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News

Our news articles are posted on a regular basis to give our clients relevant and timely information about matters pertaining to our financial services. Browse through our current and archived articles to learn more.

Category: Small Business News

Additional Medicare Tax

As 2013 comes to an end, employers, employees and self-employed individuals should make sure they are complying with the new 0.9 percent additional Medicare tax.

 

This new rule was effective at the beginning of 2013, but the effects will not be fully felt until wages reach a threshold level which, for many employees, will not occur until the final months of the year. This additional tax will also need to be considered when processing year-end bonuses.
Beginning in 2013, employers were required to withhold an additional 0.9 percent Medicare tax on the wages paid to any employee whose wages exceed $200,000.
The tax applies only to employees and self-employed individuals, not employers, and is in addition to the 1.45 percent / 2.9 percent (regular) Medicare tax that all wage earners/self-employed individuals pay.
The required withholding of the additional Medicare tax may result in over- or under- withholding of the actual tax owed. This is because, employers are required to withhold on wages paid in excess of $200,000 regardless of the employee’s filing status. The actual threshold for the additional tax is $250,000 for joint filers.

 

Example:
Assume that an employee’s wages are $220,000 annually and his/her spouse earns $150,000, and they file a joint tax return. The employer will be required to withhold the additional Medicare tax on the $20,000 of wages that is in excess of the $200,000 withholding threshold. The spouse’s employer will not withhold additional Medicare tax because their earnings do not exceed $200,000. But, together, the employee and spouse will owe additional Medicare tax on $120,000 (the excess of the combined earnings over $250,000.)
In order to avoid under-withholding, such as in the above situation, taxpayers should consider filing a new form W-4 with their employers to request that additional income tax be withheld, or alternatively, make estimated tax payments to make up the difference.
The new withholding rules will require that employers withhold the additional Medicare tax even if employees have no additional Medicare tax liability. Since this is a payroll requirement, employees cannot request that the employer reduce the required withholding.

 

Example:
Assume an employee earns $220,000 annually, and the spouse does not work. The couple file a joint tax return. The employer is required to withhold additional Medicare tax on the $20,000 of the $220,000 compensation. However, the employee and spouse will not owe any additional Medicare tax because the joint annual salary is under $250,000, the threshold for joint filers. In this example the taxpayers will have to claim a refund for those amounts on their tax return.
Between now and the end of the year, employers should be checking their payroll systems to ensure they have properly begun to withhold from their high-earners. Employees should be making some calculations to see if they need to increase their withholding and self-employed individuals should be planning, with their tax return preparers, to be sure estimated tax payments are being made. Paying taxes now, can minimize penalties and interest that apply for failure to pay the additional Medicare tax.

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Debt Crisis Averted: But What’s Next?

Working to reach consensus before the October 17th debt ceiling deadline, the U.S. Congress reached an agreement to avoid a historic, and potentially catastrophic, lapse in the government’s ability to borrow money. The agreement averted an unprecedented debt default and will enable the government to re-open many of its services after a two-week shutdown. The agreement funds federal government agencies until January 15, 2014 and extends U.S. borrowing authority until February 7, 2014 although the Treasury Department may be able to temporarily extend its borrowing ability beyond that date should Congress fail to act early next year. While the agreement is good news, the deal reached by Congress is only a temporary solution to the nation’s debt ceiling challenges. The potential for another showdown in Congress, and shutdown of the government’s borrowing power, looms in a few short months when this temporary agreement expires. The agreement was only a stop-gap measure, Americans are faced with two real prospects for early next year: another government shutdown on January 15, 2014 and another debt ceiling crisis on February 7, 2014. Moreover, some Capitol Hill insiders believe that, unless Congress aligns on a final, “once and for all” solution to the debt-ceiling crisis, we could be facing many more Congressional showdowns and deadlines — perhaps on a monthly basis and through the next election.

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Healthcare & Benefit Service :: Healthcare Insurance Marketplace Deadline by October 1, 2013

The President announced on July 2nd of 2013, that certain key provision of the Healthcare Reform Law would be delayed until 2015. Businesses with 50 or more employees will not be penalized for declining to offer health insurance to their employees in 2014. This postponement provided a level of relief for many employers regarding Health Care.

 

However, other key provisions of the Law are still in effect with deadlines fast approaching. One such provision with an October 1, 2013 deadline includes Section 1512 of the Affordable Care Act, which creates a new Fair Labor Standards Act (FLSA) section requiring notifying employees of coverage options available through the new Healthcare Insurance Marketplace (http://www.dol.gov/ebsa/newsroom/tr13-02.html).

