Follow Us

Subscribe via E-mail

Your email:

Download FREE AICPA Plan Advisory to Employee Benefit Plans - Financial Statement Audits

 Download

Current Articles | RSS Feed RSS Feed

10 Year End Tax Planning Moves for Individuals

 

Consider the following before December 31st - You still have time!

describe the image

Tags: ,

Tax Extender Package Passes - Bill Sent to President for Signature

 

The Senate voted late Tuesday and passed “Tax Increase Prevention Act of 2014” which had previously passed in the House on December 3.  The legislation extends through December 31, 2014 over fifty currently expired tax provisions.  The bill also included "ABLE Act of 2014" which establishes a new type of tax advantaged savings program for individuals with disabilities.

We have summarized below the provisions that are of most common concern to our clients.

Business Tax Provisions Extended:

  1. Bonus Depreciation – 50% first year bonus depreciation extended for one year so that it applies to qualified property acquired and placed in service before January 1, 2015 (before January 1, 2016 for certain longer-lived and transportation property).  Qualified restaurant property and qualified retail improvement property remain 15 year property and are eligible for 50% bonus depreciation if they meet the definition of qualified leasehold improvement property.

  2. 2014 Auto and Truck Depreciation Cap – First year cap raised to $8,000.

  3. Choice to Forego Bonus Depreciation – Extended for one year.

  4. Section 179 Limits – Extends for one year the $500,000 maximum expensing amount under Code Section 179 and the $2 million investment based phase out amount.  These amounts apply for qualified property placed in service before January 1, 2015.  Qualified leasehold improvement, restaurant and retail improvement property is eligible for up to $250,000 of expensing.

Individual Tax Provisions Extended:

  1. Educator Expenses – $250 above the line deduction for expenses incurred in 2014.

  2. Discharge Home Mortgage Debt – Home mortgage debt discharged on qualified principal residence debt, up to $2 million limit ($1 million for married filing separately) is excluded from gross income.

  3. Mortgage Insurance Premiums – Premiums paid or accrued before January 1, 2015 are deductible as qualified residence interest.

  4. Sales Tax Deduction – Itemizers can elect to deduct state and local sales and use taxes instead of state and local income taxes for tax years beginning before January 1, 2015.

  5. Qualified Tuition Deduction – Eligible individuals can deduct qualified tuition and related expenses of the taxpayer, his spouse or dependents.  The maximum deduction is $4,000 and adjusted gross income limits apply.

  6. Nontaxable IRA Transfer to Eligible Charities – Taxpayers who are 70 ½ or older can make tax-free distributions to a charity from an IRA up to $100,000 per year.

The Act extends other miscellaneous items for one year. Please consult with us if you have any questions or would like additional information.

Recent IRS Directive on Bad Debt Deductions

 

As the result of an Application for Industry Issue Resolution made by the American Bankers Association and numerous months of negotiations, the IRS has recently issued an IRS Directive for their Large Business and International Examiners.  The Directive clearly states that it relates to bad debt deductions under the specific charge-off method, IRC Section 166, and that it does not apply to deductions calculated under the reserve method, IRC Section 585.  The Directive does not change any previously issued IRS regulations or laws but offers examination guidance to IRS Agents so that Agents should not challenge a Bank or Bank subsidiary’s bad debt deduction for eligible debt or eligible debt securities assuming one of the following:

  • The bad debt deduction is the same amount as the charge-off reported in the Bank or Bank subsidiary’s applicable financial statement.

  • The bad debt deduction is the same amount as the charge-off pursuant to a specific order or written confirmation from the Bank’s Regulator and as reported in the Bank or Bank subsidiary’s applicable financial statement. 

  • The Bank has properly elected the Conformity Election, regardless of whether or not the express determination requirement is satisfied.

In addition, the IRS Agents are instructed to not challenge the inclusion of estimated selling costs to the extent that the estimated selling costs are included in the Bank or Bank subsidiary’s charge-off as reported in applicable financial statements.

The Directive may be applied for a Bank or a Bank subsidiary only between the years of 2010 and 2014 and once the Directive has been applied, it must be used consistently going forward.  The Directive may be applied by filing amended returns or by making the changes in the current taxable year.  Typically, in the year of application, the Bank may notice an adjustment to be determined on December 31 of the Adjustment Year. 

If under IRS audit, any Bank or Bank subsidiary will be required to supply an “LB&I Directive Related to Section 166 Deductions for Eligible Debt and Eligible Debt Securities Certification Statement” for all years in which the Directive was applied.

For more information, please contact our firm.

