Taking distributions from your traditional IRA

If you’re like many people, you’ve worked hard to accumulate a large nest egg in your traditional IRA (including a SEP-IRA). It’s even more critical to carefully plan for withdrawals from these retirement-savings vehicles.

Knowing the fine points of the IRA distribution rules can make a significant difference in how much you and your family will get to keep after taxes. Here are three IRA areas to understand:

  1. Taking early distributions. If you need to take money out of your traditional IRA before age 59½, any distribution to you will be generally taxable (unless nondeductible contributions were made, in which case part of each payout will be tax-free). In addition, distributions before age 59½ may be subject to a 10% penalty tax.

    However, there are several ways that the penalty tax (but not the regular income tax) can be avoided. These exceptions include paying for unreimbursed medical expenses, paying for qualified educational expenses and buying a first home (up to $10,000).

  2. Naming your beneficiary (or beneficiaries). This decision affects the minimum amounts you must withdraw from the IRA when you reach age 70½; who will get what remains in the account at your death; and how that IRA balance can be paid out. What’s more, a periodic review of the individuals you’ve named as IRA beneficiaries is critical to assure that your overall estate planning objectives will be achieved. Review them when circumstances change in your personal life, finances and family.
  3. Taking required distributions. Once you reach age 70½, distributions from your traditional IRAs must begin. It doesn’t matter if you haven’t retired. If you don’t withdraw the minimum amount each year, you may have to pay a 50% penalty tax on what should have been taken — but wasn’t. In planning for required minimum distributions, your income needs must be weighed against the desirable goal of keeping the tax shelter of the IRA going for as long as possible for both yourself and your beneficiaries.

Keep more of your money

Prudently planning how to take money out of your traditional IRA can mean more money for you and your heirs. Keep in mind that Roth IRAs operate under a different set of rules than traditional IRAs. Contact us to review your traditional and Roth IRAs, and to analyze other aspects of your retirement planning.

© 2019


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Some business owners can’t participate in their own companies’ HRAs

Many companies now offer Health Reimbursement Arrangements (HRAs) in conjunction with high-deductible health plans (HDHPs). HRAs offer some advantages over the perhaps better-known HDHP companion account, the Health Savings Account (HSA). If you’re considering adding an HRA, you might assume that, as a business owner, you can participate in the HRA. But this may not be the case.

Following the rules

Whether an owner can participate in his or her company’s HRA depends on several factors, including how the company is organized and the amount of the business owned by each working owner. Tax-free benefits under an HRA can be provided only to:

  • Current and former employees (including retirees), and their spouses,
  • Covered tax dependents, and
  • Children who haven’t attained age 27 by the end of the tax year.

Owners who are “self-employed individuals” within the meaning of Internal Revenue Code Section (IRC) 401(c) aren’t considered employees for this purpose and aren’t allowed to participate in an HRA on a tax-favored basis.

Defining the self-employed

Generally, a self-employed individual is someone who has net earnings from self-employment as defined in IRC Sec. 1402(a), accounting for only earnings from a trade or business in which the “personal services of the taxpayer are a material income-producing factor.” Ineligible owners include partners, sole proprietors and more-than-2% shareholders in an S corporation. Stock ownership by employees of a C corporation doesn’t preclude their tax-favored HRA participation.

The ownership attribution rules in IRC Sec. 318 apply when determining who’s a more-than-2% shareholder of an S corporation, so any employee who’s the spouse, child, parent or grandparent of a more-than-2% shareholder of an S corporation would also be unable to participate in the S corporation’s HRA on a tax-favored basis. A disqualified individual (whether because of direct or attributed ownership) could, however, be the beneficiary of a qualifying participant’s HRA coverage if he or she is the qualifying participant’s spouse, tax dependent or child under age 27.

Comparing HRAs to HSAs

Although self-employed individuals can’t receive tax-free HSA contributions through a cafeteria plan, at least they can have HSAs. This relative advantage has led some employers to favor HSA programs over HRAs.

