In Volume 3 of our 2015 Newsletter, we highlight:
- Affordable Care Act Reporting Requirement
- Domestic Production Activities Deduction (DPAD)
- Do Not Overlook Research and Development (R&D) Tax Credits
- Health Savings Accounts
Affordable Care Act Reporting Requirement
Under the Affordable Care Act (ACA), every individual is required to have minimum essential health insurance coverage. In an effort to insure this process has taken place, the IRS has developed a reporting system which some companies are required to comply with. IRS Form 1095 will be used to report information on what kind of coverage an individual has and when they had the coverage. Filing requirements are based upon the number of full-time equivalent employees (FTE) a company had in the prior year and whether the company has a fully funded health insurance plan or a self-insured health plan.
To calculate the number of FTE, a company needs to add together the number of full-time employees (working 30 hours or more per week) plus the total number of hours worked by the part-time employees for the month divided by 120. If the total of these two amounts equals 50 or more, on average during the prior year, the employer is considered an applicable large employer (ALE). All ALEs are required to file Form 1095 for each employee who was a full-time employee for any month of the calendar year.
The following table may be used to determine the filing requirements. The following forms must be sent to the responsible individual (as listed on the form) and the IRS must also receive the form along with a transmittal Form 1094.
Form 1095-B Employer Provided
Employer Classification Health Coverage Health Insurance
Fewer than 50 FTE fully-insured:
- Employer No No
- Insurance Carrier Yes No
Fewer than 50 FTE self-insured:
- Employer Yes (Parts I – IV) No
More than 50 FTE fully-insured:
- Employer No Yes (Parts I and II)
- Insurance Carrier Yes No
More than 50 FTE self-insured:
- Employer No Yes (Parts I – III)
These reporting requirements are applicable to all for-profit companies, not-for-profit companies, and governmental entities. Companies must report the required information to all full-time employees including those receiving COBRA and retiree coverage. ALEs with self-insured plans must complete Form 1095-C for all employees (including seasonal and part-time) who were covered under the plan.
All coverage information must be reported on a calendar year basis. Therefore, information from two plan policy years may need to be incorporated into the form. The collection of this data will be time consuming and most likely will require working with your payroll provider, your insurance carrier, and other professionals.
Form 1095 is required to be provided to the employee by February 1, 2016 and to the IRS by February 28, 2016 if paper filed and March 31, 2016 if electronically filed. Stiff penalties may apply to a provider that fails to file timely, fails to include all the required information, or includes incorrect information.
These tax forms should be retained as part of every taxpayer’s tax records just like any Form 1099 or W-2.
Domestic Production Activities Deduction (DPAD)
By Bob Offerman
Manufacturing companies with United States-based business activities get an additional tax break. To encourage United States-based manufacturing, congress established by the American Jobs Creation Act of 2004 a special deduction (Internal Revenue Code Section 199 deduction). The current deduction is nine percent of qualified domestic manufacturing activities. This is a special deduction over and above the company’s actual manufacturing costs. This deduction is taken at the corporate level for C corporations or is passed-through to the owners of partnerships, LLCs, S corporations, and trusts. This deduction can benefit large and small companies. Check the tax laws of the state(s) in which the company has operations to see if the state allows this deduction or the state has decoupled (about 50% of the states that tax corporate or individual income do not allow the deduction).
The manufacturing activity must be profitable. The deduction is limited to 9% of the lesser of qualified production activities income (QPAI) or taxable income for the year.
Adjusted gross income is substituted for taxable income for individuals and trusts. The deduction is calculated and reported on Form 8903, Domestic Production Activities Deduction, or on Schedules K-1 for pass-through entities.
The deduction is further limited so that it cannot exceed 50% of allocable W-2 wages. Wages for this purpose include amounts reported on Form W-2, Wage and Tax Statement, along with deferred compensation (e.g., 401(k), elected salary deferrals).
QPAI equals domestic production gross receipts (DPGRs), reduced by cost of goods sold, and other deductions, expenses, and losses allocable to the receipts.
As the name implies, DPGRs applies to domestic operations and consists of gross receipts from lease, rental, or sale of qualified production property (QPP) which was manufactured, produced, grown, or extracted by the taxpayer in whole or in significant part within the United States. DPRGs also applies to the construction and engineering industries. QPP is normally tangible personal property.
DPGRs does not include activities that are: 1) exclusively sales of property or 2) exclusively services.
Allocation of Receipts
Any reasonable method may be used to allocate gross receipts between DPGRs and non-DPGRs. Taxpayers are required to use the specific identification method if the amounts are readily available and the method would not cause the taxpayer to incur any undue burden or expense. There is a de minimis exception when less than 5% of total gross receipts is from non-DPGRs. In this case, there is no requirement to allocate gross receipts.
