Do You Have ISOs? You Need to Understand Their Tax Treatment

Incentive stock options allow you to buy company stock in the future at a fixed price equal to or greater than the stock’s fair market value on the grant date. If the stock appreciates, you can buy shares at a price below what they’re then trading for.

ISOs must comply with many rules but receive tax-favored treatment:

  • You owe no tax when ISOs are granted.
  • You owe no regular income tax when you exercise ISOs.
  • If you sell the stock after holding the shares at least one year from the exercise date and two years from the grant date, you pay tax on the sale at your long-term capital gains rate. You also may owe the 3.8% net investment income tax.
  • If you sell the stock before long-term capital gains treatment applies, a “disqualifying disposition” occurs and any gain is taxed as compensation at ordinary-income rates.

There also might be alternative minimum tax consequences in certain situations. If you’ve received ISOs, contact us. We can help you determine when to exercise them and whether to immediately sell shares received from an exercise or to hold them.

The additional 0.9% Medicare tax applies to FICA wages and self-employment income exceeding $200,000 per year ($250,000 for married filing jointly and $125,000 for married filing separately). Unfortunately, the withholding rules have been tripping up some taxpayers, causing them to face an unexpected tax bill — plus interest and penalties — when they file their returns.

Employers must withhold the additional tax beginning in the pay period when wages exceed $200,000 for the calendar year — without regard to an employee’s filing status or income from other sources. So if your wages don’t exceed $200,000, your employer won’t withhold the tax — even if you’re liable for it. This might occur because you and your spouse’s combined wages exceed the $250,000 threshold for joint filers or because you have wages from a second job or have self-employment income.

If you expect to be in the same situation in 2015, consider filing a W-4 form to request additional income tax withholding, which can be used to cover the shortfall and avoid interest and penalties. Or, you can make estimated tax payments. If you have questions about the additional 0.9% Medicare tax, please contact us.

Yeo & Yeo CPAs has been named one of West Michigan’s 101 Best and Brightest Companies to Work For by the Michigan Business & Professional Association for the eleventh consecutive year.

The annual competition is a program of the Michigan Business & Professional Association (MBPA) and identifies organizations that display a commitment to excellence in human resources practices and employee enrichment. An independent research firm scored each company’s entry based on key measures in categories such as communications, work-life balance, employee education, diversity, recognition, retention and more. The winning companies will be honored at MBPA’s annual awards program and human resources symposium on May 7 in Grand Rapids.

“It is an honor to be recognized as one of the 101 Best and Brightest Companies to Work For,” said Carol Patridge, CPA, managing principal of Yeo & Yeo’s Kalamazoo office. “We credit the excellent work environment we’ve created to our dedicated employees. They are engaged in the work they do for our clients and committed to teamwork. They are an essential piece of our success and I am very proud of them,” says Patridge.

Mark Perry, CPA, managing principal of Yeo & Yeo’s Lansing office says, “We are especially honored to be recognized as one of the winners because it is the first time that Yeo & Yeo’s Lansing office staff participated in the program. We were compared to not only prominent companies in West Michigan, but also those throughout Eaton County and as far northeast as Isabella County.”

Yeo & Yeo offers rewarding careers for individuals who have the desire and drive to grow as leaders in the accounting profession. More than 200 employees in offices throughout Michigan take pride in the firm’s reputation for personal service, commitment to clients and community support. Yeo & Yeo has a culture of developing future leaders through its in-house training department, professional development training and formal mentoring, while sustaining a family friendly work environment. The firm also offers an award-winning CPA certification bonus program. Yeo & Yeo is a strengths-based organization where employees benefit from collaboration across offices and teams, and have access to advisors and resources that help them succeed.

The United Way of Midland County has named Yeo & Yeo among the Companies That Care for 2015. This prestigious award recognizes local organizations who demonstrate their commitment to strengthening our community through their support of United Way of Midland County.

“Companies That Care” are characterized not only by the financial commitment they and their employees make, but the impact they have through advocacy and volunteerism. Yeo & Yeo joins a select group of organizations that serve as the foundation for real change and continue the strong legacy of compassion for those in need.

On April 9, the United Way hosted the sixth annual Spirit of the Community Awards event at the Great Hall in Midland. This celebration honored community heroes and the ways in which they are coming together for impact and change.

Congratulations to the other Companies That Care:

  • Aptar
  • Ayre-Rhinehart Realtors
  • Chemical Bank
  • City of Midland
  • Consumers Energy
  • Deloitte
  • Dow Corning Corporation
  • Fisher Contracting
  • Gavin & Associates LLC
  • Ieuter Insurance Group
  • McKay Press, Inc.
  • Members First Credit Union
  • Midland Daily News
  • Midland Public Schools
  • MidMichigan Health
  • Northwood University
  • RE/Max of Midland
  • Three Rivers Corporation
  • Trinseo (formerly Styron)
  • Wolverine Bank

We at Yeo & Yeo are very grateful for our clients who have put their trust in us, and for the communities throughout Michigan in which we serve, that make our longstanding success possible. We are proud of our dedicated employees, and pleased to celebrate Yeo & Yeo’s 92nd anniversary on April 1.

Looking back, several exciting developments took place during the past year.

In 2015, Yeo & Yeo was ranked the 97th largest CPA firm in the country by Accounting Today.

  • Yeo & Yeo expanded and relocated its Ann Arbor office to accommodate the firm’s growth. It is now the firm’s second largest location serving clients in Washtenaw, Wayne, Macomb and surrounding counties. The expansion gave the firm a more distinct presence in Ann Arbor.
  • The firm merged with Southgate, Mich.-based Hungerford & Co., benefitting the clients of both firms through the expanded depth of services and the firms’ combined expertise. The merger extended Yeo & Yeo’s reach in the Southeast Michigan region.
  • Yeo & Yeo was honored with several awards: Michigan’s Best and Brightest in Wellness Award, West Michigan’s 101 Best & Brightest Companies to Work For, Metro Detroit’s 101 Best & Brightest Companies to Work For, and the Midland County United Way’s Companies That Care.
  • Crain’s Detroit Business included Yeo & Yeo in its Book of Lists, highlighting the largest accounting firms.

