The Affordable Care Act (“ACA”) includes provisions that place restrictions on medical reimbursement plans and Health Reimbursement Arrangements (“HRAs”). These provisions are effective for plan years beginning after 2013. These rules apply to ALL employers, large and small. The following is a discussion of medical reimbursement plans and how the market reform provisions will affect employers offering these plans. 
 

Medical Reimbursement Plan and HRA Basics

 
By definition, medical reimbursement plans and HRAs are funded entirely but the employer and typically reimburse employees for out-of-pocket medical expenses and individual health insurance premiums. HRAs are a type of medical reimbursement plan with a feature that allows employees to carryover unused funds that were authorized, but not fully used, to the next tax year. Employees are reimbursed tax-free for qualified medical expenses up to a maximum dollar amount for each coverage period. The employer is also allowed to deduct the cost of the plan for tax purposes. The plan defines the types of health care costs for which the employee will receive reimbursement.  
 

New ACA Rules

 
Effective January 1, 2014 the market reform rules imposed by the ACA, eliminate the ability for some employers to use medical reimbursement plans and/or HRAs. Under these rules, health plans cannot impose annual dollar limits on certain health benefits, and they also must provide preventive health services at no cost to the employee. Unfortunately, most stand-alone medical reimbursement plans and HRAs do not meet these requirements.
 
In order to meet the market reform provisions of the ACA, the HRA plan must be integrated with primary health insurance coverage offered by an employer. There are rules here as well. In order for the HRA plan to be integrated with primary health insurance coverage, the HRA must only be available to employees who are covered by primary group health coverage that is provided by the employer and that meets the annual dollar limit prohibition.  
 
In addition, employer pretax reimbursement of non-employer sponsored health insurance premiums fails to meet the requirements of the market reform provisions. This also includes employer payment of premiums for non-employer sponsored health insurance directly to the insurance company. These are known as employer payment plans. The reasoning behind employer payment plans failing to meet the market reform provisions is that the ACA disallows a limitation on medical benefits provided under a group health plan, and an employer payment plan limits benefits to the amount of the premium reimbursed or paid. In order to comply with the market reform provisions, the employer may either provide an employer-sponsored qualified plan or replace a premium reimbursement arrangement with a taxable increase in wages that can be used by the employee to pay their own health insurance premiums. 
 

Penalties

 
The penalty for noncompliance with the market reform provisions of the ACA is severe. For violating these rules, an employer is subject to a penalty of $100 per day, per employee, or $36,500 per participant per year. It is imperative for employers to carefully consider whether their medical reimbursement plan or HRA violates the market reform provisions, causing the business to be subject to this penalty. 
 

More than 2% S Corporation Shareholder/Employees

 
It’s important to briefly discuss how these rules will affect a more than 2% shareholder/employee of an S Corporation. The basic rules are still the same from previous years. Employers can still reimburse or pay a more than 2% shareholder’s premiums, include the premium reimbursement in the shareholder’s W-2 (subject to income tax, not FICA), and deduct the additional compensation amount. Additionally, the shareholder can still deduct the premium reimbursement as an above-the-line, “for AGI” deduction even after 2013. Here’s where the market reform provisions of the ACA come into play. If the premiums that the S Corporation is paying or reimbursing are on non-employer sponsored health insurance for more than one S Corporation employee, then the reimbursement arrangement would be considered a group plan subject to the ACA provisions. Therefore, the penalty discussed above could apply, unless the premium reimbursement is included in the W-2 wages and taxable for BOTH income tax and FICA. 
 

Exceptions for Some Plans

 
There are some limited exceptions under which stand-alone medical reimbursement plans and HRAs may continue without violating the market reform provisions of the ACA. 

Conclusion

 
As a result of the market reform provisions of the ACA, employers are restricted from subsidizing or reimbursing employees for individual health insurance premiums on a pretax basis. Employers can however, provide a tax-free benefit to employees through an ACA-approved group health plan. They may also treat reimbursement of premiums for individual health insurance as compensation taxable for both income tax and FICA purposes. The penalties for noncompliance are harsh, so it’s important to understand how the ACA provisions will affect the plans that you currently have in place. Please give us a call at (719) 630-1186 if you need some assistance or have questions regarding this very complex topic.
As we move into 2015, the tax implications of the Affordable Care Act (ACA) are becoming a reality for most individuals. The purpose of this article is a discussion of the changes that will affect individual tax filers due to the Individual Shared Responsibility provisions attached to the ACA. The focus will be on the basic requirements of the provisions and new tax rules for the 2014 tax year and beyond. 
 

The Individual Shared Responsibility Provisions

Beginning in January 2014, nonexempt individuals were required to maintain minimum essential coverage health insurance for themselves and their dependents for each month during the taxable year. In order to meet this requirement, an individual must be enrolled in and entitled to receive benefits that include minimum essential coverage for at least one day in the month. 
 
 Individuals have several options for obtaining health insurance meeting the minimum essential coverage requirements including:
 
 

Minimum Essential Coverage

 
In order to qualify as minimum essential coverage, a plan must include items and services within at least these categories:

Health Insurance Premium Assistance Refundable Credit

To help subsidize the cost of health insurance, a premium assistance credit is available. This is a refundable tax credit available to an “applicable taxpayer” for any month that one or more members of the taxpayer’s family are enrolled in qualified health insurance through a state exchange, AND not eligible for coverage through another source such as employer or government coverage. 
 
The credit can be determined in advance by making a request to an Exchange. In that case, Treasury can make direct payments of the credits to health plan insurers. However, individuals may elect to purchase insurance without taking the credits at time of purchase and then apply to the IRS for the credit at the end of the tax year. 
 

Exemptions from Requirement for Health Coverage

Some individuals may be exempt from the requirement to maintain minimum health coverage. These include:
For further explanation of the exemptions, please follow this link:
http://www.irs.gov/uac/ACA-Individual-Shared-Responsibility-Provision-Exemptions
 

Payments Required for Noncompliance with the Individual Shared Responsibility Provisions

For 2014, the annual payment amount is the GREATER of 1% of household income that is above the tax return filing threshold for the taxpayer’s filing status, OR a family’s flat dollar amount. The flat dollar amount is $95 per adult and $47.50 per child, limited to a family maximum of $285 for 2014. The shared responsibility payments are phased in. For 2015, the payment is the greater of 2% of household income, or $325 per adult. For 2016, the payment is the greater of 2.5% of household income, or $695 per adult. 
 
