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

Solomon & Hoover CPAs, PLLC Blog

Financial Guidance to Help Your Business Succeed

Archive for October, 2015

Is there an accountable plan in your company’s future?

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The end of the year is a good time to consider making changes to your business. For example, could you be operating more tax-efficiently? And are there better ways to attract and keep good employees?

A potential answer to both of these questions is the accountable plan. Designed to handle business expense reimbursements for tax purposes, accountable plans offer certain advantages to both employers and employees over the per diem method.

A glance at per diem

Most companies taking the per diem approach to expense reimbursements use IRS tables for lodging, meals and incidental expenses. Businesses that don’t use IRS tables typically apply a simplified high-low method within the continental United States to reimburse employees up to $259 a day for high-cost localities and $172 for other localities.

Although the per diem method is relatively simple and requires less record keeping, you must be extremely careful to pay employees no more than the appropriate per diem amount. The IRS imposes heavy penalties on companies that routinely fail to do so. Plus, per diem accounting can easily drive up employees’ tax bills.

Accountable plan advantage

An accountable plan is a formal arrangement to advance, reimburse or provide allowances for business expenses. The primary advantage is that your business can deduct expenses (subject to a 50% limit for meals and entertainment) and employees can usually exclude 100% of advances or reimbursements from their income. Employees whose jobs involve frequent travel may realize significant tax savings.

To qualify as “accountable” under IRS rules, your plan must meet the following criteria:

  • It must pay expenses that would otherwise be deductible by the employee.
  • Payments must be for “ordinary and necessary” business expenses such as airfare and lodging charges.
  • Employees must substantiate these expenses — including amounts, times and places — ideally at least monthly.
  • Employees must return any advances or allowances they can’t substantiate within a reasonable time, typically 120 days.

If you fail to meet these conditions, the IRS will treat your plan as nonaccountable, transforming all reimbursements into wages taxable to the employee, subject to income and employment taxes — though potentially deductible by the employee.

Consider the move

The main disadvantages of an accountable plan are that it can take time to establish and requires meticulous record keeping. But the advantages often outweigh any initial inconvenience.

How advisory boards can benefit family businesses

Posted by admin On October 19th

How advisory boards can benefit family businesses

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Even successful family businesses can become insular, impaired by conflict or in need of fresh perspectives. That’s where an advisory board made up of business professionals from outside the company can help.

The advisory board of a private business isn’t bound — as public company boards are — by a fiduciary responsibility to shareholders. So its members are free to offer creative solutions and help resolve differences among family members on such issues as compensation, succession and retirement planning, and company direction and growth strategies. An advisory board can also provide expertise, such as marketing or employee benefits knowledge, that your business lacks.

Your board should be made up of professionals from varying fields and backgrounds, including business, government, academia and philanthropy. Professional advisors — such as accountants and lawyers — who are already familiar with your company’s issues can be particularly helpful.

Businesses should reimburse travel costs associated with attending board meetings and consider paying members for their time. Cash compensation may make sense if your business intends to remain closely held, but consider issuing stock if you plan to go public.

Protect your retirement assets from creditors

Posted by admin On October 19th

Protect your retirement assets from creditors

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Most Americans count on their retirement savings being there when they need them. But bankruptcy or an adverse judgment in a lawsuit could threaten your retirement security. That’s why it’s important to know which types of retirement accounts generally offer protection from creditors — and which ones are vulnerable.

Qualified plans are generally safe

Most qualified plans — such as pension, profit-sharing and 401(k) plans — are protected against creditors’ claims, both in and out of bankruptcy, by the Employee Retirement Income Security Act (ERISA). This protection also extends to 403(b) and 457 plans.

IRA-based employer plans, such as Simplified Employee Pension (SEP) plans and Savings Incentive Match Plans for Employees (SIMPLE) IRAs, are protected in bankruptcy. But they’re not necessarily protected outside of bankruptcy.

IRAs offer partial security

The level of asset protection available for your IRA depends in part on whether you’re involved in bankruptcy proceedings. In a bankruptcy context, creditor protection is governed by federal law. Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, both traditional and Roth IRAs are exempt from creditors’ claims up to an inflation-adjusted $1 million.

