Are frequent flyer miles ever taxable?

If you recently redeemed frequent flyer miles to treat the family to a fun summer vacation or to take your spouse on a romantic getaway, you might assume that there are no tax implications involved. And you’re probably right — but there is a chance your miles could be taxable.

Usually tax free

As a general rule, miles awarded by airlines for flying with them are considered nontaxable rebates, as are miles awarded for using a credit or debit card.

The IRS partially addressed the issue in Announcement 2002-18, where it said “Consistent with prior practice, the IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel.”

Exceptions

There are, however, some types of mile awards the IRS might view as taxable. Examples include miles awarded as a prize in a sweepstakes and miles awarded as a promotion.

For instance, in Shankar v. Commissioner, the U.S. Tax Court sided with the IRS, finding that airline miles awarded in conjunction with opening a bank account were indeed taxable. Part of the evidence of taxability was the fact that the bank had issued Forms 1099 MISC to customers who’d redeemed the rewards points to purchase airline tickets.

The value of the miles for tax purposes generally is their estimated retail value.

If you’re concerned you’ve received mile awards that could be taxable, please contact us and we’ll help you determine your tax liability, if any.

© 2016

The IRS can reclassify S corporation distributions as wages

If you run your business as an S corporation, you’re probably both a shareholder and an employee. As such, the corporation pays you a salary that reflects the work you do for the business — and you (and your company) must remit payroll tax on some or all of your wages.

By distributing profits in the form of dividends rather than salary, an S corporation and its owners can avoid payroll taxes on these amounts. Because of the additional 0.9% Medicare tax on wages in excess of $200,000 ($250,000 for joint filers and $125,000 for married filing separately), the potential tax savings from classifying payments as dividends rather than salary may be even greater than it once would have been.

IRS audit target

But paying little or no salary is risky. The IRS targets S corporations with owners’ salaries that it considers unreasonably low and assesses unpaid payroll taxes, penalties and interest.

To avoid such a result, S corporations should establish and document reasonable salaries for each position using compensation surveys, comparable industry studies, company financial data and other evidence. Spell out the reasons for compensation amounts in your corporate minutes. Have the minutes reviewed by a tax professional before being finalized.

Prove a salary is reasonable

There are no specific guidelines for reasonable compensation in the tax code or regulations. Various courts, which have ruled on this issue, have based their determinations on the facts and circumstances of each case. Factors considered in determining reasonable compensation include:

• Training and experience,
• Duties and responsibilities,
• Time and effort devoted to the business,
• Dividend history,
• Payments to non-owner employees,
• Timing and manner of paying bonuses to key people, and
• Compensation agreements.

Ascertain the right mix

Do you have questions about compensation? Contact us. We can help you determine the mix of salary and dividends that can keep your tax liability as low as possible while standing up to IRS scrutiny.

© 2016

IRS Summertime Tax Tip - Moving Expenses Can Be Deductible

Moving Expenses Can Be Deductible

IRS Summertime Tax Tip 2016-20
                                           
Did you move due to a change in your job or business location? If so, you may be able to deduct your moving expenses, except for meals. Here are the top tax tips for moving expenses.
In order to deduct moving expenses, your move must meet three requirements:

1. The move must closely relate to the start of work.  Generally, you can consider moving expenses within one year of the date you start work at a new job location. Additional rules apply to this requirement.
   
2. Your move must meet the distance test.  Your new main job location must be at least 50 miles farther from your old home than your previous job location. For example, if your old job was three miles from your old home, your new job must be at least 53 miles from your old home.
   
3. You must meet the time test.  After the move, you must work full-time at your new job for at least 39 weeks in the first year. If you’re self-employed, you must meet this test and work full-time for a total of at least 78 weeks during the first two years at your new job site. If your income tax return is due before you’ve met this test, you can still deduct moving expenses if you expect to meet it.

