Category: Business Taxes

Earlier Date for Information Returns Brings IRS Penalty Risk

IRS Penalty RiskTime for Action: We are all now facing a new Jan. 31 deadline for filing Forms W-2 with the Social Security Administration and 1099-MISC (when reporting nonemployee compensation payments in box 7) with the IRS. The earlier deadline will allow faster matching of W-2 and 1099 information with tax returns, which helps combat identity and refund theft. Unfortunately, when something is done to combat identity theft, it sometimes means extra work and, with this new rule, increased risk of penalties for not timely filing.  As a result, you need to act quickly.

Filing and Reporting

The previous deadline of Feb. 28 for submitting Forms W-2 and 1099-MISC has been in the law for many years and would have been considered “written in stone” prior to this change.  We have all become accustomed to these deadlines. We will have a steep learning curve in orienting ourselves and staff to conform to this new deadline. (The deadlines for Forms 1120 and 1065 reverse this year as well.)  The assembly of the necessary data can be a significant task.  Assembling the required data will require an increased effort.

Bottom Line:  You need to shift into overdrive now!

Penalties

The new filing deadlines could put us at greater risk for penalties, particularly as the penalty regime has grown quite strict. Since 2009, information return penalties have increased.  The amount of the penalty depends on the date the information return is filed.  The longer it takes to file the return, the greater the penalty.  In addition, these penalties are indexed for inflation.

Everyone engaged in the process of preparing information returns should become familiar with Code sections 6721 and 6722 and the applicable regulations listing the returns covered and applicable penalties for not timely filing information returns. It appears the IRS covered all the information returns and there is no way to avoid the imposition of a penalty for filing an information return late.

Terms and code sections you need to become familiar with are:

  • Code section 6041(a) covering the rule for payments of $600 or more
  • Reduction when corrected in a specified period (Code section 6721(b))
  • Exceptions for de minimis failures (Code sections 6721(c) and 6722(c))
  • Safe harbors for de minimis errors (Code sections 6721(c)(3) and 6722(c)(3))
  • Lower limitations for persons with gross receipts of not more than $5,000,000 (Code sections 6721(d) and 6722(d))
  • A new term, “intentional disregard,” has been added, resulting in larger penalty amounts for failure to timely file the information return.

Practitioners from all areas of the country have indicated that the IRS is actively assessing these penalties, is not bashful about including the intentional disregard penalty and is hesitant in granting penalty abatement for either first-time violations or determining reasonable cause if these penalties are imposed. (

On the bright side, IRS has just issued Notice 2017-9 for the safe harbor, which means taxpayers do not have to correct an error on an information return or payee statement (or face a penalty) if the dollar amount reported differs from the correct amount by $100 or less ($25 for withholdings). The safe harbor and related penalty relief do not apply if the payee opts out and requests a corrected return.

Conclusion

The compliance tasks you are facing in preparing and filing these returns are greater because of the shorter time window, and the penalty exposure is more severe, so it cannot be stressed enough you’re your team needs to be educated quickly and warned of the consequences of delay.

As CPAs, we understand your frustrations in bearing the burden of anything requiring extra time because so many criminals are out there. But we have to believe the extra protection will be worth it in the end.

Identity Theft and the IRS

Identity Theft and the IRSThe most common ways that a taxpayer becomes aware that their tax account has been a victim of identity theft are:

1. The taxpayer attempts to file a return electronically but the IRS rejects the return indicating that someone else has filed a return using the same identification number of the filer or a dependent.
2. An IRS notice that indicates more than one return has been filed for a single account.
3. An IRS bill for additional tax, an unknown refund offset , or collection action.
4. The IRS asks for confirmation of information on a return that was not filed by the taxpayer.
5. A notice is received that reflects wages earned from an employer the taxpayer has never worked for.
6. Some kind of compliance action has been taken against the taxpayer for a period which the taxpayer never filed a return nor received a refund.

