Deregulation of the energy industry was intended to give consumers a choice of electricity and natural gas providers — and an opportunity to save money. But many homeowners in deregulated states are receiving higher energy bills thanks to deceptive, and even fraudulent, door-to-door sales practices.

Deception and fraud

Not all states have deregulated. If yours has, you probably know it because you’ve received mailings, phone calls and sales rep visits from companies asking you to switch from your current provider. In most cases, traditional utilities continue to transmit the energy; the new providers, offering discounts and other incentives, deliver it to customers.

Many such offers are legitimate and can potentially save you money. But others are deceptive, designed to get you to agree to switching without a full understanding of the terms. For example, a company may offer an attractive introductory rate that becomes outrageously high after the introductory period ends. These companies usually ask you to sign a long-term contract, and getting out of one is likely to involve cancellation fees and a lot of hassle.

Then there are the cases of outright fraud. In the most common scam, slamming, a salesperson claims to represent your current utility company and tells you that there’s a problem with your account. The rep asks to see a current bill to “straighten out” the issue. Instead, the crooked rep copies down your account number and uses it to change your provider, claiming that you requested the switch. You may not even notice you’ve been conned until your bills suddenly skyrocket.

Prevention starts with knowledge

As with all consumer choices, a little knowledge can go a long way. First, find out what company currently delivers and provides energy to your home. Then learn which providers operate in your city by visiting the American Coalition of Competitive Energy Suppliers site at http://competitiveenergy.org or by contacting your state’s utility regulatory commission.

If someone comes to your door purporting to represent one of these companies, ask to see a business card and personal ID. Before inviting the rep into your home, call his or her office to confirm the individual’s identity.

Even if an offer seems above-board, never provide a door-to-door rep with:

  • A utility bill containing your account number,
  • Payment information such as credit card numbers, or
  • Personal information such as your Social Security number.

A legitimate alternative energy salesperson should be willing to leave materials so you can review them at your leisure and research your options. Be particularly suspicious of any high-pressure tactics such as special rates if you “sign today.” And, of course, if a rep makes threats or simply makes you uncomfortable, shut the door and call the police. Call us for more at 205-345-9898.

© 2019 Covenant CPA

If you’re like many Americans, letters from your favorite charities have been appearing in your mailbox in recent weeks acknowledging your 2018 year-end donations. But what happens if you haven’t received such a letter — can you still claim an itemized deduction for the gift on your 2018 income tax return? It depends.

Basic requirements

To support a charitable deduction, you need to comply with IRS substantiation requirements. This generally includes obtaining a contemporaneous written acknowledgment from the charity stating the amount of the donation, whether you received any goods or services in consideration for the donation, and the value of any such goods or services.

“Contemporaneous” means the earlier of 1) the date you file your tax return, or 2) the extended due date of your return. So if you made a donation in 2018 but haven’t yet received substantiation from the charity, it’s not too late — as long as you haven’t filed your 2018 return. Contact the charity and request a written acknowledgment.

Keep in mind that, if you made a cash gift of under $250 with a check or credit card, generally a canceled check, bank statement or credit card statement is sufficient. However, if you received something in return for the donation, you generally must reduce your deduction by its value — and the charity is required to provide you a written acknowledgment as described earlier.

Substantiation is serious business 

Don’t take the substantiation requirements lightly. In one U.S. Tax Court case, the taxpayers substantiated a donation deduction with canceled checks and a written acknowledgment. The IRS denied the deduction, however, because the acknowledgment failed to state whether the taxpayers received goods or services in consideration for their donation.

The taxpayers obtained a second acknowledgment including the required statement. But the Tax Court didn’t accept it because it wasn’t contemporaneous (that is, it was obtained after the tax return was filed).

2018 and 2019 deductions

Additional substantiation requirements apply to some types of donations. We can help you determine whether you have sufficient substantiation for the donations you hope to deduct on your 2018 income tax return — and guide you on the substantiation you’ll need for gifts you’re planning this year to ensure you can enjoy the desired deductions on your 2019 return. Call us at 205-345-9898.

