Top Accountant – Abby Sowatsky as published by Small Business Monthly, August 2015.
Independent Contractors vs. Employees
Worker classification is a hotly contested audit issue that has caused anxiety for business owners all across the country. Whether a worker is classified as an employee or as an independent contractor can mean a substantial difference in the amount of employment taxes (Social Security, Medicare, and unemployment taxes) and workers’ compensation insurance that the business pays. In addition, the new healthcare reform law imposes healthcare coverage requirements on an employer with more than 50 full-time employees, a fact which may tempt many employers to hire independent contractors instead. It is one thing to legitimately employ an independent contractor, however, an employer who misclassifies his employees either inadvertently or deliberately to minimize its employment tax or healthcare coverage responsibilities may become subject to interest, penalties, and tax liens. Such measures can cripple an otherwise successful business.
A business that is not currently under audit for employment taxes, but wishes to correct its workers’ classification may choose to enter the Voluntary Classification Settlement Program (VCSP). The IRS opened the program in 2011, and it is still in effect. Eligible businesses that enter the program are required to pay only 10% of the employment taxes that would have otherwise been due for the most recent tax year. In addition, there would be no interest or penalties, and the IRS would not conduct an employment tax audit of the business. For details on VCSP go to http://www.irs.gov and search for VCSP.
In light of the IRS’ predominantly pro-taxpayer initiatives, you may want to re-examine your worker classifications at this time. Even when potential employment tax liabilities are not overwhelming, it’s important to remember that misclassification can also cause pension plan difficulties.
E-mail firstname.lastname@example.org and we will send you a checklist to help assess the classification of independent contractors vs. employees.
“Your Partner In Success”
In Volume 2 of our 2015 Newsletter, we highlight:
- Nonprofit Budgeting Essentials
- Estate Planning
- Employee Fraud and Theft
- Retirement Plan Distributions
Hochschild, Bloom & Company LLP – Announcements
Hochschild, Bloom & Company LLP has promoted Victoria Dailey, CPA and has had several new employees join the Firm. We are very excited to introduce these individuals to you and congratulate them on their tremendous accomplishments.
We know our clients will welcome them and be as impressed with them as we are.
Victoria Dailey, CPA was recently promoted to manager. She started with the Firm in 2012 as a staff accountant, was promoted to supervisor, and most recently to manager. Prior to joining the Firm, she had almost four years’ experience in public accounting. Victoria graduated from Missouri State University with a Master’s degree in Accountancy and received her CPA license in 2009. She is a member of the Missouri Society of Certified Public Accountants. Victoria and her husband, Charlie, live in Creve Coeur, Missouri.
Abby Sowatsky, CPA recently completed her first year at the Firm, fulfilling her final requirement for certification with the Missouri State Board of Accountancy to earn her license as a CPA. She passed the AICPA Uniform CPA Examination in the summer of 2013 after she graduated from Truman State University with a Master’s degree in Accountancy. She passed all four parts and the ethics exam on the first attempt, which is a tremendous accomplishment. Abby lives in St. Louis, Missouri.
Michelle Barefield, CPA joined the Firm in October 2014 as a supervisor. She graduated from Penn State University in 1990 with a Bachelor of Accountancy and obtained her CPA license in 1992. Michelle is a member of the American Institute of Certified Public Accountants and the Missouri Society of Certified Public Accountants. Michelle brings a wide range of knowledge and thirteen years of public accounting experience to the Firm. She has three children and resides in Wildwood, Missouri.
Megan Hooks joined the Firm in October 2014 as a staff accountant. She graduated from Southeast Missouri State University with a Bachelor of Science degree in Accounting in 2013. Megan recently received notice that she passed the AICPA Uniform CPA Examination and the certification is in process to earn her license as a CPA. She resides in St. Clair, Missouri.
Kristie Buck joined the Firm in January 2015 as a staff accountant. Kristie graduated in 2011 from Southeast Missouri State University with Bachelor of Science degrees in Accounting and Finance and received a Master of Science degree in Forensic Accounting from Webster University in 2012. She is currently pursuing her CPA license and is a member of the Missouri Society of Certified Public Accountants. Kristie and her husband, Zack, live in Ballwin, Missouri.
