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Know the Tax Regulations for Reimbursing Employee Business Expenses

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Any employer reimbursing its employees for business-related expenses should consider whether the reimbursement arrangement meets the IRS’s requirements for an accountable plan. Having an accountable plan that meets tax law requirements can provide tax advantages.

Business Connection

Each expense reimbursed under an accountable plan must have a business connection. This means that the expense must be allowable as a deduction and paid or incurred by the employee while performing services as an employee.

Other Requirements

Employees must adequately account for their expenses and return any excess reimbursements or allowances within a reasonable period of time. The meaning of reasonable period of time depends on the facts and circumstances, but the IRS has provided several safe harbors.

Substantiation of an expense within 60 days after it is paid or incurred will be deemed reasonable, as will the return of an advance within 120 days. Alternatively, an employer may provide its employees with periodic statements (at least quarterly) that require them to either account for or return any advances within 120 days of the statement.

Tax Effects

Expense reimbursements made under an accountable plan that meets the requirements are not included in an employee’s wages and are not subject to federal income or employment taxes. This can be a tax saver for both the employer and the employee.

If no accountable plan is in place, amounts paid to the employee count as taxable wages. In the past, the employee could potentially deduct the expenses, but only if the employee itemizes deductions rather than claims the standard deduction. Under the new tax law, this deduction is no longer available–so the employee will include the reimbursement in income, but would not be entitled to a deduction.

Funding the Future with Your Business

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Your small business does many things. It supports the community by providing goods and services. It supports the local government by paying taxes and fees. And it supports your employees by providing their livelihoods.

Your business provides for you, too. But don’t count on this to continue. You need a plan for using your business to create personal wealth.

Fund a Retirement Plan

Contributing to a retirement plan is generally a great way to convert money from your business into a personal benefit. Over time, you may be able to accumulate a substantial amount, especially if you contribute the maximum amount. If you don’t have a retirement plan, your financial professional can give you information about the options best suited for small businesses.

Fund Your Exit Strategy

A potentially more lucrative way to convert business wealth into personal wealth is to sell your company. This is a big step and it could take longer than you think, so allow plenty of time. Make sure you have a business valuation done early in the process. That way, if the value isn’t as high as you want (need) it to be, you have time to make necessary changes.

If you don’t have a formal succession plan, create one. If you do have one, make sure it’s kept up to date. A succession plan shows potential buyers that you are committed to having the business survive without you. A buy-sell agreement is a popular way to provide for the transfer of a business. Such agreements are legal contracts that establish who can buy an interest in a company and under what conditions they may do so.

Fund Your Buy-Sell Agreement

Life insurance is a popular way to fund buy-sell agreements. If you’d like to learn more about the role insurance can play in your — and your company’s — future, call your financial professional.  Don’t have one?  We have recommendations.

Alimony Deduction Coming to an End

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The Tax Cuts and Jobs Act (TCJA) has made changes to the tax treatment of alimony that you will be interested in. These changes take effect for divorces and legal separations after 2018.

Current rules. Under the current rules, an individual who pays alimony may deduct an amount equal to the alimony or separate maintenance payments paid during the year as an “above-the-line” deduction. (An “above-the-line” deduction, i.e., a deduction that a taxpayer need not itemize deductions to claim, is more valuable for the taxpayer than an itemized deduction.)

And, under current rules, alimony and separate maintenance payments are taxable to the recipient spouse (includible in that spouse’s gross income).

Please note that the tax rules for child support—i.e., that payers of child support don’t get a deduction, and recipients of child support don’t have to pay tax on those amounts—is unchanged.

TCJA rules. Under the TCJA rules, there is no deduction for alimony for the payer. Furthermore, alimony is not gross income to the recipient. So for divorces and legal separations that are executed (i.e., that come into legal existence due to a court order) after 2018, the alimony-paying spouse won’t be able to deduct the payments, and the alimony-receiving spouse doesn’t include them in gross income or pay federal income tax on them.

TCJA rules don’t apply to existing divorces and separations. It’s important to emphasize that the current rules continue to apply to already-existing divorces and separations, as well as divorces and separations that are executed before 2019.

Some taxpayers may want the TCJA rules to apply to their existing divorce or separation. Under a special rule, if taxpayers have an existing (pre-2019) divorce or separation decree, and they have that agreement legally modified, then the new rules don’t apply to that modified decree, unless the modification expressly provides that the TCJA rules are to apply. There may be situations where applying the TCJA rules voluntarily is beneficial for the taxpayers, such as a change in the income levels of the alimony payer or the alimony recipient.

