Keep it SIMPLE: A Tax-Advantaged Retirement Plan Solution For Small Businesses

If your small business doesn’t offer its employees a retirement plan, you may want to consider a SIMPLE IRA. Offering a retirement plan can provide your business with valuable tax deductions and help you attract and retain employees. For a variety of reasons, a SIMPLE IRA can be a particularly appealing option for small businesses. The deadline for setting one up for this year is October 1, 2018.

The basics

SIMPLE stands for “savings incentive match plan for employees.” As the name implies, these plans are simple to set up and administer. Unlike 401(k) plans, SIMPLE IRAs don’t require annual filings or discrimination testing.

SIMPLE IRAs are available to businesses with 100 or fewer employees. Employers must contribute and employees have the option to contribute. The contributions are pretax, and accounts can grow tax-deferred like a traditional IRA or 401(k) plan, with distributions taxed when taken in retirement.

As the employer, you can choose from two contribution options:

1. Make a “nonelective” contribution equal to 2% of compensation for all eligible employees. You must make the contribution regardless of whether the employee contributes. This applies to compensation up to the annual limit of $275,000 for 2018 (annually adjusted for inflation).
2. Match employee contributions up to 3% of compensation. Here, you contribute only if the employee contributes. This isn’t subject to the annual compensation limit.

Employees are immediately 100% vested in all SIMPLE IRA contributions.

Employee contribution limits

Any employee who has compensation of at least $5,000 in any prior two years, and is reasonably expected to earn $5,000 in the current year, can elect to have a percentage of compensation put into a SIMPLE IRA.

SIMPLE IRAs offer greater income deferral opportunities than ordinary IRAs, but lower limits than 401(k)s. An employee may contribute up to $12,500 to a SIMPLE IRA in 2018. Employees age 50 or older can also make a catch-up contribution of up to $3,000. This compares to $5,500 and $1,000, respectively, for ordinary IRAs, and to $18,500 and $6,000 for 401(k)s. (Some or all of these limits may increase for 2019 under annual cost-of-living adjustments.)

You’ve got options

A SIMPLE IRA might be a good choice for your small business, but it isn’t the only option. The more-complex 401(k) plan we’ve already mentioned is one alternative. Some others are a Simplified Employee Pension (SEP) and a defined-benefit pension plan. These two plans don’t allow employee contributions and have other pluses and minuses. Contact us to learn more about a SIMPLE IRA or to hear about other retirement plan alternatives for your business.

© 2018

The S corporation business structure offers many advantages, including limited liability for owners and no double taxation (at least at the federal level). But not all businesses are eligible • and, with the new 21% flat income tax rate that now applies to C corporations, S corps may not be quite as attractive as they once were.

Tax comparison

The primary reason for electing S status is the combination of the limited liability of a corporation and the ability to pass corporate income, losses, deductions and credits through to shareholders. In other words, S corps generally avoid double taxation of corporate income — once at the corporate level and again when distributed to the shareholder. Instead, S corp tax items pass through to the shareholders’ personal returns and the shareholders pay tax at their individual income tax rates.

But now that the C corp rate is only 21% and the top rate on qualified dividends remains at 20%, while the top individual rate is 37%, double taxation might be less of a concern. On the other hand, S corp owners may be able to take advantage of the new qualified business income (QBI) deduction, which can be equal to as much as 20% of QBI.

You have to run the numbers with your tax advisor, factoring in state taxes, too, to determine which structure will be the most tax efficient for you and your business.

S eligibility requirements

If S corp status makes tax sense for your business, you need to make sure you qualify • and stay qualified. To be eligible to elect to be an S corp or to convert to S status, your business must:

• Be a domestic corporation and have only one class of stock,
• Have no more than 100 shareholders, and
• Have only “allowable” shareholders, including individuals, certain trusts and estates. Shareholders can’t include partnerships, corporations and nonresident alien shareholders.

In addition, certain businesses are ineligible, such as insurance companies.

Reasonable compensation

Another important consideration when electing S status is shareholder compensation. The IRS is on the lookout for S corps that pay shareholder-employees an unreasonably low salary to avoid paying Social Security and Medicare taxes and then make distributions that aren’t subject to payroll taxes.

Compensation paid to a shareholder should be reasonable considering what a nonowner would be paid for a comparable position. If a shareholder’s compensation doesn’t reflect the fair market value of the services he or she provides, the IRS may reclassify a portion of distributions as unpaid wages. The company will then owe payroll taxes, interest and penalties on the reclassified wages.

