It’s a fact of life that physicians and dental professionals operate under an increased level of scrutiny. Increasingly, compliance checks are digging in to more than charts and coding. The IRS is paying particular attention to these hot-button compliance areas: 

Worker misclassification 

Is your practice classifying hired physicians as independent contractors? The IRS may come knocking for a look at your payroll records. Violations can result in practice owners and officers being held individually liable for back payroll taxes (including withholding taxes) plus penalties and interest. 

Generally, for professionals, the IRS looks at three important factors to make the legal distinction between the employee vs. contractor status of a physician/dentist:

• Does the practice direct and control how the medical/dental professional does the job?  For example, does the employer specify when and where the worker provides services? 
• How much control does the employer have over the business and financial aspects of the worker’s job?  Determine if the worker has invested in his/her own business, has other clients and is not dependent on the employer.
• What is the relationship between the employer and the worker?  Generally contractors work on projects, not open-ended jobs and usually do not provide core services of the employer.

Experts in employment law say that, against this backdrop, most hired physicians/dentists legally fall under the category of employee. Obvious exceptions include physicians and dentists who do locum tenens or who have their own professional medical entities and bring their own ancillary personnel to the job.

Action:  To avoid sending up an audit red flag, don’t convert an existing physician employee to contractor status unless he or she has a significant change in job duties. And if you have workers doing the same job, don’t classify some as employees and others as contractors. Consult your attorney regarding appropriate classification and contracts.

Read More: To learn more about this important issue, see our January, 2016, article here.

Medical buildings

Physicians who own their medical building are facing increased IRS scrutiny. In particular, auditors are looking for the cozy transactions that can occur when the medical practice is both the tenant and the landlord. 

Action: Experts say the best approach is to treat it as if you were renting office space from someone you didn't know. Have a formal lease in place and make payments by physically writing a check or transferring money from your practice account into a separate medical building account. 

Sales and use tax

Most states impose a “use tax” on certain personal property that was purchased from a seller outside of the state for use in that state. Essentially, it taxes the use of goods on which no sales tax has been paid. Unlike sales taxes, which are charged and collected by the vendor, the use tax is self-reported by the purchaser. 

Action: If you purchase supplies or equipment from out-of-state vendors, determine whether state and local sales tax applies to these items. Then report any taxable sales on your monthly or quarterly sales tax report. Ask your CPA for guidance in this critical area.

Retirement plan audits

Managing the typical 401(k) plan can be incredibly challenging, and the IRS (and Department of Labor) cuts offenders no slack. Penalties for noncompliance — even unintentional errors — may be severe, and can even result in the loss of a plan’s tax-deferred status. 

One of the most common compliance errors involves failing to follow the terms of your original plan document — either taking actions that aren’t covered or allowed, or making changes to the plan document and then not following them in day-to-day practice. For example, maybe you’ve begun allowing participants to take out loans and hardship distributions, even though these weren’t included in your original written plan. 

Action: Make sure you understand how to detect — and correct — errors in plan administration. Start by downloading the IRS’ comprehensive 401(k) Fix-It Guide at http://www.irs.gov/pub/irs-tege/401k_mistakes.pdf.

Head off an audit before it occurs by taking steps now to identify potential compliance problem areas. Contact our office for guidance in ensuring that your practice remains compliant in all areas of operation.

The Financial Accounting Standards Board (FASB) has issued the first major changes to the accounting standards for nonprofits’ financial statement presentation in more than two decades. Accounting Standards Update (ASU) No. 2016-14, Not-for Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, affects just about every nonprofit, including charities, foundations, private colleges and universities, nongovernmental health care providers, cultural institutions, religious organizations, and trade associations.

The new standard is intended to provide improved net asset classification requirements and information about nonprofits’ resources (and changes in those resources) to donors, grantors, creditors and other users of nonprofits’ financial statements. It changes the classification of net assets and the information presented in the financial statements and footnotes about an organization’s liquidity, financial performance and cash flows. As a result, stakeholders should find it easier to understand how nonprofits manage their funds.