What began as a family owned business through three generations of the Yeo family has grown to a firm with nine offices throughout Michigan. Today, more than 200 professionals take pride in the firm’s reputation for personal service, commitment to clients and community support.

Again, we thank our clients for allowing us to be a part of their story of success.

Yeo & Yeo is pleased to announce that Eric J. Sowatsky, CPA, CGMA, has completed the Mark-to-Market Grain Accounting course administered by White Commercial Corporation. The specialty course concentrates on proper accounting procedures for grain elevators, with an emphasis on mark-to-market valuations of cash grain and futures contracts.

Sowatsky has a high-level understanding of how basis trading activities flow through a grain elevator’s financial statement, from both the merchandising perspective and the accounting perspective. Mark-to-market valuations on cash grain positions can be made in different ways, and each has a different effect on an elevator’s financial statement.

“Grain elevators use their financial statements to effectively report, manage and strengthen the financial health of the business, so it is important to be able to present the company’s financials clearly and confidently to a lender, board members and other interested parties,” says Sowatsky.

Sowatsky consults with grain elevators about basis trading, spreads and market values, as well as how to accurately value and report grain inventory and forward contracts. He emphasizes the importance of compiling financial statements on a monthly basis with proper mark-to-market entries, so clients understand not only what the numbers are, but what they mean.

Sowatsky is the leader of Yeo & Yeo’s Agribusiness Services Team, and a member of the State and Local Tax Team and healthcare Reform Team. He serves on the Michigan Agribusiness Association’s Grain Committee. His areas of expertise include collateral audit exams for lending institutions, internal control reviews, business consulting, financial reporting and tax planning issues, with an emphasis in agribusiness.

Sowatsky has more than 12 years of public accounting experience and is a senior manager in the firm’s Saginaw office. He is past president of the Great Lakes Bay Economic Club and past treasurer of Rotary Club – Saginaw Sunrise.

The IRS has provided employers with additional time to obtain the certification necessary to claim the Work Opportunity Tax Credit for 2014, which was retroactively extended by the Tax Increase Prevention Act of 2014 to cover eligible employees who began work before Jan. 1, 2015.

An employer that hired a member of a targeted group, or a tax-exempt organization that hired a qualified veteran, during 2014 will meet the requirements for the credit if a pre-screening notice to request certification is filed with the appropriate Designated Local Agency (DLA) no later than Apr. 30, 2015.

The Work Opportunity Tax Credit is available to virtually all private, for-profit employers who hire new employees from targeted groups. These groups include disabled or unemployed veterans, food stamp recipients, long-term recipients of state assistance, Supplemental Security Income recipients, ex-felons and more. Certain tax-exempt employers can receive the credit against payroll taxes for hiring qualified veterans, i.e., disabled, unemployed or food stamp recipients.

Generally the employer must complete two forms:

  1. IRS Form 8850 – Pre-Screening Notice and Certification Request for the Work Opportunity Credit
  2. Employment and Training Administration (ETA) Form 9061 – Individual Characteristics Form, Work Opportunity Tax Credit Applicant Information.

 

In Michigan, the Unemployment Insurance Agency is the Designated Local Agency. Submit the forms to the Designated Local Agency within 28 calendar days from the employee’s start date. As noted above, these forms can now be completed for applicable employees hired during 2014 and submitted on or before April 30, 2015.

Additional information can be found on the Michigan Department of Licensing and Regulatory Affairs website. Go to the Employment Security and Workplace Safety section, click on Unemployment Insurance Agency and then go to the Quick Link for Work Opportunity Tax Credit Program.

In early 2016, employers with 50 or more full-time or full-time equivalent employees, labeled Applicable Large Employers (ALEs) by the federal government’s Affordable Care Act, will be required for the first time to report information about their employees and health insurance coverage afforded to them in 2015.

New Forms 1095-B (Health Coverage), and 1095-C (Employer-Provided Health Insurance Offer and Coverage), will be issued similar to the traditional Forms W-2, but with considerably different information. Additional Forms 1094-B and 1094-C will be used as transmittals to the IRS for these forms. This reporting is voluntary for 2014, but the instructions for Forms 1094-C and 1095-C were not issued until early February 2015, so it seems unlikely there will be many takers.

The IRS has put the responsibility on employers to provide the information on these forms such that the IRS can verify that:

  1. Individuals identified have the required minimum coverage,
  2. Individuals who request premium tax credits are entitled to them, and
  3. Applicable Large Employers are meeting their shared responsibility obligations under ACA.

Data required to be compiled on a monthly basis and reported annually includes the number of full and full-time equivalent employees, whether minimum essential coverage was offered to at least 70 percent of full-time employees, and the number of total employees, including part-time and ineligible full-time employees. Also reportable are names, addresses and social security numbers of the employees, covered spouses and dependents, whether or not the employee was offered affordable minimum essential coverage, and much more.

For employers with fully insured plans, regardless of the number of employees, their insurance company will prepare and furnish Forms 1095-B to report the employee’s information, including the type of coverage offered, whether or not they accepted or that no coverage was offered. Non-ALE employers – those with fewer than 50 full-time equivalent employees – that have self-insured health plans will also complete and file Form 1095-B.

ALEs will file Forms 1094-C and 1095-C for 2015 even though many of them – those with 50 to 99 full-time equivalent employees – are not required to provide health insurance coverage to employees until 2016.