Pros and cons

S corp status isn’t the best option for every business. To ensure that you’ve considered all the pros and cons, contact us. Assessing the tax differences can be tricky — especially with the tax law changes going into effect this year.

© 2018

If you gamble, be sure you understand the tax consequences. Both wins and losses can affect your income tax bill. And changes under the Tax Cuts and Jobs Act (TCJA) could also have an impact.

Wins and taxable income

You must report 100% of your gambling winnings as taxable income. The value of complimentary goodies (“comps”) provided by gambling establishments must also be included in taxable income as winnings.

Winnings are subject to your regular federal income tax rate. You might pay a lower rate on gambling winnings this year because of rate reductions under the TCJA.

Amounts you win may be reported to you on IRS Form W-2G (“Certain Gambling Winnings”). In some cases, federal income tax may be withheld, too. Anytime a Form W-2G is issued, the IRS gets a copy. So if you’ve received such a form, remember that the IRS will expect to see the winnings on your tax return.

Losses and tax deductions

You can write off gambling losses as a miscellaneous itemized deduction. While miscellaneous deductions subject to the 2% of adjusted gross income floor are not allowed for 2018 through 2025 under the TCJA, the deduction for gambling losses isn’t subject to that floor. So gambling losses are still deductible.

But the TCJA’s near doubling of the standard deduction for 2018 (to $24,000 for married couples filing jointly, $18,000 for heads of households and $12,000 for singles and separate filers) means that, even if you typically itemized deductions in the past, you may no longer benefit from itemizing. Itemizing saves tax only when total itemized deductions exceed the applicable standard deduction.

Also be aware that the deduction for gambling losses is limited to your winnings for the year, and any excess losses cannot be carried forward to future years. Also, out-of-pocket expenses for transportation, meals, lodging and so forth can’t be deducted unless you qualify as a gambling professional.

And, for 2018 through 2025, the TCJA modifies the limit on gambling losses for professional gamblers so that all deductions for expenses incurred in carrying out gambling activities, not just losses, are limited to the extent of gambling winnings.

Tracking your activities

To claim a deduction for gambling losses, you must adequately document them, including:

1. The date and type of gambling activity.
2. The name and address or location of the gambling establishment.
3. The names of other persons (if any) present with you at the gambling establishment. (Obviously, this is not possible when the gambling occurs at a public venue such as a casino, race track, or bingo parlor.
4. The amount won or lost.

You can document income and losses from gambling on table games by recording the number of the table you played and keeping statements showing casino credit issued to you. For lotteries, you can use winning statements and unredeemed tickets as documentation.

Please contact us if you have questions or want more information about the tax treatment of gambling wins and losses.

© 2018

Inefficiency is the downward slope that can take an organization from the top of its game to a place where employees are frustrated, unhappy, and the organizations goals are more challenging to achieve. Turning around an inefficient environment requires change. Change is often difficult, which is why inefficiency is frequently ignored. Employees are usually comfortable with the status quo, but what if employees could work in an environment where tasks were clearly defined, proper training occurred, redundancy was eliminated, excellence was applauded, and meaningful goals were achieved?

Creating such an environment requires thoughtful change. To successfully implement change, acceptance from those who will be affected is imperative. The size of your finance or accounting department will drive the number of employees who need to be involved in the details of evaluating inefficiency.

The following areas address the most common issues we see clients face when it comes to running the finance or accounting department. In fact, many of these areas are problems in other departments too, and the same core thoughts can be applied throughout your company to improve efficiency.

1. Define Your Role

Consider for a moment all of the activity that goes on in the department in a day, week, month and year. It’s overwhelming at times. Employees have likely spent years “doing more with less.” Collectively consider: What should be accomplished within the department during these time periods? What tasks are being completed that should be taken on by another department? What added value could be produced if the department took on other responsibilities? Once the core functions of the department have been determined, the details can be evaluated.

2. Document Processes

If the accounts payable clerk unexpectedly quit, would anyone know how to get vendors paid? Processes are not always documented at small to mid-size businesses, but they should be. Employees should document their processes to perform key functions. A good place to start is accounts payable, cash receipting, and payroll. The documentation should include step-by-step instructions on how to accomplish a task. Information related to the use of technology, what forms of approval are required from others, and an approximate timeline should be included. A separate employee should perform a test run of the documentation to determine if the task can be completed by simply following the written process. Employees should question their current process during this phase to determine if it could be more efficient. Questions to consider:

• Can a step be automated?
• Is a procedure redundant?
• What road blocks are regularly faced?

