FAQs For Plan Sponsors and Employees on Cares Act Relief

 
The Coronavirus Aid, Relief and Economic Security (CARES) Act was a rapid response by the federal government to help businesses and employees cope with the economic issues caused by the pandemic. Many aspects of the wide-range law make significant changes affecting employer-sponsored retirement plans and their participants.

Since Congress passed the CARES Act in March 2020, we have received numerous questions from plan sponsors about the law’s impact on plans and participants. Below is a list of some of the most common questions plan sponsors face, along with our brief answers.

1. Did COVID-19 furloughs create partial plan terminations?

If an employer furloughed a significant portion of its workforce because of COVID-19 or the resulting economic downturn, it is possible that those furloughs triggered a partial plan termination. A partial plan termination happens generally when 20% or more of participants terminate employment without full vesting during a particular year. Partial terminations can occur in connection with a significant corporate event such as a plant closing, or as a result of general employee turnover due to adverse economic conditions or other reasons that are not within the employer’s control. A furlough is an involuntary, unpaid temporary leave, but the individual is still considered an employee.  A furloughed employee would generally not be considered in the calculation for a partial plan termination as long as the employee returns to work within the plan year.  Determining whether a partial plan termination occurred requires plan sponsors to calculate the turnover rate as well as take a careful look at the facts and circumstances surrounding the action(s). There is no one perfect formula that fits all situations.

Plan sponsors now have until March 31, 2021 to return the size of their workforces to a level that would avoid a partial plan termination.

2. If yes, do plans sponsors have to vest everyone or just the furloughed workers?

When a partial plan termination does occur, affected employees (i.e., those who have been terminated) automatically become 100% vested in all employer contributions, including matching contributions. Please visit our plan termination article for more information.

3. When do plan sponsors apply the partial termination rules?

The applicable period depends upon the plan’s circumstances, but it usually takes place during a specific plan year; the timeframe may be extended to more than one plan year if there are multiple, related severance events. See the Internal Revenue Service’s (IRS) issue snapshot on partial plan terminations.

4. Are sick leave and family leave payments that are mandated by the Families First Coronavirus Response Act (FFCRA) treated as plan compensation?

Probably yes, since FFCRA paid time off would be included in Box 1 of Form W-2 and many retirement plans define “compensation” as including Box 1, W-2 compensation. But plan sponsors will need to look at how their plan defines “compensation.” If paid time off is excluded, then FFCRA paid time off would likewise be excluded (but such exclusion seems to be rare).

5. Why are auditors asking plan sponsors to document their Going Concern positions in a memo?

Many plan sponsors are unsure of their ability to fund Employer contributions to their plans and have made changes to plans as a result of the pandemic. As outlined in FASB ASU 2014-15, the responsibility for performing the annual going-concern assessment is placed on management.  It is critical for management to prepare this analysis for their financial statements, including a memo on their considerations. The memo helps auditors evaluate whether there is substantial doubt about the plan’s ability to continue as a going concern. This formerly was the auditor’s responsibility, but in the past five years, this has shifted and is now a standard duty of the plan sponsor.

6. What are the most commonly adopted provisions from the CARES Act?

According to research from Plan Sponsor Council of America, 46% of surveyed plans have elected to allow repayment of coronavirus-related distributions during the next three years, followed closely by 45% allowing some distributions until December 31, 2020. Only 9% of those surveyed adopted or plan to adopt no provisions.

7. What is the difference between “temporary impairment” and “other than temporary impairment”?

These are accounting principles used to describe the nature of the decrease in an asset’s value, which is a standard topic that needs explanation in the plan’s audit. “Temporary impairment” refers to normal market fluctuations in a specific investment; “other than temporary impairment” refers to a permanent decline in the investment with little to no chance of recovery. Given the extraordinary nature of the COVID-19 pandemic and its varying economic impact across industries and businesses, it is important to work with auditors to determine the correct classification of losses.

8. How can plan sponsors change the timing and frequency of the employer matching contribution from each pay cycle to a year-end contribution?

There are IRS and plan document limitations related to changes in certain types of Employer contributions, such as Safe Harbor contributions. However, generally a sponsor can more easily change the timing of the deposit of those contributions into the plan, rather than change the formula and eligibility provisions of the Employer contribution. When cashflow is tight, consider funding the contribution on an annual, quarterly, monthly, or per payroll period basis to fit your needs. Employers generally have until the extended due date of their federal income tax return for that tax year to deposit Employer contributions into the retirement plan. Plan sponsors should check their plan documents (and summary plan description) to see if an amendment is needed to change the timing of when Employer contributions are made to the plan.

9. Do plan sponsors have to implement the CARES Act provisions for the new distribution and loan options?

The CARES Act expanded current rules on coronavirus-related distributions and loans, increasing the amount affected participants can pull from their accounts as well as the time they can take to repay the money, if applicable to the transaction. It’s important for plan sponsors to understand that the distribution and loan provisions are optional, as outlined in IRS Notice 2020-50. Plan sponsors should be aware that they may choose amongst the provisions and adopt the ones that they feel their participants would benefit from the most.

10. If plan sponsors implement a change to their plan allowed by the CARES Act, when should the plan document be amended to reflect the change?

Plan sponsors are permitted to make the CARES Act options available immediately even before a written amendment is made to the plan document.  The deadline to formally adopt the amendments has been extended to December 31, 2022 (for calendar years) or the end of the plan year starting in 2022 (for non-calendar years).   

11. Can plan sponsors stop making employer contributions?

In general, plans can reduce or eliminate discretionary non-elective and discretionary matching contributions without needing to amend plan documents, but plan sponsors need to examine plan documents to make this decision. Note that plans operating as Safe Harbor plans face a different set of requirements. See the section, “Can plans reduce or eliminate matching contributions?” in this BDO article to learn more about these requirements and other options plan sponsors have for conserving cash during the pandemic.

12. Can participants still take a Required Minimum Distribution (RMD) even though RMDs were waived for 2020?

Yes, but only if the plan allows withdrawals. The CARES Act allows participants to waive the RMD for 2020, but the law does not prohibit participants from taking a withdrawal. First, check the plan document to see whether withdrawals are allowed; then, see whether the plan has relaxed withdrawal rules as a result of the CARES Act to determine maximum amounts.