 

describe the image Luke C. Martin, CPA

 Member of the Firm

 Smith, Elliott Kearns & Company, LLC

 804 Wayne Avenue, Chambersburg, PA 17201

 Phone: 717-263-3910, ext. 2150

 lmartin@sek.com
 

describe the image Nicole E. Wilson, CPA

 Supervisor 

 Smith, Elliott Kearns & Company, LLC

 804 Wayne Avenue, Chambersburg, PA 17201

 Phone: 717-263-3910, ext. 2155

 nwilson@sek.com

 

Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter. Please contact us if you wish to have formal written advice on this matter.

IRS Releases 2015 Cost of Living Adjustments

 

The IRS has released the 2015 Cost of Living Adjustments, shown below. Please contact the firm for additional information.

2015 COL Adjustments Blog

The Bad Debt Conformity Election: History, Pros, Cons and Adoption

 

Issues for Consideration in Year-End Tax Planning

History of the Bad Debt Conformity Election for Banks

The conformity election for banks was added to the Treasury Regulations in September 1991 under Treas. Reg. Section 1.166-2(d)(3).  The election was added as a result of the banking industry’s request for conformity in the accounting for bad debts for financial statement/regulatory purposes and tax purposes.  The Regulation was added by the IRS in an attempt to reduce the amount of disagreements stemming from the timing of bad debt deductions for loan losses.

Pros of the Conformity Election

The conformity election allows for banks to have a safe harbor when deducting worthless loans.  If the conformity election has been properly elected, any loan loss deductions recognized for financial statement or regulatory purposes is also a taxable deduction, in the same year.  Without the conformity election, the deductibility of the loss could be deferred to future tax years. 

The conformity election could also allow conformity in the financial statement/regulatory treatment of non-accrual loan interest.  Meaning, typically, when a loan is moved to non-accrual status, the taxpayer is no longer required to continue to recognize the interest income related to the loan for tax purposes or regulatory purposes.

Cons of the Conformity Election

One of the disadvantages related to the application of the conformity election relates to limited flexibility for planning in the bad debt area.  In the cases of a taxpayer with an NOL carry forward or a taxpayer subject to Section 382 built-in loss regulations, taxpayers may choose to not deduct the loan loss on their tax return until the loan is wholly worthless.  However, if the conformity election has been applied, any partially worthless loan loss must be deducted in the year the loss is deducted for financial statement or regulatory purposes.

How to Adopt the Conformity Election

In order for a financial institution to elect the conformity election, the taxpayer must obtain an express determination letter from its primary regulator.  The express determination letter is obtained in correlation with the most recent regulatory exam and states that the bank is maintaining and properly applying the loan loss classification standards consistent with regulatory standards in agreement with the regulator.  After the express determination letter is obtained, the taxpayer must then complete and file the Form 3115 to properly change their method of accounting to agree with the conformity election Regulation.

Future of the Conformity Election

Since 1991 when the conformity election was added to the Treasury Regulations, bank regulators have adopted changes to the loan loss regulations.  As a result, in 2013, the Internal Revenue Service issued Notice 2013-35 regarding the conclusive presumption of worthlessness of debts.  The purpose of the Notice was to request public comments on Treasury Regulations 1.166-2(d)(1) and (3).  In particular, the IRS requested comments regarding whether changes have occurred in banking regulatory standards and processes since the adoption of the Regulations, if the Regulation remained consistent with principles of Section 166, and whether the Regulation application applied to other types of entities.    The comment period related to this Notice was closed in October 2013; however, as of now, there are no changes to the conformity election as a result to the Notice or the comments.

If you would like more information, please contact our firm.

 

describe the image Luke C. Martin, CPA

 Member of the Firm

 Smith, Elliott Kearns & Company, LLC

 804 Wayne Avenue, Chambersburg, PA 17201

 Phone: 717-263-3910, ext. 2150

 lmartin@sek.com
 

describe the image Nicole E. Wilson, CPA

 Supervisor 

 Smith, Elliott Kearns & Company, LLC

 804 Wayne Avenue, Chambersburg, PA 17201

 Phone: 717-263-3910, ext. 2155

 nwilson@sek.com

Tags: 

Determining the Value of Stock-Based Compensation

 

Stock-based compensation has been used for many years to attract employees. But the practice reached a peak in the early 1990s as legislation, accounting practices and a proliferation of fledgling technology firms converged to cement the granting of stock options as a mainstream compensation strategy.

In 2006, the accounting rules changed, requiring companies to value options at the time of the grant instead of at the time they are exercised. Since there is no longer a significant earnings benefit to using stock options, many companies now use restricted stock as a common form of compensation.

Today, business valuations often include the valuation of stock-based compensation in various forms, including stock options, restricted stock and phantom stock.