3. Cross Training

Properly documenting processes also aides in the ability to cross train employees. When an employee is sick, on vacation, or leaves without notice, organizations with cross-trained employees experience lower levels of disruption because another employee can step in to temporarily handle the tasks. We recommend to identify the functions that would benefit most from a cross-trained employee, and then determine which employees to cross train. Cross-trained employees should periodically switch roles to keep the process fresh in their mind even if the need doesn’t exist.

4. Training

While considering the three areas above, organizations typically identify areas where either the department as a whole is weak, or an employee lacks training. An appropriate training plan should be developed to ensure employees are properly trained in the areas in which they are working. Training can take on many forms from external conferences, in-house seminars, one-on-one time spent with an external trainer or time spent training one another. Resources spent on proper training benefit the organization through greater employee satisfaction, fewer mistakes, and less time spent on tasks.

5. Technology

Accounting and general ledger software have more capabilities than ever before. Taking advantage of existing technology is crucial to eliminating inefficiency. Here are some questions to ask:

• Has the software been properly set up to eliminate manual entry of duplicate information?
• Is the chart of accounts in alignment with the recommended chart of accounts?
• Is the chart of accounts unnecessarily complex?
• Have the vendor and payroll data files been reviewed, and old vendors or old employees properly removed?
• Does the software have the ability to do bank reconciliations and is the department utilizing this function?

Some software vendors provide user training. Consider if such training would benefit employees.

6. Communicate Expectations

Communicating concise expectations to employees up front reduces the amount of guesswork required to perform their functions. Deadlines should be clear. Work quality issues should be addressed throughout the year. Praise should be given when expectations are met or exceeded. Follow up should be done when expectations are not met, and a defined plan set forth with how expectations will be met in the future.

Conclusion

Inefficiency does not have to define an organization. Great strides can be made when the six areas defined above are addressed. Also, remember to empower employees within the organization to take ownership of eliminating inefficiency. 

While the requirements governing related party transactions are nothing new, lately there has been an increased focus on the proper documentation, disclosure, and audit procedures required for these types of items.

Governmental Accounting Standards Board (GASB) Statement No. 62, paragraphs 54 through 57, provide guidance on the disclosure requirements for transactions that occur between related parties. As defined by GASB 62, paragraph 57, a related party is one that either:

• Can significantly influence the management or operating policies of the transacting parties, or
• Has an ownership interest in one of the transacting parties and can significantly influence the other to the extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests

A related party can be:

• A school district’s related organizations, joint ventures and jointly governed organizations
• Elected and appointed officials of the school district
• The school district’s management
• Members of the immediate families of elected or appointed officials of the school district and its management
• Other parties which the school district may deal with if one party can significantly influence the management or operating policies of the other to the extent that one of the transacting parties might be prevented from fully pursuing its own separate interests

Common examples of related party transactions include:

• Sales, purchases, transfers, or leases of real estate, buildings, and equipment
• Services received (i.e., accounting, management, engineering, construction, and legal services)
• Borrowing and lending agreements

Interactions between related parties are considered to be related party transactions even though they may not be given accounting recognition. For example, a school district may receive services from a related party without charge and not record receipt of the services.

These reporting requirements are not meant to discourage school districts from participating in related party transactions, but to promote transparency for the users of the financial statements. The school district’s footnotes should include enough details to adequately describe the situation. This includes the nature of the related party relationship, information regarding the transaction that occurred (including terms and conditions), the amount of the transaction, any outstanding balances and/or commitments, and provisions for doubtful accounts related to the outstanding balances (if applicable).

As a result of this growing focus, auditors are required to gain an increased understanding of these types of relationships. This may involve additional inquiry of management and/or board members to ensure that they are aware of related parties that may exist. Board member listings provided to the auditors should include the companies that the board members work for to also aid in this analysis. If related party transactions are identified, additional testing may need to be performed.

For more information about related party transactions and how to stay in compliance, contact Yeo & Yeo’s Education Services Group.

When you hear “The A-Team,” you may immediately think of the hit television show that aired in the 1980s or the 2010 movie with the same name but, as a business owner, have you considered who your A-Team is?

Successful business owners know their products or services. They know how to manufacture, grow or develop their products in efficient and profitable methods. Those owners also know that they can’t achieve their triumphs alone; it takes a dedicated workforce and a team of outside advisors – their A-Team.

Who should be on your A-Team?

Your A-Team should include experienced and knowledgeable accountants, attorneys, financial advisors, insurance agents and bankers. An A-Team is a squad that works together to help your business go further. It is important at any phase of your organization’s growth to ensure that your outside advisors are working together to meet your entity’s needs without additional risk or unwanted results. The one thing that any advisor least likes to do is surprise a client with an unintended consequence.

What should an A-Team do for you?