Background on the ASU

Nonprofits’ financial statements currently are prepared according to guidance published in 1993 as Statement of Financial Accounting Standards No. 117, Financial Statements of Not-for-Profit Organizations (incorporated into Topic 958 in the FASB Accounting Standards Codification). The FASB believes that this reporting model remains sound, but stakeholders have expressed concerns regarding several areas, including:

• The complexity and “understandability” of net asset classification,
• Deficiencies in information about an organization’s liquidity and the availability of its resources,
• The lack of consistency in the type of information provided by different organizations about expenses and investment returns, and
• Misunderstandings about and opportunities to enhance the usefulness of the statement of cash flows.

In response, the FASB issued an Exposure Draft, Presentation of Financial Statements of Not-for-Profit Entities, in April 2015. After receiving an unusual amount of feedback, much of it negative, the FASB decided to split its deliberations into two phases.

The issuance of ASU No. 2016-14 represents the conclusion of Phase 1. Phase 2 will focus on certain issues considered more challenging, such as aligning the presentation of measures of operations between the statements of activities and cash flows, as well as those that might depend on a related FASB project addressing financial performance reporting by for-profit entities. The FASB hasn’t yet announced a timeline for the second phase.

New net asset classifications

One of the more notable changes in the new standard is the replacement of the existing three net asset classes (unrestricted, temporarily restricted and permanently restricted) with two new classes (net assets with donor restrictions and net assets without donor restrictions). The FASB expects this to reduce the complexity of financial reporting for nonprofits, while increasing the understandability for stakeholders. 

The new approach recognizes changes in the law that now allow organizations to spend from a permanently restricted endowment even if its fair value has fallen below the original endowed gift amount. Such “underwater” endowments will now be classified as net assets with donor restrictions, rather than the current presentation as unrestricted net assets. The guidance also requires expanded disclosures regarding underwater endowments.

In addition, the new standard eliminates the current “over-time” method for handling the expiration of restrictions on gifts used to purchase or build long-lived assets such as buildings. Nonprofits must use the placed-in-service approach (in the absence of explicit donor stipulations to the contrary). In other words, nonprofits must reclassify these gifts as net assets without donor restrictions when the asset is placed in service, rather than over the asset’s useful life. As a result, organizations won’t be able to match the depreciation expense with the release of these restricted net assets unless stipulated by the donor.

Information about liquidity and availability of resources

The new standard includes specific requirements to help financial statement users better assess a nonprofit’s available financial resources. Organizations must provide:

• Qualitative information that indicates how they manage their liquid available resources to meet cash needs for general expenses within one year of the balance sheet date, and
• Quantitative information that indicates the availability of their financial assets at the balance sheet date to meet cash needs for general expenses within one year.

An asset’s availability may be affected by its nature; external limits imposed by donors, grantors, laws and contracts with others; and internal limits imposed by board decisions. Disclosure is also required for board designations or other internal limits on the use of net assets without donor restriction.

Information about expenses 

To provide a clearer picture of a nonprofit’s spending, the new standard requires reporting of expenses by both function (which is already required) and nature in one location. This presentation, showing how the nature of expenses (for example, salaries and wages, employee benefits, supplies, and rent) relates to the functions (program services and supporting activities), can be presented on a separate statement, on the statement of activities or in the footnotes. In addition, the standard calls for enhanced disclosures regarding specific methods used to allocate costs among program and support functions. 

This information will help financial statement users assess the degree to which expenses are fixed or discretionary, how the related resources are allocated, and the costs of the services provided.

Information about investment returns

Nonprofits will now be required to net all external and direct internal investment expenses against the investment return presented on the statement of activities. Financial statement users will be better able to compare investment returns among different nonprofits, regardless of whether investments are managed externally (for example, by an outside investment manager who charges management fees) or internally (by staff).

The new standard also eliminates the current required disclosure of those netted expenses. This should eliminate the difficulty some nonprofits had with identifying management fees embedded in investment returns.

