Are you able to deduct medical expenses on your tax return?

For many people, the cost of medical care keeps going up. So if possible, you should find ways to claim tax breaks related to health care. Unfortunately, it can be difficult because there’s a threshold for deducting itemized medical expenses that can be tough to meet.

To make matters worse, the threshold for senior taxpayers is going up beginning January 1, 2017.

General rules

Before 2013, you could claim an itemized deduction for unreimbursed medical expenses paid for you, your spouse and your dependents, to the extent those expenses exceeded 7.5% of your adjusted gross income (AGI). AGI includes all of your taxable income items, reduced by certain write-offs, including those for deductible IRA contributions, alimony payments and student loan interest.

As part of the Affordable Care Act, a higher deduction threshold of 10% of AGI now applies to most taxpayers. However, if either you or your spouse were at least 65 as of December 31, 2016, the 10%-of-AGI deduction threshold won’t affect you for the 2016 tax year (the tax return you’ll file in 2017). For 2016, the 7.5%-of-AGI deduction threshold still applies for qualifying seniors.

However, this exemption is temporary. Beginning January 1, 2017, the 10% threshold will apply to all taxpayers, including those over 65.

Consider “bunching” expenses in alternating years

If you aren’t eligible for a deduction, you might be able to qualify if you concentrate medical expenses in alternating years. That way, you may qualify to claim an itemized medical expense deduction every other year — instead of losing the opportunity to claim any deduction for health care costs. Of course, this might only work if you have flexibility about when medical expenses are incurred.

Eligible expenses

Qualified medical expenses involve the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. This includes payments to physicians, dentists and other medical practitioners, as well as equipment, supplies, diagnostic devices, prescription drugs and other health care expenses.

Contact us if you have questions about what expenses are eligible and whether you can qualify for a deduction.

2017 Q1 tax calendar: Key deadlines for businesses and other employers

Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2017. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

January 31

• File 2016 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees.
• File 2016 Forms 1099-MISC, “Miscellaneous Income,” reporting nonemployee compensation payments in Box 7 with the IRS, and provide copies to recipients.
• File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2016. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return. Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944,“Employer’s Annual Federal Tax Return.”
• File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2016. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.
• File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2016 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.

February 28

File 2016 Forms 1099-MISC with the IRS and provide copies to recipients. (Note that Forms 1099-MISC reporting nonemployee compensation in Box 7 must be filed by January 31, beginning with 2016 forms filed in 2017.)

March 15

If a calendar-year partnership or S corporation, file or extend your 2016 tax return. If the return isn’t extended, this is also the last day to make 2016 contributions to pension and profit-sharing plans.

© 2016

Considering a spinoff? Think it through

In popular culture, the word “spinoff” usually refers to a television show whose main characters originated from an already established show. But the word applies to the business world, too. Here it describes a division or subsidiary of a company being sold off to a buyer as a separate entity.

The process is hardly simple. As a seller, you need to not only get a good price for your division or subsidiary, but also minimize any negative impact on your remaining holdings.

Driving factors

Many factors can drive a company to spin off a division. Common reasons include:

• Seizing an opportunity in the M&A marketplace,
• Focusing better on the core business,
• Accessing capital for reinvestment, and
• Operating more efficiently.

Spinoffs are usually executed more quickly than full-blown business sales, which can be appealing. Also, in consolidated industries with limited buyer pools, management may worry that a full sale would raise red flags with antitrust authorities.

Potential challenges

If it’s a standalone subsidiary being sold, the spinoff will likely be relatively easy. The unit is already legally separate from its parent and probably won’t have much overlap with its parent’s operations.

More challenging is spinning off an internal division — also known as a “carveout.” Here the seller has to determine which of its employees, clients and product lines will be included in the carved-out division. The seller also must legally extricate the division’s assets, debts and liabilities from those of the parent company.

Because a company must decide which employees, products and property belong with the selling division, battles over ownership of certain assets are possible. For example, if the carveout and a unit that’s remaining with the parent company both rely on the same exclusive intellectual property, who retains ownership postsale?