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June 12, 2024  Four antifraud controls are associated with at least a 50% reduction in both fraud loss and duration, according to “Occupational Fraud 2024: A Report to the Nations” published by the Association of Certified Fraud Examiners (ACFE). They are financial statement audits, reporting hotlines, surprise audits and proactive data analysis. However, the ACFE study also found that two of these — surprise audits and proactive data analysis — are among the least commonly implemented controls. Here’s how your organization might benefit from conducting periodic surprise audits. Financial statement audits vs. surprise audits Business owners and managers often dismiss the need for surprise audits, mistakenly assuming their annual financial statement audits provide sufficient coverage to detect and deter fraud among their employees. But financial statement audits shouldn’t be relied upon as an organization’s primary antifraud mechanism. By comparison, a surprise audit more closely examines the company’s internal controls that are intended to prevent and detect fraud. Such audits aim to identify any weaknesses that could make assets vulnerable and determine whether anyone has already exploited those weaknesses to misappropriate assets. Auditors usually focus on particularly high-risk areas, such as cash, inventory, receivables and sales. They show up unexpectedly, usually when the owners suspect foul play, or randomly as part of the company’s antifraud policies. In addition, an auditor might follow a different process or schedule than during an annual financial statement audit. For example, instead of beginning audit procedures with cash, the auditor might first scrutinize receivables or vendor invoices during a surprise audit. The element of surprise is critical because most fraud perpetrators are constantly on guard. Announcing an upcoming audit or performing procedures in a predictable order gives wrongdoers time to cover their tracks by shredding (or creating false) documents, altering records or financial statements, or hiding evidence. Big benefits The 2024 ACFE study demonstrates the primary advantages of surprise audits: lower financial losses and reduced duration of schemes. The median loss for organizations that conduct surprise audits is $75,000, compared with a median loss of $200,000 for those organizations that don’t conduct them — a 63% difference. This discrepancy is no surprise in light of how much longer fraud schemes go undetected in organizations that fail to conduct surprise audits. The median duration in those organizations is 18 months, compared with only nine months for organizations that perform surprise audits. Surprise audits can have a strong deterrent effect, too. Companies should state in their fraud policies that random tests will be conducted to ensure internal controls aren’t being circumvented. If this isn’t enough to deter would-be thieves or convince current perpetrators to abandon their schemes, simply seeing guilty co-workers get swept up in a surprise audit should help. Despite these benefits, the 2024 ACFE study found that less than half (42%) of the victim-organizations reported performing surprise audits. Moreover, only 17% of companies with fewer than 100 employees have implemented this antifraud control (compared to 49% of those with 100 or more employees). We can help Your organization can’t afford to be lax in its antifraud controls. The ACFE estimates that occupational fraud costs the typical organization 5% of its revenue annually, and the median loss caused by fraud is a whopping $145,000. If your organization doesn’t already conduct surprise audits, contact us to discuss how they can be used to fortify its defenses against occupational theft and financial misstatement. © 2024   [...] Read more...
June 12, 2024  Accurate bookkeeping is essential to operating a successful small business. The problems created by inadequate bookkeeping practices can have significant, long-lasting consequences. Here are four common pitfalls — and how to avoid them with the right knowledge and tools. 1. Commingled bank accounts It’s important to maintain a separate dedicated bank account for business transactions. Using the owner’s personal accounts for business purposes can have legal and tax implications. Separate accounts also make it easier to track business expenses and prepare tax returns. With a separate bank account, you can set up payments for recurring business expenses. It’s also important to review and reconcile your business records to bank statements on a regular basis. 2. Overreliance on spreadsheets Excel is a user-friendly, versatile tool for many business purposes. But without extensive programming, it lacks automation and the ability to provide real-time updates. And using spreadsheets for bookkeeping purposes can lead to inconsistent treatment of similar transactions and data entry errors. Excel should never be a substitute for dedicated accounting software, such as QuickBooks®, NetSuite® or Xero™. These cost-effective solutions streamline a small business’s financial reporting processes. Most programs integrate with bank and credit card accounts — and cloud-based platforms provide access from anywhere with the owner’s (or manager’s) laptop, tablet and smartphone. 3. The use of personal credit for business expenses Drawing from personal credit sources provides quick access to funds when you’re launching a new venture. However, they often come with high interest rates and fees. Using personal credit for business expenses also makes it harder to separate personal and business expenses for accounting and tax purposes. To get a business credit line, you’ll need to contact your bank and complete an application. While the application process may take some time, it’s worth the effort. Credit lines help establish a credit history in the company’s name, which is essential as the business grows and needs additional capital to purchase major assets and pursue investment opportunities. 4. Lax recordkeeping practices Accountants dread when a small business owner shows up to tax preparation meetings with a shoebox of receipts — or no documentation at all. Well-prepared owners have organized records, including paper filing systems, digital storage, and backup solutions, to substantiate expenses for tax and accounting purposes. By retaining original source documents — such as receipts, invoices, bank statements and contracts — you can track the business’s financial performance and file state and federal tax forms with ease. And you’re prepared if the IRS challenges any deductions or credits you claim for business-related items. Without source documents, the IRS is more likely to disallow business tax breaks and assess penalties and fines. In general, business records must be retained for a period ranging from three to seven years, depending on the nature of the record. Contact us for specific record retention guidelines. We can help Implementing sound bookkeeping practices can empower you to improve your business’s financial management and increase confidence in your financial reporting. It reduces the stress of running a business and provides essential information for your business to thrive in today’s competitive markets. Contact us for help building a solid bookkeeping foundation. © 2024   [...] Read more...
June 12, 2024The IRS recently released guidance providing the 2025 inflation-adjusted amounts for Health Savings Accounts (HSAs). These amounts are adjusted each year, based on inflation, and the adjustments are announced earlier in the year than other inflation-adjusted amounts, which allows employers to get ready for the next year. Fundamentals of HSAs An HSA is a trust created or organized exclusively for the purpose of paying the qualified medical expenses of an account beneficiary. An HSA can only be established for the benefit of an eligible individual who is covered under a high-deductible health plan (HDHP). In addition, a participant can’t be enrolled in Medicare or have other health coverage (exceptions include dental, vision, long-term care, accident and specific disease insurance). Within specified dollar limits, an above-the-line tax deduction is allowed for an individual’s contribution to an HSA. This annual contribution limitation and the annual deductible and out-of-pocket expenses under the tax code are adjusted annually for inflation. Inflation adjustments for 2025 In Revenue Procedure 2024-25, the IRS released the 2025 inflation-adjusted figures for contributions to HSAs, which are as follows: Annual contribution limits. For calendar year 2025, the annual contribution limit for an individual with self-only coverage under an HDHP will be $4,300. For an individual with family coverage, the amount will be $8,550. These are up from $4,150 and $8,300, respectively, in 2024. In addition, for both 2024 and 2025, there’s a $1,000 catch-up contribution amount for those who are age 55 or older by the end of the tax year. High-deductible health plan limits. For calendar year 2025, an HDHP will be a health plan with an annual deductible that isn’t less than $1,650 for self-only coverage or $3,300 for family coverage (these amounts are $1,600 and $3,200 for 2024). In addition, annual out-of-pocket expenses (deductibles, co-payments and other amounts, but not premiums) won’t be able to exceed $8,300 for self-only coverage or $16,600 for family coverage (up from $8,050 and $16,100, respectively, for 2024). Heath Reimbursement Arrangements The IRS also announced an inflation-adjusted amount for Health Reimbursement Arrangements (HRAs). An HRA must receive contributions from an eligible individual (employers can’t contribute). Contributions aren’t included in income, and HRA reimbursements used to pay eligible medical expenses aren’t taxed. In 2025, the maximum amount that may be made newly available for the plan year for an excepted benefit HRA will be $2,150 (up from $2,100 in 2024). Collect the benefits There are a variety of benefits to HSAs that employers and employees appreciate. Contributions to the accounts are made on a pre-tax basis. The money can accumulate tax-free year after year and can be withdrawn tax-free to pay for a variety of medical expenses such as doctor visits, prescriptions, chiropractic care and premiums for long-term care insurance. In addition, an HSA is “portable.” It stays with an account holder if he or she changes employers or leaves the workforce. Many employers find it to be a fringe benefit that attracts and retains employees. If you have questions about HSAs at your business, contact us. © 2024     [...] Read more...
June 12, 2024There are several financial and legal implications when adding a new partner to a partnership. Here’s an example to illustrate: You and your partners are planning to admit a new partner. The new partner will acquire a one-third interest in the partnership by making a cash contribution to the business. Assume that your basis in your partnership interests is sufficient so that the decrease in your portions of the partnership’s liabilities because of the new partner’s entry won’t reduce your basis to zero. More complex than it seems Although adding a new partner may appear to be simple, it’s important to plan the new person’s entry properly to avoid various tax problems. Here are two issues to consider: 1. If there’s a change in the partners’ interests in unrealized receivables and substantially appreciated inventory items, the change will be treated as a sale of those items, with the result that the current partners will recognize gain. For this purpose, unrealized receivables include not only accounts receivable, but also depreciation recapture and certain other ordinary income items. To avoid gain recognition on those items, it’s necessary that they be allocated to the current partners even after the entry of the new partner. 2. The tax code requires that the “built-in gain or loss” on assets that were held by the partnership before the new partner was admitted be allocated to the current partners and not to the entering partner. In general, “built-in gain or loss” is the difference between the fair market value and basis of the partnership property at the time the new partner is admitted. The upshot of these rules is that the new partner must be allocated a portion of the depreciation equal to his or her share of the depreciable property, based on current fair market value. This will reduce the amount of depreciation that can be taken by the current partners. The other outcome is that the built-in gain or loss on the partnership assets must be allocated to the current partners when the partnership assets are sold. The rules that apply in this area are complex, and the partnership may have to adopt special accounting procedures to cope with the relevant requirements. Follow your basis When adding a partner or making other changes, a partner’s basis in his or her interest can undergo frequent adjustment. It’s important to keep proper track of your basis because it can have an impact on these areas: • Gain or loss on the sale of your interest, • How partnership distributions to you are taxed, and • The maximum amount of partnership loss you can deduct. We can help Contact us if you’d like assistance in dealing with these issues or any other issues that may arise in connection with your partnership. © 2024   [...] Read more...
