November 9 was a busy day in Washington for lawmakers in their race to create a tax reform package. The House Ways and Means Committee made amendments to, and approved, the Tax Cuts and Jobs Act. And the Senate Finance Committee released “policy highlights” for its proposed version of a tax plan.

Many of the House and Senate provisions are similar. For example, both plans would repeal the alternative minimum tax and retain the charitable contribution deduction. However, there are a number of key differences. Here is a high-level comparison of the House and the Senate tax bill proposals:

Individual taxes

The following changes would generally be effective beginning in 2018:

• Individual tax rates.
  • The House bill would consolidate the seven current federal income tax brackets into four: 12%, 25%, 35% and 39.6%.
  • The Senate plan would still have seven tax brackets, but they would be 10%, 12%, 22.5%, 25%, 32.5%, 35% and 38.5%. (Currently, the brackets are 10%, 15%, 25%, 28%, 33%, 35% and 39.6%.)
• Personal exemptions and standard deduction.
  • The House bill would eliminate the current personal exemptions for taxpayers and their dependents. It would nearly double the standard deduction to $12,000 for single filers and $24,000 for married couples (adjusted for inflation), which, for many taxpayers, would remove the incentive to itemize deductions. 
  • The Senate plan would do the same but includes an $18,000 standard deduction for single parents (head of household filers).
• Child tax credit.
  • The House bill would increase the child tax credit from $1,000 to $1,600 for each qualifying child. The credit would not be adjusted for inflation, so its value would drop over time, and some tax professionals predict that the increased credit would not offset the loss of personal exemptions for many higher-income families. 
  • The House also includes a $300 credit for nonchild dependents, as well as a $300 “family flexibility credit” for the taxpayer (or both spouses, for a joint return). The nonchild dependent credit and the family flexibility credit would be effective for tax years ending before January 1, 2023.
  • The House plan would also increase the income levels at which these credits phase out. Under current law, the child tax credit is phased out beginning at income levels of $75,000 for single filers and $110,000 for joint filers. The House plan would raise these amounts to $115,000 and $230,000, respectively.
  • The Senate plan would increase the child tax credit to $1,650. It also would significantly increase the annual income threshold at which the credit begins to phase out to $1 million for married joint filers and $500,000 for single taxpayers. In addition, the Senate plan would provide a $500 credit for dependents other than qualifying children.
• Mortgage interest deduction.
  • The House bill would cap the mortgage interest deduction limit at $500,000 of debt for homes purchased after November 2, 2017.
  • The Senate bill would keep the current mortgage interest deduction limit at $1 million of debt.
• State and local taxes.
  • The House bill would generally eliminate state and local tax write-offs but preserve a deduction for property taxes limited to $10,000.
  • The Senate bill would fully repeal deductions for state and local taxes, including property taxes.
  • The deduction of state and local income taxes would be repealed under both bills.
• Medical expense deduction.
  • The deduction generally allows taxpayers to deduct unreimbursed medical expenses that exceed certain amounts.
  • The House bill would get rid of the medical expense deduction. 
  • The Senate bill would retain it.
• Adoption tax credit.
  • The credit for adoption expenses would have been repealed under the original House bill but a November 9 amendment eliminated the repeal.
  • The Senate bill would also retain the credit for qualified expenses. 
  • It appears that the adoption tax credit is no longer a tax reform target.
• Enhanced standard deduction for blind and elderly taxpayers.
  • The House bill would eliminate this deduction.
  • The Senate plan would retain it.
• Estate tax.
  • The House bill would essentially double the gift, estate and generation-skipping transfer (GST) tax exemptions to $10 million (adjusted for inflation) and eliminate the estate and GST taxes entirely after 2023. That same year, it would reduce the gift tax rate to 35%.
  • The Senate bill would double the exemptions, similar to the House provision. But unlike the House, the Senate does not propose repealing the estate tax or GST tax or reducing the gift tax rate at any point.

