories and other information of 145.5 million Americans. Shortly thereafter, the Securities and Exchange Commission (SEC) reported a hacking incident that occurred in 2016.

These incidents have raised concerns from individuals and lawmakers about delays in reporting breaches. However, breach response requires a delicate balance. Organizations that are hacked have a responsibility to make a measured, comprehensive assessment of the situation before reporting a breach to the public at large. Here are details of the SEC breach incident and guidance for victim-organizations on how (and when) to report a data breach.

SEC Announces Breach

In September, SEC Chairman Jay Clayton announced that the agency was expanding a probe into a 2016 data breach of its electronic filing system, known as EDGAR (short for Electronic Data Gathering, Analysis and Retrieval). The investigation will primarily focus on a review of when agency officials learned that the EDGAR system had been hacked. The FBI and U.S. Secret Service have also launched investigations into the breach.

What exactly is EDGAR? It's the electronic filing system that the SEC created to increase efficiency and accessibility to corporate filings. Most publicly traded companies must submit documents to the SEC using EDGAR. However, some smaller companies may be exempt from these EDGAR mandates if they don't meet certain thresholds.

Examples of documents that the SEC requires companies to file through EDGAR include annual and quarterly corporate reports and information pertaining to institutional investors. This time-sensitive information is often critical to investors and analysts.

Hackers Exploit Outdated System

EDGAR was launched in the 1990s, and it's been routinely updated and modified over the last two decades. Like many legacy systems, however, EDGAR has some weaknesses and glitches, and the system will eventually need to be replaced.

In September 2016, the SEC awarded a $6.1 million contract to a firm to collect information needed to completely redesign EDGAR. The SEC anticipates that the information-gathering phase will extend through March 2018. A further extension may be requested to provide additional support for the redesign.

Based on the SEC's preliminary investigation, it appears that hackers were able to breach EDGAR by using authentic financial data when they were testing the agency's corporate filing system. The breach occurred in October 2016 and was reportedly detected that month. The cyberattack appears to have been routed through a server in Eastern Europe.

The SEC's enforcement division discovered the breach as part of an ongoing investigation. Although SEC Chair Clayton was vague on the details, he admitted, "Information they gained caused them to question whether there had been a breach of the system."

Furthermore, it's not entirely clear what kind of information was breached. Corporate filings contain detailed financial information about company performance, but such information is usually available to investors in press releases prior to SEC disclosure. According to industry insiders, one potential target could be Forms 8-K. These are unscheduled filings regarding material events that companies are legally required to disclose. These disclosures in EDGAR begin before the official word gets out to the rest of the world.

Media sources say that the FBI's investigation has homed in on trading activities conducted in connection with the breach. One possibility is that the EDGAR breach is connected to a group of hackers that intercepted electronic corporate press releases in a previous case handled by the FBI team.

SEC Chair Clayton, who took office in May 2017, claims to have first learned of the breach in August 2017. Although he didn't blame his predecessors, Clayton can't guarantee that there haven't been other breaches. "I cannot tell you with 100% certainty that this is the only breach we have had," Clayton said, reiterating that the investigation was "ongoing."

Take Control of Breach Response

Public response to the SEC incident, which was announced at roughly the same time as the high-profile Equifax breach, has focused significant attention on the lag between when an organization detects a breach and when it's announced to the public.

The media and congressional investigations have cast doubt on the intentions of SEC Chair Clayton and the management team at Equifax: Were the delayed responses actually attempts to hide the truth, thereby exposing investors and other stakeholders to even greater potential losses?

Before anyone jumps to conclusions, however, it's also important to consider the perspective of the victim-organization. It takes time to investigate a breach before announcing it to the public. A knee-jerk response that needs to subsequently be revised can cause major damage to the organization's reputation with its stakeholders.

What should you do as soon as you suspect that your organization's data has been breached? First, call your attorney, who will help assemble a team of data response specialists. The preliminary goal is to answer two fundamental questions:

1. How were the systems breached?

2. What data did the hackers access?

    Once these questions have been answered, forensic experts can help evaluate the extent of the damage. Sometimes, a breach occurs, but the hackers don't actually steal any data.

    A comprehensive data response includes the following services:

    • Legal,

    • Forensic,

    • Information technology (IT),

    • Communications / public relations, and

    • Credit monitoring services.

    Whether your organization is small or large, for-profit or not-for-profit, the goal in breach response is essentially the same: to provide accurate, detailed information about the incident as quickly as possible to help minimize losses and preserve trust with customers, employees, investors, creditors and other stakeholders.

    Once investigative and response procedures are underway, management needs to take proactive measures to fortify controls. This final step helps minimize the risk that another data breach will occur in the future.