June 12, 2024Let’s say you plan to use a C corporation to operate a newly acquired business or you have an existing C corporation that needs more capital. You should know that the federal tax code treats corporate debt more favorably than corporate equity. So for shareholders of closely held C corporations, it can be a tax-smart move to include in the corporation’s capital structure: • Some third-party debt (owed to outside lenders), and/or • Some owner debt. Tax rate considerations Let’s review some basics. The top individual federal income tax rate is currently 37%. The top individual federal rate on net long-term capital gains and qualified dividends is currently 20%. On top of this, higher-income individuals may also owe the 3.8% net investment income tax on all or part of their investment income, which includes capital gains, dividends and interest. On the corporate side, the Tax Cuts and Jobs Act (TCJA) established a flat 21% federal income tax rate on taxable income recognized by C corporations. Third-party debt The non-tax advantage of using third-party debt financing for a C corporation acquisition or to supply additional capital is that shareholders don’t need to commit as much of their own money. Even when shareholders can afford to cover the entire cost with their own money, tax considerations may make doing so inadvisable. That’s because a shareholder generally can’t withdraw all or part of a corporate equity investment without worrying about the threat of double taxation. This occurs when the corporation pays tax on its profits and the shareholders pay tax again when the profits are distributed as dividends. When third-party debt is used in a corporation’s capital structure, it becomes less likely that shareholders will need to be paid taxable dividends because they’ll have less money tied up in the business. The corporate cash flow can be used to pay off the corporate debt, at which point the shareholders will own 100% of the corporation with a smaller investment on their part. Owner debt If your entire interest in a successful C corporation is in the form of equity, double taxation can arise if you want to withdraw some of your investment. But if you include owner debt (money you loan to the corporation) in the capital structure, you have a built-in mechanism for withdrawing that part of your investment tax-free. That’s because the loan principal repayments made to you are tax-free. Of course, you must include the interest payments in your taxable income. But the corporation will get an offsetting interest expense deduction — unless an interest expense limitation rule applies, which is unlikely for a small to medium-sized company. An unfavorable TCJA change imposed a limit on interest deductions for affected businesses. However, for 2024, a corporation with average annual gross receipts of $30 million or less for the three previous tax years is exempt from the limit. An example to illustrate Let’s say you plan to use your solely owned C corporation to buy the assets of an existing business. You plan to fund the entire $5 million cost with your own money — in a $2 million contribution to the corporation’s capital (a stock investment), plus a $3 million loan to the corporation. This capital structure allows you to recover $3 million of your investment as tax-free repayments of corporate debt principal. The interest payments allow you to receive additional cash from the corporation. The interest is taxable to you but can be deducted by the corporation, as long as the limitation explained earlier doesn’t apply. This illustrates the potential federal income tax advantages of including debt in the capital structure of a C corporation. Contact us to explain the relevant details and project the tax savings. © 2024   [...] Read more...
June 12, 2024After experiencing a downturn in 2023, merger and acquisition activity in several sectors is rebounding in 2024. If you’re buying a business, you want the best results possible after taxes. You can potentially structure the purchase in two ways: Buy the assets of the business, or Buy the seller’s entity ownership interest if the target business is operated as a corporation, partnership or LLC. In this article, we’re going to focus on buying assets. Asset purchase tax basics You must allocate the total purchase price to the specific assets acquired. The amount allocated to each asset becomes the initial tax basis of that asset. For depreciable and amortizable assets (such as furniture, fixtures, equipment, buildings, software and intangibles such as customer lists and goodwill), the initial tax basis determines the post-acquisition depreciation and amortization deductions. When you eventually sell a purchased asset, you’ll have a taxable gain if the sale price exceeds the asset’s tax basis (initial purchase price allocation, plus any post-acquisition improvements, minus any post-acquisition depreciation or amortization). Asset purchase results with a pass-through entity Let’s say you operate the newly acquired business as a sole proprietorship, a single-member LLC treated as a sole proprietorship for tax purposes, a partnership, a multi-member LLC treated as a partnership for tax purposes or an S corporation. In those cases, post-acquisition gains, losses and income are passed through to you and reported on your personal tax return. Various federal income tax rates can apply to income and gains, depending on the type of asset and how long it’s held before being sold. Asset purchase results with a C corporation If you operate the newly acquired business as a C corporation, the corporation pays the tax bills from post-acquisition operations and asset sales. All types of taxable income and gains recognized by a C corporation are taxed at the same federal income tax rate, which is currently 21%. A tax-smart purchase price allocation With an asset purchase deal, the most important tax opportunity revolves around how you allocate the purchase price to the assets acquired. To the extent allowed, you want to allocate more of the price to: Assets that generate higher-taxed ordinary income when converted into cash (such as inventory and receivables), Assets that can be depreciated relatively quickly (such as furniture and equipment), and Intangible assets (such as customer lists and goodwill) that can be amortized over 15 years. You want to allocate less to assets that must be depreciated over long periods (such as buildings) and to land, which can’t be depreciated. You’ll probably want to get appraised fair market values for the purchased assets to allocate the total purchase price to specific assets. As stated above, you’ll generally want to allocate more of the price to certain assets and less to others to get the best tax results. Because the appraisal process is more of an art than a science, there can potentially be several legitimate appraisals for the same group of assets. The tax results from one appraisal may be better for you than the tax results from another. Nothing in the tax rules prevents buyers and sellers from agreeing to use legitimate appraisals that result in acceptable tax outcomes for both parties. Settling on appraised values becomes part of the purchase/sale negotiation process. That said, the appraisal that’s finally agreed to must be reasonable. Plan ahead Remember, when buying the assets of a business, the total purchase price must be allocated to the acquired assets. The allocation process can lead to better or worse post-acquisition tax results. We can help you get the former instead of the latter. So get your advisor involved early, preferably during the negotiation phase. © 2024   [...] Read more...
May 28, 2024If your business doesn’t already have a retirement plan, it might be a good time to take the plunge. Current retirement plan rules allow for significant tax-deductible contributions. For example, if you’re self-employed and set up a SEP-IRA, you can contribute up to 20% of your self-employment earnings, with a maximum contribution of $69,000 for 2024 (up from $66,000 for 2023). If you’re employed by your own corporation, up to 25% of your salary can be contributed to your account, with a maximum contribution of $69,000. If you’re in the 32% federal income tax bracket, making a maximum contribution could cut what you owe Uncle Sam for 2024 by a whopping $22,080 (32% × $69,000). Other Possibilities: There are more small business retirement plan options, including: 401(k) plans, which can even be set up for just one person (also called solo 401(k)s), Defined benefit pension plans, and SIMPLE-IRAs. Depending on your situation, these plans may allow bigger or smaller deductible contributions than a SEP-IRA. For example, for 2024, a participant can contribute $23,000 to a 401(k) plan, plus a $7,500 “catch-up” contribution for those age 50 or older. Watch the Calendar Thanks to a change made by the 2019 SECURE Act, tax-favored qualified employee retirement plans, except for SIMPLE-IRA plans, can now be adopted by the due date (including any extension) of the employer’s federal income tax return for the adoption year. The plan can then receive deductible employer contributions that are made by the due date (including any extension), and the employer can deduct those contributions on the return for the adoption year. Important: This provision didn’t change the deadline to establish a SIMPLE-IRA plan. It remains October 1 of the year for which the plan is to take effect. Also, the SECURE Act change doesn’t override rules that require certain plan provisions to be in effect during the plan year, such as the provisions that cover employee elective deferral contributions (salary-reduction contributions) under a 401(k) plan. The plan must be in existence before such employee elective deferral contributions can be made. For example, the deadline for the 2023 tax year for setting up a SEP-IRA for a sole proprietorship business that uses the calendar year for tax purposes is October 15, 2024, if you extend your 2023 tax return. The deadline for making a contribution for the 2023 tax year is also October 15, 2024. For the 2024 tax year, the deadline for setting up a SEP and making a contribution is October 15, 2025, if you extend your 2024 tax return. However, to make a SIMPLE-IRA contribution for the 2023 tax year, you must have set up the plan by October 1, 2023. So, it’s too late to set up a plan for last year. While you can delay until next year establishing a tax-favored retirement plan for this year (except for a SIMPLE-IRA plan), why wait? Get it done this year as part of your tax planning and start saving for retirement. We can provide more information on small business retirement plan options. Be aware that, if your business has employees, you may have to make contributions for them, too. © 2024       [...] Read more...
