The Tax Cuts and Jobs Act (TCJA) didn’t change the federal tax credit for “increasing research activities,” but several TCJA provisions have an indirect impact on the credit. As a result, the research credit may be available to some businesses for the first time.
Previously, corporations subject to alternative minimum tax (AMT) couldn’t offset the research credit against their AMT liability, which erased the benefits of the credit (although they could carry unused research credits forward for up to 20 years and use them in non-AMT years). By eliminating corporate AMT for tax years beginning after 2017, the TCJA removed this obstacle.
Now that the corporate AMT is gone, unused research credits from prior tax years can be offset against a corporation’s regular tax liability and may even generate a refund (subject to certain restrictions). So it’s a good idea for corporations to review their research activities in recent years and amend prior returns if necessary to ensure they claim all the research credits to which they’re entitled.
The TCJA didn’t eliminate individual AMT, but it did increase individuals’ exemption amounts and exemption phaseout thresholds. As a result, fewer owners of sole proprietorships and pass-through businesses are subject to AMT, allowing more of them to enjoy the benefits of the research credit, too.
More to consider
By reducing corporate and individual tax rates, the TCJA also will increase research credits for many businesses. Why? Because the tax code, to prevent double tax benefits, requires businesses to reduce their deductible research expenses by the amount of the credit.
To avoid this result (which increases taxable income), businesses can elect to reduce the credit by an amount calculated at the highest corporate rate that eliminates the double benefit. Because the highest corporate rate has been reduced from 35% to 21%, this amount is lower and, therefore, the research credit is higher.
Keep in mind that the TCJA didn’t affect certain research credit benefits for smaller businesses. Pass-through businesses can still claim research credits against AMT if their average gross receipts are $50 million or less. And qualifying start-ups without taxable income can still claim research credits against up to $250,000 in payroll taxes.
Do your research
If your company engages in qualified research activities, now’s a good time to revisit the credit to be sure you’re taking full advantage of its benefits. Call us today at 205-345-9898.
© 2018 Covenant CPA
If you’re the owner of a small business, you may think of your tight-knit group of employees as a family. If you wish to include them as beneficiaries in your estate plan, it’s critical to be aware of possible unintended tax consequences.
Unraveling the (tax) code
Generally, money or other property received by gift or inheritance is excluded from the recipient’s income for federal tax purposes. But there’s an exception for gifts or bequests to employees: Under Internal Revenue Code Section 102(c), the exclusion doesn’t apply to “any amount transferred by or for an employer to, or for the benefit of, an employee.”
Certain gifts to employees aren’t taxable, including “de minimis” fringe benefits, employee achievement awards and qualified disaster relief payments. Otherwise, the IRS generally views transfers to employees as “supplemental wages” subject to income and payroll taxes.
U.S. Supreme Court weighs in
Despite Sec. 102(c), it may be possible to make a gift to an employee that avoids income taxes. According to the U.S. Supreme Court, such a gift must be made under “detached and disinterested generosity” or “out of affection, respect, admiration, charity or like impulses.” In contrast, if a gift is intended to reward an employee for past performance or serve as an incentive for future performance, it’s considered compensation and is subject to income and payroll taxes. Unfortunately, the intent behind a gift can be difficult to prove.
Keep in mind that treating a gift or bequest as compensation isn’t necessarily a bad thing. In some cases, the income and payroll taxes may be less severe than the gift, estate and generation-skipping transfer taxes that otherwise would apply. And you can always “gross up” the transferred amount to ensure that the recipient has enough cash to pay the taxes.
Contact us at 205-345-9898 if you’re considering including employees in your estate plan.
© 2018 Covenant CPA
Protecting your company through the purchase of various forms of insurance is a risk-management necessity. But just because you must buy coverage doesn’t mean you can’t manage the cost of doing so.
Obviously, the safer your workplace, the less likely you’ll incur costly claims and high workers’ compensation premiums. There are, however, bigger-picture issues that you can confront to also lessen the likelihood of expensive payouts. These issues tend to fall under the broad category of employee wellness.
When you read the word “wellness,” your first thought may be of a formal wellness program at your workplace. Indeed, one of these — properly designed and implemented — can help lower or at least control health care coverage costs.
