Tax News: January 2016

How you can help prevent tax-related identity theft

Tax-related fraud isn’t a new crime, but tax preparation software, e-filing and increased availability of personal data have made tax-related identity theft increasingly easy to perpetrate. The IRS is taking steps to reduce such fraud, but taxpayers must play their part, too.

How they do it

Criminals perpetrate tax identity theft by using stolen Social Security numbers and other personal information to file tax returns in their victims’ names. Naturally, the fake returns claim that the filer is owed a refund — and the bigger, the better.

To ensure they’re a step ahead of taxpayers filing legitimate returns and employers submitting W-2 and 1099 forms, the thieves file early in the tax season. They usually request that refunds be made to debit cards, which are hard for the IRS to trace once they’re distributed.

IRS takes action

The increasing rate of tax-related fraud — not to mention the well-publicized 2015 IRS data breach — has spurred government agencies and private sector businesses to act. This past June, a coalition made up of the IRS, state tax administrators, tax preparation services and payroll and tax product processors announced a new program with five initiatives:

  1. Taxpayer identification.Coalition members will review transmission data such as Internet Protocol numbers.
  2. Fraud identification.Members will share fraud leads and aggregated tax return information.
  3. Information assessment.The Refund Fraud Information Sharing and Assessment Center will help public and private sector members share information.
  4. Cybersecurity framework.Members will be required to adopt the National Institute of Standards and Technology cybersecurity framework.
  5. Taxpayer awareness and communication.Members will increase efforts to inform the public about identity theft and protecting personal data.

Your role in preventing fraud

But the IRS and tax preparation professionals can’t fight fraud without your help. Be sure to keep your Social Security card secure, and if businesses (including financial institutions and medical providers) request your Social Security number, ensure they need it for a legitimate purpose and have taken precautions to keep your data safe. Also regularly review your credit report. You can obtain free copies from all three credit bureaus once a year.

Road rules: Deducting business travel expenses

If you travel for business, you’ll want to ensure that the expenses you incur while doing so are tax deductible. IRS rules are strict, and improperly substantiated deductions can cost you.

Away from home rule

Generally, ordinary and necessary expenses of traveling away from home for work are deductible. For the expenses to qualify, you must be away from your tax home — your regular place of business — substantially longer than an ordinary day’s work and need to sleep or rest to meet the work demands while away.

You don’t necessarily have to stay away from home overnight to satisfy the rest requirement. If you travel for business purposes throughout the day but return home that night to sleep, you may still be considered “away from home” for tax purposes. In this case, expenses you incur for such trips are still deductible.

Also, the trip must be primarily for business purposes. If your trip involves both business and personal activities, a portion of the travel expenses may be nondeductible personal expenses.

Deductible travel expenses

Most airfare, taxis, rental cars, lodging, meals (with exceptions), tips and business phone calls are tax deductible. But you can’t write off “lavish or extravagant” travel expenses, so be prepared to prove that your patronage of a high-end restaurant or five-star hotel was reasonable under the circumstances.

Generally, only 50% of business-related meal and entertainment expenses are deductible. If your employer reimburses you under an accountable plan (see below), the 50% limit applies to your employer rather than you.

You must substantiate deductions for lodging — and for other travel expenses greater than $75 — with adequate records. These include credit card receipts, canceled checks or bills. Records should indicate the amount, date, place, essential character of the expense and business purpose.

Be accountable

If your employer reimburses your travel expenses, an accountable plan enables the company to deduct the reimbursements, but the reimbursements aren’t included in your income as salary and aren’t subject to FICA and other payroll tax obligations. Although you may still be able to deduct some or all business travel expenses without an accountable plan, such deductions are available only if you itemize and your expenses and other miscellaneous deductions exceed 2% of your adjusted gross income.

For reimbursed expenses to qualify under an accountable plan, you must have paid or incurred them while on company business and reported the expenses to your employer within a reasonable time (usually within 60 days). You also must return any excess reimbursements — usually within 120 days after they were paid or incurred.