May 2, 2024Businesses usually want to delay recognition of taxable income into future years and accelerate deductions into the current year. But when is it wise to do the opposite? And why would you want to? One reason might be tax law changes that raise tax rates. The Biden administration has proposed raising the corporate federal income tax rate from its current flat 21% to 28%. Another reason may be because you expect your noncorporate pass-through entity business to pay taxes at higher rates in the future and the pass-through income will be taxed on your personal return. There have also been discussions in Washington about raising individual federal income tax rates. If you believe your business income could be subject to tax rate increases, you might want to accelerate income recognition into the current tax year to benefit from the current lower tax rates. At the same time, you may want to postpone deductions into a later tax year, when rates are higher and the deductions will be more beneficial. To Fast-Track Income Consider these options if you want to accelerate revenue recognition into the current tax year: Sell appreciated assets that have capital gains in the current year, rather than waiting until a later year. Review the company’s list of depreciable assets to determine if any fully depreciated assets are in need of replacement. If fully depreciated assets are sold, taxable gains will be triggered in the year of sale. For installment sales of appreciated assets, elect out of installment sale treatment to recognize gain in the year of sale. Instead of using a tax-deferred like-kind Section 1031 exchange, sell real property in a taxable transaction. Consider converting your S corporation into a partnership or LLC treated as a partnership for tax purposes. That will trigger gains from the company’s appreciated assets because the conversion is treated as a taxable liquidation of the S corp. The partnership will have an increased tax basis in the assets. For construction companies with long-term construction contracts previously exempt from the percentage-of-completion method of accounting for long-term contracts: Consider using the percentage-of-completion method to recognize income sooner as compared to the completed contract method, which defers recognition of income until the long-term construction is completed. Limitations To Postpone Deductions Consider the following actions to postpone deductions into a higher-rate tax year, which will maximize their value: Delay purchasing capital equipment and fixed assets, which would give rise to depreciation deductions. Forego claiming big first-year Section 179 deductions or bonus depreciation deductions on new depreciable assets and instead depreciate the assets over a number of years. Determine whether professional fees and employee salaries associated with a long-term project could be capitalized, which would spread out the costs over time. Buy bonds at a discount this year to increase interest income in future years. If allowed, put off inventory shrinkage or other write-downs until a year with a higher tax rate. Delay charitable contributions into a year with a higher tax rate. If allowed, delay accounts receivable charge-offs to a year with a higher tax rate. Delay payment of liabilities where the related deduction is based on when the amount is paid. Contact us to discuss the best tax planning actions in the light of your business’s unique tax situation. © 2024       [...] Read more...
May 2, 2024  If you operate a business, or you’re starting a new one, you know records of income and expenses need to be kept. Specifically, you should carefully record expenses to claim all the tax deductions to which you’re entitled. And you want to make sure you can defend the amounts reported on your tax returns in case you’re ever audited by the IRS. Be aware that there’s no one way to keep business records. On its website, the IRS states: “You can choose any recordkeeping system suited to your business that clearly shows your income and expenses.” But there are strict rules when it comes to deducting legitimate expenses for tax purposes. And certain types of expenses, such as automobile, travel, meal and home office costs, require extra attention because they’re subject to special recordkeeping requirements or limitations on deductibility. Ordinary and Necessary A business expense can be deducted if a taxpayer establishes that the primary objective of the activity is making a profit. To be deductible, a business expense must be “ordinary and necessary.” In one recent case, a married couple claimed business deductions that the IRS and the U.S. Tax Court mostly disallowed. The reasons: The expenses were found to be personal in nature and the taxpayers didn’t have adequate records for them. In the case, the husband was a salaried executive. With his wife, he started a separate business as an S corporation. His sideline business identified new markets for chemical producers and connected them with potential customers. The couple’s two sons began working for the business when they were in high school. The couple then formed a separate C corporation that engaged in marketing. For some of the years in question, the taxpayers reported the income and expenses of the businesses on their joint tax returns. The businesses conducted meetings at properties the family owned (and resided in) and paid the couple rent for the meetings. The IRS selected the couple’s returns for audit. Among the deductions the IRS and the Tax Court disallowed: Travel expenses. The couple submitted reconstructed travel logs to the court, rather than records kept contemporaneously. The court noted that the couple didn’t provide “any documentary evidence or other direct or circumstantial evidence of the time, location, and business purpose of each reported travel expense.” Marketing fees paid by the S corporation to the C corporation. The court found that no marketing or promotion was done. Instead, the funds were used to pay several personal family expenses. Rent paid to the couple for the business use of their homes. The court stated the amounts “were unreasonable and something other than rent.” Retirement Plan Deductions Allowed The couple did prevail on deductions for contributions to 401(k) accounts for their sons. The IRS contended that the sons weren’t employees during one year in which contributions were made for them. However, the court found that 401(k) plan documents did mention the sons working in the business and the father “credibly recounted assigning them research tasks and overseeing their work while they were in school.” Thus, the court ruled the taxpayers were entitled to the retirement plan deductions. (TC Memo 2023-140) Lesson Learned As this case illustrates, a business can’t deduct personal expenses, and scrupulous records are critical. Make sure to use your business bank account for business purposes only. In addition, maintain meticulous records to help prepare your tax returns and prove deductible business expenses in the event of an IRS audit. Contact us if you have questions about retaining adequate business records. © 2024       [...] Read more...
May 2, 2024It’s not unusual for a partner to incur expenses related to the partnership’s business. This is especially likely to occur in service partnerships such as an architecture or law firm. For example, partners in service partnerships may incur entertainment expenses in developing new client relationships. They may also incur expenses for: transportation to get to and from client meetings, professional publications, continuing education and home office. What’s the tax treatment of such expenses? Here are the answers. Reimbursement or Not As long as the expenses are the type a partner is expected to pay without reimbursement under the partnership agreement or firm policy (written or unwritten), the partner can deduct the expenses on Schedule E of Form 1040. Conversely, a partner can’t deduct expenses if the partnership would have honored a request for reimbursement. A partner’s unreimbursed partnership business expenses should also generally be included as deductions in arriving at the partner’s net income from self-employment on Schedule SE. For example, let’s say you’re a partner in a local architecture firm. Under the firm’s partnership agreement, partners are expected to bear the costs of soliciting potential new business except in unusual cases where attracting a large potential new client is deemed to be a firm-wide goal. In attempting to attract new clients this year, you spend $4,500 of your own money on meal expenses. You receive no reimbursement from the firm. On your Schedule E, you should report a deductible item of $2,250 (50% of $4,500). You should also include the $2,250 as a deduction in calculating your net self-employment income on Schedule SE. So far, so good, but here’s the issue: a partner can’t deduct expenses if they could have been reimbursed by the firm. In other words, no deduction is allowed for “voluntary” out-of-pocket expenses. The best way to eliminate any doubt about the proper tax treatment of unreimbursed partnership expenses is to install a written firm policy that clearly states what will and won’t be reimbursed. That way, the partners can deduct their unreimbursed firm-related business expenses without any problems from the IRS. Office in a Partner’s Home Subject to the normal deduction limits under the home office rules, a partner can deduct expenses allocable to the regular and exclusive use of a home office for partnership business. The partner’s deductible home office expenses should be reported on Schedule E in the same fashion as other unreimbursed partnership expenses. If a partner has a deductible home office, the Schedule E home office deduction can deliver multiple tax-saving benefits because it’s effectively deducted for both federal income tax and self-employment tax purposes. In addition, if the partner’s deductible home office qualifies as a principal place of business, commuting mileage from the home office to partnership business temporary work locations (such as client sites) and partnership permanent work locations (such as the partnership’s official office) count as business mileage. The principal place of business test can be passed in two ways. First, the partner can conduct most of partnership income-earning activities in the home office. Second, the partner can pass the principal place of business test if he or she: Uses the home office to conduct partnership administrative and management tasks and Doesn’t make substantial use of any other fixed location (such as the partnership’s official office) for such administrative and management tasks. To Sum Up When a partner can be reimbursed for business expenses under a partnership agreement or standard operating procedures, the partner should turn them in. Otherwise, the partner can’t deduct the expenses. On the partnership side of the deal, the business should set forth a written firm policy that clearly states what will and won’t be reimbursed, including home office expenses if applicable. This applies equally to members of LLCs that are treated as partnerships for federal tax purposes because those members count as partners under tax law. © 2024     [...] Read more...
May 2, 2024  Accurate, timely financial information is key to making good decisions for executives, board members, investors and other stakeholders. But not everyone who reads your financial statements will really understand the numbers they receive and what they mean to your organization. Here are some ways to present your financial results in a reader friendly manner. Consider your Audience The people who rely on your organization’s financial statements probably come from different walks of life and different positions. Some may have financial backgrounds, but others might not. And it’s this latter group you need to keep in mind as you supply financial data. This is especially true for nonprofits, such as charities, religious organizations, recreational clubs and social advocacy groups. Their stakeholders may include board members, volunteers, donors, grant makers, watchdog groups and other people in the community. But it also may apply to for-profit businesses that share financial data with their boards, employees and investors who don’t have a controlling interest in the organization. Don’t assume all your stakeholders understand accounting jargon. It may be helpful to provide definitions of certain financial reporting terms. For example, a nonprofit might explain that “board-designated net assets” refers to items set aside for a particular purpose or period by the board. Examples include safety reserves or a capital replacement fund, which have no external restriction by donors or by law. While this definition might seem obvious to a nonprofit’s management team, stakeholders might not be familiar with it. You could also provide internal stakeholders with some basic financial training by bringing in outside speakers, such as accountants, investment advisors and bankers. Add Pictures to Get Your Message Across In addition to providing numerical information from your company’s income statement, balance sheet