If your company faces the need to “remediate” or clean up environmental contamination, the money you spend can be deductible on your tax return as ordinary and necessary business expenses. Of course, you want to claim the maximum immediate income tax benefits possible for the expenses you incur.
These expenses may include the actual cleanup costs, as well as expenses for environmental studies, surveys and investigations, fees for consulting and environmental engineering, legal and professional fees, environmental “audit” and monitoring costs, and other expenses.
Current deductions vs. capitalized costs
Unfortunately, every type of environmental cleanup expense cannot be currently deducted. Some cleanup costs must be capitalized. But, generally, cleanup costs are currently deductible to the extent they cover:
“Incidental repairs” (for example, encapsulating exposed asbestos insulation); or
Cleaning up contamination that your business caused on your own property (for example, removing soil contaminated by dumping wastes from your own manufacturing processes, and replacing it with clean soil) — if you acquired that property in an uncontaminated state.
On the other hand, remediation costs generally have to be capitalized if the remediation:
Adds significantly to the value of the cleaned-up property,
Prolongs the useful life of the property,
Adapts the property to a new or different use,
Makes up for depreciation, amortization or depletion that’s been claimed for tax purposes, or
Creates a separate capital asset that’s useful beyond the current tax year.
However, parts of these types of remediation costs may qualify for a current deduction. It depends on the facts and circumstances of your situation. For example, in one case, the IRS required a taxpayer to capitalize the costs of surveying for contamination various sites that proved to be contaminated, but allowed a current deduction for the costs of surveying the sites that proved to be uncontaminated.
Maximize the tax breaks
In addition to federal tax deductions, there may be state or local tax incentives involved in cleaning up contaminated property. The tax treatment for the expenses can be complex. If you have environmental cleanup expenses, we can help plan your efforts to maximize the deductions available.
If your company faces the need to “remediate” or clean up environmental contamination, the money you spend can be deductible on your tax return as ordinary and necessary business expenses. Of course, you want to claim the maximum immediate income tax benefits possible for the expenses you incur.
If you’re adopting a child, or you adopted one this year, there may be significant tax benefits available to offset the expenses. For 2019, adoptive parents may be able to claim a nonrefundable credit against their federal tax for up to $14,080 of “qualified adoption expenses” for each adopted child. (This amount is increasing to $14,300 for 2020.) That’s a dollar-for-dollar reduction of tax — the equivalent, for someone in the 24% marginal tax bracket, of a deduction of over $50,000.
Adoptive parents may also be able to exclude from their gross income up to $14,080 for 2019 ($14,300 for 2020) of qualified adoption expenses paid by an employer under an adoption assistance program. Both the credit and the exclusion are phased out if the parents’ income exceeds certain limits, as explained below.
Adoptive parents may claim both a credit and an exclusion for expenses of adopting a child. But they can’t claim both a credit and an exclusion for the same expense.
Qualified adoption expenses
To qualify for the credit or the exclusion, the expenses must be “qualified.” These are the reasonable and necessary adoption fees, court costs, attorney fees, travel expenses (including amounts spent for meals and lodging) while away from home, and other expenses directly related to the legal adoption of an “eligible child.”
Expenses in connection with an unsuccessful attempt to adopt an eligible child can qualify. However, expenses connected with a foreign adoption (one in which the child isn’t a U.S. citizen or resident) qualify only if the child is actually adopted.
Taxpayers who adopt a child with special needs get a special tax break. They will be deemed to have qualified adoption expenses in the tax year in which the adoption becomes final in an amount sufficient to bring their total aggregate expenses for the adoption up to $14,300 for 2020 ($14,080 for 2019). In other words, they can take the adoption credit or exclude employer-provided adoption assistance up to that amount, whether or not they had $14,300 for 2020 ($14,080 for 2019) of actual expenses.
Phase-out for high-income taxpayers
The credit allowable for 2019 is phased out for taxpayers with adjusted gross income (AGI) of $211,160 ($214,520 for 2020). It is eliminated when AGI reaches $251,160 for 2019 ($254,520 for 2020).
Taxpayer ID number required
The IRS can disallow the credit and the exclusion unless a valid taxpayer identification number (TIN) for the child is included on the return. Taxpayers who are in the process of adopting a child can get a temporary number, called an adoption taxpayer identification number (ATIN), for the child. This enables adoptive parents to claim the credit and exclusion for qualified expenses.
When the adoption becomes final, the adoptive parents must apply for a Social Security number for the child. Once obtained, that number, rather than the ATIN, is used.