    Plan Ahead

    Data breaches are an inevitable part of today's interconnected, technology-driven world. How an organization responds to a breach can set it apart from others and affect its goodwill with stakeholders.

    Proactive organizations don't wait for a breach to strike, however. Work with your legal and forensic accounting professionals to help prevent and detect breaches, as well as to establish policies and procedures for investigating and responding to suspected hacking incidents.

    EMPOWERED EMPLOYEES ARE THE KEY TO CUSTOMER SERVICE

    110117 Blog Photo.jpg

    Keeping customers happy is essential for ongoing business success in any economy. However, cost and quality alone won't lead your customers to view you as a trusted partner and valued resource. Your frontline employees are the ones who deal one-on-one with customers, and that's where casual purchases can lead to long-term relationships.

    But your employees can't do it by themselves. Managers and the HR department need to do everything they can to make sure employees are empowered and supported to always deliver excellent customer service.

    More Empowerment to Them

    What exactly is an empowered employee? It means that the employee has the latitude to help a customer without needing to consult a list of approved policies, get approval from a superior or fear for his or her job for making certain decisions.

    True empowerment is rooted in the company's culture and acts to support its overarching values and mission. Therefore, you have to instill your business's values and mission from Day 1 and reinforce them with employees at every opportunity.

    Posters and slogans are a start, but weaving your mission and vision into every communication and using them as a basis for all decisions will take you further. For example, your CEO's messages should be full of the words that make up your values and give examples of the mission in action. Yes, like all things critical to success in organizations, expectations must be set and demonstrated from the top.

    Training and Support

    Employees also need to understand what their role is in delivering an excellent customer experience. Moreover, they need to know exactly what that looks like for your company. Role-playing exercises are particularly useful to instill this kind of learning, as is observation and feedback. Have newer employees shadow highly skilled veterans to see how it's done, and then have the veterans observe the less experienced on their first couple of solo turns.

    Training on customer service expectations should be extended throughout the organization to all employees, whether they actively work with clients or not. Otherwise, you run the risk of an employee sabotaging customer service efforts because he or she is using a different playbook or isn't clear about your company's ideals for customer service.

    Also, scrutinize your policies, procedures and reward structures to ensure that nothing you do as a company competes with your customer service-centric mandates. For instance, are you rewarding employees for the number of transactions they can process in a shift? That might be a worthy incentive in a business where customers value speed (such as a fast-food restaurant) but it could work against a company where thoroughness and care (such as tax preparation services) take prominence.

    Be sure to evaluate this quality in performance reviews. In particular, ensure managers and supervisors are being held accountable for how well they're instilling customer service principles in employees.

    Hire Wisely

    When hiring frontline employees, spend time learning what their customer service mindset is. Ask them to describe for you the customer service policies of their previous employers and how they implemented them in various scenarios.

    In addition, ask them to walk you through how they would handle an unhappy customer if they had complete freedom to do whatever they wanted to rectify the situation. And then ask them how they'd handle the same situation based on your customer-service guidelines. The bottom line is to set the expectations around customer service as early as possible.

    Clear Value, Clear Choice

    The value of creating a customer-centric organization is clear. Excellent customer service can ensure that new clients become regulars and that regulars stay that way and spread the word about your company to their family and friends.

    The way to create a customer-centric mindset, through empowered employees, is equally black and white. Either your employees are empowered and supported to be customer advocates or they aren't. Make sure yours are.

    ARE YOU READY FOR THE NEW IRS PARTNERSHIP AUDIT RULES?

    101917 Blog Photo.jpg

    Are You Ready for the New IRS Partnership Audit Rules?

    Legislation enacted in 2015 established a new IRS audit regime for partnerships and limited liability companies (LLCs) that are treated as partnerships for tax purposes. Here's a comparison between the old and new partnership audit rules, along with a summary of recently proposed guidance to help partners prepare for the changes that are effective starting with the 2018 tax year.

    Important note: To keep things simple, we'll refer to any LLC that's treated as a partnership for tax purposes as a partnership and any LLC member that's treated as a partner for tax purposes as a partner.

    Old Rules

    Under the old rules, the federal income tax treatment of partnership items of income, gain, deduction and credit is generally determined at the partnership level, even though these tax items are passed through to the partners and reported on their returns. After a partnership audit is completed and the resulting adjustments to partnership tax items are determined, the IRS generally recalculates the tax liability of each partner and sends out bills for additional taxes, interest and penalties to the partners.

    This set-up was deemed to be inefficient, so Congress established a new audit regime for partnerships. However, the old rules will continue to apply to most partnerships for tax years beginning in 2017.