But HRAs have other advantages for employers, including more control over how amounts are spent and typically lower costs relative to the nominal amount of benefits provided. (While the full HSA contribution must be funded with cash, HRAs typically are notional accounts that need only be funded when participants incur expenses, and not all participants will incur expenses up to the limit established by the employer.) Thus, the decision can seldom be made based on the participation rules alone.

Going in smart

Controlling costs remains a challenge for most businesses that offer health care benefits. An HRA may be a feasible solution, but make sure you know all the rules going in. Our firm can help you choose health care benefits that suit you and your employees.

© 2019


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The tax implications of a company car

The use of a company vehicle is a valuable fringe benefit for owners and employees of small businesses. This benefit results in tax deductions for the employer as well as tax breaks for the owners and employees using the cars. (And of course, they get the nontax benefits of driving the cars!) Even better, recent tax law changes and IRS rules make the perk more valuable than before.

Here’s an example

Let’s say you’re the owner-employee of a corporation that’s going to provide you with a company car. You need the car to visit customers, meet with vendors and check on suppliers. You expect to drive the car 8,500 miles a year for business. You also expect to use the car for about 7,000 miles of personal driving, including commuting, running errands and weekend trips with your family. Therefore, your usage of the vehicle will be approximately 55% for business and 45% for personal purposes. You want a nice car to reflect positively on your business, so the corporation buys a new luxury $50,000 sedan.

Your cost for personal use of the vehicle will be equal to the tax you pay on the fringe benefit value of your 45% personal mileage. By contrast, if you bought the car yourself to be able to drive the personal miles, you’d be out-of-pocket for the entire purchase cost of the car.

Your personal use will be treated as fringe benefit income. For tax purposes, your corporation will treat the car much the same way it would any other business asset, subject to depreciation deduction restrictions if the auto is purchased. Out-of-pocket expenses related to the car (including insurance, gas, oil and maintenance) are deductible, including the portion that relates to your personal use. If the corporation finances the car, the interest it pays on the loan would be deductible as a business expense (unless the business is subject to business-interest limitation under the tax code).

In contrast, if you bought the auto yourself, you wouldn’t be entitled to any deductions. Your outlays for the business-related portion of your driving would be unreimbursed employee business expenses that are nondeductible from 2018 to 2025 due to the suspension of miscellaneous itemized deductions under the Tax Cuts and Jobs Act. And if you financed the car yourself, the interest payments would be nondeductible.

And finally, the purchase of the car by your corporation will have no effect on your credit rating.

Administrative tasks

Providing an auto for an owner’s or key employee’s business and personal use comes with complications and paperwork. Personal use will have to be tracked and valued under the fringe benefit tax rules and treated as income. This article only explains the basics.

Despite the necessary valuation and paperwork, a company-provided car is still a valuable fringe benefit for business owners and key employees. It can provide them with the use of a vehicle at a low tax cost while generating tax deductions for their businesses. We can help you stay in compliance with the rules and explain more about this prized perk.

© 2019


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“Innocent spouses” may get relief from tax liability

When a married couple files a joint tax return, each spouse is “jointly and severally” liable for the full amount of tax on the couple’s combined income. Therefore, the IRS can come after either spouse to collect the entire tax — not just the part that’s attributed to one spouse or the other. This includes any tax deficiency that the IRS assesses after an audit, as well as any penalties and interest. (However, the civil fraud penalty can be imposed only on spouses who’ve actually committed fraud.)

Innocent spouses

In some cases, spouses are eligible for “innocent spouse relief.” This generally involves individuals who were unaware of a tax understatement that was attributable to the other spouse.

To qualify, you must show not only that you didn’t know about the understatement, but that there was nothing that should have made you suspicious. In addition, the circumstances must make it inequitable to hold you liable for the tax. This relief is available even if you’re still married and living with your spouse.