and statement of cash flows, consider presenting some information in a graphical format. Long lists of numbers can have a dizzying effect on financial statement readers. Pictures may be easier for laypeople to digest than numbers and text alone. For instance, you might use a pie graph to show the composition of your company’s assets. Likewise, a line or bar graph might be an effective way to communicate revenue, expenses and profit trends over time. Present Financial Ratios Financial ratios show relationships between key items on your financial statements. While ratios don’t appear on the face of your financial statements, you can highlight them when communicating results to stakeholders. For instance, you might report the days in receivables ratios (accounts receivable divided by annual revenue times 365 days) from the current and prior reporting periods to demonstrate your efforts to improve collections. Or you might calculate gross margin (revenue minus cost of goods sold) as a percentage of revenue from the current and prior reporting periods to show how increases in raw materials and labor costs have affected your business’s profitability. Another useful tool is the “current ratio.” A comparison of current assets to current liabilities is commonly used as a measure of short-term liquidity. A ratio of 1:1 means an organization would have just enough cash to cover current liabilities if it ceased operations and converted current assets to cash. It may also be helpful to provide industry benchmarks to show how your company’s performance compares to others in your industry. This information is often available from industry trade publications and websites. Be Transparent About Non-GAAP Metrics One area of particular concern is how your organization presents financial information that doesn’t conform to U.S. Generally Accepted Accounting Principles (GAAP), such as earnings before interest, taxes, depreciation and amortization (EBITDA). The use of non-GAAP metrics has grown in recent years. While non-GAAP metrics can provide greater insight into the information that management considers important in operating the business, take care not to mislead stakeholders by putting greater emphasis on non-GAAP metrics than the GAAP data provided in your financial statements. For instance, EBITDA is often adjusted for such items as stock-based compensation, nonrecurring items, intangibles and other company-specific items. If you report EBITDA, you should clearly disclose how it was calculated, including any adjustments, and how it compares to earnings before tax on your GAAP income statement. Use Plain English Regardless of your industry, stakeholders want accurate, transparent information about your organization’s financial performance. It’s up to you to supply them with information they fully understand so they can make informed decisions. Contact us for help communicating your results more effectively to give stakeholders greater confidence and clarity when reviewing your financial reports. © 2024       [...] Read more...
April 12, 2024Two significant regulatory changes to retirement plans require immediate attention from plan sponsors, both to ensure current operational compliance and to comply with upcoming deadlines. Many long-term, part-time (LTPT) employees are now eligible for 401(k) retirement plans; there is also a new method of counting defined contribution retirement plan participants on Form 5500 Annual Return/Report. It’s important to note that a retirement plan’s audit status could be affected as these changes take effect. In addition to understanding the far-reaching implications that could help avoid missteps with LTPT employee eligibility and revised participant headcounts, we will explore how to correct any missteps that have already occurred. New Eligibility Opportunities for Long-Term, Part-Time Employees Prior to the SECURE Act of 2019 and SECURE 2.0 Act of 2022 (collectively SECURE), employers could exclude employees from their tax-qualified defined contribution plans based on the number of hours they worked per year. Typically, this meant that part-time employees were ineligible to contribute to their employer’s retirement plan — no matter how many years they had worked for their employer. An IRS Employee Plans Newsletter issued on January 26, 2024, defined LTPT employees as workers who have worked at least 500 hours per year in three consecutive years, although the consecutive year condition will be reduced to two years in 2025. SECURE expanded LTPT employee access to employer retirement plans by requiring 401(k) plans to allow employees that meet the LTPT requirements to make elective deferrals starting with the first plan year beginning on or after January 1, 2024. Employers are not required to make employer contributions for LTPT employees. However, the burden of identifying, notifying, and enrolling these newly eligible LTPT employees falls on the employers. Failing to inform LTPT employees of their eligibility as of January 1, 2024, may have resulted in non-compliance. To rectify any compliance issues, employers can consider using the IRS amnesty program known as the Employee Plans Compliance Resolution System (EPCRS). It is essential to understand this new requirement because LTPT employee eligibility may affect two other administrative functions for plan sponsors: Form 5500 filing and the annual employee benefit plan audit requirement. A Key Change When Counting Participants for Form 5500 Prior to 2023, IRS Form 5500 — an essential part of ERISA’s reporting and disclosure framework — required defined contribution retirement plan sponsors to include employees who were eligible to make elective deferrals on the first day of the plan year. In most organizations, LTPT employees would be excluded from this headcount unless the employer’s plan allowed them to make contributions to the retirement plan. Now, employers need only include participants with an account balance in the defined contribution retirement plan as of the first day of the plan year (but, for new plans, the participant account balance count is determined as of the last day of the first plan year). This may sound like a simple change, but the potential increase in participants who are LTPT employees complicates the matter. The Impact on a Plan’s Audit Requirement An organization’s obligation to have an annual audit of its retirement plan is dependent on the number of plan participants as of the first day of the plan year. Beginning with the 2023 plan year, defined contribution plans that have more than 100 participant accounts as of the first day of the 2023 plan year generally must have an annual independent audit. Before 2023, all plan participants who were eligible to make salary deferrals were included in headcounts as participants even if they had not made any plan contributions. The DOL changed the rules starting in 2023 to include only those with account balances as participants. Keep in mind that the number of participants can be decreased by taking advantage of rules that allow distributions of small account balances (accounts valued at less than $7,000 starting in 2024) to former participants, if the defined contribution plan adopted these provisions. The audit requirement of plans with 100 or more employees may change since employees without account balances are no longer counted. An organization may find that the defined contribution plan no longer requires an audit if eligible employees have not contributed to the 401(k) plan, but the audit requirement may be triggered when previously excluded LTPT employees begin to make elective deferrals. Navigating the New Normal For Certain Retirement Plans The LTPT employee rules take effect for plan years beginning on or after January 1, 2024 (for calendar-year end plans). If your organization missed the deadline to allow LTPT employees to participate in your plan, the good news is that there is a path to compliance. However, implementing these complicated changes in the law requires in-depth knowledge of the complex issues surrounding tax-qualified retirement plans. Experienced consultants can provide guidance and support throughout the process in the following ways: Analyze plan documents and employee data to identify any compliance gaps or issues that need to be addressed Engage in detailed discussions with plan sponsors to explain the intricacies of the changes and helping them understand the necessary steps to ensure compliance Facilitate communication with service providers to aid in a smooth transition and implementation of any required changes Calculate corrective actions required to rectify any non-compliance issues and confirm future compliance Guide the employer in enrolling in the IRS’s amnesty program (EPCRS), if necessary, to self-report non-compliance issues Help plan sponsors track the path taken to incorporate the necessary changes into the plan documents, to ensure ongoing compliance and avoid future issues Discuss Form 5500 preparation considerations, including participant head count     [...] Read more...
April 10, 2024The qualified business income (QBI) deduction is available to eligible businesses through 2025. After that, it’s scheduled to disappear. So if you’re eligible, you want to make the most of the deduction while it’s still on the books because it can potentially be a big tax saver. Deduction Basics The QBI deduction is written off at the owner level. It can be up to 20% of: QBI earned from a sole proprietorship or single-member LLC that’s treated as a sole proprietorship for tax purposes, plus QBI from a pass-through entity, meaning a partnership, LLC that’s treated as a partnership for tax purposes or S corporation. How is QBI defined? It’s qualified income and gains from an eligible business, reduced by related deductions. QBI is reduced by: 1) deductible contributions to a self-employed retirement plan, 2) the deduction for 50% of self-employment tax, and 3) the deduction for self-employed health insurance premiums. Unfortunately, the QBI deduction doesn’t reduce net earnings for purposes of the self-employment tax, nor does it reduce investment income for purposes of the 3.8% net investment income tax (NIIT) imposed on higher-income individuals. Limitations At higher income levels, QBI deduction limitations come into play. For 2024, these begin to phase in when taxable income before any QBI deduction exceeds $191,950 ($383,900 for married joint filers). The limitations are fully phased in once taxable income exceeds $241,950 or $483,900, respectively. If your income exceeds the applicable fully-phased-in number, your QBI deduction is limited to the greater of: 1) your share of 50% of W-2 wages paid to employees during the year and properly allocable to QBI, or 2) the sum of your share of 25% of such W-2 wages plus your share of 2.5% of the unadjusted basis immediately upon acquisition (UBIA) of qualified property. The limitation based on qualified property is intended to benefit capital-intensive businesses such as hotels and manufacturing operations. Qualified property means depreciable tangible property, including real estate, that’s owned and used to produce QBI. The UBIA of qualified property generally equals its original cost when first put to use in the business. Finally, your QBI deduction can’t exceed 20% of your taxable income calculated before any QBI deduction and before any net capital gain (net long-term capital gains in excess of net short-term capital losses plus qualified dividends). Unfavorable Rules for Certain Businesses For a specified service trade or business (SSTB), the QBI deduction begins to be phased out when your taxable income before any QBI deduction exceeds $191,950 ($383,900 for married joint filers). Phaseout is complete if taxable income exceeds $241,950 or $483,900, respectively. If your taxable income exceeds the applicable phaseout amount, you’re not allowed to claim any QBI deduction based on income from a SSTB. Other Factors Other rules apply to this tax break. For example, you can elect to aggregate several businesses for purposes of the deduction. It may allow someone with taxable income high enough to be affected by the limitations described above to claim a bigger QBI deduction than if the businesses were considered separately. There also may be an impact for claiming or forgoing certain deductions. For example, in 2024, you can potentially claim first-year Section 179 depreciation deductions of up to $1.22 million for eligible asset additions (subject to various limitations). For 2024, 60% first-year bonus depreciation is also available. However, first-year depreciation deductions reduce QBI and taxable income, which can reduce your QBI deduction. So, you may have to thread the needle with depreciation write-offs to get the best overall tax result. Use it Or Potentially Lose it © 2024       [...] Read more...
