Red Spot Design2, Author at The CJ Group

Are Roth IRAs Still Beneficial under the New Tax Law?

Posted on March 19, 2018July 22, 2024 by Red Spot Design2

The Roth IRA remains an attractive retirement planning vehicle for many individuals after the changes made by the Tax Cuts and Jobs Act (TCJA). Here’s what you need to know about Roth IRAs and Roth IRA conversions under the new law.

Tax Advantages

Roth IRAs offer several important tax advantages over traditional IRAs. First and foremost, unlike traditional IRA withdrawals, qualified Roth IRA withdrawals are federal-income-tax-free — and they’re usually state-income-tax-free, too. In general, a qualified withdrawal is one that’s taken after the Roth account owner has met both of the following requirements:

- The owner has had at least one Roth IRA open for over five years, and

The owner has reached age 59½, become disabled or died.

For purposes of meeting the five-year requirement, the clock starts ticking on the first day of the tax year for which you make your initial contribution to your first Roth account. That initial contribution can be a regular annual contribution, or it can be a conversion contribution.

The second reason Roth IRAs are beneficial is that they’re exempt from the required minimum distribution (RMD) rules. So, unlike with traditional IRAs, you don’t have to start taking RMDs from Roth IRAs after reaching age 70½. Roth IRAs can be left untouched for as long as you live. This important privilege makes your Roth IRA a great asset to leave to your heirs (unless you need the money to help finance your own retirement).

New Tax Law Eliminates Reversal Privilege for Roth IRA Conversions

Did you know that the Tax Cuts and Jobs Act (TCJA) contains a provision that negatively affects Roth IRA conversions?

Under prior law, you had until October 15 of the year after an ill-advised conversion to reverse it to avoid the conversion tax hit. Thanks to the TCJA, for 2018 and beyond, you can no longer reverse the conversion of a traditional IRA into a Roth account. This elimination of the conversion reversal privilege is permanent.

However, the IRS recently clarified, in Frequently Asked Questions (FAQs) posted on its website, that, if you converted a traditional IRA into a Roth account in 2017, you can reverse the conversion as long as it’s done by October 15, 2018. (That deadline applies regardless of whether you extend the deadline for filing your 2017 federal income tax return to October 15.)

In IRS jargon, a Roth conversion reversal “recharacterizes” the Roth account back to traditional IRA status. Your Roth IRA trustee or custodian (or tax advisor) can help you fill out the requisite paperwork.

When do reversals make sense? Suppose you converted two traditional IRAs (Accounts A and B) into two Roth IRAs in 2017. The value of Account A has increased since the conversion date. Unfortunately, Account B has plummeted in value, and it’s now worth significantly less than it was on the conversion date. In this situation, you’d be required to pay income tax on Account B’s value on the conversion date — and some of that value is now gone.

Fortunately, through October 15, 2018, you have the option of recharacterizing Account B back to traditional IRA status. After the reversal, it’s as if the ill-fated conversion never happened, so you won’t owe any 2017 income tax on the conversion of Account B. And you can still leave Account A in Roth IRA status.

Annual Roth IRA Contributions

The idea of making annual Roth IRA contributions makes the most sense for those who believe they’ll pay the same or higher tax rates during retirement. Higher future taxes can be avoided on Roth account earnings, because qualified Roth withdrawals are tax-free. The downside is that you get no deductions for making Roth contributions.

If you expect to pay lower tax rates during retirement, current tax deductions may be worth more to you than tax-free withdrawals later. So, you might be better off making deductible traditional IRA contributions, assuming your income is below the phaseout threshold (below).

Roth contributions also make sense when you’ve maxed out on deductible retirement contribution possibilities but you want to sock away additional money for retirement.

There are limits to annual Roth IRA contributions, however. The maximum amount you can contribute for any tax year is the lesser of:

- Your earned income for the year (including wages, salaries, bonuses, alimony and self-employment income), or

The annual contribution limit for that year.

For 2018, the annual Roth contribution limit is $5,500 (or $6,500 if you will be age 50 or older as of year end). In addition, for 2018, eligibility to make annual Roth contributions is phased out between modified adjusted gross income (MAGI) of $120,000 and $135,000 for unmarried individuals. For married joint filers, the 2018 phaseout range is between MAGI of $189,000 and $199,000.

The deadline for making annual Roth contributions is the same as the deadline for annual traditional IRA contributions, which is the original due date of your return. For example, the contribution deadline for the 2018 tax year is April 15, 2019. However, you can make a 2018 contribution anytime between now and then. The sooner you contribute, the sooner you can start earning tax-free income.

Important: Making contributions to traditional IRAs is off limits for the year you reach age 70½ and beyond. In contrast, people age 70½ or older can still make annual Roth IRA contributions (assuming the eligibility requirements explained above are met). So, Roth IRAs can be a smart savings tool for older individuals as well as for younger ones.

In addition, if you’re an employee, research whether your employer offers a Roth 401(k) option. This retirement savings tool is similar to a Roth IRA: It allows you to make after-tax contributions. Qualified withdrawals from a Roth 401(k) are generally federal and state tax-free. But these accounts are not exempt from the RMD rules. And, unlike Roth IRAs, there are no income level phaseouts for contributing to Roth 401(k) accounts, so they can be a tax-wise move for higher income individuals who are above the income thresholds for contributing to a Roth IRA.

Roth Conversions

The quickest way to get a significant sum into a Roth IRA is by converting a traditional IRA to Roth status. The conversion is treated as a taxable distribution from your traditional IRA, because you’re deemed to receive a payout from the traditional account for the money that will go into the new Roth account. So converting your IRA before year end will trigger a bigger federal income tax bill for this year — and possibly a bigger state income tax bill, too. The good news: There are no income limits on Roth conversions, and the amount you convert isn’t hit with the 10% early IRA withdrawal penalty tax even if you are under age 59½.

More good news for conversions: Today’s federal income tax rates might be the lowest you’ll see for the rest of your life. For most individuals, the tax rates for 2018 through 2025 will be lower than what you paid in prior years. In 2026, the pre-TCJA rates and brackets are scheduled to come back into force, but many people doubt that will happen.

