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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

You’ve Been Provided with Free Identity Theft Protection. Is it Taxable?

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Identity theft occurs when a person wrongfully obtains and uses another person’s personal information (such as name, social security number, bank account information, etc.) in a way that involves fraud or deception, usually for economic gain.  It has become the number one consumer complaint to the Federal Trade Commission for 15 consecutive years.

Businesses, government agencies, and other organizations make significant efforts to secure the personal information of customers and employees.  Even though significant effort is put forth to combat identity theft, criminals are becoming increasingly sophisticated.  A data breach can expose personal information to criminals causing harm to their victims.  In response to such breaches, organizations often provide credit reporting and monitoring services, identity theft insurance policies, identity restoration services, or other similar services to customers and employees whose information may have been breached.

When Identity Theft Protection Services are Tax-Free

The IRS has received questions regarding the taxability of identity protection services provided at no cost to customers and employees whose personal information may have been compromised.   The IRS issued an announcement that it will NOT assert that an individual whose personal information may have been compromised in a data breach must pay tax on the value of the identity protection services provided by the organization that experienced the data breach.

Additionally, the IRS will not assert that an employer providing identity protection services to an employee whose personal information may have been breached must include the value of identity protection services in the employee’s taxable compensation.

When Identity Theft Protection Services are Taxable

The IRS also states that this tax-free provision does NOT apply to cash received in lieu of identity protection services, or to identity protection services received for reasons other than as a result of a data breach, such as identity protection services received in connection with an employee’s compensation benefit package.  This announcement also does not apply to proceeds received under an identity theft insurance policy.

What if Identity Theft Protection Services are Provided before a Breach Occurs?

The IRS received comments stating that an increasing number of businesses are combating data breaches by providing identity theft protection services to employees and other individuals before a data breach occurs in order to help detect any occurrence of a breach in their information systems, and to minimize the impact of their operations.

Accordingly, the IRS will NOT assert that an individual must pay tax on the value of identity protection services provided by the individual’s employer or by another organization to which the individual provided personal information.  Similarly, employees will not have to include in taxable income the value of such services provided by their employers.

Again, this announcement does not apply cash received in lieu of identity protection services or proceeds received under an identity theft insurance policy.

Comments or questions about this post?  Please let us know through the comment area below!

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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.

The myRA? It’s Just Been Revoked.

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A myRA is a government-administered Roth IRA authorized to hold only one type of investment, a US Treasury security which earns interest at the same variable rate as investments in the government securities fund for federal employees.  MyRAs became available in 2014 and were described as being safe, simple, and affordable savings accounts to help low- and moderate-income taxpayers save for retirement.

Why the MyRA Program Failed

Unfortunately for the myRA program, there are a multitude of private sector investment alternatives.  Taxpayers have many options in the private market to offer no account maintenance fees, no minimum balance, and safe investment opportunities.  Demand for myRA accounts has been extremely low, and the Treasury Department announced that it will be phasing out the myRA program over the next few months.  Taxpayers have paid nearly $70 million to administer this program since 2014 and the cost to taxpayers is not justified.

MyRAs are Roth IRAs that Can Only Invest in One Security.  When the MyRA Account Becomes Too Big, it Must be Converted to a Roth IRA…Huh?

MyRAs are subject to the same rules that apply to Roth IRAs, including the income-based eligibility for contributions, maximum annual contributions, and tax treatment of distributions.  Participants can save up to $15,000 in a myRA account and can hold funds in myRAs for up to 30 years.  Once either of these limits is reached, the myRA will have to be rolled into a Roth IRA.  So why not just invest in a Roth IRA?  Exactly, that is why the myRA is being discontinued.  Too bad $70 million taxpayer dollars had to be wasted.

The myRA program is no longer accepting new enrollments.  However, existing accounts remain open and accessible, and until further notice, participants can make deposits and their accounts will earn interest.  Participants are being notified of upcoming changes, including information on how to roll over their myRAs into Roth IRAs.

Comments or questions about this post?  Please let us know through the comment area below!

If you found this article informative, subscribe to our Tax Newsletter.

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.

Deducting Travel Expenses for Charity

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People who travel to, or on behalf of, a charitable organization as a volunteer may be able to deduct the travel expenses as charitable contributions.  Unreimbursed travel expenses are deductible only if there is no significant element of personal pleasure, recreation, or vacation in the travel.  In determining whether there is a significant element of personal pleasure, the relevant question is how much time the taxpayer spends in service to the organization and how much time the taxpayer spends in recreation or in free time.

