Author Archive: Justine O'Sullivan

Could “bunching” medical expenses into 2018 save you tax?

Posted on by

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.

The changes

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

Striking a balance between fraud prevention and employee privacy

Posted on by

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.

Allowable actions

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

Selling your business? Defer — and possibly reduce — tax with an installment sale

Posted on by

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.

Tax benefits

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).

Other benefits

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.

Tax risks

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

Tenancy-in-common: A versatile estate planning tool

Posted on by

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

Following the ABCs of customer assessment

Posted on by

When a business is launched, its owners typically welcome every customer through the door with a sigh of relief. But after the company has established itself, those same owners might start looking at their buying constituency a little more critically.

If your business has reached this point, regularly assessing your customer base is indeed an important strategic planning activity. One way to approach it is to simply follow the ABCs.

Assign profitability levels

First, pick a time period — perhaps one, three or five years — and calculate the profitability level of each customer or group of customers based on sales numbers and both direct and indirect costs. (We can help you choose the ideal calculations and run the numbers.)

Once you’ve determined the profitability of each customer or group of customers, divide them into three groups:

  1. The A group consists of highly profitable customers whose business you’d like to expand.
  2. The B group comprises customers who aren’t extremely profitable, but still positively contribute to your bottom line.
  3. The C group includes those customers who are dragging down your profitability. These are the customers you can’t afford to keep.

Act accordingly

With the A customers, your objective should be to grow your business relationship with them. Identify what motivates them to buy, so you can continue to meet their needs. Is it something specific about your products or services? Is it your customer service? Developing a good understanding of this group will help you not only build your relationship with these critical customers, but also target marketing efforts to attract other, similar ones.

Category B customers have value but, just by virtue of sitting in the middle, they can slide either way. There’s a good chance that, with the right mix of product and marketing resources, some of them can be turned into A customers. Determine which ones have the most in common with your best customers; then focus your marketing efforts on them and track the results.

When it comes to the C group, spend a nominal amount of time to see whether any of them might move up the ladder. It’s likely, though, that most of your C customers simply aren’t a good fit for your company. Fortunately, firing your least desirable customers won’t require much effort. Simply curtail your marketing and sales efforts, or stop them entirely, and most will wander off on their own.

Cut costs, bring in more

The thought of purposefully losing customers may seem like a sure recipe for disaster. But doing so can help you cut fruitless costs and bring in more revenue from engaged buyers. Our firm can help you review the pertinent financial data and develop a customer strategy that builds your bottom line. So call us today at 205-345-9898.

© 2018 Covenant CPA

Consider all the tax consequences before making gifts to loved ones

Posted on by

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

3 ways to protect yourself from fraud when shopping online

Posted on by

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:

  1. 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.
  2. 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.
  3. 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

Now’s the time to review your business expenses

Posted on by

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.

Need help?

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

Turn down an inheritance using a qualified disclaimer

Posted on by

If you are about to receive an inheritance from a family member, you can use a qualified disclaimer to refuse the bequest. The assets will then bypass your estate and go directly to the next beneficiary in line. It’s as if the successor beneficiary, not you, had been named as the beneficiary in the first place.

But why would you ever look this proverbial gift horse in the mouth? For beneficiaries who already have large estates themselves, using a legally valid disclaimer can save gift and estate taxes, often while redirecting funds to where they ultimately would have gone anyway.

Estate planning benefits

Federal estate tax laws are fairly rigid, but a qualified disclaimer offers some unique flexibility to a forward-thinking beneficiary. Currently, the gift and estate tax exemption can shelter a generous $11.18 million in assets for 2018. By maximizing portability of any unused exemption amount, a married couple can effectively pass up to $22.36 million in 2018 to their heirs free of gift and estate taxes.

However, despite these lofty amounts, wealthier individuals, including those who aren’t married and can’t benefit from the unlimited marital deduction or portability, still might have estate tax liability concerns. Plus, the gift and estate tax exemption is currently scheduled to drop roughly by half in 2026.

By using a disclaimer, you avoid having the exemption further eroded by the inherited amount. Assuming you don’t need the money, shifting it to the younger generation without it ever touching your hands not only allows it to bypass your taxable estate, but saves gift and estate tax for the family as a whole.

5 legal requirements for qualified disclaimers

To be legally valid as a qualified disclaimer, the following five requirements must be met:

  1. The disclaimer must be made in writing and signed by the disclaiming party.
  2. The disclaimer must be irrevocable and unqualified.
  3. The disclaimant (that is, the person disclaiming) must not accept the interest or any of its benefits.
  4. The disclaimer must be delivered to the person or entity charged with the obligation of transferring the assets no more than nine months after the date the property was transferred or nine months after a disclaimant who is a minor reaches age 21.
  5. The interest must pass to a person other than the disclaimant without any direction by the disclaimant. Bear in mind that the spouse of the deceased is specifically authorized to be the person receiving the property by virtue of a disclaimer.

Look before you leap

Using a qualified disclaimer can provide flexibility if your net worth is already high and you’re in line for an inheritance from your parents or other loved ones. Before taking action, consult with us to help ensure a disclaimer is right for you and, if it is, that it meets the five legal requirements. Call us at 205-345-9898.

© 2018 Covenant CPA

4 pillars of a solid sales process

Posted on by

Is your sales process getting off-balance? Sometimes it can be hard to tell. Fluctuations in the economy, changes in customer interest and dips in demand may cause slowdowns that are beyond your control. But if the numbers keep dropping and you’re not sure why, you may need to double-check the structural soundness of how you sell your company’s products or services. Here are four pillars of a solid sales process:

1. Synergy with marketing. The sales staff can’t go it alone. Your marketing department has a responsibility to provide some assistance and direction in generating leads. You may have a long-standing profile of the ideal candidates for your products or services, but is it outdated? Could it use some tweaks? Creating a broader universe of customers who are likely to benefit from your offerings will add focus and opportunity to your salespeople’s efforts.

2. Active responsiveness. A sense of urgency is crucial to the sales process. Whether a prospect responded to some form of advertisement or is being targeted for cold calling, making timely and appropriate contact will ease the way for the salesperson to get through to the decision maker. If selling your product or service requires a face-to-face presence, making and keeping of appointments is critical. Gather data on how quickly your salespeople are following up on leads and make improvements as necessary.

3. Clear documentation. There will always be some degree of recordkeeping associated with sales. Your salespeople will interact with many potential customers and must keep track of what was said or promised at each part of the sales cycle. Fortunately, today’s technology (typically in the form of a customer relationship system) can help streamline this activity. Make sure yours is up to date and properly used. Effective performers spend most of their time calling or meeting with customers. They carry out the administrative parts of their jobs either early or late in the day and don’t use paperwork as an excuse to avoid actively selling.

4. Consistency. A process is defined as a series of related steps that lead to a specific end. Lagging sales are often the result of deficiencies in steps of the sales process. If your business is struggling to maintain or increase its numbers, it may be time to audit your sales process to identify irregularities. You might also hold a sales staff retreat to get everyone back on the same page. Contact us at 205-345-9898 to discuss these and other ideas on reinforcing your sales process.

© 2018 Covenant CPA