Solomon & Hoover CPAs, PLLC Blog - Financial Guidance to Help Your Business Succeed

Solomon & Hoover CPAs, PLLC Blog

Financial Guidance to Help Your Business Succeed

Don’t let the kiddie tax play costly games with you

 

 

It’s not uncommon for parents, grandparents and others to make financial gifts to minors and young adults. Perhaps you want to transfer some appreciated stock to a child or grandchild to start them on their journey toward successful wealth management. Or maybe you simply want to remove some assets from your taxable estate or shift income into a lower tax bracket. Whatever the reason, beware of the “kiddie tax.” It can play costly games with the unwary.

An evolving concept

Years ago, the kiddie tax applied only to those under age 14. But, more recently, the age limits were revised to children under age 19 and to full-time students under age 24 (unless the students’ earned income is more than half of their own support).

Another important, and even more recent, change to the kiddie tax occurred under the Tax Cuts and Jobs Act (TCJA). Before passage of this law, the net unearned income of a child was taxed at the parents’ tax rates if the parents’ tax rates were higher than the tax rates of the child. The remainder of a child’s taxable income — in other words, earned income from a child’s job, plus unearned income up to $2,100 (for 2018), less the child’s standard deduction — was taxed at the child’s rates. The kiddie tax applied to a child if the child:

  • Hadn’t reached the age of 19 by the close of the tax year, or the child was a full-time student under the age of 24 whose earned income was less than half of their own support, and either of the child’s parents was alive at such time,
  • Had unearned income exceeding $2,100 (for 2018), and
  • Didn’t file a joint return.

Now, under the TCJA, for tax years beginning after December 31, 2017, the taxable income of a child attributable to earned income is taxed under the rates for single individuals, and taxable income of a child attributable to net unearned income is taxed according to the brackets applicable to trusts and estates. This rule applies to the child’s ordinary income and his or her income taxed at preferential rates. As under previous law, the kiddie tax can potentially apply until the year a child turns 24.

The tax in action

Let’s say you transferred to your 16-year-old some stock you’d held for several years that had appreciated $10,000. You were thinking she’d be eligible for the 0% long-term gains rate and so could sell the stock with no tax liability for your family. But you’d be in for an unhappy surprise: Assuming your daughter had no other unearned income, in 2018 $7,900 of the gain would be taxed at the estate and trust capital gains rates, equal to a tax of $795.

Or let’s say you transferred the appreciated stock to your 18-year-old grandson with the plan that he could sell the stock tax-free to pay for his college tuition. He won’t end up with the entire $10,000 gain available for tuition because of the kiddie tax liability.

Fortunately, there may be ways to achieve your goals without triggering the kiddie tax. For example, if you’d like to shift income and you have adult children (older than 24) who’re no longer subject to the kiddie tax but in a lower tax bracket, consider transferring income-producing or highly appreciated assets to them.

A risky time

Many families wait until the end of the year to make substantial, meaningful gifts. But, given what’s at stake, now is a good time to start a methodical process to determine the best possible way to pass along your wealth. After all, with the many changes made under the TCJA, the kiddie tax might affect you in ways you weren’t expecting. The best advice is to simply run the numbers with an expert’s help. Please contact our firm for more information and some suggestions on how to achieve your financial goals.

4 questions to ask before hiring household help

 

 

When you hire someone to work in your home, you may become an employer. Thus, you may have specific tax obligations, such as withholding and paying Social Security and Medicare (FICA) taxes and possibly federal and state unemployment insurance. Here are four questions to ask before you say, “You’re hired.”

 

1. Who’s considered a household employee?

A household worker is someone you hire to care for your children or other live-in family members, clean your house, cook meals, do yard work or provide similar domestic services. But not everyone who works in your home is an employee.

For example, some workers are classified as independent contractors. These self-employed individuals typically provide their own tools, set their own hours, offer their services to other customers and are responsible for their own taxes. To avoid the risk of misclassifying employees, however, you may want to assume that a worker is an employee unless your tax advisor tells you otherwise.