We can help ensure that you meet all the requirements to get the full benefit of the tax savings available to adoptive parents. Please contact us if you have any questions
The number of people engaged in the “gig” or sharing economy has grown in recent years, according to a 2019 IRS report. And there are tax consequences for the people who perform these jobs, such as providing car rides, renting spare bedrooms, delivering food, walking dogs or providing other services.
Basically, if you receive income from one of the online platforms offering goods and services, it’s generally taxable. That’s true even if the income comes from a side job and even if you don’t receive an income statement reporting the amount of money you made.
IRS report details
The IRS recently released a report examining two decades of tax returns and titled “Is Gig Work Replacing Traditional Employment?” It found that “alternative, non-employee work arrangements” grew by 1.9% from 2000 to 2016 and more than half of the increase from 2013 to 2016 could be attributed to gig work mediated through online labor platforms.
The tax agency concluded that “traditional” work arrangements are not being supplanted by independent contract arrangements reported on 1099s. Most gig work is done by individuals as side jobs that supplement their traditional jobs. In addition, the report found that the people doing gig work via online platforms tend to be male, single, younger than other self-employed people and have experienced unemployment in that year.
Gig worker characteristics
The IRS considers gig workers as those who are independent contractors and conduct their jobs through online platforms. Examples include Uber, Lyft, Airbnb and DoorDash.
Unlike traditional employees, independent contractors don’t receive benefits associated with employment or employer-sponsored health insurance. They also aren’t covered by the minimum wage or other protections of federal laws, aren’t part of states’ unemployment insurance systems, and are on their own when it comes to training, retirement savings and taxes.
If you’re part of the gig or sharing economy, here are some considerations.
You may need to make quarterly estimated tax payments because your income isn’t subject to withholding. These payments are generally due on April 15, June 15, September 15 and January 15 of the following year.
You should receive a Form 1099-MISC, Miscellaneous Income, a Form 1099-K or other income statement from the online platform.
Some or all of your business expenses may be deductible on your tax return, subject to the normal tax limitations and rules. For example, if you provide rides with your own car, you may be able to deduct depreciation for wear and tear and deterioration of the vehicle. Be aware that if you rent a room in your main home or vacation home, the rules for deducting expenses can be complex.
It’s critical to keep good records tracking income and expenses in case you are audited. Contact us if you have questions about your tax obligations as a gig worker or the deductions you can claim. You don’t want to get an unwelcome surprise when you file your tax return next year.
Device policies pertaining to smartphones and other technology tools continue to frustrate business owners as they try to balance their needs for security and functionality against employees’ rights to privacy and freedom. At some companies, loose “bring your own device” (BYOD) policies are giving way to stricter “choose your own device” (CYOD) or “corporate-owned, personally enabled” (COPE) policies.
CYOD: Their device, your data
A CYOD policy lets employees buy a device for combined personal and work purposes from an approved list of products. Generally, the employee owns the device with the business retaining ownership of the SIM card and any proprietary data. Many employers pay for the accompanying mobile plan. Sometimes, high-performance devices are made available only to “power users,” while employees with fewer tech-related job requirements must choose from lesser models.
Under a CYOD policy, you can:
Ensure device compatibility with your systems,
Require security protections on the devices, and
Conduct ongoing security monitoring.
It also makes maintenance and support easier for your IT department, because IT staff will know exactly which devices they’ll need to handle.
Some employees may be unhappy with their choice of devices, which can undermine morale and productivity. Then again, many workers appreciate the improved functionality and flexibility of owning a device that connects them to work.
COPE: All yours
If you’re looking for even greater control and security, look into a COPE policy. They’re most common at large companies or those with heavy compliance burdens.
Here, you buy and own the device, which is intended primarily for business purposes. Most policies do allow for limited personal use — such as phone calls and messaging, approved non-work-related apps and some settings customization.
COPE policies are like CYOD policies in that you can configure employees’ devices for maximum security (including blocking certain features or apps and activating remote wipe capabilities). But they go one step further by minimizing personal use and allowing you to retain possession after an employee leaves the company. Another upside: Many employees will view an employer-provided device as a valuable perk.
One downside is you’ll incur higher costs in covering both the purchase price and mobile plans, though you may be able to lessen the hit through volume discounts. In addition, employees may have concerns about their employer-provided devices inevitably containing some of their own information. “Containerization” tools can help alleviate such worries by segregating business and personal data.
A matter of priorities
The right move for your company comes down to priorities. To tighten security and control costs, a CYOD policy may be a reasonable upgrade to an existing BYOD approach. But if you need absolute security, a COPE policy could be necessary.
Bear in mind that you can always customize a policy to best suit your needs. For example, you might apply different requirements to different departments based on the type of work performed and data accessed. Our firm can help you analyze the potential costs of any device policy and make the right choice.