    The Big Difference

    The new partnership audit regime applies to partnerships with more than 100 partners at the partnership level. The big difference under the new rules is that, subject to certain exceptions, any resulting additions to tax and any related interest and penalties are generally determined, assessed and collected at the partnership level.

    Specifically, the partnership — not the individual partners — will be required to pay an imputed tax underpayment amount, which is generally the net of all audit adjustments for the year multiplied by the highest individual or corporate federal income tax rate in effect for that year.

    However, the partnership can pay a lower amount if it can show that the underpayment would be lower if it were based on certain partner-level information, such as:

    • Differing tax rates that may be applicable to specific types of partners (for example, individuals, corporations and tax-exempt organizations), and

    • The type of income subject to the adjustments (for example, ordinary income vs. capital gains or cancellation of debt income).

    An alternative procedure, known as the "push-out election," allows the partners to take the IRS-imposed adjustments to partnership tax items into account on their own returns. Or, if eligible, a partnership can elect out of the new rules altogether. (See below for more details on both elections.)

    Partnership Representatives

    The new partnership audit rules eliminate the tax matters partner role that applied under the old rules. Instead, partnerships will be required to designate a partnership representative. The partnership representative has the sole authority to act on behalf of the partnership in IRS audits and other federal income tax proceedings.

    If the partnership doesn't choose a representative, the IRS can select an individual or entity to fill that role. If the partnership representative is an entity (as opposed to an individual), the partnership must appoint a designated individual through whom the partnership representative will act.

    Under the proposed regulations, the partnership representative has a great deal of authority, and no state law, partnership agreement, or other document or agreement can limit that authority. Specifically, the partnership representative has the sole authority to extend the statute of limitations for a partnership tax year, settle with the IRS or initiate a lawsuit. Any defense against an IRS action that isn't raised by the partnership representative is waived.

    With all this authority comes the associated risk, which may mean that some partnerships will have a hard time finding someone willing to act as the representative. Partnerships should consider indemnifying or compensating their partnership representatives accordingly.

    According to the proposed regulations, partnerships must designate a partnership representative separately for each tax year. The designation is done on the partnership's timely filed (including any extension) federal income tax return for that year.

    Partnerships should amend their agreements to establish procedures for choosing, removing and replacing the partnership representative. In addition, the partnership agreement should carefully outline the duties of the partnership representative.

    The Push-Out Election

    As noted above, under the new rules, a partnership must pay the imputed underpayment amount (along with penalties and interest) resulting from an IRS audit — unless it makes the push-out election. Under the election, the partnership issues revised tax information returns (Schedules K-1) to affected partners and the partnership isn't financially responsible for additional taxes, interest and penalties resulting from the audit.

    As the name suggests, the push-out election allows the partnership to push the effects of audit adjustments out to the partners that were in place during the tax year in question. This effectively shifts the resulting liability away from the current partners to the partners that were in place during the tax year to which the adjustment applies. The push-out election must be filed within 45 days of the date that the IRS mails a final partnership adjustment to the partnership. This deadline can't be extended. The proposed regulations specify the information that must be included in a push-out election. The partnership must also provide affected partners with a statement summarizing their shares of adjusted partnership tax items.

    Partnership agreements should be updated to address whether the partnership representative is required to make the push-out election or the circumstances in which a push-out election will be made. When deciding whether to make the election, various factors should be considered, including:

    • The effect on partner self-employment tax liabilities,

    • The 3.8% net investment income tax,

    • State taxes, and

    • The incremental cost of issuing new Schedules K-1 to affected partners.

    Partnerships may want to require their partnership representatives to analyze specified factors to determine whether a push-out election should be made.

    Option to Elect Out of the New Rules

    Eligible partnerships with 100 or fewer partners can elect out of the new audit rules for any tax year, in which case the IRS must separately audit each partner. However, the option to elect out of the new partnership audit regime is available only if all of the partners are:

    • Individuals,

    • C or S corporations,

    • Foreign entities that would be treated as C corporations if they were domestic entities,

    • Estates of deceased partners, or

    • Other persons or entities that may be identified in future IRS guidance.

    The election out must be made annually and must include the name and taxpayer ID of each partner. The partnership must notify each partner of the election out within 30 days of making the election out.

    Eligible partnerships may want to amend their partnership agreements to address whether electing out will be mandatory. In most situations, electing out will be preferable. However, partnerships looking to maintain flexibility in their partnership agreements should include provisions indicating how the decision to elect out will be made.

    Partnerships choosing to elect out may want to amend their agreements to prohibit the transfer of partnership interests to partners that would cause the option to elect out to be unavailable. They also may want to limit the number of partners to 100 or fewer to preserve eligibility for electing out.

