Year-End Planning for Investors

Regardless of future legislation, some tried and true strategies will help investors trim their tax bill in 2017. Year-end loss harvesting can be worthwhile.

Example 1: Nick Rogers tallies his investment trades so far in 2017 and discovers he has realized $30,000 worth of net capital gains: his trading profits versus his trading losses. If those gains are all long-term (the assets were held more than one year), Nick would owe $4,500 to the IRS at his 15% rate.

Therefore, Nick goes over his portfolio to see if he has securities that he can sell at a loss. Although recent stock prices were generally strong, Nick has some energy and telecom shares that have lost value. If Nick takes $15,000 worth of losses in 2017, he will drop his net capital gain from $30,000 to $15,000, cutting his 2017 tax bill from his trading in half.

Example 2: Suppose that Nick can take $35,000 worth of losses by year-end. That would convert his $30,000 net capital gain for 2017 to a $5,000 net capital loss, avoiding any tax owed on Nick’s trades this year.

In addition, taxpayers generally can deduct up to $3,000 worth of net capital losses on their annual tax returns. Assuming Nick is in a 33% tax bracket, a $3,000 net capital loss would save him $990—much better than a tax bill of $4,500.

Don’t forget funds

When you tally your year-end net gains or losses to date, don’t neglect to check your mutual funds. Many funds make distributions to shareholders in December; estimates of upcoming distributions may be posted on the fund’s website before the payout.

Whether you receive the money or automatically reinvest in more shares of the fund, distributions from funds held in a taxable account will be taxable. These payouts could be interest, dividends, or capital gains, and taxed accordingly. A distribution of short-term capital gains, for instance, may be taxed more heavily than a distribution of long-term capital gains.

Be careful of how you purchase funds near year-end. If you buy before the payout (technically, the “ex-dividend” date), you will receive the scheduled distribution and owe tax on that amount. (Reinvested distributions add to your basis, which would produce a better tax result when you sell the shares.) Conversely, if you wait until after the distribution, you’ll avoid the resulting tax and possibly buy at a lower price, as fund shares typically drop after the payout.

Selling shares before the distribution will enable you to avoid the tax on a distribution you haven’t received. You may sell at a higher price before the payout, which would increase your taxable gain or reduce your capital loss from the sale. The bottom line is that the timing of mutual fund trades can be a topic for discussion in year-end tax planning sessions.

Gaining from gains

In example 2, Nick has a net capital loss of $5,000 in 2017, of which he can deduct $3,000. What happens to the other $2,000? If he wishes, Nick can carry over that $2,000 loss to future years to offset future capital gains. There are no limits to the amount of losses Nick can carry over or the length of time he can do so.

Example 3: Yet another option is for Nick to sell enough assets to produce an additional $2,000 gain by December 31. This gain will be tax-free, because Nick can use his excess $2,000 net capital loss as an offset. If Nick wants, he can immediately buy back the shares he sold.

Why would Nick do this? To increase his basis in the shares he sold and bought. As mentioned, a higher basis will yield a better tax result on a future sale. This maneuver might work best with a mutual fund that does not charge for such transactions.

Going forward

After selling assets at a gain, an immediate repurchase can produce a smaller taxable gain or a larger capital loss in the future. A similar repurchase after a sale for a loss, though, can trigger the wash sale rules; then, the capital loss won’t count and no current tax benefit will be allowed. The amount of the disallowed loss will be added to your basis in the repurchased assets.

To avoid a wash sale after taking a capital loss, several tactics can be used. You can wait for at least 31 days and then buy back the security you sold, if you still want to hold it. If you don’t want to be out of the market that long, you can immediately buy another security that’s not substantially identical to the one you sold. Yet another possibility is to “double up.”

Example 4: As part of his plan to take losses near year-end, Nick intends to sell $10,000 worth of an energy stock that has lost value. He believes this stock is now well valued, so he wants to maintain his position in this holding.

To do so, Nick first invests another $10,000 in this stock, then waits 31 days and takes a $10,000 loss by selling shares that he previously held. Nick will wind up in the same position but will be able to take the $10,000 loss on the original shares. Because of the timing, a doubling up strategy must be initiated before the end of November to provide a 2017 tax benefit.

How to Reduce Your Liability & Turn Your Defined Contribution Plan Into An Asset


Often a business owner will start a defined benefit plan to both retain and attract quality employees to their company. Over time, and without some expert guidance, these plans can turn into more of a burden, especially if a company experiences significant growth or is in a high turnover industry.