So, if you convert your traditional IRA into a Roth IRA in 2018, you’ll pay today’s low tax rates on the extra income triggered by the conversion and completely avoid the potential for higher future rates on all the postconversion income that will be earned in your new Roth account. That’s because qualified Roth withdrawals taken after age 59½ are totally federal-income-tax-free after you’ve had at least one Roth account open for over five years.

To be clear, the best candidates for the Roth conversion strategy are people who believe that their tax rates during retirement will be the same or higher than their current tax rates.

A word of caution: Converting a traditional IRA with a significant balance could push you into a higher tax bracket. For example, if you’re single and expect your 2018 taxable income to be about $100,000, your marginal federal income tax bracket is 24%. Converting a $100,000 traditional IRA into a Roth account in 2018 would cause a big chunk of the extra income from the conversion to be taxed at 32%. (For 2018, the 32% tax bracket starts at $157,501 for single people.) But if you spread the $100,000 conversion equally between 2018 and 2019, the extra income from converting would be taxed at 24% (assuming Congress leaves the current tax rates in place through at least 2019).

To Roth or Not to Roth?

Should you incorporate a Roth IRA into your retirement savings program? Roth IRAs offer significant tax advantages, if you’re eligible to make annual contributions or if you convert a traditional IRA into a Roth account. Today’s comparatively low federal income tax rates under the TCJA provide an extra incentive to consider the Roth conversion strategy right now. Contact your tax advisor to help understand the pros and cons of Roth IRAs and Roth conversions under the new tax law.

Good News! More Families May Be Eligible for the Child Credit in 2018

Posted on March 16, 2018July 22, 2024 by Red Spot Design2

The Tax Cuts and Jobs Act (TCJA), which was signed into law on December 22, 2017, made significant changes to the child credit. This credit is generally available to taxpayers with children under the age of 17, but the new law adds a new (smaller) credit for other dependents. Here are the details.

Old Rules

Under prior tax law, the child credit was $1,000 per “qualifying child.” But the credit was reduced for married couples filing jointly by $50 for every $1,000 (or part of $1,000) by which their adjusted gross income (AGI) exceeded $110,000. The phaseout thresholds were $75,000 for unmarried taxpayers and $55,000 for married couples filing separately.

To the extent the $1,000-per-child credit exceeded your tax liability, it resulted in a refund of up to 15% of your earned income (for example, wages or net self-employment income) above $3,000. For taxpayers with three or more qualifying children, the excess of the taxpayer’s Social Security taxes for the year over the taxpayer’s earned income credit for the year was refundable. In all cases, the refund was limited to $1,000 per qualifying child.

Important: These “old” rules still apply to tax returns that you’re filing for the 2017 tax year (which must be filed or extended by April 17, 2018).

New Law

For 2018 through 2025, the TCJA doubles the child credit to $2,000 per qualifying child under the age of 17. It also allows a new credit of $500 for any dependent who isn’t a qualifying child under age 17. There’s no age limit for the $500 credit, but the tax tests for dependency must be met.

Examples of dependents who qualify for the new credit include:

A qualifying 17- or 18-year-old,
A full-time student under age 24,
A disabled child of any age, and
Other qualifying (nonchild) relatives if all the requirements are met.

The TCJA also substantially increases the phaseout thresholds for the credit. For 2018 through 2025, the total credit amount allowed to a married couple filing jointly is reduced by $50 for every $1,000 (or part of $1,000) by which their AGI exceeds $400,000 (up from $110,000 under prior law). The threshold is now $200,000 for all other taxpayers.

So, if you were previously prohibited from taking the credit because your AGI was too high, you may now be eligible to claim the credit. But, beware, these phaseouts are not indexed for inflation.

In addition, under current law, the refundable portion of the credit has been increased to a maximum of $1,400 for each qualifying child. And the earned income threshold has been decreased to $2,500 (from $3,000 under prior tax law) — which could potentially result in a larger refund. The $500 credit for dependents other than qualifying children is nonrefundable.

Say Goodbye to Dependency Exemptions … For Now

The new tax law isn’t all good news for families. For the 2017 tax year, you can claim an exemption of $4,050 from taxable income for each qualifying dependent (subject to phaseouts at higher income levels). But that deduction has temporarily been suspended, for 2018 through 2025.

Many families still expect to come out ahead under the new law, however. That’s because credits reduce your tax bill dollar for dollar. By contrast, exemptions and deductions only reduce your taxable income, which is the amount that you’re taxed on.

However, families with older kids may be at a disadvantage under the new law. Why? Under prior law, dependency exemptions were available for qualifying dependents up to age 24 if they were full-time students. But a young person is ineligible for the child credit starting the year he or she turns 17. (However, older kids may still qualify for the new $500 credit for nonchild dependents, as well as various education credits, under the new law.)

Your tax advisors can help you take advantage of the tax breaks that may be available for raising children and caring for other family members.

Claiming Your Credit

To claim the credit, you must include the qualifying child’s Social Security number (SSN) on your tax return. Under prior law, you could also use an individual taxpayer identification number (ITIN) or adoption taxpayer identification number (ATIN).

If a qualifying child doesn’t have an SSN, you won’t be able to claim the $1,400 credit. But you can claim the $500 credit for that child using an ITIN or ATIN. The SSN requirement doesn’t apply for nonqualifying-child dependents, but you must provide an ITIN or ATIN for each dependent for whom you’re claiming a $500 credit.

Consult a Tax Pro

Thanks to the TCJA, more families will receive tax breaks to help offset the costs of raising kids and taking care of other nonchild dependents. If you have children under 17 or other dependents, contact your tax advisor to determine if these changes can benefit you.

The Most Common Types of Restaurant Theft

Posted on March 15, 2018July 23, 2024 by Red Spot Design2

restaurant employee embezzlement In regards to restaurant theft of food or supplies, at your POS, in accounting processes, or of intellectual property, mitigating the risk of loss through theft is an ongoing challenge. Automation has improved security in transactions as well as back-office functions. But with top concerns in the restaurant industry being wholesale food costs and building and maintaining sales volume, the reduction of theft can improve those concerns for restauranteurs.