Wellness programs typically focus on one or more of three types of services/activities:
- Health screenings to identify medical risks (with employee consent),
- Disease management to support people with existing chronic conditions, and
- Lifestyle management to encourage healthier behavior (for example, diet or smoking cessation).
The Affordable Care Act offers incentives to employers that establish qualifying company wellness programs. As mentioned, though, it’s critical to choose the right “size and shape” program to get a worthwhile return on investment.
Beyond promoting physical well-being, your business can also encourage mental health wellness to help you avoid or prevent claims involving:
- Wrongful termination,
- Sexual harassment, or
- Other toxic workplace issues.
If you’ve already invested in employment practices liability insurance, you know that it doesn’t come cheap and premiums can skyrocket after just one or two incidents. But, in today’s highly litigious society, many businesses consider such coverage a must-have.
Controlling these costs starts with training. When employees are taught (and reminded) to behave appropriately and understand company policies, they have much less ground to stand on when considering lawsuits. And, on a more positive note, a well-trained workforce should get along better and, thereby, operate in a more upbeat, friendly environment.
To take mental health wellness one step further, you could implement an employee assistance program (EAP). This is a voluntary and confidential way to connect employees to outside providers who can help them manage substance abuse and mental health issues. Although it will call for an upfront investment, an EAP can lower insurance costs over the long term by discouraging lifestyle choices that tend to lead to accidents and lawsuits.
Hand in hand
Happy and healthy — there’s a reason these two words go hand in hand. Create a workforce that’s both and you’ll stand a much better chance of maintaining affordable insurance premiums. We can provide further information on how to reduce potential liability and lower the costs of various forms of business insurance. Call us today at 205-345-9898.
© 2018 Covenant CPA
Some of your medical expenses may be tax deductible, but only if you itemize deductions and have enough expenses to exceed the applicable floor for deductibility. With proper planning, you may be able to time controllable medical expenses to your tax advantage. The Tax Cuts and Jobs Act (TCJA) could make bunching such expenses into 2018 beneficial for some taxpayers. At the same time, certain taxpayers who’ve benefited from the deduction in previous years might no longer benefit because of the TCJA’s increase to the standard deduction.
Various limits apply to most tax deductions, and one type of limit is a “floor,” which means expenses are deductible only to the extent that they exceed that floor (typically a specific percentage of your income). One example is the medical expense deduction.
Because it can be difficult to exceed the floor, a common strategy is to “bunch” deductible medical expenses into a particular year where possible. The TCJA reduced the floor for the medical expense deduction for 2017 and 2018 from 10% to 7.5%. So, it might be beneficial to bunch deductible medical expenses into 2018.
Medical expenses that aren’t reimbursable by insurance or paid through a tax-advantaged account (such as a Health Savings Account or Flexible Spending Account) may be deductible.
However, if your total itemized deductions won’t exceed your standard deduction, bunching medical expenses into 2018 won’t save tax. The TCJA nearly doubled the standard deduction. For 2018, it’s $12,000 for singles and married couples filing separately, $18,000 for heads of households, and $24,000 for married couples filing jointly.
If your total itemized deductions for 2018 will exceed your standard deduction, bunching nonurgent medical procedures and other controllable expenses into 2018 may allow you to exceed the applicable floor and benefit from the medical expense deduction. Controllable expenses might include prescription drugs, eyeglasses and contact lenses, hearing aids, dental work, and elective surgery.
Planning for uncertainty
Keep in mind that legislation could be signed into law that extends the 7.5% threshold for 2019 and even beyond. For help determining whether you could benefit from bunching medical expenses into 2018, please contact us at 205-345-9898.
© 2018 Covenant CPA
The expense of preventing fraud is minimal compared to the cost of cleaning up after fraud has been committed. One common fraud deterrent is to monitor employees on the job. But are you legally entitled to monitor employees? The answer is “sometimes.” One thing is certain: You must follow current employment law to the letter.
Two competing interests
Many laws apply to employees’ privacy rights. In general, they attempt to balance employers’ interests in minimizing losses and injuries and maximizing production with employees’ interests in being free from intrusion into their private affairs.