2. When do I pay employment taxes?

You’re required to fulfill certain state and federal tax obligations for any person you pay $2,100 or more annually (in 2018) to do work in or around your house. (The threshold is adjusted annually for inflation.)

In addition, you’re required to pay the employer’s half of FICA (Social Security and Medicare) taxes (7.65% of cash wages) and to withhold the employee’s half. For employees who earn $1,000 or more in a calendar quarter, you must also pay federal unemployment taxes (FUTA) equal to 6% of the first $7,000 in cash wages. And, depending on your resident state, you may be required to make state unemployment contributions, but you’ll receive a FUTA credit for those contributions, up to 5.4% of wages.

You don’t have to withhold federal (and, in most cases, state) income taxes, unless you and your employees agree to a withholding arrangement. But regardless of whether you withhold income taxes, you’re required to report employees’ wages on Form W-2.

3. Are there exceptions?

Yes. You aren’t required to pay employment taxes on wages you pay to your spouse, your child under age 21, your parent (unless an exception is met) or an employee who is under age 18 at any time during the year, providing that performing household work isn’t the employee’s principal occupation. If the employee is a student, providing household work isn’t considered his or her principal occupation.

4. How do I make tax payments?

You pay any federal employment and withholding taxes by attaching Schedule H to your Form 1040. You may have to pay state taxes separately and more frequently (usually quarterly). Keep in mind that this may increase your own tax liability at filing, though the Schedule H tax isn’t subject to estimated tax penalties.

If you owe FICA or FUTA taxes or if you withhold income tax from your employee’s wages, you need an employer identification number (EIN).

There’s no statute of limitations on the failure to report and remit federal payroll taxes. You can be audited by the IRS at any time and be required to pay back taxes, penalties and interest charges. Our firm can help ensure you comply with all the requirements.

ESOPs offer businesses tax and other benefits

Posted by admin On June 19th

ESOPs offer businesses tax and other benefits

 

 

Wouldn’t it be great if your employees worked as if they owned the company? An employee stock ownership plan (ESOP) could make that a reality.

Under an ESOP, employee participants take part ownership of the business through a retirement savings arrangement. Meanwhile, the business and its existing owner(s) can benefit from some tax breaks, an extra-motivated workforce and potentially a smoother path for succession planning.

How ESOPs work

To implement an ESOP, you establish a trust fund and either:

  • Contribute shares of stock or money to buy the stock (an “unleveraged” ESOP), or
  • Borrow funds to initially buy the stock, and then contribute cash to the plan to enable it to repay the loan (a “leveraged” ESOP).

The shares in the trust are allocated to individual employees’ accounts, often using a formula based on their respective compensation. The business must formally adopt the plan and submit plan documents to the IRS, along with certain forms.

Tax impact

Among the biggest benefits of an ESOP is that contributions to qualified retirement plans such as ESOPs typically are tax-deductible for employers. However, employer contributions to all defined contribution plans, including ESOPs, are generally limited to 25% of covered payroll. But C corporations with leveraged ESOPs can deduct contributions used to pay interest on the loans. That is, the interest isn’t counted toward the 25% limit.

Dividends paid on ESOP stock passed through to employees or used to repay an ESOP loan may be tax-deductible for C corporations, so long as they’re reasonable. Dividends voluntarily reinvested by employees in company stock in the ESOP also are usually deductible by the business. (Employees, however, should review the tax implications of dividends.)

In another potential benefit, shareholders in some closely held C corporations can sell stock to the ESOP and defer federal income taxes on any gains from the sale, with several stipulations. One is that the ESOP must own at least 30% of the company’s stock immediately after the sale. In addition, the sellers must reinvest the proceeds (or an equivalent amount) in qualified replacement property securities of domestic operation corporations within a set period.

Finally, when a business owner is ready to retire or otherwise depart the company, the business can make tax-deductible contributions to the ESOP to buy out the departing owner’s shares or have the ESOP borrow money to buy the shares.

Risks to consider

An ESOP’s tax impact for entity types other than C corporations varies somewhat from what we’ve discussed here. And while an ESOP offers many potential benefits, it also presents risks such as complexity of setup and administration and a strain on cash flow in some situations. For help determining whether one may make sense for your business, contact us.