How It’s Done

One of the keys to a business valuation is understanding the company’s big picture. Stock-based compensation — in any form — must be carefully considered because, as a claim on equity, it can significantly affect the value of a company.

According to valuation guru and NYU Professor Aswath Damodaran, the best way to deal with stock-based compensation in a discounted cash flow valuation is to “recognize its two-layered impact on value per share.”

Damodaran suggests that if the company is going to continue to compensate employees with options or restricted stock, forecasted earnings and cash flows for the company will be lower than for a company that doesn’t compensate employees in that way. Damodaran notes, “The lower cash flows will reduce the value of the business and equity today.”

Damodaran also describes what he calls the “deadweight effect” of options on the value of a company that has granted employees stock options in the past, and the options are still “live.” He explains that these options represent a claim “that must be netted out of equity to arrive at the value of the common stock. The latter should then be divided by the actual number of shares outstanding to get the value per share.” (Damodaran notes that restricted shares can simply be included in the outstanding shares.)

He continues, “While it may seem like you are double counting options … you are not.” He explains, “In fact, if a company stops using equity-based compensation after years of option grants, the first effect (on earnings/cash flows) will stop, but the second effect (the ‘deadweight’ effect of outstanding options) will continue until all of the options either expire or are exercised.”

Managing Practicalities

The reality of valuing stock-based compensation is not always straightforward. Particularly in smaller companies, recordkeeping may be limited and some of the details, restrictions and agreements about shares and vesting may be lost. Because of their flexible nature, phantom stock grants are often incompletely documented or ambiguously worded, and disagreements over the intent of the granted stock are not uncommon.

If a business valuation includes stock-based compensation, be sure your valuation analyst is experienced and familiar with the valuation techniques required to account for the options and shares in question. As Damodaran cautions, “There are no free lunches, and if a company chooses to pay $5 million to an employee, that will affect the value … no matter what form that payment is in — cash, restricted stock, options or goods.”

If you would like more information about the valuation of stock-based compensation, please contact our firm.

 

Source: Aswath Damodaran, “Musings on Markets: Stock-based Employee Compensation: Value and Pricing Effects,” February 2014.

Jacob Kaufman resized 600

 Jacob H. Kaufman, CPA, CVA, Member of the Firm

 Smith Elliott Kearns & Company, LLC

 804 Wayne Avenue, Chambersburg, PA 17201

 Phone: 717-263-3910, ext. 2134

 jkaufman@sek.com


The Better Way

 

Now that Hi Bracket has retired, his tax return is pretty simple. Recently he got an offer to sell some land he owned, which had been handed down through the family for many years and had a large gain associated with it. He knew it would be a capital gain which was generally taxed at 15% (pretty good rate) so he decided to take the money and run. He went ahead and paid the federal and state estimated tax on the gain. But when his tax return was prepared, the tax he owed was way more than the 15% on his $500,000 gain! Now what went wrong?

Lots of “bad” things can happen when income shoots way up, all of which cost money. He learned that his rental loss domino effectdeduction on the property was no longer allowed. He got no personal exemptions, he didn’t get all of itemized deductions, part of the capital gain was taxed at 20%, not 15% and he owed an extra 3.8% on the gain for what is commonly called the Obamacare tax. To make things worse, the Alternative Minimum Tax (AMT) kicked in so he got no federal benefit from paying his state income tax. And to add insult to injury, his Medicare premiums will triple for the following year!

The Better Way would be (you guessed it) to have the calculations done up front. The timing of when a sale takes place can affect the timing of estimated payments which can allow the federal benefit to be deferred to a year when AMT isn’t applicable. Also, to spread the gain into more than one year could keep income lower, saving the higher tax rates and even help the Medicare premiums. Heck, rental losses might be deductible, exemptions available and even things like child credit and education costs might not be wiped out!

If you are considering an unusual transaction, please check with us up front to save as much as possible.

Delivering Retirement Plan Participant Disclosures Electronically

 

electronic notificationThe Department of Labor (DOL) and Internal Revenue Service (IRS) allow retirement plan participant disclosures and notices to be delivered electronically. This may be an effective way of reducing the time and expense involved in providing all of the required communications to the participants in your retirement plan. Some of the items that may be sent electronically rather than in paper format include the following:

  • Participant Statements
  • Safe Harbor Notice
  • Participant Fee Disclosures under 404(a)(5)
  • Qualified Default Investment Alternative (QDIA) notices
  • Summary Plan Description (SPD)
  • Summary of Material Modifications (SMM)
  • Summary Annual Report (SAR)

Electronic Disclosure Rules

computer_w-junkmailComplying with the following rules will ensure that the use of electronic communication meets DOL and IRS standards:

At the time that the participant receives the electronic notification, they must also be notified of what they are receiving and why it is important. This may be done in the body of an email that is sent to the participant.