    Important note: Many small partnerships may assume that they're automatically eligible to elect out of the new partnership audit rules because they have 100 or fewer partners. That's not necessarily true. For example, the option to elect out isn't available if one or more of the partners are themselves a partnership (including an LLC that is treated as a partnership for tax purposes). Also, if there is an S corporation partner, each S corporation shareholder must be counted as a partner for purposes of the 100-partner limitation.

    Coming Soon

    Although the new partnership audit rules don't take effect until next year, partnerships should start reviewing partnership agreements and amending them as necessary. At a minimum, partnerships that don't expect to elect out of the new audit rules should appoint a partnership representative before filing their 2018 returns. Your tax advisor can help you get up to speed on the new partnership audit rules and recommend specific actions to ease the transition.

    YOU MAY NEED TO MAKE ESTIMATED TAX PAYMENTS

    092517 Blog Photo.jpg

    You may have to make estimated tax payments if you earn income that's not subject to withholding, such as income from self-employment, interest, dividends, alimony, rent, realized investment gains, prizes and awards.

    You also may have to pay estimated taxes if your income tax withholding on salary, pension or other income isn't enough, or if you had a tax liability for the prior year. Please consult a professional with tax expertise regarding your individual situation.¹

    How to Pay Estimated Taxes

    If you are filing as a sole proprietor, partner, S corporation shareholder and/or a self-employed individual and expect to owe tax of $1,000 or more when you file a return, you should use Form 1040-ES, Estimated Tax for Individuals, to calculate and pay your estimated tax. You may pay estimated taxes either online, by phone or through the mail.²

    How To Figure Estimated Tax

    To calculate your estimated tax, you must include your expected adjusted gross income, taxable income, taxes, deductions and credits for the year. Consider using your prior year's federal tax return as a guide.

    When To Pay Estimated Taxes

    For estimated tax purposes, the year is divided into four payment periods, each with a specific payment due date. If you do not pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due a refund when you file your income tax return.

    Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller.

    REAL ESTATE INVESTORS: LET'S TALK ABOUT LIKE-KIND EXCHANGES

    091917 Blog Photo.jpg

    Are you thinking about divesting a real estate investment and then replacing it with another property? If you sell appreciated property outright, you'll incur a taxable gain, which lowers the amount available to spend on the replacement property. But you may be able to defer your tax bill (or even make it disappear) with a Section 1031 like-kind exchange.

    Unfortunately, there are rumors that upcoming tax reform legislation could eliminate the time-honored like-kind exchange privilege. So, while tax breaks for like-kind exchanges are still in place, it could be a good idea to complete any like-kind exchanges that you're considering sooner rather than later. Here's what you need to know about like-kind exchanges under the current tax rules.

    What Constitutes Like-Kind Property?

    You can arrange for tax-free real property exchanges as long as the relinquished property (the property you give up in the exchange) and the replacement property (the property you receive in the exchange) are of a like kind. Under Internal Revenue Code Section 1031 and related guidance, "like-kind property" is liberally defined. For example, you can swap improved real estate for raw land, a strip center for an apartment building or a boat marina for a golf course.

    But you can't swap real property for personal property without triggering taxable gain, because real property and personal property aren't considered like-kind. So, you can't swap an apartment building for a cargo ship. You also can't swap property held for personal use, such as your home or boat. Inventory, partnership interests and investment securities are also ineligible for like-kind exchanges. As a result, the vast majority of tax-free like-kind exchanges involve real property.

    In 2002, the IRS clarified that even undivided fractional ownership interests in real estate (such as tenant-in-common ownership interests) can potentially qualify for like-kind exchanges. For example, if you sell an entire commercial building, you don't need to receive an entire commercial building as the replacement property in order to complete your tax-free exchange. Instead, you could receive an undivided fractional ownership interest in a building as the replacement property.

    What Happens to the Gain in a Like-Kind Exchange?

    Any untaxed gain in a like-kind exchange is rolled over into the replacement property, where it remains untaxed until you sell the replacement property in a taxable transaction.

    However, under the current federal income tax rules, if you still own the replacement property when you die, the tax basis of the property is stepped up to its fair market value as of the date of death — or as of six months later if your executor makes that choice. This beneficial provision basically washes away the taxable gain on the replacement property. So your heirs can then sell the property without sharing the proceeds with Uncle Sam.

    The like-kind exchange privilege and the basis step-up-on-death rule are two big reasons why fortunes have been made in real estate.

    However, as noted earlier, the like-kind exchange privilege could possibly be eliminated as part of tax reform. Even if that doesn't happen, the estate tax might be repealed, which could also ultimately reduce the tax-saving power of like-kind exchanges.