  • Form 1094-C will include information on whether or not the employer offered minimum essential coverage, the number of full-time employees and total employees, and more.
  • Parts I and II of Form 1095-C will report for each employee what type of coverage was offered, the employee share of the lowest cost monthly premium, and any penalty safe harbor provision for the full year (or by month if less than the full year), covered individuals’ social security numbers and months of coverage.
  • Part III of Form 1095-C duplicates the Form 1095-B information and will only be used by ALEs with self-insured health plans.

These four forms are the backbone of the ACA’s ability to verify coverage information for individuals claiming eligibility for premium tax credits on the Individual Health Insurance Marketplace. They also will form the basis for assessment of Employer Shared Responsibility Payments, also known as the Employer Mandate Penalties. The volume and complexity of data required to be reported is astounding and presents a massive opportunity for mistakes.

To put it in context, look at what occurred when the federal government itself issued Forms 1095-A a few months ago. During 2014, millions of individual taxpayers were able to acquire health insurance through the federal, and in some cases the state, Health Insurance Marketplace. In January 2015, the Marketplace, otherwise known as the federal government, issued Form 1095-A (Health Insurance Marketplace Statement), to those taxpayers to provide information needed to reconcile advance premium tax credits received with those allowed based on actual 2014 income information. While this seems simple enough in theory, events proved to be anything but. On February 20, 2015, the IRS announced that over 800,000 of the Forms 1095-A issued contained erroneous information and were being amended.

Employers of all size, particularly those considered ALEs, are facing a paradigm shift in information reporting and need to be prepared to meet this challenge. We urge all impacted employers to closely study the reporting requirements under these new forms and establish a process to gather the required data before it becomes a fire drill.

This reporting should not be taken lightly. Like Forms W-2, the penalty for late or inaccurate filing can be steep, up to $100 per day, per form required to be issued. The IRS has stated that it will not impose these penalties for 2015 reporting on entities that make a good faith effort to comply. Employers need to prepare to show that good faith effort.

Form 1095-C Preparation Services

Avoid significant penalties and save a considerable amount of time — let Yeo & Yeo simplify ACA compliance by providing Form 1095-C preparation services that are efficient and cost-effective.

Refer to Yeo & Yeo’s Affordable Care Act – Employer Reporting Powerpoint presentation for a summary of what is reported on each of the forms and a chart of the major reporting requirements.

The Tax Increase Prevention Act of 2014 extends the “tax extenders” retroactively for one year (through 2014). This allows taxpayers to claim the temporary incentives on their 2014 tax returns that are filed in 2015. It also includes the Achieving a Better Life Experience (ABLE) Act, creating tax-favored savings accounts for individuals with disabilities along with some tax-related offsets. Congress also approved an Omnibus Spending Agreement for fiscal year 2015, which cuts funding for the IRS. There were discussions of making a number of the extenders permanent, however, the Tax Increase Prevention Act does not make any permanent, nor extends them for the usual two-year time period. The final fate of the extenders will be determined in 2015.

Individual Extenders

State and Local Sales Tax Deduction

The provision extends through 2014 the option to take an itemized deduction for state and local general sales taxes in lieu of an itemized deduction for state and local income taxes. The taxpayer may either deduct the actual amount of sales tax paid in the tax year, or, alternatively, an amount prescribed by the IRS.

Higher Education Deduction

The provision extends through 2014 the above-the-line deduction for qualified tuition and related expenses for higher education. The deduction is capped at $4,000 for an individual whose adjusted gross income (AGI) does not exceed $65,000 ($130,000 for joint filers) or $2,000 for an individual whose AGI does not exceed $80,000 ($160,000 for joint filers). Expenses paid by year-end for an academic term starting on or before March 31 of the following year qualify for the deduction in the year paid.

Teacher’s Classroom Expense Deduction

The provision extends through 2014 the above-the-line deduction for the eligible expenses of elementary and secondary school teachers (grades K-12, including school administrators and assistants). The deduction is capped at $250 and covers expenses that otherwise would have to be itemized.

Mortgage Debt Exclusion

The provision extends through 2014 the exclusion from gross income of a discharge of qualified principal residence indebtedness. The Act excludes from income cancellation of mortgage debt on a principal residence of up to $2 million ($1 million for a married taxpayer filing a separate return) through 2014.

Mortgage Insurance Premium Deduction

The provision extends through 2014 the treatment of qualified mortgage insurance premiums as deductible interest. This deduction phases out ratably for taxpayers with adjusted gross income of $100,000 to $110,000 (half those amounts for married taxpayers filing separately).

Charitable Distributions from IRAs

The provision extends through 2014 the ability of individuals at least 70½ years of age to make tax-free distributions from Individual Retirement Accounts (IRAs) to a qualified charitable organization. The exclusion may not exceed $100,000 per taxpayer each year.

Transit Benefits Parity

The provision extends through 2014 the maximum monthly exclusion amount for transit passes and van pool benefits so that these benefits match the exclusion for qualified parking benefits at $250 per month. These benefits are excluded from an employee’s wages for payroll tax purposes, and from gross income for income tax purposes.

Contribution of Real Property for Conservation Purposes

The provision extends through 2014 an enhanced deduction for contributions of capital gain real property for conservation purposes, with the contribution to be taken against 50% of the contribution base. This provision also would extend the enhanced deduction for certain individual and corporate farmers and ranchers. A qualified conservation contribution is a contribution of a real property interest to a qualified organization, exclusively for conservation purposes.