In addition, spouses may be able to limit liability for any tax deficiency on a joint return if they’re widowed, divorced, legally separated or have lived apart for at least one year.

Election to limit liability

If you make this election, the tax items that gave rise to the deficiency will be allocated between you and your spouse as if you’d filed separate returns. For example, you’d generally be liable for the tax on any unreported wage income only to the extent that you earned the wages.

The election won’t provide relief from your spouse’s tax items if the IRS proves that you knew about the items when you signed the return — unless you can show that you signed the return under duress. Also, the limitation on your liability is increased by the value of any assets that your spouse transferred to you in order to avoid the tax.

An “injured” spouse

In addition to innocent spouse relief, there’s also relief for “injured” spouses. What’s the difference? An injured spouse claim asks the IRS to allocate part of a joint refund to one spouse. In these cases, an injured spouse has all or part of a refund from a joint return applied against past-due federal tax, state tax, child or spousal support, or a federal nontax debt (such as a student loan) owed by the other spouse. If you’re an injured spouse, you may be entitled to recoup your share of the refund.

Whether, and to what extent, you can take advantage of the above relief depends on the facts of your situation. If you’re interested in trying to obtain relief, there’s paperwork that must be filed and deadlines that must be met. We can assist you with the details.

Also, keep “joint and several liability” in mind when filing future tax returns. Even if a joint return results in less tax, you may choose to file a separate return if you want to be certain of being responsible only for your own tax. Contact us with any questions or concerns.

© 2019


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It’s a good time to buy business equipment and other depreciable property

There’s good news about the Section 179 depreciation deduction for business property. The election has long provided a tax windfall to businesses, enabling them to claim immediate deductions for qualified assets, instead of taking depreciation deductions over time. And it was increased and expanded by the Tax Cuts and Jobs Act (TCJA).

Even better, the Sec. 179 deduction isn’t the only avenue for immediate tax write-offs for qualified assets. Under the 100% bonus depreciation tax break provided by the TCJA, the entire cost of eligible assets placed in service in 2019 can be written off this year.

Sec. 179 basics

The Sec. 179 deduction applies to tangible personal property such as machinery and equipment purchased for use in a trade or business, and, if the taxpayer elects, qualified real property. It’s generally available on a tax year basis and is subject to a dollar limit.

The annual deduction limit is $1.02 million for tax years beginning in 2019, subject to a phaseout rule. Under the rule, the deduction is phased out (reduced) if more than a specified amount of qualifying property is placed in service during the tax year. The amount is $2.55 million for tax years beginning in 2019. (Note: Different rules apply to heavy SUVs.)

There’s also a taxable income limit. If your taxable business income is less than the dollar limit for that year, the amount for which you can make the election is limited to that taxable income. However, any amount you can’t immediately deduct is carried forward and can be deducted in later years (to the extent permitted by the applicable dollar limit, the phaseout rule, and the taxable income limit).

In addition to significantly increasing the Sec. 179 deduction, the TCJA also expanded the definition of qualifying assets to include depreciable tangible personal property used mainly in the furnishing of lodging, such as furniture and appliances.

The TCJA also expanded the definition of qualified real property to include qualified improvement property and some improvements to nonresidential real property, such as roofs; heating, ventilation and air-conditioning equipment; fire protection and alarm systems; and security systems.

Bonus depreciation basics

With bonus depreciation, businesses are allowed to deduct 100% of the cost of certain assets in the first year, rather than capitalize them on their balance sheets and gradually depreciate them. (Before the TCJA, you could deduct only 50% of the cost of qualified new property.)

This break applies to qualifying assets placed in service between September 28, 2017, and December 31, 2022 (by December 31, 2023, for certain assets with longer production periods and for aircraft). After that, the bonus depreciation percentage is reduced by 20% per year, until it’s fully phased out after 2026 (or after 2027 for certain assets described above).

Bonus depreciation is now allowed for both new and used qualifying assets, which include most categories of tangible depreciable assets other than real estate.