By adopting and clearly communicating employment policies, your company can, within limits, establish its authority to conduct searches and surveillance that might otherwise be deemed intrusive. But before you state your policies, check with your attorney to ensure they don’t violate any federal or state laws.
In most cases, federal law allows employers to take the following actions (but keep in mind that some state laws may be more restrictive):
Electronic activities monitoring. As a general rule, you can’t monitor employees’ use of electronic devices (including tracking Internet use) without their knowledge. But there are two notable exceptions. First, you can monitor if you have a legitimate business need to do so (for example, to record a client’s buy/sell instructions to a stockbroker). The second exception is when one party to a communication consents to the monitoring. If your company clearly states a policy to monitor communications, an employee is usually considered to have consented by remaining in the job.
Phone call monitoring. You’re generally allowed to monitor business-related phone conversations to and from the workplace. However, you can’t monitor personal calls and must hang up as soon as it’s apparent the call isn’t work-related, unless the employee has given you permission to listen in.
Physical searches. Exercise extreme caution before searching an employee’s person. If you feel a body search is necessary, don’t threaten or apply physical force or prevent the employee from leaving the room or workplace. Aside from possible referral to law enforcement, keep the search results confidential. This is to prevent leaks that could form the basis for libel or slander suits.
Surveillance. You can install cameras in your company’s offices or production areas, but usually not in “private” areas such as restrooms and locker rooms. As with other searches, surveillance records must be kept confidential. Only individuals who must know the information to properly perform their duties should have access to evidence of possible wrongdoing.
Avoiding land mines
Protecting your company from fraud while also adhering to employee privacy regulations can be challenging. To avoid legal land mines, develop your company’s policies with the help of an employment law attorney. Contact us at 205-345-9898 to learn more.
© 2018 Covenant CPA
You’ve spent years building your company and now are ready to move on to something else, whether launching a new business, taking advantage of another career opportunity or retiring. Whatever your plans, you want to get the return from your business that you’ve earned from all of the time and money you’ve put into it.
That means not only getting a good price, but also minimizing the tax hit on the proceeds. One option that can help you defer tax and perhaps even reduce it is an installment sale.
With an installment sale, you don’t receive a lump sum payment when the deal closes. Instead, you receive installment payments over a period of time, spreading the gain over a number of years.
This generally defers tax, because you pay most of the tax liability as you receive the payments. Usually tax deferral is beneficial, but it could be especially beneficial if it would allow you to stay under the thresholds for triggering the 3.8% net investment income tax (NIIT) or the 20% long-term capital gains rate.
For 2018, taxpayers with modified adjusted gross income (MAGI) over $200,000 per year ($250,000 for married filing jointly and $125,000 for married filing separately) will owe NIIT on some or all of their investment income. And the 20% long-term capital gains rate kicks in when 2018 taxable income exceeds $425,800 for singles, $452,400 for heads of households and $479,000 for joint filers (half that for separate filers).
An installment sale also might help you close a deal or get a better price for your business. For instance, an installment sale might appeal to a buyer that lacks sufficient cash to pay the price you’re looking for in a lump sum.
Or a buyer might be concerned about the ongoing success of your business without you at the helm or because of changing market or other economic factors. An installment sale that includes a contingent amount based on the business’s performance might be the solution.
An installment sale isn’t without tax risk for sellers. For example, depreciation recapture must be reported as gain in the year of sale, no matter how much cash you receive. So you could owe tax that year without receiving enough cash proceeds from the sale to pay the tax. If depreciation recapture is an issue, be sure you have cash from another source to pay the tax.
It’s also important to keep in mind that, if tax rates increase, the overall tax could end up being more. With tax rates currently quite low historically, there might be a greater chance that they could rise in the future. Weigh this risk carefully against the potential benefits of an installment sale.
Pluses and minuses
As you can see, installment sales have both pluses and minuses. To determine whether one is right for you and your business — and find out about other tax-smart options — please contact us at 205-345-9898.
© 2018 Covenant CPA
If you hold significant real estate investments, tenancy-in-common (TIC) ownership can be a powerful, versatile estate planning tool. A TIC interest is an undivided fractional interest in property. The property isn’t split into separate parcels. Rather, each TIC owner has the right to use and enjoy the entire property.
