Category Archive: Blog

Employee Travel Expense Reimbursement

Often, clients ask for clarification on expense travel rules and the treatment of reimbursements when frequent flyer miles are used.  A couple common questions include:

  1. If employees use their personal frequent flyer miles to purchase airplane tickets for a work-related flight, should the employees be reimbursed by the company?
  2. If the employees are reimbursed, is this a taxable benefit?

Frequent Flyer Miles

Internal Revenue Service (“IRS”) Topic 511 addresses business travel expenses and states “if you’re provided with a ticket or you’re riding free as a result of a frequent traveler or similar program, your cost is zero”. The employee is considered to have paid nothing for the airplane ticket, so there is no cost on which to base a reimbursement by the company.

Reimbursement of Employee

There are two types of employer reimbursement programs – accountable and non-accountable.

An accountable plan must follow three rules. Reimbursements or allowances under an accountable plan can not be included as income by the employee. The three rules of an accountable plan are:

  1. The expenses must have been incurred while performing services as an employee.
  2. The employee must adequately account for the expenses within a reasonable time.
  3. Any excess reimbursement or allowance must be returned by the employee to the employer.

If the reimbursement plan does not meet all of the above rules, then the plan is a non-accountable plan. Reimbursements or allowances received under a non-accountable plan are included as wages on the employee’s Form W-2.

CONCLUSION

Employees should not be reimbursed by the company for work-related airplane tickets purchased using frequent flyer miles.

If the employees are reimbursed by the company, the company has a non-accountable plan and the reimbursement has to be included in the employee’s wages on Form W-2.

Contact your HLB Gross Collins, P.C. representative if you have additional questions.

HLB Raises Over 8,600 Euros for Charity

HLB International, one of the leading global accountancy networks with a presence in 140 countries, raised over eight thousand and six hundred euros for the Malta Community Chest Fund. The funds were presented to Noel Zarb, Chief Administrator of the Community Chest Fund when the network held its annual conference in Malta from October 18-22 .

The Malta Community Chest Fund is a charitable foundation under the patronage of the President of Malta. The aim of the institution is to help organizations and individuals in need. It helps a vast range of people throughout the year, with the major amounts going towards chemotherapy and specialized medicine which would not be part of the list of medicines given through state aid.

HLB International’s CEO Marco Donzelli commented “As a network, HLB International is committed to giving back to our local communities. Which is why, while we were in Malta for our international conference, we partnered with The Malta Community Chest Fund. We’re delighted to have been able to support such a vital cause.”

HLB’s International conference brought together 130 professionals from 33 countries. Sessions during the conference explored the need for successful firms to continuously grow and progress and featured presentations that explored the challenges of connectivity, leadership, trust and development. As well as insights from HLB International member firms, the conference presented well-received key note speakers, including Gale Crosley, a leading consultant in the accountancy field and Adrian Furnam, Professor of Psychology.

HLB International holds several international and regional conferences every year, which are an opportunity not only to hear about the latest developments within the industry but also for HLB professionals to network. It’s those close, personal relationships between HLB members that contribute to making HLB a personalized and cohesive network, which allows for the smooth running of clients’ business across borders.

Real Estate Dealer or Investor

Investors in real estate generally do so for financial gain.  The upside to investing in real estate is that investors get a return on their investment and receive cash distributions but are also able to defer income tax.  The significant depreciation that the property provides offsets the rental income and often times generates losses.  These losses that are passed through to investors are not usually deductible in the year incurred (unless the taxpayer is a real estate professional) because taxpayers that invest in real estate are generally considered passive investors.  Passive investors are only able to offset passive losses against income from passive activities.  In the case where a taxpayer may invest in multiple real estate transactions they may incur a net loss on one investment and a net gain on another.  This passive income and loss would offset one another.  Otherwise, passive losses are carried forward until they can be offset by passive income or until the property is disposed.  In the case of disposal, any prior disallowed losses would be released and offset ordinary income.  If the property is held for longer than a year the gain is taxed at the capital gains rate of 20% and any depreciation recaptured would be taxed at a rate of 25%.  Both rates still favorable to the maximum ordinary rate of 39.6%.  In addition, pass through income from real estate investments are generally subject to the net investment income tax of 3.8%.