When speaking with plan sponsors, the three questions that come up most often are:
• How can I reduce my plan costs?
• How can I reduce my fiduciary liability?
• What can I do about terminated employees that are still in the plan?

Plan costs come in three forms, but in some cases, they will overlap: 1) plan administrative costs based on total participant count; 2) investment costs bundled into the net investment return of investments available to participants; and 3) individual services fees based on the optional features included in your plan. An often noted assumption by plan sponsors is that there are minimal administrative costs to a plan, only to dig deeper and find that there is revenue sharing being paid to a third party administrator by way of the investment fees rather than as a fixed cost per participant. The Plan sponsors are charged with the responsibility as fiduciaries of the plan to ensure that the services provided to the plan are necessary and that the cost of those services is reasonable. Thus, transparency is key in understanding all costs incurred within your benefit plan. A survey of defined contribution (“DC”) plans conducted by Brightscope showed that smaller DC plans (those under $10 million) tend to pay between 1.0% to 1.5% in annual expenses, but as high as 4%. Plans over $10 million typically pay no more than 1%, and costs steadily decrease to near .5% as plan sizes near $100 million.

In review of this data, what stands out is the fact that Bundled plans (i.e.-all investment recordkeeping, administration and education services provided by one vendor) tend to cost much more on a percentage basis than Un-Bundled plans (i.e.- plan sponsor is the “bundler” providing in-house support and hand picking independent service providers for all remaining fiduciary needs). A third option is an Alliance model where the plan sponsor chooses a vendor to provide recordkeeping, administration and education, and that vendor has an alliance with partners to provide an array of investment options and other specialty services as the plan requires. The key driver in being cost conscious is focusing on the “reasonable” threshold for plan costs through the reduction or elimination of sales compensation and revenue sharing along with the ability to select less expensive and better performing investment options in an Un-Bundled or Alliance environment.
Fiduciary liability is a term that has been around for years, but has become a front and center focus due to the large number of high profile defined contribution plan lawsuits, and the Department of Labor’s “Fiduciary Rule”. While it is not possible to completely eliminate the fiduciary liability of a plan sponsor, substantially reducing it is part of a methodical process that should be done in conjunction with the hiring of a qualified professional such as legal counsel, CPA, and/or independent investment advisor, the latter of which is addressed under Section 3(21) and Section 3(38) of the Employee Retirement Income Security Act (“ERISA”).

Terminated employees who remain in a plan can create an additional administrative burden. Not only are you required to keep these participants up to date on changes/annual informational releases regarding the plan, including fee disclosure statements, but plans with more than 100 to 120 participants can be subject to audit requirements depending on the type of 5500 tax filing done for the plan and consideration of the 80-120 rule, which adds another layer of cost. It is possible to force terminated employees out of your plan, and thus reduce the overall number of participants, but there are specific steps that must be taken to make certain they have been properly notified and treated fairly and in accordance with your plan’s agreement. Proactively working with your Section 3(21) or Section 3(38) professional to reduce these numbers and keep them to a minimum going forward is key to reducing your liabilities and focusing on maintaining your plan as a beneficial asset to the plan sponsor and its participants.

By Alan J. Conner, CPFA & Laura E. Madajewski, CPA MBA

Disaster Relief Bill Signed into Law

President Trump on September 29 signed the Disaster Tax Relief and Airport and Airway Extension Act of 2017 (HR 3823). Congress approved the bill the day before.

In a Statement of Administration Policy, the White House had explained that HR 3823 would “provide targeted tax relief for taxpayers impacted by Hurricanes Harvey, Irma and Maria. In addition to supporting these tax relief measures, the administration will submit further requests to the Congress for supplemental funding in the near future, and looks forward to working with Congress to enact these recovery measures into law.”

The measure will, among other things:

  • eliminate the current law requirements in the disaster areas that uncompensated personal casualty losses exceed 10 percent of adjusted gross income to qualify for deduction;
  • eliminate the current law requirement that taxpayers itemize deductions to access this tax relief;
  • provide an exception to the 10-percent early retirement plan withdrawal penalty for qualified hurricane relief distributions
  • allow for the re-contribution of retirement plan withdrawals for home purchases cancelled due to eligible disasters;
  • provide flexibility for loans from retirement plans for qualified hurricane relief;
  • temporarily suspend limitations on charitable contribution deductions associated with qualified hurricane relief made before December 31, 2017;
  • provide a tax credit for 40 percent of wages (up to $6,000 per employee) paid by a disaster-affected employer to each employee from a core disaster area; and
  • allow taxpayers to refer to earned income from the immediately preceding year for purposes of determining the Earned Income Tax Credit and Child Tax Credit for the 2017 tax year.