Each of these individuals work in our Chesterfield office and they work in all aspects of accounting and taxes and are definitely great assets to the Firm.
Nonprofit Budgeting Essentials By Angela Dorn
Nonprofit organizations are often faced with a balancing act – striving to reach ambitious goals for their mission while dealing with the constraints of limited funding. In an effort to attract donors and achieve positive financial results, transparency is not only important, but it is imperative. One of the best ways to accomplish this task is to prepare an annual budget that is approved by the organization’s board of directors. But the process does not stop there; following the plan is the key to success.
Anticipation of available resources can be difficult even in the best of times. Many dynamics beyond the control of the organization weigh into the outcome. A conservative approach is often the best method for budgeting available resources. Several factors play into determining accurate revenue numbers. Expected donations from donors, grant opportunities, and capital campaign goals all play a role in developing the plan for funding. An additional consideration can be given to whether the organization has a fund balance or reserves that are accessible that can be used in the current year.
By this time, fundraisers for the year should already be planned. The receipts the organization expects to raise need to be compared to the costs of the events. These type of activities should support the nonprofit function rather than serve as a distraction. Projected funds should include donations to be received at the event, as well as the amounts anticipated from ticket sales, raffles, auction items, etc. Then the amount these type of activities are expected to cost the organization should be examined to insure the fundraising event will be beneficial to the organization. Direct costs as well as indirect costs should be estimated at this point.
Once the available resources can be determined, the focus should switch to the expected use of the funds. Start with the bare minimums, such as the fixed costs. Many times this consists of payroll expenses to key employees, occupancy expenses, utilities, and insurance.
Then step back and take a look at the available funds left to directly support the mission. This is the amount to be expended on the program activities. Is there a goal to increase the reserves or are there projects that will require the use of reserves this year? What can be done to stretch the dollars for meeting the needs of the organization? The goal is to have the ability to adequately support the mission of the organization.
The next piece of the budget process would be to examine the expenses on a functional basis. The organization should have a written plan to define how it allocates shared expenses across program, management and general, and fundraising. Many donors look for this when making the decision to support the organization and they like to see their funds being used for the benefit of the mission.
After the budget is approved, the monitoring begins. Regular assessment of the organization’s actual results in comparison to the budget is as important as the preparation of the original budget. Throughout the year, if results are not lining up with the expectation, the plan should be reviewed and revised. Proposed amendments, if necessary, should be presented to the board of directors for approval. Knowing the financial goal and working to attain it will go far in making the organization a success.
* * * * * * * * Unless you are prepared to give up something valuable you will never be able to truly change at all, because you’ll be forever in the control of things you can’t give up. Andy Law * * * * * * * *
Many feel that estate planning is just for the wealthy. Estate planning includes making arrangements to manage and distribute your property in an orderly fashion while you are still alive and upon your death.
If you have a small estate, you still need to do some planning. You need a financial power of attorney and a health care directive. If you become incapacitated you need someone to be able to pay your bills and make financial decisions for you while you are still alive. Joint ownership, pay on death (POD), or transfer on death (TOD) are a great way to title assets. Remember, the POD and TOD titling only allows the heir to take possession of the asset after the individual is deceased. Making sure the beneficiaries on your retirement plans and life insurance policies are up to date is very important.
It is recommended that larger estates setup a trust. This allows you to have one document that manages all of your property. It will designate a trustee to take over your affairs when you become incapacitated or die. You, of course, must retitle your assets into the trust name or they will not be considered legally in the trust.
If the estate is above the estate exemption level, currently $5,340,000 for 2015, more aggressive tax planning tools need to be used. Some tax saving ideas include family partnerships and charitable giving. Annual gifting to family members is always a quick and easy way to transfer assets. The current annual limit is $14,000 for 2015. It is even advisable to gift assets over the annual limit if it is an asset that will appreciate significantly between now and your death. This gets an asset out of your estate while the value is low.
Everyone should do some planning before it is too late.
Employee Fraud and Theft By Mike Williams
Fraud and theft are very common these days especially in the workplace. It is often the long-term or nicest employee who is guilty. The culprit is often caught either from a tip from another employee or on accident. The following are a few ways to help prevent or spot this problem.