Dealers in real estate have different tax implications than investors and do not benefit from the characteristics discussed above.  When you are a dealer in real estate you are considered to be active and materially participating in the trade or business.  The real estate is not depreciable and so the significant offset to the income is lost.  A dealer in real estate treats the property as inventory.  The sale is considered to be done in the ordinary course of business.  As such, any gain or loss incurred is taxed in the current year at ordinary rates.  Losses that are incurred as a dealer are deductible in that year and are able to offset other income.  Unlike investors in real estate, the dealer’s income is not subject to the net investment income tax of 3.8%.

Factors to consider when determining whether property is held for investment or for sale in a trade or business include:

  • The nature of the acquisition of the property
  • The frequency and continuity of sales over an extended period
  • The nature and the extent of the taxpayer’s business
  • The activity of the seller about the property
  • The extent and substantiality of the transactions

For more information about these factors and how investing or dealing in real estate impacts your tax position contact a member of our Real Estate team.

The Georgia Retraining Tax Credit

Is your company investing in employees through means such as new equipment, new software, or new technology? If so, your company may be eligible for the Georgia Retraining Tax Credit. The purpose of this credit is to encourage employers to continuously invest in their employees via the very means mentioned above – upgrading equipment, acquiring new technology, and even completing ISO 9000 training.

Only eligible programs qualify for the Georgia Retraining Tax Credit. Eligible programs must be designed to enhance quality and productivity or to teach certain software technologies. The retraining tax credit covers expenses incurred as part of the retraining, although the cost of the new equipment, software, or technology itself is not covered. Covered expenses must be approved by the Technical College System of Georgia and include:

  • Cost of instructors
  • Cost of teaching materials
  • Employee wages during retraining
  • Reasonable travel expenses

The retraining credit is a Georgia-only credit that can be used to offset up to 50% of a company’s Georgia income tax liability. The actual credit amount amounts to 50% of the covered retraining expenses up to $500 per full-time employee per program. The maximum annual credit per employee is $1,250. Should the credit not be fully used in one year, the excess can be carried forward for 10 years.

HLB Gross Collins, P.C. has been serving some of the Southeast’s most prominent companies for nearly 50 years. We work closely with clients to ensure they are taking advantage of all available credits and savings opportunities.

Laura Madajewski Honored at Georgia Manufacturing Alliance Summit

Congratulations to HLB Gross Collins, P.C. Manufacturing and Distribution Practice Leader, Laura Madajewski, who was recently honored at the Georgia Manufacturing Alliance Summit. She received an award to recognize outstanding leadership in networking for the North West Chapter of GMA. HLB Gross Collins, P.C. hosts the Northwest Chapter for monthly networking group luncheons, as well as various training, educational and Advisory Board gatherings for GMA.

The award recognized Laura and HLB Gross Collins, P.C. as premier service providers and acknowledged our commitment and dedication to GMA and the Georgia Manufacturers & Distributors community, which is made up of approximately 10,000 manufacturers in Georgia.

 

Koskinsen Warns of Impending IRS IT System Failure

 

Current IRS Commissioner John Koskinen’s term is scheduled to end November 12, 2017. Speaking at the Urban-Brookings Tax Policy Center on October 31, Koskinen sent a strong warning to lawmakers of an impending IRS IT System failure. As the IRS’s available resources dwindle, “it’s not a question of whether, but when this system will fail,” he said. Koskinen noted the IRS is currently operating on antiquated IT systems while fending off 4-million cybersecurity threats each day.

November/December Dates to Remember

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.

December 15

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

Corporations. Deposit the fourth installment of estimated income tax for 2017.

Year-End Business Tax Planning

IRC Section 179 permits “expensing,” or first-year tax deduction, of outlays for business equipment that otherwise would be recovered through depreciation over many years. For 2017, expensing the costs of up to $510,000 of equipment is allowed, with a phase-out beginning after $2.03 million of purchases.