Generally, to be reimbursable on a tax-free basis, your travel must meet the “away from home” rule discussed earlier. However, your employer can reimburse local lodging expenses if the lodging is temporary and necessary for you to participate in or be available for a bona fide business meeting or function. The expenses involved must be otherwise deductible by you as a business expense (or be expenses that would otherwise be deductible if you paid them).

Exceptions happen

As with most IRS rules, there are exceptions to which travel expenses you can deduct. If you’re unsure about some expenses, give us a call.

Hoping to grow your business? Start with the financing

Let’s say you’ve drafted a strategic growth plan that discusses in detail the new products and markets that you hope will power your company’s future growth. You’ve performed extensive market research and are confident that your offerings will appeal to customers and that you know how to reach them. Unfortunately, if your plan covers only such topics as product development, manufacturing, distribution, sales and marketing, it probably won’t succeed.

To avoid potential cash-flow issues and other financial crises, your strategic plan should specify precisely how you’ll fund your growth initiatives. If your company is sitting on a pile of cash just waiting to be invested, you’re lucky. Most businesses must finance growth with equity or debt.

Equity isn’t necessarily easy

Using your own equity in the business to raise capital can be a good solution. However, selling ownership to outside investors, such as private equity firms and venture capitalists, isn’t always as easy as it sounds. For starters, you’ll need a professional appraisal of your company and you’ll have to find investors who believe in your growth strategy — and ability to execute it.

Equity financing doesn’t need to be repaid. But, depending on how much equity you sell and how successful your company is in reaching its goals, equity can end up being expensive in the long run. For example, you may need to give up some control to investors, which can lead to disputes over major decisions.

Price of debt

Debt financing, on the other hand, does have to be repaid, and will cost you interest. Depending on the size and financial health of your company and the nature of your growth plans, you may be able to qualify for:

  • Term loans,
  • Commercial mortgages,
  • Construction loans,
  • Equipment leases, and
  • Small Business Administration loans.

Banks require borrowers to provide detailed financial information and pledge collateral, possibly including your home and other personal assets. They may also hold you to covenants that, for example, prevent you from borrowing additional money until their loan is repaid.

Reasonable expectations

We stand ready to help you weigh the advantages and drawbacks of the financing options available to your business. We can also help you evaluate your growth assumptions to ensure that your profit expectations are reasonable.

Tax calendar

January 15

Individual taxpayers’ final 2015 estimated tax payment is due unless Form 1040 is filed by February 2, 2016, and any tax due is paid with the return.

February 1

  • Most employers must file Form 941 (Employer’s Quarterly Federal Tax Return) to report Medicare, Social Security, and income taxes withheld in the fourth quarter of 2015. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return. Employers who have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944 (Employer’s Annual Federal Tax Return).
  • Give your employees their copies of Form W-2 for 2015. If an employee agreed to receive Form W-2 electronically, have it posted on the website and notify the employee.
  • Give annual information statements to recipients of certain payments you made during 2015. You can use the appropriate version of Form 1099 or other information return. Form 1099 can be filed electronically with the consent of the recipient.
  • File Form 940 [Employer’s Annual Federal Unemployment (FUTA) Tax Return] for 2015. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it is more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.
  • File Form 945 (Annual Return of Withheld Federal Income Tax) for 2015 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on pensions, annuities, IRAs, etc. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.
  • File Form 943 (Employer’s Annual Federal Tax Return for Agricultural Employees) to report Social Security and Medicare taxes and withheld income for 2015. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.

February 29

  • The government’s copy of Form 1099 series returns (along with the appropriate transmittal form) should be sent in by today. However, if these forms will be filed electronically, the due date is extended to March 31.
  • The government’s copy of Form W-2 series returns (along with the appropriate transmittal Form W-3) should be sent in by today. However, if these forms will be filed electronically, the due date is extended to March 31.

March 15

  • 2015 income tax returns must be filed or extended for calendar-year corporations. If the return is not extended, this is also the last day for calendar-year corporations to make 2015 contributions to pension and profit-sharing plans.