© 2019 Covenant CPA

A variety of tax-related limits affecting businesses are annually indexed for inflation, and many have gone up for 2019. Here’s a look at some that may affect you and your business.

Deductions

  • Section 179 expensing: 
    • Limit: $1.02 million (up from $1 million)
    • Phaseout: $2.55 million (up from $2.5 million)
  • Income-based phase-ins for certain limits on the Sec. 199A qualified business income deduction: 
    • Married filing jointly: $321,400-$421,400 (up from $315,000-$415,000)
    • Married filing separately: $160,725-$210,725 (up from $157,500-$207,500)
    • Other filers: $160,700-$210,700 (up from $157,500-$207,500)

Retirement plans

  • Employee contributions to 401(k) plans: $19,000 (up from $18,500)
  • Catch-up contributions to 401(k) plans: $6,000 (no change)
  • Employee contributions to SIMPLEs: $13,000 (up from $12,500)
  • Catch-up contributions to SIMPLEs: $3,000 (no change)
  • Combined employer/employee contributions to defined contribution plans (not including catch-ups): $56,000 (up from $55,000)
  • Maximum compensation used to determine contributions: $280,000 (up from $275,000)
  • Annual benefit for defined benefit plans: $225,000 (up from $220,000)
  • Compensation defining “highly compensated employee”: $125,000 (up from $120,000)
  • Compensation defining “key employee”: $180,000 (up from $175,000)

Other employee benefits

  • Qualified transportation fringe-benefits employee income exclusion: $265 per month (up from $260)
  • Health Savings Account contributions: 
    • Individual coverage: $3,500 (up from $3,450)
    • Family coverage: $7,000 (up from $6,900)
    • Catch-up contribution: $1,000 (no change)
  • Flexible Spending Account contributions: 
    • Health care: $2,700 (up from $2,650)
    • Dependent care: $5,000 (no change)

Additional rules apply to these limits, and they are only some of the limits that may affect your business. Please contact us for more information at 205-345-9898.

© 2019 Covenant CPA

What if the unthinkable happens and your spouse dies unexpectedly? Would you be prepared to cope emotionally and financially? As the surviving spouse, you’ll face several tasks and challenges.

First steps first

By no means complete, the following are areas that will need to be addressed:

Death certificates. One of the first things to do is obtain death certificates, which you’ll need to provide for various dealings with financial institutions and others. While it may be difficult to estimate how many death certificates will ultimately be requested of you, you’ll probably want to start with at least a dozen.

Notifications. You must get the word out to other interested parties, including your spouse’s employer, if applicable; credit card companies; life insurance companies; retirement plan and IRA administrators; the state motor vehicle agency; the state office for inheritance tax, if applicable; and your attorney.

Social Security benefits. If your spouse was receiving benefits, consult with the Social Security Administration as to the benefits available to a surviving spouse. Frequently, modifications are required if the survivor was the lower-earning spouse. Even if your spouse wasn’t receiving benefits yet, you may be eligible for survivor benefits, depending on your age and other factors.

Insurance. Don’t assume that everything about your insurance will stay the same. Review your various policies to ensure that you’ll have the optimal coverage going forward. Make whatever beneficiary changes are required.

Retirement plans and IRAs. You may face important decisions regarding employer retirement plans, such as 401(k) plans, as well as traditional and Roth IRAs. For example, if your spouse had a traditional IRA, you can complete a timely rollover to an IRA of your own without owing any tax. Conversely, you might opt for a lump-sum payout from a 401(k) or IRA should you need the funds.

Investments. Review the investments that were owned solely by your spouse, as well as those you owned jointly. When you have time, sit down with your financial advisor to chart out a path for the future, focusing on changes in personal objectives, time horizon and risk tolerance.

Estate tax filing. Although federal estate tax returns generally are required for only the wealthiest individuals, you may choose to file a return to establish the value of inherited assets. Generally, the return is due within nine months of the date of the death.