Example 1: ABC Corp. spends $400,000 on equipment and off-the-shelf computer software equipment in 2017. The company can deduct $400,000 this year on those purchases. To qualify for this Section 179 tax treatment in 2017, the equipment or software must be purchased and placed into service by December 31.

Example 2: DEF Corp. spends $800,000 on qualified items in 2017. The first $510,000 can be deducted immediately, but the other $290,000 must be depreciated.

Example 3: GHI Corp. spends $2.4 million on equipment and software in 2017. Above $2.03 million, there is a dollar-for-dollar phaseout of Section 179 tax benefits, so the $370,000 phaseout limits first year deductions to $140,000. The remaining $2.26 million must be depreciated.

Bountiful bonus

Beyond IRC Section 179, “bonus” depreciation is in effect in 2017. Companies can depreciate 50% of the cost of relevant equipment acquired and placed in service this year—that would be a $145,000 deduction in the case of DEF Corp. in example 2 (50% of $290,000), in addition to the $510,000 deduction under IRC Section 179. Bonus depreciation will drop from 50% to 40% in 2018 and to 30% in 2019; this tax break applies only to new equipment, whereas Section 179 expensing applies to used and new equipment.

Sooner or later

As explained previously, there is considerable uncertainty about whether tax legislation will pass this year and what such a law might include. Lower tax rates are a possibility. Consequently, you might plan to defer business income into 2018, when tax rates might drop, and accelerate company deductions into 2017 to offset highly taxed income.

In terms of deferring income, if your company uses the cash method of accounting, you could delay sending out invoices late in the year, so you’ll receive the payments (and owe the tax) in 2018. Deferring income can be more challenging if your company uses the accrual method of accounting, but, in certain circumstances, you may be able to defer income, even where you have been paid in advance. Our office can let you know if this is a practical approach for your firm and help with the required paperwork.

Even if tax rates do not drop under a new law, deferring income—and the resulting tax—for a year may be helpful for your company’s cash flow. Similarly, accelerating deductible expenses from early 2018 to late 2017 may be advisable. Necessary equipment repairs might be pushed forward, for example.

If your company pays substantial bonuses to employees, consider the timing as 2017 ends. Cash method businesses might pay those bonuses in December. Companies on the accrual method generally can deduct bonuses to unrelated employees in 2017, if their obligation to pay the bonuses is fixed and determinable at year-end and they make the bonus payments within 2½ months after year-end.

Year-End Tax Planning for Charitable Donations

Some surveys indicate that more than 30% of all charitable giving occurs in December, and that over 10% of donations are made in the last three days of the year. The year-end holiday spirit may be a factor in the early winter philanthropy, but taxes probably play a role, as well. A check you write to your favorite charity in December gives you a tax deduction the following April, but if you wait until New Year’s, you’ll have to wait a full year for the tax benefit.

To do well while doing good, you might reconsider the typical practice of writing checks for gifts to charity. Instead, give appreciated securities. Going into the ninth year of a bull market, you probably have stocks or stock funds that have gained value and would be ideal for contributing to your favorite cause.

Example 1: Wendy Harris donates, by check, $5,000 every year to a cancer research charity. This year, Wendy looks over her portfolio and sees that one of her stocks has appreciated substantially since its purchase in 2015, so she decides to reduce her exposure to that company.

Wendy paid $30 each for the shares, which now trade at $50. If she sells $5,000 worth of those shares, Wendy would have a $2,000 long-term capital gain and owe $300 to the IRS, at a 15% tax rate. Instead, she donates $5,000 worth of shares to her favorite charity.

With this tactic, Wendy would get the same $5,000 tax deduction that she would have received with a cash contribution. If the assets have been held longer than one year, donors can deduct the fair market value of the contribution. Yet, the donated shares would have been worth only $4,700 to Wendy if she had sold them and paid the tax on her gain.

Meanwhile, the recipient can sell the shares for $5,000 and owe no tax as a charitable organization. Therefore, Wendy gets a full tax break, the charity keeps the full amount, and the capital gain tax obligation is never paid.