Businesses are not immune either to identity theft, look for unusual notices from the IRS or other state or local agencies concerning:

1. A closed business.
2. Individuals who were never employees.
3. Unexpected unpaid taxes.
4. Original returns accepted as an amended return.
5. A business that has been “administratively terminated” by the secretary of state for no activity or failure to pay registration fees suddenly comes back to life and notices are received from the SOS.

Things that a taxpayer can do if they are the victim of identity theft:

1. Submit Form 14039, Identity Theft Affidavit, to the IRS as quickly as possible.
2. Respond to any IRS notice or letter immediately.
3. Continue to file and pay taxes even if by paper.
4. Visit www.irs.gov/identitytheft to review all focused identity theft information the IRS provides.

The IRS actions will most likely be:

1. Confirm that the identity theft victim has filed Form 14039.
2. Do a coding of the taxpayer account file to indicate there has been a receipt of  identity theft documentation.
3. Reconcile the account to reflect any valid return information.
4. Place an identity theft indicator on the account, if the IRS deems that step to be necessary.
5. Place a hold on the account during the investigation. Information exchange is limited during this phase and the taxpayer will likely be frustrated with an inability to have a conversation with the IRS regarding their account. From the IRS’s perspective, while attempting to determine the real taxpayer, they will choose to err on the side of caution.
6. Taxpayer will be at the mercy of the IRS until they can satisfy themselves as to proper identity. The policy of the Identity Protection Specialized Unit is to stop the flow of information until all parties have been identified.

If a taxpayer suspects identity theft it may be best to contact their tax preparer, if they have one, to determine the best steps to take. It may be better to do some information gathering like getting a transcript of their account to identify if any discrepancies exist before submitting Form 14039.

REMEMBER the IRS does not call the taxpayer first! That is not how they operate. The first contact from the IRS is always a letter or notice. If you receive a call from someone out of the blue telling you they are the IRS it is bogus and a phishing call by someone trying to get your personal information.

New Qualified Improvement Property Classification

Property Taxes Salt Lake City UT

Property Taxes Salt Lake City UTOn Dec. 18, 2015, Congress passed a tax extenders package, the Protecting Americans from Tax Hikes (PATH) Act of 2015 and in that Act gave a new definition to non residential real property improvements falling in the category named Qualified Improvement Property. The definition of this property is as follows:

Qualified improvement property is any improvement to an interior portion of a building that is nonresidential real property if the improvement is placed in service after the date the building was first placed in service, excluding:

  1. ) enlargements;
  2. ) elevators/escalators; and
  3. ) internal structural framework. The improvements do not need to be made pursuant to a lease.

Qualified improvement property is depreciated over 39 years unless it also qualifies as qualified leasehold, restaurant or retail property. If falls into one of these classifications the improvements can be depreciated over 15 years. The real kicker in this is that all of these improvements are eligible for bonus depreciation.

Bonus depreciation for property placed in service thru December 31, 2017 is 50% of the cost.

In 2018 it is 40% and 2019 it is 30%. This is quite the expansion of the deduction for these types of costs and could provide significant tax savings in the year the improvements are completed. For a more in-depth explanation of qualified improvement property and a refresher on the definition of leasehold, restaurant or retail improvements, Give Us a Call and we would be happy to discuss it with you.

Areas of Service: Property Taxes Salt Lake City UT, Property Tax UT

Tax Strategies for Selling Business

Tax and Financial News

Tax Strategies For Selling Business Salt Lake City – A Family Affair?

Selling Business Salt Lake CityWhen it comes to selling your business Salt Lake City, finding an optimal tax strategy depends on the purchaser. Transferring a business inside a family requires very different tactics and treatment compared to a sale to an independent third party. There is no one-size-fits-all strategy; the best tax treatment is always determined by the unique circumstances of the situation Selling Business Salt Lake City.