Consolidate accounts and simplify your financial life

If you’ve accumulated many bank, investment and other financial accounts over the years, you might consider consolidating some of them. Having multiple accounts requires you to spend more time tracking and reconciling financial activities and can make it harder to keep a handle on how much you have and whether your money is being invested advantageously.

Start by identifying the accounts that offer you the best combination of excellent customer service, convenience, lower fees and higher returns. Hold on to these and consider closing the rest, keeping in mind the bank account amounts you’ll be consolidating. The Federal Deposit Insurance Corporation generally insures $250,000 per depositor, per insured bank. So if consolidation means that your balance might exceed that amount, it’s better to keep multiple accounts. You should also keep accounts with different beneficiaries separate.

When closing accounts, make sure you stop automatic payments or deposits and destroy checks and cards associated with them. To prevent any future disputes, obtain letters from the financial institutions stating that your accounts have been closed. Closing an account generally takes several weeks.

Tax News: December 2015

What You Should Know About Capital Gains And Losses

When you sell a capital asset, the sale results in a capital gain or loss. A capital asset includes most property you own for personal use (such as your home or car) or own as an investment (such as stocks and bonds). Here are some facts that you should know about capital gains and losses:

  • Gains and losses. A capital gain or loss is the difference between your basis and the amount you get when you sell an asset. Your basis is usually what you paid for the asset.
  • Net investment income tax (NIIT). You must include all capital gains in your income, and you may be subject to the NIIT. The NIIT applies to certain net investment income of individuals who have income above statutory threshold amounts — $200,000 if you are unmarried, $250,000 if you are a married joint-filer, or $125,000 if you use married filing separate status. The rate of this tax is 3.8%.
  • Deductible losses. You can deduct capital losses on the sale of investment property. You cannot deduct losses on the sale of property that you hold for personal use.
  • Long- and short-term. Capital gains and losses are either long-term or short-term, depending on how long you held the property. If you held the property for more than one year, your gain or loss is long-term. If you held it one year or less, the gain or loss is short-term.
  • Net capital gain. . If your long-term gains are more than your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss, you have a net capital gain.
  • Tax rate. The capital gains tax rate, which applies to long-term capital gains, usually depends on your taxable income. For 2015, the capital gains rate is zero to the extent your taxable income (including long-term capital gains) does not exceed $74,900 for married joint-filing couples ($37,450 for singles). The maximum capital gains rate of 20% applies if your taxable income (including long-term capital gains) is $464,850 or more for married joint-filing couples ($413,200 for singles); otherwise a 15% rate applies. However, a 25% or 28% tax rate can also apply to certain types of long-term capital gains. Short-term capital gains are taxed at ordinary income tax rates.
  • Limit on losses. If your capital losses are more than your capital gains, you can deduct the difference as a loss on your tax return. This loss is limited to $3,000 per year, or $1,500 if you are married and file a separate return.
  • Carryover losses. If your total net capital loss is more than the limit you can deduct, you can carry over the losses you are not able to deduct to next year’s tax return. You will treat those losses as if they happened in that next year.

 

Providing Tax-Free Fringe Benefits To Employees

One way you can find and keep valuable employees is to offer the best compensation package possible. An important part of any compensation package is fringe benefits, especially tax-free ones. From an employee’s perspective, one of the most important fringe benefits you can provide is medical coverage. Disability, life, and long-term care insurance benefits are also significant to many employees. Fortunately, these types of benefits can generally be provided on a tax-free basis to your employees. Let’s look at these and other common fringe benefits.

  • Medical coverage. If you maintain a health care plan for your employees, coverage under that plan isn’t taxable to them. Employee contributions are excluded from income if pretax coverage is elected under a cafeteria plan; otherwise, such amounts are included in their wages, but are deductible on a limited basis as itemized deductions.

Caution: Employers must meet a number of new requirements when providing health insurance coverage to employees. For instance, benefits must be provided through a group health plan (either fully insured or self-insured). Reimbursing an employee for individual policy premium payments can subject the employer to substantial penalties.