It doesn’t matter if an employer sponsors a health plan or not, the employer must still let employees know about their options that are available on January 1, 2014.

 
By October 1st 2013, employers must provide employees information related to:

 

1. The existence of the Marketplace (referred to in the statute as the Exchange) including a description of the services provided by the Marketplace, and the manner in which the employee may contact the Marketplace to request assistance;

 

2. If the employer plan’s share of the total allowed costs of benefits provided under the plan is less than 60 percent of such costs, the employee may be eligible for a premium tax credit if the employee purchases a qualified health plan through the Marketplace; and

 

3. If the employee purchases a qualified health plan through the Marketplace, the employee may lose the employer contribution (if any) to any health benefits plan offered by the employer and that all or a portion of such contribution may be excludable from income for Federal income tax purposes.

Model notices can be downloaded from the DOL at http://www.dol.gov/ebsa/healthreform/. There are two separate notices; one for those who currently offer health coverage and one for those who do not. The Department of Labor is recommending employers provide the forms either electronically or by certified mail to ensure receipt.

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Accounting & Tax :: Potential Tax Return Audit Red Flags-What They Are and How to Avoid Them

Millions of individuals file tax returns but only a small percentage of those returns are examined by the IRS or other taxing authorities. While there should be little reason to worry about an IRS examination, there are a few things that may lead to an increased chance of examination:

 

High Income Earners

The overall audit rate for individuals found during an IRS study conducted in 2012 is 1.03%. The individual audit rate for taxpayers making $200,000 or more is 3.70% or 1 out of every 27 returns. Make over $1,000,000? The rate jumps to 1-in-8 returns. The more income reflected on your tax return, the more likely it will be for you to have an IRS examination.

 

Failing to report taxable income

The IRS receives copies of all W-2 and 1099 forms. If your return is missing income that was reported to the IRS on a W-2 or 1099, it is likely that you will automatically receive a notice requesting an explanation.

 

Charitable deductions

If charitable deductions reported on a return are disproportionately large compared to income, the IRS is likely to investigate. Therefore, it is important to keep all charitable donation receipts. Audit exposure also exists if valuable property is donated without appraisals, or if Form 8283 is not filed when a property donation over $500 is made and the deduction is claimed.

 

Home office deductions

The home office deduction consists of a portion of rent, mortgage interest, real estate tax payments, insurance, utilities, phone bills and other costs allocated proportionately to an area of an individual’s home used regularly and exclusively for business purposes. The space used to claim the home office deduction cannot also be used as a guest bedroom or play room, nor can the office computer be sometimes used for homework. Therein lays the difficulty in substantiating the deduction. The IRS is aware of the difficulty a taxpayer may have in substantiating a home office deduction and is often successful in knocking down the deduction in part or all together during an audit. (The IRS recently issued new non substantiation guidelines on this deduction, but the amounts are very low.)

 

Rental Losses

In general, most real estate losses are not currently recognized and are suspended until such time as the taxpayer can recognize real estate rental income. This is known as the passive loss rule. If a taxpayer actively participates in the rental real estate property, an up to $25,000 of losses could be available to offset income, however the deduction begins to fade out as individual’s income reaches $100,000, and is completely phased out at $150,000. Real estate losses are fully deductible for those individuals who are deemed to be real estate professionals. In order to be considered a real estate professional you must spend more than 50% of your working hours and at least 750 hours a year participating in real estate as a developer, broker or landlord. The IRS may pull your return for review to substantiate the claim of real estate professional, especially if your day job is not in real estate.

 

Deducting business meals, travel and entertainment

Historically, self-employed individuals understate income and overstate deductions. Large deductions for travel, meals and entertainment, especially when compared to income, can cause a closer look from an IRS agent.

 

100% business vehicle use

Similar to the home office deduction, which requires regular and exclusive use of an area for business use, it is difficult to maintain that a vehicle is used for business and only business purposes. If you are going to be claiming a 100% business vehicle deduction, be sure to maintain detailed mileage logs including details of where and when you went on each trip.

 

Writing off hobby losses

If you have wage income in addition to large Schedule C losses, there is a high chance your return will be pulled for inspection. Horse breeding and car racing are two such hobbies moonlighting as businesses that can cause scrutiny from an IRS agent. In order for a business to be considered legitimate by the IRS, it must be entered into with the intention of making a profit. If your business reflects profits for 3 out of 5 years (2 out of 7 for horse breeding) it is generally considered a legitimate business intended to make money. If you are audited, you will have to prove you have a legitimate business and not a hobby. Make sure you can support for all expenses.

