Tag: taxes

Is your small business prepared for the new employment tax filing deadline?

Posted by Maria T. Rollins on

Be Aware of New W-2 and 1099 Filing Deadlines

In an effort to combat fraud, the Protecting Americans from Tax Hikes (PATH) Act of 2015 was enacted. It revises the filing deadline for Form W-2 and certain types of Form 1099.New Filing Deadlines for W2 and 1099s

Without proper planning, these revisions can cause some real stress for small businesses.

In the past, there were always two dates to consider when filing your employer tax forms. Forms were due to recipients on January 31st and forms were due to the government agencies (IRS and Social Security Administration) on February 28th.

Effective with 2016 tax forms, W-2’s and 1099’s with Box 7 entries are now due by January 31st for both recipient and government agency filings.  Form 1099 box 7 reports non-employee compensation.

In practice, we have found that many businesses do not have correct recipient information for employees and independent contractors, and unfortunately do not realize this until it is time to prepare the recipient copies of the forms. In the past, the issuer had until February 28th to track down or correct any incomplete recipient information.

If you fail to file a correct W-2 or 1099 information return by the due date, and you cannot show reasonable cause, you may be subject to a penalty. There are also penalties if you report an incorrect TIN (taxpayer identification number) or fail to report a TIN. Accordingly, collecting correct information timely is very important.

Complying with PATH

Our recommendations to businesses to assure compliance with the new due dates are as follows:

  • Verify the accuracy of all employee information NOW
  • Review all vendor files NOW and confirm that all applicable files include the vendor’s name, address and TIN
  • Obtain Form W-9, “Request for Taxpayer Identification Number and Certification”, for each new vendor PRIOR to issuing any payment to the vendor
  • Contact all vendors with missing information NOW to allow sufficient time to receive the correct information (it may be difficult to secure the correct information if you no longer do business with the vendor)

Due to the shortened filing deadline between the end of the year and the filing due date, it is essential that you have all the complete and accurate filing information by early January.

We’ve Got Your Back

At KRS we assist our business clients with employer tax reporting as well as tax planning and compliance. Feel free to contact partner Maria Rollins at 201.655.7411 if you have any questions relating to the filing deadlines or any tax compliance issues.

Tax Planning Strategies – Minimizing 2016 Individual Income Taxes

Posted by Maria T. Rollins on

It is never too early to get a jump start on tax planning. Why not start now and minimize your end of the year holiday stress? These tax planning techniques could help you reduce 2016 taxes.

Make Charitable Contributions

Tax planning strategies for 2016Making charitable contributions is a great way to reduce your taxable income. The most common type of donation is a monetary contribution. Taxpayers are allowed to make tax deductible monetary contributions to qualified organizations in amounts up to 50% of adjusted gross income.

Additionally, donating securities is an excellent way to support a charitable organization and avoid paying capital gains tax.  When you donate securities that were held for more than one year, the contribution is deducted at fair market value and capital gains tax is avoided.  This strategy works best with appreciated securities.  Unlike monetary charitable contributions, donating securities to qualified organizations are limited to 30% of adjusted gross income.

Plan for Capital Gains

If capital gains are expected to be significant in 2016, consider selling some securities in your portfolio at a loss and generate capital losses. Capital losses are netted against capital gains to calculate the net taxable amount. Furthermore, if capital losses exceed capital gains, taxpayers may take a capital loss deduction up to $3,000 in the current year and carry forward the remainder to future years.

For example, if a taxpayer sells two securities, one with a gain of $50,000 and one at a loss of $65,000, a $3,000 capital loss deduction is allowed in the current year. The remaining $12,000 capital loss is carried forward to the following year.

Avoid Alternative Minimum Tax

The alternative minimum tax (AMT) has a significant impact on tax planning for high income individuals.  AMT limits certain benefits and itemized deductions you might otherwise be eligible to receive. In years where taxpayers will be subject to AMT, one strategy is to accelerate income or defer tax deductions. This will help avoid AMT either in the current year or over multiple years.

For example, if you are subject to AMT and will not receive any benefit for state tax payments in the current year, defer those payments, if possible, to the next year when you’re not subject to the AMT.

If you’re not in the AMT for the current year, pay any state taxes before the end of the year, which may be due in April, to accelerate the year of the tax deduction. The IRS has the following tax tool to help determine if you might be taxed under AMT (https://www.irs.gov/individuals/alternative-minimum-tax-assistant-for-individuals).

Prepay Deduction Items

Another way to reduce taxable income in 2016 is to prepay 2017 real estate taxes, state and local income taxes, and other miscellaneous itemized deductions.  Itemized deductions are recognized in the year they are paid, not the year they are due. If a taxpayer itemizes and has the option to accelerate 2017 expenses to 2016, this will increase deductions in 2016 which will decrease adjusted gross income.

Before implementing this strategy confirm you will not be subject to the AMT and your overall itemized deductions will be greater than the standard deduction. You should also consider itemized deduction limitations that may be greater due to higher income in 2016.