See Publication 521, Moving Expenses, for more information about these rules. It’s available on IRS.gov/forms anytime.
If you can claim this deduction, here are a few more tips from the IRS:

• Travel.  You can deduct transportation and lodging expenses for yourself and household members while moving from your old home to your new home. You cannot deduct your travel meal costs.
• Household goods and utilities.  You can deduct the cost of packing, crating and shipping your things. You may be able to include the cost of storing and insuring these items while in transit. You can deduct the cost of connecting or disconnecting utilities.
• Nondeductible expenses.  You cannot deduct as moving expenses any part of the purchase price of your new home, the cost of selling a home or the cost of entering into or breaking a lease. See Publication 521 for a complete list.
• Reimbursed expenses.  If your employer later pays you for the cost of a move that you deducted on your tax return, you may need to include the payment as income. You report any taxable amount on your tax return in the year you get the payment.
• Address Change.  When you move, be sure to update your address with the IRS and the U.S. Post Office. To notify the IRS file Form 8822, Change of Address.

Premium Tax Credit – Changes in Circumstances.
If you or anyone in your family purchased health coverage through the Marketplace and had advance payments of the premium tax credit paid in advance to your insurance company to lower your monthly premiums, it is important to report life changes to the Marketplace when they happen. Moving to a new address is one change you should report. Other things to report include changes in your income, employment, family size, and gaining or losing eligibility for other coverage. Reporting life changes as they happen allows the Marketplace to adjust your advance credit payments. This will help you avoid a smaller refund or unexpectedly owing taxes when you file your tax return

An effective succession plan calls for decisive action

The prospect of leaving your company in the hands of someone else likely brings mixed emotions. You’ve no doubt spent a substantial amount of time and a great degree of effort in getting your enterprise to where it is today. So, as the saying goes, parting will be such sweet sorrow.

Yet, when it comes to creating and executing a succession plan, decisive action is critical. You’ve got to respect the importance of timeliness — not only for you and your family, but also for your successor and employees. So here are two key questions to answer.

1. When’s your target date?

By designating your departure date far enough in advance, you’re more likely to pick the right successor, as well as facilitate a smoother transfer of power.

In some industries, it can take years to appoint and train a qualified successor and effectively work through the many management, ownership and organizational issues. But don’t choose a date too far away, because your successor-to-be may get tired of waiting.

2. How will you break the news?

Maybe it’s many years away, maybe it’s sooner than that. But don’t wait too long to reveal to staff when you’re leaving the company and whom you’ve selected as a replacement. Giving everyone ample notice (as long as one to two years) will allow plenty of time for employees to voice their concerns about your successor and the transition as a whole.

Break the news gently to gain their support for the new boss while giving employees good reasons to stay with your company. If disagreements arise, discuss the issues openly. Seek compromise by enabling your successor to exercise his or her newfound decision-making authority but staying involved as a consultant to ensure he or she doesn’t alienate staff.

Need some help?

Coming up with — and carrying out — a succession plan can be among the most difficult things a business owner ever does. Please contact us for help assessing the financial and operational viability of your plan.

© 2016

Now’s the time to start thinking about “bunching” — miscellaneous itemized deductions, that is

Many expenses that may qualify as miscellaneous itemized deductions are deductible only to the extent they exceed, in aggregate, 2% of your adjusted gross income (AGI). Bunching these expenses into a single year may allow you to exceed this “floor.” So now is a good time to add up your potential deductions to date to see if bunching is a smart strategy for you this year.

Should you bunch into 2016?

If your miscellaneous itemized deductions are getting close to — or they already exceed — the 2% floor, consider incurring and paying additional expenses by Dec. 31, such as:

• Deductible investment expenses, including advisory fees, custodial fees and publications
• Professional fees, such as tax planning and preparation, accounting, and certain legal fees
• Unreimbursed employee business expenses, including vehicle costs, travel, and allowable meals and entertainment.

But beware …

These expenses aren’t deductible for alternative minimum tax (AMT) purposes. So don’t bunch them into 2016 if you might be subject to the AMT this year.

Also, if your AGI exceeds the applicable threshold, certain deductions — including miscellaneous itemized deductions — are reduced by 3% of the AGI amount that exceeds the threshold (not to exceed 80% of otherwise allowable deductions). For 2016, the thresholds are $259,400 (single), $285,350 (head of household), $311,300 (married filing jointly) and $155,650 (married filing separately).