TIC in action
An individual TIC can’t sell or lease the underlying property, or take other actions with respect to the property as a whole, without the other owners’ consent. But each owner has the right to sell, mortgage or transfer his or her TIC interest. This includes the right to transfer the interest, either directly or in trust, to his or her heirs or other beneficiaries.
Someone who buys or inherits a TIC interest takes over the original owner’s undivided fractional interest in the property, sharing ownership with the other tenants in common. Each TIC interest holder has a right of “partition.” That is, in the event of a dispute among the co-owners over management of the property, an owner can petition a court to divide the property into separate parcels or to force a sale and divide the proceeds among the co-owners.
TIC and estate planning
Here are a couple of the ways TIC interests can be used to accomplish your estate planning goals:
Distributing your wealth. Dividing real estate among your heirs — your children, for example — can be a challenge. If you transfer real estate to them as joint tenants, their options for dealing with the property individually will be limited. What if one child wants to hold on to the real estate, but the other two want to cash out? Transferring TIC interests can avoid disputes by giving each heir the power to dispose of his or her interest without forcing a sale of the underlying property.
Reducing gift and estate taxes. Fractional interests generally are less marketable than whole interests. Plus, because an owner must share management with several co-owners, fractional interests provide less control. As a result, TIC interests may enjoy valuation discounts for gift and estate tax purposes.
Get an appraisal
If you’re considering using TIC interests in your estate plan, it’s critical to obtain an appraisal to support your valuation of these interests. Keep in mind that appraising a TIC interest is a two-step process. It begins with an appraisal of the real estate as a whole. Then an appraisal of the fractional interests follows. In some cases, it may be desirable to use two appraisers: a real estate appraiser for the underlying property and a business valuation expert to quantify and support any valuation discounts you claim. Contact us with questions at 205-345-9898.
© 2018 Covenant CPA
Many people choose to pass assets to the next generation during life, whether to reduce the size of their taxable estate, to help out family members or simply to see their loved ones enjoy the gifts. If you’re considering lifetime gifts, be aware that which assets you give can produce substantially different tax consequences.
Multiple types of taxes
Federal gift and estate taxes generally apply at a rate of 40% to transfers in excess of your available gift and estate tax exemption. Under the Tax Cuts and Jobs Act, the exemption has approximately doubled through 2025. For 2018, it’s $11.18 million (twice that for married couples with proper estate planning strategies in place).
Even if your estate isn’t large enough for gift and estate taxes to currently be a concern, there are income tax consequences to consider. Plus, the gift and estate tax exemption is scheduled to drop back to an inflation-adjusted $5 million in 2026.
Minimizing estate tax
If your estate is large enough that estate tax is a concern, consider gifting property with the greatest future appreciation potential. You’ll remove that future appreciation from your taxable estate.
If estate tax isn’t a concern, your family may be better off tax-wise if you hold on to the property and let it appreciate in your hands. At your death, the property’s value for income tax purposes will be “stepped up” to fair market value. This means that, if your heirs sell the property, they won’t have to pay any income tax on the appreciation that occurred during your life.
Even if estate tax is a concern, you should compare the potential estate tax savings from gifting the property now to the potential income tax savings for your heirs if you hold on to the property.
Minimizing your beneficiary’s income tax
You can save income tax for your heirs by gifting property that hasn’t appreciated significantly while you’ve owned it. The beneficiary can sell the property at a minimal income tax cost.
On the other hand, hold on to property that has already appreciated significantly so that your heirs can enjoy the step-up in basis at your death. If they sell the property shortly after your death, before it’s had time to appreciate much more, they’ll owe no or minimal income tax on the sale.
Minimizing your own income tax
Don’t gift property that’s declined in value. A better option is generally to sell the property so you can take the tax loss. You can then gift the sale proceeds.
Capital losses can offset capital gains, and up to $3,000 of losses can offset other types of income, such as from salary, bonuses or retirement plan distributions. Excess losses can be carried forward until death.