Business Extenders

Bonus Depreciation

Bonus depreciation allows taxpayers to claim an additional first-year depreciation deduction. The provision extends 50% bonus depreciation to property acquired and placed in service during 2014 (2015 for certain property with a longer production period). This provision continues to allow taxpayers to elect to accelerate the use of AMT credits in lieu of bonus depreciation under special rules for property placed in service during 2014. The provision would also continue a special accounting rule involving long-term contracts and a special rule for regulated utilities.

Code Section 179 Expensing

The provision extends the small business expensing limitation and phase-out amounts in effect from 2010 to 2013 ($500,000 and $2 million) to property placed in service during 2014. These amounts currently are $25,000 and $200,000, respectively. It allows taxpayers to immediately deduct, rather than gradually depreciate, the cost of qualified assets, subject to certain limitations. The special rules that allow expensing for computer software, qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property also would be extended through 2014.

Qualified Leasehold/Retail Improvements, Restaurant Property

The provision extends the 15-year straight-line recovery period for qualified leasehold improvements, qualified restaurant property, and qualified retail improvement property to property placed in service during 2014. Qualified leasehold improvements, qualified retail improvements and qualified restaurant property up to $250,000 may be treated as Code Section 179 property, but with a lower dollar cap.

Research Tax Credit

The provision extends through 2014 the research and development (R&D) tax credit. The R&D credit generally allows taxpayers a 20% credit for qualified research expenses or a 14% alternative simplified credit. The research tax credit may be claimed for increases in business-related qualified research expenditures and for increases in payments to universities and other qualified organizations for basic research.

Work Opportunity Tax Credit

The provision extends through 2014 the work opportunity tax credit (WOTC). Employers that hire military veterans and other qualified individuals may be eligible for the WOTC credit. The credit amount is generally equal to 40% of up to $6,000 in qualified first-year wages. Employees must begin work for the employer before January 1, 2015.

100% Exclusion for Gain on Qualified Small Business Stock

The provision extends the exclusion of 100% of the gain on certain small business stock for non-corporate taxpayers applicable to stock acquired before January 1, 2015, and held for more than five years. This provision also would extend the rule that eliminates such gain as an AMT preference item.

Reduced Recognition Period for S Corporation Built-In Gains Tax

The provision extends, to sales of assets occurring during 2014, the rule reducing to five years (rather than ten years) the period for which an S corporation must hold its assets following conversion from a C corporation to avoid the tax on built-in gains. The period begins with the first day of the first tax year for which the corporation is an S corporation.

New Markets Tax Credit

The provision authorizes the allocation of an additional $3.5 billion of new markets tax credits for 2014. The credit encourages taxpayers to make loans to, or invest in, businesses in low-income communities.

Employer Wage Credit for Employees Who are Active Duty Members of the Uniformed Services

The provision extends through 2014 the 20% employer wage credit (only available to employers with 50 or fewer employees) for employees called to active military duty.

Qualified Zone Academy Bonds

The provision authorizes the issuance of $400 million of qualified zone academy bonds during 2014. The bond proceeds are used for school renovations, equipment, teacher training, and course materials at a qualified zone academy, provided that private entities have promised to donate certain property and services to the academy with a value equal to at least 10% of the bond proceeds.

Enhanced Charitable Deduction for Contributions of Food

The provision extends through 2014 the enhanced deduction for charitable contributions of inventory of apparently wholesome food for non-corporate business taxpayers.

Classification of Certain Race Horses as 3-Year Property

The provision extends the 3-year recovery period for race horses to property placed in service during 2014.

Special Expensing Rules for Certain Film and Television

The provision extends through 2014 the special expensing provision for qualified film and television productions. In general, only the first $15 million of costs may be expensed.

Treatment of Certain Dividends of Regulated Investment Companies

The provision extends through 2014 provisions allowing for the pass-through character of interest-related dividends and short-term capital gains dividends from regulated investment companies to non-resident aliens.

Basis Adjustment to Stock of S Corporations Making Charitable Contributions of Property

The provision extends through 2014 the rule providing that a shareholder’s basis in the stock of an S corporation is reduced by the shareholder’s pro rata share of the adjusted basis of property contributed by the S corporation for charitable purposes.

Empowerment Zone Tax Incentives

The provision extends through 2014 the tax benefits for certain businesses and employers operating in empowerment zones. Empowerment zones are economically distressed areas, and the tax benefits available include tax-exempt bonds, employment credits, increased expensing, and gain exclusion from the sale of certain small-business stock.

Energy Tax Extenders

Code Section 25C Credit

This provides an extension of credit for nonbusiness energy property. The provision extends through 2014 the credit for purchases of nonbusiness energy property. The provision allows a credit of 10% of the amount paid or incurred by the taxpayer for qualified energy improvements, up to $500. It rewards taxpayers who make qualified energy efficiency improvements to residential property.

Production Tax Credit

The provision extends the production tax credit (PTC) – a per-kilowatt-hour – for wind and certain other renewable sources of electricity to facilities for which construction has commenced by the end of 2014.

Biodiesel and Renewable Diesel

The provision extends through 2014 the $1.00 per gallon production tax credit for biodiesel, and the small agri-biodiesel producer credit of 10 cents per gallon. The provision also extends through 2014 the $1.00 per gallon production tax credit for diesel fuel created from biomass.

Second Generation Biofuel Producer Credit

The provision extends through 2014 the cellulosic biofuels producers credit.

Credit for Energy-Efficient New Homes

The provision extends through 2014 the tax credit for manufacturers of energy-efficient residential homes. An eligible contractor may claim a tax credit of $1,000 or $2,000 for the construction or manufacture of a new energy-efficient home that meets qualifying criteria.

Special Allowance for Second Generation Biofuel Plant Property

The provision extends through 2014 50% bonus depreciation for cellulosic biofuel facilities.

Energy-Efficient Commercial Buildings Deduction

The provision extends through 2015 the above-the-line deduction for energy efficiency improvements to lighting, heating, cooling, ventilation, and hot water systems of commercial buildings.