    Why? An elimination of the step-up in basis at death might accompany an estate tax repeal. For example, with the 2010 federal estate tax repeal (which ended up being temporary and, essentially, optional), the step-up in basis was eliminated, and that could happen again. An elimination of the step-up in basis would mean that a taxpayer inheriting property acquired in a like-kind exchange would have the same basis in the property as the deceased, and thus could owe substantial capital gains tax when he or she ultimately sells the property.

    What's a Deferred Like-Kind Exchange?

    It's usually difficult (if not impossible) for someone who wants to make a like-kind exchange to locate another party who owns suitable replacement property and also wants to make a like-kind exchange rather than a cash sale. The saving grace is that properly executed deferred exchanges can also qualify for Section 1031 like-kind exchange treatment.

    Under the deferred exchange rules, you need not make a direct and immediate swap of one property for another. Instead, the typical deferred like-kind exchange follows this four-step process:

    1. You transfer the relinquished property (the property you want to swap) to a qualified exchange intermediary. The intermediary's role is to facilitate a like-kind exchange for a fee, which is usually a percentage of the fair market value of the property exchanged.

    2. The intermediary arranges for a cash sale of your relinquished property. The intermediary then holds the resulting cash sales proceeds on your behalf.

    3. The intermediary uses the cash to buy suitable replacement property that you've identified and approved in advance.

    4. The intermediary transfers the replacement property to you.

    This series of transactions counts as a tax-free like-kind exchange, because you wind up with like-kind replacement property without ever taking possession of the cash that was transferred in the underlying transactions.

    What Are the Timing Requirements for Deferred Like-Kind Exchanges?

    For a deferred like-kind exchange to qualify for tax-free treatment, the following two requirements must be met:

    1. You must unambiguously identify the replacement property before the end of a 45-day identification period. The period starts when you transfer the relinquished property. You can satisfy the identification requirement by specifying the replacement property in a written and signed document given to the intermediary. That document can list up to three properties that you would accept as suitable replacement property.

    2. You must receive the replacement property before the end of the exchange period, which can last no more than 180 days. Like the identification period, the exchange period also starts when you transfer the relinquished property.

    The exchange period ends on the earlier of: 1) 180 days after the transfer, or 2) the due date (including extensions) of your federal income tax return for the year that includes the transfer date. When your tax return due date would reduce the exchange period to less than 180 days, you can extend your return. An extension restores the full 180-day period.

    Will Like-Kind Exchanges Survive Possible Tax Reform Efforts?

    Under the current tax rules, like-kind exchanges offer significant tax advantages, but they can be complicated to execute. Your tax advisor can help you navigate the rules.

    Looking ahead, it's uncertain when and if tax reform will occur and whether the tax benefits of a like-kind exchange will survive any successful tax reform efforts. So, if you own an appreciated real estate investment and you're contemplating swapping it out, it may be advisable to enter into a like-kind exchange sooner rather than later.

    START SUCCESSION PLANNING NOW

    091217 Blog Posting.jpg

    The majority of North American businesses are family owned and many are facing ownership-transfer issues as the baby-boomer founders enter retirement.

    On the eve of a retirement, or following a death, family-run businesses have four basic choices. The first two involve giving up a family tradition: closing up shop or selling the business to outsiders or non-family employees.

    The second two choices involve keeping the business under family control and either hiring outside managers or passing on the business to younger family members.

    That final option of family succession can be difficult and not every business that attempts it is successful. Family dynamics often play a major role in the success or failure of a transition. Only a very small number of family businesses succeed in transfers to the second generation and even fewer make it to the third generation.

    The key to success: Clear communication and the cooperation and commitment of everyone involved. Set up a family retreat early on in the process and bring in an independent third-party facilitator, such as your accountant, who can keep everyone's eye on the ball and smooth over the rough patches.

    The facilitator can objectively help to determine strategy, assess the current situation, develop strategic plans and discuss, review, implement and monitor those plans. Other professionals, such as insurance agents and bankers, may also be called in to help devise the plans and put them into effect.

    The planning involves mapping out four distinct strategies in this order:

    1. A business plan that sets out the founders' original vision, mission and goals and gives other family members a clear picture of what the future should entail.

    2. A family plan aimed at avoiding sibling rivalries and management-control issues. Here, you address compensation policies, management expectations, performance measures, job descriptions and codes of conduct within the business. You should also outline who is entitled to join the business and how to treat family members who aren't involved with the company.

    3. An estate/retirement plan that incorporates a business valuation, how to finance the buyout, distribute retirement funds and calculate estate taxes. Another critical issue here is the inheritance of corporate and non-corporate assets.

    4. A succession plan that sets the date for retirement, establishes a timetable for training new management, outlines any role the founders will continue to play and arranges for the management of cash flow.