 

Running a cash business

Small business owners in cash intensive industries such as taxi drivers, car washes, bars, hair salons and restaurants have historically been a target for IRS examination. Agents are aware that when a good portion of revenue is cash based, there is an opportunity for a taxpayer to underreport income as there is no trail (ie. credit card receipts.)

 

Failing to report a foreign bank account:

In recent years, there has been greater IRS interest in taxpayers with offshore bank accounts or signature authority, specifically in tax haven countries. In the past, the IRS has set up programs for taxpayers to come forward with previously undisclosed accounts with the incentive of reduced penalties for not reporting sooner, as failure to report a foreign bank account leads to significant penalties.

 

Engaging in currency transactions

The IRS receives reports of cash transactions in excess of $10,000 involving banks, casinos, car dealerships and other businesses. Banks and other institutions also file reports on suspicious activities such as $9,000 deposits several days in a row. These currency transactions are known to lead to undisclosed income, creating a greater risk of audit examination for those engaging in them.

 

Taking higher-than-average deductions

If you have deductions that are disproportionately large compared to your income, your return has a higher chance of being reviewed.
While the areas outlined above do present items that will provide greater audit exposure, if you have proper documentation, there should be nothing to worry about in the case of an IRS examination.

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Accounting & Tax :: Partnerships and LLC’s: The Basics of Making a 754 Election

The basis of the assets of a partnership or LLC may not reflect the basis of the interest in the hands of the partners(s). If a Section 754 election is made, by the entity, certain events can trigger an equalization of basis without waiting until the assets are sold. Utilizing this election can accelerate deductions into earlier years, which may be beneficial for owners of LLC’s and partnerships.

 

What is a 754 election?
Section 754 allows a partnership to make an election to “step-up” the basis of the assets within a partnership when one of two events occurs: distribution of partnership property or transfer of an interest by a partner. This “step-up” in basis is used to make the outside basis (basis of the partnership in the hands of the owner) equal to the inside basis (the basis of the assets in partnership) for tax purposes. This equalization of basis can be beneficial to an owner when the “step-up” is deemed to be related to depreciable or amortizable property. It will allow for depreciation and amortization deductions, starting in the year the election is made, rather than recouping basis when the interest or property is transferred.

The election is made by filing a written statement with the tax return. It is important to note that the election is in effect for the year filed and all years thereafter. It can only be revoked with IRS consent. All distributions and transfers of interests will be subject to the election and the “step-up” or “step-down” must be calculated when one of these events occurs.

 

How does the election work in the case of a distribution?
In general, there is no effect on the basis of the undistributed pass-through entity’s assets when a current distribution is made. However, if a 754 election is made or is in place, there may be a “step-up” or “step-down” of the remaining assets. Any gain recognized by the distributee (because his outside basis is less than the basis of the property he received) increases the basis of the remaining assets in the partnership. Since current distributions cannot result in a loss to the distributee, there will only be a “step-down” of assets if the distribution is made in complete liquidation of the distributee’s interest.

The “step-up” or “step-down” is allocated to the other pass-through entity owners. This equalizes the other owners by providing them with a tax asset equal to the asset that the distributee partner received.

 

Example 1:
ABC partnership distributes real estate with a value of $100,000 to partner A. Partner A’s outside basis in ABC is $90,000. The $10,000 difference (gain to be recognized by A) is allocated to partners B and C and any related depreciation/amortization deductions are specially allocated to B and C. No entry is made to record the $10,000 754 asset on the books of the partnership: the $10,000 is reflected in partner B and C’s outside bases. Additional depreciation/amortization deductions will be specifically allocated to these partners in the future.

 

How does the election work when there is a transfer of an interest?
When a new partner acquires an interest from a former partner, the price paid is based on the fair market value of the interest (which is based on the underlying value of assets of the partnership). However, if the assets of the partnership are greater in value than the outside basis, there is a distortion between the new partner’s outside basis and the proportionate value of the assets of the partnership. If a 754 election is made, the incoming partner receives a “step-up” or “step-down” for any difference in what he paid and the former partner’s previously taxed capital (essentially, the proportionate basis of the assets of the partnership). The “step-up” and any related depreciation or amortization deductions are allocated to the incoming partner.