If you’d like more information on miscellaneous itemized deductions, the AMT or the itemized deduction limit, let us know.

© 2016

Using independent contractors? Protect your business with these tips

Many businesses use independent contractors to keep payroll taxes and fringe benefit costs down. But using outside workers may result in other problems. The IRS often questions businesses about whether workers should be classified as employees or independent contractors for federal employment tax purposes.

If the IRS reclassifies a worker as an employee, your company could be hit with back taxes, interest and penalties. In addition, the employer could be liable for employee benefits that should have been provided but weren’t. Audits by state agencies may also occur.

The key is control

So, how can you safeguard your use of independent contractors? Unfortunately, no single factor determines a worker’s legal status. The issue is complicated, but the degree of control you have over how a worker gets the job done is often considered the most important factor. Little or no control indicates independent contractor status.

The IRS looks at a number of other issues, including:

Tools and facilities. Employers usually give tools, equipment and workspace to employees, while contractors invest their own money in these items.

Hours. Employees generally have set schedules, while contractors are allowed greater flexibility. (However, the IRS recognizes that some work must be done at specific times.)

Important steps

With those guidelines in mind, here are some tips:

1. Clarify the relationship with a written independent contractor agreement. Include details, such as the services the contractor will perform, the term of the agreement and how much you’ll pay. Include statements that the individual is an independent contractor and will pay federal and state taxes.
2. Give contractors leeway over how they perform their duties. Resist the urge to supervise them the way you oversee employees.
3. Send each contractor (and the IRS) a Form 1099 showing non-employee income if you pay him or her $600 or more in a calendar year.
4. Maintain good records. Keep an independent contractor’s taxpayer ID number and other information required by the IRS, but also keep items that can help prove the person is self-employed. For example, retain business cards, letterheads, invoices and advertisements from independent contractors.

In many cases, proactive planning can help secure independent contractor status. Contact us if you have questions about worker classification.

Should you offer spousal health care coverage?

When looking to manage benefits costs, employers have many ideas to consider. One in particular is whether and how to offer health care insurance to their employees’ spouses.

The Affordable Care Act doesn’t require spousal coverage. It only requires coverage for dependent children. But many employees may frown on seeing spousal coverage suddenly become expensive or vanish entirely. So this is a question warranting careful forethought.

2 established ways

Essentially, there are two established ways of saving money on spousal coverage: 1) rationalizing the expense through a cost-sharing surcharge, or 2) eliminating coverage altogether through a “spousal carve-out” policy.

Few employers appear willing to lower the boom on spousal coverage by eliminating it (also known as an “absolute carve-out”) — especially when spouses lack access to coverage through their own employers. Forcing workers’ spouses to seek coverage on the individual market, possibly at a very high cost, would likely embitter the affected employees, potentially increasing turnover.

Potential variations

But it doesn’t have to be an all-or-nothing proposition. One variation on the surcharge approach is to give a monetary award to employees whose spouses switch from your plan to the spouse’s employer’s plan.

Or you could have a spousal carve-out program with an escape hatch. Such an arrangement would allow the spouse to remain on your plan if the price the spouse would have to pay for coverage under his or her own employer’s plan exceeds a specified threshold.

Still another approach is to require employed spouses whose own employers offer coverage to enroll in those plans in order to receive benefits under your plan. This way, yours becomes the secondary plan, incurring only the portion of claims not covered by the spouse’s employer’s plan (the primary plan).

Worthy contemplation

Unfortunately, there are no quick and easy ways to keep health care plan costs in check. But policies that ensure you aren’t paying the medical bills of employee spouses who could be getting coverage through their own employers are certainly worth contemplating.

What you need to know about estimated tax payments

Paying the proper amount of tax by the annual federal income tax filing deadline isn’t enough to avoid interest and penalties; you must also meet requirements for paying tax throughout the year through withholding and/or quarterly estimated tax payments. If you have income from sources such as self-employment, interest, dividends, alimony, rent, prizes, awards or the sales of assets, you may have to pay estimated tax.