Finally, review your estate plan

Once you’re over the initial shock of the death, sit down with your attorney and review your estate plan. You’ll likely need to make several revisions in areas where you named your spouse as beneficiary. If you need help during this difficult time, please turn to us at 205-345-9898.

© 2019 Covenant CPA

Nowadays, data drives everything — including the very buildings in which companies operate. If your business is considering upgrading its current facility, or moving to or constructing a new one, it’s important to be aware of “smart” buildings.

A smart building is one equipped with a variety of sensors that gather and track information about the structure’s energy usage and performance. With this data, the owners can better regulate the building’s energy consumption and, ultimately, save money.

Has this been the case in real life? The results of a 2018 Forbes Insights/Intel survey seem to indicate so. Of the 211 business leaders from around the world who responded, 66% answered affirmatively when asked whether smart building management technologies have produced a return on investment.

What’s out there

The name of the game with smart buildings is integration. Traditional building management and control systems don’t easily converge with today’s technology-driven and Internet-connected infrastructure. (This infrastructure is often referred to as “the Internet of Things.”) Sensor-collected data, however, flows directly to the management and control system of a building to automate everything from HVAC to lighting to security features.

Smart technology isn’t limited to new construction. When real estate developers renovate commercial space, it’s increasingly retrofitted with smart technology. By the same token, many large companies have renovated their own buildings to install data-gathering sensors. Doing so is an expensive undertaking but may be worthwhile if your business owns facilities in a prime location and doesn’t want to move.

At the same time, don’t assume every building will be completely automated. In the health care sector, for example, some facilities are finding that manual control of lighting and ventilation systems remains more effective because high traffic volume hampers computerized efforts to regulate energy usage.

Criteria to consider

The primary advantage of smart technology is simple. Over time, you should save money on energy costs by more accurately tracking and regulating usage — dollars that you can redirect toward more profitable activities. Any property you buy, however, must still fit a sensible budget and fulfill other functional criteria, such as being “right-sized” to your on-site workforce and perhaps coming with tax incentives.

When leasing, you’ll need to get specifics from the owner regarding the smart building in question. Was it built new with sensors or retrofitted? Are the sensors and data-processing equipment themselves up to date? You’ll also need to research local energy costs to ensure that the property owner is passing along the savings to you under a reasonable lease agreement.

Here to stay

Just as auto manufacturers no longer make cars without built-in computers, developers and contractors generally aren’t constructing buildings without smart technology. Bear this in mind as you shop for space. Whether you’re looking to lease, buy or build, we can help you weigh the pertinent factors and make the right decision. Call us today at 205-345-9898.

© 2019 Covenant CPA

From invoices and payments to discounts and write-offs, many business transactions are recorded to accounts receivable. This makes receivables a popular fraud target. But your business doesn’t have to become a victim.

Common schemes

Receivables fraud occurs when dishonest employees divert customer payments for their personal use. They use various methods, including:

Lapping. This is the most common type of receivables fraud. It involves the application of receipts from one account to cover misappropriations from another. For example, rather than credit Customer A’s account for its payment, a dishonest employee pockets the funds and later posts a payment from Customer B to A’s account, Customer C’s payment to B’s account and so on.

Write-offs and discounts. Instead of crediting a payment to the customer’s account, fraudsters might pocket the funds and then record a bad debt write-off or discount to the customer’s account. Despite the diversion of incoming payments, the customer’s account will reflect the expected current balance.

Prevention tips

Segregation of duties is critical to preventing receivables fraud. This means that the employee who handles incoming payments from customers should be different from the person who handles invoicing. Also consider assigning a different employee to manage customer complaints. Such complaints often increase when receivables fraud is occurring.

In addition, require mandatory vacation time for all employees. Receivables schemes typically require their perpetrators to remain vigilant — and in the office — to avoid detection. For this reason, it’s also advisable to rotate job duties among accounting staffers.