Your A-Team should work together to reduce risks while maximizing financial returns. They should make certain that your company is well-rounded with operating agreements, buy-sell agreements, liability and life insurance, retirement plans, operating lines of credit and loans in place that meet your needs. Providing valuable financial guidance while minimizing tax obligations are other needs that each company may have, for which a team approach works best. When the team works together for you and your company, they can help reduce the time required to address these types of critical issues, freeing up your time to concentrate on what will drive your company toward future success.

Within Yeo & Yeo, we have seen instances of advisors who sold our clients investments that caused additional, unexpected taxes. Or, the sale of a business that was structured well for legal purposes but, had it been allocated a little differently, could have saved the client tax dollars. Both of these examples are surprises no one likes to experience. Successful business owners work with talented advisors who understand many of the causes and effects of a company’s decisions.

Do you work with your advisors individually or do you involve each of them in a decision? Reflect on the following questions as you work with your advisors or consider hiring new ones:

• Am I working with people I trust?
• Are they experienced and knowledgeable?
• Do they give me ideas to make my company better?
• Do they help solve issues my company is facing?
• Do they offer or encourage the idea of talking to each other?
• Do they consider multiple scenarios and work as a team to provide the results I need?
• Are they responsive?
• Are they up to date on the latest laws, regulations and products?

A collaborative A-Team can help deliver exact results for your business to set you apart from the competition. Rely on your Yeo & Yeo consultant and other professionals to help you roar at your competition like Mr. T., “I pity the fool who doesn’t rely on their A-Team!”

UPDATE:  The IRS has pushed the Form W-4 changes to 2020.

The IRS stated, ”Following feedback from the payroll and tax communities, the Treasury Department and the IRS will incorporate important changes into a new version of the Form W-4, Employee’s Withholding Allowance Certificate, for 2020. The 2019 version of the Form W-4 will be similar to the current 2018 version. A new draft version of the W-4 for 2019 will be available in the coming weeks.”

The proposed 2019 Form W-4 reflects major changes including the elimination of the number of allowances, and the new marital status box – Head of Household.

At this time, all current employees’ W-4 forms are still valid. However, all new employees hired after December 31, 2018, and all employees filing exempt in 2018, will need to use the new 2019 Form W-4 form beginning January 1, 2019.

The IRS is strongly encouraging, but not mandating, all employees to file a new Form W-4 for 2019.

Employees may use the IRS Withholding Calculator to help them complete the new 2019 Form W-4. https://www.irs.gov/individuals/irs-withholding-calculator

For a copy of the proposed instructions, go to https://www.irs.gov/pub/irs-dft/iw4–dft.pdf

For a copy of the proposed form, go to https://www.irs.gov/pub/irs-dft/fw4–dft.pdf

The estimated timeline for the release of the final version of the 2019 Form W-4 is November 2018.

How would your employees, board or even you go about reporting suspected misconduct, fraud or violations of policies and procedures? If you don’t know, then you should refer to your organization’s whistleblower policy, and if you find that your organization does not have one, now is the time to consider adopting one.

Adopting whistleblower policies are a best practice in the nonprofit community. In fact, this is another policy in our quick tip series significant enough that the IRS requires organizations to report whether or not they have implemented one in their Form 990 tax return. Adoption of these policies demonstrates to the general public and potential donors your organization’s adherence to best governance practices and responsible stewardship.

As a rule of thumb, your whistleblower policy should reflect the structure of your organization and should not be overly complex. It should address how individuals go about reporting suspected wrongdoings, including who to contact and how (this could include multiple points of contact based on the nature of the concern). It is important that the policy also describes the maximum timeframe for acknowledging reported misconduct and affirm that those who come forward in good faith will not be subject to reprisal or retaliation, but those who do not act in good faith, or knowingly make false accusations, will be subject to disciplinary actions.

Adopting a policy should not be the final step in this process. Everyone in the organization should be made aware of the policy, and at least annually the board should review and update the policy as necessary.

The biggest tax bill in 30+ years has redefined the tax landscape. We are proud to offer our clients and friends an overview of some of the key changes affecting individual and business taxpayers.

Individuals: Have you reviewed how your situation will differ from 2017 to 2018 and beyond? Learn about the new tax brackets, exemptions and deductions, the Alternative Minimum Tax (ATM), the “Kiddie” tax and the effect on your estate plan.

Businesses: Be aware of the new deduction for pass-through entities, business interest deductions, bonus depreciation, the Section 179 deduction, and other business deductions and changes. Our industry-specialized CPAs and business consultants can help you review your company’s strategies to maximize opportunities through the new tax bill.