Retirement plan options for business owners

Posted by admin On June 19th

Retirement plan options for business owner

 

As a business owner, you may have most of your money tied up in your company — making saving for retirement especially challenging. If you haven’t already set up a tax-advantaged retirement plan, think about setting one up this year.

Keep in mind that, if you have employees, they generally must be allowed to participate in the plan, provided they work enough hours and meet other qualification requirements. Here are a few options to consider:

Profit-sharing plans. This is a defined contribution plan that allows discretionary employer contributions and flexibility in plan design. You can make deductible 2018 contributions as late as the due date of your 2018 income tax return, including extensions — provided your plan existed on December 31, 2018.

Simplified Employee Pensions (SEPs). A SEP is a defined contribution plan that provides benefits like those of a profit-sharing plan. But you can establish a SEP in one year and still make deductible contributions as late as the due date of your income tax return for the previous year, including extensions. Another benefit is that a SEP is easier to administer than a profit-sharing plan.

Defined benefit plans. This plan sets a future pension benefit and then actuarially calculates the contributions needed to attain that benefit. The maximum annual benefit generally is $220,000 for 2018 (up from $215,000 for 2017) — or 100% of average earned income for the highest three consecutive years, if less. Because it’s actuarially driven, the contribution needed to attain the projected future annual benefit may exceed the maximum contributions allowed by other plans, depending on your age and the desired benefit.

You can make deductible 2018 contributions until the due date of your 2018 income tax return, including extensions — provided your plan existed on December 31, 2018. Warning: Employer contributions are generally required and must be paid quarterly if there was a shortfall in funding for the prior year.

Tax Calendar

Posted by admin On June 19th

Tax calendar

July 16 — If the monthly deposit rule applies, employers must deposit the tax for payments in June for Social Security, Medicare, withheld income tax, and nonpayroll withholding.

July 31 — If you have employees, a federal unemployment tax (FUTA) deposit is due if the FUTA liability through June exceeds $500.

  • The second quarter Form 941 (“Employer’s Quarterly Federal Tax Return”) is also due today. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until August 10 to file the return.

August 15 — If the monthly deposit rule applies, employers must deposit the tax for payments in July for Social Security, Medicare, withheld income tax, and nonpayroll withholding.

September 15 — Third quarter estimated tax payments are due for individuals, trusts, and calendar-year corporations.

  • If a six-month extension was obtained, partnerships should file their 2017 Form 1065 by this date.
  • If a six-month extension was obtained, calendar-year S corporations should file their 2017 Form 1120S by this date.
  • If the monthly deposit rule applies, employers must deposit the tax for payments in August for Social Security, Medicare, withheld income tax, and nonpayroll withholding.

Getting to know your credit and debit cards a bit better

 

 

 

Virtually everyone has a credit and debit card these days. But many of us still live in fear of these plastic necessities because we’re not terribly familiar with the fine print of the arrangements under which they operate. Let’s get to know them a bit better.

Credit cards

If your credit card is used without your permission, you may be responsible for up to $50 in charges, according to the Federal Trade Commission (FTC). If your card is lost or stolen and you report the loss before your card is used in a fraudulent transaction, you can’t be held responsible for any unauthorized charges. Some card issuers protect customers regardless of when — or if — they notify the card company.

When reporting a card loss or fraudulent transaction, contact the card company via phone; many provide toll-free numbers that are answered around the clock. In addition, the FTC advises following up via a letter or email. It should include your account number, the date you noticed the card was missing (if applicable), and the date you initially reported the card loss or fraudulent transaction.

Debit dangers

Debit card liability can be a little riskier. It generally depends on whether the card was lost or stolen or is still in your possession, the type of transaction, and when you reported the loss or unauthorized transaction.

According to the FTC, if you report a missing debit card before any unauthorized transactions are made, you aren’t responsible for the unauthorized transactions. If you report a card loss within two business days after you learn of the loss, your maximum liability for unauthorized transactions is $50.