Business taxes

These changes also would generally be effective beginning in 2018, but be sure to note the exceptions:

• Corporate tax rate.
  • The House bill would slash the corporate tax rate from 35% to 20% beginning in 2018 — the largest one-time reduction of the corporate rate in history.
  • The Senate plan also would cut the rate from 35% to 20%, but it would delay the change until 2019.
• Pass-through business tax rate.
  • The original House bill called for substantial changes to the taxation of owners of pass-through entities (sole proprietorships, partnerships and S corporations), and the Ways and Means Committee passed amendments to its bill on November 9 that would complicate matters further. The House bill would tax pass-through owners on their “business income” at a maximum rate of 25%, rather than at their individual income tax rate. Those “actively involved” in their businesses would pay their individual rate on 70% of their income (which would be deemed wages) and the 25% rate on the remaining income.
  • Alternatively, until 2023, these business owners would be able to apply a “facts-and-circumstances” formula that calculates the amount of their wage income based on their capital investment in their businesses. This option might be especially appealing for capital-intensive businesses. Personal services businesses (for example, law, accounting, consulting, engineering and financial services firms) wouldn’t be eligible for the 25% rate at all.
  • These provisions introduce more complexity into the income tax process. In addition, the National Federation of Independent Business expressed concern that the pass-through provisions would not help most small businesses, because their income is low enough that they already pay less than 25% in taxes.
  • In response to such criticism, the House on November 9 added an amendment to its bill that would provide relief to some small business owners. The amendment eventually would provide a 9% tax rate, in lieu of the ordinary 12% tax rate, for the first $75,000 in net business taxable income of an active owner or shareholder earning less than $150,000 in taxable income through a pass-through business and married filing jointly. (For single taxpayers, the $75,000 and $150,000 amounts would be $37,500 and $75,000, and, for heads of households, they’d be $56,250 and $112,500.)
  • The Senate bill would provide tax relief to owners of pass-through entities by establishing a “simple and easy-to-administer deduction for pass-through businesses of all sizes.” The deduction would amount to 17.4% for certain pass-through income. The deduction would be phased out for specified service businesses whose taxable income exceeded $150,000 for married joint filers and $75,000 for other taxpayers.
  • As taxable income exceeds $150,000 for married joint filers, the benefit of the 9% rate relative to the 12% rate is reduced, and it’s fully phased out at $225,000 for such filers. Businesses of all types would be eligible for the preferential 9% rate. The proposed 9% rate would be phased in over five tax years. The rate for 2018 and 2019 would be 11%. For 2020 and 2021, it would be 10%, and for 2022 and thereafter, it would be 9%.
• Depreciation of business assets.
  • The House bill would allow companies to immediately expense capital investments — except buildings — acquired and placed in service after September 27, 2017, and before January 1, 2023 (with an additional year for certain property with a longer production period).
  • In addition, under the House bill, the limit on Section 179 expensing for pass-through entities would rise to $5 million from $500,000, with the phaseout threshold increasing to $20 million from $2 million. These higher amounts would be adjusted for inflation, and the definition of “qualifying property” would be expanded but would not include property used in a real estate business. But the limits would be boosted for only five years, which some economists say isn’t long enough to encourage much capital investment.
  • The Senate plan would also allow for full and immediate expensing of qualifying assets acquired and placed in service before January 1, 2023, though there would be some differences in which assets would qualify. The Senate bill also would increase the Sec. 179 expensing limit, but only to $1 million, and would increase the phaseout threshold, but only to $2.5 million. The higher limits would, however, be permanent (and continue to be indexed for inflation).
• Nonqualified deferred compensation amendment.
  • When it was released, the House bill contained a provision that would tax an employee on nonqualified deferred compensation differently than it does now. It would essentially eliminate the ability to defer taxes beyond the vesting period. Business groups complained that the provision would mark the end of many nonqualified deferred compensation plans.
  • A House amendment, which was approved on November 9, would preserve the current tax treatment of nonqualified deferred compensation.
  • The Senate bill does propose significant changes to the tax treatment of nonqualified deferred compensation.  

Next Steps

Despite all of the proposed tax reform activity, there is still a long way to go before a law is passed. The full House of Representatives plans to vote on its bill as early as this week, according to Republican leaders. Senate Finance Committee members said they will make revisions to their plan in coming weeks before crafting a formal bill to be submitted for a full Senate vote.
The House and Senate must reconcile their differences into a single bill that Republican lawmakers hope to vote on before Christmas so that President Trump can sign it by December 31. Meanwhile, lobbyists and special interest groups, as well as taxpayers, will continue to weigh in, and some Republican lawmakers have already expressed opposition to parts of the proposals.
With the significant differences between the House and Senate plans, it remains to be seen whether they will craft a unified bill that can be passed by both chambers by the end of the year.
The SKR+CO tax team is actively monitoring tax reform proposals and will continue to provide updates as new information becomes available.

