In Volume 1 of our 2017 Newsletter, we highlight:
- FIRM NEWS
- BUSINESS IDENTITY THEFT
- RESEARCH CREDIT
- QUALIFIED TUITION PROGRAMS
- TRANSACTIONS WITH RELATED PARTIES
- ACCOUNTING METHOD CHANGE FOR TAX PURPOSES
- LONG-TERM CARE INSURANCE
We are sorry to announce the death of our senior partner John L. Politte. John joined the Firm in 1961 and became a partner in 1970. He retired in 1995 but still came into the office on a regular basis. He passed away on December 14, 2016 after a short illness. He is survived by his wife, three children, ten grandchildren, and two great-grandchildren.
He spent 30 years in the Army Reserve having achieved the rank of lieutenant colonel. He enjoyed cars, flying and playing music with the Washington Brass Band.
John served on various civic organizations including the Washington Lions Club where he was a recipient of the Lions’ Melvin Jones award. He also belonged to the Washington 353 Redevelopment Corporation, the Civic Industrial Corporation, a former City councilman, the Mercy Hospital Foundation Board, and many other organizations. He will truly be missed.
Business Identity Theft
Identify theft is a crime that impacts the lives of millions of individual taxpayers every year and the numbers are rapidly increasing. Individuals are no longer the only ones being targeted by these criminals. Now business owners have a new kind of threat to be concerned about that can cause a whirlwind of devastation to a victim’s business.
Business identity theft is the newest threat to small businesses all across America. A criminal will seize a company’s identity and use it to acquire credit in the company’s name or file fraudulent tax returns. A substantial amount of time may be required to correct identity theft and the damage inflicted can cripple a business, prevent it from acquiring any credit, and even threaten its very operation while a victim is trying to clean up and recover from it.
If you receive any correspondence from the Internal Revenue Service (IRS) or a State Department of Revenue (DOR), including a change of address notice that is not correct or you did not initiate, it is best to respond quickly to alert the IRS or State DOR that the information is not correct. Call us if any questions about identity theft arises.
The Protecting Americans from Tax Hikes (PATH) Act of 2015 modifies and makes permanent the credit for increasing research activities (research credit). The PATH Act also adds the research credit to the list of credits that may offset alternative minimum tax, (AMT) as well as regular tax, effective for tax years beginning after December 31, 2015.
The credits, prior to 2016, were not always usable to owners of Partnerships and S Corporations. The credit was allowed to reduce the individual’s regular taxes but was not allowed to reduce AMT tax. For companies with average revenue of less than $50 million the tax credit may now be used to offset the AMT tax. Credits carried over from years prior to 2016 will still be limited by the AMT tax.
The research credit was provided to encourage taxpayers to increase their research expenditures and is the sum of the following three components:
- 20% of the excess of qualified research expenses for the current tax year over a base period amount;
- 20% for basic research payments to a university (or other qualified organization) in excess of a qualified organization base period amount (available only to C corporations); and
- 20% of the amounts paid or incurred by a taxpayer in carrying on any trade or business to an energy research consortium for qualified energy research.
Taxpayers may elect an alternative method to calculate the research credit amount using an alternative simplified credit. Under the alternative simplified credit method, a taxpayer can claim an amount equal to 14% of the amount by which the qualified research expenses exceed 50% of the average qualified research expenses for the three preceding tax years. If the taxpayer has no qualified research expenses for any of the preceding three years, then the credit is equal to 6% of the qualified research expenses for the current tax year. If the taxpayer makes the election to use the alternative simplified credit method, the election is effective for succeeding tax years unless revoked with the consent of the IRS.
The research credit requires good record keeping but the reduction in your taxes should make it well worth the effort.
Qualified Tuition Programs
Qualified tuition programs, also known as Section 529 plans, are maintained by a state or an agency of the state and are used to pay for qualified higher education expenses. Qualified expenses include required tuition and fees, books, supplies, and equipment (computer or peripheral equipment, software, and internet access – if used primarily by the student). Room and board is deductible if the student is at least half-time.
The deductions for room and board is the greater of:
- The actual amount charged if the student was residing in housing owned and operated by the institution (on-campus room and board cost) or
- The allowance, as determined by the eligible educational institution that was included in the cost of attendance for financial aid purposes.