Special Rule for Sales or Dispositions to Implement FERC or State Electric Restructuring Policy for Qualified Electric Utilities

The provision extends through 2014 a rule that permits taxpayers to elect to recognize gain from qualifying electric transmission transactions ratably over an eight-year period beginning in the year of sale (rather than entirely in the year of sale) if the amount realized from such sale is used to purchase exempt utility property within the applicable period.

Excise Tax Credits Relating to Certain Fuels

The provision extends through 2014 the $0.50 per gallon alternative fuel tax credit and alternative fuel mixture tax credit.

Multiemployer Defined Benefit Pension Plan Extenders

Automatic Extension of Amortization Periods

The provision extends through 2015 the ability of multiemployer pension (ME) plans to take an additional five years to amortize funding shortfalls. The proposal was enacted in the Pension Protection Act of 2006 (PPA), but expired at the end of 2014. ME plans generally have 15 years to amortize shortfalls and can seek Treasury approval for an additional ten years. A plan receiving such Treasury approval may not combine the two extensions.

Exclusion of Shortfall Funding Method and Endangered and Critical Rules

The provision extends through 2015 the special rules for three categories of severely underfunded ME plans. It also would extend through 2015 the ability of ME plans to generally start or stop using the shortfall funding method without obtaining approval from Treasury. Endangered (yellow zone) plans are either less than 80% funded or projected not to meet minimum required contributions within seven years. A plan is seriously endangered (orange zone) if both are the case. In general, critical (red zone) plans generally must be either less than 65% funded or projected to be unable to meet minimum required contributions or pay promised benefits within four to 10 years. Yellow and orange zone plans must adopt a funding improvement plan under which the plan is projected to reduce underfunding by one-third or one-fifth over ten or 15 years, respectively. Red zone plans must adopt a rehabilitation plan under which the plan is projected to emerge from critical status in ten years, or if not possible using all reasonable measures, use all reasonable measures to postpone insolvency. Yellow zone and orange zone plans are generally prohibited from increasing benefits or reducing contributions. Red zone plans are permitted to cut certain ancillary vested benefits. In addition, red zone plans are effectively exempt from the minimum required contribution rules. Plans using the shortfall funding method amortize shortfalls on a different basis than a number of years, such as units of production, which could result in a longer amortization period than is otherwise applicable (generally 15 years, although plans may take an additional 5 years, as noted above). Before PPA, plans were generally required to obtain Treasury approval to start or stop using the shortfall funding method.

Technical Corrections

Deadwood Provisions

Under current law, there are numerous provisions that relate to past tax years (and generally are no longer applied in computing taxes for open tax years), involve situations that were narrowly defined and unlikely to recur, or otherwise have outlived their usefulness. These types of provisions are often referred to as “deadwood” provisions. The provision would repeal these current-law deadwood provisions. These provisions generally would be effective on the date of enactment, although the tax treatment of any transaction occurring before that date, of any property acquired before that date, or of any item taken into account before that date, would not be affected by these provisions.

Joint Committee on Taxation

Increased Refund and Credit Threshold for Joint Committee on Taxation (JCT) Review of C Corporation Return

Generally, the IRS may not issue a refund or credit of any income or certain other taxes in excess of $2 million until JCT staff reviews the facts surrounding the proposed refund or credit and communicates any concerns back to the IRS, which can then modify the refund or credit at its discretion. Under the provision, the threshold for JCT review of refunds or credits with respect to returns filed by C corporations would be increased to $5 million. The provision would be effective on the date of enactment, except with respect to pending refund or credit reports that have been transmitted by the IRS to JCT prior to such date.

Contact your local Yeo & Yeo tax professional for assistance.

 

Personal Property Tax Reform was passed in Michigan during 2014, but Michigan businesses still have a Personal Property Tax (PPT) filing requirement in 2015.

  • Small businesses – those with less than $80,000 in personal property within a taxing jurisdiction need to file an affidavit to claim exemption from PPT. It is due February 10.
  • Commercial and industrial businesses – still need to file Form 632 for the 2015 year (12/31/2014 property). It is due February 20.

The reform legislation established a seven-year phase-in for changes to personal property taxation on manufacturing property in Michigan. It also established a new Statewide Essential Services Assessment, which will be implemented in 2016, at the same time that Eligible Manufacturing Personal Property exemptions from PPT begin.

Contact your Yeo & Yeo professional for more details.

Yeo & Yeo CPAs & Business Consultants, a leading accounting and business consulting firm throughout Michigan, is pleased to announce that David T. Jewell, CPA, has been promoted to the position of principal.

Jewell has over 12 years of tax, accounting and business consulting experience. He started with the firm in 2008. He is the co-leader of the firm’s Tax Services Group and a member of Yeo & Yeo’s healthcare Reform, State and Local Tax, and Agribusiness teams. Jewell’s areas of expertise include federal taxation of businesses, individual tax planning and preparation, small business start-ups and business succession planning. He presents tax seminars and writes tax articles for publication. He is based in the firm’s Kalamazoo office.

“We are proud to recognize Dave for his leadership and expertise. He has excelled in managing complicated tax issues for our clients and is committed to helping them succeed,” says Carol Patridge, managing principal of the Kalamazoo office.

Jewell is a member and past treasurer of the Portage Rotary Club, and past treasurer of the Kalamazoo Builders Exchange. He volunteers for the Kalamazoo Gospel Mission and the Salvation Army.

Learn more about David

Accounting Today has named Yeo & Yeo the 97th largest accounting firm in the United States. Accounting Today ranks the country’s largest accounting firms by net revenue for the previous fiscal year. Yeo & Yeo is one of four Michigan-based firms to be included in the Top 100 listing.