Multiple choice

The strategy followed by Wendy can be effective if you wish to make one or two charitable gifts of appreciated securities. However, if you want to make many gifts to various charities, the process can get cumbersome.  In these situations, you might want to contribute via a donor-advised fund.

Example 2: Jack Franklin donates $5,000 a year to 10 different charities, at $500 each. Jack sends $5,000 of appreciated securities, bought years ago for $3,000, to a donor-advised fund. If he donates the securities by December 31, 2017, Jack can take a $5,000 deduction on his 2017 tax return. Once the money is in the donor-advised fund, Jack can request grants of $500 each to his 10 designated recipients. Even if he requests the grants after 2017, his tax break for this year won’t be affected.

Many financial firms and community foundations offer donor-advised funds, and they might have different requirements for the initial contribution, subsequent contributions, and individual grants.

Senior strategies

Yet another charitable opportunity is available for IRA owners over age 70½. Instead of writing checks or donating appreciated assets, they can make qualified charitable distributions (QCDs) from their IRAs, up to $100,000 per donor per year.

Example 3: Phyllis Thompson, age 77, donates a total of $3,000 a year to 3 different charities. Phyllis takes the standard deduction, rather than itemizing, so she gets no tax benefit from these donations.

In 2017, Phyllis donates via QCDs: she sends the $3,000 directly from her IRA to the 3 charities. In this example, Phyllis has a required minimum distribution of $15,000 in 2017. The $3,000 QCD counts as part of her RMD, so Phyllis satisfies her full RMD with a $12,000 IRA withdrawal.

Here, Phyllis has fulfilled her philanthropic intentions and the charities have received their funds. Instead of paying tax on a $15,000 taxable RMD, Phyllis picks up $12,000 of taxable income, saving tax by using QCDs.

Note that people who itemize deductions can’t deduct QCDs. Even so, there may be tax advantages from using QCDs because making RMDs to charity, rather than to IRA owners, will reduce adjusted gross income (AGI). A lower AGI, in turn, may deliver benefits elsewhere on the IRA owner’s tax return.

Donating Appreciated Shares

  • Check with the charitable recipient to determine its procedure.
  • You may need to obtain the charity’s brokerage account number, then inform your broker or mutual fund company, which can execute the share transfer.
  • Some financial firms have their own forms to be signed by the donor and the charity’s representatives. Other paperwork might be required.
  • The earlier you begin the process, the greater the probability of completing the transfer by December 31, for a 2017 tax deduction.
  • Rather than donate shares that trade at a loss, you can sell those shares, take the capital loss for tax advantages, and donate the cash proceeds.

Year-End Retirement Tax Planning

If your company sponsors a 401(k) plan, your employer may offer a match. Make certain that you’re contributing at least enough in 2017 to get the full match, which is essentially free money. The same is true when you’re setting up your 2018 contributions late this year.

Example 1: Jill Myers earns $100,000 a year working for a company that offers a 50% match on 6% of pay. For Jill, 6% of pay is $6,000, so Jill must be sure that she has contributed at least $6,000 to her 401(k) in 2017 to get a $3,000 match, and that she’ll contribute at least that much in 2018. That’s an assured 50% return on her money.

Many companies now offer both a traditional 401(k) and a Roth 401(k). With the traditional version, contributions reduce taxable income and the current tax bill, but future distributions will be taxable. Roth 401(k) contributions offer no current tax benefit, but distributions will all be tax-free after age 59½, if you have had the account for at least five years.

If both versions are available, which should you choose for 2018 contributions? Employees in relatively low tax brackets may prefer the Roth 401(k) because the current tax savings will be modest and the advantage of tax-free withdrawals in retirement may be significant.

Employees in higher brackets may opt for the traditional 401(k) for upfront tax reduction. That’s especially true for those who expect to be in a lower tax bracket after retirement. On the other hand, even plan participants with high income might choose the Roth side if they wish to have a source of tax-free cash flow in retirement and they already have ample pretax funds in the traditional 401(k). Note that all matches to a Roth 401(k) contribution will go into the participant’s traditional 401(k) account.