Worthy consideration

Is your company looking to streamline operations? Could it use the cash from selling a strong division? If so, a spinoff is worth considering. But you’ll need to think through the strategy thoroughly and execute the deal carefully. Please contact our firm to discuss the concept further and assess the financials involved.

How entity type affects tax planning for owner-employees

Come tax time, owner-employees face a variety of distinctive tax planning challenges, depending on whether their business is structured as a partnership, limited liability company (LLC) or corporation. Whether you’re thinking about your 2016 filing or planning for 2017, it’s important to be aware of the challenges that apply to your particular situation.

Partnerships and LLCs

If you’re a partner in a partnership or a member of an LLC that has elected to be disregarded or treated as a partnership, the entity’s income flows through to you (as does its deductions). And this income likely will be subject to self-employment taxes — even if the income isn’t actually distributed to you. This means your employment tax liability typically doubles, because you must pay both the employee and employer portions of these taxes.

The employer portion of self-employment taxes paid (6.2% for Social Security tax and 1.45% for Medicare tax) is deductible above the line. Above-the-line deductions are particularly valuable because they reduce your adjusted gross income and modified adjusted gross income, which are the triggers for certain additional taxes and phaseouts of many tax breaks.

But flow-through income may not be subject to self-employment taxes if you’re a limited partner or the LLC member equivalent. And be aware that flow-through income might be subject to the additional 0.9% Medicare tax on earned income or the 3.8% net investment income tax (NIIT), depending on the situation.

S and C corporations

For S corporations, even though the entity’s income flows through to you for income tax purposes, only income you receive as salary is subject to employment taxes and, if applicable, the 0.9% Medicare tax. Keeping your salary relatively — but not unreasonably — low and increasing your distributions of company income (which generally isn’t taxed at the corporate level or subject to employment taxes) can reduce these taxes. The 3.8% NIIT may also apply.

In the case of C corporations, the entity’s income is taxed at the corporate level and only income you receive as salary is subject to employment taxes, and, if applicable, the 0.9% Medicare tax. Nevertheless, if the overall tax paid by both the corporation and you would be less, you may prefer to take more income as salary (which is deductible at the corporate level) as opposed to dividends (which aren’t deductible at the corporate level, are taxed at the shareholder level and could be subject to the 3.8% NIIT).

Whether your entity is an S or a C corporation, tread carefully, however. The IRS remains on the lookout for misclassification of corporate payments to shareholder-employees. The penalties and additional tax liability can be costly.

As you can see, tax planning is extra important for owner-employees. Plus, tax law changes proposed by the President-elect and the Republican majority in Congress could affect tax treatment of your income in 2017. Please contact us for help identifying the ideal strategies for your situation.

Build consensus before you buy business software

Business owners get to make executive decisions. It’s one of the perks of the job. But acting unilaterally when buying business software can be a risky move. Because new technology affects the entire team, the entire team (or at least key members) should have input on the choice. And while it may be impossible to please everyone, it’s possible to come close.

Management feedback

Certain kinds of new business software (or upgrades) may appear no-brainers. But you’d be surprised. Managers may see a lot of bells and whistles in a just-released product, but few useful features. You also have to consider the software’s compatibility with your company’s other applications.

So begin by gathering feedback from your management team. In particular, note which features are “must haves” and which ones are “just wants.” Then work with your IT and financial departments (or advisors) to target the right software within a specific budgetary range.

Employee input

Even if your managers agree on a product, the process isn’t over. Although giving lower-level employees a say in the software selection process might seem to create more problems than it solves, they’ll be using it too. So lay the groundwork for a smooth implementation by hearing their thoughts as well.

As you do so, try to assuage any fear or confusion about the prospective new software. Typically effective moves include:

• Announcing which company system (or systems) will be affected,
• Explaining your strategic objectives for adding or changing software, and
• Keeping staff regularly updated on the effort’s progress.

This approach can make employees feel like they’re part of the initiative and help foster more rapid buy-in.

A smart buy

Whether shopping for the holidays or buying mission-critical business software, everyone wants to make a smart buy. Please contact our firm for help setting a budget and engaging in a procurement process that ensures you make a smart buy.