    It's never too soon to start: Succession planning helps you balance both personal and business interests and helps ensure that your family-run business gets through the transition successfully.

    TEACH MANAGERS HOW TO MOTIVATE

    082117 Blog Photo.jpg

    The workforce of your dreams is probably made up of brilliant, engaged employees who take the initiative, collaborate effortlessly, enthusiastically promote your company's goals, never take a sick day and offer to take a pay cut at their next performance appraisal, right?

    Although it's unlikely that you can have a staff that maintains perfect health and is independently wealthy, it's possible that your staff can be brilliant, engaged, collaborative and all the other superlatives you can think of. They just need the right motivation, and your managers are just the ones to deliver it.

    6 Motivational Tactics

    There's no doubt about it, employees can and do get fired up from a rousing speech from the CEO or a day spent at a seminar conducted by a world-renowned speaker. However, humans tend to be creatures of habit. Once we get back to our offices and our normal routines, those pep talks often fade before they can take hold. That's where the steady, consistent actions of good managers come in. 

    Here are six motivational tactics your managers should be comfortable with and regularly putting into practice with their staff:

    1. Recognize the big and small. Recognition fuels motivation because it gives employees a sense that what they're doing matters and is important to the company. Recognize the big stuff, such as landing a huge account, as well as the small stuff, such as covering the phones for a co-worker.

    Regularly communicate compliments, concerns and appreciation, and have a formal, yearly awards program. Keep in mind that the form of the recognition is less important than providing it regularly.

    2. Understand the importance of individuality. One of the best lessons a manager can learn is that his or her staff is made up of individuals who have unique experiences, perspectives and skills. Being treated as a person, and not as just another cog in the wheel, helps motivate employees because they feel valued and see that their particular talents are contributing to the whole.

    3. Get employees involved. Motivation also rises when employees work with their managers to solve problems and are actively involved in defining their work. This means managers need to be less focused on issuing orders and more willing to collaborate with staff to determine the best course of action in a given situation. In other words, being a manager doesn't mean one should be a micro-manager.

    4. Be empathetic. Empathy requires having an open mind and being willing to step into someone's shoes to see things from their point of view. This is a key skill for managers to hone so that they can effectively relate to their employees — particularly when disagreements arise.

    Even if employees' suggestions weren't heeded, as long as their bosses demonstrate empathy, employees will at least feel that their comments were heard. They'll likely still be disappointed by the outcome, but they'll be less likely to feel defeated.

    5. Provide challenging and stimulating work. It's not an earth-shattering revelation to say that employees' motivation rises when they're passionate about their work and sinks when they're bored or uninspired by the job. A manager who is focused on motivation will work with his or her staff to find the silver lining.

    For instance, turn the work into an important developmental milestone, such as an opportunity to delegate some portion of the task to a less experienced team member. Or a dual goal can be created: The employee will complete the task as well as analyze the process and come up with ways it can be done differently next time.

    6. Communicate effectively. Being able to clearly convey goals, commitments and expectations to employees is another skill that managers must master. After all, employees can't get fired up to complete a task if they're not really sure what they're doing.

    Remember, talking, e-mailing, text messaging or whatever method is being used to deliver information is only one half of the communication equation. Listening is equally important.

      Why Motivation Is Key

      If you teach the skills that are at the heart of motivation, you can coach any manager to become an inspiration to his or her staff. In addition to keeping productivity high, motivating managers will set the right tone for those who will move up the ranks in your organization. Those reasons should be motivation enough to focus on this essential element of leadership.

      DO YOU HAVE A DEDUCTIBLE BUSINESS LOSS OR A NONDEDUCTIBLE HOBBY LOSS?

      There's a fine line between businesses and hobbies under the federal tax code. If you engage in an unincorporated sideline — such as a marketing director by day and an artist on the nights and weekends — you may think of that side activity as a business and hope to deduct any losses on your personal tax return. But the IRS may disagree and reclassify the money-losing activity as a hobby.

      In general, the hobby loss rules aren't taxpayer friendly. But there's a ray of hope: If you heed the rules, there's a good chance you can win the argument and establish that you have a business rather than a hobby. Here's some guidance, along with a recent example of a taxpayer who ran afoul of the rules.

      Hobby Loss Rules

      If you operate an unincorporated for-profit business activity that generates a net tax loss for the year (deductible expenses in excess of revenue), you can generally deduct the full amount of the loss on your federal income tax return. That means the loss can be used to offset income from other sources and reduce your federal income tax bill.

      On the other hand, the tax results are less favorable if your money-losing side activity is classified as a hobby,which essentially means an activity that lacks a profit motive. In that case, you must report all the revenue on your tax return, but your allowable deductions from the activity are limited to that revenue. In other words, you can never have an overall tax loss from an activity that's treated as a hobby, even if you lose tons of money.