The rules

Generally, you must pay estimated tax if both of these statements apply:

1. You expect to owe at least $1,000 in tax after subtracting tax withholding and credits, and
2. You expect withholding and credits to be less than the smaller of 90% of your tax for the year or 100% of the tax on your previous year’s return. There are special rules for farmers, fishermen, certain household employers and certain higher-income taxpayers.

If you’re a sole proprietor, partner or S corporation shareholder, you generally have to make estimated tax payments if you expect to owe $1,000 or more in tax when you file your return.

Making the payments

Payments are spaced through the year into four periods or due dates. Generally, the due dates are April 15, June 15, Sept. 15 and Jan. 15, unless the date falls on a weekend or holiday.

Estimated tax is calculated by factoring in expected gross income, taxable income, taxes, deductions and credits for the year. The easiest way to pay estimated tax is electronically through the Electronic Federal Tax Payment System. You can also pay estimated tax by check or money order using the Estimated Tax Payment Voucher or by credit or debit card.

If you’d like assistance determining whether you need to pay estimated tax or calculating your payments, contact us.

Combining business and vacation travel: What can you deduct?

If you go on a business trip within the United States and tack on some vacation days, you can deduct some of your expenses. But exactly what can you write off?

Transportation expenses

Transportation costs to and from the location of your business activity are 100% deductible as long as the primary reason for the trip is business rather than pleasure. On the other hand, if vacation is the primary reason for your travel, then generally none of your transportation expenses are deductible.

What costs can be included? Travel to and from your departure airport, airfare, baggage fees, tips, cabs, and so forth. Costs for rail travel or driving your personal car are also eligible.

Business days vs. pleasure days

The number of days spent on business vs. pleasure is the key factor in determining if the primary reason for domestic travel is business. Your travel days count as business days, as do weekends and holidays if they fall between days devoted to business, and it would be impractical to return home.

Standby days (days when your physical presence is required) also count as business days, even if you aren’t called upon to work those days. Any other day principally devoted to business activities during normal business hours also counts as a business day, and so are days when you intended to work, but couldn’t due to reasons beyond your control (such as local transportation difficulties).

You should be able to claim business was the primary reason for a domestic trip if business days exceed personal days. Be sure to accumulate proof and keep it with your tax records. For example, if your trip is made to attend client meetings, log everything on your daily planner and copy the pages for your tax file. If you attend a convention or training seminar, keep the program and take notes to show you attended the sessions.

Once at the destination, your out-of-pocket expenses for business days are fully deductible. These expenses include lodging, hotel tips, meals (subject to the 50% disallowance rule), seminar and convention fees, and cab fare. Expenses for personal days are nondeductible.

We can help

Questions? Contact us if you want more information about business travel deductions

4 pillars of robust business growth

Many businesses start life small and simple. But with growth comes the need for a stronger company infrastructure and increased operational sophistication. As you pursue a more robust business, focus on these four pillars:

1. Organizational management

Implement a formalized system for measuring performance that begins with written job descriptions and training. Issue a clearly written handbook of company policies. Give employees regular and constructive feedback.

Taking these steps is not only necessary — it also serves to motivate, compensate and reward staff members. Strong organizational management is particularly key to attracting and retaining good employees, who typically desire an objective and well-balanced performance evaluation system.

2. Business processes

At the core of your business are its processes. The more you can systematize and document them, the more easily you can train your staff to follow them for increased efficiency, productivity and quality.

Professionalizing your business processes also involves streamlining operations in mission-critical areas. These include sales and marketing, finance, human resources, and customer product and service delivery.

3. Strategic planning

For new businesses and many small ones, business planning discussions occur randomly and informally. But, as your operations become increasingly complex, you’ve got to make strategic planning a regular and formalized activity.

Hold regular strategic planning meetings. Update your written business plan and communicate your strategic goals companywide. Doing so will keep employees in the loop and empower them to make effective decisions and act in alignment with your stated objectives.

4. IT systems

There’s no way around it: Advanced technology runs today’s businesses. Yet, as a company’s operations grow, it can struggle with a conglomeration of outdated and disconnected hardware and applications.