Considering contributions

In 2017, the maximum you can contribute to a 401(k) as a plan participant is $18,000, or $24,000 if you will be at least age 50 at year-end. As of this writing, the 2018 limits haven’t been released, but some estimates indicate they could be $18,500 and $25,000. When you’re finalizing your 2017 contributions and setting the amounts of income you’ll place in the plan in 2018, should you choose the maximum amounts? That could be a savvy selection, but you should consider the alternatives.

Instead of maxing your 401(k), you may prefer to pay down any credit card balances. Credit card interest is not tax deductible, so paying off a card with a 15% interest rate is the equivalent of earning 15%, after tax, with no investment risk. It’s possible you’ll earn that much or more with an unmatched 401(k) contribution, which offers tax deferral, but that’s not a sure thing.

The choice between unmatched 401(k) contributions and paying down a home mortgage or student loans is a tougher call. Mortgage interest usually is tax deductible, and student loan interest might be, as well.

Example 2: Jill Myers has a mortgage with a 4% interest rate. In her 25% tax bracket, Jill’s return on paying down the mortgage would be 3%, and after tax, 75% of 4%. Jill believes she could earn more than that in her 401(k), so she increases her 2017 contributions to her 401(k) at year-end and raises her contributions for 2018, rather than planning on sending extra amounts to reduce her mortgage balance.

If her company does not offer a Roth 401(k), Jill may have to make another choice. She could reduce the amount she’ll specify for unmatched 401(k) contributions and plan to contribute to a Roth IRA instead. As is the case with a Roth 401(k), Roth IRAs are funded with after-tax dollars but may deliver untaxed cash flow in the future. Roth IRA contributions in 2017 can be up to $5,500, or $6,500 for those 50 or older.

Example 3: Suppose Jill is age 40, and she has been putting $500 per month into her 401(k), for an anticipated total of $6,000 in 2017. As the year-end approaches, Jill believes she can contribute a total of $15,000 to retirement funds for 2017. Besides the $6,000 to get a full employer match in example 1, Jill decides to put $5,500 into a Roth IRA and a total of $9,500 into her 401(k). Therefore, Jill has her employer increase her 2017 401(k) contribution by $3,500, and she also sets her 2018 contribution at $800 a month, or $9,600 a year. Jill has until April 17, 2018, to make her 2017 Roth IRA contribution.

IRA withdrawals

IRA owners also have some year-end tax planning opportunities. Money in a traditional IRA compounds, tax deferred, but required minimum distributions (RMDs) take effect after age 70½.

Example 4: Bert Palmer, age 75, has $1 million in his IRA. The IRS Uniform Lifetime Table puts his “distribution period” at 22.9 years, so Bert divides $1 million by 22.9 to get his RMD for this year: $43,668. If Bert withdraws less, he’ll owe a 50% penalty on the shortfall. (If you’re 70½ or older, you should withdraw at least the RMD amount.)

Although Bert does not need the money for living expenses, he must take the distribution to avoid the penalty. That $43,668 is added to Bert’s other income, so the effective tax on that distribution can be steep.

Suppose that Bert dies with that $1 million IRA, which passes to his daughter, Carol. Carol must take RMDs each year, regardless of her age. If Carol is now a middle-aged, successful executive with a high income, those RMDs likely will be heavily taxed. Indeed, pretax money in a traditional IRA probably will be taxed when paid out, whether to the IRA owner or to a beneficiary.

Therefore, IRA owners may want to take distributions before age 70½. Careful planning can fine tune the amount withdrawn at year-end 2017, keeping taxable income within a relatively low tax bracket. Withdrawn funds may be spent, given to loved ones, reinvested elsewhere, or moved to a Roth IRA for potential tax-free treatment in the future. HLB Gross Collins, P.C. can go over your specific situation to assess whether it makes sense to reduce your traditional IRA before age 70½ and, thus, decrease the amount of RMDs for you and for your beneficiaries.