You may benefit from implementing at least one of these tax planning strategies. They are just a few of the methods to reduce taxable income and should be implemented on a case-by-case basis. At KRS we work with our clients to develop fluid tax plans and minimization strategies.

If you would like to learn more about tax planning and how to implement strategies to reduce your taxes, please contact Maria Rollins, CPA, to set up a consultation.

Can Real Estate Professionals Pay No Income Taxes (a la Donald Trump)?

Posted by Simon Filip on

real estate professionals can deduct tax losses resulting from their real estate activities

As a CPA with a substantial real estate practice, I found the recent controversy regarding Donald Trump’s tax losses and the possibility that he paid no federal income tax to be quite interesting.  Although we do not know what part, if any, of the losses arose from Mr. Trump’s real estate activities, it is not unusual or illegal for real estate professionals to deduct tax losses resulting from their real estate activities.

News reports indicate that Donald Trump’s 1995 federal income tax return reflected a tax loss of approximately $916 million dollars, which may have been carried forward to offset income and reduce Trump’s taxes in succeeding years. As this revelation appears to be the source of public outrage, I wanted to explain taxation of rental real estate and how owners and investors may legally benefit from losses.

Trump most likely operates many of his business ventures as “pass-through” entities, such as partnerships and limited liability companies. Pass-through entities pass through all of their earnings, losses and deductions to their owner, for inclusion on their personal income tax returns. In the case of losses, the owner or member can use these losses to offset other income and carry forward any excess to future years. As with all things taxes, there are requirements that must be met (see Passive Loss Limitations in Rental Real Estate).

Owners of rental real estate are not only allowed to deduct for mortgage interest, real estate taxes and other items, but also depreciation. The Internal Revenue Code allows for depreciation of assets used in a trade or business, which include rental real estate. This is an allowance for the wear and tear of the building and astute taxpayers can further benefit from depreciation by accelerating their depreciation deductions (see my blog, The Tax Benefits of Cost Segregation in Real Estate). While many properties are increasing in value, the owners are receiving an income tax benefit in the form of an annual tax deduction for the wear and tear of the building.

If certain requirements are met, a real estate professional, as defined by the Internal Revenue Code (there is no reference to “Mogul” in the Code) can offset other items of income with losses generated by their real estate activities. I have more details on the income tax advantages of being a real estate professional in a previous blog posting, Passive Activity Loss and the Income Tax Puzzle for Real Estate Professionals.

Donald Trump invested in many business ventures during the 1980s and 1990s and real estate may have only been a small part of the substantial loss reflected on his 1995 tax return. Without Mr. Trump’s tax returns, we will never know. As an accountant, I’m more curious about the transactions that gave rise to the loss and the application of the specific tax law provisions permitting deduction of these losses.

What are your thoughts regarding the ability of real estate professionals to offset other items of income with their losses from real estate activities?

Why do investors want to participate in Zero Cash Flow deals?

Posted by Simon Filip on

Zero cash flow deals offer tax savingsHint: it’s about deferring taxes

Most zero cash flow Triple Net Lease (“NNN”) investments have two components. First, you purchase a high quality NNN investment with a long-term lease and a tenant with a high credit rating. Next, you obtain zero cash flow financing, where the rents from the tenant equals the debt service. This financing has an amortization period that is typically fixed to the term of the lease and a flat interest rate. Commonly, an investor will put between 10 and 20 percent down, and when the lease’s initial term ends, he or she will have a debt-free building.

Zero cash flow loans are highly leveraged and lenders require a strong credit tenant, which is why drug stores such as Walgreens and CVS are highly sought-after investments for these arrangements.

During the Lease Term

While the real estate investment is not providing current cash flow, the depreciation generated from these investments is structured to more than cover principal payments, leaving a net loss that can be used to offset other taxable income. Refer to my blogs on real estate professionals and passive loss limitations to determine if those losses can be used.

During the term of the NNN investment, principal payments will gradually grow. Once they exceed depreciation, you may be subject to phantom income, which is taxable. (See my previous blog on phantom income.) Prior to reaching this point, an investor should consider disposing of the asset (possibly through a like-kind exchange) or refinancing the property. If you have already reached the point in a zero cash flow deal where principal payments exceed depreciation, tax planning should be undertaken to minimize income taxes.

End of Lease Term

If an investor retains ownership until the end of the lease, the loan will be satisfied and the building will be owned without any debts. If there are options in the lease, it’s possible that the tenant exercises the option and the property will generate cash flow with no debt service. On the other hand, if the tenant decides to move out, it’s reasonable to assume the building will still have value.

While many investors acquire NNN properties for steady cash flow, that is not the only reason investors should consider a NNN deal. Astute investors use NNN investments as a way to minimize their tax exposure. Zero cash flow deals do not provide current cash flow, but can offer tax savings through depreciation deductions and appreciation of the real estate in the long-term.

KRS CPAs can help you establish tax savings with NNN investments. Give us a call at 201-655-7411 or email SFilip@KRScpas.com.

Understanding IRS Rules for Self-Rentals

Posted by Simon Filip on

Owner or renter – or both? 