Establish a code of conduct and live by it as the owner or manager of the organization. Have a written policy that sets what is acceptable and what is not. Be sure to make employees aware of the policy and show them by your personal actions what is the proper behavior.
Set up checks and balances. Having one person perform a multitude of related functions can be dangerous. Do not have one person prepare invoices, open the mail, reconcile the bank and credit card statements, and make postings to the general ledger. Have someone else perform at least one of these functions.
Keep everything locked and secured. Keep keys and computer system access tightly controlled including from former employees. Change locks and passwords to secure your information.
Finally, be aware of your employee’s behavior. Are they acting different, not taking vacation, working extra or irregular hours? Make employees aware that there is a zero tolerance for employee fraud and theft. No one knows your organization better than you. If something does not seem right, it probably is not.
Retirement Plan Distributions
Your retirement plans and IRAs may be among the largest, if not the largest, asset that you have. Therefore, one of the most important planning areas for you is taking distributions from your IRAs and qualified retirement plans. Understanding the basic tax rules and then planning your distributions to meet your personal financial and estate planning objectives is essential. We can explain those rules and provide some strategies for you to consider as part of your overall tax plan.
Some taxpayers may consider early retirement as a viable option. However, generally, a distribution made before you are 59½ years of age is subject to a 10% penalty in addition to the tax otherwise payable on the distribution. There are some exceptions. The penalty may not apply for certain hardship cases, for first-time home buyers, or to pay certain medical or education expenses. Many distributions may be received tax free if they are transferred to an IRA or another eligible plan within 60 days of the distribution.
Though there is a penalty for premature distributions, there is also a 50% penalty for failure to commence distributions by a certain age. Minimum distribution rules are imposed to prevent participants from unreasonably deferring the tax on their retirement savings. Under these rules, distributions are required to begin, for a participant other than a 5% owner, no later than April 1 of the calendar year following the later of:
- The calendar year in which the participant reaches age 70½, or
- The calendar year in which the participants retires.
The minimum distribution rules do not apply to Roth IRAs while the account owner is alive, but do apply to traditional IRAs, deferred compensation plans, tax sheltered annuities, and qualified retirement plans.
Navigating the rules of when and how retirement distributions are taxed can be intimidating. However, we can help you make the right choices that will minimize your tax burden, meet your financial needs, and comply with tax regulations. Please give our office a call to discuss your retirement plan options.
Estate Planning Tips
There are many things you should do now to make things easier for your heirs upon your death. Make a list of all your important papers (include: bank accounts, brokerage accounts, life insurance policies, etc.). Be sure to give a copy of the list to a family member or your estate administrator. Keeping a copy in your safe deposit box or a safe place in your home is also recommended. Also having these items organized will help your attorney when preparing or updating your will and revocable living trust.
While making the list, check to see that all beneficiary (successor beneficiaries and per stirpes) or transfer on death designations are up to date. Have there been any births, deaths, or name changes since the designations were first put on the account?
Also make a list of all credit cards and other debts that you may have. This will allow your heirs to see that all of these are properly paid and to close any accounts not in use.
While organizing your information, be sure to properly destroy any papers that are no longer valid. Consolidating your information to only include current information will assist in finalizing your estate.
There are more things that may need to be done such as updating the following: 1) will, 2) healthcare directive, 3) HIPPA release, 4) durable general power of attorney, and 5) revocable living trust. You need to start your planning today to ease the burden for your family.
E-mail email@example.com and we will send you a guide for preparing your estate planning records.
Scam Phone Calls
Several clients have received calls since April 15 stating that the caller is with the IRS and there is a problem with the client’s return and demanding immediate payment. These are bogus scam calls and are NOT coming from the IRS. Some of the con artists may even say you have a refund coming and they are checking to verify your information. They will trick you into sharing confidential information.
They usually alter the caller ID to make it look like the IRS is calling. They use fake names and ID badge numbers. If you don’t answer, they may leave an urgent callback request. This callback number, of course, is a number set up by the scammers. When you call them back, they will answer “IRS” making it seem legitimate.
Don’t be fooled by these calls. Also, the IRS does not use email, text, or other social media means to discuss your personal tax information. When in doubt, be sure to call us to double-check if the call is legit.