  • Disability insurance. Your disability insurance premium payments aren’t included in your employee’s income, nor are your contributions to a trust providing disability benefits. The employees’ premium payments (or any other contribution to the plan) generally are not deductible by them or excludable from their income. However, they can make pretax contributions to a cafeteria plan for their disability benefits; such contributions are excludable from their income.
  • Long-term care insurance. Plans providing coverage under qualified long-term care insurance contracts are treated as health plans. Accordingly, your premium payments under such plans aren’t taxable to your employees. However, long-term care insurance can’t be provided through a cafeteria plan.
  • Life insurance. Your employees generally can exclude from gross income premiums you pay on up to $50,000 of qualified group term life insurance coverage. Premiums you pay for qualified coverage exceeding $50,000 is taxable to the extent it exceeds the employee’s contributions toward coverage.
  • Retirement plans. Qualified retirement plans that comply with a host of requirements receive favorable income tax treatment, including (1) current deduction by you, the employer, for contributions to the plan; (2) deferral of the employee’s tax until benefits are paid; (3) deferral of taxes on plan earnings; and (4) in the case of 401(k) plans and SIMPLE plans, the employee’s ability to make pretax contributions.
  • Dependent care assistance. You can provide your employees with up to $5,000 ($2,500 for married employees filing separately) of tax-free dependent care assistance during the year. The dependent care services must be necessary for the employee’s gainful employment.
  • Adoption assistance. Generally, in 2015, employees can exclude from income qualified adoption expenses of up to $13,400 for each eligible child paid or reimbursed by you under an adoption assistance program.
  • Educational assistance. You can help your employees with their educational pursuits on a tax-free basis through educational assistance plans (up to $5,250 per year), job-related educational assistance, and qualified scholarships.

Benefits provided to self-employed individuals. Generally, different and less favorable tax rules apply to certain fringe benefits provided to self-employed individuals, including sole proprietors (including farmers), partners, members of limited liability companies (LLCs) electing to be treated as partnerships, and more-than-2% S corporation shareholders. However, except in the case of a more-than-2% S corporation shareholder, if the owner’s spouse is a bona fide employee of the business, but not an owner, the business may be able to provide tax-free benefits to the spouse just like any other employee.

Education Planning: It’s Best To Start Early

The increasing costs of higher education have made education planning an important aspect of personal financial planning. However, because the actual expenditure will not be incurred for many years, it is often given a low current priority. Also, some parents are counting on scholarships to cover the cost of their children’s education. Unfortunately, this tendency to postpone the issue may eliminate several education planning strategies that must be implemented early to be effective.

Escalating costs. Although the increase in the cost of attending college has slowed down to its lowest escalation rate in years, the College Board reports that 2014—2015 tuition and fees continue to rise at a rate faster than the consumer price index (www.collegeboard.com). All told, the cost of a college education is staggering, and this is unlikely to change.

According to the College Board report, for one year of full-time study, private four-year colleges rose 3.7% (to an average cost of $31,231) from 2013—2014 for tuition and fees alone. Average total charges with room and board are $42,419. Public four-year colleges are up 2.9% (to an average of $9,139) from last year for in-state tuition and fees — room and board adds on another $9,804. Public four-year colleges are up 3.3% (to an average of $22,958) from last year for out-of-state tuition and fees. Average total charges with room and board are $32,762. Even tuition and fees at public two-year schools are up 3.3% (to an average of $3,347).

The report indicates that the subsidies provided to full-time undergraduates at public universities through the combination of grant aid and federal tax benefits averaged $6,110 in 2014—2015 —far below the actual cost of attending.

Six methods to pay for college. In general, the six basic methods of paying for a child’s higher education include a child working his or her way through school; obtaining financial aid (scholarships and federal loans); paying college expenses out of the parents’ current income or assets; using education funds accumulated over time; obtaining private loans; and grandparents (or others) paying college costs.

The first method (child pays) can work, and many successful persons have obtained a good education while working to pay their way. But this often limits the student’s choice of schools and can adversely affect grades. Planning to rely on financial aid (the second method) is risky, and the family may not qualify for enough. The third method (parents paying out of current income or assets) works for some, but many parents will not know if their current income and/or assets will be sufficient until it is too late. In addition, this method is not as tax-efficient as some strategies used to accumulate separate education funds (the fourth method). However, these strategies are not without risks. Poor investment choices could prove costly. The fifth method (private loans) can result in a serious debt burden. Obviously, the sixth method is ideal, but it is not available to many.