      Moreover, you must treat the total amount of allowable hobby expenses (limited to income) as a miscellaneous itemized deduction item. That means you get no write-off unless you itemize. Even if you do itemize, the write-off for miscellaneous deduction items is limited to the excess of those items over 2% of your adjusted gross income (AGI). The higher your AGI is, the less you'll be allowed to deduct. High-income taxpayers can find their allowable hobby activity deductions limited to little or nothing.

      Finally, if you're subject to the alternative minimum tax (AMT), your hobby expenses are completely disallowed when calculating your AMT liability.

      Why is the hobby loss issue an IRS hot button? After applying all of the tax-law restrictions, your money-losing hobby can add to your taxable income. That's because you must include all the income on your return while your allowable deductions may be close to zero.

      A Silver Lining: IRS Safe Harbor Rules

      Now that you understand why hobby status is unfavorable and for-profit business status is helpful, how can you determine whether your money-losing side activity is a hobby or a business?

      There are two safe harbors that automatically qualify an activity as a for-profit business:

      1. The activity produces positive taxable income (revenues in excess of deductions) for at least three out of every five years.

      2. You're engaged in a horse racing, breeding, training or showing activity, and it produces positive taxable income in two out of every seven years.

      Taxpayers who can plan ahead to qualify for these safe harbors earn the right to deduct their losses in unprofitable years.

      Intent to Make Profit

      If you can't qualify for one of these safe harbors, you may still be able to treat the activity as a for-profit business and deduct the losses. How? Basically, you must demonstrate an honest intent to make a profit. Factors that can demonstrate such intent include the following:

      • You conduct the activity in a business-like manner by keeping good records and searching for profit-making strategies.

      • You have expertise in the activity or hire expert advisors.

      • You spend enough time to justify that the activity is a business, not just a hobby,

      • You've been successful in other similar ventures, suggesting that you have business acumen.

      • The assets used in the activity are expected to appreciate in value. (For example, the IRS will almost never claim that owning rental real estate is a hobby even when tax losses are incurred for many years).

      The U.S. Tax Court will also consider the history and magnitude of income and losses from the activity. In general, occasional large profits hold more weight than more frequent small profits, and losses caused by unusual events or bad luck are more justifiable than ongoing losses that only a hobbyist would be willing to accept.

      Another consideration is your financial status — if you earn a large income or most of your income from a full-time job or another business you own, an unprofitable side activity is more likely to be considered a hobby.

      The degree of personal pleasure you derive from the activity is also a factor. For example, running film festivals in lively college towns is a lot more fun than, say, working as a finance executive — so the IRS is far more likely to claim the former is a hobby if you start claiming losses on your tax returns. (See "Lights, Camera, Action: Film Festivals Classified as a Hobby" at right.)

      Toeing a Fine Line

      Business losses are fully deductible; hobby losses aren't. So, taxpayers will prefer to have their side activities classified as businesses. Over the years, the Tax Court has concluded that a number of pleasurable activities could be classified as for-profit businesses rather than hobbies, based on the facts and circumstances of each case. Your tax advisor can help you create documentation to prove that you're on the right side of this issue.

      UNLOCK THE BIGGEST POSSIBLE DEDUCTION FOR A HOME OFFICE

      The IRS recently issued a reminder about claiming the home office deduction. In particular, it explained a simplified method that offers a time-saving option. But many taxpayers who maintain a home office fare better tax-wise by deducting expenses under the regular method. Others may not be eligible to deduct any home office expenses. Here's why.

      Regular and Exclusive Use

      Most home-related expenses, such as utilities, insurance and repairs, aren't deductible. But if you use part of your home for business purposes, you may be entitled to deduct a portion of these everyday expenses, within certain limits.

      In general, you'll qualify for a home office deduction if part of your home is used "regularly and exclusively" as your principal place of business. Here's an overview of these two tests:

      1. Regular use. You must use a specific area of your home for business on a regular basis. Incidental or occasional business use is not regular use. The IRS considers all the facts and circumstances for this determination.

      2. Exclusive use. You must use a specific area of your home only for business. This area can be a room or other separately identifiable space. It's not necessary for the space to be physically partitioned off from the rest of the room. However, you don't meet the requirements for the exclusive use test if the area is used both for business and personal purposes.

        Rules for Employees

        If you're an employee, the home office must be used for the employer's convenience. In essence, this requirement should be spelled out in an employment contract with the company. For this reason, home office deductions are more likely to be claimed by self-employed taxpayers than employees who work for an unrelated business.