For purposes of the individual shared responsibility payment, household income is defined as the sum of modified adjusted gross income (MAGI), plus the aggregate MAGI of all other individuals taken into account in determining the taxpayer’s family size. 
 
Example:  In 2014, the Smiths, a couple with no children, file a return as married filing jointly. They have household income of $150,000. The Smiths are both uninsured for the entire year of 2014. What is the Smiths’ shared responsibility payment?
 
The penalty is the greater of the flat dollar penalty or the percentage of income penalty, so in this case it would be $1,297. 
 

New Tax Forms and Reporting Required for Individual Shared Responsibility Provisions

Individuals will need to complete some new tax forms to include with their 2014 return. IRS Form 8962 will be used to compute Premium Tax Credits for individuals. This form should be filed by you if you are an individual taking the premium tax credit, or if advance payment of the premium tax credit was paid for you or anyone in your tax family. In addition, Form 8965 will be filed by you if you want to claim a coverage exemption for yourself or another member of your tax household. Form 1040 will also require new entries on line 46, Excess Advance Premium Tax Credit Repayment, line 61, Tax Owed for Individual Shared Responsibility Payment, and line 69, Net Premium Tax Credit. 
 
 
For Draft 2014 Form 1040, please follow this link:
http://www.irs.gov/pub/irs-dft/f1040–dft.pdf
 
For 2014 Form 8962, please follow this link:
http://www.irs.gov/pub/irs-pdf/f8962.pdf
 
For 2014 Form 8965, please follow this link:
http://www.irs.gov/pub/irs-pdf/f8965.pdf
 

Conclusion

Individual taxpayers filing 2014 tax returns in the year 2015 will be affected by the ACA Individual Shared Responsibility provisions. If you do not meet the requirements of the Individual Shared Responsibility provisions, you will be required to make a payment for noncompliance. Keep in mind that the payment amounts will increase for tax years 2015 and after, so it would be in the best interest of most individuals to comply with these provisions to avoid penalties in future tax years. 
 
We are always happy to discuss your individual tax situation with you and help you better understand these new provisions. You may contact us at (719) 630-1186 or through our Secure Email.
 
 

Many businesses will be affected by the Employer Shared Responsibility provisions of the Affordable Care Act (ACA). Beginning in January 2015, applicable large employers will be subject to these provisions and need to be in compliance to avoid making payments to the IRS. This article will discuss the changes that will come about for businesses due to the Employer Shared Responsibility provisions attached to the ACA including new tax rules for the 2015 tax year and beyond.

 

The Employer Shared Responsibility Provisions

Beginning in January 2015, employers with 100 or more full-time and full-time equivalent (FTE) employees in 2015 (reducing to 50 or more for 2016 and thereafter) may be assessed fees for any month they fail to offer employer-sponsored minimum essential coverage. They may also be assessed fees if they do offer employer-sponsored minimum essential coverage, but the employee contribution amount for this coverage is deemed unaffordable. Small employers and self-insured companies do not have to comply with the Employer Shared Responsibility Provisions. 
 
For purposes of the Employer Shared Responsibility provisions, a full-time employee is an individual employed on average at least 30 hours of service per week. An employer that meets the 50 full-time employee threshold (100 in the year 2015) is referred to as an applicable large employer. 
 
The Employer Shared Responsibility provisions generally are not effective until Jan. 1, 2015, meaning that no Employer Shared Responsibility payments will be assessed for 2014. Employers will use information about the number of employees they employ and their hours of service during 2014 to determine whether they employ enough employees to be an applicable large employer for 2015.
 

Are You an Applicable Large Employer?

To be subject to the Employer Shared Responsibility provisions for a calendar year, an employer must have employed during the previous calendar year at least 50 full-time employees or a combination of full-time and part-time employees that equals at least 50 (100 for tax year 2015). An employee working 130 hours in a calendar month will be treated as the monthly equivalent of 30 hours per week.
 
Part-time employees need to be converted to full-time equivalent employees by calculating the aggregate number of hours (but not more than 120 hours for any one-employee) for all employees who were not employed on average at least 30 hours per week for that month. Next, divide the total hours calculated by 120. This equals the number of full-time equivalent employees for the calendar month. Seasonal employees are not included in the calculation of FTE employees. 
  
Example:  Jones, Inc. has 92 full-time employees, plus 10 part-time employees for the month. The total number of hours worked for the month by part-time workers is 1,100. Calculate the number of full-time employees. 
 

 

Actual Number of Employees

Hours Worked

Divided by

FTE

Full-time

92

 

 

92

Part-time

10

1,100

120

9.2

Total

102

 

 

101

 
In this example, Jones, Inc. qualifies as an applicable large employer in 2015 because it has 101 full-time equivalent employees for the month. 
 
Companies with a common owner or part of a controlled group need to combine their employees to determine if the companies, collectively, constitute an applicable large employer. If the combined total meets the threshold, then each separate company is subject to the Employer Shared Responsibility Provisions. 
 

Requirements for Employer to Comply with ACA Provisions

Applicable large employers must offer minimum essential health coverage to 70% of full-time employees and their dependents to be compliant. The percentage increases to 95% in 2016 and thereafter. In addition, the health coverage offered by the employer must be affordable for the employee. For this requirement, an employee’s contribution for single coverage cannot exceed 9.5% of the employee’s annual household income. The plan is also required to provide minimum value coverage to employees and their dependents. A plan provides minimum value if it covers at least 60% of the total allowed cost of benefits that are expected to be incurred under the plan. 
 

Play or Pay – What is the Cost of Noncompliance?