The best tax strategy for an interfamily transfer largely depends on whether the owner has sufficient outside resources or if they are counting on the sale to fund their retirement or next venture.

In cases where the owner has sufficient resources, one option is to directly gift shares or interests in the business to family members. Gifting can trigger gift tax consequence but not income tax consequences, and the recipient assumes your cost basis in the transferred asset. Let’s look at a few scenarios to see how this could work out.

In the first example, assume that at the time of the owner’s retirement, the value of the company is $10 million. If you gift the company to family members at that time (assuming gift-splitting from a married couple), the $10 million value is assessed against your lifetime gift/estate tax unified credit), the current total unified credit in this situation is slightly less than $11 million. As a result, gifting in this scenario would not result in any tax owed and leave you with just under $1 million of unified credits to apply to other assets.

In a second scenario, assume the owner holds on to the company until death and then transfers it via their estate to family members. Also assume that the company has grown since it was worth $10 million and that at the owner’s death is now worth $40 million. In this scenario, there is now a substantial estate tax issue. So we can see that generally, if the value of a business is expected to increase substantially over time, it pays to transfer to subsequent generations sooner rather than later.

Next, let’s look at options under the opposite situation – where the owner needs to take out proceeds from the sale or transfer of the company to live on.

The first option here is that the owner could retain actual ownership and only transition management to the following generation. This allows the owner to keep an income stream from the business. The problem here is that eventually the family will end up in the same situation as discussed above, where waiting and passing the entity through the owner’s estate will result in substantial estate tax liabilities. So the question remains then, if the owner is dependent on the company for income, what can be done to avoid estate taxes upon transfer?

The second option is that the owner sells the company to the next generation. In this case assume the children do not have the cash to buy the business outright, so the owner issues a note to enable the purchase at the time that the business was worth $10 million. Here, issuing the promissory note would essentially freeze the transfer value at $10 million. The purchasing children would then pay deductible interest on the promissory note to the parents out of income from the acquired company. At the time of the issuer’s death, the children’s own promissory note would pass to back to themselves. The issue here is that upon the sale of the company, the parent would realize a capital gain and incur an income tax liability. Overall, it is likely (but not certain, dependent on the exact situation) that the capital gains tax on an early sale is likely to be far less than the estate tax incurred on a transfer at death after significant appreciation.

As you can see, there are many variables and options at play in transferring a company to the next generation, so it is best to plan ahead with the help of qualified professionals.

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Areas of Services: Selling Business Salt Lake City, Selling Your Business, CPA Firm Sandy UT, CPA Sandy UT, Accountant Sandy UT, Taxes Sandy UT

New Trade Pact Could Impact Your Business

Tax and Financial News

New Trade Pact Could Impact Your Business

CPA Whitecity UT

More than five years of contentious negotiations have come to an end, and the Trans-Pacific Partnership is now complete. The TPP is the largest trade deal in more than two decades. It joins 12 countries, including the United States, in easing tariffs, creating agreed-upon minimal standards for both worker and environmental protections, and establishing intellectual property protections. Proponents believe the agreement will help increase American-made exports, thereby growing the U.S. economy, providing well-paying jobs, and strengthening the middle class.

The TPP is no small development. It involves more than 40 percent of the world’s competing economies, making it a big deal for business owners of all sizes. The TPP is not law yet in the United States because it must still be approved by Congress. During the summer of 2015, Congress granted President Obama fast-track authority to negotiate the deal. This means the President and his administration were given complete authority to craft the agreement, which must be given a straight up or down vote by Congress without the possibility of amendments or filibusters. Many groups are opposed to the TPP, including an unlikely alliance of labor unions, certain Democratic factions and Tea Party Republicans.