“Being acknowledged among the Top 100 demonstrates our commitment to be a relevant CPA firm to do business with and to work for, now and in the future. This is even more impressive when we hear that there are approximately 45,000 CPA firms in the United States,” says Thomas E. Hollerback, President & CEO.

Two important advances led the firm to experience growth during 2014 and propel Yeo & Yeo to the Top 100.

  • In January, the firm merged with Southgate, Mich.-based Hungerford & Co., benefitting the clients of both firms through the expanded depth of services and the firms’ combined expertise in accounting, tax, valuation and business consulting. The merger extended Yeo & Yeo’s reach in the Southeast Michigan region.
  • In October, the firm expanded and relocated its Ann Arbor office to accommodate future growth. The expansion allowed the firm to have a more distinct presence in Ann Arbor. The modern design and more efficient layout of the new office space affords a first-class work environment for current and future staff, and an inviting atmosphere for clients. The Ann Arbor office is the firm’s second-largest office.

“Getting back into the Top 100 has been one of Yeo & Yeo’s top three goals for the past few years. We have focused on growth in our service and industry niches and in seeking merger candidates, such as Hungerford & Co. As we grow, we get more depth and can offer more services to our clients. We thank our clients and the communities that we serve for their support,” says Hollerback.

Accounting Today also named Yeo & Yeo among firms in the Great Lakes region that are growing at a fast pace. The firm is proud to be a pacesetter in audit, tax and management advisory services. The firm’s mission statement of providing “outstanding business, financial and accounting solutions,” is a reflection of its commitment to clients’ success.

See the complete Accounting Today Top 100  report.

The firm has nine offices throughout Michigan and more than 200 employees. Yeo & Yeo affiliates include Affiliated Medical Billing, Yeo & Yeo Technology and Yeo & Yeo Financial Services.

The Department of Labor announced in mid-September 2013 that at this time they will not penalize employers who do not provide their employees with notification of the availability of the Health Marketplace (the Exchanges).

Virtually all employers are required to provide these notices by October 1, 2013, regardless of whether or not they offer health insurance to their employees. Notice is to be provided to full-and part-time workers who were hired on or before September 30, 2013, regardless of the size of the employer. For employees hired after September 30, 2013, the notification is to be provided within 14 days of the start of their employment. The Department of Labor has announced that there is no penalty for failure to provide these notices.

Employers who have not yet provided the “required” notification to their employees are encouraged to do so.

The U.S. Department of Labor issued two model notices to assist employers in complying with this requirement. The model notices consist of “Part A: General Information,” and “Part B: Information About Health Coverage Offered by Your Employer.” Both parts must be completed (except as noted below) before being issued to the employee.

For employers that currently offer health insurance

Part B of the model form provides information regarding the health coverage provided and related restrictions on coverage. It also provides a box to check that the employer coverage provided meets both the minimum value and the affordability standards of the Affordable Care Act. We recommend that the employer consult with its insurance provider to determine the correct answer to this question. Part B, Questions 13-16 are not required to be completed; they represent optional information the employer can provide at its discretion.

For employers that currently do not offer health insurance

Part B of the model form provides employer contact information and the affirmative statement that no coverage is offered.

 

Employer healthcare reporting and mandate payments postponed until 2015. On July 2, 2013, the Administration announced that it will provide an additional year, until Jan. 1, 2015, before the mandatory employer and insurer reporting requirements under the Affordable Care Act (ACA, commonly referred to as “Obamacare”) begin. Since this will make it impractical to determine which employers do not provide minimum essential health coverage, and therefore would owe shared responsibility payments under Code Sec. 4980H for 2014, transition relief is also being extended for those payments. Any employer shared responsibility payments will not apply until 2015.

The Congressional Research Service (CRS) has issued a report outlining the required functions of health insurance exchanges under the ACA. Under the ACA, qualified individuals and small businesses will be able to purchase private health insurance through exchanges set up by states or by the federal Health & Human Services Agency (HHS). The initial open enrollment period for all exchanges will begin on October 1, 2013, and all exchanges are to be operational and offering coverage on January 1, 2014. Exchanges must carry out a number of functions, including determining eligibility and enrolling individuals in appropriate plans. In general, health plans offered through exchanges will provide comprehensive coverage and meet the private market reforms specified in the ACA. To make exchange coverage more affordable, qualifying individuals will receive premium assistance in the form of tax credits. Some recipients of these premium credits also may qualify to receive subsidies to help cover their cost-sharing expenses. The CRS report provides a detailed explanation of these exchanges, coverage offered through them, and the cost assistance features mentioned above.

Guidance on healthcare premium tax credit. The IRS has issued proposed regulations on the healthcare premium tax credit, which applies for tax years ending after Dec. 31, 2013. The credit is designed to make health insurance affordable to individuals with modest incomes (i.e., between 100% and 400% of the federal poverty level, or FPL) who are not eligible for other qualifying coverage, such as Medicare, or “affordable” employer-sponsored health insurance plans that provide “minimum value.” It is available for individuals who purchase affordable coverage through “Affordable Insurance Exchanges.” In general, an employer-sponsored plan is not affordable if the employee’s required contribution with respect to the plan exceeds 9.5% of his household income for the tax year. The proposed regulations address (i) minimum value, including the treatment of health reimbursement arrangements, health savings accounts, wellness program incentives, arrangements that reduce premiums, and methods for determining minimum value; (ii) the definition of “modified adjusted gross income” as it comes into play in determining household income for purposes of the credit; (iii) coverage for retirees, newborns and newly adopted children; and (iv) premium assistance amounts for partial months of coverage.