It is a small business world after all. With the ease and popularity of e-commerce, as well as the incredible efficiency of many supply chains, companies of all sorts are finding it easier than ever to widen their markets by crossing state lines.

But therein lies a risk: Operating in another state means possibly being subject to taxation in that state. The resulting liability can, in some cases, inhibit profitability while in other cases it can produce tax savings.

Do you have “nexus?”

Essentially, “nexus” means a business presence in a given state that is substantial enough to trigger that state’s tax rules and obligations.

Precisely what activates nexus depends on that state’s chosen criteria. Triggers can vary by state, but common criteria can include:

• Employing workers in the state.
• Owning (or, in some cases even leasing) property there.
• Marketing your products or services in the state.
• Maintaining a substantial amount of inventory there.
• Using a local telephone number.

A minimal amount of business activity in a given state may not create tax liability there. For example, an HVAC company that makes a few tech calls a year across state lines probably would not be taxed in that state. If you ask a salesperson to travel to another state to establish relationships or gauge interest – as long as he or she does not close any sales, and you have no other activity in the state, you likely will not have nexus.

Strategic moves

If your company already operates in another state and you’re unsure of your tax liabilities there — or if you’re thinking about starting up operations in another state — consider conducting a nexus study. This is a systematic approach to identifying the out-of-state taxes to which your business activities may expose you.

Keep in mind that the results of a nexus study may not be negative. For example, you may find that your company’s overall tax liability is lower in a neighboring state. In such cases, it may be advantageous to create nexus in that state.

The complexity of state tax laws offers both risk and opportunity. Contact your CPA business advisor to learn more.

Among the taxes that are being considered for repeal as part of tax reform legislation is the estate tax. This tax applies to transfers of wealth at death, hence why it is commonly referred to as the “death tax.” Its sibling, the gift tax — also being considered for repeal — applies to transfers during life. Yet most taxpayers will not face these taxes even if the taxes remain in place.

Exclusions and exemptions

For 2017, the lifetime gift and estate tax exemption is $5.49 million per taxpayer. (The exemption is annually indexed for inflation.) If your estate does not exceed your available exemption at your death, then no federal estate tax will be due.

Any gift tax exemption you use during life does reduce the amount of estate tax exemption available at your death. But every gift you make will not use up part of your lifetime exemption.

For example:

• Gifts to your U.S. citizen spouse are tax-free under the marital deduction. (So are transfers at death, bequests.)
• Gifts and bequests to qualified charities are not subject to gift and estate taxes.
• Payments of another person’s health care or tuition expenses are not subject to gift tax if paid directly to the provider.
• Each year you can make gifts up to the annual exclusion amount ($14,000 per recipient for 2017) tax-free without using up any of your lifetime exemption.

What is your estate tax exposure?

A simplified way to project your estate tax exposure is to take the value of your estate, net of any debts. Also subtract any assets that will pass to charity on your death.

Then, if you’re married and your spouse is a U.S. citizen, subtract any assets you will pass to him or her. (But keep in mind that there could be estate tax exposure on your surviving spouse’s death, depending on the size of his or her estate.) The net number represents your taxable estate.

You can then apply the exemption amount you expect to have available at death. Remember, any gift tax exemption amount you use during your life must be subtracted. But if your spouse predeceases you, then his or her unused estate tax exemption, if any, may be added to yours (provided the applicable requirements are met).

If your taxable estate is equal to or less than your available estate tax exemption, no federal estate tax will be due at your death. But if your taxable estate exceeds this amount, the excess will be subject to federal estate tax.

Be aware that many states impose estate tax at a lower threshold than the federal government does. So you could have state estate tax exposure even if you do not need to worry about federal estate tax.

If you’re not sure whether you’re at risk for the estate tax or if you’d like to learn about gift and estate planning strategies to reduce your potential liability, please contact your business advisor.