Presentation of operating cash flows

One of the more controversial components of the FASB’s Exposure Draft was its requirement that organizations use the “direct method,” not the “indirect method,” to present net cash from operations on the statement of cash flows. The two methods produce the same results, but the direct method provides more understandable information to financial statement users.

The final version of the new standard allows nonprofits to use either method. But, should an organization opt for the direct method, it will no longer need to include an indirect method reconciliation. The FASB hopes this change, which should reduce the costs of the direct method, will encourage more nonprofits to use it.

Timing

The new standard takes effect for annual financial statements issued for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. Early application is allowed. 

Nonprofits should resist the temptation to delay preparations even though they may also be dealing with the implementation of the new accounting standards for lease accounting and revenue recognition. If you have questions about how the new standard will affect your nonprofit, please contact us.

The reporting of employer expense reimbursements by employees will vary based on whether the employer reimburses under an accountable or nonaccountable plan. This article will briefly discuss the two types of expense reimbursement plans and what the tax consequences are for the employee. 

The Basics

To qualify as an accountable plan, the employer’s reimbursement arrangement must require all of the following:

1. The employee’s expenses must be connected to the business. This means that the employee must have paid or incurred deductible expenses while performing services as an employee. 
2. The employee must adequately account to the employer for the expenses within a reasonable period of time.
3. Any excess reimbursement must be returned to the employer within a reasonable period of time. 

On the other hand, nonaccountable plans are reimbursement arrangements that do not meet one or more of the requirements listed above.  For example, an employee who is reimbursed under an accountable plan, but fails to return, within a reasonable time, excess reimbursements. In this example, the excess reimbursements would be treated as if paid under a nonaccountable plan. In addition, if an employee is repaid for business expenses by reducing the amount reported as wages, it will be considered a nonaccountable plan. 

What is a Reasonable Period of Time? 

The IRS states that a reasonable period of time depends on the facts and circumstances of each situation. However, actions that take place within the times specified in the following list will be treated as taking place within a reasonable period of time:

• Employee adequately accounts for expenses within 60 days after they were paid or incurred. 
• Employee returns any excess reimbursement within 120 days after the expense was paid or incurred. 
• Employee is given a periodic statement (at least quarterly) that asks the employee to either return or adequately account for outstanding advances, and the employee complies within 120 days of the statement. 

What is Adequate Accounting?

The second requirement for an accountable plan says that the employee must adequately account to the employer for expenses. Examples of adequate accounting by the employee include providing the employer a statement of expense, account book, diary, or similar record in which the expense is entered at or near the time it was paid. The employee also must provide documentary evidence, like receipts, of travel, mileage, and other business expenses. 

It’s important to note that the employee must provide the employer with the same type of records and supporting information that would have to be provided to the IRS if the IRS questioned a deduction on the tax return. 

Tax Reporting

So why does it matter if your employer uses an accountable or nonaccountable plan? It matters because it affects how you will report the reimbursements and expenses for tax purposes. Expense reimbursements under accountable plans should not be included in box 1 wages on the employee’s Form W-2. In addition, as long as the expenses equal the reimbursements, the employee should not file Form 2106 to report employee business expenses nor claim a deduction. 

In the case of reimbursements under a nonaccountable plan, the employer will include the amount of reimbursements in box 1 wages on Form W-2. The employee must complete Form 2106 and itemize deductions to deduct business expenses. Only the business expenses greater than 2% of adjusted gross income will qualify for a deduction on Schedule A of Form 1040. 

Conclusion

Whether a reimbursement arrangement is an accountable or nonaccountable plan is determined based on whether the plan meets all three requirements of an accountable plan. While accountable plans have requirements that must be met, they could be viewed as more favorable to employees for tax reporting purposes. 

If you have questions about your expense reimbursement plan – as an employer or an employee – please contact us to discuss.