It is your responsibility as the taxpayer to maintain the appropriate receipts for proof that the distributions from the plan were for qualified expenses. Any expenses that are used as qualified expenses for a 529 plan cannot also be used for another education benefit, such as the tuition credit. Please give us a call for more assistance with these expenses.
Transactions With Related Parties
The tax rules governing loss deductions from relative-to-relative transactions are strict. You cannot deduct losses from the sale of property to a relative. If the buyer and the seller are considered related, the seller’s loss deduction is denied. It is irrelevant that the sale was at arm’s-length, bona fide, and made in good faith. The prohibition is absolute and it has been upheld by the U.S. Supreme Court. If the property is later sold to an unrelated party, the gain from the second sale is reduced by the nondeductible loss from the original sale.
The IRS defines relative as spouse, parent, grandparent, child, grandchild, brother, or sister. The loss deduction also is not allowed if you sell property to a corporation, partnership and some trusts, in which you may have an interest. Sales to other relatives, such as your son-in-law, daughter-in-law, aunt, uncle, cousins, and so on, are generally outside of this prohibition.
The rule applies to direct and indirect sales. You cannot circumvent the rule by using a “straw” buyer; that is, a third person who buys the property from you for a short time and then conveys it to the intended buyer, your relative.
Special rules apply in limited circumstances. Divorce situations in which still-related taxpayers may be at odds with each other allow for certain narrow exceptions to the rules. Leaseback transactions, installment sales to related persons and corporate transactions, too, may pose other problems. A sale/leaseback between related persons (a sale followed by a lease of the same property back to the seller), may be deemed a sham if the transaction lacks economic substance and is done for tax avoidance. If the IRS makes this determination, you lose any tax benefits, such as rent deductions.
Accounting Method Change For Tax Purposes
Businesses can enhance their cash flow by optimizing their tax accounting methods. This is especially important in times of tight money and inadequate revenues. More and more businesses are putting their taxes under a microscope and taking a hard look at whether they can improve their cash flow by changing the accounting methods that they have elected either on past returns or during the current year. A taxpayer who is not on the optimal accounting method is effectively prepaying taxes, an undesirable and unnecessary result.
Every business must adopt a method of accounting to determine when it recognizes items of income and deduction. An accounting method determines when an item is taken into account for taxes, not whether the item is taken into account for book purposes. The choice of an appropriate method is important because it determines the timing of overall income or loss.
The two most common overall accounting methods are the cash method, in which income and deductions are taken into account when payments are received or made, and the accrual method, in which income and deductions are taken into account when amounts are earned and expenses are incurred. Other accounting methods can apply to specific “material” items, such as the valuation of inventory or the treatment of an installment sale.
A change in accounting method can benefit many companies. Before changing an accounting method, the IRS requires that a taxpayer obtain the IRS’s consent. For some changes, the taxpayer must apply to the IRS for advance consent. For these changes, the taxpayer cannot switch methods until the IRS agrees. For other methods, the IRS has streamlined the process and will approve changes automatically. For these changes, the taxpayer can switch to another method simply by filing the proper information with the IRS, without having to wait for the IRS to grant its consent. This list of methods highlights the variety of proper accounting methods and is a guideline to the types of permissible changes. “Automatic consent” also significantly lowers the compliance costs needs to switch to a more advantageous method, enabling many more businesses to realize net savings by running through the new list and identifying yet unclaimed opportunities. There are some limitations for certain businesses and other issues related to these tax accounting changes.
Long-term Care Insurance
As the cost of nursing home care continues to go up, the need for long-term care insurance increases. It can be difficult to determine the coverage needed and the type of benefits that would be covered by a policy. Time must be taken to properly research the terms and provisions of the policies you are considering including the following:
- Determine your coverage needs, what are the cost of facilities in your area?
- Some policies provide for annual inflation protection. Coverage at current cost may not be sufficient just a few years from now.
- Delaying the time after you enter the home and the time your coverage starts can make a large difference in your premiums. How much can you afford to pay before your coverage begins?
- Evaluate the types of coverage a policy will cover; in-home care, adult day-care, assisted living facility, etc.
This is only a few of the items you need to research before buying a policy. Long-term care insurance is similar to property and casualty insurance. Hopefully you will never need it, but if you do you are glad you have it.