In its 2018 decision in South Dakota v. Wayfair, the U.S. Supreme Court upheld South Dakota’s “economic nexus” statute, expanding the power of states to collect sales tax from remote sellers. Today, nearly every state with a sales tax has enacted a similar law, so if your company does business across state lines, it’s a good idea to reexamine your sales tax obligations.
A state is constitutionally prohibited from taxing business activities unless those activities have a substantial “nexus,” or connection, with the state. Before Wayfair, simply selling to customers in a state wasn’t enough to establish nexus. The business also had to have a physical presence in the state, such as offices, retail stores, manufacturing or distribution facilities, or sales reps.
In Wayfair, the Supreme Court ruled that a business could establish nexus through economic or virtual contacts with a state, even if it didn’t have a physical presence. The Court didn’t create a bright-line test for determining whether contacts are “substantial,” but found that the thresholds established by South Dakota’s law are sufficient: Out-of-state businesses must collect and remit South Dakota sales taxes if, in the current or previous calendar year, they have 1) more than $100,000 in gross sales of products or services delivered into the state, or 2) 200 or more separate transactions for the delivery of goods or services into the state.
The vast majority of states now have economic nexus laws, although the specifics vary:Many states adopted the same sales and transaction thresholds accepted in Wayfair, but a number of states apply different thresholds. And some chose not to impose transaction thresholds, which many view as unfair to smaller sellers (an example of a threshold might be 200 sales of $5 each would create nexus).
If your business makes online, telephone or mail-order sales in states where it lacks a physical presence, it’s critical to find out whether those states have economic nexus laws and determine whether your activities are sufficient to trigger them. If you have nexus with a state, you’ll need to register with the state and collect state and applicable local taxes on your taxable sales there. Even if some or all of your sales are tax-exempt, you’ll need to secure exemption certifications for each jurisdiction where you do business. Alternatively, you might decide to reduce or eliminate your activities in a state if the benefits don’t justify the compliance costs.
Note: If you make sales through a “marketplace facilitator,” such as Amazon or Ebay, be aware that an increasing number of states have passed laws that require such providers to collect taxes on sales they facilitate for vendors using their platforms.
If you need assistance in setting up processes to collect sales tax or you have questions about your responsibilities, contact us.
Working capital is the difference between a company’s current assets and current liabilities. For a business to thrive, its working capital must be greater than zero. A positive balance enables the company to meet its short-term cash flow needs and grow.
But too much working capital can be a sign of inefficient management. In general, you want to generate as much income as possible from the money that’s tied up in receivables, inventory, payables and other working capital accounts. Here’s how to find the sweet spot between too little and too much working capital.
Current assets are those that can be easily converted into cash within a 12-month period. Conversely, current liabilities include any obligations due within 12 months, including accounts payable, accrued expenses and notes payable.
In addition to calculating the difference between these two amounts, management may calculate the current ratio (current assets ÷ current liabilities) and the acid-test ratio (cash, receivables and investments ÷ current liabilities). A company’s working capital ratios can be compared over time or against competitors to help gauge performance.
You can also compute turnover ratios for receivables, inventory and payables. For example, the days-in-receivables ratio equals the average accounts receivable balance divided by annual sales times 365 days. This tells you, on average, how long it takes the company to collect customer invoices.
There are three main goals of working capital management:
To ensure the company has enough cash to cover expenses and debt,
To minimize the cost of money spent on funding working capital, and
To maximize investors’ returns on assets and investments.
Maintaining a positive working capital balance requires identifying patterns of activity related to line items within the current asset and liability sections.
Suppose your company’s current ratio has fallen from 1.5 to 1.2. Is this good or bad? That depends on your circumstances. You’ll need to identify the reasons it’s fallen to determine whether the decline is a sign of an impending cash flow shortage. Often the answer lies in three working capital accounts: 1) accounts receivable, 2) inventory, and 3) accounts payable.
For example, when it comes to collecting from customers, how much time elapses between the recognition of an accounts receivable and its collection? Are certain customers habitually slower to pay than others?
Inventory has significant carrying costs, including storage, insurance, interest, pilferage, and the potential for damage and obsolescence. Has your company established target inventory levels? If so, who within the organization monitors compliance? To avoid running out of materials, companies often hold too much inventory. And it’s often financed through trade debt, which can prove costly over the long term.
With respect to the payment of accounts payable, does your company pay according to the credit terms offered by the vendor? Are there penalties for paying past those terms? It might be time for your company to renegotiate its payment terms.