Applicable large employers that are not in compliance with the Employer Shared Responsibility provisions may be subject to two new penalties beginning in 2015. A large employer may be liable for one, but not both, of these penalties. An applicable large employer may be assessed fees for each month they:
 
  1. Fail to offer employer-sponsored minimum essential coverage to 70% of full-time employees and their dependents (increasing to 95% in 2016), AND at least one full-time employee enrolls for coverage, from the Exchange, and receives a subsidy. The assessment is equal to 1/12 of $2,000, or $166.67 per month, for each full-time employee, less the first 80 employees in 2015 (decreasing to 30 in 2016 and thereafter).
  2. Offer employer-sponsored minimum value coverage to full-time employees and their dependents, but the employee contribution is deemed unaffordable, AND at least one employee enrolls for coverage, from the Exchange, and receives a subsidy. The assessment is the LESSER of:
 
Example:  For every month in 2015, ABC Corp. fails to offer minimum essential coverage to its 125 full-time employees. One of ABC’s employees receives a tax credit for enrolling in a plan offered on the Colorado Exchange. For 2015, ABC Corp. will be assessed a non-deductible excise tax of $90,000. (125 full-time employees – 80 for 2015 = 45 * $2,000 = $90,000)
 

New Tax Forms and Reporting Required for Employer Shared Responsibility Provisions

Applicable large employers that provide health insurance coverage through an employer-sponsored plan, whether through an insurance provider or self-insured plan, must provide coverage information statements to covered employees on Form 1095-C. A copy of form 1095-C will also be submitted by these employers to the IRS with transmittal Form 1094-C. Health insurers, including sponsors of self-insured plans, will provide required information to covered employees on Form 1095-B. A copy of this form will also be submitted by these health insurers to the IRS with transmittal Form 1094-B. 
 
For further explanation of these new forms, please follow this link:
https://www.skrco.com/blogs/news-and-tax-alerts/2014/8/27/new-aca-reporting-forms-you-need-to-know-about
 
For Draft 2014 Form 1095-C, please follow this link:
http://www.irs.gov/pub/irs-dft/f1095c–dft.pdf
 
For Draft 2014 Form 1095-B, please follow this link:
http://www.irs.gov/pub/irs-dft/f1095b–dft.pdf
 

Conclusion

As an employer, if you have not done so already, now is the time to determine whether you will be considered an applicable large employer. If you will be an applicable large employer, and you decide to provide an employer-sponsored health plan, you need to determine if the plan will be in compliance with the Employer Shared Responsibility provisions to avoid having to pay the excise tax. If you will be an applicable large employer and choose not to provide an employer-sponsored health plan, you should determine how much you will be required to pay and plan accordingly. If you have questions regarding this complicated subject matter, please contact us at (719) 630-1186.
 

New Filing Requirements for Business by Tax Year 2014 

In September of 2013, the IRS issued regulations, required to be employed on tax year 2014 returns, that created guidelines for treatment of tangible property expenditures, whether tangible personal or real property. These new tangible property regulations (TPRs) provide guidance on the capitalization and depreciation of capital expenditures, the treatment of materials and supplies, and the opportunity to write off all or a portion of an asset when disposed of. They present new risks and opportunities that affect taxpayers in every industry that owns depreciable capital assets, spends funds on repairs and maintenance, and/or material and supplies. Below is a summary of the new regulations and how they will impact your business. 
 

Required Tax Filings

 
The good news of the TPRs is that taxpayers who have significant fixed assets with remaining depreciation or real property will typically have large current and future tax deductions. In order to obtain these tax deductions, a significant amount of “one time” work and related IRS tax filings need to occur, and occur by tax year 2014. This work relates to accounting method change forms. On the other hand, taxpayers who have been able to write their asset acquisitions off under bonus or Section 179 deductions will see minimal tax deductions but are still subject to the “one time” new tax filing requirements for 2014.
 
It is unfortunate that the IRS has required the majority of the TPRs to be implemented: (a) retroactively, and (b) via the filings of numerous additional required special tax forms for tax year 2014. Retroactive application of the TPRs requires taxpayers to revisit every asset on its depreciation schedule to see if it should have been capitalized under the new capitalization rules or criteria (see below). If a prior asset/expenditure does not qualify as an asset under the new principals, it must be written off by 2014, or the opportunity to write off that item by tax year 2014 will be lost. The scary part of the TPRs is the threat of the IRS to disallow any future depreciation for prior items that do not pass the new capitalization criteria.
 
Example, ABC, Inc. capitalized a $40,000 roof expenditure ten years ago. After applying the new criteria, it is determined that the remaining tax depreciation of $30,000 should be written off in 2014. If ABC does not properly complete the “one time” tax filings in their 2014 return, ABC will permanently lose $30,000 as a tax deduction. It is not allowed to continue to take annual depreciation for this item. Even if ABC did not have a tax deduction to take for tax 2014, ABC still has to file those numerous “one time” tax forms. Additionally, the IRS requires that the accounting method change forms not all be filed together. This could require several different sets of these forms to be filed.
 
The word “required” used above is very important to us as your tax return preparers. As CPAs and as your tax preparer, we are required to follow the rules and restrictions of our state and federal licensing parameters. Those parameters subject us to very large preparer’s penalties and sanctions, should we not follow them. One of those rules and regulations prohibits us from preparing and/or signing your 2014 return unless that return includes the new TPR implementation and form submissions.
 

Capital expenditures

 
Taxpayers and their accountants have always faced the challenge of differentiating between what are capital improvements or repair and maintenance expenses as they sought the balance between accurately reflecting business profits verses maximizing tax deductions. The new TPRs dictate that expenditures must be written off as repairs if they are not required to be capitalized. That is, repairs and maintenance are the opposite of what is required to be capitalized. Consequently, an understanding of the capitalization rules is imperative. Rule: a taxpayer must capitalize any amounts that are paid to improve a unit of property or assets purchased. One makes an improvement to a unit of property if it is deemed to be betterment, a restoration, or adaption to a new or different use. The employment of this guidance is heavily fact specific. While there are no bright line tests, there are now known specific criteria that need to be applied to the expenditures. The new criteria also require a thorough review of the past and future expenditures on improvements. That review will determine if prior capitalized expenditures should now be written off and will determine whether future ones will be capitalized.
 

Unit of Property

 
The foundation of the capitalization rules is in the comparison of the expenditure to the unit of property. A unit of property consists of a group of functionally interdependent components. In other words, if placing one component in service is dependent on placing another component in service, then they are functionally interdependent and considered one unit of property.
 