401k loans have become a very popular means to access cash quickly. Approximately 30% of all employees who have the ability to take out a 401k loan have done so.
Employers must amend their plans to allow for 401k loans by the participants. Many small businesses have not added this feature to their plan due to the costs and many guidelines required to administer the loans. Restrictions can be placed on what the loans can be used for such as education costs, medical bills, purchase of a home, etc.
If a participant has had no other plan loan in the 12-month period ending on the day before you apply for a loan, they are usually allowed to borrow up to 50% of their vested account balance to a maximum of $50,000. Notwithstanding this rule, a minimum of $10,000 may be borrowed (provided that there is adequate outside security for such a loan). If the participant had another plan loan in the last 12-month period they will be limited to 50% of their vested account balance, or $50,000, minus the outstanding loan balance in the preceding 12-month period, whichever is less.
Because of the cost, many plans will also set a minimum amount (often $1,000) and restrict the number of loans any participant may have outstanding at any one time.
Loan payments are generally deducted from payroll checks and, if the participant is married, they may need their spouse to consent to the loan.
Some of the advantages to 401k loans are:
- There are no credit checks or long forms to complete.
- Interest rates are usually 1% or 2% above prime.
- The interest is going back into your plan.
Some of the disadvantages are:
- You may be taking funds out of accounts that were earning a higher rate of return than the interest you are paying.
- You may have to pay a fee to get the loan.
- If you quit work or change employers, you will be required to pay the loan back. If not, it will be shown as a distribution from the plan, which is subject to income taxes and possibly a 10% early withdrawal penalty if you are not at least 59½.
- The loan must be paid back over five years, although this can be extended for a home purchase.
Much consideration should be given before taking out a 401k loan. Before taking out a 401k loan, be sure to weigh all your options. It should be used as a last resort.
In Volume 1 of our 2015 newsletter, we highlight:
2014 Tax Prevention Act:
- Identity Protection Number
- Business Credit Cards
- Mortgage Insurance Premiums
- State and Local Sales Tax
- Tuition and Fees
- Teacher Classroom Expenses
- Charitable Distributions from IRA
- Social Security Benefits
Depreciation by Jerrold D. Rosen, CPA
Towards the end of December, Congress enacted the Tax Increase Prevention Act of 2014 (2014 Tax Prevention Act), which provides a one-year extension of popular business and individual tax provisions. These incentives include an extension of bonus depreciation provisions and temporary increases in the deductible amount and investment limitation under Code Sec. 179.
The 2014 Tax Prevention Act extends the 50% first-year bonus depreciation allowance for one year to apply to qualifying new property acquired after December 31, 2007 and placed in service before January 1, 2015. There is no limit on the total amount of bonus depreciation that may be claimed in any given tax year, and the bonus depreciation allowance rate of 50% remains unchanged.
Bonus depreciation also relates to the dollar limitations on the depreciation deduction for the year in which a taxpayer places a passenger automobile in service within a business, and for each succeeding year. If bonus depreciation had not been extended, 2013 would have been the final year in which substantial first-year write-offs for the purchase of a business automobile were available.
To be eligible for bonus depreciation, qualified property must be depreciable under the Modified Accelerated Cost Recovery System (MACRS) and have a recovery period of 20 years or less. These requirements encompass a wide variety of assets. The property must be new and placed in service before January 1, 2015.
In addition to the bonus depreciation changes, the 2014 Tax Prevention Act retroactively extends the increased deduction and investment limits under Code Sec. 179. Generally, Code Sec. 179 permits a business that satisfies limitations on annual investment to elect to deduct (or expense) the cost of qualifying property rather than depreciate the cost over time.
For tax years beginning after 2009 and before 2015, taxpayers are permitted to expense up to $500,000 of the cost of qualifying property under Code Sec. 179, reduced by the amount by which the qualified investment exceeds $2,000,000. Qualifying property includes depreciable tangible personal property purchased for use in the active conduct of a trade or business. Off-the-shelf computer software placed in service in tax years beginning after 2002 and before 2015 is treated as qualifying property.
Thanks For Your Referrals!