 

Example 2:
Z owns 50% of XYZ partnership and has previously taxed capital of $25,000. Z sells his 50% interest to W for $50,000. The $25,000 difference is allocated to incoming partner W and any related depreciation/amortization deductions are specially allocated to W. No entry is made to record the $25,000 754 asset on the books of the partnership: the $25,000 is reflected in partner W’s outside basis. Additional depreciation/amortization deductions will be specifically allocated to this partner in the future.

 

What is the downside to the election?
As mentioned before, this is a permanent election that is only revocable with IRS consent. In one year there may be a “step-up”, making the election beneficial. However, if a “step-down” occurs in a subsequent year, it too must be calculated. Accounting for the election can be complicated as there will be special allocations of inside basis and related deductions to specific partners which will need to be tracked and disclosed on the partner’s form K-1. Furthermore, the election is an entity level election and all partners are subject to the rules (as they pertain to that specific partnership). It would be wise to check the operating agreement (if applicable) to see if a 754 election is allowed and how the determination to make it is made between the partners.

 

Is it right for my partnership?
If there is a transfer of an interest or a distribution in property and the inside and outside basis has a disparity, the election can be beneficial to accelerate deductions, if there is greater inside basis than outside basis. Before making the election, the partners should consider the likelihood of the assets declining in value and the extent of separate accounting they are willing and able to handle.

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Commercial Insurance :: What Every Employer Needs to Know About Workers’ Compensation

Employers must buy insurance to cover workers’ compensation claims. This type of insurance provides funding for injured employees, and employers also receive protection from lawsuits stemming from a worker’s injuries. State laws govern workers’ compensation, and every state has a slightly different set of rules and payment rates. To learn about a specific state’s workers’ compensation laws, it is best to contact an agent for more details. The United States Department of Labor also provides information on its official site.

What Is Covered Under Workers’ Compensation
Only work-related illnesses and injuries are covered by workers’ compensation. However, this does not mean the injury has to happen in the workplace. If an employee is injured while out driving a company car off the premises of the workplace, the injuries will be covered. Both sudden and gradual injuries are covered if they are work related. An example of a sudden injury is an employee falling off of a ladder, and a gradual injury might be a foot condition that develops from walking or standing on a concrete floor every day for several years.

What Workers’ Compensation Does Not Cover
Some problems that happen in the workplace are not covered. Some of the following situations are examples:

  • Self-inflicted injuries
  • Injuries from drug or alcohol use
  • Injuries resulting from horseplay
  • Injuries following termination or a layoff
  • Injuries sustained from fighting
  • Felony-related injuries
  • Independent contractor injuries
  • Injuries sustained while off duty but on workplace premises

When Employees Can Sue Employers
Employers are not protected from employee lawsuits in all situations. When an employee’s injuries are due to the employer’s intentional actions or there is no workers’ compensation insurance, the employee is allowed to sue the employer in court for a wide range of damages. In some cases, employees may also be able to sue third parties that are involved and have caused damages.

Workers’ Compensation Benefits
There are several provisions made possible by workers’ compensation. These include the following:

  • Replacement income when employees are off work
  • Vocational rehabilitation training or placement assistance
  • Medical expense payments for physician appointments, drugs and surgeries

If an employee is unable to work temporarily, that individual usually receives about 66 percent of his or her income as disability payments. There is a fixed ceiling amount for this percentage, and the benefits are available to people who are unable to do the same type of work that was done prior to the disability’s beginning. Some people may be able to perform other types of work, but there are people who are unable to work at all. If this is the case, such a person will usually receive permanent disability payments.

Workers’ Compensation And Employer Responsibilities
Under the workers’ compensation system, employers have several obligations. When requirements are not met, employers may face fines. In addition to this, employees may be able to sue such employers.

Carrying Workers’ Compensation Insurance
If a business does not have this type of coverage, the owner is vulnerable to lawsuits that may be filed by injured workers. In addition to carrying insurance, employers should post notices and provide employees with information about their legal rights. This should be done on a regular basis. Any posted notices should be placed in areas that employees use frequently during working hours. The literature should include the following bits of information:

  • The name of the workers’ compensation insurance carrier
  • A self-insurance statement for employers who have their own insurance
  • The name of the entity responsible for claims adjustments
  • A statement that workers have the right to change doctors
  • A statement that injured workers have the right to medical treatment
  • Details about workers’ compensation benefits

When hiring new workers, employers should notify them of all these points prior to starting work. Within 24 hours of an injury happening on the job, employers must provide workers with claim forms. They must also provide written information again about that worker’s rights under the insurance plan and state laws. To learn more about workers’ compensation insurance and how it works, contact us to schedule an appointment.

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