Choose gifts wisely
No matter your current net worth, it’s important to choose gifts wisely. Please contact us at 205-345-9898 to discuss the gift, estate and income tax consequences of any gifts you’d like to make.
© 2018 Covenant CPA
Online shopping enables consumers to buy almost anything from the convenience of their own homes. But comfortable surroundings can lull online shoppers into a false sense of security. You wouldn’t leave your wallet unattended in a busy shopping mall or enter a sketchy-looking shop, yet you may be taking similar risks on the Internet.
One of the biggest risks is shopping on fraudulent sites or making purchases from crooked marketplace sellers who have no intention of shipping the goods you’ve paid for. Here are three suggestions for protecting yourself:
- Use feedback features. When shopping in online marketplaces such as eBay or Amazon, pay close attention to ratings and comments provided by previous customers about individual sellers. Bear in mind, however, that some online review platforms allow sellers to request the removal of negative reviews. And while reputable marketplaces and review sites do their best to block fake reviews, it’s possible for sellers to boost their profile by paying “customers” to post five-star ratings and raves.
- Perform basic research. Before making a purchase from an unfamiliar retail site, plug the site’s name into a major search engine. Because negative information may not appear at the top of search results, look beyond the first or second page. In some extreme circumstances, disgruntled customers set up their own sites to air grievances about an online retailer or you may find news of legal action. Also be wary if you find almost no information about a retailer. Some scam artists frequently change the names and addresses of their sites to stay one step ahead of the law.
- Always pay with a credit card. Credit card companies generally allow their customers to dispute fraudulent charges and get their money back if they don’t receive the goods they purchased. So beware of online sellers who ask you to pay by check, ACH or wire to avoid credit card processing fees. Online marketplace scammers sometimes ask customers to skip the site’s payment system and pay them directly. This is dangerous because it places a transaction beyond the reach of the marketplace’s fraud detection and prevention systems.
Most online merchants deliver on their customer commitments. However, a small percentage take advantage of the Web’s anonymity to commit fraud. Be sure to check out any site or seller you intend to do business with and, just as important, listen to your gut. If something makes you uneasy, don’t proceed with the transaction. Contact us for more information at 205-345-9898.
© 2018 Covenant CPA
As we approach the end of the year, it’s a good idea to review your business’s expenses for deductibility. At the same time, consider whether your business would benefit from accelerating certain expenses into this year.
Be sure to evaluate the impact of the Tax Cuts and Jobs Act (TCJA), which reduces or eliminates many deductions. In some cases, it may be necessary or desirable to change your expense and reimbursement policies.
What’s deductible, anyway?
There’s no master list of deductible business expenses in the Internal Revenue Code (IRC). Although some deductions are expressly authorized or excluded, most are governed by the general rule of IRC Sec. 162, which permits businesses to deduct their “ordinary and necessary” expenses.
An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your business. (It need not be indispensable.) Even if an expense is ordinary and necessary, it may not be deductible if the IRS considers it lavish or extravagant.
What did the TCJA change?
The TCJA contains many provisions that affect the deductibility of business expenses. Significant changes include these deductions:
Meals and entertainment. The act eliminates most deductions for entertainment expenses, but retains the 50% deduction for business meals. What about business meals provided in connection with nondeductible entertainment? In a recent notice, the IRS clarified that such meals continue to be 50% deductible, provided they’re purchased separately from the entertainment or their cost is separately stated on invoices or receipts.
Transportation. The act eliminates most deductions for qualified transportation fringe benefits, such as parking, vanpooling and transit passes. This change may lead some employers to discontinue these benefits, although others will continue to provide them because 1) they’re a valuable employee benefit (they’re still tax-free to employees) or 2) they’re required by local law.
Employee expenses. The act suspends employee deductions for unreimbursed job expenses — previously treated as miscellaneous itemized deductions — through 2025. Some businesses may want to implement a reimbursement plan for these expenses. So long as the plan meets IRS requirements, reimbursements are deductible by the business and tax-free to employees.
The deductibility of certain expenses, such as employee wages or office supplies, is obvious. In other cases, it may be necessary to consult IRS rulings or court cases for guidance. For assistance, please contact us at 205-345-9898.
© 2018 Covenant CPA