If you report the card loss after that time but within 60 calendar days of the date your statement showing an unauthorized transaction was mailed, liability can jump to $500. Finally, if you report the card loss more than 60 calendar days after your statement showing unauthorized transactions was mailed, you could be liable for all the funds taken from your account.

If you notice an unauthorized debit card transaction on your statement, but your card is in your possession, you have 60 calendar days after the statement showing the unauthorized transaction is mailed to report it and still avoid liability.

While the lower protections required on debit cards may make you wonder whether you’re safer using a credit card, some debit card companies offer protections that go above what the law requires. Check with your provider.

Risk management steps

Taking a few simple steps can help cut the risk that you’ll be held liable for unauthorized use of your credit or debit card. First, carry only cards you need and destroy old ones, shredding them if possible. Don’t provide your card number over the phone or online unless you’ve initiated the contact.

In addition, choose a PIN that’s not easily guessed and make sure to memorize it. If you have online access, take a few moments to scan transactions every time you log on or at least once a week. If you still use paper statements, be sure to review them when they arrive in the mail. If you notice a transaction that isn’t yours, report it to your credit card issuer or bank right away.

Finally, keep a list of important numbers and relevant data stored separately from the cards themselves. Having this information handy will make it easier to report a missing card or suspicious transaction quickly.

Ins and outs

Many of us have grown so familiar with our credit and debit cards that we take them for granted. But keep in touch with their ins and outs. We can answer any further questions you may have.

No kidding: Child credit to get even more valuable

 

 

The child credit has long been a valuable tax break. But, with the passage of the Tax Cuts and Jobs Act (TCJA) late last year, it’s now even better — at least for a while. Here are some details that every family should know.

 

Amount and limitations

For the 2017 tax year, the child credit may help reduce federal income tax liability dollar-for-dollar by up to $1,000 for each qualifying child under age 17. So if you haven’t yet filed your personal return or you might consider amending it, bear this in mind.

The credit is, however, subject to income limitations that may reduce or even eliminate eligibility for it depending on your filing status and modified adjusted gross income (MAGI). For 2017, the limits are $110,000 for married couples filing jointly, and $55,000 for married taxpayers filing separately. (Singles, heads of households, and qualifying widows and widowers are limited to $75,000 in MAGI.)

Exciting changes

Now the good news: Under the TCJA, the credit will double to $2,000 per child under age 17 starting in 2018. The maximum amount refundable (because a taxpayer’s credits exceed his or her tax liability) will be limited to $1,400 per child.

The TCJA also makes the child credit available to more families than in the past. That’s because, beginning in 2018, the credit won’t begin to phase out until MAGI exceeds $400,000 for married couples or $200,000 for all other filers, compared with the 2017 phaseouts of $110,000 and $75,000. The phaseout thresholds won’t be indexed for inflation, though, meaning the credit will lose value over time.

In addition, the TCJA includes (starting in 2018) a $500 nonrefundable credit for qualifying dependents other than qualifying children (for example, a taxpayer’s 17-year-old child, parent, sibling, niece or nephew, or aunt or uncle). Importantly, these provisions expire after 2025.

Qualifications to consider

Along with the income limitations, there are other qualification requirements for claiming the child credit. As you might have noticed, a qualifying child must be under the age of 17 at the end of the tax year in question. But the child also must be a U.S. citizen, national or resident alien, and a dependent claimed on the parents’ federal tax return who’s their own legal son, daughter, stepchild, foster child or adoptee. (A qualifying child may also include a grandchild, niece or nephew.)

As a child gets older, other circumstances may affect a family’s ability to claim the credit. For instance, the child needs to have lived with his or her parents for more than half of the tax year.

Powerful tool

Tax credits can serve as powerful tools to help you manage your tax liability. So if you may qualify for the child credit in 2017, or in years ahead, please contact our firm to discuss the full details of how to go about claiming it properly.

What is “reasonable compensation,” anyway?

Posted by admin On April 29th

What is “reasonable compensation,” anyway?

 

The issue of reasonable owners’ compensation often comes up in federal tax inquiries. But it may also be an issue in shareholder disputes and divorce cases.