U.S. businesses are likely to experience significant changes if the TPP passes Congress and becomes law. The TPP removes tariffs on thousands of different goods manufactured in the United States. As a result, manufacturers who export their products directly to TPP member countries should experience increased economic activity. The U.S. Chamber of Commerce expects the TPP to spur a $125 billion increase in U.S. exports over the next decade. On the other hand, the TPP applies both ways, so U.S. manufacturers can expect increased competition as well. Tariffs will fall on TPP member goods coming into the United States on everything from electronics to textiles. Tariffs in the following areas represent the most significant changes.

  • Manufactured products: Tariffs are eliminated on every manufactured product that the U.S. exports to TPP countries. For example, U.S. manufactured machinery currently has import taxes as high as 59 percent added to it by importing TPP countries.
  • Agriculture products: Import taxes on American agricultural products to TPP countries are reduced. Import taxes currently as high as 40 percent on poultry products, 35 percent on soybeans and 40 percent on fruit will be lowered.
  • Automotive products: Tariffs that are currently as high as 70 percent on U.S. automotive products are eliminated.
  • Information and communication technology: The TPP eliminates import taxes as high as 35 percent on American-made IT exports to TPP countries.

Further, the TPP gives greater authority among Pacific Rim Nations to the United States instead of granting that role to China. China however has its own trade agreement in the making, known as the Regional Comprehensive Economic Partnership. The TPP primarily favors the United States because China is widely perceived to have lower labor and environmental standards. The trade deal could also give the United States more leverage in negotiations regarding China’s currency manipulation. Currently, China enables the value of TPP partners’ currencies to remain artificially low, thereby making it more difficult for U.S. companies to sell their goods in the Asia-Pacific region.

There are many other specifics in the TPP that can affect businesses; however, just these few tariff-related items are significant in their own right. Keep an eye out in 2016 to see if the TPP becomes law and these changes actually become a reality.

Areas of Services: CPA Whitecity UT, Accountant Whitecity UT, Business Valuation Whitecity UT, Wealth Management Whitecity UT

Business Valuation Sandy UT

Business Valuation Sandy UT

Selling Your Business to Pay for Retirement

Business Valuation Sandy UTMany small business owners get so immersed in day-to-day operations that they don’t take the time to consider long-range plans, such as retirement. But even for those who are able to work a good, long time – avoiding the misfortunes of health issues, financial emergencies and business setbacks – retirement tends to sneak up on you. Business Valuation Sandy UT 

However, the day will come when you realize that you can’t work forever, and at some point the business you’ve labored to build will need to work for you. Don’t let that moment come so late that you haven’t prepared your enterprise to procure the highest price possible.

You might think you have retirement covered. Once you’re ready, you’ll just sell the business and retire on the proceeds. But that plan can have flaws. For example, what if when you want to retire, the economy is in a downturn and there are few prospective buyers?

What if you have to sell before you previously intended due to a health concern or family emergency? If we have learned anything during the past decade, it’s to plan for contingencies.

Do you have a plan to aggressively pay off your mortgage and other obligations so you can retire debt free? Do you have insurance to protect both your business and family should something happen to you? It’s important to start strategizing ahead of time so that, regardless of whether all goes to plan or not, you have options when the time comes to retire. A big part of this equation is to understand the value of your business as it relates to retirement planning.

Because a small business is often built on blood, sweat, experience and long hours, it can be difficult to step away and view it as an asset. To create a retirement plan, it’s important that you recognize this and consider how much that asset is worth. To get started, hire a third party appraiser or broker to value your business from an objective market perspective. Bear in mind that there are three methods typically used to assess the value of a business:

  1. Asset approach – Add up all of the assets and subtract their depreciation to determine value.
  2. Income approach – Calculate the net present value of the income generated by your business by discounting future cash flows and applying multipliers to EBIDA (Earnings Before Interest, Depreciation and Amortization).
  3. Market approach – Compare your business to others in your industry, paying careful attention to similar size and location, and factor in intangible variables such cash flow, market opportunity, economic conditions, customer loyalty, team experience, etc.