The time to plan is now. 

Read Now: Biggest Tax Bill in 30+ Years Redefines Tax Landscape (PDF)   

Do you have a question for a CPA? Contact Us  to schedule a call or meeting to review your unique situation.

The law prohibits employers from hiring anyone who is not legally authorized to work in the country. It is up to the employer to verify that their workers are eligible to work. This happens during the hiring process when the new employee completes Form I-9. Access an updated Form I-9: https://www.uscis.gov/sites/default/files/files/form/i-9.pdf.

As a part of the government’s comprehensive effort to combat unauthorized immigration, the Immigration and Customs Enforcement (ICE) Homeland Security Investigations’ audits of Form I-9 have increased by more than 65 percent and are expected to continue to rise. Any employer can be investigated, but the industries at higher risk are construction, manufacturing, hotels and restaurants.

What to expect if audited

The process of an I-9 audit begins with the delivery of a “Notice of Inspection” (NOI) to the employer. After delivery, the employer has as little as three days to produce Form I-9s for all their employees. Employers should keep forms together in a dedicated drawer or binder, and should not save Form I-9s for longer than required. (According to federal law, the forms need to be kept for three years after the date you hire an employee or one year after the employee’s termination, whichever is later.) Additional paperwork may also be requested.

Also keep in mind:

• Respond quickly to an NOI, even if it is just to ask ICE for a time extension.
• Notify all employees and managers who handle I-9s.
• Choose one person to correspond with ICE to avoid inconsistency in the information given.
• Secure all records – ICE may view missing forms as an attempt to destroy evidence.

Once all documents have been submitted, ICE will review them and note discrepancies. If simple technical errors are found, the employer will have ten days to make corrections. Bigger discrepancies are more difficult to fix. These are things like relying on unacceptable documents for employment verification.

Penalties

Unless you are a very small company, fines can add up quickly. Generally fines range from $110 to $1,100 for every substantive violation. The range is the same for every technical violation that is not corrected within the ten-day period. Additional fines can be assessed if ICE can prove the employer knowingly hired or continued to employ unauthorized workers. ICE considers:

• Whether the employer knowingly hired unauthorized workers or committed a paperwork violation
• Prior offenses
• The percentage of total reviewed I-9s that have violations, and
• Other factors such as business size, good faith, seriousness, employment of unauthorized aliens, and history

Most common errors

• Employee leaves out required information such as maiden name, address, date of birth. 
• Form is not filled out according to the time requirements. 
• Employee does not sign one of the sections. 
• Employee fails to check the box indicating their citizenship status or they check multiple boxes. 
• Employer does not enter an acceptable verification document.
• Employer fails to enter the date of hire. 

How to correct an I-9 

• Always use a different color ink.
• Initial and date next to all changes.
• If information is correct but in the wrong place, draw an arrow to the right place, initial and date
• Attach a memo to explain the reason for the correction.
• If you don’t know how to fix it, have the employee complete a new Form I-9 and attach a memo explaining the reason. Retain the old form.
• If an I-9 is missing for an employee, have the employee complete a new Form I-9. When signing, use the current date – do not backdate.

How to prepare your company for an I-9 audit – steps to take now

Conduct an internal audit.

• Separate I-9s from employee personnel files.
• Verify all I-9s are accounted for by cross-referencing a list of current employees and recent terminations.
  • Gather a list of current employees hired after November 1986.
  • Add to the list any employees who terminated in the last three years.
• Ensure employees who check the box in Section 1 are clearly identified.
• If you discover a mistake, correct the existing form or, if there are multiple errors, you can prepare a new Form I-9.
  • If you choose to correct the existing Form I-9, cross out the incorrect portions, enter the correction information, and initial and date the corrections.
  • If you create a new Form I-9, retain the old form. You should also attach a short memo to both the new and old Forms I-9 stating the reason for your action.
• If you discover you are missing the Form I-9 for an employee:
  • Immediately provide the employee with a Form I-9.
  • Allow the employee three business days to provide acceptable documents.
  • Do not backdate the Form I-9.

Consider going one step further and have a labor attorney who has experience in I-9 laws and procedures review all of your I-9s.

The Social Security Administration (SSA) has begun mailing notifications to businesses and third parties who submitted 2017 W-2 forms that contained name and Social Security number (SSN) combinations that did not match the SSA records. The purpose of these notifications is to prepare employers for the 2018 W-2 filing deadline. These notifications will list various free online services available to employers through the SSA’s Business Services Online that can help ensure accuracy on the 2018 W-2 forms.