Restaurant Theft of Food/Beverages/Supplies

Stealing food, beverages and supplies from restaurants can be coordinated by employees or in combination with vendors. There is outright stealing of food from the inventory, but there are also instances where vendors will agree to short shipments or deliver lower quality food while providing kick-backs to staff involved in ordering or inventory.

Free meals and drinks given to friends and family outside of alotted comps are another form of food theft. Employees also may walk away with supplies and quality equipment. At a minimum, employees may graze too much while on duty.

To protect against food and beverage theft, there are several precautions restaurant owners and management can take:

Regular stock checks, performed at unpredictable times or right before deliveries
Comparison of purchase orders against deliveries at the time of delivery
Monitoring of bartender habits when pouring drinks for consistency in volume
Review of comp practices against alottment
Policies enforced on employee meals and break habits
Security camera monitoring

There is a big difference between babysitting staff and developing a workplace environment in which employees are engaged in loss prevention. Restaurant owners and managers need to communicate with all employees about the costs of food loss, including costs passed on to patrons in the form of increased prices or even removing popular but pricier menu items. Increased menu prices or menu changes may reduce customer volume as well as tips. Another consequence of theft? Management can reduce hours per employee.

Theft at POS

There are many ways that employee theft can occur at the point of sale. Automated systems can reduce some loss, but not all. Common forms of theft at POS include cash taken from the register, voiding ordered items, dropping sales or improperly ringing up items and inflating tips.

At the bar, patrons may be charged for premium drinks and served well drinks with the bartender/server pocketing the difference.

Noticing lower profit margins even with the same number of meals and drinks can be a red flag that receipts are not matching sales. More subtle signs of theft can be a change in employee morale as honest staffers witness others taking advantage of the system.

More restaurants are transitioning to automated point of sale software programs, including programs that can be run from tablets as servers circulate. This eliminates data inputs to a central POS kiosk. The advantages of automation for loss prevention include the ease of tracking orders by employee ID (no more badge swiping), more transparent payment tracking against orders, and even integration with accounting and inventory systems. Tracking tip records can also uncover theft if percentages are higher than the industry average of 5-15 percent, or higher than historically at the establishment.

As employees learn systems, there are ways to get around safeguards. For example, many employee thefts occur through discount or loyalty programs, in which the employee inputs a discount for the customer but the customer pays full price. Delaget, an expert in loss prevention, found that four in 10 discount codes are fraudulent. The most common discount theft was manager code theft.

Some solutions offered for this type of theft included monitoring discount codes through the POS system as well as instituting a manager discount policy and including a fingerprint (biometric) security feature.

Watch for changes in employee behavior such as defensiveness or acting secretive. Also, if your prices haven’t changed, but customers seem to be complaining about price hikes, this could signal fraudulent price inflation at the POS.

Restaurant Theft in Accounting

When most business owners think of theft, they think about the back office functions. In this area, the thefts are likely more elaborate and damaging to the operation. Restaurant closures due to employee theft are most often caused through extensive management or ownership fraud.

The person responsible for end-of-day reconciliations has one of the greatest opportunities to manipulate voids, cancel checks and perform other register manipulation — leading to thousands and sometimes millions of dollars in loss over time. More elaborate accounting fraud schemes occur through underreporting earnings on the balance sheet or setting up fake accounts payable. Small and infrequent deposit losses also add up.

Cash transactions are also a big source of loss when not monitored regularly against petty cash reconciliations. Cash is the most coveted form of theft, particularly for employees who suddenly experience an outside issue or concern that requires quick payment. Bleeding the till should include certain safeguards, such as sealing cash in an envelope with the manager’s name written across the back or moving cash when there are few employees around.

A strong loss prevention program should include a combination of proven automated technology, regular reports and analysis and good supervision by trusted staff. Incorporating a third-party review of the books adds another layer of control and analysis that can discover discrepancies in inventory, receipts, margins and general accounting methods that require a second look.

Sometimes, it’s the accounting system or analytics that are hiding opportunities for lower costs and higher profits. Managers may not be tracking the right KPIs or comparing A to B in a way that indicates losses. Incorporating better processes to leverage information from the restaurant’s POS and bookkeeping systems can identify operational improvements that support cost and theft reduction. For example, review of franchise and sales tax rates as well as permit and licensing fees can reveal overpayments.

Theft of Intellectual Property

One area of theft not always talked about is a loss of intellectual property. Again, in close-knit restaurant communities, owners and staff want to protect proprietary processes, recipes and even certain aspects of branding that make the overall restaurant experience unique. Analyze the areas of the business that add the most value or profit, and look for ways to protect those assets.

There is a fine line, however, between encouraging creative development in the kitchen and limiting ownership of that creativity by staff such as head chefs. Each situation is unique and can’t be covered by generic nondisclosure or confidentiality agreements. But it is worth the conversation to maintain a competitive position in your market.

Cornwell Jackson has worked with retail businesses, including restaurants for decades, and provides direction on compliance as well as business advisory services. We help restaurant owners and franchisors determine policies and procedures, investments in technology and the viability and timing of additional locations. If you have questions around employee theft and how our team can support your accounting processes and daily POS or reconciliation methods, contact us for a consultation.

Download the Whitepaper: Protect Your Restaurant from Employee Embezzlement

Scott Bates, CPA, is a partner in Cornwell Jackson’s audit practice and leads the business services practice, including outsourced accounting, bookkeeping, and payroll services. He is an expert for clients in restaurants, healthcare, real estate, auto and transportation, technology, service, construction, retail, and manufacturing and distribution industries.

Article originally published on March 7th, 2016. Updated in 2018.

Know the Details of the Family and Medical Leave Tax Credit

Posted on March 14, 2018 by Red Spot Design2

The Tax Cuts and Jobs Act enacted at the end of last year will give your company a tax credit if you initiate a new paid family and medical leave benefit. Although the IRS has yet to issue its interpretive regulations, the text of the law itself gives you enough to go on to at least consider whether doing so would be a worthwhile exercise.