The IRA limit doesn’t, however, apply to amounts rolled over from a qualified plan or a 403(b) or 457 plan — or to any earnings on those amounts. Suppose, for example, that you have $4 million invested in a 401(k) plan. If you roll it over into an IRA, the entire $4 million, plus all future earnings, will generally continue to be exempt from creditors’ claims in bankruptcy.

To ensure that rollover amounts are fully protected, it’s a good idea to keep those funds in separate IRAs rather than commingling them with any contributory IRAs you might own. Also, make sure the rollover is fully documented and the word “rollover” is part of its name. Further bear in mind that, once a distribution is made from the IRA, the distributed funds are no longer protected.

Outside bankruptcy, the protection afforded an IRA depends on state law. Most states provide traditional and Roth IRAs with some protection against creditors’ claims. It’s uncertain whether SEP plans or SIMPLE IRAs are protected outside of bankruptcy, but there’s some precedent for the argument that state-law exemptions don’t apply to these IRAs.

Nothing is certain

Note that even employer plans and IRA assets aren’t protected in some circumstances. For example, the IRS can seize distributions from retirement accounts for unpaid taxes. And under a Qualified Domestic Relations Order, an ex-spouse may have access to retirement benefits. Because your situation is unique, talk to a financial advisor about the best way to protect your retirement assets.

 

A question of inheritance

A recent Supreme Court case, Clark v. Rameker, clarified what had been unsettled: Bankruptcy protection does not extend to inherited IRAs. In a nonbankruptcy context, some states expressly exempt inherited IRAs, while courts in other states are divided on the issue.

To provide additional asset protection to your heirs, consider naming an IRA trust as beneficiary of your IRA. A well-designed trust will preserve the tax-deferral and other benefits of the account while offering greater asset protection to your beneficiaries than an inherited IRA.

 

 

Planning for the AMT
A proactive approach can limit your tax liability

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If you’re hoping to minimize your 2015 tax bill, it’s critical to start planning now. This is especially true if you’ve ever come close to triggering the alternative minimum tax (AMT) and you think you might do so this year.

What is it?

The AMT — a separate tax system that doesn’t allow certain deductions and income exclusions — initially was put in place to prevent wealthy Americans from taking so many tax breaks that they eliminated their tax liability. But even taxpayers who don’t normally consider themselves “upper income” can trigger the AMT. For example, you could be vulnerable if you exercised incentive stock options this year or took a higher paying job.

AMT calculations can be complicated, but the system basically has two tax rates (26% and 28%) and inflation-adjusted income thresholds for them. An exemption is also available, but it phases out based on income. For 2015, the AMT exemptions are $53,600 for singles and heads of households and $83,400 for joint filers. The phaseout ranges are $119,200 to $333,600 for singles and heads of households and $158,900 to $492,500 for joint filers. If AMT income is within the applicable range, a partial exemption is available; if it exceeds the top of the range, no exemption is available.

Which one do you pay?

To determine whether you owe the AMT, you’ll need to calculate your tax under both the regular and AMT systems. You’re responsible for whichever amount is higher.

Under the AMT, you can’t take a personal exemption for yourself and your dependents. And you aren’t allowed to deduct such items as home equity debt interest not used to improve your home; state and local income and property taxes; and miscellaneous itemized deductions subject to the 2% floor. In addition, tax-exempt interest on certain private activity municipal bonds is taxable.

How do you reduce your bill?

Fortunately, strategies exist for minimizing AMT — and future tax — liability. For example, you might be able to postpone until next year the payment of deductible expenses that you aren’t allowed to take for AMT purposes. Or you might want to recognize additional income this year to take advantage of the AMT’s lower maximum rate (28% vs. 39.6% under the regular tax system).

There’s also an AMT credit. If you pay the AMT in one year on deferral items (those that affect more than one tax year, such as depreciation) you may be entitled to a credit for a subsequent year. The credit, however, might provide only partial relief or take years before you can fully use it. Nonetheless, the AMT credit’s refundable feature can reduce the time it takes to recoup AMT payments.

Make use of time

Some taxpayers don’t even realize that the AMT is looming until it’s too late to do anything to manage it. Talk to your tax advisor now while you still have several months to strategize.