April 10, 2024Your business should generally maximize current year depreciation write-offs for newly acquired assets. Two federal tax breaks can be a big help in achieving this goal: first-year Section 179 depreciation deductions and first-year bonus depreciation deductions. These two deductions can potentially allow businesses to write off some or all of their qualifying asset expenses in Year 1. However, they’re moving targets due to annual inflation adjustments and tax law changes that phase out bonus depreciation. With that in mind, here’s how to coordinate these write-offs for optimal tax-saving results. Sec. 179 Deduction Basics Most tangible depreciable business assets — including equipment, computer hardware, vehicles (subject to limits), furniture, most software and fixtures — qualify for the first-year Sec. 179 deduction. Depreciable real property generally doesn’t qualify unless it’s qualified improvement property (QIP). QIP means any improvement to an interior portion of a nonresidential building that’s placed in service after the date the building is placed in service — except for any expenditures attributable to the enlargement of the building, any elevator or escalator, or the internal structural framework. Sec. 179 deductions are also allowed for nonresidential building roofs, HVAC equipment, fire protection systems and security systems. The inflation-adjusted maximum Sec. 179 deduction for tax years beginning in 2024 is $1.22 million. It begins to be phased out if 2024 qualified asset additions exceed $3.05 million. (These are up from $1.16 million and $2.89 million, respectively, in 2023.) Bonus Depreciation Basics Most tangible depreciable business assets also qualify for first-year bonus depreciation. In addition, software and QIP generally qualify. To be eligible, a used asset must be new to the taxpayer. For qualifying assets placed in service in 2024, the first-year bonus depreciation percentage is 60%. This is down from 80% in 2023. Sec. 179 vs. Bonus Depreciation The current Sec. 179 deduction rules are generous, but there are several limitations: The phase-out rule mentioned above, A business taxable income limitation that disallows deductions that would result in an overall business taxable loss, A limited deduction for SUVs with a gross vehicle weight rating of more than 6,000 pounds, and Tricky limitation rules when assets are owned by pass-through entities such as LLCs, partnerships, and S corporations. First-year bonus depreciation deductions aren’t subject to any complicated limitations. But, as mentioned earlier, the bonus depreciation percentages for 2024 and 2023 are only 60% and 80%, respectively. So, the current tax-saving strategy is to write off as much of the cost of qualifying asset additions as you can with Sec. 179 deductions. Then claim as much first-year bonus depreciation as you can. Example: In 2024, your calendar-tax-year C corporation places in service $500,000 of assets that qualify for both a Sec. 179 deduction and first-year bonus depreciation. However, due to the taxable income limitation, the company’s Sec. 179 deduction is limited to only $300,000. You can deduct the $300,000 on your corporation’s 2024 federal income tax return. You can then deduct 60% of the remaining $200,000 ($500,000 − $300,000), thanks to first-year bonus depreciation. So, your corporation can write off $420,000 in 2024 . That’s 84% of the cost! Note that the $200,000 bonus depreciation deduction will contribute to a corporate net operating loss that’s carried forward to your 2025 tax year. Managing Tax Breaks As you can see, coordinating Sec. 179 deductions with bonus depreciation deductions is a tax-wise idea. We can provide details on how the rules work or answer any questions you have. © 2024       [...] Read more...
April 10, 2024If your small business is strapped for cash (or likes to save money), you may find it beneficial to barter or trade for goods and services. Bartering isn’t new — it’s the oldest form of trade — but the internet has made it easier to engage in with other businesses. However, if your business begins bartering, be aware that the fair market value of goods that you receive in these types of transactions is taxable income. And if you exchange services with another business, the transaction results in taxable income for both parties. Fair Market Value Here are some examples of an exchange of services: A computer consultant agrees to offer tech support to an advertising agency in exchange for free advertising. An electrical contractor does repair work for a dentist in exchange for dental services. In these cases, both parties are taxed on the fair market value of the services received. This is the amount they would normally charge for the same services. If the parties agree to the value of the services in advance, that will be considered the fair market value unless there’s contrary evidence. In addition, if services are exchanged for property, income is realized. For example: If a construction firm does work for a retail business in exchange for unsold inventory, it will have income equal to the fair market value of the inventory. If an architectural firm does work for a corporation in exchange for shares of the corporation’s stock, it will have income equal to the fair market value of the stock. Joining a Club Many businesses join barter clubs that facilitate barter exchanges. These clubs generally use a system of “credit units,” which are awarded to members who provide goods and services. The credits can be redeemed for goods and services from other members. In general, bartering is taxable in the year it occurs. But if you participate in a barter club, you may be taxed on the value of credit units at the time they’re added to your account, even if you don’t redeem them for actual goods and services until a later year. For example, let’s say that you earn 2,500 credit units one year, and that each unit is redeemable for $2 in goods and services. In that year, you’ll have $5,000 of income. You won’t pay additional tax if you redeem the units the next year, since you’ve already been taxed on that income. If you join a barter club, you’ll be asked to provide your Social Security number or Employer Identification Number. You’ll also be asked to certify that you aren’t subject to backup withholding. Unless you make this certification, the club is required to withhold tax from your bartering income at a 24% rate. Tax Reporting By January 31 of each year, a barter club will send participants a Form 1099-B, “Proceeds from Broker and Barter Exchange Transactions,” which shows the value of cash, property, services and credits that you received from exchanges during the previous year. This information will also be reported to the IRS. Exchanging Without Exchanging Money By bartering, you can trade away excess inventory or provide services during slow times, all while hanging on to your cash. You may also find yourself bartering when a customer doesn’t have the money on hand to complete a transaction. As long as you’re aware of the federal and state tax consequences, these transactions can benefit all parties involved. Contact us if you need assistance or would like more information. © 2024       [...] Read more...
April 10, 2024Here are some of the key tax-related deadlines that apply to businesses and other employers during the second quarter of 2024. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements. April 15th If you’re a calendar-year corporation, file a 2023 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004) and pay any tax due. For corporations, pay the first installment of 2024 estimated income taxes. Complete and retain Form 1120-W (worksheet) for your records. For individuals, file a 2023 income tax return (Form 1040 or Form 1040-SR) or file for an automatic six-month extension (Form 4868) and pay any tax due. For individuals, pay the first installment of 2024 estimated taxes, if you don’t pay income tax through withholding (Form 1040-ES). April 30th Employers report income tax withholding and FICA taxes for the first quarter of 2024 (Form 941) and pay any tax due. May 10th Employers report income tax withholding and FICA taxes for the first quarter of 2024 (Form 941), if they deposited on time, and fully paid, all of the associated taxes due. May 15th Employers deposit Social Security, Medicare and withheld income taxes for April if the monthly deposit rule applies. June 17th Corporations pay the second installment of 2024 estimated income taxes. © 2024       [...] Read more...
April 8, 2024At Financial Executives International’s Corporate Financial Reporting Insights Conference last November, staff from the Securities and Exchange Commission (SEC) expressed concerns related to the use of financial metrics that don’t conform to U.S. Generally Accepted Accounting Principles (GAAP). Companies continue to have trouble complying with the SEC’s guidelines on non-GAAP reporting, said Lindsay McCord, chief accountant of the SEC’s Division of Corporation Finance. Here’s some guidance that may help as you prepare your company’s financial statements for the first quarter of 2024. Ongoing Concerns GAAP is a set of rules and procedures that accountants typically follow to record and summarize business transactions. These guidelines provide the foundation for consistent, fair, honest and accurate financial reporting. Private companies generally aren’t required to follow GAAP, but many do. Public companies don’t have a choice; they’re required by the SEC to follow GAAP. Over the years, the use of non-GAAP measures has grown. These unaudited figures can provide added insight when they’re used to supplement GAAP performance measures. But they can also be used to mislead investors and artificially inflate a public company’s stock price. Specifically, companies may include unaudited performance figures — such as earnings before interest, taxes, depreciation and amortization (EBITDA) — to cast the company in a more favorable light. Non-GAAP metrics may appear in the management, discussion and analysis section of their financial statements, earnings releases and investor presentations. For example, a company’s EBITDA is typically higher than its GAAP earnings. That’s because EBITDA is commonly adjusted for such items as stock-based compensation, nonrecurring items, intangibles and other company-specific items. In addition, non-GAAP metrics or adjustments may be cherry-picked to present a stronger financial picture than what appears in audited financial statements. Some companies also may erroneously present non-GAAP metrics more prominently than GAAP numbers — or fail to clearly label and describe non-GAAP measures. 10 Key Questions The Center for Audit Quality (CAQ) recommends considering the following 10 questions to help ensure transparent non-GAAP metric disclosures: What’s the purpose of the non-GAAP measure, and would a reasonable investor be misled by the information? Has the non-GAAP measure been given more prominence than the most comparable GAAP measure? How many non-GAAP measures have been presented, and are they all necessary and appropriate for investors to understand performance? Why has management selected a particular non-GAAP measure to supplement GAAP measures that are already established and consistently applied within its industry or across industries Does the company’s disclosure provide substantive detail on its purpose and usefulness for investors? How is the non-GAAP measure calculated, and does the disclosure clearly and adequately describe the calculation, as well as the reconciling items between the GAAP and non-GAAP measures? How does management use the measure and has that use been disclosed? Is the non-GAAP measure sufficiently defined and clearly labeled as non-GAAP or could it be confused with a GAAP measure? What are the tax implications of the non-GAAP measure, and does the calculation align with the tax consequences and the nature of the measure? Does the company have material agreements, such as a debt covenant, that require compliance with a non-GAAP measure? If so, are they disclosed? The CAQ provides additional questions that address the consistency and comparability of non-GAAP metrics. We Can Help Non-GAAP metrics can provide greater insight into the information that management considers important in running the business. However, care should be taken not to mislead investors and lenders. Contact us to discuss your company’s non-GAAP metrics and disclosures. © 2024       [...] Read more...