For example, a truck and its components (engine, tires, etc.) are one unit of property because each of those components needs to be placed in service at the same time in order for the truck to function. The regulations have special rules for buildings. In general, a building and its structural components are one unit of property.
 
Examples of the structural components would be roofs, walls, floors, ceilings and other items that relate to the operation of a building. There are also certain “building systems” that the regulations have defined as separate units of property. These building systems include HVAC system, plumbing, electrical, escalators, elevators, fire protection, alarm/security and gas distribution. Even though a building is one unit of property, the capitalization criteria must be applied at the building structure or system level, and then even smaller comparisons for any item that performs a material and specific function.
 

New Capitalization Criteria

 
Once a unit of property is defined, a taxpayer then needs to determine if the amounts paid result in a betterment, restoration or adaption to new/different use, as follows:
 
Betterment: Funds spent to correct a material defect/condition that existed prior to the acquisition of a unit of property; result in a material addition to the unit of property (i.e. enlargement, expansion or extension); and/or result in a material increase in capacity, productivity, efficiency, strength, quality or output of the unit of property.
 
Restoration: Funds spent to return the unit of property to its ordinarily efficient operating condition if the property was in disrepair and no longer functional; replacement of a component of a unit of property where a gain/loss is recognized on the component; rebuilding the unit of property to a like-new condition after the end of its class life; or the replacement of part(s) that comprise a major component, large physical portion, or substantial structural part of the unit of property.
 
New/Different Use: Funds spent to adapt a unit of property to a new or different use if the adaption is not consistent with the taxpayer’s original intended use of the unit of property when acquired.
 
Example: Able Contractors LLC purchased a bulldozer tractor in 2008. In 2014, it paid $20,000 to have the engine and transmission rebuilt and everything repainted. Under the new regulations, this cost would fall under the restoration category discussed above and would be required to be capitalized. The applicable class life for a contractor is 6 years and in this example the item was rebuilt to a like-new condition after the end of its class life. Let’s assume the same facts but the bulldozer was purchased in 2010. As the class life of the tractor (6 years) does not end until 2015, the expenditures could be deducted.
 

Routine Maintenance Safe Harbor

 
The IRS offered some opportunities in the regulations by acknowledging that taxpayers do incur expenditures that assist in keeping a unit of property in its efficient operating condition. As a result, the IRS created the Routine Maintenance Safe Harbor (RMSH) rule that allows taxpayers to expense certain costs that are routine and reoccur at specific times during the use of unit of property. For personal property, an activity is reoccurring if you expect to do it more than once during the applicable class life of the unit of property. The RMSH has special rules for buildings and their structural components. In the case of a building and/or its components, an expenditure can be treated as a repair & maintenance if one reasonably expect to perform it more than once over a 10 year period of time. 
 

De Minimis Safe Harbor to acquire property

 
When a taxpayer purchases a unit of property, generally capitalization is required; however, the IRS provided some relief under the TPRs by creating a De Minimis Safe Harbor (DMSH) exception. This exception allows taxpayers to immediately deduct amounts they pay to acquire or improve property, if the taxpayer complies with all of the DMSH rules. The DMSH rules can be applied by all taxpayers if the rules are met. First, one must have a capitalization policy in place before the tax year starts. This policy must specify that expenditures under a certain dollar amount (i.e. like $1,000 and under) are allowed to be expensed. Additionally, the taxpayer must have an invoice, and deduct the expenditure on its books. Under the regulations, taxpayers who have an applicable financial statement (AFS) are granted safe harbor to be able deduct up to $5,000 of the cost of an item of property (per invoice) or expenditure. For those who do not have an AFS, the $5,000 safe harbor is reduced to $500 per item. Although the regulations state the $5,000/$500 as safe harbor limits, the capitalization policy should be set to an appropriate level for your business. During an IRS audit, the taxpayer has the burden of proving to the IRS that the amount paid in excess of the safe harbor was reasonable. The DMSH is a safe harbor and not a restricted ceiling limitation.
 
Example: XYZ, Inc. does not have an AFS, has a written policy in place before tax year begins that states they will expense property that costs $500 or less. XYZ purchases 25 items that cost $400 each on a total invoice of $10,000. Since XYZ has a written policy in place and each item (unit of property) is $500 or less, XYZ must expense the full $10,000 paid if it writes these items off on its books.
 

Disposals

 
As another positive aspect of the TPRs, it also allows taxpayers the opportunity to partially dispose of duplicate portions of property, including buildings and their structural components. Historically, for example, if one replaced a roof on a building and capitalized the replacement costs the taxpayer was not allowed to dispose of the prior roof. Under the TPRs, a taxpayer can elect to dispose of the prior roof. These partial asset dispositions provide an opportunity to write 
off duplicable assets for tax years prior to 2014 and are only available through the filing of the 2014 tax returns.
 

Materials and Supplies

 
Materials and supplies (M & S) are defined as tangible property, excluding inventory, which is used or consumed in operations and is: either (a) A component acquired to maintain, repair or improve a unit of tangible property, (b) bulk, such as fuel, water, lubricants and similar items that are reasonably expected to be used in 12 months or less, (c) temporary or emergency spare parts, (d) units of property whose useful life is 12 months or less, or (e) a unit of property with a cost less than $200. Once an item is determined to be M & S, the regulations require a taxpayer to classify these M & S as either incidental or nonincidental. Incidental materials and supplies can be deducted when they are purchased. On the other hand, nonincidental materials and supplies are required to be deferred and deducted in the year they are used or consumed. No later than tax year 2014, taxpayers are required to defer and keep a physical inventory or a record of consumption for its nonincidental M & S. This rule is trumped, up to the taxpayer’s DMSH. Taxpayers must review and adapt its accounting by tax year 2014 to conform its treatment of M & S to the TPRs.
 
Example, Bob’s Wood Shop has temporary machine parts and bulk wood treatment on hand at tax year end 2014, that are above its DMSH. Bob’s has to defer, and not take as tax deduction in 2014, these items.
 

Conclusion

 
While the new regulations are complex, understanding how they impact your business is critical to maximizing tax deductions while maintaining tax compliance. Past decisions regarding the Maintenance & Supplies expenditures, as well as the capitalization or write off of R & M must be reviewed to determine what changes are necessary under the new regulations. These changes will require the filing of certain IRS tax forms no later than tax year 2014 while other changes are either new annual elections or choices. Stockman Kast Ryan and Company has the resources and expertise to assist you in determining how these new regulations will affect your business.