Tracking thieves

When receivables fraud is suspected, a forensic expert will use several methods to uncover illicit activities. For example, the expert might trace a sample of cash receipts to the sales ledger and deposit slips to find discrepancies in dates, payee names and amounts. The expert also may compare deposit slips against the books and send requests for confirmations to a sample of customers to verify current balances and payment histories. Other items that deserve scrutiny are:

  • Bad debt write-offs,
  • Accounts with unexplained credits,
  • Increased customer credit limits, and
  • Random adjustments to the accounts receivable ledger.

To identify perpetrators and find internal control weaknesses, experts often interview employees.

Take control

Even though fraud experts have methods of finding receivables fraud, it’s better for companies to stop these schemes before they start. Contact us for help strengthening your business’s internal controls at 205-345-9898.

© 2019 Covenant CPA

This year, the optional standard mileage rate used to calculate the deductible costs of operating an automobile for business increased by 3.5 cents, to the highest level since 2008. As a result, you might be able to claim a larger deduction for vehicle-related expense for 2019 than you can for 2018.

Actual costs vs. mileage rate

Businesses can generally deduct the actual expenses attributable to business use of vehicles. This includes gas, oil, tires, insurance, repairs, licenses and vehicle registration fees. In addition, you can claim a depreciation allowance for the vehicle. However, in many cases depreciation write-offs on vehicles are subject to certain limits that don’t apply to other types of business assets.

The mileage rate comes into play when taxpayers don’t want to keep track of actual vehicle-related expenses. With this approach, you don’t have to account for all your actual expenses, although you still must record certain information, such as the mileage for each business trip, the date and the destination.

The mileage rate approach also is popular with businesses that reimburse employees for business use of their personal automobiles. Such reimbursements can help attract and retain employees who’re expected to drive their personal vehicle extensively for business purposes. Why? Under the Tax Cuts and Jobs Act, employees can no longer deduct unreimbursed employee business expenses, such as business mileage, on their individual income tax returns.

But be aware that you must comply with various rules. If you don’t, you risk having the reimbursements considered taxable wages to the employees.

The 2019 rate

Beginning on January 1, 2019, the standard mileage rate for the business use of a car (van, pickup or panel truck) is 58 cents per mile. For 2018, the rate was 54.5 cents per mile.

The business cents-per-mile rate is adjusted annually. It is based on an annual study commissioned by the IRS about the fixed and variable costs of operating a vehicle, such as gas, maintenance, repair and depreciation. Occasionally, if there is a substantial change in average gas prices, the IRS will change the mileage rate midyear.

More considerations

There are certain situations where you can’t use the cents-per-mile rate. It depends in part on how you’ve claimed deductions for the same vehicle in the past or, if the vehicle is new to your business this year, whether you want to take advantage of certain first-year depreciation breaks on it.

As you can see, there are many variables to consider in determining whether to use the mileage rate to deduct vehicle expenses. Contact us if you have questions about tracking and claiming such expenses in 2019 — or claiming them on your 2018 income tax return.

© 2019

An annual estate plan checkup is critical to the health of your estate plan. Because various exclusion, exemption and deduction amounts are adjusted for inflation, they can change from year to year, impacting your plan.

2019 vs. 2018 amounts

Here are a few key figures for 2018 and 2019:

Lifetime gift and estate tax exemption

  • 2018: $11.18 million
  • 2019: $11.40 million

Generation-skipping transfer tax exemption

  • 2018: $11.18 million
  • 2019: $11.40 million

Annual gift tax exclusion

  • 2018: $15,000
  • 2019: $15,000

Marital deduction for gifts to a noncitizen spouse

  • 2018: $152,000
  • 2019: $155,000

You may need to update your estate plan based on these changes. But the beginning of the year isn’t the only time for an estate plan checkup. Whenever there are significant changes in your family, such as births, deaths, marriages or divorces, it’s a good idea to revisit your estate plan. Your plan also merits a look any time your financial situation changes significantly.

Turn to us for help

If you haven’t yet had your annual estate plan checkup, please contact us at 205-345-9898. Or, if you don’t yet have an estate plan, we can help you create one.

