Volume 4 – 2017
In Volume 4 of our 2017 Newsletter, we highlight:
- New Partnership Audit Rules
- New Form I-9 Reminder
- Protect Your Credit And Identity
- Personally Sign Checks
- Should Volunteers Receive An IRS Form 1099-MISC?
- Year-End Tips
- Small Employer Health Reimbursement
- Cancel Unused Credit Cards
- Employing Your Children In Your Business
New Partnership Audit Rules
In the past, the IRS has encountered difficulties when auditing partnerships and LLCs taxed as a partnership with complex ownership structures. The Bipartisan Budget Act of 2015 (the Act) enacted new rules effective January 1, 2018. For any partnership with more than 100 partners, the new audit provisions are mandatory. Plans with 100 or fewer qualifying partners can elect out of the new audit rules. Qualifying partners consist of individuals, estates of deceased partners, S corporations, and C corporations. LLCs and trusts are not qualifying partners and, therefore, would disqualify the partnership from making the election.
The new Act is effective for tax years beginning January 1, 2018. Under the new Act rules, if the IRS audits a partnership and adjusts various items of income, deductions, etc., the additional taxes owed will be assessed at the partnership level rather than at the individual partner level.
The election out of the rules is done on an annual basis on the partnership return. When making the election the partnership must provide the IRS with the name and identification number of all the partners as well as the identification number of any indirect partners who are shareholders in an S corporation who is a partner. The partnership must also notify all the partners of the election. Because this is an annual election, the partnership may elect in some years and elect out other years.
The second most important change included in the Act is the appointment of a partnership representative. Currently partnerships are required to designate a tax matters partner. That individual was one of the partners whom the IRS could communicate with. That individual did not have absolute authority when dealing with issues concerning the IRS.
The new partnership representative does not have to be one of the partners. This individual will have the sole authority to act on behalf of the partnership and can bind all the partners. The partnership representative also has the authority to elect in or elect out of the new partnership audit rules as discussed earlier.
The new changes to the partnership audit rules and the partnership representative rules are very dramatic. Much consideration should be given by the partners to consider what they want to do.
This new Act is considered a revenue raiser, which probably means we will be seeing more audits of partnerships and LLCs taxed as partnerships.
New Form I-9 Reminder
The U.S. Citizenship and Immigration Services (USCIS) started requiring employers to use the Form I-9 to verify the identity and employment authorization of every person they hire. The form has been required to be used since November 16, 1986. A new Form I-9 was issued by the USCIS on September 18, 2017. There were minor updates to the instructions and some changes to the list of acceptable documents.
Employers are required to use the new form. If you have a completed form for a current employee, there is no need to complete a new form. Employers must retain the form for the later of either three years after the employee, was hired or one year after the employee was terminated.
Protect Your Credit And Identity
With the recent major cybersecurity breach at the credit reporting agency, Equifax, it is more important than ever to check your credit report. Information stolen includes names, social security numbers, birth dates, addresses, and driver’s license numbers. Equifax has set up a website www.equifaxsecurity2017.com to check if your information was compromised. At the bottom of the screen, there is a tab “Am I Impacted.” Once you click on the tab, you need to enter your last name and the last six digits of your social security number and it will tell you if your information has been compromised. Afterwards, this site will also allow you to enroll in free credit monitoring for one year (even if you have not been affected).
One year of credit monitoring is not enough though. Having your personal information stolen can have a life-long impact on you. When a credit card is stolen, you just need to get a new card with a new number. You cannot get a new Social Security number or date of birth. Many fraudsters wait a year or two until things have settled down to start using your personal information. You need to check your credit report annually. The three credit service agencies have created a website www.annualcreditreport.com which allows you to request, view, and print your credit reports.
When looking at your report, you need to check that all the accounts listed are yours and that notices of late payments that you believe were paid on time are corrected. Any delinquencies that are more than seven years old are taken off of your report. Any errors on your report will lower your FICO score which may impact your ability to get a loan.
You can also call 877-322-8228 or write to Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281 to request your report. The law allows you to order one free copy from each of the agencies every 12 months.