Allocation of Costs
When determining QPAI, taxpayers need to determine the allocable portion of cost of goods sold along with the allocable portion of other expenses, losses, and deductions. For taxpayers that have no non-DPGRs, all cost of goods sold would reduce their QPAI. Other taxpayers should use a reasonable method of allocation. These methods could include allocating expenses based on gross receipts, units produced, or total production costs. Taxpayers should keep in mind that if costs can be specifically identified without undue burden or cost, this method should be used. The method for allocation of cost of goods sold should be consistent with method of allocation of gross receipts, unless there is support that a different method is more accurate.
Do not overlook the benefits that DPAD can have on the profitability and competitiveness of your company.
Do Not Overlook Research and Development (R&D) Tax Credits
By Bob Offerman
What if you could save hundreds of thousands of dollars annually in state and federal taxes — all thanks to work you are already doing? Through research and development tax incen-tives, you can.
The R&D Tax Credits, first enacted in 1981, has been one of the most valuable credits lever-aged by companies. Every year, the R&D credit yields billions of dollars in federal and state benefits to companies engaged in qualifying research. Thousands of companies take advan-tage of the credit across several industries, including:
♦ Manufacturing and Fabrication ♦ Aerospace and Defense
♦ Software Development ♦ Tool and Die Casting
♦ Engineering ♦ Foundries
♦ Machining ♦ Chemical and Formula
One of the common misconceptions surrounding the R&D tax credit is that participants must wear lab coats and use test tubes in order to qualify for the credit. This could not be further from the truth. In reality, the definition of R&D tax credit for tax credit purposes is fairly broad. Companies are able to qualify activities beginning with the development of concepts and extend to the point where a product, process, formula, or other business component is ready to be commercially released. Companies engaged in the following activities should consider looking into the R&D tax credit:
- Developing or engineering a new or improved product, process, formula, or software
- Evaluating the feasibility of a product, process, formula, or software
- Developing engineering architecture
- Developing experimental models and prototypes
- Testing an experimental product, process, formula, or software
- Beta testing
- Improving processes or the manufacturability of a product
- Technical design reviews
- Participating in technical meetings
- Documenting the results of research
- Maintaining research equipment
- Compiling research data
- Fabricating experimental models
- Experimenting with new technologies
- Creating more efficient and environmentally friendly designs
- CAD or 3D Modeling
- Supervising technical personnel engaged in R&D
The expenditures of R&D are reasonable costs you incur in your trade or business for activities intended to provide information to help eliminate uncertainty about the development or improvement of a product. Uncertainty exists if the information available to you does not establish how to develop or improve a product or the appropriate design of a product.
Whether expenditures qualify as R&D expenditures depends on the nature of the activity to which the expenditures relate. Neither the nature of the product (or improvement) being developed, nor the level of technological advancement matters when making this determination.
Costs related to R&D may also be eligible to be expensed immediately — even those costs not eligible for the R&D credit. Expenses incurred for software development, equipment used in your business, or other similar expenses are generally capitalized and depreciated over a specified period of time. If eligible as a qualified R&D expense, such costs can be immediately deducted, therefore, reducing your overall tax liability in the current year.
Health Savings Accounts
A health savings account (HSA) is a tax-exempt trust or custodial account to which tax-deductible contributions may be made by individuals with a high deductible health plan, which can be used to pay for qualified medical expenses.
For calendar year 2015, the annual limitation on contributions for an individual with self-only coverage under a high deductible health plan (HDHP) is $3,350, and individuals with family coverage under a HDHP is $6,650. A HDHP for calendar year 2015 is a health plan with a minimum annual deductible of $1,300 for self-only coverage or $2,600 for family coverage, and the annual out-of-pocket expenses (deductibles, co-payments, and other amounts, but not premiums) do not exceed $6,450 for self-only coverage or $12,900 for family coverage. You also cannot be enrolled in Medicare or be claimed as a dependent on another person’s return to qualify to set up an HSA.
Distributions used for qualified medical expenses from HSAs are tax free, even though contributions to the account are deductible when deposited. You may withdraw money to pay for your medical expenses and the medical expenses of your spouse and dependents. Generally, most medical expenses can be paid by these withdrawals. Withdrawals for most non-medical purposes, however, are subject to federal and state taxes and a 20% penalty. Persons who are age 65 or older are not subject to the 20% penalty even if the distributions are for non-medical purposes.
HSAs are a possible way to get a tax deduction to pay for qualified medical expenses.