How grandparents can help. . Grandparents, as well as other taxpayers, have a unique opportunity for gifting to Section 529 college savings plans by contributing up to $70,000 at one time, which currently represents five years of gifts at $14,000 per year. ($14,000 is the annual gift tax exclusion amount for 2015.) A married couple who elects gift-splitting can contribute up to double that amount ($140,000 in 2015) to a beneficiary’s 529 plan account(s) with no adverse federal gift tax consequences. As an added feature, money in a 529 plan owned by a grandparent is not assessed by the federal financial aid formula when qualifying for student aid.

Conclusion. The key to effective education planning is to start planning and saving early to create future options. In addition, the use of tax-sheltered investment and savings vehicles like a 529 plan can help ensure adequate funds are available when a child enters college.

Seniors Age 70 1/2 Take Your Required Retirement Distributions Before Year End 

The tax laws generally require individuals with retirement accounts to take annual withdrawals based on the size of their account and their age beginning with the year they reach age 70 1/2. Failure to take a required withdrawal can result in a penalty of 50% of the amount not withdrawn.

If you turned age 70 1/2 in 2015, you can delay your 2015 required distribution to 2016. Think twice before doing so, though, as this will result in two distributions in 2016 — the amount required for 2015 plus the amount required for 2016, which might throw you into a higher tax bracket or trigger the 3.8% net investment income tax. On the other hand, it could be beneficial to take both distributions in 2016 if you expect to be in a substantially lower bracket in 2016.

Earn 5% Or More On Liquid Assets

Yes, that is too good to be true, but we got your attention. As you are painfully aware, it is extremely difficult to earn much, if any, interest on savings, money market funds, or CDs these days. So, what are we to do? Well, one way to improve the earnings on those idle funds is to pay down debt. Paying off a home loan having an interest rate of 5% with your excess liquid assets is just like earning 5% on those funds. The same goes for car loans and other installment debt. But, the best return will more likely come from paying off credit card debt! We are not suggesting you reduce liquid assets to an unsafe level, but examine the possibility of paying off some of your present debt load with your liquid funds. Paying down $100,000 on a 5% home loan is like making more than $400 per month on those funds.

 

Important Information: The information contained in this newsletter was not intended or written to be used and cannot be used for the purpose of (1) avoiding tax—related penalties prescribed by the Internal Revenue Code or (2) promoting or marketing any tax—related matter addressed herein.

The Tax and Business Alert is designed to provide accurate information regarding the subject matter covered. However, before completing any significant transactions based on the information contained herein, please contact us for advice on how the information applies in your specific situation. Tax and Business Alert is a trademark used herein under license. © Copyright 2015.

6 Important Tax Changes for 2015

6 Important Tax Changes for 2015

With 2015 officially in motion, you may be in the mindset of preparing to file your 2014 taxes. However, you also need to consider the newest changes in the tax code for 2015 and starting planning now to avoid costly mistakes throughout the year. Planning ahead for tax changes and adjusting your budget accordingly can mean the difference between writing a large or small check to the IRS in 2016. To help you get started, here are a few of the big tax changes for 2015 and how they may affect you.