Important: When both 100% first-year bonus depreciation and the Sec. 179 deduction are available for the same asset, it’s generally more advantageous to claim 100% bonus depreciation, because there are no limitations on it.

Maximize eligible purchases

These favorable depreciation deductions will deliver tax-saving benefits to many businesses on their 2019 returns. You need to place qualifying assets in service by December 31. Contact us if you have questions, or you want more information about how your business can get the most out of the deductions.

© 2019


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Dashboard software helps you keep your eyes on the prize

Like most business owners, you’ve probably been urged by industry experts and professional advisors to identify the most important key performance indicators (KPIs) for your company. So, just for the sake of discussion, let’s say you’ve done that. A natural question that often follows is: Now what? You know you’re supposed to keep an eye on these metrics every day but … how?

The right technology has you covered. There’s a specific type of software — commonly referred to as a “business dashboard” — that allows business owners to create customized views of all their chosen KPIs. And these applications don’t just lay out numbers like a spreadsheet. They provide an easy visual experience that allows you to keep your eyes on the prize: a cost-controlled, profitable company.

Cloud-based knowledge

Business dashboards have been around for a decade or two in various forms. But today’s solutions have the advantage of being cloud-based, meaning the data driving them is typically stored on a secure server off-site. And you can access the dashboard from anywhere at any time on an authenticated device. (You can also still run a dashboard from your company’s own servers, if you prefer.)

If you’ve never used a dashboard before, you might wonder what one looks like. The name says it all. Ideally, a dashboard is a single screen of data — like the panel of gauges in your car — that displays various KPIs in the form of pie charts, bar graphs and other graphic elements.

A few must-haves

When shopping for a product, there are a few “must-haves” to insist on. The software should:

  • Support your chosen KPIs,
  • Present itself in a visually pleasing, logical manner that allows you to easily, intuitively follow those KPIs, and
  • Update itself in real time, enabling you to react quickly to sudden swings in your company’s financial performance.

Be wary of vendors that over-promise “otherworldly” knowledge of your industry or try to upsell you on bells and whistles. The simpler the dashboard, the better. There will always be more complex financial issues regarding your business that can’t be put into simple terms on a dashboard.

Also, the rise of artificial intelligence (AI) is causing many to question the long-term viability of business dashboards. AI gathers and shapes data so quickly, and in such massive amounts, that some experts argue that a business owner’s chosen KPIs can rapidly become outmoded.

Nonetheless, dashboard software is still widely used in many industries. Just be prepared to regularly reassess and, if necessary, update your KPIs.

Shop carefully

If you decide to invest in a business dashboard (or upgrade your current one), you’ll need to go about it carefully. We can help you set a budget and compare prices and functionalities to get an optimal return on investment.

© 2019


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Should you elect S corporation status?

Operating a business as an S corporation may provide many advantages, including limited liability for owners and no double taxation (at least at the federal level). Self-employed people may also be able to lower their exposure to Social Security and Medicare taxes if they structure their businesses as S corps for federal tax purposes. But not all businesses are eligible — and with changes under the Tax Cuts and Jobs Act, S corps may not be as appealing as they once were.

Compare and contrast

The main reason why businesses elect S corp status is to obtain the limited liability of a corporation and the ability to pass corporate income, losses, deductions and credits through to shareholders. In other words, S corps generally avoid double taxation of corporate income — once at the corporate level and again when it’s distributed to shareholders. Instead, tax items pass through to the shareholders’ personal returns, and they pay tax at their individual income tax rates.

But double taxation may be less of a concern today due to the 21% flat income tax rate that now applies to C corporations. Meanwhile, the top individual income tax rate is 37%. S corp owners may be able to take advantage of the qualified business income (QBI) deduction, which can be equal to as much as 20% of QBI.

In order to assess S corp status, you have to run the numbers with your tax advisor, and factor in state taxes to determine which structure will be the most beneficial for you and your business.