Uncertainty over expired tax provisions complicates year end tax planning

Now that the final quarter of 2014 has begun, many businesses and individuals are turning their attention to year end tax planning. This year, however, uncertainty over dozens of expired or expiring tax provisions complicates the planning process, particularly for business owners.

Fifty-seven provisions expired at the end of 2013 and six more are scheduled to expire at the end of 2014. Congress may extend many of these provisions (in some cases retroactively to the beginning of 2014), but that likely won’t happen until after the midterm elections on Nov. 4 — and perhaps not for a month or more after that date. In the meantime, there are many year end tax planning strategies for businesses and individuals that are available now. Others won’t take shape until after Congress acts.

Keep an eye on expired tax breaks

Year end tax planning for businesses often focuses on acquiring equipment, machinery, vehicles or other qualifying assets to take advantage of enhanced depreciation tax breaks. Unfortunately, the following breaks were among those that expired at the end of 2013:

Enhanced expensing election. Before 2014, Section 179 permitted businesses to immediately deduct, rather than depreciate, up to $500,000 in qualified new or used assets. The deduction was phased out, on a dollar-for-dollar basis, to the extent qualified asset purchases for the year exceeded $2 million. Because Congress failed to extend the enhanced election, these limits have dropped to only $25,000 and $200,000, respectively, for 2014.

Bonus depreciation. Also expiring at the end of 2013, this provision allowed businesses to claim an additional first-year depreciation deduction equal to 50% of qualified asset costs. Bonus depreciation generally was available for new (not used) tangible assets with a recovery period of 20 years or less, as well as for off-the-shelf software. Currently, it’s unavailable for 2014 (with limited exceptions).

Lawmakers are considering bills that would restore enhanced expensing and bonus depreciation retroactively to the beginning of 2014, but probably won’t take any action until late in the year. In the meantime, how should you handle qualified asset purchases?

  1. If you need equipment or other assets to run your business, you should acquire it regardless of the availability of tax breaks.
  2. For less urgent asset needs, consider spending up to $25,000, the amount you’ll be able to expense regardless of whether Congress extends the expired breaks.
  3. For additional planned asset purchases, consider taking a wait-and-see approach and be prepared to act quickly if and when “tax extenders” legislation is signed into law.

Keep in mind that, to take advantage of depreciation tax breaks on your 2014 tax return, you’ll need to place assets in service by the end of the year. Paying for them this year isn’t enough.

Other expired tax provisions to keep an eye on include the Work Opportunity credit, Empowerment Zone incentives, the health care coverage credit and a variety of energy-related tax breaks.

Revisit the research credit

Congress is likely to extend the research credit (also commonly referred to as the “research and development” or “research and experimentation” credit), as it has done repeatedly since the credit was first established in 1981. But regardless of whether the research credit is restored, it pays to investigate whether your business is eligible for the credit for previous tax years.

Even if you lack the documentation to support traditional research credits, you may qualify for the alternative simplified credit (ASC). Until recently, the ASC could be claimed only on a timely filed original tax return. But the IRS issued new regulations in June allowing most eligible businesses to claim missed credits for open tax years by filing an amended return.

Don’t overlook the manufacturers’ deduction

Many businesses miss out on significant tax savings because they fail to recognize that they’re eligible for the manufacturers’ deduction, also called the “Section 199” or “domestic production activities” deduction. It allows you to deduct up to 9% of your company’s income from “qualified production activities,” limited to 50% of W-2 wages paid by the taxpayer that are allocable to domestic production gross receipts.

Many business owners assume that the deduction is available only to manufacturers. But it’s also available for certain construction, engineering, architecture, software development and agricultural activities.

Consider traditional year end strategies

As always, consider traditional year end planning strategies, such as deferring income to 2015 and accelerating deductions into 2014. If your business uses the cash method of accounting, you may be able to defer income by delaying invoices until late in the year or accelerate deductions by paying certain expenses in advance.

If your business uses the accrual method of accounting, you may be able to defer the tax on certain advance payments you receive this year. You may also be able to deduct year end bonuses accrued in 2014 even if they aren’t paid until 2015 (provided they’re paid within 2½ months after the end of the tax year).

But deferring income and accelerating deductions isn’t the best strategy in all circumstances. If you expect your business’s marginal tax rate to be higher next year, you may be better off accelerating income into 2014 and deferring deductions to 2015. This strategy will increase your 2014 tax bill, but it can reduce your overall tax liability for the two-year period.

Finally, consider switching your tax accounting method from accrual to cash or vice versa if your business is eligible and doing so will lower your tax bill.

Implement strategies for individuals

Like businesses, individuals often can reduce their tax bills by deferring income and accelerating deductions. To defer income, for example, you might ask your employer to pay your year end bonus in early 2015. And to accelerate deductions, you might pay certain property taxes early or increase your IRA or qualified retirement plan contributions to the extent that they’ll be deductible. Such contributions also provide some planning flexibility because you can make 2014 contributions to IRAs, and certain other retirement plans, after the end of the year.

Remember that, when you use a credit card to pay expenses or make charitable contributions this year, you can deduct them on your 2014 return even if you don’t pay your bill until next year.

Other year end tax planning strategies to consider include:

Investment planning. If you’ve sold stocks or other investments at a gain this year — or plan to do so — consider offsetting those gains by selling some of your poorly performing investments at a loss.

Reducing capital gains is particularly important if you’re subject to the net investment income tax (NIIT), which applies to taxpayers with modified adjusted gross income (MAGI) over $200,000 ($250,000 for joint filers). The NIIT is an additional 3.8% tax on the lesser of 1) your net income from capital gains, dividends, taxable interest and certain other sources, or 2) the amount by which your MAGI exceeds the threshold.

In addition to reducing your net investment income by generating capital losses, you may have opportunities to bring your MAGI below the threshold by deferring income or accelerating deductions.