The Basics

In case you missed it, here’s a recap of the basics. First, the tax credit is available this year and next, but it could be extended beyond 2019 if Congress decides it’s working well. It primarily relies on leave eligibility criteria laid out by the Family and Medical Leave Act.

The size of the credit tops out at 25% of the wages paid to employees during their new family leave benefit. To qualify for that maximum credit, employees must be paid 100% of their wages during the leave period.

For your company to get the minimum credit (12.5% of wages earned), employees must be paid at least 50% of their normal earnings. The credit percentage inches up (toward the maximum of 25% credit) as the proportion of wages paid to the employee on leave increases.

More Nuts and Bolts

This tax credit is for new programs only, so it cannot be claimed for paid time off programs that you already have in place. Also, the minimum duration of the new family leave benefit is two weeks, and it must be offered both to full- and part-time employees who have been on board for a year or longer. You can’t take the credit against benefits paid to employees earning more than $72,000, a figure will be inflation-indexed in following years.

If you decide to take advantage of the tax credit, you’ll need to define the new benefit in writing for employees. The description should then go in your employee handbook, assuming you have one.

Should you take advantage of this program? People and organizations that have been advocating for paid family and medical leave for many years always marshal justifications for doing so based on concrete benefits to the employer. They assert that such policies improve employee productivity and make workers more loyal. No doubt in many instances that’s true but, of course, there’s no guarantee it that will happen at your company.

What Else Should You Consider?

Here’s some more food for thought:

To what extent will you actually be able to use the tax credit? The answer depends not only upon how many employees take advantage of it, but also the size of your tax liability. If you’re not anticipating much of a tax bill for 2018 and 2019, the credits might not do you much good from a purely financial standpoint.
How much money are we really talking about? Assume the following: You have 100 employees earning an average of $40,000. Your benefits call for full wage replacement, entitling you to the maximum 25% tax credit. And, over the course of a year, 25 employees use the new benefit, averaging two weeks each (the minimum leave to qualify for the credit). Based on those assumptions, the pre-tax added cost of the benefit would be around $38,462, and the 25% tax credit would reduce it on an after-tax basis to $28,847, if your company’s tax liability exceeds the credit amount.
What happens if you launch a paid family and medical leave benefit based on the prospect of its diminished after-tax cost but Congress doesn’t extend the program after 2019? At that point, you might find it difficult to pull the plug on this benefit.
What if you were already giving serious consideration to providing a paid family and medical leave benefit without expecting a new financial incentive? The tax credit would be icing on the cake.
Even if you weren’t contemplating such a program, are you having challenges attracting and keeping new and old employees on board? Unless the benefit is abused, its dollar cost might be well worth the possible boost it would give to your reputation as a good place to work.
Do you have the administrative capacity to judge the merits of paid borderline family and medical absence requests? It’s possible that you’ll experience more leave requests once employees know they’ll be paid during that leave period than when they weren’t.

Employee Attitudes

It’s also important to try to gauge how much employees would value this benefit. You might want to poll your workers on their preference for some new benefit possibilities, not just paid family and medical leave.

For example, you might consider giving them a choice between paid family and medical leave and a larger match to their 401(k) contributions, using a match amount that would be similar in cost to a paid leave plan. Such a survey might reveal a strong employee preference for the higher 401(k) match. If so, those results could make the choice an easier one.

It’s true that not all tax incentives are the right fit for every company. Even so, this new tax credit for paid family and medical leave is certainly worth a look. Ask your trusted financial advisor to run the numbers so you can make an informed decision.

IRS Clarification: Home Equity Loan Interest May Still Be Deductible

Posted on March 13, 2018 by Red Spot Design2

The IRS recently announced that in many cases, taxpayers can continue to deduct interest paid on home equity loans. The tax agency issued the clarification because there were questions and concerns that such expenses were no longer deductible under the Tax Cuts and Jobs Act (TCJA), which was signed into law on December 22, 2017.

Background Basics

Taxpayers can deduct interest on mortgage debt that’s “acquisition debt” under the tax law. Acquisition debt means debt that is:

1. Secured by the taxpayer’s principal home and/or a second home, and

2. Incurred in acquiring, constructing, or substantially improving the home. This rule hasn’t been changed by the TCJA.

Under prior law, the maximum amount that was treated as acquisition debt for the purpose of deducting interest was $1 million ($500,000 for married individuals filing separate tax returns). This meant that a taxpayer could deduct interest on no more than $1 million of acquisition debt. Taxpayers could also deduct interest on home equity debt. “Home equity debt,” as specially defined for purposes of the mortgage interest deduction, meant debt that:

Was secured by the taxpayer’s home, and
Wasn’t “acquisition indebtedness.” (In other words, it wasn’t incurred to acquire, construct, or substantially improve the home.)

Therefore, the rule allowed taxpayers to deduct interest on home equity debt and enabled taxpayers to deduct interest on debt that wasn’t incurred to acquire, construct, or substantially improve a home — in other words, debt that could be used for any purpose. As with acquisition debt, the rules in place before the TCJA limited the maximum amount of “home equity debt” on which interest could be deducted; here, the limit was the lesser of $100,000 ($50,000 for a married taxpayer filing separately), or the taxpayer’s equity in the home.

Under the TCJA, for tax years beginning after December 31, 2017 and before January 1, 2026, the limit on acquisition debt is reduced to $750,000 ($375,000 for a married taxpayer filing separately). The $1 million, pre-TCJA limit applies to acquisition debt incurred before December 15, 2017, and to debt arising from refinancing pre-December 15, 2017 acquisition debt, to the extent the debt resulting from the refinancing doesn’t exceed the original debt amount.

Under the TCJA, for tax years beginning after December 31, 2017 and before January 1, 2026, there’s no longer a deduction for interest on “home equity debt.” The elimination of the deduction for interest on home equity debt applies regardless of when the home equity debt was incurred.