Beginning in spring 2019, the SSA will notify each employer who has at least one 2018 Form W-2 mismatch that corrections are needed. For a sample employer letter, see https://www.ssa.gov/employer/notices/EDCOR.pdf. This letter will only identify the number of mismatches, not who the employee is. It will be the responsibility of the employer to find which Form W-2 has the incorrect information and correct it by filing a Form W-2C. Penalties for not providing correct W-2 forms begin at $50 per return with a maximum of $530 per return unless there is intentional disregard, in which case there is no limitation on the amount of the penalty.

For further information, see https://www.ssa.gov/employer/notices.html.

The Michigan State Housing Development Authority (MSHDA) and the U.S. Department of Agriculture’s Office of Rural Development (RD) recently released the allowable multifamily property management fees for 2019.

MSHDA

The maximum fees allowed by MSHDA for the 2019 calendar year are as follows:

• Management fee per unit – $527
• Premium management fee per unit – $81

This is slightly more than a two percent increase from the 2018 maximum fees of $515 for the management fee per unit and $79 for the premium management fee per unit.

See MSHDA’s 2019 Annual Budget Guide Policy

Rural Development

RD management fees vary from state to state based on the increase of HUD’s Operating Cost Adjustment Factor.

The fees in effect for 2019 can be found in the attachments to HB 3560-2, Chapter 3.

Highlights for Michigan include an approximate four percent increase from the 2018 fee of $50 to $52 per occupied unit per month beginning in 2019.

HUD

Multifamily projects subject to the U.S. Department of Housing and Urban Development (HUD) should review the guidelines in The Management Agent Handbook for requirements in determining allowable fee amounts to be paid with project funds.

HUD management fees are typically calculated using a fee per unit, per month calculation that is converted to a percent of the total rental income of a property. Management fee agreements may be open-ended or define a set period, such as three years.

For more information, please contact your Yeo & Yeo advisor. 

Converting a traditional IRA to a Roth IRA can provide tax-free growth and tax-free withdrawals in retirement. But what if you convert your traditional IRA — subject to income taxes on all earnings and deductible contributions — and then discover you would have been better off if you hadn’t converted it?

Before the Tax Cuts and Jobs Act (TCJA), you could undo a Roth IRA conversion using a “recharacterization.” Effective with 2018 conversions, the TCJA prohibits recharacterizations — permanently. But if you executed a conversion in 2017, you may still be able to undo it.

Reasons to recharacterize

Generally, if you converted to a Roth IRA in 2017, you have until October 15, 2018, to undo it and avoid the tax hit.

Here are some reasons you might want to recharacterize a 2017 Roth IRA conversion:

• The conversion combined with your other income pushed you into a higher tax bracket in 2017.
• Your marginal income tax rate will be lower in 2018 than it was in 2017.
• The value of your account has declined since the conversion, so you owe taxes partially on money you no longer have.

If you recharacterize your 2017 conversion but would still like to convert your traditional IRA to a Roth IRA, you must wait until the 31st day after the recharacterization. If you undo a conversion because your IRA’s value declined, there’s a risk that your investments will bounce back during the waiting period, causing you to reconvert at a higher tax cost.

Recharacterization in action

Sally had a traditional IRA with a balance of $100,000 when she converted it to a Roth IRA in 2017. Her 2017 tax rate was 33%, so she owed $33,000 in federal income taxes on the conversion.

However, by August 1, 2018, the value of her account had dropped to $80,000. So Sally recharacterizes the account as a traditional IRA and amends her 2017 tax return to exclude the $100,000 in income.

On September 1, she reconverts the traditional IRA, whose value remains at $80,000, to a Roth IRA. She will report that amount when she files her 2018 tax return. The 33% rate has dropped to 32% under the TCJA. Assuming Sally is still in this bracket, this time she’ll owe $25,600 ($80,000 × 32%) — deferred for a year and resulting in a tax savings of $7,400.

(Be aware that the thresholds for the various brackets have changed for 2018, in some cases increasing but in others decreasing. This, combined with other TCJA provisions and changes in your income, could cause you to be in a higher or lower bracket in 2018.)

Know your options

If you converted a traditional IRA to a Roth IRA in 2017, it’s worthwhile to see if you could save tax by undoing the conversion. If you’re considering a Roth conversion in 2018, keep in mind that you won’t have the option to recharacterize. We can help you assess whether recharacterizing a 2017 conversion or executing a 2018 conversion makes sense for you.

© 2018

One of the biggest concerns for family business owners is succession planning — transferring ownership and control of the company to the next generation. Often, the best time tax-wise to start transferring ownership is long before the owner is ready to give up control of the business.