Personally Sign Checks
Unless you are the CEO or CFO of a very large company, you, as the owner of a small or mid-size business, should personally sign and mail all of the checks. There are a variety of reasons for this advice, including:
- Enabling you to have an overview of where the money is going
- Allowing you to observe frivolous spending anywhere in your organization
- Deterring possible fraud, since employees know that management sees all of the checks
Personal review, signing, and mailing of checks by the owner is considered by some to be the most effective internal control for any small business. If you cannot do the above, we suggest that at a minimum, you receive all bank statements (unopened) to monitor them while making sure that all employees are aware of this activity.
Should Volunteers Receive An IRS Form 1099-MISC?
Most people are aware that if a person or company (other than a corporation) performs services for a nonprofit organization and is not an employee of the nonprofit organization, an IRS Form 1099-MISC would be issued by the nonprofit organization to the individual or entity and filed with the IRS on or before January 31 of the next year. But, would anyone find it surprising to learn that volunteers of nonprofit organizations may also be the recipient of an IRS Form 1099-MISC at year-end?
How is that possible? Generally, a volunteer is a person who does not have a profit motive, i.e., where the value of services exceeds the benefits received. However, sometimes volunteers receive stipends, benefits, small fees, or reimbursements for expenses. As long as the value is under $600 per year, the nonprofit organization is not required to issue an IRS Form 1099-MISC. The income may still be required to be reported by the taxpayer on their tax return.
Some volunteers receive a stipend, which is an amount of money given to cover expenses. These may or may not be considered as taxable income. For example, stipends are not considered to be taxable if they are paid for education-related expenses or college tuition within certain limits.
Benefits received may or may not be taxable to the volunteer. Nonprofits often look for ways to thank their volunteers. These benefits should be a nominal amount. An appreciation party with food and drink would be an example of a nominal gift. However, if cash gifts or gift cards are handed out, these would be taxable to the volunteer. Again, if it is less than $600, it would not be reported to the volunteer on the IRS Form 1099-MISC, but would still be considered income taxable to the taxpayer.
Now, let’s talk about payment for expenses.
Nonprofit organizations can either have an accountable or non-accountable expense reimbursement plan. An accountable plan means the nonprofit organization follows the IRS rules for reimbursements and the volunteer does not report the reimbursement as income. The expense has to have been incurred for the nonprofit organization’s business purpose. The volunteer has to account to the organization for the expense in a timely manner (generally no more than 60 days after incurred) and amounts received that are greater than the expense incurred must be returned in a reasonable amount of time (generally no more than 120 days after the money was received). If the volunteer received the funds in advance of the expense, then the funds should normally not be given more than 30 days in advance of the expense being incurred. Return of any unused funds would follow the 120 day after the event rule.
If the nonprofit organization has a nonaccountable plan, any amounts received would be subject to tax. Volunteers may receive an IRS Form 1099-MISC if the amounts are over $600 at year-end and it will be up to the volunteer to deduct the related expenses on Schedule A of their own tax returns. Again, records will need to be retained for proof of the expenses. The volunteer’s responsibility is to retain documentation of what was expended. This includes the ability to show what was purchased, how much it cost, the purpose of the purchase, and from whom.
Receiving an IRS Form 1099-MISC often comes as a surprise to taxpayers. This may be especially true if the taxpayer was a volunteer for the organization. The organization has to have information from the taxpayer to complete the IRS Form 1099-MISC including name, address, and social security number or employer identification number. If the volunteer is asked to provide this information, chances are the volunteer may be required to receive an IRS Form 1099-MISC.
- Check into the various ways nonprofits are asking for support: contributions, volunteering, buying tax credits, or attending a fundraiser. Remember only donations to eligible organizations are tax-deductible. The IRS Select Check tool on the IRS website www.irs.gov is a searchable online database that lists most eligible charitable organizations. Churches, synagogues, temples, mosques, and government agencies are eligible to receive deductible donations, even if they are not listed in this database.
- Get proof of monetary donations. A bank record or a written statement from the charity is needed to prove the amount and date of any donation of money. Money donations can include various forms apart from cash such as check, credit card, and payroll deduction. Taxpayers using payroll deductions should retain a pay stub, a Form W-2 wage statement, or other proof showing the total amount withheld for charity, along with the pledge card showing the name of the charity.
- Older IRA owners have a different way to give — IRA owners age 70½ or older can transfer up to $100,000 per year to an eligible charity tax-free. The transfer can count as their required minimum distribution for the year. Funds must be transferred directly by the IRA trustee to the eligible charity.