Every participant should also be told that they have the right to request a paper copy of the disclosure if they would like.

The electronic delivery system should be designed in such a way as to ensure that the participant’s personal information is handled in a confidential manner and that the electronic communications are actually received. This may be accomplished through periodic surveys to confirm receipt or by sending the disclosure email with return receipt enabled.

Selecting Which Notices to Send Electronically and to Whom

Deciding to send disclosures and notices electronically is not an all or nothing proposition. You can choose to send a particular disclosure electronically and continue to disseminate other disclosures in the traditional paper format. In addition, you may elect to send disclosures electronically to some participants (e.g. current employees) while sending those same disclosures in paper format to other participants (e.g. former employees who retain a balance in the plan).

retirement plan participant's consentPermission Required?

Whether or not you need to obtain the participant’s consent to electronic communication depends upon whether or not they have a computer at work that they have access to at any location where they are expected to perform their duties as employees. If they do, then consent is not required. Merely having access to a computer at the workplace is not sufficient; the computer must be at their designated workstation(s) and the use of the computer must be an integral part of their job. For any participants who do not meet this standard, such as former employees or current employees who do not use a computer at work, consent is required before you are able to electronically provide disclosures and notices.

Getting the Plan Participant’s OK

retirement plan participant's consentIf consent is required, then you will need to have a system in place to collect and track the participants’ responses so that you are able to prove that a participant consented to electronic delivery. To obtain participant consent to electronic delivery, you may either send an email or a letter to the participant that includes the following:

  • A list of the notices / disclosures to which the consent applies
  • A notification to the participant that they may withdraw their consent at any time for no cost and instructions on how to do so
  • Information on how to update their contact information for electronic delivery or physical delivery
  • A notification to the participant that they may receive a paper copy of any notice / disclosure at any time and the cost of the paper copy (if applicable)
  • Information on any hardware/software requirements for accessing and retaining the documents

The rules for obtaining consent and maintaining records of that consent make it difficult for plan sponsors to comply. Therefore, many sponsors who provide disclosures electronically to current employees who use computers as an integral part of their job continue to provide disclosures to everyone else in the traditional paper format by either handing them out or via first class mail.

Nathan T. GageNathan T. Gage, QKA, MBA works in the firm's Retirement Plan Services Group. He joined the firm in 2014, bringing with him over 11 years of experience in retirement plan services and business analysis. His responsibilities include the design, implementation and third party administration of retirement plans. Nate holds the ASPPA designation as a Qualified 401(k) Administrator (QKA), which is offered to retirement plan professionals who work primarily with 401(k) plans.

Final Guidance by FRB on Bank Income Tax Allocations

 

Implementation should be completed no later than October 31, 2014

Federal regulators have issued final guidance on income tax allocation agreements involving holding companies and insured depository institutions to reduce confusion regarding ownership of tax refunds.

In 1998, the interagency policy statement said that a holding company that receives a tax refund from a taxing authority obtains these funds as an agent for its subsidiary insured depository institutions and other affiliates. The new guidance instructs the insured depository institutions and their holding companies to review their tax allocation agreements to ensure:

1.  Agreements expressly acknowledge that the holding company receives any tax refunds as agent.

2.  All bank organizations insert specific language in their tax allocation agreements to clarify refund ownership.

3.  Clarity on how certain requirements of sections 23A and 23B of the Federal Reserve Act apply to tax allocation agreements between depository institutions and their affiliates.

We are here to help with implementation. For questions about how the new guidance affects your institution, contact Luke C. Martin, CPA, Member of the Firm, or Nicole E. Wilson, CPA, Supervisor at 717-263-3910.

Click here to download the complete addendum.

Download

                                 Luke C. Martin, CPALuke C. Martin, CPA           Nicole E. Wilson, CPANicole E. Wilson, CPA

Minimum Wage Rate in Maryland Changes January 1, 2015

 

Maryland flagGovernor O'Malley has signed a bill that will raise the minimum wage rate from $7.25 per hour to:

(1) $8.00 per hour on Jan. 1, 2015;

(2) $8.25 per hour on July 1, 2015;

(3) $8.75 per hour on July 1, 2016;

(4) $9.25 per hour on July 1, 2017; and

(5) $10.10 per hour on July 1, 2018.

The legislation also freezes the minimum cash wage for tipped employees at $3.63 per hour.

Tags: 
All Posts