In Volume 4 of our 2015 Newsletter, we highlight:
- Bad Debt — The Right Focus
- Alternative Minimum Tax For Individuals
- Long-term Care Insurance
- Planning For Installment Sales
- Watch Out For Counterfeit Cashier’s Checks
Hochschild, Bloom & Company LLP has recently hired three new employees and promoted one to a supervisor position in the Firm.
Robert Robbins, CPA joined the Firm’s Chesterfield office in October 2015 as a supervisor. He graduated from University of Missouri – Saint Louis in 2009 with a Master’s degree in Accountancy and received his CPA license in 2012. Prior to joining the Firm, he had four and a half years of experience in public accounting. Robert is a member of both the American Institute of Certified Public Accountants and the Missouri Society of Certified Public Accountants. He resides in University City, Missouri.
Ryan Price joined the Firm in October 2015 as a staff accountant. He graduated from Westminster College with a Bachelor of Science degrees in Accounting and Business Administration in 2015. Ryan is currently pursuing his CPA license and is a member of the Missouri Society of Certified Public Accountants. Ryan works in the Chesterfield office and resides in Lake Saint Louis, Missouri.
Ashley Straatmann, CPA joined the Firm’s Washington office in September 2015. Prior to joining the Firm, she had four years of experience in public accounting. Ashley graduated from Missouri State University in 2011 with a Master of Accountancy degree and obtained her CPA license in 2012. She is a member of the American Institute of Certified Public Accountants and the Missouri Society of Certified Public Accountants. Ashley and her husband, Sam, live in Labadie, Missouri.
Leslie Haddox was recently promoted to supervisor in the Firm. Leslie will continue to be based in our Washington office where she has been since she joined the Firm in February 2007. She graduated from Missouri State University with a Bachelor of Science degree in Accounting. She will be taking on an expanded role in serving the Firm’s clients, especially in the governmental area. Leslie resides in Washington, Missouri, along with her husband, Joe, and their two children.
Bad Debt — The Right Focus
Clients and their collection personnel are sometimes very casual about bad debt losses because they focus only on the amount of the loss. Instead, the focus should be on the amount of sales that needs to be generated to recover the loss. That depends on your company’s profit margin. For example, if you incur a bad debt loss of $2,000 and your profit margin is 10%, you would need to generate $20,000 in additional sales to offset the credit loss. The lower the profit margin, the greater the sales needed. Thus if your profit margin were only 4%, $50,000 in sales would be needed to compensate for the loss. By having management and credit and collection personnel focus on the revenue side of the equation, companies will often be more careful about assessing and taking on credit risk, as well as increasing their collection efforts.
Alternative Minimum Tax For Individuals
As if the regular federal income tax rules are not complicated enough, you also may have to cope with the alternative minimum tax (AMT). Although it was originally designed to exact a minimum amount of tax from taxpayers who take advantage of complex tax shelters and big-yield deductions, the AMT has evolved to the point where it reaches mainstream taxpayers.
Here’s how the AMT works in a nutshell. You begin with taxable income as computed for purposes of the regular federal income tax. Then you add back to the taxable income many of the important deductions you claimed to arrive at the regular taxable income. For example, state and local income and real property taxes, miscellaneous itemized deductions, and personal exemptions all may need to be added back. Depending on the types of businesses and investments you are involved in, there could be other adjustments as well. For example, certain tax breaks for incentive stock options are not allowed for AMT purposes.
Despite an inflation adjusted exemption amount each year, the trend in the growth of the number of taxpayers subject to the AMT continues to grow. For 2015, the exemption amount is $83,400 for married individuals filing jointly and surviving spouses, $53,600 for single and head of household, and for unmarried individuals (no surviving spouses), $41,700 for married individuals filing separately, and $23,800 for estates and trusts.
What should you do about the AMT? The best way to handle AMT liability is careful planning involving the coordination of future regular income tax and AMT, using accurate projections of income, expenses, and deductions over multiple years with several alternative scenarios. An overall plan must then be devised to manage your AMT liability without raising regular tax liability. Most important, every major business and investment decision you are contemplating should be taken with the AMT in mind. The tax advantages you may be counting on to make a deal work may not be quite as robust as you expected because of the AMT.
We believe that a thorough analysis of your current and projected tax situation could minimize or eliminate your exposure to AMT liability.
Long-term Care Insurance By Tom Buescher
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?
- Buy a policy that provides 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.).
These are 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. You hope you will never need it, but if you do you are glad you have it.
Planning For Installment Sales
If you want to sell investment property but you cannot find a cash buyer, you may have to settle for installment payments. Fortunately, the tax installment sale rules generally allow you to match the payment of tax on realized gain to your receipt of payments. These rules can be used for sales of real estate held as investment property and for sales of closely held stock. However, they are not available for sales of publicly-traded stocks or bonds.
The installment method applies automatically if you are eligible to use it and receive at least one payment after the close of the tax year in which the sale takes place. However, you can choose not to use it, and there are times when you should make this choice.
An individual who sells property on the installment basis will want to take steps to minimize risks beyond making the buyer personally liable on the loan. But you have to be careful when structuring protection because if you go too far, you will jeopardize the tax deferral that you are seeking. For example, if the note will be paid out of an escrow account, you will generally be treated as receiving cash up front and be taxed currently. You can, however, use an escrow as long as there is a substantial restriction on your right to receive payments. Also, a third-party guarantee will generally not cause you to be taxed on the guaranteed amount.
Sometimes, you will want to elect out of installment reporting. For example, if the sale would generate a big capital gain and you have large capital losses from other sources, you may choose to have the entire gain recognized in the year of the sale so you can use your losses to offset the gain. Also, installment reporting may not be desirable if the gain would be taxed as ordinary income (e.g., sale of land held for one year or less) and you expect to be in a higher tax bracket in post-sale years.
Selling property to a family member on the installment basis offers a number of advantages and, at the same time, raises a number of concerns. If you are in a high bracket and own income-producing property, you can make an installment sale of the property to a family member in a lower bracket and thereby save family income tax. But you have to be sure that the notes carry a high enough rate of interest or interest will be imputed to you. But, if the value of the notes and interest payments are less than the value of the property sold, you may have to set a higher rate so that you are not charged with making a gift. Taxpayers should also factor in the increased capital gains rate for higher income taxpayers for tax years beginning in 2013. The American Taxpayer Relief Act of 2012, enacted in January 2013, permanently increased the capital gains rate to 20% for single filers with income above $400,000 and married couples filing jointly with income exceeding $450,000.
The family-member buyer can resell the nondepreciable property if he or she no longer finds it suitable as an investment. However, if the sale occurs within two years of the purchase, the original seller’s gain will be accelerated. And while concerns about security may be less significant if the purchaser is a family member, protective steps usually should be taken even for related party sales.
Please feel free to call if you have any questions about any of the matters addressed in this letter or about any other aspect of installment sales.
Watch Out For Counterfeit Cashier’s Checks
The availability of affordable high-quality scanners has made forging easier. Al-though most banks provide checks that have sophisticated security features, some financial institutions may be lax in their precautions. Our best advice is that
if you are uncertain about a cashier’s check tendered by a customer, call the issuing bank listed on the check before parting with any merchandise or providing service.
To Our Friends And Clients
Holidays are the time for friends and relatives to get together and celebrate. Life has become so busy and stressful that we do not always have time to spend with those we love. This may cause both emotional and physical health problems. We need the support of everyone around us. Take the time this holiday season to spend time with the important people in your life. Best wishes for a blessed and healthy holiday.