You might wish to value your business using all three approaches and then establish a price based on the one with the most favorable valuation. Recognize, too, that the value of a small business is frequently influenced by less tangible assets – such as the expertise of a key employee – so it’s not always effective to use a simple mathematic formula.

It’s also a good idea to plan two exit strategies. For example, Plan A might be to sell for a generous profit, while Plan B is to retain equity in the business but hand it over to someone else to run if you don’t get an offer for the price you want. Consider your future market and the ideal buyer, and manage your business so that it will be an attractive turnkey for that target when you’re ready to sell. Or, think about grooming a younger employee or one of your children to take over the business when you retire. Perhaps selling isn’t your best option – if you remain invested in the business it could generate passive income to supplement your nest egg.

There’s your business plan, and your retirement plan … now is the time to think about how to integrate the two.

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Areas of Service: Business Valuation Sandy UT,  Valuation Expert Sandy UT

CCH 2012 Tax Briefings – West Jordan UT Accountant Special Report

West Jordan UT Accountant

Special Report

Obama Wins Second Term; Agreement On Taxes/Spending Possible By Year-End
President Obama secured a second term in office November 6, 2012, in the end winning the Electoral College by a wide margin. The President’s re-election now sets in motion what will likely be difficult negotiations between Democrats and Republicans over the fate of the Bush-era tax cuts, nearly $100 billion in automatic spending cuts, and the more than 50 expiring tax extenders, which include the alternative minimum tax (AMT) patch for tens of millions of taxpayers. The President’s re-election has also significantly changed the dynamics for reaching an eventual agreement over long-term tax reform.

IMPACT.
Year-end tax strategies will demand more urgent attention from higher-income taxpayers as the result of President Obama’s re-election. The President has consistently called for higher tax rates on individuals with incomes above $200,000 and families with incomes above $250,000 and continuation of the current lower tax rates for others. He campaigned on reinstatement of the 36 percent and 39.6 percent income tax rates for higher-income individuals. The President also advocated a maximum capital gains rate increase from 15 percent to 20 percent and a dividend rate rise from 15 percent to 36 percent or 39.6 percent for higher-income taxpayers. His re-election also ensures that the 3.8 percent Medicare contribution surtax on net investment income will go into effect on January 1, 2013, and continue into the foreseeable future.
Before the election, President Obama had predicted Democrats and the GOP could reach a “grand bargain” that permanently resolves the fate of the Bush-era tax cuts, lowers the corporate tax rate and takes a serious step toward deficit reduction with revenue raisers within four to six months. In the interim, both sides may have to settle for a temporary extension of some of the expiring provisions, including some income tax rates, and leave the long-term fate of the Bush-era tax cuts and more to the 113th Congress, which will meet in January 2013.

Comment
Less than 24 hours after the results were in, House Speaker John Boehner, R-Ohio, said Democrats and Republicans should focus on “common ground” to address the so-called “fiscal cliff.” Lawmakers are due back in Washington on November 13. They will break for Thanksgiving later in November and will return in early December. Although the scheduled work period is short, there have been reports of lawmakers engaging in behind-the-scenes discussions about taxes and deficit reduction in the weeks before the election. These discussions could help kick-start serious negotiations between the White House and the GOP.

Comment
Whether any eventual compromise hammered out between Congress and the Obama Administration would extend lower income tax and capital gains/dividends rates for one more year, into 2013, or allow the higher top rates in 2013 to start at temporarily higher income levels than initially proposed, remains speculative. In the meantime, higher-income taxpayers must decide whether to wait-and-see … or secure the benefit of current rates now, through accelerating income, postponing deductions/credits, harvesting appreciation/capital gains, having closely-held corporations declare special dividends, closing business sales/acquisitions, and executing family gift-giving strategies—all before year end 2012. While it is not absolutely certain that tax rates will rise in 2013, it is more than certain that rates will never drop lower than they are now in 2012 for most higher-income taxpayers.