For instance, minority shareholders or spouses of controlling shareholders may claim that an owner is taking an excessive salary, thereby impairing the value of the business. Alternatively, a nonowner-spouse may claim that a salary is too low, because the owner-spouse is trying to minimize the base on which alimony and child support payments will be calculated.

If you find yourself embroiled in these situations or under fire from the IRS, a financial expert can help you support — or defend against — these claims.

Factors to consider

What’s considered reasonable in shareholder disputes or divorces may vary based on state law or legal precedent. A reasonable compensation assessment generally starts by looking outside the company at external market conditions and geographic location. Then, the analysis turns to internal factors, such as the company’s size, financial performance and compensation programs. Finally, the individual’s contributions to the company, including his or her responsibilities, skills, reputation and experience, are factored into the analysis, along with any personal guarantees from the owner.

An owner may sometimes warrant a salary that’s higher or lower than what nonowner-employees receive for similar positions. For example, the U.S. Tax Court recently upheld a combined annual salary of more than $7.3 million for two owners of a large Arizona concrete contractor. That may seem like a lot of money, but the court ruled that the company’s investors still received a reasonable return on investment after owners’ salaries were paid. This type of analysis is known as the independent investor test.

Compensation resources

Another type of analysis hinges on comparable salaries paid in arm’s length compensation arrangements. Reliable compensation data for a particular industry or geographic market can be found in several public and private salary surveys. A few common examples include Willis Towers Watson’s executive salary surveys, the Risk Management Association’s Annual Statement Studies® and MicroBilt’s Integra industry reports. An expert may also consult Economic Research Institute’s quarterly salary surveys, the Conference Board’s annual executive compensation reports and Dun & Bradstreet’s Key Business Ratios on the Web.

Additional industry- or location-specific data can be obtained from salary surveys that break down the data by industry, market or size; industry trade associations and publications; and executive headhunters.

Outside expertise

Deciding what’s reasonable for a business owner to receive as compensation can be subjective and sensitive. Our firm can serve as an expert or work with yours to research comparable market data and use it to come up with a defensible estimate.

The new deal on employee meals (and entertainment)

 

 

Years and years ago, the notion of having a company cafeteria or regularly catered meals was generally feasible for only the biggest of businesses. But, more recently, employers providing meals to employees has become somewhat common for many midsize to large companies. A recent tax law change, however, may curtail the practice.

As you’re likely aware, in late December 2017 Congress passed and the President signed the Tax Cuts and Jobs Act. The law will phase in a wide variety of changes to the way businesses calculate their tax liabilities — some beneficial, some detrimental. Revisions to the treatment of employee meals and entertainment expenses fall in the latter category.

Before the Tax Cuts and Jobs Act, taxpayers generally could deduct 50% of expenses for business-related meals and entertainment. But meals provided to an employee for the convenience of the employer on the employer’s business premises were 100% deductible by the employer and tax-free to the recipient employee. Various other employer-provided fringe benefits were also deductible by the employer and tax-free to the recipient employee.

Under the new law, for amounts paid or incurred after December 31, 2017, deductions for business-related entertainment expenses are disallowed. Meal expenses incurred while traveling on business are still 50% deductible, but the 50% disallowance rule now also applies to meals provided via an on-premises cafeteria or otherwise on the employer’s premises for the convenience of the employer. After 2025, the cost of meals provided through an on-premises cafeteria or otherwise on the employer’s premises will be completely nondeductible.

If your business regularly provides meals to employees, let us assist you in anticipating the changing tax impact.

Tax calendar

Posted by admin On April 29th

Tax calendar

April 17 — Besides being the last day to file (or extend) your 2017 personal return and pay any tax that is due, 2018 first quarter estimated tax payments for individuals, trusts and calendar-year corporations are due today. Also due are 2017 returns for trusts, calendar-year estates and C corporations, FinCEN Form 114 (Report of Foreign Bank and Financial Accounts [but an automatic extension applies to October 15]), and any final contribution you plan to make to an IRA or Education Savings Account for 2017. In addition, Simplified Employee Pension and Keogh contributions are due today if your return isn’t being extended.

June 15 — Second quarter estimated tax payments for individuals, trusts and calendar-year corporations are due today.