What Travel Expenses are Deductible?

Deductible travel expenses include:

  • Air, rail, and bus transportation
  • Auto expenses.  The use of an automobile for charitable purposes is deductible at the standard mileage rate of 14 cents per mile.  Alternatively, taxpayers may deduct the cost of gas and oil directly related to the use of the auto in providing services to a charitable organization
  • Reasonable food (subject to the 50% meal limitation) and lodging costs necessarily incurred while away from home
  • Transportation costs between the airport or station and the hotel (or place where the taxpayer is staying)

There is no deduction for the value of the volunteer’s time or services.

Example:  Tim is on the board of directors of a charity.  There is a seminar in Florida on fundraising.  Tim is sent by the charity to attend the seminar.  He is covering the travel, lodging, and meal costs.  If the seminar lasts a couple hours a day for three days, and Tim spends most of the day hanging out at Disney World, it is highly likely that the travel contains a significant element of personal pleasure and the travel, lodging, and meal expenses are not deductible.

Example 2:  Same as above except that the seminar is 8 hours a day for three days.  Tim goes out for dinner and entertainment each night.  In this example, most of the day is spent at the seminar and even though Tim enjoys some recreation at night, it is unlikely that this amount of recreation would constitute a significant element of personal pleasure.  Tim would be able to deduct the expenses.

Keeping Records

Unreimbursed volunteer expenses have the same substantiation requirements that apply to cash contributions.  To prove a gift was made, a donor must produce one of the following:

  • A cancelled check
  • A receipt showing the name of the charity, the contribution date, and the contribution amount

A contribution of $250 or more must, in addition to meeting one of the two above requirements, be supported by a contemporaneous written acknowledgement by the charity.  It is critical for clients to have all required receipts before filing their return, even if this means extending the return.  Since the charity is not directly receiving funds it may be unaware that the volunteer incurred the expenses, volunteers have to be proactive in requesting an acknowledgement that they incurred unreimbursed expenses while volunteering.

 

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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.

What You Need to Know about the Alternative Minimum Tax

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The alternative minimum tax (AMT) can increase the complexity of your tax planning. Knowing the basic rules can help you better plan for its potential impact.

How It Works

Originally introduced in the 1960s, the AMT system was designed to prevent higher income taxpayers from avoiding federal income taxes through the use of various exclusions, deductions, and credits. To achieve this goal, the AMT system treats certain items — referred to as “preferences” and “adjustments” — less favorably than they are treated for regular income-tax purposes.

Affected items include interest on certain tax-exempt bonds; itemized deductions for home equity loan interest, state and local income taxes, and medical expenses; personal and dependency exemptions; incentive stock options; and depreciation.

Generally, the AMT calculation starts with your regular taxable income and requires you to make the required revisions for adjustments and preferences until you arrive at alternative minimum taxable income (AMTI). Then, after an exemption amount is subtracted, a 26% tax rate is applied to the first $187,800 (in 2017) of the resulting income, and a 28% tax rate is applied to any amounts above $187,800.

The 2017 exemption amounts are $84,500 (married filing jointly), $53,900 (single and head of household) and $42,250 (married filing separately). These exemptions phase out at higher income levels.

Planning

If you believe you may have a potential AMT problem — either this year or in 2016 — you may be able to use certain strategies to reduce your tax. For example, if a tax projection indicates that you will be subject to AMT this year but not next year, you may want to delay prepaying certain expenses, such as state and local income taxes, for which you would not receive a tax benefit this year.

Connect with our team today for all the latest and most current tax rules and regulations.

Comments or questions about this post?  Please let us know through the comment area below!

If you found this article informative, subscribe to our Tax Newsletter.

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.

The Tax Implications of a Company Car

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When an employer provides a company vehicle to an employee, the employee must generally include the market value of her personal use of the vehicle in her income.  The employer can generally take a payroll deduction for the actual costs, including depreciation, of providing the vehicle to the employee.

If the personal use of the vehicle is de minimis (of such small value that accounting for it would be impractical), the employee will not have to include the value of her personal use in income.  However, personal use of more than one day per month is not considered de minimis, so this exception is of little value.

Determining How Much to Include in the Employee’s Income

Under the general valuation rule, the value of the company vehicle that is included in the employee’s income is what it would cost the employee to lease a comparable vehicle for the same period the vehicle is available to her.  Generally, a cents-per-mile value cannot be used unless a comparable vehicle is available for lease to the employee on a cents-per-mile basis.