- Donating property — For donations of clothing and other household items, the deduction amount is normally limited to the item’s fair market value. Clothing and household items must be in good or better condition to be tax-deductible. A clothing or household item for which a taxpayer claims a deduction of over $500 does not have to meet this standard if the taxpayer includes a qualified appraisal of the item with their tax return. Donors must get a written acknowledgement from the charity for all gifts worth $250 or more. It must include, among other things, a description of the items contributed. Special rules apply to cars, boats, and other types of property donations. The IRS website www.irs.gov has information to help you determine the value of donated property
- Deductions for volunteers — Volunteers can deduct car and transportation expenses to drive to meetings, special events, or to the place they volunteer at. They can deduct the actual cost of gas and oil used or take 14 cents per mile. If public transportation is used, the cost can be deducted. Parking fees and tolls paid can also be deducted. Out-of-pocket expenses that are not reimbursed can be deducted as well. It is important to retain documentation for the expenses incurred. The expenses have to be incurred for a qualified, IRS-recognized charity. The volunteer cannot be reimbursed by the nonprofit organization for the expenses. The expenses have to be for the charity and related to their mission. They cannot be personal expenses. Finally, the volunteer has to be able to itemize their deductions on their tax return.
- Tax credits are a means for nonprofit organizations to raise funds for projects that support their mission. They can also provide tax benefits to the donor.
- Fundraisers can be a lot of fun as well as provide additional funding for nonprofit organizations. The ticket to such events should indicate the value of what was provided to the attendee.
Small Employer Health Reimbursement
There is a new health reimbursement available for small employers. This is known as the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). This allows employers the opportunity to reimburse qualified employees for the cost of their health insurance premiums and other health expenses on a pre-tax basis.
To qualify as a QSEHRA, you must meet all of the following requirements:
- Be a small employer with 50 or fewer full-time equivalent employees that does not offer its employees a group health plan.
- Must provide the same benefits to all employees. Employers can exclude part-time employees (less than 30 hours per week), seasonal employees, employees with less than 90 days of service, under the age of 25, and those covered by a collective bargaining agreement.
- Must be solely funded by the employer.
An employer must provide a notice to the employee at least 90 days before the start of the year or the start of the employee’s eligibility. This notice must state the amount of available reimbursement for the year. It must explain that if the employee has applied for premium assistance through the Marketplace Exchange, they must inform the exchange of the amount of qualified reimbursement. Lastly, the notice must explain that if the employee drops their health coverage, they may be subject to penalties and any reimbursements under the QSEHRA will be included in their income.
The employee must provide proof of insurance to quality for the pre-tax health reimbursement.
The reimbursements cannot exceed $4,950 for single employee coverage and $10,000 for family coverage (subject to cost of living increases). These limits must be prorated if an employee does not work the entire year.
Please call our office for more assistance on setting up these plans.
Cancel Unused Credit Cards
Some credit card holders are taking advantage of special one-year rates and transferring balances to a new card in order to save on interest expense. After clearing a balance from a credit card account, it is important to cancel the card. If you have the unused credit on your credit report, your potential debt load could be considered too high to allow you to qualify for an auto loan or a mortgage. So make sure all your unused credit cards are cancelled as soon as you can.
Employing Your Children In Your Business
If you own a family business, you may be able to hire your children to work in your business and garner some tax and financial benefits. For example:
- No Social Security taxes are due when a sole proprietorship or a husband-wife partnership hire their children who are under 18 years old.
- Federal unemployment insurance taxes are not owed until the children reach age 21.
- Since the children’s pay is usually taxed at the children’s low rate, the shift in income from parent to the children usually results in tax savings. In 2017, a child can have up to $6,350 of earned income without owing any income tax.
- Paying your children for working for you will not result in a loss of a dependency exemption, regardless of the pay, as long as the child is either younger than age 19, or younger than age 24 and a full-time student.
- A Roth IRA can be opened based on the child’s wages and provide a start for building lifetime financial security for their children.
Be aware though that you must provide the children with real jobs and the pay must be reasonable for the services the children provide, or the IRS may disallow the arrangement. You should also remember that the payroll tax savings are not available, if your business is organized as a corporation, but the income tax savings remains. We will be glad to be more specific and detailed when discussing this subject with interested business owners. If you have any questions, please do not hesitate to contact us.