© 2016

Want to save for education? Make 2016 ESA contributions by December 31

There are many ways to save for a child’s or grandchild’s education. But one has annual contribution limits, and if you don’t make a 2016 contribution by December 31, the opportunity will be lost forever. We’re talking about Coverdell Education Savings Accounts (ESAs).

How ESAs work

With an ESA, you contribute money now that the beneficiary can use later to pay qualified education expenses:

• Although contributions aren’t deductible, plan assets can grow tax-deferred, and distributions used for qualified education expenses are tax-free.
• You can contribute until the child reaches age 18 (except beneficiaries with special needs).
• You remain in control of the account — even after the child is of legal age.
• You can make rollovers to another qualifying family member.

Not just for college

One major advantage of ESAs over another popular education saving tool, the Section 529 plan, is that tax-free ESA distributions aren’t limited to college expenses; they also can fund elementary and secondary school costs. That means you can use ESA funds to pay for such qualified expenses as tutoring and private school tuition.

Another advantage is that you have more investment options. So ESAs are beneficial if you’d like to have direct control over how and where your contributions are invested.

Annual contribution limits

The annual contribution limit is $2,000 per beneficiary. However, the ability to contribute is phased out based on income.

The limit begins to phase out at a modified adjusted gross income (MAGI) of $190,000 for married filing jointly and $95,000 for other filers. No contribution can be made when MAGI hits $220,000 and $110,000, respectively.

Maximizing ESA savings

Because the annual contribution limit is low, if you want to maximize your ESA savings, it’s important to contribute every year in which you’re eligible. The contribution limit doesn’t carry over from year to year. In other words, if you don’t make a $2,000 contribution in 2016, you can’t add that $2,000 to the 2017 limit and make a $4,000 contribution next year.

However, because the contribution limit applies on a per beneficiary basis, before contributing make sure no one else has contributed to an ESA on behalf of the same beneficiary. If someone else has, you’ll need to reduce your contribution accordingly.

Would you like more information about ESAs or other tax-advantaged ways to fund your child’s — or grandchild’s — education expenses? Contact us!

© 2016

Take stock of your inventory accounting method’s impact on your tax bill

If your business involves the production, purchase or sale of merchandise, your inventory accounting method can significantly affect your tax liability. In some cases, using the last-in, first-out (LIFO) inventory accounting method, rather than first-in, first-out (FIFO), can reduce taxable income, giving cash flow a boost. Tax savings, however, aren’t the only factor to consider.

FIFO vs. LIFO

FIFO assumes that merchandise is sold in the order it was acquired or produced. Thus, the cost of goods sold is based on older — and often lower — prices. The LIFO method operates under the opposite assumption: It allocates the most recent costs to the cost of sales.

If your inventory costs generally rise over time, LIFO offers a definite tax advantage. By allocating the most recent — and, therefore, higher — costs first, it maximizes your cost of goods sold, which minimizes your taxable income. But LIFO involves more sophisticated record keeping and more complex calculations, so it’s more time-consuming and expensive than FIFO.

Other considerations

LIFO can create a problem if your inventory levels begin to decline. As higher inventory costs are used up, you’ll need to start dipping into lower-cost “layers” of inventory, triggering taxes on “phantom income” that the LIFO method previously has allowed you to defer. If you use LIFO and this phantom income becomes significant, consider switching to FIFO. It will allow you to spread out the tax on phantom income.

If you currently use FIFO and are contemplating a switch to LIFO, beware of the IRS’s LIFO conformity rule. It generally requires you to use the same inventory accounting method for tax and financial statement purposes. Switching to LIFO may reduce your tax bill, but it will also depress your earnings and reduce the value of inventories on your balance sheet, which may place you at a disadvantage in comparison to competitors that don’t use LIFO. There are various issues to address and forms to complete, so be fully informed and consult your tax advisor before making a switch.

The method you use to account for inventory can have a big impact on your tax bill and financial statements. These are only a few of the factors to consider when choosing an inventory accounting method. Contact us for help assessing which method will provide the best fit with your current financial situation.

© 2016