Charitable planning. If you plan to make charitable donations, consider donating highly appreciated stock or other assets rather than cash. This strategy is particularly effective if you own appreciated stock you’d like to sell but you don’t have any losses to offset the gains. Donating stock to charity allows you to dispose of the stock without triggering capital gains taxes, while still claiming a charitable deduction. Then you can take the cash you’d planned to donate and reinvest it in other securities.

Monitoring expired tax breaks. Keep an eye on Congress. If certain expired tax breaks are extended before the end of the year, you may have some last-minute planning opportunities. Expired provisions include tax-free IRA distributions to charity for taxpayers age 70½ and older, the deduction for state and local sales taxes, the above-the-line deduction for qualified tuition and related expenses, and the credit for energy efficient appliances.

Start now

Most strategies for reducing your 2014 tax bill must be implemented by the end of the year, so it’s a good idea to start planning now. Uncertainty surrounding the fate of expired tax breaks complicates matters, so contact us today to develop contingency plans for dealing with whatever tax legislation is signed into law.

Effective Oct. 1, IRS Notice 2014-57, 2014–2015 Special Per Diem Rates, updates the per diem rates that can be used for reimbursement of ordinary and normal business expenses incurred while employees travel away from home. It also revises the list of high-cost localities for use in the high-low substantiation method. The per diem rates, which are established by the General Services Administration (GSA), are updated before the end of the federal government’s fiscal year. Some employers elect to use these rates to simplify recordkeeping.

Background

As long as employees properly account for their business-travel expenses, reimbursements are generally tax-free to the employees and deductible by the employer. But keeping track of actual costs can be a logistical nightmare. With the government-approved per diem rates, employees don’t have to keep receipts for all of their travel expenses. So, employees and employers alike often prefer this recordkeeping shortcut.

Here’s how the per diem method works: Assuming that the travel qualifies as a business expense, the employer simply pays the employee the per diem allowance designated for the specific travel destination and deducts the per diem paid. The employee doesn’t have to report the payments on his or her personal tax return but still must substantiate the time, place and business purpose of the travel.

Although the rates are set by the GSA to cover travel by government employees, private employers may also use them for their employees. The rates are updated annually for the following areas:

  • The 48 states in the continental United States and the District of Columbia (the “CONUS” rates),
  • Certain areas outside the continental United States, including Alaska, Hawaii, Puerto Rico and U.S. possessions (the “OCONUS” rates), and
  • Foreign countries outside the CONUS and OCONUS areas.

There are also optional rates for high-cost and low-cost areas. These designations simplify the expense reimbursement process even further by providing two per diem rates, one for high-cost localities and another for low-cost localities.

What do per diem rates cover?

Airfare and other transportation costs aren’t covered by the per diem rates. What the rates do include are amounts for lodging and amounts for meals and incidental expenses (M&IE). For this purpose, M&IE includes:

  • Meals and room service,
  • Laundry, dry cleaning and ironing of clothing, and
  • Fees and tips to service providers, such as food servers and luggage handlers.

Typically, if an employer chooses to use per diem rates, it uses them for all employees who regularly travel on business. An employer may choose to use the per diem rates for the specific travel destinations or for the high- and low-cost areas. However, per diem rates for lodging can’t be used by an employee who owns, either directly or indirectly, more than 10% of the company. Instead, these owners must keep track of the actual amount of those business-travel expenses and retain their receipts. For M&IE, even those who own more than 10% of the company may use the per diem rates.

What’s new in fiscal year 2015?

For fiscal year 2015 — which spans Oct. 1, 2014, through Sept. 30, 2015 —the per diem rate for high-cost areas has risen to $259, an increase of $8 over the prior year. This rate consists of $194 for lodging and $65 for M&EI.

The per diem rate for low-cost areas has increased by only $2. The low-cost per diem rate is now $172, including $120 for lodging and $52 for M&IE.

As usual, the list of cities (and their surrounding areas) included on the list of high-cost areas has been tweaked, and the time periods for which some of the seasonal areas will be included as high-cost areas have been revised. The changes are as follows:

  • San Mateo/Foster City/Belmont, Calif.; Sunnyvale/Palo Alto/San Jose, Calif.; Glendive/Sidney, Mont.; and Williston, N.D. have been added to the list of high-cost areas.
  • Time periods for Sedona, Ariz.; Napa, Calif.; Vail, Colo.; Fort Lauderdale, Fla.; Miami; and Philadelphia have been modified.
  • Yosemite National Park, Calif.; San Diego; and Floral Park/Garden City/Great Neck, N.Y., have been removed from the list of high-cost areas.

The definition of “incidental travel expenses” has also been modified. To remain consistent with Federal Travel Regulations, incidental expenses now include only fees and tips given to porters, baggage carriers, hotel staff and staff on ships.

Transportation between places of lodging or business and places where meals are taken is no longer included in incidental expenses. In addition, the costs of mailing or filing travel vouchers and paying employer-sponsored charge card billings are specifically excluded. So, employers that use per diem rates may separately reimburse employees for transportation and mailing expenses.

Timing is everything

The travel expense updates go into effect on Oct. 1, 2014. During the last three months of calendar 2014, an employer that uses the per diem or high-low method may switch to the new rates or continue with the rates it’s been using for the first nine months of 2014.

But an employer must select one year’s set of rates for this quarter and stick with it; it can’t use 2014 rates for some employees and 2015 rates for others. Likewise, an employer can’t use the 2014 list of high-cost areas for some reimbursements and the 2015 list for others. In addition, if an employer used the high-low substantiation method for the first nine months of the year, it must continue using that method through Dec. 31, 2014.

Because business-travel expenses often attract IRS attention, they require detailed, accurate recordkeeping. The per diem and high-low methods can make recordkeeping less burdensome, but they’re not the best solution for all employers. If you have questions regarding the expense substantiation methods, please give us a call.

– See more at: https://www.skrco.com/blogs/news-and-tax-alerts/2014/10/20/business-travel-per-diem-rates-updated-for-2015#sthash.cW3OJeGS.dpuf

Did you know that Colorado businesses, including banks, financial institutions and business entities of all types, are required to file reports and turn over unclaimed property when the business holds unclaimed property of customers, employees and others?