© 2019 Covenant CPA

One thing in plentiful supply in today’s business world is help. Orbiting every industry are providers, consultancies and independent contractors offering a wide array of support services. Simply put, it’s never been easier to outsource certain business functions so you can better focus on fulfilling your company’s mission and growing its bottom line. Here are four such functions to consider:

1. Information technology. This is the most obvious and time-tested choice. Bringing in an outside firm or consultant to handle your IT systems can provide the benefits we’ve mentioned — particularly in the sense of enabling you to stay on task and not get diverted by technology’s constant changes. A competent provider will stay on top of the latest, optimal hardware and software for your business, as well as help you better access, store and protect your data.

2. Payroll and other HR functions. These areas are subject to many complex regulations and laws that change frequently — as does the software needed to track and respond to the revisions. A worthy vendor will be able to not only adjust to these changes, but also give you and your staff online access to payroll and HR data that allows employees to get immediate answers to their questions.

3. Customer service. This may seem an unlikely candidate because you might believe that, for someone to represent your company, he or she must work for it. But this isn’t necessarily so — internal customer service departments often have a high turnover rate, which drives up the costs of maintaining them and drives down customer satisfaction. Outsourcing to a provider with a more stable, loyal staff can make everyone happier.

4. Accounting. You could bring in an outside expert to handle your accounting and financial reporting. A reputable provider can manage your books, collect payments, pay invoices and keep your accounting technology up to date. The right provider can also help generate financial statements that will meet the desired standards of management, investors and lenders.

Naturally, there are potential downsides to outsourcing these or other functions. You’ll incur a substantial and regular cost in engaging a provider. It will be critical to get an acceptable return on that investment. You’ll also have to place considerable trust in any vendor — there’s always a chance that trust could be misplaced. Last, even a good outsourcing arrangement will entail some time and energy on your part to maintain the relationship.

Is this the year your business dips its toe in the vast waters of outsourced services? Maybe. Our firm can help you answer this question, choose the right function to outsource (if the answer is yes) and identify a provider likely to offer the best value. Call us at 205-345-9898.

© 2019 Covenant CPA

While most provisions of the Tax Cuts and Jobs Act (TCJA) went into effect in 2018 and either apply through 2025 or are permanent, there are two major changes under the act for 2019. Here’s a closer look.

1. Medical expense deduction threshold

With rising health care costs, claiming whatever tax breaks related to health care that you can is more important than ever. But there’s a threshold for deducting medical expenses that was already difficult for many taxpayers to meet, and it may be even harder to meet this year.

The TCJA temporarily reduced the threshold from 10% of adjusted gross income (AGI) to 7.5% of AGI. Unfortunately, the reduction applies only to 2017 and 2018. So for 2019, the threshold returns to 10% — unless legislation is signed into law extending the 7.5% threshold. Only qualified, unreimbursed expenses exceeding the threshold can be deducted.

Also, keep in mind that you have to itemize deductions to deduct medical expenses. Itemizing saves tax only if your total itemized deductions exceed your standard deduction. And with the TCJA’s near doubling of the standard deduction for 2018 through 2025, many taxpayers who’ve typically itemized may no longer benefit from itemizing.

2. Tax treatment of alimony

Alimony has generally been deductible by the ex-spouse paying it and included in the taxable income of the ex-spouse receiving it. Child support, on the other hand, hasn’t been deductible by the payer or taxable income to the recipient.

Under the TCJA, for divorce agreements executed (or, in some cases, modified) after December 31, 2018, alimony payments won’t be deductible — and will be excluded from the recipient’s taxable income. So, essentially, alimony will be treated the same way as child support.

Because the recipient ex-spouse would typically pay income taxes at a rate lower than that of the paying ex-spouse, the overall tax bite will likely be larger under this new tax treatment. This change is permanent.

TCJA impact on 2018 and 2019

Most TCJA changes went into effect in 2018, but not all. Contact us at 205-345-9898 if you have questions about the medical expense deduction or the tax treatment of alimony — or any other changes that might affect you in 2019. We can also help you assess the impact of the TCJA when you file your 2018 tax return.

© 2019 Covenant CPA