Supporting a professionalized, process-oriented business environment requires integrated IT systems. Employees can more easily access operational information and improve productivity with connected technology.

Growing pains

Every business, no matter how large or small, goes through growing pains. Please contact us for help managing your growth in a measured and financially savvy manner.

© 2016

3 strategies for tax-smart giving

Giving away assets during your life will help reduce the size of your taxable estate, which is beneficial if you have a large estate that could be subject to estate taxes. For 2016, the lifetime gift and estate tax exemption is $5.45 million (twice that for married couples with proper estate planning strategies in place).

Even if your estate tax isn’t large enough for estate taxes to be a concern, there are income tax consequences to consider. Plus it’s possible the estate tax exemption could be reduced or your wealth could increase significantly in the future, and estate taxes could become a concern.

That’s why, no matter your current net worth, it’s important to choose gifts wisely. Consider both estate and income tax consequences and the economic aspects of any gifts you’d like to make.

Here are three strategies for tax-smart giving:

1. To minimize estate tax, gift property with the greatest future appreciation potential. You’ll remove that future appreciation from your taxable estate.

2. To minimize your beneficiary’s income tax, gift property that hasn’t appreciated significantly while you’ve owned it. The beneficiary can sell the property at a minimal income tax cost.

3. To minimize your own income tax, don’t gift property that’s declined in value. Instead, consider selling the property so you can take the tax loss. You can then gift the sale proceeds.

For more ideas on tax-smart giving strategies, contact us.

© 2016

Accelerate depreciation deductions with a cost segregation study

Business owners may be able to see substantial tax savings faster by conducting cost segregation studies. These studies identify property components and their costs, allowing you to maximize current depreciation deductions by using shorter lives and speeding up depreciation rates available for the qualifying parts of the property.

Depreciation rules

Buildings generally are depreciated over 27.5 years (residential rental) or 39 years (commercial) using the straight-line method. This recovery period applies to real property, which includes buildings as well as structural components such as walls, concrete floors, paint, windows, ceilings and HVAC systems.

You may be able to write off some parts of a property faster than 27.5 or 39 years by separating the parts that aren’t structural. In some cases, you can use a 5-, 7- or 15-year rate of depreciation. There are no hard-and-fast rules for distinguishing personal property eligible for accelerated depreciation from structural components that are depreciated as part of a building. Various factors come into play, including how the property is affixed to the building, whether it’s designed to remain in place permanently, and how difficult it would be to move or remove.

Examples of personal property that can qualify for a faster depreciation deduction include:

• Decorative fixtures,
• Cabinets, shelves,
• Movable wall partitions, and
• Carpeting.

You can also depreciate the allocated portion of certain capitalized indirect or overhead costs — such as architectural and engineering fees. And land improvements that you can isolate with a cost segregation study include parking lots, sidewalks, fences and landscaping.

Consider a cost segregation study when you buy, build or remodel — or when you’ve done so within the last few years. Be aware that the overall benefits may be limited in certain circumstances, such as when a business is subject to the alternative minimum tax or located in a state that doesn’t follow federal depreciation rules. Passive activity loss rules can also defer benefits.

A cost segregation study can be an excellent way for gaining faster write-offs on real estate and construction projects. Contact us to help determine whether you can benefit.

© 2016

Please go home: The problem businesses face with presenteeism

What keeps business owners up at night? Many would say sluggish productivity or escalating expenses. An employee coming to work every day usually doesn’t make the list. But a staff member who never takes a day off can cause problems by showing up sick, distracted or too stressed out to be effective. There’s a name for this problem: presenteeism.

What’s the issue?

The premise of presenteeism is simple. Employees who aren’t feeling well — for whatever reason — don’t perform well. They may:

• Work more slowly,
• Struggle concentrating or making decisions,
• Take more frequent breaks,
• Make more mistakes, or
• Need to repeat tasks until they’re completed correctly.

But it may not end there. When employees come to work while suffering from communicable diseases, such as a cold or the flu, the problem can grow exponentially. One worker coughs on two people who get sick, and they cough on four people who get sick, and so on.