A family limited partnership (FLP) can help owners enjoy the tax benefits of gradually transferring ownership yet allow them to retain control of the business.

How it works

To establish an FLP, you transfer your ownership interests to a partnership in exchange for both general and limited partnership interests. You then transfer limited partnership interests to your children.

You retain the general partnership interest, which may be as little as 1% of the assets. But as general partner, you can still run day-to-day operations and make business decisions.

Tax benefits

As you transfer the FLP interests, their value is removed from your taxable estate. What’s more, the future business income and asset appreciation associated with those interests move to the next generation.

Because your children hold limited partnership interests, they have no control over the FLP, and thus no control over the business. They also can’t sell their interests without your consent or force the FLP’s liquidation.

The lack of control and lack of an outside market for the FLP interests generally mean the interests can be valued at a discount — so greater portions of the business can be transferred before triggering gift tax. For example, if the discount is 25%, in 2018 you could gift an FLP interest equal to as much as $20,000 tax-free because the discounted value wouldn’t exceed the $15,000 annual gift tax exclusion.

To transfer interests in excess of the annual exclusion, you can apply your lifetime gift tax exemption. And 2018 may be a particularly good year to do so, because the Tax Cuts and Jobs Act raised it to a record-high $11.18 million. The exemption is scheduled to be indexed for inflation through 2025 and then drop back down to an inflation-adjusted $5 million in 2026. While Congress could extend the higher exemption, using as much of it as possible now may be tax-smart.

There also may be income tax benefits. The FLP’s income will flow through to the partners for income tax purposes. Your children may be in a lower tax bracket, potentially reducing the amount of income tax paid overall by the family.

FLP risks

Perhaps the biggest downside is that the IRS scrutinizes FLPs. If it determines that discounts were excessive or that your FLP had no valid business purpose beyond minimizing taxes, it could assess additional taxes, interest and penalties.

The IRS pays close attention to how FLPs are administered. Lack of attention to partnership formalities, for example, can indicate that an FLP was set up solely as a tax-reduction strategy.

Right for you?

An FLP can be an effective succession and estate planning tool, but it isn’t risk free. Please contact us for help determining whether an FLP is right for you.

© 2018

This webinar has concluded.

Do you have customers outside of your home state? If so, this ruling may impact you.

Under the Tax Cuts and Jobs Act, employees can no longer claim the home office deduction. If, however, you run a business from your home or are otherwise self-employed and use part of your home for business purposes, the home office deduction may still be available to you.

Home-related expenses

Homeowners know that they can claim itemized deductions for property tax and mortgage interest on their principal residences, subject to certain limits. Most other home-related expenses, such as utilities, insurance and repairs, aren’t deductible.

But if you use part of your home for business purposes, you may be entitled to deduct a portion of these expenses, as well as depreciation. Or you might be able to claim the simplified home office deduction of $5 per square foot, up to 300 square feet ($1,500).

Regular and exclusive use

You might qualify for the home office deduction if part of your home is used as your principal place of business “regularly and exclusively,” defined as follows:

1. Regular use. You use a specific area of your home for business on a regular basis. Incidental or occasional business use is not regular use.

2. Exclusive use. You use the specific area of your home only for business. It’s not necessary for the space to be physically partitioned off. But, you don’t meet the requirements if the area is used both for business and personal purposes, such as a home office that also serves as a guest bedroom.

Regular and exclusive business use of the space aren’t, however, the only criteria.

Principal place of business

Your home office will qualify as your principal place of business if you 1) use the space exclusively and regularly for administrative or management activities of your business, and 2) don’t have another fixed location where you conduct substantial administrative or management activities.

Examples of activities that are administrative or managerial in nature include:

• Billing customers, clients or patients,
• Keeping books and records,
• Ordering supplies,
• Setting up appointments, and
• Forwarding orders or writing reports.

Meetings or storage

If your home isn’t your principal place of business, you may still be able to deduct home office expenses if you physically meet with patients, clients or customers on your premises. The use of your home must be substantial and integral to the business conducted.

Alternatively, you may be able to claim the home office deduction if you have a storage area in your home — or in a separate free-standing structure (such as a studio, workshop, garage or barn) — that’s used exclusively and regularly for your business.

Valuable tax-savings

The home office deduction can provide a valuable tax-saving opportunity for business owners and other self-employed taxpayers who work from home. If you’re not sure whether you qualify or if you have other questions, please contact us.

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Once upon a time, some parents and grandparents would attempt to save tax by putting investments in the names of their young children or grandchildren in lower income tax brackets. To discourage such strategies, Congress created the “kiddie” tax back in 1986. Since then, this tax has gradually become more far-reaching. Now, under the Tax Cuts and Jobs Act (TCJA), the kiddie tax has become more dangerous than ever.