Guidance on required employer notice on healthcare coverage options. Beginning Jan. 1, 2014, individuals and employees of small businesses will have access to affordable healthcare coverage through a new competitive private health insurance market called the “Health Insurance Marketplace” (the Marketplace). Certain employers must provide written notice to employees about health insurance coverage options available through the Marketplace. A government agency has provided the following guidance on the notice requirement and has issued model notices:

  • Who must provide notices. Notices must be provided by any employers to whom the Fair Labor Standards Act applies. Generally, this means an employer that employs one or more employees who are engaged in, or produce goods for, interstate commerce. For most firms, this rule doesn’t apply if they have less than $500,000 in annual dollar volume of business.
  • To whom must notices be provided. Employers must provide a notice to each employee, regardless of plan enrollment status (if applicable), or of part-time or full-time status. Employers do not have to provide a separate notice to dependents or other individuals who are, or may become, eligible for coverage under any available plan, but who are not employees.
  • Form and content of notice. The notice must be provided in writing in a manner calculated to be understood by the average employee. The notice must include information regarding the existence of a new Marketplace, as well as contact information and a description of the services provided by the Marketplace. In addition, the notice must: (1) inform the employee that the employee may be eligible for a premium tax credit if the employee purchases a qualified health plan (QHP) through the Marketplace, and (2) include a statement informing the employee that if the employee purchases a QHP, the employee may lose the employer contribution (if any) to any health benefits plan offered by the employer, and that all or a portion of such contribution may be excludable from income for federal income tax purposes.
  • Timing and delivery of notice. Employers must provide the notice to each new employee at the time of hiring beginning Oct. 1, 2013. For 2014, a notice is considered to be provided at the time of hiring if it is provided within 14 days of an employee’s start date. For employees who are current employees before Oct. 1, 2013, employers must provide the notice no later than Oct 1, 2013.

Final regulations on wellness incentives in group health plans. The IRS, acting in concert with other government agencies, has issued final regulations on nondiscriminatory wellness incentives offered in connection with group health plans. Before Obamacare, group health plans and group health issuers were prohibited from discriminating against individual participants and beneficiaries regarding eligibility, benefits and premiums, based on a health factor. However, an exception allowed premium discounts or rebates or modifications to otherwise applicable cost sharing in return for adherence to certain programs of health promotion and disease prevention. The exception allowed benefits, premiums, and contributions to vary depending on the employees’ participation in a wellness program. Obamacare made changes to the rules impacting wellness programs, most notably increasing the maximum financial incentives available to employees who participate in wellness programs. The new regulations provide numerous examples of participatory wellness programs, including a program that reimburses employees for all or part of the cost of membership in a fitness center; a diagnostic testing program that provides a reward for participation and does not base any part of the reward on outcomes; and a program that provides a reward to employees for attending monthly, no-cost health education seminars. They also clarify that participatory wellness programs are permissible as long as they are available to all similarly situated individuals, regardless of health status.

Final regulations fill in statutory gaps on indoor tanning tax. The IRS has issued final regulations on the health reform legislation’s 10% excise tax on indoor tanning services provided on or after July 1, 2010. The regulations address practical considerations that may not have been contemplated when the law was drafted. For example, they address prepayments for tanning services and services provided as part of a gym membership. The IRS had previously issued the regulations as temporary regulations. The final regulations adopted the temporary ones with some clarifications.

For more information, the IRS has issued a new flyer identifying online resources concerning healthcare reform.

 

The Patient Protection and Affordable Care Act, also known as healthcare Reform, was passed in 2010. The law is complex and includes many provisions that will impact individual and business taxpayers. The following is a summary of the changes that will take place in the next two years.

In 2013, many changes will directly affect individuals:

Flexible Spending Contribution Cap – Section 125 flexible spending account contributions are limited to $2,500 per year (indexed for inflation).
Itemized Deduction Threshold – Unreimbursed medical expenses will have to exceed 10% of AGI, up from 7.5%, to be deductible (this is waived for those 65 or older for tax years 2013-2016).
Additional Medicare Tax – The employee portion of Medicare tax on wages over $200,000 ($250,000 MFJ) will increase by 0.9% – from 1.45% to 2.35%.
Additional Tax on Investment Income – For high income earners (over $200,000 or $250,000 MFJ), a new 3.8% Medicare surtax on the lesser of investment income, or the amount of investment income over the income threshold.

Elimination of Business Deduction for Certain Retiree Prescription Drug Costs Excise Tax on Medical Device Sales – 2.3%

In 2014, the following changes will take effect:

Individual Mandate Requirement that all U.S. citizens and legal residents have qualifying health coverage or face a penalty if they do not. By 2016, the penalty will be the greater of $695 per person or 2.5% of household income.
Automatic Enrollment of Employees in Large Employer Plans (those with more than 200 full-time employees)


Individual/Small Business “SHOP” Exchanges

  • The Act creates state-based exchanges (American Health Benefit Exchange and Small Business Health Options Program, or “SHOP”) where individuals and small businesses pool together to spread financial risk and buy healthcare insurance coverage for themselves and their employees.
  • Generally available to employers with up to 100 full-time employees until 2017 – after this, larger businesses may be allowed to participate.
  • Opportunity for small businesses to offer coverage, and possibly save money in the process by pooling together.

Small Business Tax Credit

  • Tax Credit equal to 50% of health insurance costs, assuming the following qualifications are met:
    • 10 or fewer full-time equivalent employees
    • Average annual wages of less than $25,000
    • Employer must pay 50% or more of the premium
    • Must purchase coverage through the state-based Exchange
  • Companies with between 11 and 25 employees with an average wage of less than $50,000 will be eligible for partial credits. Tax credit for small business expires after 2017.