If you wish to discuss the impact of these rules on your particular situation, please give me a call.

New Tax Rules on Mortgages and Home Equity Loans

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I am writing to let you know about changes that the Tax Cuts and Jobs Act (TCJA) made in the rules for deducting home mortgage interest.

Deductibility of interest on “acquisition debt.” Taxpayers may deduct interest on mortgage debt that is “acquisition debt.” Acquisition debt means debt that is: (1) secured by the taxpayer’s principal home and/or a second home, and (2) incurred in acquiring, constructing, or substantially improving the home. This rule isn’t changed by the TCJA.

Pre-TCJA maximum for acquisition debt. Under the pre-TCJA rules, the maximum amount that was treated as acquisition debt for the purpose of deducting interest was $1 million ($500,000 for marrieds filing separately). This meant that a taxpayer could deduct interest on no more than $1 million of acquisition debt.

Pre-TCJA deduction for “home equity” debt; maximum. Under pre-TCJA rules, taxpayers could also deduct interest on “home equity debt.” “Home equity debt,” as specially defined for purposes of the mortgage interest deduction, meant debt that: (1) was secured by the taxpayer’s home, and (2) wasn’t “acquisition indebtedness” (that is, wasn’t incurred to acquire, construct, or substantially improve the home). Thus, the rule allowing deduction of interest on home equity debt enabled taxpayers to deduct interest on debt that was not incurred to acquire, construct, or substantially improve a home—on debt that could be used for any purpose. As with acquisition debt, pre-TCJA rules limited the maximum amount of “home equity debt” on which interest could be deducted to the lesser of $100,000 ($50,000 for a married taxpayer filing separately), or the taxpayer’s equity in the home.

TCJA decreases maximum acquisition debt. Under the TCJA, starting in 2018, the limit on acquisition debt is reduced to $750,000 ($375,000 for a married taxpayer filing separately). The $1 million, pre-TCJA limit applies to acquisition debt incurred before Dec. 15, 2017, and to debt arising from refinancing pre-Dec. 15, 2017 acquisition debt, to the extent the debt resulting from the refinancing does not exceed the original debt amount. Thus, taxpayers can refinance up to $1 million of pre-Dec. 15, 2017 acquisition debt, and that refinanced debt amount won’t be subject to the reduced limitation.

TCJA eliminates deduction for “home equity” debt. Also, starting in 2018, there is no longer a deduction for interest on “home equity debt.” The elimination of the deduction for interest on home equity debt applies regardless of when the home equity debt was incurred.

Taking the TCJA changes into account. Taxpayers considering taking out a home equity loan—i.e., a loan that’s not incurred to acquire, construct, or substantially improve the home—should take into consideration the fact that interest on the loan won’t be deductible. Further, taxpayers with outstanding home equity debt—again, meaning debt that’s not incurred to acquire, construct, or substantially improve the home—will lose the prior-law interest deduction for interest on that debt, starting in 2018. (Interest on home equity debt is deductible for the 2017 tax year, the return for which is filed in early 2018.)

TCJA changes will last through 2025. Finally, it’s important to note that both of these changes—the lowered maximum for acquisition debt, and the elimination of the deduction for home equity debt—last for eight years, through 2025. In the absence of intervening legislation, the pre-TCJA rules will come back into effect in 2026. So beginning in 2026, interest on “home equity” loans will be deductible again, and the limit on qualifying acquisition debt will be raised back to $1 million ($500,000 for married separate filers).

If you would like to discuss how these changes affect your particular situation, and any planning moves you should consider in light of them, please give me a call.

Know Your Tax Requirements for Your Rental Properties

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For years, owners of rental properties that show a tax loss have had to contend with the tax law’s “passive loss” limitations. With limited exceptions, real estate rental losses may be used only to reduce passive income — the rental losses are not currently deductible against nonpassive income, such as salary.

Now, owners of real estate rental properties that show a profit also face a potential tax headache. In addition to regular taxes, their profits could be subject to the 3.8% surtax on net investment income first introduced in 2013.

A Break for Real Estate Professionals

Taxpayers who can demonstrate that they “materially participate” in their real estate rental activities as “real estate professionals” may be able to avoid both the passive loss limitations and the 3.8% surtax on rental income. However, the requirements are stringent.

Very generally, a real estate professional spends more hours working on real-estate- related trade or business activities during the year than working in non-real-estate trades or businesses. Additionally, the time spent on the real estate activities must total more than 750 hours during the year.

Material participation means regular, continuous, and substantial participation. IRS regulations contain seven tests for establishing material participation. Each rental property is separately evaluated for material participation unless the taxpayer makes an election to treat all rental real estate activities as one activity.