We can help
Working capital management is as much art as it is science. Contact us to help determine the optimal level of working capital based on the nature of your business. We can help you brainstorm ways to fortify your financial position and operate more efficiently.
The right entity choice can make a difference in the tax bill you owe for your business. Although S corporations can provide substantial tax advantages over C corporations in some circumstances, there are plenty of potentially expensive tax problems that you should assess before making the decision to convert from a C corporation to an S corporation.
Here’s a quick rundown of four issues to consider:
LIFO inventories. C corporations that use last-in, first-out (LIFO) inventories must pay tax on the benefits they derived by using LIFO if they convert to S corporations. The tax can be spread over four years. This cost must be weighed against the potential tax gains from converting to S status.
Built-in gains tax. Although S corporations generally aren’t subject to tax, those that were formerly C corporations are taxed on built-in gains (such as appreciated property) that the C corporation has when the S election becomes effective, if those gains are recognized within five years after the conversion. This is generally unfavorable, although there are situations where the S election still can produce a better tax result despite the built-in gains tax.
Passive income. S corporations that were formerly C corporations are subject to a special tax. That tax kicks in if their passive investment income (including dividends, interest, rents, royalties, and stock sale gains) exceeds 25% of their gross receipts, and the S corporation has accumulated earnings and profits carried over from its C corporation years. If that tax is owed for three consecutive years, the corporation’s election to be an S corporation terminates. You can avoid the tax by distributing the accumulated earnings and profits, which would be taxable to shareholders. Or you might want to avoid the tax by limiting the amount of passive income.
Unused losses. If your C corporation has unused net operating losses, they can’t be used to offset its income as an S corporation and can’t be passed through to shareholders. If the losses can’t be carried back to an earlier C corporation year, it will be necessary to weigh the cost of giving up the losses against the tax savings expected to be generated by the switch to S status.
These are only some of the factors to consider when a business switches from C to S status. For example, shareholder-employees of S corporations can’t get all of the tax-free fringe benefits that are available with a C corporation. And there may be issues for shareholders who have outstanding loans from their qualified plans. These factors have to be taken into account in order to understand the implications of converting from C to S status.
Contact us. We can explain how these factors will affect your company’s situation and come up with strategies to minimize taxes.
As we all know, medical services and prescription drugs are expensive. You may be able to deduct some of your expenses on your tax return but the rules make it difficult for many people to qualify. However, with proper planning, you may be able to time discretionary medical expenses to your advantage for tax purposes.
The basic rules
For 2019, the medical expense deduction can only be claimed to the extent your unreimbursed costs exceed 10% of your adjusted gross income (AGI). You also must itemize deductions on your return.
If your total itemized deductions for 2019 will exceed your standard deduction, moving or “bunching” nonurgent medical procedures and other controllable expenses into 2019 may allow you to exceed the 10% floor and benefit from the medical expense deduction. Controllable expenses include refilling prescription drugs, buying eyeglasses and contact lenses, going to the dentist and getting elective surgery.
In addition to hospital and doctor expenses, here are some items to take into account when determining your allowable costs:
1. Health insurance premiums. This item can total thousands of dollars a year. Even if your employer provides health coverage, you can deduct the portion of the premiums that you pay. Long-term care insurance premiums are also included as medical expenses, subject to limits based on age.
2. Transportation. The cost of getting to and from medical treatments counts as a medical expense. This includes taxi fares, public transportation, or using your own car. Car costs can be calculated at 20¢ a mile for miles driven in 2019, plus tolls and parking. Alternatively, you can deduct certain actual costs, such as for gas and oil.
3. Eyeglasses, hearing aids, dental work, prescription drugs and professional fees. Deductible expenses include the cost of glasses, hearing aids, dental work, psychiatric counseling and other ongoing expenses in connection with medical needs. Purely cosmetic expenses don’t qualify. Prescription drugs (including insulin) qualify, but over-the-counter aspirin and vitamins don’t. Neither do amounts paid for treatments that are illegal under federal law (such as marijuana), even if state law permits them. The services of therapists and nurses can qualify as long as they relate to a medical condition and aren’t for general health. Amounts paid for certain long-term care services required by a chronically ill individual also qualify.
4. Smoking-cessation and weight-loss programs. Amounts paid for participating in smoking-cessation programs and for prescribed drugs designed to alleviate nicotine withdrawal are deductible. However, nonprescription nicotine gum and patches aren’t. A weight-loss program is deductible if undertaken as treatment for a disease diagnosed by a physician. Deductible expenses include fees paid to join a program and attend periodic meetings. However, the cost of food isn’t deductible.