Colorado’s reporting requirements for the November 1, 2014 deadline

For all businesses and governmental agencies that are holders of unclaimed property, a Report of Unclaimed Property is due to the Colorado Department of Treasury on November 1, 2014, for the reporting period July 1, 2013 through June 30, 2014. The only exception to this reporting period is for life insurance companies that must report on a calendar year reporting period. If your business does not hold unclaimed property during a particular reporting year, no report is required. However, some businesses may choose to file a report even if no report is required, so that the statute of limitations doesn’t remain open.

With the Report of Unclaimed Property, businesses are required to report unclaimed property which was presumed abandoned during the previous 5-year period. For the report due on November 1, 2014, businesses will report property that was presumed to be abandoned during the period July 1, 2009 through June 30, 2014. Along with the report, businesses must also forward or remit unclaimed property to the State Treasurer. The State Treasurer then acts as the custodian and steward of the property until it is claimed by its rightful owner.

What is unclaimed property?

If the term unclaimed property is new to you, here are some facts about unclaimed property:  Unclaimed property is generally intangible property held by a business that has remained dormant or unclaimed by the rightful owner of the property for a period of 5 years from the last customer-initiated contact, generally. The dormancy period for payroll, wages and salary checks is one year. An IRA account becomes unclaimed property three years after the distribution date (when the owner becomes 72 and ½ years old) in most cases.

Common examples of unclaimed property include:

Checking and Savings Accounts Utility Refunds Stocks and Bonds
Oil and Gas Royalty Payments Safety Deposit Boxes Uncashed Insurance Checks
Payroll Checks Mutual Funds Money Orders
Gift Cards and Certificates Uncashed Dividends Security Deposits
Uncashed Checks Customer Refund Checks Credit Balances

 

Special considerations

All items of unclaimed property must be reported. However, like kind items with a value of less than $25 each may be reported in the aggregate. For some types of property, the holder can retain 2% or $25, whichever is more. However, this retainage is not applicable to property reported in the aggregate.

Small businesses with annual gross receipts of less than $500,000 do not need to file a Report of Unclaimed Property until the aggregated amount of unclaimed property exceeds $3,500 or any single item is $250 or more. All other businesses most report annually unless they have no unclaimed property for the year. Businesses must maintain records related to unclaimed property reporting for five years from the due date of the report. Failure to file and remit unclaimed property may result in penalties and interest.

How to notify owners and report unclaimed property

Businesses holding unclaimed property in the amount of $50 or more must send written notice to the owner’s last known address stating that property is being held and may be turned over to the State Treasury. This notice must be sent not more than 120 days before filing the unclaimed property report.

All 50 states have unclaimed property laws. You should report unclaimed property to the state of last known address of the owner. If your records do not include a state of last known address for unclaimed property, you should report to your company’s state of incorporation or to the state of domicile if the business is not incorporated.

The Colorado Treasury encourages electronic reporting of unclaimed property. Following is a link to a page that includes instructions to obtain software for unclaimed property reporting. http://www.colorado.gov/treasury/gcp/holderrep.html

Below are links to the Unclaimed Property Reporting Forms for Colorado:

http://www.colorado.gov/treasury/gcp/images/FormA.pdf

http://www.colorado.gov/treasury/gcp/images/FormB.pdf

If your business has unclaimed property, be aware that a failure to file and remit unclaimed property may result in penalties and interest. And keep in mind that your business must maintain records related to unclaimed property reporting for five years from the due date of the report.

For more information regarding unclaimed property, please give us a call at (719) 630-1186 or consult detailed information on the Colorado Treasury website at http://www.colorado.gov/treasury/gcp/

 

retirementThe bumpy economy and volatile markets haven’t made saving for retirement any easier. But, you’ve still got to keep saving for your golden years. And when doing so, everyone needs to abide by certain fundamentals.

Cash is king

Volatile markets aren’t the only danger your retirement nest egg faces. In fact, you could present one of the biggest dangers — if you make early withdrawals from your IRA or take a 401(k) plan loan.

For example, in addition to being subject to income tax, traditional IRA withdrawals before age 59½ will likely be subject to a 10% early withdrawal penalty. A 401(k) loan (if your plan allows) won’t create a tax liability. However, if you default on it, your outstanding balance will be treated as a distribution and trigger any additional tax liabilities and penalties.

Perhaps more important, the amount that can continue to grow tax-deferred — tax-free in the case of a Roth account — will be reduced after a retirement plan withdrawal or loan, which can significantly shrink what you have at retirement.

To avoid having to tap into your retirement plan, maintain a cash reserve. The optimal amount will vary depending on your age, health, available credit and job situation. But generally you should have enough cash on hand to cover three to six months of living expenses.

Contributions count

While market volatility may make you leery of putting more into your retirement plan, for most people it’s advantageous to do so. First, the power of a retirement plan is tax-deferred (or, in the case of Roth accounts, tax-free) growth. The more time funds have to grow, the larger your nest egg can become.

Second, when the value of stocks is low, you can buy more shares for the same amount of money. Assuming retirement is still at least several years away (so there’s ample time for the market to recover), a down market can be a great time to buy.

Third, if your employer offers a match, at minimum you should contribute enough to get the maximum match. If you don’t, it’s essentially like turning down additional compensation.

Financial objectives change

Examine your investments to see whether the allocation percentages are in harmony with your current risk tolerance and financial objectives. Diversification (which offers not only some protection during market declines, but also higher potential returns over the long run) continues to be a critical investment strategy.

Because retirement plans are subject to annual contribution limits, many people also need to save for retirement outside these tax-advantaged accounts. Consider the tax consequences of investments that create realized capital gains or dividend distributions, because they’ll affect your return on investment. And remember that timing can have a dramatic impact.

For instance, the top long-term capital gains rate of 20% is nearly 20 percentage points lower than the highest ordinary-income tax rate of 39.6% — and it generally applies to the sale of investments held for more than 12 months. Even if you’re not subject to these top rates, paying tax at your long-term capital gains rate rather than your ordinary-income tax rate will provide substantial savings.

Insurance is integral

If you’re like most Americans, your biggest asset is your ability to earn income. Disability insurance can help you protect that asset.

Although many employers offer short-term disability insurance, you may wish to obtain additional, long-term coverage. In computing the level of coverage to carry, plan so that monthly income (based on disability benefits and your current resources) equals at least 60% of your pretax salary.