October/November Dates to Remember

October 16

Individuals. If you have an automatic six-month extension to file your income tax return for 2016, file Form 1040, 1040A, or 1040EZ and pay any tax, interest, or penalties due.

Corporations. File a 2016 calendar-year income tax return (Form 1120) and pay any tax, interest, and penalties due. This due date applies only if you timely requested an automatic six-month extension.

Employers. For Social Security, Medicare, withheld income tax, and nonpayroll withholding, deposit the tax for payments in September if the monthly rule applies.

October 31

Employers. For Social Security, Medicare, and withheld income tax, file Form 941 for the third quarter of 2017. Deposit any undeposited tax. (If your tax liability is less than $2,500, you can pay it in full with a timely filed return.) If you deposited the tax for the quarter in full and on time, you have until November 13 to file the return.

For federal unemployment tax, deposit the tax owed through September if more than $500.

November 13

Employers. For Social Security, Medicare, and withheld income tax, file Form 941 for the third quarter of 2017. This due date applies only if you deposited the tax for the quarter in full and on time.

November 15

Employers. For Social Security, Medicare, withheld income tax, and nonpayroll withholding, deposit the tax for payments in October if the monthly rule applies.

Annual exempt organization return.  File a 2016 calendar year Not-For-Profit return (Form 990) by November 15.  This due date applies only if you timely requested an automatic six-month extension.

How to Get 100% Reimbursed for Employee Meal Expenses

Many business owners, self-employed individuals, and other taxpayers are aware that business meals and entertainment expenses are only 50% deductible. You might treat a key client to a restaurant meal and spend $100. Even if this meal has a definite business purpose (you wind up with an important contract), only $50 will be tax deductible.

Nevertheless, some business meals can be fully deductible. The Tax Court recently overruled the IRS in a case regarding the pro hockey team, the Boston Bruins (Jacobs v. Commissioner, 148 T.C. No. 24, 6/26/17). Although the IRS claimed tax deficiencies totaling about $85,000 over two years’ tax returns, the court sided with the team’s owners and allowed 100% deductions for meal costs.

Pregame preparation

As is the case with most professional sports teams, the Bruins play half of their games away from home. National Hockey League rules require teams to arrive well in advance, so the Bruins schedule hotel rooms for the players and other traveling employees. These hotel arrangements include the provision of rooms where meals are served, with specified menus, before the games.

All traveling employees are entitled to eat meals there at no personal cost. The players are required to eat there, on time, because considerable game planning occurs at these meals between players and coaches.

The Tax Court noted that the meal service was nondiscriminatory, as all traveling hockey employees could attend. Moreover, the meal expenses were associated with the active conduct of the taxpayer’s trade or business: winning hockey games.

The Bruins argument

The Bruins argued that the meals were 100% deductible, because the costs of the meals were excepted from the 50% meals and entertainment limitation because they were de minimis fringe benefits.

Five tests

The court found that the meals would qualify as de minimis fringe benefits if they were provided in a nondiscriminatory manner and five other tests relating to the meal were met:

  1. The eating facility is owned or leased by the employer.
  2. The facility is operated by the employer.
  3. The facility is located on or near the business premises of the employer.
  4. The meals furnished at the facility are provided during, or immediately before or after, the employees’ workday.
  5. The revenue or operating cost test is passed. (This last point will be satisfied if the meals are furnished for the employer’s convenience on the employer’s business premises.)

The court found that the team furnished the meals in a nondiscriminatory manner because it provided the meals to all traveling hockey employees. After analyzing the evidence presented, the court decided that the meals met the five tests. Consequently, it held that the costs of the meals was 100% deductible as de minimis fringe benefits not subject to the 50% meals and entertainment limitation in IRC Section 274(n)(2)(B).

Key takeaways

Although professional sports teams operate a very specialized business, the Tax Court’s reasoning in this case may apply to other situations, especially in sports and entertainment industries in which employees are provided meals away from home as part of their work schedule.

In addition, this decision can be a reminder that certain meal expenses can be 100% deductible. For example, employers might be entitled to deduct the full cost of food and drink at events primarily for the benefit of rank and file employees. Those occasions could be holiday parties, company outings, banquets, and so on. Also, meals, snacks, and beverages provided to employees at no charge, on or near the firm’s premises for valid business purposes, may be 100% deductible.

HLB Gross Collins, P.C. can help you structure employee benefits of this nature so that your business will meet the requirements for full tax advantages.

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