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Small business beware, they’re watching you!

As CPA's we attend dozens of hours of training every year.  Our educators keep us apprised of areas of increased IRS interest: 1.  Reasonable Salary for the owner of an S-Corporation who takes money from the firm. 2.  Filing of necessary information returns-1099's. 3.  Disclosure of Foreign accounts and or investments.  The new FinCEN 114 replaces the old 90.22.1. 4.  Documentation of taxpayer qualification for 'Earned Income Tax Credit.' 5.  Auto use documentation in writing in substantiation of 'business use of auto.' Our job is to keep you informed, and, make sure you're aware of what documentation you need in defense of a claimed deduction or credit.

~Posted 01/22/14

Obamacare, “Affordable Care Act”

A:  Regarding EMPLOYERS:
  1. Obamacare as “employer mandated” health insurance is largely irrelevant unless a business has 50 full-time equivalent employees (FTE).
  2. Be aware that just because it is not applicable a business owner may still be asked to PROVE it's not applicable!  Therefore, many businesses who have more than a handful of employees, but less than 50 employees may still want to retain records documenting such things as hire dates, hours worked, etc.  This way when one of the businesses employees applies for health insurance, and the IRS inquires of the business why they don't have coverage at work, the employer can quickly document the whole issue is not applicable due to not having more than 50 FTEs.
i.     FTE does cause part-timers to be considered full-timers in certain cases; HOWEVER, even if you have 50 FTE’s the Penalty is generally not applicable unless you have at least 30 TRUE full-time employees.  FTE in many cases also includes INDEPENDENT CONTRACTOR staff or those who are commonly called '1099 employees.'  The FTE definition is very technical and is different from that used to define an employee for labor law purposes.
  1. Attributed ownership rules apply to employers owning multiple companies.  Generally, if common ownership or control exists between businesses (meaning 50% of the business is owned by the same group of owners) the company staff may be added together for purposes of determining the number of FTEs.
  2. The penalty against the employer is generally either $ 2,000 or $ 3,000 per eligible employee.
i.     The penalty is enforceable and collected through the payroll tax reporting.
  1. Employers must keep copious records, with hours worked, etc.
    B:  Regarding individual TAXPAYER-EMPLOYEE and small business(meaning less than 30 TRUE FTEs during all months of the tax year):
  1. Only if the taxpayer or SPOUSE of the employee doesn’t have ‘affordable’ insurance options at work, (or COBRA alternative), can the taxpayer-employee go to the ‘Exchange’ to purchase health insurance.
  2. This ‘Exchange’ should be up and running by 10/1/13.  It is really just a hub to find insurance that is compliant with Obamacare.  You do not have to go to the exchange, but from a practical standpoint it will be the BEST alternative to employer provided insurance in many cases.
  3. The nonworking SPOUSE cannot go to the Exchange if the working employee CAN add the spouse to the employer plan for an affordable premium payment.  What happens if the couple is no longer a 'couple' but aren't legally divorced either?  We don't yet know.
i.     “Affordable” employer coverage is defined in a couple of ways, but the easiest way is to say the “employee’s” portion of the cost (paid by payroll withheld by the employer) for purchase of company provided health insurance is no more than 9.5 % of his/her “Box 1” W2 wage.  Yes, Box 1 (net of Sec 125, and 401K:  this needs more clarification, but that’s what the regulation currently states.)
  1. We may surmise, the employer will offer health coverage and charge no more than 9.5% for the employee portion of the premium. But to keep the coverage affordable to the firm the employer would move to offer the minimum legal coverage.  We see hundreds of employees who are paying way more than 9.5% of their pay for quality health coverage.  That will have to change, and the employers won't absorb those costs.  This is the point where many state the employer will simply drop the health insurance and pay the penalty.
  2. Taxpayers MAY qualify for a ‘tax credit’ to offset the cost of health insurance IF total household income is less than 400% of the ‘poverty level’ assigned to their zip code.  For example of family of 4 in AZ making less than about $80,000 annually would have some portion of the tax credit.
  3. If the taxpayer is using the Exchange to purchase insurance, any applicable (and assumed) credit will be used to reduce the monthly health insurance premium.  This only happens IF they buy through the EXCHANGE.
  4. The taxpayer could still qualify for a tax credit even if they don’t use the Exchange, but the credit is taken when the tax return is filed.