To avoid the 3.8% surtax, a real estate professional must also establish that his or her rental income was derived in the ordinary course of a trade or business. The IRS will presume this was the case if the taxpayer devotes more than 500 hours per year — or in five of the last ten years — to each real estate rental activity or to all real estate rental activities viewed as a group.

Give us a call today, so we can help you determine the right course of action for you.

Getting a Handle on Payment Issues

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Most small business owners love what they do. But that’s not to say things can’t get a little difficult, especially when customers don’t pay their bills on time. Even one or two slow-pay or no-pay customers can be enough to throw your company’s finances off.

Understanding what might be going on with your customers and being proactive can help you keep your accounts receivable on steady ground.

Purchase Order Predicaments

Not all customers use purchase orders, but those that do rely on them to coordinate ordering and accounts payable functions. If there’s a mix-up involving a purchase order and your invoice doesn’t match up with the customer’s purchase order, your invoice could end up on the “problem” pile instead of the “pay” pile. Be proactive by verifying that the purchase order numbers on your invoices are correct before they are sent.

Strapped for Cash

Lack of money is a common excuse for not paying. One reason your customer may not be able to pay you is because your customer’s customers haven’t paid their bills. Regardless of the reason, be the squeaky wheel and keep communicating with your past due customers.

You can help reduce your exposure to customer cash shortfalls by tightening your credit requirements.

Disputes, Dilemmas, and Other Disappointments

Misships, damaged goods, late deliveries. Plenty of things can go wrong during the fulfillment process. Rather than make a phone call, customers may just “file” your invoice at the bottom of the pile.

Follow-up e-mails or phone calls to find out if your customers are satisfied will help smooth any ruffled feathers and could improve how quickly you get paid.

Vanishing Invoices

“We never received your invoice” is a weak excuse, but you still have to find a way around it. Once again, early follow-up is key. Paperless billing and the potential to monitor whether e-mailed invoices have been opened can also help eradicate this excuse.

Don’t get left behind. Contact us today to discover how we can help you keep your business on the right track. Don’t wait, give us a call today.

Have an S Corporation? Be sure to Give Yourself a Paycheck

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If your company is organized as an S corporation, you may wonder whether it is better to take income from the company as salary or as cash distributions. Of the two options, distributions carry the least tax cost because they are not subject to employment taxes. But that doesn’t mean you shouldn’t take a paycheck from your firm.

IRS Warning

Over the years, the IRS has made a point of warning S corporations not to attempt to avoid federal employment taxes by having corporate officer/shareholders treat their compensation as cash distributions, payments of personal expenses, or loans instead of as wages. According to the IRS, distributions must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.

What Is a “Reasonable” Salary?

To avoid problems with the IRS, you should be sure to take a reasonable amount of salary if you receive any direct or indirect payments from your company. However, the tax law has no hard-and-fast guidelines regarding what is considered “reasonable.” When the issue has come up in court, the determination has been based on the facts and circumstances of the particular case. Various factors have come into play, including:

  • Duties and responsibilities
  • Time and effort devoted to the business
  • Training and experience
  • What comparable businesses pay for similar services
  • Timing and manner of paying bonuses to key people
  • Payments to employees who are not shareholders
  • The corporation’s dividend-paying history
  • Compensation agreements
  • The use of a formula to determine compensation

An Exception

What about an S corporation officer who doesn’t perform any services for the corporation — or whose services are very minor? In this relatively unusual situation, assuming the officer receives no direct or indirect pay, he or she would not be considered an employee.

For more help with individual or business taxes, connect with us today. Our team can help you with all your tax issues, large and small.

Michigan’s New Minimum Wage

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minimum-wageA few years ago, Governor Snyder signed a law that annually increased the minimum wage.  Under this law, the minimum wage effective January 1, 2018 is $9.25 per hour.  Beginning in January 2019, the minimum wage will be indexed for inflation.  The minimum wage increase for each year will not take effect if the unemployment rate in Michigan is 8.5% or more in the year prior to the year of the minimum wage increase.

Training Wage is Still Available

As existed under prior law, an employer may pay a new employee who is under age 20 an hourly training wage of $4.25 for the first 90 days of that employee’s employment.  After 90 days has passed, the employee must be paid at least minimum wage.

 Minor Minimum Wage is Still Available

The minimum wage for an employee who is less than 18 years of age is 85% of the general minimum wage listed above.  The training wage for 2018 is $7.86 (85% of $9.25).  This is not a new rule.