There are three common penalties assessed against taxpayers: underpayment, late payment, and late filing.  These penalties are fairly easy to avoid if you plan ahead.  Generally, tax returns for individual taxpayers are due April 15th and any unpaid tax is also due.  If you fail to meet this deadline, or you did not pay enough taxes during the year through Federal withholding or estimated tax payments, you may be liable for IRS underpayment of estimated tax, late payment, and/or late filing penalties in addition to any tax you owe. 

Underpayment of Estimated Tax Penalty

Probably the most common type of penalty is the underpayment of estimated tax penalty.  This can affect any taxpayer but most often impacts taxpayers who are not W-2 wage earners.  Since income taxes are not directly withdrawn and remitted to the IRS during the year via payroll, the burden falls on the taxpayer to pay estimated tax payments through the year.  These estimates must be paid in four equal quarterly installments which are due on April 15, June 15, September 15, and January 15.  

The underpayment penalty consists of the interest on the underpaid amount for the number of days the payment is late.  Interest is charged at the Federal rate for underpayments which is currently set at 3% for the first quarter of 2016 and 4% for the second quarter of 2016.  Since estimates are required to be paid each quarter, you may be liable for an underpayment penalty even if all tax has been paid.

This underpayment penalty will generally not apply if the tax due, after subtracting any tax withheld, is less than $1,000 or the taxpayer had no tax liability for the prior year return that covered 12 months.

The IRS has provided a safe harbor to help taxpayers avoid these penalties.  Individuals are subject to an underpayment penalty unless total withholding and estimated tax payments equal the smaller of:

• 90% of the tax shown on the current year tax return or
• 100% of the tax shown on the prior year tax return [110% if the taxpayer’s prior year adjusted gross income exceeded $150,000 ($75,000 for married taxpayers filing separately)].

There are special rules for farmers and fishermen so please contact us if at least two-thirds of your gross income is from farming or fishing.

Late Payment Penalty

If you do not pay the tax you owe by the April 15 filing deadline, you will most likely face a failure-to-pay penalty.  The failure-to-pay penalty is .5% of the unpaid balance and applies for each month or part of a month after the due date.  This penalty starts accruing the day after the filing due date.  The penalty is capped at a maximum of 25% of the unpaid tax due. 

If you timely requested an extension of time to file your individual income tax return and paid at least 90% of the taxes owed with the extension request, you may not face a failure-to-pay penalty.  However, you must pay any remaining tax due by the extended due date (generally October 15).         

Late Filing Penalty

One of the most punitive penalties is for failing to file your tax return on time when you owe tax.  The failure-to-file penalty starts at 5% of your unpaid taxes for each month or part of the month the return is late.  The penalty is capped at 25% of the unpaid balance due.  There will be no penalty imposed if there is no tax due with the tax return filing.  If you file your return more than 60 days after the due date or extended due date, the minimum penalty for late filing is the smaller of $135 or 100% of the unpaid tax.

The silver lining with the late filing penalty is that there is no reason to ever incur a late filing penalty.  As long as you file an extension by the April 15th due date, you automatically get an additional 6 months to file the tax return.  So even if you cannot pay the tax, you should still file a return or an extension.  

If both the 5% failure-to-file penalty and the .5% failure-to-pay penalty apply in any month, the maximum penalty you will pay for the month will be 5%.   
  
Penalties for late payment and late filing will not be imposed if the taxpayer can show that the failure was due to reasonable cause, rather than to willful neglect.  Some of the reasonable cause requests that have been approved in the past include death or serious illness of the taxpayer or an immediate family member, unavoidable absence of the taxpayer on the filing due date, and the destruction of the taxpayer’s residence or business.  

Many businesses host a picnic for employees in the summer. It’s a fun activity for your staff and you may be able to take a larger deduction for the cost than you would on other meal and entertainment expenses.

Deduction limits

Generally, businesses are limited to deducting 50% of allowable meal and entertainment expenses. But certain expenses are 100% deductible, including expenses:

• For recreational or social activities for employees, such as summer picnics and holiday parties,
• For food and beverages furnished at the workplace primarily for employees, and
• That are excludable from employees’ income as de minimis fringe benefits.