January 25, 2024  Beginning in 2024, small businesses will need to comply with the Corporate Transparency Act. Harris CPAs is excited to work with our clients that are impacted and we are close to selecting a third party provider to assist our clients with these filings. We will have that information available soon! In the meantime we wanted to provide a brief overview of the Act and its requirements. Corporate Transparency Act – What is it and what does it mean for me? In 2021, Congress enacted the Corporate Transparency Act. This now requires some businesses to file a Beneficial Ownership Information (BOI) report with FinCEN (Financial Crimes and Enforcement Network) of the United States Treasury. In preparing the filing, there are several steps to go through to be in compliance with the new reporting requirement. We hope to walk you through these important steps to make the process a bit more understandable. Here is an overview and checklist of the Corporate Transparency Act guidelines to follow: Determine if you are a “reporting company.” Define who the beneficial owners are – spoiler alert, it’s not just members of the LLC or shareholders. Identify up to two company applicants. Understand the timeline and file electronically on the Treasury Department’s website (which went live on January 1, 2024). How do I determine if I have a “reporting company”? A “reporting company” is a corporation, Limited Liability Company (LLC), or other entity created by filing a document. This must be filed with a Secretary of State, a similar office under the law of state or Indian tribe, or a foreign company registered to do business in the U.S. at any Secretary of State or Indian Tribe filing. There are twenty-three types of entities that are exempt from filing. Many of the exemptions are publicly traded companies, nonprofits (organized under 501(c) of the Internal Revenue Code) and certain large operating companies. Large operating companies are defined as having average gross receipts over the past three taxable years in excess of $5 million AND employing more than 20 full-time staff members. I have determined that I have a “reporting company”; who are my beneficial owners? Once you determine that you have a filing requirement, you must determine who has to be reported as a beneficial owner. A beneficial owner is defined as any individual who directly or indirectly exercises substantial control over a reporting OR owns at least 25% of the ownership interest in the company. Ownership interests include any items that may be converted to ownership in the future (i.e., stock options, restricted stock units or debt that may be converted to equity). There are 5 exceptions to the definition of a beneficial owner. This includes: (1) a minor child; (2) a nominee/intermediary/custodian/agent; (3) employees who are not senior officers, do not exercise substantial control over the business, or do not have an economic benefit of the business other than wages earned; (4) ownership through future inheritance; and (5) a creditor holding non-convertible debt instrument. Who are the company applicants? The company is able to report up to two applicants on the filing of the BOI. The company applicant would be the person(s) who filed the original organizational documents with the Secretary of State when the entity was created. If a third party was used, the individual within the company who authorized the third party to create the entity would be the applicant. Company applicants are only required to be disclosed if the entity was created on or after January 1, 2024. For entities created before this date, company applicants are not required to be disclosed. What information do I need to collect and report for the beneficial owners of my business? For a “reporting company”, you will need to report: (1) the full legal name of the business along with any trade names used; (2) the complete current U.S. address; (3) the state of registration; and (4) the taxpayer ID number used by the business for tax filings. For each beneficial owner, you will need their full legal name, date of birth, complete current address and a copy of one of the following non-expired documents: U.S. Passport, State Driver’s license or identification document issued by a state, local government or tribe. These documents will need to be uploaded to the Treasury Department portal. When is my report due? New entities filed with a Secretary of State after 12/31/2023 and before 12/31/2024 must file within 90 days of creation of the entity. Entities filed with a Secretary of State after 12/31/2024 will have to prepare the initial filing 30 days after the initial Secretary of State filing. However, existing companies created with a Secretary of State have to file their initial report by December 31, 2024. Once the initial report is filed, there is no additional filing needed until you experience a change in the BOI report. All companies who have a change in their BOI after initial filing are required to file an updated report within 30 days of the change. Examples of changes include changes to name, address, obtaining a new driver’s license or passport, changes to officer positions, and registering a DBA. If a beneficial owner becomes deceased, the report needs to be filed within 30 days of settling the owner’s estate. What happens if companies do not file? Penalties accrue at $591 per day, up to 2 years in prison, and/or up to $10,000 in fines. Hopefully the information provided below leaves you feeling a bit more informed on the steps needed to properly file with the new reporting requirement. Obviously working with your accountant can greatly help in navigating any questions or challenges that arise for your business, as it relates to the Corporate Transparency Act.   Harris will be providing more information to assist you in the filing requirement. Look for this communication to come soon.   [...] Read more...
January 23, 2024American workers are facing a savings crisis made more acute by soaring interest rates, persistent inflation, and other economic stressors. In its 2023 Workplace Wellness Survey, the Employee Benefit Research Institute (EBRI) found that 30% of workers could not pay for an unexpected $500 expense, while half of EBRI’s respondents considered their retirement savings to be their only “significant emergency savings.” This dependence on retirement savings is also rising according to Vanguard research that reveals hardship withdrawals from workplace retirement plans increased from 2021 to 2022. About 80% of those withdrawals were taken by lower-income participants (defined as the participants with an annual income of between $30,000 and $75,000) to avoid losing their home or to pay for unexpected medical bills. Further, one-third of the participants who took a hardship withdrawal in 2022 had previously taken a withdrawal in 2021. This data underscores an important challenge facing employees and employers alike: near-term financial needs may sabotage the long-term financial security and retirement outcomes of many Americans. And while today only 20% of workers have access to an emergency savings account at work, EBRI’s survey found that more than 80% of those without such a benefit want one and would prioritize it above other benefits, such as health savings accounts and additional paid time off. How Employers Can Help: The In-Plan Options To help address this issue, the Secure 2.0 Act of 2022 offers plan sponsors a way to include an emergency-savings benefit, also known as pension-linked emergency savings accounts or PLESAs, as an add-on to an existing retirement plan program. The Act permits PLESAs to be added as of January 1, 2024. Here are a few things to know about PLESAs: PLESAs are intended for non-highly-compensated employees (as defined by the IRS). Employees can contribute up to $2,500 (or a lesser amount determined by the plan sponsor) on an after-tax (Roth) basis. Employees may take withdrawals as frequently as monthly. Employers have the option of auto-enrolling employees in a PLESA up to a rate of 3% of compensation. Employers may match contributions to a PLESA, but must: Match at the same rate that applies to any retirement plan match. Make matching contributions to the participant’s retirement account, not the PLESA. Employees are not required to document a hardship or immediate financial need to take a withdrawal. PLESA contributions must be held as cash in interest-bearing deposit accounts or in regulated principal preservation investment products. While the intended goal of PLESAs is positive — to promote healthy saving habits while helping to preserve the retirement savings of employees — there remain many open questions about key aspects of the legislation including eligibility, employee and employer contributions, and distributions. The DOL and IRS have been directed to study emergency savings in defined-contribution plans and to report their findings to Congress, but the deadline for doing so isn’t until December 29, 2029. For plan sponsors concerned about the complexity and lack of regulatory clarity around setting up and administering PLESAs, a standalone emergency savings product is an alternative. Out-of-Plan Alternatives A growing number of retirement plan recordkeepers are partnering with plan sponsors to add out-of-plan (sometimes referred to as à la carte) emergency savings products to their menu of benefits. Financial wellness nonprofit Commonwealth interviewed plan recordkeepers and noted that eight out of nine recordkeepers offered or are planning to offer an emergency savings product. One such program recently initiated by some plan sponsors allows employees to contribute a portion of their net pay to an account maintained by the company’s 401(k) recordkeeper. Financial education modules and one-on-one financial coaching sessions are also being offered in conjunction with the program. Insight: Weigh the Pros and Cons When considering either approach, plan sponsors need to think through what they are trying to achieve. If it is a behavioral shift they are seeking, the in-plan option may make sense because once participants reach the $2,500 contribution limit, any overflow of funds automatically goes into the participant’s Roth retirement savings along with any employer matching contributions. In this way, plan sponsors are encouraging better short- and long-term saving habits, while also helping to reduce hardship withdrawals and loans from retirement plans along with the associated penalties and fees. For other employers, particularly smaller companies, the out-of-plan option may be a more easily implemented choice because employers are not required to already have a retirement plan in place. Also, because standalone savings plans are not subject to ERISA, there are no regulatory hurdles, auto-enrollment, auto-escalation, or fiduciary obligations for sponsors. The relative simplicity of implementing these out-of-plan savings vehicles could offer an attractive option for smaller employers. However, while out-of-plan products are attractive for their ease of use, they do not include an employer matching contribution feature. From a behavioral perspective, the out-of-plan product lacks the employee behavioral trigger that some employers want to achieve. Employers who are looking to modify employee savings habits could consider other options. We recommend sponsors clarify the goals for your employees and your benefits program and consider whether adding some type of emergency savings option (in or out-of-plan) may complement your overall objectives.   [...] Read more...