We appreciate the confidence you have shown as clients and friends by referring new business to us. You are the key to our growth. As we grow, our ability to retain competent personnel is enhanced. We are able to commit more resources into widening our industry knowledge and training our staff, which allows us to serve you more efficiently. Please continue to refer friends or business associates to us who may benefit from our services.
Identity Protection Number
The Internal Revenue Service (IRS) is assigning six-digit numbers called identity protection personal identification numbers (IP PIN) to eligible taxpayers to help prevent the misuse of their Social Security number on fraudulent federal income tax returns. The IP PIN helps to verify your identity and accept your return. The number can be used whether you electronically or paper file your return.
Eligible individuals include:
- Victims of identity theft whose case has been resolved
- Individuals who were a resident of Florida, Georgia, or Washington, DC in the prior year
- Taxpayers who receive a notice asking if they want to voluntarily “opt in” the program
The IP PIN prevents the filing of a fraudulent tax return with your Social Security number or your spouse’s. A different IP PIN will be issued to you every December. If you receive an IP PIN for one of your dependents, do not use it on your return. You cannot use your IP PIN on your state return.
If you E-file your return with an incorrect or missing IP PIN, it will be rejected. You will have to correct the IP PIN or paper file the return. A return that is paper filed without the correct IP PIN will be delayed in processing to determine your identity.
You are not required to use your IP PIN when filing an amended return, your extension, or when submitting estimated taxes. The six-digit number is only used to file Forms 1040, 1040A, and 1040EZ.
Participation in this program is strictly voluntary. A taxpayer who elects not to use the IP PIN will be required to paper file their return. Once a taxpayer opts in, they cannot opt out. Using the IP PIN is a lifetime obligation.
Business Credit Cards
Business credit cards are useful and convenient but can also create security and management issues. A business credit card can provide a new business the opportunity to build credit. You can provide certain employees with a card with a preset limit to avoid overspending. Most cards have established rewards and discount programs for using the card. Taking advantage of these rewards can help lower your costs.
You must avoid charging personal items with the company credit card. Mixing your personal and business expenses can be a real management problem. Signing up for several cards to take advantage of deals can actually cause your credit rating to drop.
When providing company cards to your employees, it is important to have a credit card policy. This holds the employee responsible for the card. It limits the use of the card. It specifies the proper documentation of the business purposes of the expenditure. It also states what needs to be done if the card is lost or stolen. Putting all of this in writing gives the employee a resource to refer to.
Taking cash advances and paying late can cost you fees and high interest rates. The extra costs can more than offset any benefits the cards may provide. With prudent use and management, your small business credit card can provide you with benefits.
Individuals by Lee Z. Snyder, CPA
Some of the provisions affecting individuals which were part of the 2014 Tax Prevention Act are listed below. These one-year retroactive extensions allow you to claim many popular tax incentives that expired on December 31, 2013 on your 2014 tax return.
Mortgage Insurance Premiums
Homebuyers who lack sufficient funds to make a full down payment on a home may be required to purchase or obtain mortgage premium insurance, which guarantees repayment of the acquisition loan in the case of the death or disability of the mortgagor. This provision treats mortgage insurance premiums as deductible interest that is qualified residence interest. Your principal residence and one other property that you use for personal purposes may qualify for this deduction.
State and Local Sales Tax
Since the 2004 tax year, there has been an option to deduct state and local general sales taxes instead of state and local income taxes. Many individuals benefit by doing comparison calculations to determine whether the sales tax or income tax deduction provides the highest deduction. If you made a big-ticket purchase such as a car before year-end, you may be able to increase your deductions and qualify to itemize your deductions by claiming the sales tax instead of the income tax deduction.
Tuition and Fees
Qualified tuition and related expenses are tuition and fees required for your enrollment or attendance at an eligible educational institution for courses of instruction. The maximum deduction is $4,000 for taxpayers with adjusted gross income (AGI) not exceeding $65,000 ($130,000 for married joint filers), $2,000 for AGI from $65,000 to $80,000 ($130,000 to $160,000 for joint filers), and $0 for other taxpayers. Expenses paid this year for an academic term starting on or before March 31, 2015 qualify for the higher education deduction in 2014.