There is one caveat for a 100% deduction: The entire staff must be invited. Otherwise, expenses are deductible under the regular business entertainment rules.

Recordkeeping requirements

Whether you deduct 50% or 100% of allowable expenses, there are a number of requirements, including certain records you must keep to prove your expenses. If your company has substantial meal and entertainment expenses, you can reduce your tax bill by separately accounting for and documenting expenses that are 100% deductible. If doing so would create an administrative burden, you may be able to use statistical sampling methods to estimate the portion of meal and entertainment expenses that are fully deductible.

For more information about deducting business meals and entertainment, including how to take advantage of the 100% deduction, please contact us.

1. Get Educated. Educate yourself about the types of scams, malware, phishing, spyware and other common and emerging threats that exist on the internet and how to avert them.
2. Install Protective Software. Install a firewall and antivirus software, with automatic updates, on all computers and networks (including wireless) to avoid hackers, malware and viruses.
3. Enable two-factor authentication (passwords and PINS) on devices, apps and on-line accounts, including e-mail accounts, whenever possible–one of the strongest cybersecurity measures available. Most on-line banking, finance, e-commerce and social media sites, as well as many e-mail providers, allow two-factor authentication.
4. Use strong passwords with a combination of 10 to 15 upper and lower case letters, numbers and special characters. 
5. Change Passwords Frequently. Passwords should be changed every 90 days and should be different for each account.  
6. Click with caution.  Don’t open emails, download files or click links received from people or organizations that you don’t recognize. Even if the message is from someone you know, be cautious and look for information that indicates that the message is legitimate.
7. Use Alerts. Add alerts to your on-line bank and credit card accounts so that you’ll know about unusual transactions immediately.
8. Be Vigilant. Check your on-line bank and credit card account balances and transactions for fraudulent activity every day.
9. Surf safely.  Use a search engine to navigate to the correct web-address to avoid phony web-sites. 
10. Practice safe shopping.  Before you enter any payment information look for the following items on the web-site:  look in the address bar to see if the site starts with “https://; look for a trustmark to make sure the site is safe; when you’re on a payment page, look for the lock symbol in your browser, indicating that the site uses encryption or scrambling to keep your information safe. 

What you need to know to combat tax identity theft

Individual tax identity theft

IRS actions 

Risks for businesses

Tips for preventing tax identity theft

• Use antivirus and other security software on all workplace and personal computers,
• Update your data security plans regularly to reflect new risks,
• Educate employees about phishing schemes,
• Truncate or redacte identifying numbers where possible,
• Keep identifying numbers and other sensitive information in a secure location and restrict access on a need-to-know basis,
• Update business filings with the IRS and the secretary of state for your state when contact information changes,
• Monitor your credit reports, IRS and state tax authority accounts, and other business filings,
• File W-2s, W-3s and 1099s as early as possible, and
• Develop an action strategy for dealing with tax identity theft, including identifying whom to notify in the event of theft.

Don’t put your head in the sand

If your business claims deductions for meal, entertainment, vehicle or travel expenses, be aware that the IRS may closely review them. Too often, taxpayers don’t have the necessary documentation to meet the strict requirements set forth under tax law and by the IRS.

Be able to withstand a challenge

Whether you file a business return or file Schedule C with your personal return, these deductions can be a hot button for the IRS. Here are some DOs and DON’Ts:

DO keep detailed, accurate records. Documentation is critical when it comes to deducting meal, entertainment, vehicle and travel expenses. You generally must have receipts, canceled checks or bills that show amounts and dates. In addition, there are other rules for specific expenses. For example, you must record the business purpose of entertainment expenses, as well as the names of those you entertained and their business relationship to you. If you reimburse employees for expenses, make sure they comply with the rules.

DON’T re-create expense logs at year end or wait until you receive an IRS deficiency notice. Take a moment to record the details in a log or diary at the time of the event or soon after. Require employees to submit monthly expense reports.