In light of the recent natural disasters, we feel it is prudent and timely to revisit casualty loss rules.

If you suffered damage to your home or personal property last year, you may be able to deduct these “casualty” losses on your 2017 federal income tax return. A casualty is a sudden, unexpected or unusual event, such as a natural disaster (hurricane, tornado, flood, earthquake, etc.), fire, accident, theft or vandalism. A casualty loss doesn’t include losses from normal wear and tear or progressive deterioration from age or termite damage.

Here are some things you should know about deducting casualty losses:

When to deduct. Generally, you must deduct a casualty loss on your return for the year it occurred. However, if you have a loss from a federally declared disaster area, you may have the option to deduct the loss on an amended return for the immediately preceding tax year.

Amount of loss. Your loss is generally the lesser of 1) your adjusted basis in the property before the casualty (typically, the amount you paid for it), or 2) the decrease in fair market value of the property as a result of the casualty. This amount must be reduced by any insurance or other reimbursement you received or expect to receive. If the property was insured, you must have filed a timely claim for reimbursement of your loss.

$100 rule. After you’ve figured your casualty loss on personal-use property, you must reduce that loss by $100. This reduction applies to each casualty loss event during the year. It doesn’t matter how many pieces of property are involved in an event.

10% rule. You must reduce the total of all your casualty or theft losses on personal-use property for the year by 10% of your adjusted gross income (AGI). In other words, you can deduct these losses only to the extent they exceed 10% of your AGI.

Have questions about deducting casualty losses? Contact your business advisor today.

Whether you filed your 2016 tax return by the April 18 deadline or you filed for an extension, you may be overwhelmed by the amount of documentation involved. While you need to hold on to all of your 2016 tax records for now, it is a great time to take a look at your records from previous tax years to see what you can purge.

Consider the statute of limitations
At minimum, keep tax records for as long as the IRS has the ability to audit your return or assess additional taxes, which generally is three years after you file your return. However, it may be extended to six years when there is a substantial understatement or omission. To be safe, we recommend keeping records for seven years.

Keep some documents longer

You will need to keep certain records beyond the statute of limitations:

• Tax returns. Keep them forever as a reference and a record that you filed.
• W-2 forms. Consider holding them until you begin receiving Social Security benefits. Why? In case a question arises regarding your work record or earnings for a particular year.
• Records related to real estate or investments. Keep these as long as you own the asset, plus three years after you sell it and report the sale on your tax return (or six years if you’re concerned about the six-year statute of limitations).

This is only a sampling of retention guidelines for tax-related documents. Please see our record retention schedule to create a personalized plan or contact your business advisor.

The kids are back to school and life is a little slower now. It’s a good time to look at your year-to-date federal and Colorado withholdings to make sure that you won’t have either a large balance due at year-end or a large overpayment on April 15, 2018.

Did you get a large refund with your 2016 return?  Are your work and tax circumstances about the same for 2017?  If so, perhaps you should reduce your withholding for the remainder of 2017. The ideal payroll withholding situation is to have just enough tax withheld to (1) avoid underpayment of estimated tax penalties and (2) avoid a large balance due on your 2017 tax returns.

Just stop by your payroll office and submit a new Form W-4 to change your withholding.

If you receive income that is not subject to withholding, you may need to either increase your withholding for 2017 or make estimated tax payments. If you make estimated tax payments, now is a good time to reassess your third and fourth quarter estimated tax payments or determine if you need to make additional estimated tax payments. This will allow you to avoid underpayment of estimated tax payments or to make sure that you don’t overpay your taxes for 2017.

You tax advisor can help you determine the amount of required withholding and/or estimated tax payments for 2017.

We’ve previously published several articles in our blog, Practice Elevations, related to the need for adequate internal controls to prevent theft in medical and dental practices.  Because of evidence that theft is increasingly common in small businesses, including professional practices, with the amount of losses also on the rise, we are returning to this subject again this month.

The 2016 report of the Association of Certified Fraud Examiners (ACPE) share reveals some sobering statistics:

• The survey results show that most businesses lose 5% of revenues each year as a result of theft, and much of that loss of revenues is to employees. Lost revenues have a particularly significant impact on the economic success of small businesses, including dental and medical practices.
• The median loss for all cases in the 2016 ACFE report was $150,000, up from $145,000 in the 2014 report. The median loss incurred by small businesses was the same as for largest businesses.
• The most frequent forms of theft involved billing and check tampering schemes.