        Typically, you won't qualify for deductions if you bring work home at night from your daytime office, either. Consider the relative importance of the activities performed at each place where you conduct business and the amount of time spent at each business location.

        Principal Place of Business Tests

        Your home office will qualify as your principal place of business if you 1) use the space exclusively and regularly for administrative or management activities of your business, and 2) don't have another fixed location where you conduct substantial administrative or management activities. (See "Tax Wisdom of Soliman" at right.)

        Examples of activities that are administrative or managerial in nature include:

        • Billing customers, clients or patients,

        • Keeping books and records,

        • Ordering supplies,

        • Setting up appointments, and

        • Forwarding orders or writing reports.

        Other Ways to Qualify

        If your home isn't your principal place of business, you may deduct home office expenses if you physically meet with patients, clients or customers on your premises. To qualify, the use of your home must be substantial and integral to the business conducted.

        Alternatively, you can claim the home office deduction if you use a storage area in your home — or if you have a separate free-standing structure (such as a studio, workshop, garage or barn) that's used exclusively and regularly for your business. The structure doesn't have to be your principal place of business or a place where you meet patients, clients or customers.

        Two Methods: Actual Expenses vs. Simplified

        Traditionally, taxpayers deduct actual expenses when they claim a home office deduction. Deductible home office expenses may include:

        • Direct expenses, such as the cost of painting and carpeting a room used exclusively for business,

        • A proportionate share of indirect expenses, such as mortgage interest, property taxes, utilities, repairs and insurance, and

        • A depreciation allowance.

        Keeping track of actual expenses can be time consuming. Fortunately, there's a streamlined method that's allowed under a tax law change that went into effect in 2013: You can simply deduct $5 for each square foot of home office space, up to a maximum total of $1,500.

        For example, if you've converted a 300-square-foot bedroom to an office you use exclusively and regularly for business, you can write off $1,500 under the simplified method (300 square feet x $5). However, if your business is located in a 600-square-foot finished basement, the deduction under the simplified method will still be only $1,500 because of the cap on the deduction under this method.

        As you can see, the cap can make the simplified method less beneficial for larger home office spaces. But even for spaces of 300 square feet or less, taxpayers often qualify for a bigger deduction using the actual expense method. So, it can be worth the extra hassle.

        Hypothetical Example

        To illustrate how this might work, let's assume that your 3,000-square-foot home is your principal place of business. You use a 300-square-foot bedroom as your home office. For 2017, you expect to have $1,500 of direct expenses for your home office plus $10,000 of indirect expenses for the entire home, including utilities, insurance and repairs. (For simplicity, we'll disregard mortgage interest and property taxes that would be deductible on Schedule A, "Itemized Deductions.") Based on IRS tables, you're also entitled to a $500 depreciation allowance.

        Using the simplified method, you're eligible to deduct $1,500, as described above. But, if you keep the required records to deduct your actual expenses, you could deduct $3,000 for your home office — $1,500 in direct expenses, $1,000 in indirect expenses (10% of $10,000) and $500 in depreciation. That's double the maximum amount you could deduct with the simplified method. The deduction would be even greater if the home office space were larger.

        Flexibility in Filing

        When claiming the home office deduction, you're not locked into a particular method. For instance, you might choose the actual expense method in 2017, use the simplified method in 2018 and then switch back to the actual expense method thereafter. The choice is yours.

        This is a valuable tax-saving opportunity for many taxpayers, especially those who are self-employed and work from home. Consult with your professional tax advisor regarding what's right for your personal situation.

        PROJECT HONDURAS

        One of our big goals this year was to return to Honduras for the 5th time. Over the past five years our Fulling Management Team to Honduras has included staff and family members, clients, vendors and friends. During our June 1-9, 2017 trip, our objectives included:

        1. Partnering with local medical and dental Honduran professionals to provide medical care in three remote communities.

        2. Teaching the children how to prevent foot-borne illnesses and provide them their own pair of The Shoe that Grows.

        3. Providing funding and support for local Honduran men to build a new school in San Jose, Honduras.

        With assistance from over 150 people around the United States:

        - 150+ Honduran children and adults received medical and dental care (some for the first time!).

        - We washed several little toes and feet and provided The Shoes that Grows to 100 kids.

        - Now 100% funded, the new school building construction in San Jose is well underway and should be ready toward the end of summer.

        Part of our activities included hosting a soccer tournament for middle school boys. They traveled by buses from surrounding communities around La Fortunita, Honduras. This provided a great opportunity to build relationship with these young men and introduce them to our host group www.hondurasministries.org.

        If you would like to see more photos or read more about the Honduras trip adventures, you can check them out on the Fulling Management Facebook page. https://www.facebook.com/FullingMgmt/.

        - Rusty Fulling