New Release

In the IRS’s Internal Release 2018-32, the tax agency stated that despite the newly-enacted restrictions on home mortgages under the TCJA, taxpayers can often still deduct interest on a home equity loan, home equity line of credit (HELOC), or second mortgage, regardless of how the loan is labeled.

The IRS clarified that the TCJA suspends the deduction for interest paid on home equity loans and lines of credit, unless they’re used to buy, build or substantially improve the taxpayer’s home that secures the loan.

For example, interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest on the same loan used to pay personal living expenses — such as credit card debts — isn’t deductible. As under pre-TCJA law, for the interest to be deductible, the loan must be secured by the taxpayer’s main home or second home (known as a qualified residence), not exceed the cost of the home and meet other requirements.

For anyone considering taking out a mortgage, the TCJA imposes a lower dollar limit on mortgages qualifying for the home mortgage interest deduction. The lower limits apply to the combined amount of loans used to buy, build or substantially improve the taxpayer’s main home and second home.

In its release, the IRS provided the following examples:

Illustration 1: In January 2018, John takes out a $500,000 mortgage to purchase a main home with a fair market value of $800,000. In February 2018, he takes out a $250,000 home equity loan to put an addition on the main home. Both loans are secured by the main home and the total doesn’t exceed the cost of the home. Because the total amount of both loans doesn’t exceed $750,000, all of the interest paid on the loans is deductible. However, if John used the home equity loan proceeds for personal expenses, such as paying off student loans and credit cards, then the interest on the home equity loan wouldn’t be deductible.

Illustration 2: In January 2018, Mary takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2018, she takes out a $250,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages doesn’t exceed $750,000, all of the interest paid on both mortgages is deductible. However, if Mary took out a $250,000 home equity loan on the main home to purchase the vacation home, then the interest on the home equity loan wouldn’t be deductible.

Illustration 3: In January 2018, Bob takes out a $500,000 mortgage to purchase a main home. The loan is secured by the main home. In February 2018, he takes out a $500,000 loan to purchase a vacation home. The loan is secured by the vacation home. Because the total amount of both mortgages exceeds $750,000, not all of the interest paid on the mortgages is deductible. Only a percentage of the total interest paid is deductible.

If you have questions about home equity loans or other provisions of the TCJA, consult with your Cornwell Jackson Tax Advisor.

TCJA Tax Law: Six Changes that Effect Payroll

Posted on March 12, 2018July 22, 2024 by Red Spot Design2

The Tax Cuts and Jobs Act (TCJA) is the biggest overhaul of the tax code in more than 30 years.

For instance, the TCJA cuts income tax rates for individuals and corporations, doubles the standard deduction, eliminates personal exemptions and repeals or modifies numerous deductions. It will have a major impact in 2018 and beyond.

But there’s more. In addition to withholding changes already reflected in employees’ paychecks, the TJCA includes other benefit-related provisions affecting payroll. Following are six prime examples:

1. Credit for employer-paid family and medical leave.

This is brand new. The TCJA creates a tax credit for wages paid to qualifying employees on family and medical leave. This credit can be as high as 25% of the wages paid.

To qualify, an employer must offer at least two weeks of annual paid family and medical leave, as described by the Family and Medical Leave Act (FMLA), to qualified employees. The paid leave must provide at least 50% of the employee’s wages.

Qualified individuals are those who have been working for the employer for at least one year, and, in the preceding year, weren’t paid compensation that exceeded 60% of $72,000 (threshold will be indexed for inflation).

The credit equals 12.5% of the amount of wages paid during a leave period and tops out at 25%. The credit is increased gradually for payments above 50% of wages paid. No double-dipping: Employers can’t also deduct wages claimed for the credit.

Note that the new credit is only available for 2018 and 2019. It could, however, be extended by a future act of Congress.

2. Transportation benefits.

Prior to 2018, employers could deduct certain transportation benefits of up to $250 a month (indexed to $255 per month in 2017) that were provided tax-free to employees. These included:

Mass transit passes. This is any pass, token, fare card, voucher or similar item entitling a person to ride free of charge or at a reduced rate on mass transit or in a vehicle seating at least six adults plus the driver if the person operating the vehicle is in the business of transporting persons for pay or hire.
Commuter highway vehicle expenses. These vehicles must seat at least six adults plus the driver. There must have been a reasonable expectation that at least 80% of the vehicle mileage would be for transporting employees between their homes and workplaces. Employees also had to occupy at least 50% of the seats (not including the driver’s seat).
Qualified parking fees. This benefit covered employer-provided parking for employees on or near the business premises. It also provided fees for parking on or near the location from which employees commuted to work using mass transit, commuter highway vehicles or carpools, such as the parking lot of a train station.

A tax-free benefit of up to $20 a month was allowed for bicycle commuting.

The TCJA eliminates the tax deduction for these three main transportation benefits beginning in 2018. But the benefits remain tax-free to employees. The tax exclusion for bicycle commuting is repealed.

3. Entertainment expenses.

Under prior law, an employer could deduct 50% of the cost of business entertainment and meal expenses that were “directly-related to” or “associated with” the business. Notably, this included entertainment in a clear business setting and meals immediately preceding or following a “substantial business discussion.”

Tax regulations imposed strict recordkeeping requirements for deducting business entertainment expenses. For example, you had to record the time, place and date of the entertainment, the person or people entertained and the business relationships of the parties.

Beginning in 2018, this deduction is repealed. However, employers may still deduct 50% of the cost of business meals while traveling away from home.

4. On-premises meals.

In the past, employers could deduct certain meals provided to employees on the business premises if those meals qualified as a de minimis fringe benefit. For instance, the deduction could be applied to meals furnished while employees worked late hours, as well as food and beverages provided to employees at on-site eating facilities such as a company cafeteria. The value of these benefits was tax-free for employees.

An employer could deduct 100% of the cost of these benefits.

Under the TCJA, the deduction is reduced to 50% of the cost and is eliminated after 2025. However, the value continues to be tax-free to employees.