A short history

Years ago, the kiddie tax applied only to children under age 14 — which still provided families with ample opportunity to enjoy significant tax savings from income shifting. In 2006, the tax was expanded to children under age 18. And since 2008, the kiddie tax has generally applied to children under age 19 and to full-time students under age 24 (unless the students provide more than half of their own support from earned income).

What about the kiddie tax rate? Before the TCJA, for children subject to the kiddie tax, any unearned income beyond a certain amount ($2,100 for 2017) was taxed at their parents’ marginal rate (assuming it was higher), rather than their own likely low rate.

A fiercer kiddie tax

The TCJA doesn’t further expand who’s subject to the kiddie tax. But it will effectively increase the kiddie tax rate in many cases.

For 2018–2025, a child’s unearned income beyond the threshold ($2,100 again for 2018) will be taxed according to the tax brackets used for trusts and estates. For ordinary income (such as interest and short-term capital gains), trusts and estates are taxed at the highest marginal rate of 37% once 2018 taxable income exceeds $12,500. In contrast, for a married couple filing jointly, the highest rate doesn’t kick in until their 2018 taxable income tops $600,000.

Similarly, the 15% long-term capital gains rate takes effect at $77,201 for joint filers but at only $2,601 for trusts and estates. And the 20% rate kicks in at $479,001 and $12,701, respectively.

In other words, in many cases, children’s unearned income will be taxed at higher rates than their parents’ income. As a result, income shifting to children subject to the kiddie tax will not only not save tax, but it could actually increase a family’s overall tax liability.

The moral of the story

To avoid inadvertently increasing your family’s taxes, be sure to consider the big, bad kiddie tax before transferring income-producing or highly appreciated assets to a child or grandchild who’s a minor or college student. If you’d like to shift income and you have adult children or grandchildren who’re no longer subject to the kiddie tax but in a lower tax bracket, consider transferring such assets to them.

Please contact us for more information about the kiddie tax — or other TCJA changes that may affect your family.

© 2018

Join Yeo & Yeo’s Tammy Moncrief, CPA, and David Jewell, CPA as they provide a comprehensive overview of the tax law changes impacting businesses, and discuss critical planning considerations and opportunities.

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Meal, vehicle and travel expenses are common deductions for businesses. But if you don’t properly document these expenses, you could find your deductions denied by the IRS.

A critical requirement

Subject to various rules and limits, business meal (generally 50%), vehicle and travel expenses may be deductible, whether you pay for the expenses directly or reimburse employees for them. Deductibility depends on a variety of factors, but generally the expenses must be “ordinary and necessary” and directly related to the business.

Proper documentation, however, is one of the most critical requirements. And all too often, when the IRS scrutinizes these deductions, taxpayers don’t have the necessary documentation.

What you need to do

Following some simple steps can help ensure you have documentation that will pass muster with the IRS:

Keep receipts or similar documentation. You generally must have receipts, canceled checks or bills that show amounts and dates of business expenses. If you’re deducting vehicle expenses using the standard mileage rate (54.5 cents for 2018), log business miles driven.

Track business purposes. Be sure to record the business purpose of each expense. This is especially important if on the surface an expense could appear to be a personal one. If the business purpose of an expense is clear from the surrounding circumstances, the IRS might not require a written explanation — but it’s probably better to err on the side of caution and document the business purpose anyway.

Require employees to comply. If you reimburse employees for expenses, make sure they provide you with proper documentation. Also be aware that the reimbursements will be treated as taxable compensation to the employee (and subject to income tax and FICA withholding) unless you make them via an “accountable plan.”

Don’t re-create expense logs at year end or when you receive an IRS deficiency notice. Take a moment to record the details in a log or diary at the time of the event or soon after. The IRS considers timely kept records more reliable, plus it’s easier to track expenses as you go than try to re-create a log later. For expense reimbursements, require employees to submit monthly expense reports (which is also generally a requirement for an accountable plan).

Addressing uncertainty

You’ve probably heard that, under the Tax Cuts and Jobs Act, entertainment expenses are no longer deductible. There’s some debate as to whether this includes business meals with actual or prospective clients. Until there’s more certainty on that issue, it’s a good idea to document these expenses. That way you’ll have what you need to deduct them if Congress or the IRS provides clarification that these expenses are indeed still deductible.

For more information about what meal, vehicle and travel expenses are and aren’t deductible — and how to properly document deductible expenses — please contact us.

© 2018