  1. 401(k) Limits: In 2014, the cap for employee contributions to 401(k) plans was set at $17,500. In 2015, that limit will increase to $18,000. What does this mean for you? If you do have a 401(k) plan through work, be sure to inform your payroll department to increase your contribution (beginning January 1st) to make sure you are saving the maximum allowable in 2015. The allowance for those 50 years old and older has also been increased from $5,500 to $6,000.
  2. Alternative Minimum Tax: The AMT is an income tax on corporations, estates, trusts, and individuals imposed by the government. Moving into 2015, the AMT exemption has been raised by 1.5% from 2014. The AMT exemption amount for FY 2015 is $53,600 for individuals and $83,400 for those filing jointly.
  3. Standard Deduction: In 2015, the standard deduction (the fixed amount that reduces one’s taxable income each year) will increase to $6,300 for single filers and $12,600 for those filing jointly. This important change is crucial to tax planning. If you are unable to itemize enough deductions to exceed your standard deduction, it may be the only tax break you receive from the government on your next year’s tax return.
  4. Affordable Care Act:
    • For Employers: The ObamaCare Employer Mandate was set to begin in 2014, but was delayed until 2015. The Employer Mandate states that businesses with 100 or more full-time equivalent employees (30 hours or more per week)  must provide health insurance to at least 70% for 2015 of their F/T employees and dependents (age 26 and under), or pay a fine. A way for businesses to circumvent any financial penalty involved making “employer healthcare arrangements” with their full-time staff members, which means the employer reimbursed employees for some or all of the premium expenses incurred for health insurance policies. However, under section 498D of the Internal Revenue Code, if these types of arrangements were done, the employer could be subject to a $100 excise tax per day per employee.
    • For Individuals: The Affordable Care Act has been top of mind to many since being enacted. Part of its regulations mandates that most Americans must have health insurance or they are subject to paying a tax penalty. In 2014, the penalties were 1% of your household income or $95 per person (whichever is greater). Most people may have thought that was steep. However, in 2015, the penalties have increased to 2% of total household income or $325 per person. Those fees can add up quickly for the lower and middle class tax brackets.
  1. Flexible Spending Account Limits: In 2014, the annual limit for employee contributions to flexible spending accounts was set at $2,500 for qualified healthcare expenses. Beginning January 1, 2015, that limit will be raised $50 (up to $2,550). Those enrolled in flexible spending accounts through their employer need to make sure they opt in for the new maximum to get full benefit from the program.
  2. Tax Brackets: Income tax figures will once again be raised for 2015 at about 1.6% from 2014.

Unsure how these changes may affect you? Click here to contact a Scheffel Boyle Representative today!

2015 Illinois Tax Rate Changes

2015 Illinois Tax Rate Changes

  • Illinois Personal Income Tax rate is increased from 3% to 5% between January 1, 2011 and December 31, 2014. The rate will revert to 3.75% (originally proposed at 4%) from January 1, 2015 to December 31, 2024.
  • Corporate Income Tax Rate is increased from the current 7.3% rate to 9.5% starting January 1, 2011 through December 31, 2014. It then drops to 7.75% between January 1, 2015 and December 31, 2024.

Unsure about how this might affect you? Click here to contact your Scheffel Boyle team today!

One Year Delay for Play or Pay Penalties

SUMMARY

In response to employers’ requests for more time to implement complex regulations regarding reporting requirements under the Affordable Care Act, the Obama Administration announced on Tuesday, July 2, 2013, a one-year delay in the effective date of a major component of the Act requiring employers with at least 50 workers to offer health coverage or be exposed to a penalty. The provision, commonly known as the “play or pay” penalty or employer mandate, will now become effective on January 1, 2015. Obviously, the delay removes the pressure to redesign plan coverage in the next few months to maximize the cost benefit of avoiding (or paying) the penalties. Employers now have an extra year to vet the pros and cons of their plan designs and to implement the Act’s requirements on coverage.

The Act’s other two major provisions, expanding Medicaid and requiring individuals to obtain coverage or pay a penalty, will still become effective on January 1, 2014.

BACKGROUND

The extended provision, commonly known as the “play or pay” penalty or employer mandate, requires businesses with 50 or more full-time or full-time-equivalent workers to provide insurance to full-time workers or risk a penalty of $3,000 for each full-time employee over 30. Even employers that offer health care benefits can be subject to a different penalty calculation if the offered coverage is not of the right quality or is not affordable. In this instance, a penalty of $3,000 will be assessed for each full-time employee who actually received a federal subsidy to purchase health coverage on an exchange.

For more information or to speak with one of the Scheffel & Company, PC experts, please contact us today.

This article originally appeared in BDO USA, LLP’s “BDO Knows Compensation & Benefits” (July 2013) Copyright @ 2013 BDO USA, LLP, All rights reserved. www.bdo.com

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