5. Moving expense reimbursements.

Previously, if employees qualified under a two-part test involving distance and time, they could deduct their out-of-pocket job-related moving expenses on their personal income tax returns. The deductions were claimed “above-the-line,” so they were available to both those who itemized and those who claimed the standard deduction. Alternatively, employers may have reimbursed employees tax-free for qualified moving expenses.

Now, starting in 2018, the TCJA repeals both the moving expense deduction and the tax exclusion except for active duty military personal.

6. Achievement awards.

Currently, an employer can deduct up to $400 of the value of achievement awards to employees for length of service or safety. The tax exclusion is multiplied by four to $1,600 for awards under a written nondiscriminatory achievement plan. On the receiving end, employees aren’t taxed on the value of the awards that don’t exceed the employer’s deduction.

Beginning in 2018, the TCJA clarifies that the tax deduction and corresponding tax exclusion don’t apply to cash, gift coupons or certificates, vacations, meals, lodging, tickets to sporting or theater events, securities and “other similar items.” However, the tax breaks are still available for gift certificates that allow the recipient to select tangible property from a limited range of items preselected by the employer.

Reminder: This is only an overview of six of the key tax law changes affecting payroll matters. Do you have any questions about the new law’s impact on benefits? Don’t hesitate to contact your payroll providers for more details.

Fringe Benefits Surviving the Axe

Several fringe benefit crackdowns threatened by Congress didn’t make it into the final version of the new tax law. The items on the chopping block that were eventually spared include:

Dependent care assistance plans,
Adoption assistance programs,
Employer-provided housing, and
Educational assistance programs.

Also, certain liberalizations of the hardship distribution safe-harbor rules were contemplated, but eventually skipped by the lawmakers.

R&D Credit Is Now Improved for Manufacturers

Posted on March 10, 2018July 22, 2024 by Red Spot Design2

After being extended more than a dozen times by various pieces of legislation, the research and development (R&D) credit was finally made permanent by the Protecting Americans from Tax Hikes (PATH) Act of 2015.Now the Tax Cuts and Jobs Act (TCJA), goes one step farther. Not only does the law preserve the credit in all its glory, it generally enhances it in context of several other provisions.

Calculate the R&D Credit

The R&D credit is intended to encourage spending on research activities by both established firms and start-ups. Generally, the credit equals the sum of:

20% of the excess of qualified research expenses for the year over a base amount,
The university basic research credit (20% of the basic research payments), and
20% of the qualified energy research expenses undertaken by an energy research consortium.

The base amount is a fixed-base percentage of average annual receipts — net of returns and allowances — for the four years before the R&D credit is claimed. The fixed-base percentage can’t exceed 16% and the base amount can’t be less than 50% of the annual qualified research expenses.

Alternatively, a manufacturer or other business entity may claim a simplified R&D credit of 14% of the amount by which its qualified research expenses for the year exceed 50% of its average qualified research expenses for the preceding three tax years.

The credit is only available for qualified expenses, which must:

Qualify as a “research and experimentation (R&E) expenditure” under Section 174 of the tax code (see box below “Change in Store for R&E Deduction”), and
Relate to research undertaken to discover information that is technological in nature and the application of which is intended to be useful in developing a new or improved business component.

In addition, substantially all the research activities must relate to a new or improved function, performance, reliability or quality.

While the R&D credit has always offered tax saving benefits for manufacturers, the TCJA opens even more opportunities to use the credit.

Enter the TCJA

Under the TCJA, the benefits of the R&D credit are enhanced when the following related provisions are taken into account:

Corporate AMT.

Previously, the corporate alternative minimum tax (AMT) was a thorn in the side of firms utilizing the R&D credit. But the TCJA changes the landscape.

Before the TCJA, a manufacturing firm generally could use the R&D credit only to offset regular tax liability, but not the corporate alternative minimum tax (AMT). Under a provision in the PATH Act, a limited exception was approved under which a business with $50 million or less in average gross receipts for the previous year could use the R&D credit to offset AMT liability.

That issue is largely moot, as the new law repeals the corporate AMT beginning in 2018. As a result, some larger firms will realize the tax benefits of the R&D credit. For individuals, though the AMT still exists, albeit at higher limits. Thus, if your R&D credit is from a pass-through entity, your ability to use it to offset the AMT may continue to be limited.

Expensing.

The TCJA enhances both the Section 179 deduction and bonus depreciation. Under Sec. 179, the maximum expensing allowance is doubled from $500,000 to $1 million for property placed in service in 2018. The phase-out level increases from $2 million to $2.5 million. In addition, 50% bonus depreciation is doubled to 100% for a five-year period, beginning in 2018, before being gradually phased out over the following five years.

Thus, the new law encourages businesses to buy depreciable equipment for its research activities. In most cases, a firm will be able to expense the full cost in the year the equipment is placed in service.

Net operating losses (NOLs).

Previously, a business could carry back an NOL for two years before carrying it forward for 20 years. Beginning in 2018, NOLs generally can’t be carried back and may be carried forward indefinitely. However, they are limited to 80% of taxable income. Consequently, the R&D credit may be a valuable tool for firms with an NOL, because to the extent that they are not able to use an NOL to shelter income, the credit can be used to offset the tax that would otherwise be due.

Maximize the Credit

The R&D credit is still standing after the tax reform law and can be an even more effective tax shelter for manufacturers in the wake of the new law. Consult with your tax advisor for ways to maximize this credit and its related tax-savings opportunities.

Change in Store for R&E Deduction

The Tax Cuts and Jobs Act (TCJA) makes a significant change in the deduction for research and experimental (R&E) expenditures allowed by Section 174.

Briefly stated, the TCJA requires firms to spread out the tax benefit over time, rather than deduct the expenditures, starting in 2022.

Prior to the TCJA, taxpayers could either currently deduct R&E expenditures or amortize the costs over a period of not less than 60 months. Qualified expenses are limited to the following:

In-house wages and supplies attributable to qualified research,
Certain time-sharing costs for computer use in qualified research, and
65% of contract research expenses, that is, amounts paid to outside contractors in the U.S. for conducting qualified research on the taxpayer’s behalf, or, in the case of qualified research consortium, 75%.