Medical and dental practices are particularly susceptible to fraud and theft. It is estimated that fraud and theft account for three to 10 percent of total health care costs in the United States.  Why are medical and dental practices particularly susceptible?  In many cases, the practice, due to limited staffing resources and the existence of long-term employees and centralized accounting functions, has not implemented or deemed internal controls to be necessary in the past.

What practice and business circumstances lead most frequently to employee theft?  Here are three elements that are usually present when employees commit theft:

• Pressure – work related pressures or personal finance pressures
• Opportunity – lack of basic accounting and internal controls; prior lack of disciplinary action; misplaced trust of the employer
• Rationalization – the employee believes that the employer owes money to the employee or that the employee is just “borrowing” the money

What are some financial red flags that could indicate possible fraud or theft in your medical or dental practice?

• Increase in accounts receivable
• Decrease in collection ratio
• Increase in accounts payable
• Increase in over-time, but work output remains behind or not current
• Poor accounting records
• Large increase in supply expenses over prior periods
• Patient and payer complaints about recording of payments

What basic internal controls are a must for every medical and dental practice?

• Segregation of job duties
• Mandatory vacations
• Institute employee fidelity bonding, a form of insurance protection

Where are the potential weak spots in your practice that need internal controls and extra attention from practice management?

• Front desk
• Billing and collections
• Accounts payable
• Payroll

Below are basic internal controls for each of the areas that need controls and extra attention from management:

Front desk internal controls:

• Make sure that every patient encounter on the daily schedule has a charge and a payment.
• All payments received must be accounted for in the reconciliation at the end of the day.

Billing and collections internal controls:

• Segregate duties and cross train employees
• Consider a lockbox
• The total receipts in the general ledger (posted from the deposit slip) just agree to the total receipts posted in the billing system daily. If receipts are received at month end, before explanation of benefits, reconcile deferred revenue on a monthly basis so that cash collections in the financials agrees to cash collections in the practice management system.
• Randomly conduct spot checks every few days and routinely review adjustments to ensure there was a valid reason for making them. No charges can be written off without written consent by the manager. Often, just the knowledge that someone may be looking over their shoulder is enough to keep would-be fraudsters in line.
• Determine if the practice management system can block a 100% write-off.
• Monitor contractual adjustments
• Monitor bad debt write-offs

Accounts payable internal controls:

• Throw away all signature stamps!
• Ensure there is a regular check signer in the practice
• Develop a list of approved vendors
• There should be an invoice, stamped “paid” with each check so that the invoice cannot be paid a second time – either accidentally or deliberately, attached to each check. Signer should review each invoice for reasonableness
• Set bank account controls so that transfers can be made only between specified accounts at the same bank and only by authorized individuals
• Bank statements should be opened by an owner or by a manager who has no check writing/signing responsibilities. Review cancelled check payees
• Bank reconciliation should be prepared by someone who has no check writing or billing/collection/deposit responsibilities
• Regular and frequent review of general ledger detail
• Regular and frequent review of practice overhead

Payroll internal controls

• Managers approve payroll hours before submitted for payment
• All overtime must be approved by a manager in advance
• Periodically review year-to-date gross wages for individual employees to ensure that compensation is reasonable

Stockman Kast Ryan + CO can help you take fraud prevention a step further by conducting an external review of internal controls. In addition, an operational audit may be commissioned to help ensure that the practice is enjoying efficient operations while minimizing the risk of fraud loss.

 

Contact our office today to learn more. 

Collections are the lifeblood of any medical or dental practice. But do you really know if you’re doing a good job of collecting receivables? Find out for sure by monitoring these three collections performance indicators:

1. Days in Accounts Receivable

To find out how long it takes to collect a day's worth of gross charges, add up the charges posted for a specific period of time and divide by the total number of days in that period. Then divide the total accounts receivable by the average daily charges. 