You can deduct the medical costs that you pay for dependents, such as your children. Additionally, you may be able to deduct medical costs you pay for other individuals, such as an elderly parent. If you have questions about medical expense deductions, contact us.
Business owners are urged to create succession plans for the good of their families and their employees. But there’s someone else who holds a key interest in the longevity of your company: Your lender.
If you want to maintain a clear path to acquiring the working capital your business may need after you’ve stepped down, it’s important to keep your lender apprised of your progress in putting a carefully considered succession plan in place.
A viable successor
One key operational issue that lenders look for in a succession plan to address is, simply, who will lead the enterprise after you? For family-owned businesses, finding a successor can be difficult. Children or other relatives may be qualified but have no interest in taking the reins. Or they may want to be involved but have insufficient experience.
To reassure your lender about issues such as these, take the time to identify and nurture future leaders. As early as possible, select someone who you believe holds leadership potential and educate the prospective successor in all aspects of running the business. This way, when control formally transfers, your lender will have confidence that the new leader is truly the boss and fully capable of making executive decisions.
None of this should happen overnight. You need to lay out a well-defined path for the successor under the assurance that his or her hard work during the transition period will eventually be rewarded with the leadership role, as well as ownership interests. Ideally, you’ll want to set a specific timeframe for the transfer of control and ownership to officially occur — all while keeping your lender in the loop.
Most business owners have more than one heir to factor into succession planning. So, it’s important for lenders to know that the planning process involves the entire family, regardless of whether the individuals involved are active in the business’s day-to-day operations. This enables everyone to understand their roles — and the financial and personal consequences of an unsuccessful succession plan (which can adversely affect loan arrangements in place).
A common issue is how to equitably divide assets among heirs when only some of them will have control of or receive ownership interests in the business. If there are sufficient liquid assets, you can buy life insurance to provide for any children who won’t be involved in the business and give ownership interests only to those who will be involved. Or you might establish a family trust to own and operate the business, so that the entire family shares the risks and benefits.
Your lender may not be top of mind as you ponder the many details of a succession plan. But it’s important to cover all the bases, including keeping your company in good standing for future loans. We can help you with all the tax, accounting and financial aspects of a good succession plan — including effective communication with your lender.
For tax purposes, December 31 means more than New Year’s Eve celebrations. It affects the filing status box that will be checked on your tax return for the year. When you file your return, you do so with one of five filing statuses, which depend in part on whether you’re married or unmarried on December 31.
More than one filing status may apply, and you can use the one that saves the most tax. It’s also possible that your status options could change during the year.
Here are the filing statuses and who can claim them:
Single. This status is generally used if you’re unmarried, divorced or legally separated under a divorce or separate maintenance decree governed by state law.
Married filing jointly. If you’re married, you can file a joint tax return with your spouse. If your spouse passes away, you can generally file a joint return for that year.
Married filing separately. As an alternative to filing jointly, married couples can choose to file separate tax returns. In some cases, this may result in less tax owed.
Head of household. Certain unmarried taxpayers may qualify to use this status and potentially pay less tax. The special rules that apply are described below.
Qualifying widow(er) with a dependent child. This may be used if your spouse died during one of the previous two years and you have a dependent child. Other conditions also apply.
Head of household status
Head of household status is generally more favorable than filing as a single taxpayer. To qualify, you must “maintain a household” that, for more than half the year, is the principal home of a “qualifying child” or other relative that you can claim as your dependent.
A “qualifying child” is defined as someone who:
Lives in your home for more than half the year,
Is your child, stepchild, foster child, sibling, stepsibling or a descendant of any of these,
Is under 19 years old or a student under age 24, and
Doesn’t provide over half of his or her own support for the year.
Different rules may apply if a child’s parents are divorced. Also, a child isn’t a “qualifying child” if he or she is married and files jointly or isn’t a U.S. citizen or resident.
Maintaining a household
For head of household filing status, you’re considered to maintain a household if you live in it for the tax year and pay more than half the cost of running it. This includes property taxes, mortgage interest, rent, utilities, property insurance, repairs, upkeep, and food consumed in the home. Don’t include medical care, clothing, education, life insurance or transportation.
Under a special rule, you can qualify as head of household if you maintain a home for a parent of yours even if you don’t live with the parent. To qualify, you must be able to claim the parent as your dependent.
You must generally be unmarried to claim head of household status. If you’re married, you must generally file as either married filing jointly or married filing separately, not as head of household. However, if you’ve lived apart from your spouse for the last six months of the year and a qualifying child lives with you and you “maintain” the household, you’re treated as unmarried. In this case, you may be able to qualify as head of household.
If you have questions about your filing status, contact us.