Under the TCJA, firms can deduct R&D costs through 2021. Beginning in 2022, firms must amortize R&E expenditures over a five-year period (or a 15-year period for foreign R&D expenditures).

5 Stages for Integrated Product Delivery

Posted on March 9, 2018July 22, 2024 by Red Spot Design2

How IPD is slowly altering the construction process.

It’s not a stretch to say that the construction industry didn’t change much for decades before technology started making inroads around the turn of the century.And the forces of change are clearly at work in the current environment, encompassing the use of new and improved tools, revised methodologies, and faster approaches to the jobs at hand.

Arguably, first and foremost for many construction firms is the transformation to an integrated product delivery (IPD) system. This approach emphasizes innovation and collaboration to reduce waste, cut costs and boost productivity. Leading professional associations such as the American Institute of Architects and the Associated General Contractors are spearheading the movement, creating standards and guidelines to be used in the process.

Team Effort

The main goal of IDP is to initiate a “team effort” of the owners of construction firms, architects, engineers, managers and subcontractors. Unlike traditional construction projects, where these individuals and groups generally act independently, IDP incorporates joint planning from the outset.

This approach to construction projects leverages knowledge and expertise that each team member brings, guided by these principles:

Trust
Transparency
Information sharing
Mutual objectives
Shared risk
Shared reward
Collaborative decisions
Total use of technological capabilities
Early involvement Early goal definition

Each team member’s skills are maximized and the focus shifts from meeting individual expectations to collectively achieving goals. The upshot: Success is measured by the degree to which those shared goals are achieved.

Traditional contracting and construction work is based on separate silos of responsibility. Practically speaking, transferring from one silo to another often results in inefficiency. The notion of breaking down silos of responsibility and requiring cooperation among all the main participants is a sea change in the construction industry.

Five Essential Stages

Although the details will vary from project to project, there are generally five critical stages to the IPD process:

1. Information-gathering and conceptualization.

A meeting of the minds must occur before the first shovel hits the ground. This requires brainstorming sessions about objectives and ways to avoid potential problems. There’s a heavy emphasis on minimizing the risks and mistakes that can typically plague a construction project.

2. Design.

The next logical step is to incorporate decision from the first stage into the design process, taking into account regulations and other applicable laws. Involving all team members at this stage helps reduce waste and provide overall savings.

3. Project execution.

When the design is complete, the project can be executed using computer modeling and design data analysis. Frequently, digital representations using Building Information Modeling (BIM) will be included, helping to predict outcomes. (See The Expanding Role of BIM below.) Be aware that any data generated from proposed projects must be analyzed and virtually tested to help ensure the desired results.

4. Actual construction.

In the past, this was typically the first step for a construction company. But, when using IDP, ground-breaking begins after the general contractor and perhaps certain subcontractors have already been involved in first three stages. Typically, this is the stage where the benefits of the integrated model are realized. The project should run smoothly without delays and design conflicts; change orders and waste should be avoided; and, most importantly, the job should come in on time and on budget.

5. Operations.

If initial objectives are met, operations will continue successfully, with reduced costs and maintenance expenses. This is likely to impress surrounding neighbors, potentially prompting additional projects. Big Benefits on Tap

For many participants in IPD, the favorable results can’t be ignored. Among the benefits are:

Risks and rewards can be predicted.
Construction results can be assessed and analyzed.
Higher standards can be achieved.
Regulations can be more easily observed.
Construction procedural issues can be detected and accommodated quickly with minimum distraction and delay.
Contracts can be prepared for all team members, filling in gaps that can appear when parties work independently.
Cost estimations can be more precise.

The times, they are a-changin’. New technology allows for significant advances in efficiency and accuracy that translate into upgrades in delivery methods. To be successful, however, an IPD project requires all team members to tackle new roles. This dramatic cultural change is slowly evolving.

Adapt and Embrace

Don’t be left behind in the dust. Start adapting to the IPD framework now and embrace the shift that’s slowly changing the industry.

The Expanding Role of BIM

Building Information Modeling (BIM) is a powerful tool that can be used in a collaborative process.

When BIM is incorporated into integrated project delivery, it can create a solid visualization of the project and identify actual construction behavior, performance and other relevant data. It facilitates the process by clarifying intent and recording and sharing accurate information.

Similarly, BIM provides reliable data that reduces the need for requests for information, change orders and rework.

Practical advice: Require all the parties to use BIM and to share the information electronically.

Outsourcing Payroll Administration and Compliance

Posted on March 8, 2018July 23, 2024 by Red Spot Design2

There is a common story we see across small businesses of all sizes. Owners and operators of the company are focused on top line growth, hitting the pavement to bring in new business. They add employees to support the new business growth. They add benefits to keep those great employees. Before realizing it, the owners and small bookkeeping staff are overwhelmed with benefit and payroll administration. Is the company doing it right? Do owners and employees know what they don’t know?

At this point, the owners seek advice from other business owners and their CPA. Would outsourcing payroll make sense or should they add in-house staff to manage it better? After reviewing a few payroll services, the company is understandably faced with more questions about which service provides the best options — not to mention price.

Once decided on a payroll service, the real education begins. The company is still providing a lot of information to the payroll service to set up the structure and system, such as personnel information, their employment status, types of benefits and how each employee wants those wages and benefits managed through payroll. Later, staff also must reach out when there are new hires, promotions and changes to benefits. Depending on the payroll service, owners and operators might not get a lot of help understanding everything. They are also on their own to figure out internal processes that make information gathering and sharing simpler.

Let’s say the business expands even more to another state. Then the owner is faced with multi-state payroll complications. Although the solution to a well-managed payroll and benefits system takes time and strategy, the opportunity to address payroll complexity first lies with your CPA. This relationship can either simplify or increase complexity, so let’s look at some of the payroll pitfalls and questions every business owner should consider.