Teacher Classroom Expenses
If you are a primary or secondary education professional, you are permitted an above-the-line deduction of up to $250 per year for unreimbursed teacher classroom expenses, which include books, supplies (other than nonathletic supplies for courses of instruction in health or physical education), computer equipment (including related software and services), other equipment, and supplementary materials used in your classroom. If your expenses exceed the $250 per teacher limit, or are non-classroom supplies, they may be deductible as employment-related miscellaneous itemized deductions (subject to a 2% of AGI floor).
Charitable Distributions From IRA
You must begin taking required minimum distributions (RMDs) from your traditional IRA by April 1 of the calendar year following the year in which you attain age 70½. If your IRA trustee makes a distribution from your IRA directly to a charitable organization on or after you attain age 70½, the distribution, referred to as a “qualified charitable distribution,” is excluded from gross income. A qualified charitable distribution (QCD) also counts towards satisfying your RMD from a traditional IRA.
The total amount of QCDs from all of your IRAs cannot exceed $100,000 for the year ($200,000 for married joint filers). The QCDs cannot be claimed as itemized deductions, but the tax-free treatment reduces your AGI, which in turn lowers the floor for deducting medical expenses and miscellaneous deductions.
These are just some of the individual provisions which were extended. If you have any questions about these or any other extenders, please give us a call.
Social Security Benefits by Thomas W. Buescher, CPA
Ten thousand people reach retirement age daily and many are unprepared. Social Security encourages you to plan now. Someday, we would all like to relax and enjoy retirement. Most do not have pensions and must rely on Social Security for most of their income.
Social Security has once again started mailing out benefit statements. They will now be mailed out once every five years starting at age 25 unless you are receiving benefits or have registered for a “My Social Security” account online. After age 60 people will receive a statement every year.
The Social Security statement helps people plan for their financial future. The statement gives a complete earnings history, allowing you to verify the accuracy of your earnings. An individual’s future benefits are deter-mined by the amount of earnings over their lifetime. Currently full retirement age is 66. If you choose to retire at age 62, you will receive reduced benefits, and if you wait until age 70, your benefit payments will be higher.
Always check the accuracy of your statement, your future benefits rely upon it.
The IRS issued final regulations that help to distinguish capital expenditures from supplies, repairs, and maintenance. Virtually every business must comply with these new rules for its first tax year beginning on or after January 1, 2014. There are elections to be made to comply with the regulations.
One election is the de minimus safe harbor expensing which allow companies to expense all individual capital items costing less than $500 ($5,000 for companies with audited statements). If this election is made, it is across the board (meaning all items meeting the criteria must be expensed). All companies wishing to follow this rule must prepare a capitalization policy for the company.
Another election for small businesses with average annual sales of less than $10,000,000 is to potentially expense some building repairs, maintenance, and improvements. The expensing is for total repairs for the year of the lesser of 2% of the unadjusted basis of the property or $10,000.
Companies may now expense amounts paid for incidental items that would normally be capitalized or inventoried with an individual cost of $200 or less when purchased. Previously these items could not be expensed until placed in service.
The final two items pertain to buildings. The safe harbor rule allows you to expense routine maintenance and improvements if they are reasonably expected to be performed again during the class life of the property or within 10 years for buildings. The second ruling allows you to write off a structural component of a building as a disposition when a new replacement is purchased. The replacement component must then be capitalized.
STANDARD VEHICLE MILEAGE RATE
The Internal Revenue Service issued the 2015 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical, or moving purposes. Beginning on January 1, 2015, the standard mileage rates for the use of a car (also vans, pickups, or panel trucks) will be:
- 57.5 cents per mile for business miles (previously 56 cents)
- 23 cents per mile for medical or moving purposes (previously 23.5 cents)
- 14 cents per mile for charitable work (remains the same)
Effective January 1, 2015 the minimum wage in several states will be increasing. Companies who are engaged in the retail or service industry whose annual gross receipts are less than $500,000 are not required to pay the state minimum wage rate. The Federal minimum rate is $7.25 per hour. When the state minimum wage rate is higher than the federal rate, workers are paid the higher rate.
The minimum wage in Illinois for adults over the age of 18 who are no longer probationary remains at $8.25 per hour for 2015.
Missouri’s minimum wage rate is increasing to $7.65 per hour beginning
January 1, 2015.