Also evaluate whether you have adequate life insurance. The amount needed will depend on your current net worth, the lifestyle you want to provide for your family, and your personal circumstances and desires.

Time goes on

Just about everyone’s retirement needs evolve. But that doesn’t mean retirement planning itself changes drastically. Fundamentals such as these should help you get to where you want to go. 

 

The bumpy economy and volatile markets haven’t made saving for retirement any easier. But, you’ve still got to keep saving for your golden years. And when doing so, everyone needs to abide by certain fundamentals.

Cash is king

Volatile markets aren’t the only danger your retirement nest egg faces. In fact, you could present one of the biggest dangers — if you make early withdrawals from your IRA or take a 401(k) plan loan.

For example, in addition to being subject to income tax, traditional IRA withdrawals before age 59½ will likely be subject to a 10% early withdrawal penalty. A 401(k) loan (if your plan allows) won’t create a tax liability. However, if you default on it, your outstanding balance will be treated as a distribution and trigger any additional tax liabilities and penalties.

Perhaps more important, the amount that can continue to grow tax-deferred — tax-free in the case of a Roth account — will be reduced after a retirement plan withdrawal or loan, which can significantly shrink what you have at retirement.

To avoid having to tap into your retirement plan, maintain a cash reserve. The optimal amount will vary depending on your age, health, available credit and job situation. But generally you should have enough cash on hand to cover three to six months of living expenses.

Contributions count

While market volatility may make you leery of putting more into your retirement plan, for most people it’s advantageous to do so. First, the power of a retirement plan is tax-deferred (or, in the case of Roth accounts, tax-free) growth. The more time funds have to grow, the larger your nest egg can become.

Second, when the value of stocks is low, you can buy more shares for the same amount of money. Assuming retirement is still at least several years away (so there’s ample time for the market to recover), a down market can be a great time to buy.

Third, if your employer offers a match, at minimum you should contribute enough to get the maximum match. If you don’t, it’s essentially like turning down additional compensation.

Financial objectives change

Examine your investments to see whether the allocation percentages are in harmony with your current risk tolerance and financial objectives. Diversification (which offers not only some protection during market declines, but also higher potential returns over the long run) continues to be a critical investment strategy.

Because retirement plans are subject to annual contribution limits, many people also need to save for retirement outside these tax-advantaged accounts. Consider the tax consequences of investments that create realized capital gains or dividend distributions, because they’ll affect your return on investment. And remember that timing can have a dramatic impact.

For instance, the top long-term capital gains rate of 20% is nearly 20 percentage points lower than the highest ordinary-income tax rate of 39.6% — and it generally applies to the sale of investments held for more than 12 months. Even if you’re not subject to these top rates, paying tax at your long-term capital gains rate rather than your ordinary-income tax rate will provide substantial savings.

Insurance is integral

If you’re like most Americans, your biggest asset is your ability to earn income. Disability insurance can help you protect that asset.

Although many employers offer short-term disability insurance, you may wish to obtain additional, long-term coverage. In computing the level of coverage to carry, plan so that monthly income (based on disability benefits and your current resources) equals at least 60% of your pretax salary.

Also evaluate whether you have adequate life insurance. The amount needed will depend on your current net worth, the lifestyle you want to provide for your family, and your personal circumstances and desires.

Time goes on

Just about everyone’s retirement needs evolve. But that doesn’t mean retirement planning itself changes drastically. Fundamentals such as these should help you get to where you want to go.

 

If you donate property to charity, it’s critical that you comply with tax rules for substantiating the value of your gift. If you don’t, the IRS may deny your entire charitable deduction, even if your valuation is spot-on.

 

Qualified appraisal required

To deduct a donation of property (other than publicly traded securities) worth more than $5,000 ($10,000 for closely held stock), you’re required to have the property appraised by a qualified appraiser.

You must also file Form 8283, “Noncash Charitable Contributions,” with your federal tax return and have the appraiser sign the form’s Section B, Part III, “Declaration of Appraiser.” For property worth more than $500,000, you must also attach the appraisal report to your return.

A qualified appraiser is a professional who has earned an appraisal designation from a recognized professional organization or otherwise meets certain minimum education and experience requirements. The appraiser should also have appropriate education and experience in valuing the type of property being appraised. The tax regulations provide detailed requirements for qualified appraisals. Among other things, a qualified appraisal report must:

  • Be prepared, signed and dated by a qualified appraiser other than the donor or donee,
  • Relate to an appraisal conducted within 60 days before the contribution,
  • Not involve a “prohibited appraisal fee,” and
  • Provide certain information, including a description of the property and its physical condition, the actual or expected contribution date, the terms of any agreements that affect the property’s value, the appraiser’s identity and qualifications, the valuation date, and the methods and basis of valuation.

A prohibited appraisal fee is one that’s based on a percentage of the property’s appraised
value (or a percentage of the allowed deduction), with certain exceptions.

Dot the i’s and cross the t’s

The qualified appraisal requirement is one where form is just as important as substance. If you don’t follow the rules to the letter, you’ll likely lose valuable tax deductions regardless of whether the reported value is accurate. In the case of Mohamed v. Commissioner, a married couple learned this lesson the hard way.

In 2003 and 2004, the couple donated several pieces of real estate to a charitable remainder trust (CRT). The husband, a real estate broker and certified real estate appraiser, “self-appraised” the properties to be worth approximately $18.5 million. At the time, donations greater than $5,000 required an appraisal summary. (The requirement of an appraisal report for donations greater than $500,000 was added later.)

The husband filled out Form 8283 himself, admittedly without reading the instructions. Although he attached statements to the form containing information about the properties and their value, the statements didn’t qualify as appraisal summaries. The couple’s biggest problem, though, was that the husband wasn’t a qualified appraiser, because he was both the donor and — as trustee of the charitable trust — the donee.

Because the couple failed to adequately substantiate their donation, the Tax Court denied them any charitable deduction. After the IRS started its audit, an independent appraiser valued the properties at more than $20 million, but by then it was too late.

Get the deductions you deserve

If you plan to donate property to charity, discuss the appraisal requirements with your tax advisor. Why? Because, as you can see, just one mistake can wipe out otherwise legitimate tax benefits.