Is there a cure?

Because presenteeism can stem from a gamut of sources, companies must be on guard for dips in productivity. When one occurs, managers should know how to discuss the matter with the potentially affected employees.

Your benefits program may hold the key. Both the employee and your organization may be better served if the worker takes advantage of available benefits — such as paid sick days, an employee assistance program or leave of absence — that will help him or her deal with the outside stressor causing presenteeism.

It’s also important to emphasize wellness. Many companies now offer formal wellness programs to encourage actions such as engaging in exercise, getting an annual physical and learning about healthy living.

What’s the number?

It’s much easier to detect presenteeism when you’re measuring productivity. Choose the right metrics and don’t underestimate this potentially costly threat to your profitability.

© 2016

Don’t roll the dice with your taxes if you gamble this year

For anyone who takes a spin at roulette, cries out “Bingo!” or engages in other wagering activities, it’s important to be familiar with the applicable tax rules. Otherwise, you could be putting yourself at risk for interest or penalties — or missing out on tax-saving opportunities.

Wins

You must report 100% of your wagering winnings as taxable income. The value of complimentary goodies (“comps”) provided by gambling establishments must also be included in taxable income because comps are considered gambling winnings. Winnings are subject to your regular federal income tax rate, which may be as high as 39.6%.

Amounts you win may be reported to you on IRS Form W-2G (“Certain Gambling Winnings”). In some cases, federal income tax may be withheld, too. Anytime a Form W-2G is issued, the IRS gets a copy. So if you’ve received such a form, keep in mind that the IRS will expect to see the winnings on your tax return.

Losses

You can write off wagering losses as an itemized deduction. However, allowable wagering losses are limited to your winnings for the year, and any excess losses cannot be carried over to future years. Also, out-of-pocket expenses for transportation, meals, lodging and so forth don’t count as gambling losses and, therefore, can’t be deducted.

Documentation

To claim a deduction for wagering losses, you must adequately document them, including:

1. The date and type of specific wager or wagering activity.
2. The name and address or location of the gambling establishment.
3. The names of other persons (if any) present with you at the gambling establishment. (Obviously, this is not possible when the gambling occurs at a public venue such as a casino, race track, or bingo parlor.)
4. The amount won or lost.

The IRS allows you to document income and losses from wagering on table games by recording the number of the table that you played and keeping statements showing casino credit that was issued to you. For lotteries, your wins and losses can be documented by winning statements and unredeemed tickets.

Please contact us if you have questions or want more information. If you qualify as a “professional” gambler, some of the rules are a little different.

Investigate the tax benefits of the research credit

If your company engages in research and development, you’re driven to innovate and bring new products and improvements to market. It’s that spirit of discovery that keeps businesses in the United States on the leading edge. Even better, you may qualify for a lucrative federal tax credit for some of your expenses related to R&D. Many states also offer research tax incentives.

Improved and permanent

The federal research tax credit is now permanent, thanks to the Protecting Americans from Tax Hikes (PATH) Act of 2015. This is good news because, for more than 30 years, the popular tax break periodically expired and was reinstated (usually for a year or two), which caused uncertainty for businesses.

Generally, the credit is equal to a portion of qualified research expenses incurred during the taxable year. The credit is complicated to calculate and not all research activities are eligible but the tax savings can be sizable.

The PATH Act added two new features that are especially favorable to small businesses.

1. Beginning in 2016, small businesses with $50 million or less in gross receipts may claim the credit against alternative minimum tax liability.
2. The credit can be used by certain even smaller businesses against the employer’s portion of Social Security tax. This provision also became effective in 2016.

Tax planning opportunity

Now that the credit is permanent, companies can count on it when they plan R&D projects. There could also be an opportunity to file an amended tax return and collect a refund if you incurred qualified expenses in previous years but didn’t claim them.

Be aware that the IRS announced recently that it “does see a significant amount of misuse of the research credit each year.” Good recordkeeping is important. To claim a credit, taxpayers must document their activities to establish the amount of qualified research expenses paid. Contact us to find out how to maximize the benefits allowed under the law.