S corp qualifications

If you decide to go the S corp route, make sure you qualify and will stay qualified. To be eligible to elect to be an S corp or to convert, your business must:

  • Be a domestic corporation,
  • Have only one class of stock,
  • Have no more than 100 shareholders, and
  • Have only “allowable” shareholders, including individuals, certain trusts and estates. Shareholders can’t include partnerships, corporations and nonresident alien shareholders.

In addition, certain businesses are ineligible, such as financial institutions and insurance companies.

Base compensation on what’s reasonable

Another important consideration when electing S status is shareholder compensation. One strategy for paying less in Social Security and Medicare employment taxes is to pay modest salaries to yourself and any other S corp shareholder-employees. Then, pay out the remaining corporate cash flow (after you’ve retained enough in the company’s accounts to sustain normal business operations) as federal-employment-tax-free cash distributions.

However, the IRS is on the lookout for S corps that pay shareholder-employees unreasonably low salaries to avoid paying employment taxes and then make distributions that aren’t subject to those taxes.

Paying yourself a modest salary will work if you can prove that your salary is reasonable based on market levels for similar jobs. Otherwise, you run the risk of the IRS auditing your business and imposing back employment taxes, interest and penalties. We can help you decide on a salary and gather proof that it’s reasonable.

Consider all angles

Contact us if you think being an S corporation might help reduce your tax bill while still providing liability protection. We can help with the mechanics of making an election or making a conversion, under applicable state law, and then handling the post-conversion tax issues.

© 2019


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Is your accounting software living up to the hype?

Accounting software typically sells itself as much more than simple spreadsheet or ledger. The products tend to pride themselves on being comprehensive accounting information systems — depending on the price point, of course.

So, is your accounting software living up to the hype? If not, there are a couple of relatively simple steps you can take to improve matters.

Train and retrain

Many businesses grow frustrated with their accounting software packages because they haven’t invested enough time to learn their full functionality. When your personnel are truly up to speed, it’s much easier for them to standardize reports to meet your company’s needs without modification. Doing so not only reduces input errors, but also provides helpful financial information at any point during the year — not just at month end.

Along the same lines, your company should be able to perform standard journal entries and payroll allocations automatically within your accounting software. Many systems can recall transactions and automate, for example, payroll allocations to various programs or vacation accrual reports. If you’re struggling to extract and use these types of financial information, you might be underusing your accounting software (or it might be time for an upgrade).

Ideally, a champion on your staff may be able to step up and share his or her knowledge with others to get them up to speed. Otherwise, you could explore the cost of engaging an external consultant to review your software’s functionality and retrain staff on its basic features, as well as the many shortcuts and advanced features available.

Commit to continuous improvement

Accounting systems that aren’t monitored can become inefficient over time. Encourage employees to be on the lookout for labor-intensive steps that could be better automated, along with processes that don’t add value and might be eliminated. Also, note any unusual activity and look for transactions being improperly reported — remember the old technological adage, “garbage in, garbage out.”

Leadership plays an important role, too. Ownership and management are ultimately responsible for your company’s overall financial oversight. Periodically review critical documents such as monthly bank statements, financial statements and accounting entries. Look for vague items, errors or anomalies and then determine whether misuse of your accounting system may be to blame.

Take the time

Many businesses don’t even realize they have a problem with their accounting software until they take the time to evaluate and improve it. And only then does the system finally deliver on the hype — sometimes. Our firm can help you review your accounting software and ensure it’s delivering the information you need to make good business decisions.

© 2019


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What to do if your business receives a “no-match” letter



In the past few months, many businesses and employers nationwide have received “no-match” letters from the Social Security Administration (SSA). The purpose of these letters is to alert employers if there’s a discrepancy between the agency’s files and data reported on W-2 forms, which are given to employees and filed with the IRS. Specifically, they point out that an employee’s name and Social Security number (SSN) don’t match the government’s records.