For instance, if you have charged $640,000 in the past 12 months, or 365 days, your average daily revenue is $1,753. Then, if your total accounts receivable today are $80,000, the days in accounts receivable is 45.6. That means it is taking an average of 45.6 days to collect your payments. Note that if this number is consistently high — or you notice a jump in the number of days outstanding from one month to the next — it could be sign of problems caused by anything from coding errors and incomplete documentation to claims rejections caused by patient registration errors. 

Recommendation: We recommend that you use a rolling average of 12 months of charges for this computation. The results will vary by specialty and payer mix, but a typical goal for days in accounts receivable is 35 to 40 days.  

Action: Determine how your practice’s days in accounts receivable compares with other practices using a source such as the Medical Group Management Association (MGMA) annual Cost Survey Report or Performance and Practices of Successful Medical Groups Report. 

2. Accounts over 90 days

The practice’s aging report, based on date of entry and NOT ”re-aged,” should be reviewed monthly. Obviously, the longer an account remains unpaid the higher the risk of it becoming uncollectable. So, it’s critical to measure the percent of your accounts receivable in each “aging bucket.” 

Recommendation: We recommend that you review a separate aging report for both insurance and patient receivables monthly, paying particular attention to outlier payers in the insurance aging report to spot any developing trends. Credit balances in accounts receivable should be investigated and manually added back to each aging “bucket” to get a clear picture of accounts receivable aging. An acceptable performance indicator would be to have no more than 15 to 20 percent total accounts receivable in the greater than 90 days category. Yet, the MGMA reports that better-performing practices show much lower percentages, typically in the range of 5 percent to 8 percent, depending on the specialty. 

Action: Consider establishing a target AR range for your practice. For example, you might shoot for having 60 percent of receivables fall into the 0-30 days bucket, 20 percent in 31-60 days, 5 percent each at 61-90 days and 91-120 days, and 10 percent falling over 120 days. 

3. Net Collection Percentage

This is the bottom-line number that reveals how successful you were in collecting the money you are entitled to collect. Add up your total collections and divide by adjusted charges (charges less contractual adjustments) to determine how much you have actually collected. For example, if your practice only collected $50 on a procedure contracted for $75, your net collection rate would be 67 percent (50 divided by 100 minus 25). 

Recommendation: We recommend that you use a rolling average of 12 months of net charges and receipts for this calculation. In general, a net collection percentage of 97 percent or higher will help ensure a healthy bottom line for the practice.

Action: If your net collection rate is lower than this, drill down and calculate the net collection rate by each of your payers to determine if the problem is coming from a particular source. If net collection percentage is consistently down across all of your payers, you’ll know that the problem is internal (e.g. your front-end billing process is resulting in rejected claims). 
 

Contact our office today for help in monitoring your practice’s collection performance.

Stay on top of filing and reporting deadlines with our tax calendar! Our tax calendar includes dates categorized by employers, individuals, partnerships, corporations and more to keep you on track.

 

Colorado Secretary of State Wayne Williams recently urged Coloradans to be mindful when making a donation to Hurricane Harvey relief efforts.

“It is important for Coloradans to research the charities they support and trust that their donations are being used prudently,” he said.

Williams shared 10 tips to avoid charity scams.

10 tips to avoid charity scams

1. Ask for the registration number of the charity and paid solicitor.
2. Make a note of the individual caller’s first and last name and the name of the telemarketing company that employs the caller.
3. Ask the solicitor how much of the donation will go to the charity, whether the donation is tax deductible, and what charitable programs it will support.
4. If solicited in person, ask for the solicitor’s identification and registration number.
5. Resist pressure to give on the spot, whether from a telemarketer or door-to-door solicitor, and beware if they thank you for making a pledge you don’t remember making. If you feel uncomfortable, just say, “No, thank you.”
6. Do not pay in cash. Donate by check made payable to the charity or use the charity’s website to donate by credit card.
7. Make sure you are visiting the official website of the charity you wish to support, and beware of lookalike websites, especially if you are asked to provide personal financial information.
8. Research the charity’s disclosure and financial statements on the Secretary of State’s website.
9. Be wary if the charity fails to provide detailed information about its identity, mission, finances and how the donation will be used. Reputable charities will gladly provide the information requested.
10. Watch out for charities with names that sound similar to well-known organizations. These sound-alike names are intended to confuse.

 

If you have tax questions about donating to the hurricane relief efforts, please call your tax professional.