  5. The applicable tax credit is based upon the 2012 Modified AGI, which is used to calculate the credit for the 2014 insurance premium.  The actual tax credit is then ‘recalculated’ with the filing of the 2014 tax return.  If the credit is less than anticipated, the taxpayer does pay back the excess or any credit taken (pre credited through the Exchange) with the tax return filing.
  6. Individuals would owe a Penalty if they do not purchase at least ‘bronze level’ health insurance (read this as minimal coverage as defined in your state of residence).  There may be a coverage level below, 'bronze,' however we have been informed this coverage is only available to young adults under the age of 30.
    1. The penalty for year 2014 is a minimum of $ 95 per PERSON (remember dependents are added) or 1% of household income.  The penalty goes up to $ 695 (plus inflation adjustments) or 2.5% in 2016.
    2. Observation:::: If the penalty is only $ 95, the insurance is $ 1,200-1,800 annually, the insurance has a $ 5,000 deductible (this is the standard deductible for the lowest level of coverage available on the Exchange), and the taxpayer is already living ‘pay check to pay check;’  will the taxpayer purchase the insurance?  Recall also that the insurance has no ‘preexisting’ insurance clause; so, one could wait until they get sick and then purchase the insurance.
    3. The individual tax penalty is waived IF health insurance would cost more than 8% of your income.
    4. Unlike the employer penalty, the individual penalty is not collectible in and of itself against the taxpayer (i.e. no tax levy).  But, the penalty is due and is paid with the filing of a tax return.  Therefore, any refund due the taxpayer will be used to collect the penalty imposed.
    5. Individuals who earn less than 400% of the poverty rate, and, their insurance coverage costs more than 8% of their income, MAY qualify for health insurance through Medicaid.  The Exchange becomes the first screener for Medicaid eligibility.  It is predicted Medicaid enrolment will increase by 300%to 500% within three years.
  C:  New 3.8% investment tax
  1. Starts in 2013.
  2. Only an issue if MFJ(married filing joint) MAGI(modified adjusted gross income) > $ 250k
  3. The tax is applied as additional tax to investment income.  This includes RENT (even if one is a Real Estate Professional!), interest, dividends, capital gain income, Partnership income, and Royalties, but NOT S-Corp Income.
  4. Tax planning can significantly impact this tax!
    D:  New .9% Medicare tax.
  1. Starts in 2013.
  2. Generally withheld from your wage as an additional withholding amount.
  3. Only an issue if Wages/SE Income MFJ > $ 250k.
  4. Paid with the 1040, but Employer withholding is required when Wage exceeds $ 200k.
  5. Computed and paid when exceeds $ 200k; not computed by pay period, but based on YTD.
  6. Employer is LIABLE if they don’t collect the extra Medicare tax withholding from the employee.
  7. The self-employed will still pay the tax if applicable.  They, however, will simply include any necessary prepayment with their estimated tax payment coupon.
    Recap: 2 penalties (employer and taxpayer-employee), but only the employer side is a real concern at this point. 1 tax credit for the individual, but it’s frequently used prospectively as a credit against the current cost of the insurance. The individual credit is proved based upon actual MAGI(modified adjusted gross income). The credit is proved against information provided by the State to the IRS which reports utilization of a credit via the Exchange. The 'Exchange' is a hub for purchase of insurance, and a calculator for purposes of Medicaid eligibility and the tax credit. 1 tax credit for ‘small businesses’ (fewer than 50 employees) that elect to provide coverage, but the calculation may be more expensive than the credit value.

~Posted 06/14/13

Cancellation of Debt

The IRS states: ‘Cancellation of debt generally results in taxable income.’  However, we are aware of several exceptions to this general rule.  And, many professional tax preparers are aware of a very broad exception dealing with debt related to your primary residence.  However, a technicality in Arizona State law sometimes allows a similar exception for debt on other residential property; property which is NOT your primary residence.  Several other often missed exceptions might be claimed by filing a FORM 982 with your tax return.  Said FORM informs the IRS of the special circumstance allowing the cancelled debt income to not be taxable. Many taxpayers are fearful of the IRS when dealing with cancellation of debt income.  This fear often leads to missed deductions. As an example, let’s assume your rental property was foreclosed upon or ‘sold short.’  Let’s assume the cancelled debt is income pursuant to the IRS Code.  But, remember the property title transferred, therefore this is a SALE; a sale which in most cases is a taxable loss.  Is the sale a ‘capital loss’ subject to limitation or an ‘ordinary loss?’  An ordinary loss may offer full deduction, and in many cases fully absorbs the cancellation of debt income.  What if the ordinary loss exceeds the cancellation of debt income?  TAX REFUND! We’ve handled dozens of these issues and have taken classes dealing specifically with cancellation of debt issues.

~Posted 01/16/13