According to the SSA, the purpose of the letters is to “advise employers that corrections are needed in order for us to properly post” employees’ earnings to the correct records. If a person’s earnings are missing, the worker may not qualify for all of the Social Security benefits he or she is entitled to, or the benefit received may be incorrect. The no-match letters began going out in the spring of 2019.

Why discrepancies occur

There are a number of reasons why names and SSNs don’t match. They include typographical errors when inputting numbers and name changes due to marriage or divorce. And, of course, employees could intentionally give the wrong information to employers, as is sometimes the case with undocumented workers.

Some lawmakers, including Democrats on the U.S. House Ways and Means Committee, have expressed opposition to no-match letters. In a letter to the SSA Commissioner, they wrote that, under “the current immigration enforcement climate,” employers might “mistakenly believe that the no-match letter indicates that workers lack immigration status and will fire these workers — even those who can legally work in the United States.”

How to proceed

If you receive a no-match letter telling you that an employee’s name and SSN don’t match IRS records, the SSA gives the following advice:

  • Check to see if your information matches the name and SSN on the employee’s Social Security card. If it doesn’t, ask the employee to provide you with the exact information as it is shown on the card.
  • If the information matches the employee’s card, ask your employee to check with the local Social Security office to resolve the issue.
  • Once resolved, the employee should inform you of any changes.

The SSA notes that the IRS is responsible for any penalties associated with W-2 forms that have incorrect information. If you have questions, contact us or check out these frequently asked questions from the SSA: https://bit.ly/2Yv87M6

© 2019  


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Odd word, cool concept: Gamification for businesses

“Gamification.” It’s perhaps an odd word, but it’s a cool concept that’s become popular among many types of businesses. In its most general sense, the term refers to integrating characteristics of game-playing into business-related tasks to excite and engage the people involved.

Might it have a place in your company?

Internal focus

Sometimes gamification refers to customer interactions. For example, a retailer might award customers points for purchases that they can collect and use toward discounts. Or a company might offer product-related games or contests on its website to generate traffic and visitor engagement.

But, these days, many businesses are also using gamification internally. That is, they’re using it to:

  • Engage employees in training processes,
  • Promote friendly competition and camaraderie among employees, and
  • Ease the recognition and measurement of progress toward shared goals.

It’s not hard to see how creating positive experiences in these areas might improve the morale and productivity of any workplace. As a training tool, games can help employees learn more quickly and easily. Moreover, with the rise of social media, many workers are comfortable sharing with others in a competitive setting. And, from the employer’s perspective, gamification opens all kinds of data-gathering possibilities to track training initiatives and measure employee performance.

Specific applications

In most businesses, employee training is a big opportunity to reap the benefits of gamification. As many industries look to attract Generation Z — the next big demographic to enter the workforce — game-based learning makes perfect sense for individuals who grew up both competing in various electronic ways on their mobile devices and interacting on social media.

For example, safety and sensitivity training are areas that demand constant reinforcement. But it’s also common for workers to tune out these topics. Framing reminders, updates and exercises within game scenarios, in which participants might win or lose ground by following proper or improper work practices, is one way to liven up the process.

Game-style simulations can also help prepare employees for management or leadership roles. Online training simulations, set up as games, can test participants’ decision-making and problem-solving skills — and allow them to see the potential consequences of various actions before granting them such responsibilities in the real-word situations. You might also consider rewards-based games for managers or project leaders based on meeting schedules, staying within budgets, or preventing accidents or other costly mistakes.

Intended effects

Naturally, gamification has its risks. You don’t want to “force fun” or frustrate employees with unreasonably difficult games. Doing so could lower morale, waste time and money, and undercut training effectiveness.

To mitigate the downsides, involve management and employees in gamification initiatives to ensure you’re on the right track. Also consider involving a professional consultant to implement established and tested “gamified” exercises, tasks and contests. We can help you identify and assess the potential costs involved and keep those costs in line.

© 2019


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