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Areas of Service: Salt Lake City Accountant Special Report, West Jordan UT Accountant

CCH 2012 Tax Briefings – LOOMING DEADLINES from Salt Lake City Accountant

Salt Lake City Accountant

LOOMING DEADLINES

Effective January 1, 2013:

• ▪ The Bush-era tax cuts, extended by the Tax Relief, Unemployment Insurance
Reauthorization and Job Creation Act of 2010, expire;

• ▪ Across-the-board spending cuts take effect under the Budget Control Act of
2011;

• ▪ The employee-side payroll tax holiday ends;

• ▪ More tax extenders expire, joining the ranks of extenders that expired
after 2011.

Unlike 2010, when the Bush-era tax rates were extended for two years, any
extension of the Bush-era tax rates will most likely be accompanied by deficit
reduction measures. The extent of those deficit reduction measures is unclear
at this time. Among the likely potential revenue raisers are increased taxes on
higher-income individuals, accomplished through higher marginal rates and the
elimination or curtailment of certain tax preferences. Tax preferences that
might be targeted for repeal would most likely include those impacting business
taxpayers, such as certain oil and gas tax breaks and the last-in-first out
(LIFO) method of accounting.

One scenario calls for Congress approving an AMT patch and other popular
expiring extenders in the lame-duck session. The IRS maintains that it cannot
wait much longer to issue 2012 tax year forms without delaying the start of the
2013 filing season. Meanwhile, if the law isn’t changed, the Congressional
Budget Office estimates that over 20 million additional middle-income taxpayers
will become subject to the AMT without the so-called “AMT patch” for
2012. With 2012-focused tax legislation, however, there is also speculation
that Congress may buy itself some time by enacting a three-month extension of
Bush-era tax cuts (to be pro-rated over 2013). An extension of some sort may be
necessary because without it, wage withholding at the higher tax rates would
become mandatory for all taxpayers at all income levels.

Payroll tax holiday. Take home pay will also be immediately reduced if Congress
does not extend the employee-side payroll tax holiday, or enact some
replacement for it. The employee-share of OASDI is scheduled to return to 6.2
percent instead of 4.2 percent (up to the 2013 Social Security wage base of
$113,700). Proponents of an extension maintain that the economy cannot take the
hit on consumer spending that would result from a sunset of the payroll tax
holiday; opponents argue that it is temporary tax relief that the nation can no
longer afford.

Salt Lake City CPA – Children Employed in Family Owned Business

Salt Lake City CPA – Children Employed in Family Owned Business

One great tax planning tool just got clarified in the last couple of days.  In final regulations issued by the Treasury Department on October 31, 2011 the exceptions from taxes under FICA and FUTA under sections 3121(b)(3) (concerning individuals who work for certain family members) and 3306(c)(5) (concerning persons employed by children and spouses and children under 21 employed by their parents) has again been extended to entities that are distregarded as separate from their owners for federal tax purposes.

Recent changes to Section 301.7701-2(c)(2)(iv) provide that, with respect to wages paid after December 31, 2008, a disregarded entity is treated as separate entity for purposes of employment taxes and is treated as a corporation for purposes of employment taxes and related reporting requirements.  Therefore, the entity, rather than the owner, is considered to be the employer of any individual performing services for the entity.

So in layman’s terms, the ability to take advantage of employing children under the age of 18 and not paying FICA or FUTA taxes if the parent owns a disregarded entity (single member LLC)  and pays the child through that entity  has been restored.  The same holds true for persons employed by children and spouses and children under 21 employed by their parents through a disregarded entity are not subject to FUTA taxes.   Prior to this regulation the recently passed law had made this impossible since an entity regarded as a corporation for payroll tax purposes could not take advantage or these exclusions.

This is a great way to save some significant tax dollars.  Please be aware that these exclusions are also available to partnerships owned exclusively by Mom and Dad. (Salt Lake City CPA – Children Employed in Family Owned Business)