Premium Assistance Tax Credit and Free Choice Vouchers

  • Tax Credit – available to certain low and middle income taxpayers (earning up to 400% of the federal poverty level) to facilitate the purchase of health insurance. Credit is refundable and can be advanced.
  • Free Choice Voucher – employers are required to provide any employee with income under 400% of FPL and whose share of premium exceeds 8% but is less than 9.8% of their income and who choose to enroll through the exchange with a voucher – equivalent to premium employee would have paid had they enrolled in employer plan.

Insurance Carrier Rate Setting Restrictions

  • Insurers no longer able to set rates or exclude coverage based on pre-existing conditions.
  • Can vary premiums only by geographic location, age and tobacco use.

Guarantee Issue Insurance Policies – Carriers may no longer deny coverage based on health factors. Essential Benefits Package – Creation of an essential health benefits package/minimum benefits that must be covered.

Deductible Limits – Health insurance plan deductibles are limited to $2,000 for individuals and $4,000 for families unless contributions are offered that offset deductible amounts (i.e., HRA contribution).

Annual Fee on Insurance Companies – Annual fees totaling $8 billion in the first year and $47.5 billion from 2014–2019 will be imposed on health insurance companies.

Wellness Programs – Allows employers to offer employees rewards or benefits for participating in a wellness program.

No annual limits on coverage in grandfathered individual and group plans. Allows states to apply for a waiver for up to five years of requirements relating to

  • Qualified health plans
  • Exchanges
  • Cost-sharing reductions
  • Tax credits
  • Individual and shared responsibility for employers, provided they create their own programs meeting specified standards

In 2015, the following changes will take effect:

Employer Mandate

  • Employers with more than 50 employees must offer coverage or be subject to a penalty.
  • If an employer does not provide coverage and one employee receives a tax credit through the exchange, the employer will pay a penalty for all full-time employees.
  • Fine for non-compliance is $2,000 per employee annually, but first 30 employees not counted (i.e., if employer has 51 employees and doesn’t provide coverage, the employer pays a fine for 21 employees).

Rev. 07/2013

On March 25, 2010 both the U.S. Senate and House of Representatives passed the second stage of President Obama’s healthcare Reform package. Following is a general description of the Bill’s tax and other costs issues impacting individual and business taxpayers. Since the provisions of the Bill take effect over a period of years, they are organized by when the provisions first become effective.

Year 2010:

Effective on the date of enactment, unmarried children under age 27 can be insured on a parent’s health insurance plan, and such plans must extend coverage if they offer dependent coverage.

The adoption credit and adoption assistance exclusion are each increased by $1,000 for tax years beginning on or after January 1, 2010; the credit is made refundable and is extended through 2011.

Effective July 1, 2010, a 10% federal excise tax is imposed on indoor tanning services, to be paid by the service recipient and collected and remitted by the service provider.

A Small Employer Health Insurance Credit is allowed for tax years beginning after December 31, 2009. This credit, which is extremely complex, is equal to 35% (increases to 50% beginning in 2014) of the employer-paid premiums for qualified health insurance provided to qualified employees (and their families).

  • The employer must pay at least 50% of the health insurance premium cost.
  • A Small Employer is one that has 10 or fewer “full-time equivalent” qualified employees who have an average annual wage of $25,000.
  • The allowable credit is phased out for employers with more than 10 but no more than 25 full-time equivalent qualified employees, or who have an average annual wage of more than $50,000.
  • Full-time equivalent employees are based on 2,080 hours per year and exclude non-qualified employees.
  • Non-qualified employees include self-employed individuals (partners and sole proprietors), 2% shareholders of S Corporations, 5% owners of regular corporations and virtually any relative of such and, therefore no credit is allowed for health insurance premiums paid for them. The number of qualified employees is aggregated to take into account all employers within controlled groups.
  • For regular business taxpayers, the credit is a non-refundable general business credit and can offset Alternative Minimum Tax.
  • For nonprofit organizations, the credit is reduced to an initial 25% (increasing to 35% in 2014) and is taken as a credit against otherwise payable payroll taxes.

Year 2011:

For tax years beginning after December 31, 2010, most over-the-counter medications will no longer be eligible for reimbursement through health reimbursement accounts, flexible savings accounts, health savings accounts or Archer medical savings accounts.

A 20% penalty will be imposed for distributions from health savings accounts and Archer medical savings accounts made after December 31, 2009, which are not used for qualified medical expenses.

Year 2013:

For tax years beginning after December 31, 2012:

The allowable contributions to health flexible spending accounts will be capped at $2,500 per year.

The itemized deduction for medical expenses will be limited to amounts in excess of 10% of adjusted gross income (was 7.5%). For individuals age 65 or over, this change is delayed until 2017.

The employee portion of Medicare hospital insurance tax will increase from 1.45% of wages to 2.35% of wages over $200,000 for single taxpayers and $250,000 for married couples. Self-employed persons will pay 3.8% on earnings over the threshold amounts.

A 3.8% Medicare hospital insurance tax is extended to investment income of single taxpayers with adjusted gross incomes above $200,000 and married joint filers above $250,000. Net investment income includes taxable interest, dividends, royalties, non-qualified annuities, rents, income from passive trade or business investments and net capital gains.

Year 2014:

A penalty will be imposed on U.S. citizens and legal residents without qualifying health insurance coverage. The penalty is phased in over a three-year period and is capped at the greater of $695 per person per year ($2,085 maximum per family) or 2.5% of taxable income.

A premium assistance tax credit for low and middle income individuals and families (earning up to 400% of the federal poverty level) to facilitate the purchase of health insurance.

Year 2015:

A penalty of up to $2,000 per employee will be imposed on employers with at least 50 employees that do not offer health insurance to their employees.

Year 2018:

For tax years beginning after December 31, 2017, a 40% excise tax is imposed on high-cost employer-sponsored health coverage.