Pitfalls of Poorly Managed Payroll Administration

Businesses can face serious fines and penalties from the Internal Revenue Service and other tax authorities for failing to comply with timely payments and reporting. At a minimum, employers must account for federal income tax, federal and state unemployment tax, Social Security and Medicare. Many companies have run into trouble in the areas of paying unemployment taxes, making late payroll deposits, incorrectly classifying employees as independent contractors on 1099s and assuming that depositing payroll is the same as reporting.

Penalties can be classified and pursued as “failure to deposit,” “failure to pay” or “failure to file.” Worst-case scenarios if payroll issues aren’t resolved could include losing the business and/or being charged with a federal crime. Individual shareholders and even corporate officers can be pursued and assessed penalties under certain circumstances.

The Department of Labor’s impending changes to overtime exemption rules are creating even more angst in the area of wage and hour compliance. Employees previously exempt from overtime rules may now be considered non-exempt, leading to the need to track overtime hours and communicate possible changes in benefits. It may even require employers to dictate how employees can take time off or how they work outside of normal business hours. These changes tie directly into payroll administration and tax planning.

On the benefits side, employers can offer a variety of things to compete for talent as well as help employees work efficiently. Properly classifying these benefits and properly withholding for pre-tax or taxable benefits simply adds to the complexity. Handle something wrong, and you will have compliance problems as well as upset employees.

It is fair to say that payroll administration and compliance is a big deal, and the decision on whether or not to outsource should not be taken lightly.

Payroll is the most up-to-date KPI in a business — and the most expensive. Business owners we talked to are more than happy to find ways to save money in this area. Are you ready to consider an alternative to your current system of payroll administration? Call the payroll team at Cornwell Jackson.

Continue Reading: Things to Ask your CPA about Payroll Outsourcing

Scott Bates, CPA, is a partner in the audit practice and leads the firm’s business services practice, which includes a dedicated team for outsourced accounting, bookkeeping and payroll services. He provides consulting to clients in healthcare, real estate, auto, transportation, technology, service, dealerships and manufacturing and distribution. Contact Scott at scott.bates@cornwelljackson.com or 972-202-8000.

Blog originally published April 6, 2016. Updated on March 8, 2018.

Fair Market Value Test Can Render Related Finance Companies Invalid

Posted on March 6, 2018July 23, 2024 by Red Spot Design2

Related finance companies have been around for a long time…and so have the IRS guidelines for valid RFCs that auto dealerships must follow for tax compliance.

Like third-party lenders, RFCs can offer to acquire receivables at a 25-40 percent, up-front discount of fair market value (FMV). Problems arise, however, when the discount is not based on FMV or when the dealer cannot prove an actual benefit from the transaction of either improving cash flow or shifting risk.

After the transaction, if the dealer is still directly responsible for the asset in terms of collecting payments, owning title, or collecting any insurance proceeds, for example, the IRS will question whether a sale of property actually occurred.

Discounts on Fair Market Value

A discount is typically acceptable in nearly all transfers of receivables. The level of discount is influenced by credit history, past payment history, time on the note and age of the vehicle. Related Finance Companies can offer to buy notes at a discount regardless of whether they buy in bulk or choose transactions selectively.

The IRS can consider the following in determining whether a dealer sold receivables to an RFC at fair market value:

Car jackets for loans that were sold to the RFC compared to loans that were sold to third parties
- Could the debtor have obtained financing from third parties or was it unlikely? The car jacket usually includes a credit report on the borrower. If the discount rate is large, the customer will have a poor credit history.
- If these loans were sold to the RFC at FMV, then similar loans sold to third parties will have a similar discount rate.
Frequency of payments on the loan required: weekly, biweekly, or monthly?
- Required weekly payments generally indicate higher credit risk.
The dealer’s collection history on the loans prior to the discount date
- Poor customer collections decrease the value of the note receivables.
- Average dealer markup on dealer-financed sales compared to the average dealer markup on third-party financed and cash sales
If the markup is the same, then the face amount of the note should be the FMV of the note on the loan date. To the extent the markup is higher on dealer-financed sales, the FMV of the loans are less than their face value on the loan date.

In addition to these considerations of FMV, the IRS will look at the date of the discount relative to the date of the loan transaction. The closer the discount date is to the loan date, the less likely that factors such as a change in interest rates could impact the FMV calculation.

Related Finance Companies: Cash and Risk Benefits

The IRS may also determine that the transfer of dealer notes to the RFC was not a true sale of property based upon the following factors:

Upon the transfer of the notes, the dealer still had burdens of ownership:
- Dealer’s employees collected the payments and performed repossessions
- Dealer bared the risks of the credit-worthiness of the notes
- Dealer’s financial position did not change when the notes were transferred to the RFC
RFC was thinly capitalized
Dealer, not the RFC, was responsible for repossessions
Title was not transferred to the RFC and RFC could not have sold the notes
Borrowers were not notified that the loan was reassigned to the RFC
If a vehicle was damaged in an accident, the dealer (not the RFC) had the right to any insurance proceeds
No written sales contracts were drawn up between the dealer and the RFC

If the IRS determines that no actual sales transaction took place with an entity separate from the dealership, auditors may perform a tax adjustment calculation.

This calculation equals the dealer’s increase in taxable income, which can be substantial depending on the number of transactions in a given tax year or years. All other unrelated income or expenses of the RFC will also remain on the RFC return.

Again, it can be very complex and time-consuming to regularly review the multiple areas of your entity forms, operations, transactions and tax reporting to ensure full compliance with the IRS on related finance company operations. This is why many dealerships fall short in the event of an IRS query.

To help you determine if it’s the right time to review financial management of your auto dealership or RFC operations, the IRS provides a helpful checklist of common questions to consider.

Download Cornwell Jackson’s whitepaper and checklist on RFC risk management.

Scott Bates is an assurance and business services partner for Cornwell Jackson and supports the firms auto dealership practice. His clients include small business owners for whom he directs a team that provides outsourced accounting solutions, assurance, tax compliance services, and strategic advice. If you would like to learn more about how this topic might affect your business, please email or call Scott Bates.

Blog originally published Dec. 4, 2015. Updated on March 6, 2018.

Unlock the Potential of Your Business

Let’s Connect