Tax effects of self rentalsSelf-rental is an arrangement in which a business and property that it rents are both owned by the same person(s). It is common for a taxpayer to own an operating business and also own the accompanying real estate. That person has to materially participate in the operating company for the self rental rules to apply. If the operating company is an entity that the owner(s) actively participate in on a day-to-day basis, in most cases the owner(s) would be considered to materially participate in that activity.

Additional details on material participation can be found in Internal Revenue Service  Publication 925.

The passive activity loss rules

As discussed in my blog post, Passive Loss Limitations in Rental Real Estate, the IRS Code generally prohibits taxpayers from deducting passive activity losses against other income, including salaries, interest, dividends, and income from nonpassive activities. Generally, a passive activity loss can only be used to offset other passive income.

The IRS considers most business activities to be nonpassive if a taxpayer materially participates in the business.  One of the exceptions to this rule is rental real estate. Rental real estate activities are generally considered passive regardless of level of participation.

Trapped losses

Passive losses can only offset other passive income. Assuming a taxpayer incurs a loss on the rental of property to a business in which he or she materially participates, absent any other passive income during the year, the loss will not be deductible. However, the loss is carried forward to future tax years to offset income from the activity.

If there are unused passive losses from the activity when the property is sold, such suspended losses from that activity are recognized in the year of disposition.

How self-rental rules can apply

What does it all mean? Here’s an example to help you understand how the rules apply:

A taxpayer owns a warehouse which is rented by his distribution company that he materially participates in as owner and president. During the year the rental warehouse incurs a loss of $50,000, while the distribution company has $50,000 of income.

Does the $50,000 of losses incurred by the warehouse offset the $50,000 of profits from the distribution company?

No. Because the property was essentially rented to himself (i.e., to a business in which he materially participated), the self-rental rules apply. In the case of a self-rental, income is treated as nonpassive and loss is treated as passive. The self-rental rule characterizes the $50,000 of rental loss as passive which cannot offset the nonpassive income from the distribution company.

If you are currently involved in a self-rental or are considering this transaction, there are methods whereby you can avoid or reduce the disadvantageous tax effect of the self-rental rule. Contact me at 201.655.7411 or sfilip@krscpas.com and I can help you understand which methods are most advantageous to you.

What is Risk? How Does it Affect Business Value?

Posted by Gerald A. Shanker on

 

risk and business value
What are the risks in your business, and what can you do to reduce them?

According to Dictionary.com, risk is defined as “the chance of injury or loss; a hazard or a dangerous chance.” In the business valuation context, risk refers to the possibility of financial loss or drop in asset value.

In layman’s terms, the risk in buying a business is that you will overpay for it. The more risk that is associated with an investment, the higher the return that is demanded by the investor. The higher expected returns are achieved when the market places a lower value on a business that is perceived as having higher risk.

In estimating the value of a business, the analysis is based on expected cash flows and the risk that such cash flows will not be received as expected. An astute buyer seeks to minimize risk, through careful evaluation and understanding of the business he or she is considering buying or investing in. As I have said in previous blogs, the evaluation of a closely held business is no different than the evaluation done in purchasing 100 shares of a public company:

  • Will the company continue to pay dividends?
  • How much will those dividends be?
  • What will the shares be worth when you are ready to sell them?

Certain risks, such as the economy in which the business operates, are uncontrollable. Some risks, such as future competition, may be anticipated but others, such as technological obsolescence may come as a complete surprise. Many years ago, a client purchased a chain of successful photographic film developing labs and continued to operate them successfully until the advent of digital photography. The client certainly did his homework, but did not see the change that was coming. Neither did Kodak and look what happened to them!

Controllable risks to consider

If you are buying or selling a business, what are some of the controllable risks that you should look out for?  Here are a few of the more common ones:

  • Poor accounting records – A company’s accounting records should tell the full financial story of the business. With all the low-cost accounting software that is available, there is no reason that every business should not have great accounting records. A company’s books should speak for themselves; the more stories, explanations, and exceptions, the greater the perceived risk.
  • Customer concentration – Is the continued success of the business dependent upon a single customer or a few customers? If the loss of any of these customers would negatively impact the business, that is a significant risk.
  • Supplier concentration – Is the business dependent on any suppliers that cannot be quickly and easily replaced? This could be a problem if anything happens to one of those suppliers.
  • Key employees – Is the business dependent on the services of one or more employees? Are there enforceable employment contracts and non-compete agreements in place with them? If the business does not have these agreements (signed by all parties and on file), what would happen if those employees went to work for your competitor?
  • Foreign competition – Can the product or service offered by the business be purchased at a lower cost from a foreign provider? Everything from tax preparation to manufacturing to technology consulting can be outsourced overseas these days. If this hasn’t affected your business yet, chances are it soon will. What are you doing to remain competitive?

Taking these factors into account, what are the risks in your business, and what can you do to reduce them?

Everything you do to reduce business risk will be a step toward increasing your company’s value. If you’d like a fresh look at the risks inherent in your business, or to discuss the business valuation of your company, contact me at 201.655.7411 or  GShanker@krscpas.com.