There are also three special valuation rules (each having different requirements).

  • The Annual Lease Value Method
  • The Commuting Value Method
  • The Cents-per-Mile Method

The Annual Lease Value Method (ALV)

The ALV is based on IRS tables and is based on the market value of the vehicle on the first date it is available to the employee.  The vehicle’s purchase price can be used as the market value if the vehicle was purchased in an arm’s length transaction.  If the employer leases the vehicle, the employer can use the MSRP plus sales tax less 8% of this sum as the market value.

Example: ABC Corp leases a Ford Focus.  The MSRP for the car is $23,000.  After sales tax, the cost is $24,380.  ABC Corp can reduce this sum by 8% to determine a market value of $22,429 to look up in the ALV tables.  Based on the ALV tables, the employee will have to include $6,100 as income for her personal use of the car with a market value of $22,429.

The ALV includes maintenance and insurance, but does not include gas.  If the employer pays for gas, the value of the gas will have to be included in income in addition to the ALV amount.

The Commuting Value Method

This method may be used if four requirements are met:

  • The auto must be owned or leased by the employer and provided to the employee to use in the employer’s business
  • The employer requires, because of business reasons, the employee to commute in the vehicle (e.g., the employee is on 24 hour call)
  • The employer must have a written policy that forbids the employee (or certain family members) from using the vehicle for personal reasons other than commuting or de minimis personal use
  • The employee required to use the vehicle must not be a controlling owner of the employer

If these requirements are met, the personal use value of the company car will be $3 per round trip ($1.50 per one way commute).

The Cents-Per-Mile Method

This method may be limited because it cannot be used when the value of the vehicle when it first becomes available to the employee exceeds $15,900 for a passenger vehicle and $17,800 for a truck or van.  In addition, this rule may be used only for vehicles that are expected to be used in the employer’s business throughout the year, or for vehicles that are actually driven at least 10,000 miles in that year and used primarily for business by employees.  If the vehicle qualifies under this method, the standard mileage rate (53.5 cents in 2017) may be used to determine the personal use value of the vehicle.

Requirements of All Special Use Valuation Methods

To use any of the three special valuation rules, one of the following conditions must exist:

  • The employer treats the value of the vehicle as wages for reporting purposes before the extended due date of its tax return for the year the benefit is provided
  • The employee includes the value of the benefit in income before the extended due date of her tax return for the year the benefit is provided
  • The employee is not in control of the employer
  • The employer demonstrates a good faith effort to treat the benefit correctly

Payroll Tax Implications

The employer must report and withhold income and employment taxes on the value of personal use of a company car.  However, there are two elections available to the employer:

  • The employer can elect to treat the personal use value as paid at any time during the year.  Thus, the employer can treat the entire personal use value as being provided on December 31 of each year to delay the due dates of the income withholding and payroll taxes
  • An employer can elect not to withholding income taxes (the employee will have to pay income tax estimates on her own).  However, the employer is still responsible for employment taxes.

 

Comments or questions about this post?  Please let us know through the comment area below!

If you found this article informative, subscribe to our Tax Newsletter.

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.

 

 

Taxes and Your Social Security

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social security income tax

If you thought Uncle Sam would forget about taxes on your Social Security retirement benefits, think again. When you have other income, up to 85% of your benefit could be taxable. Your “combined income” determines whether — and how much of — your benefits will be subject to federal income tax.

What’s Combined Income?

Your combined income comprises all the income you receive from any source, with only a few exceptions. Combined income includes wages and self-employment income; rental income; investment income, such as interest, dividends, and capital gains; income from pensions and retirement accounts (but not tax-free Roth distributions); and — here’s the kicker — even tax-exempt interest from municipal bonds. In addition, you have to add in half your Social Security benefits when you are figuring your combined income.*

The Thresholds

You won’t pay taxes on your Social Security if:

  • Your combined income is not more than $25,000 and your filing status is single or head of household
  • Your and your spouse’s combined income is not more than $32,000 and you file a joint return

Up to 50% of benefits are taxable if you have combined income between:

  • $25,000 and $34,000 (single/head of household)
  • $32,000 and $44,000 (married joint)

Up to 85% of benefits are taxable if you have combined income of more than:

  • $34,000 (single/head of household)
  • $44,000 (married joint)

And if you’re a married taxpayer filing a separate return, you’ll probably have to pay taxes on your benefits. Connect with us today for all the latest and most current tax rules and regulations.

* You have to take certain adjustments into account in the combined income calculation.

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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.

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