DO keep in mind that there’s no “right” way to keep records. The IRS website states: “You may choose any recordkeeping system suited to your business that clearly shows your income and expenses.”

DO respect the fine line between personal and business expenses. Be careful about trying to combine business and pleasure. For example, you can’t deduct expenses for a spouse on a business trip unless he or she is employed by the company and there’s a bona fide business reason for his or her presence.

We can help

These are general rules and there may be exceptions. If your records are lost due to, say, a fire, theft or flood, there may be a way to estimate expenses. With guidance from us, you can maintain records that can stand up to IRS scrutiny. For more information about recordkeeping, contact us.

The wedding bells are ringing, waves are crashing onshore at your honeymoon in Hawaii, and then it hits you!  How is getting married going to affect my taxes? Okay, so maybe no one is thinking about taxes on their honeymoon, but it is something that every couple should understand. The tax system of the United States is setup so that combined tax liability of a married couple may be higher or lower than their combined tax bill if the couple had remained single.

This is where the idea of marriage penalty and marriage bonus comes from. The marriage penalty often affects taxpayers that have very high and very low incomes, and the marriage bonus affects several middle-income couples who have disparate incomes. The extent to which the marriage penalty or bonus affects a given couple depends on factors such as the level of their combined income, the proportion of their individual incomes being similar, and how many children they have.

A marriage bonus typically occurs when one individual with a higher income marries and files a joint return with an individual who has a much smaller income, and the additional income is not usually enough to push the combined income into a higher tax bracket. Married couples fall into the married filing joint tax brackets, which are wider in terms of income limits and result in a lower tax bill.

A marriage penalty occurs when two individuals with equal incomes marry and relates to individuals who have very low and high incomes. A high-income couple falls into this trap because income tax brackets for married couples at the top of the income tax schedule are not twice as wide as the equivalent brackets for single filers.  

An example is the 33% tax bracket, which for 2016 single filers starts out at $190,151, but for married filing joint filers it starts out at $230,451. Two high incomes when combined could easily put a couple’s income into a higher bracket than filing as single, thus resulting in a penalty.

Another item to consider for the marriage penalty with high-income earners is the new 3.8% investment income tax. This tax is imposed on single filers who have adjusted gross income of $200,000 or more and for married filers with gross income of $250,000.

Two individuals who both made $150,000 would not be subject to the net investment income tax if filing as single. But if these two filed as married they would be subject to the additional tax, which is the lesser of their net investment income or the amount of their adjusted gross income over the threshold, times 3.8%.

When else can a penalty occur?

A marriage penalty can also occur when two low-income individuals file as married. Two individuals who file single can be eligible for a large earned income credit depending on how many children they have to claim. The other advantage of claiming a dependent is the opportunity to file as head of household instead of just single. Head of household tax brackets are wider and there is also a larger standard deduction. Filing married eliminates the benefits of head of household and could potentially lower the amount of earned income credit available due to the combined incomes.

So what options do we have?

The idea of a marriage penalty or bonus causing a couple to tie the knot or to wait it out seems extraordinary, but it could affect one’s decision to work, work less, or not work at all. A married couple could have one individual who makes $40,000 and falls into the 25% tax bracket filing single, but who would fall into the 15% tax bracket filing married. The reverse could be true for the other spouse who didn’t work as single and would have been in the 0% bracket, but then married if they decided to work could possibly be in the 15% to 25% bracket.

Will the US ever change this policy?

There are ways to eliminate the marriage penalty and bonus, but it would require large changes to the US tax code. The US tax code is designed to be progressive in nature, but to also be equal in treatment among married and unmarried couples. If the United States adopted a flat tax and removed all provisions, then the marriage penalties and bonuses could be elmiminated. The United States could also eliminate the marriage penalty and bonus by keeping  the progressive tax structure, but requiring everyone to file single. Without a major overhaul of the United States tax code, solutions such as widening the tax brackets for high-income earners filing joint and a permanent extension of the marriage penalty relief of the Earned Income Tax Credit will have to suffice as potential short term solutions.