 Minimum Wage for Tipped Employees

The current minimum wage for tipped employees is $3.38 per hour.  It will increase to $3.52 per hour in 2018.  To qualify for this lower rate, the following must occur:

  • the employee receives gratuities in the course of employment
  • the tipped minimum wage plus the gratuities received must be at least equal to the general minimum wage (i.e., in 2018 the tips received per hour plus the tipped minimum wage of $3.52 must be at least equal to the general minimum wage of $9.25).  If there is a shortfall, the employer must pay the shortfall to the employee.

 Overview of Minimum Wage Rates

 The schedule of minimum wage increases under the law:

Minimum Wage

Minimum Wage for Tipped Employees Minimum Wage

for Minors

Training Wage (first 90 days only)

Prior to September 1, 2014

$7.40

$2.65 $6.29 $4.25
September 1, 2014

$8.15

$3.10

$6.93

$4.25

January 1, 2016

$8.50

$3.23

$7.23

$4.25

January 1, 2017

$8.90 $3.38 $7.57

$4.25

January 1, 2018

$9.25

$3.52

$7.86

$4.25

 

If you have any questions on how this applies to you, please feel free to give us a call.

 

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Buzzkill Disclaimer:  This post contains general tax information that may or may not apply in your specific tax situation. Please consult a tax professional before relying on any information contained in this post.

How to Determine the Value of Your Property Before You Donate

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The tax deduction available for making a charitable donation of property may be no more than the fair market value of the property on the date of the gift. Fair market value is the price that a willing buyer and seller would agree to when neither is required to act and both have reasonable knowledge of the relevant facts.

The IRS lists several factors that may be considered in determining fair market value.*

Cost or selling price can be an accurate measure of fair market value when the transaction and the donation dates are close and there has been no change that would affect the item’s value.

Sales of comparable properties may be useful for determining value where the properties sold and the property donated are similar and the sales occurred reasonably close in time to the date of the donation.

Replacement cost may be a good indicator of value in some situations, provided that depreciation is subtracted from the cost to reflect the property’s physical condition and obsolescence.

Expert opinion is relevant to the extent the expert has the appropriate education and experience and has thoroughly analyzed the transaction.

* IRS Publication 561, Determining the Value of Donated Property

Who Qualifies as an Appraiser?

Generally, where a charitable deduction of more than $5,000 is claimed for donated property, the IRS requires a qualified appraisal by a qualified appraiser. A qualified appraiser is someone who:

  • Has earned an appraisal designation from a recognized professional organization or has met certain education and experience requirements
  • Regularly prepares appraisals for a fee
  • Is not an “excluded individual,” such as the donor, the donee, or a party to the transaction in which the donor acquired the property being appraised (Other exclusions apply.)

The qualified appraisal must be signed and dated and can be made no earlier than 60 days before the valued property is donated.

To learn more about tax rules and regulations for donations, give us a call today. Our knowledgeable and trained staff is here to help.

Do You Have a Business Continuity Plan? You Should

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What if disaster strikes your business? An estimated 25% of businesses don’t reopen after a major disaster strikes.* Having a business continuity plan can help improve your odds of recovering.

The basic plan

The strategy behind a business continuity (or disaster recovery) plan is straightforward: Identify the various risks that could disrupt your business, look at how each operation could be affected and identify appropriate recovery actions.

Make sure you have a list of employees ready with phone numbers, e-mail addresses and emergency family contacts for communication purposes. If any of your employees can work from home, include that information in your personnel list. You’ll need a similar list of customers, suppliers and other vendors. Social networking tools may be especially helpful for keeping in touch during and after a disaster.

Risk protection

Having the proper insurance is key to protecting your business — at all times. In addition to property and casualty insurance, most small businesses carry disability, key-person life insurance and business interruption insurance. And make sure your buy-sell agreement is up to date, including the life insurance policies that fund it. Meet with your financial professional for a complete review.

Maintaining operations

If your building has to be evacuated, you’ll need an alternative site. Talk with other business owners in your vicinity about locating and equipping a facility that can be shared in case of an emergency. You may be able to limit physical damage by taking some preemptive steps (e.g., having a generator and a pump on hand).

Protecting data

A disaster could damage or destroy your computer equipment and wipe out your data, so take precautions. Invest in surge protectors and arrange for secure storage by transmitting data to a remote server or backing up daily to storage media that can be kept off site.

Protecting your business

If you think your business is too small to need a plan or that it will take too long to create one, just think about how much you stand to lose by not having one. Meet with your financial professional for a full review.

For more tips on how to keep business best practices front and center for your company, give us a call today. We can’t wait to hear from you.

* www.sba.gov/content/disaster-planning

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