December 11, 2023  While, the IRS’ announcement last month provides significant compliance relief for processing catch-up contributions as after-tax “Roth” contributions, the focus now for plan sponsors should be on proper implementation of the guidance. IRS Notice 2023-62 established a two-year administrative extension window for plan sponsors to delay their implementation of mandated changes required by the SECURE 2.0 Act of 2022 until January 1, 2026. It also clarified that the IRS will allow catch-up contributions to continue to be made under pre-SECURE 2.0 law for plan years starting in 2024. The IRS took this action to address a drafting mistake in Section 603 of SECURE 2.0 that technically eliminated all catch-up contributions by accidentally deleting IRC Section 402(g)(1)(C). Legislators have indicated Congress intends to resolve this error with a future technical correction. This extension was welcomed by the defined contribution retirement plan community, which had previously voiced concerns about having insufficient time to update their systems to implement the provision. Section 603 of SECURE 2.0 had originally required catch-up contributions made to a qualified retirement plan — such as 401(k), 403(b), or 457(b) plans — by higher income employees (who earned $145,000 or more in the prior year) to be made on a Roth basis beginning January 1, 2024. Despite the recent extension, additional clarification is needed for plan administrators, sponsors, and other key stakeholders to fully understand their regulatory burden. Execution Challenges The new so-called “Rothification” rules had generated numerous questions from key retirement plan industry stakeholders, including large employers. There were also requests for additional implementation time as well as for more detailed and clarifying regulatory guidance. For instance, the ERISA Industry Committee (ERIC) published an open letter in July 2023 that cited a number of administrative hurdles for implementation and the need for transition relief. One concern cited was the new $145,000 income limit imposed on Roth catch-up contributions. Because it is a brand-new threshold (and not part of any existing qualified plan rule or requirement), implementation would require plan sponsors to coordinate closely with their payroll administrators, recordkeepers, and other service providers to make the necessary system updates. The new income limit is also anticipated to have a significant trickle-down impact on both sponsor and provider systems and processes. Plan sponsors also need to develop and roll out communication of the changes to employees, which requires IRS guidance that had not yet been provided. As ERIC’s open letter indicated, the industry had concerns that starting implementation before the issuance of IRS guidance could result in costly re-work. Additionally, employers whose plans do not currently allow for Roth plan contributions faced a dilemma as to whether to eliminate catch-up contributions entirely (at least, until they were able to implement a Roth program) or attempt to quickly implement a Roth option. Welcome Relief The IRS notice provides a two-year administrative transition period during which qualified retirement plans offering catch-up contributions will be treated as satisfying the new rules in Section 414(v)(7)(A) even if the contributions are not designated as Roth contributions throughout the transition period (or until December 31, 2025). Additionally, a plan that does not currently provide for any designated Roth contributions will still be treated as satisfying the new requirements. The notice also identifies some topics for expected future regulatory guidance, including the following proposed IRS positions on important open questions: Higher-income employees with no FICA income in the preceding year would not be subject to the requirements of the new catch-up rules. Plan sponsors may treat higher-income earners’ pre-tax, catch-up contributions elections as default Roth catch-up elections when they become subject to the mandatory Roth catch-up treatment. For plans maintained by more than one employer, the preceding calendar year wages for an eligible participant would not be aggregated with wages from another participating employer for purposes of determining whether the participant’s income meets the $145,000 threshold.   [...] Read more...
July 13, 2023The Department of Labor (DOL) released the final changes to Form 5500 relating to the September 2021 notice of proposed form revisions (NPFR) to amend the Form 5500. The changes fall into seven major categories. These changes are effective for plan years beginning on or after January 1, 2023 and will be incorporated into the 2023 Form 5500. As a reminder, the Form 5500 provides the DOL, Internal Revenue Service and the Pension Benefit Guaranty Corporation with information about a retirement plan’s operations, qualifications, financial condition, and compliance with government regulations. Below, we review some of the key changes to Form 5500 and what the adjustments are. Are You a Large Plan or a Small Plan? The Rules Have Changed Historically, determining whether your plan was “large” versus “small” was based on the number of eligible participants in your plan. If your plan had at least 100 eligible participants on the first day of the plan year, you were considered a large plan—regardless of how many participants had accounts or elected to participate in the plan. As a result, the DOL’s recent changes to Form 5500 redefine large plans by the number of participants with account balances on the first day of the plan year. If your plan has at least 100 participants with active accounts, then you are a large plan, and an annual audit is required. (Note that this provision only applies to defined contribution plans and is in effect for plan years that begin on or after January 1, 2023.)This provision will significantly change the threshold for the status of large versus small plans. The DOL estimates 19,500 large plans will no longer be subject to the annual audit requirement relating to this participant-count methodology change. While this change is likely good news for many plan sponsors, there are some potential issues. For example, a failed compliance test or the allocation of forfeitures could push plans over the 100-participant threshold. If a plan fails the Actual Deferral Percentage or the Actual Contribution Percentage test, participants who closed out their accounts may need to be reinstated for reimbursement purposes. To avoid this issue, plan sponsors should carefully review their plan documents to determine whether they are able to “push out” participants with account balances under $5,000. More Updates Coming Down the Pike The DOL’s final changes includes several other changes. Mock-ups of the new forms and instructions for the following items will be available later this year at Reginfo.gov: Consolidated Form 5500 for Defined Contribution Groups Streamlined reporting on the 5500 for pooled employer plans and multiple-employer plans New breakout categories for administrative expenses (Schedule H) Revisions to the financial and funding reporting requirements for defined benefit plans New Internal Revenue Code (IRC) compliance questions to improve tax oversight Certain revisions from the NPFR have been delayed including proposed revisions to the content requirements for the schedules of assets filed by large plans. The DOL wants to modernize data reported in a plan’s individual investments to improve consistency, transparency, and usability of plan investment information, but feedback revealed that service providers need more time. Insight: Partner With Service Providers to Build Your Strategy Most plan sponsors process distributions with the help of service providers, so it is important to partner with such service providers to keep an eye on your number of participants—especially if you are close to the threshold of 100 active plan participants. Plan sponsors should clarify if it is their goal to remain a small plan, familiarize themselves with the options presented in the plan document to move participants out of the plan, and determine the procedure for a potential distribution. Learn how Harris CPAs can help you here! Employee Benefit Plan Page   [...] Read more...
February 21, 2023SECURE 2.0 was signed into law on December 29, 2022, makes sweeping changes to retirement savings plans. Before plan sponsors can take advantage of the many provisions in SECURE 2.0, the DOL will need to provide additional regulations and guidance on some of the provisions. In other words, there is more to come on SECURE 2.0. In the meantime, the DOL is focused on 17 items recently released in its biannual regulatory agenda. Plan sponsors and other industry experts should pay attention to this agenda to be sure they understand how these changes may affect them—particularly in areas such as changes to the fiduciary rule, updates on pooled employer plans, and final rules on lifetime income illustrations. In total, the Employee Benefits Security Administration (EBSA) listed three pre-rule stage items, nine proposed rule stage items, and five final rule stage items in its recently released regulatory agenda. Pre-Rule Stage: Improving Participant Engagement and Effectiveness: The DOL’s EBSA has been tasked with finding ways to improve retirement plan disclosures to enhance outcomes for employees. The EBSA will start by consulting with plan sponsors and other stakeholders to explore ways to improve such disclosures. Pooled Employer Plans: The SECURE Act of 2019 amended the Employee Retirement Income Security Act of 1974 (ERISA) to allow pooled employer plans to be a type of single employer pension benefit plan. The EBSA will begin exploring the need for regulatory guidance to run these plans. Requirements Related to Advanced Explanation of Benefits and Other Provisions Under the Consolidated Appropriations Act of 2021: The EBSA is reviewing whether regulation or guidance is needed to ensure patients have transparency in their health care treatment options and expected costs before a scheduled service. Request for comments closed in November 2022 and an analysis is expected in April 2023. Proposed-Rule Stage Definition of the Term “Fiduciary”: The DOL’s is proposing to amend ERISA’s definition of fiduciary to more closely reflect today’s relationships between participants, service providers, and others who provide investment advice for a fee. This proposal has been carried over since the Spring 2021 regulatory agenda and has no timeline for completion. Improvement of the Form 5500 and Implementing Related Regulations: Working with the Internal Revenue Service and Pension Benefit Guaranty Corporation, the DOL intends to modernize the Form 5500 to make investment data more mineable. This proposal has been carried over since Fall 2021 and movement on it is expected by June 2023. Definition of Employer Under Section 3(5) of ERISA – Association Health Plans: The EBSA will explore whether to replace or remove its 2018 final rule that set alternative criteria when an employer association could act on behalf of an employer to create a multiple employer group health plan. Action on this is expected in March 2023. Adoption of Amended and Restated Voluntary Fiduciary Correction Program: The EBSA took public comments until January 20, 2023 on its plan to expand the scope of transactions eligible for self-correction. Final Rule Stage Pension Benefit Statements – Lifetime Income Illustrations: The SECURE Act added a lifetime income illustration requirement for certain defined contribution plans. The final rule is expected to be released in May 2023. Prohibited Transaction Exemption Procedures: An April 2023 final rule is expected that would modify the DOL’s process for granting prohibited transaction exemption. Independent Contractor Classification Under the Wage and Hour Division agenda, the DOL announced that it expects to issue a final rule clarifying independent contractor status in May 2023. This ruling has been issued, delayed, and debated in court by the Biden and Trump administrations. The current administration believes the 2021 regulation does not reflect what is written in the Fair Labor Standards Act and will issue its updated rule to complement the law. Employee Benefit Plan Page [...] Read more...
November 11, 2022As we approach the new year, it is time for individuals to review their 2022 and 2023 tax situations and identify opportunities to reducing, deferring or accelerating their tax obligations. Click the the picture below to read the full issue on 2022 Year-End Tax Planning for Individuals: Highlights from this guide: Individual Tax Planning Highlights with tax brackets Timing of Income and Deductions Long-Term Capital Gains with rate brackets Retirement Plan Contributions Foreign Earned Income Exclusion Kiddie Tax Alternative Minimum Tax Limitations on Deduction of State and Local Taxes ( Salt Limitations) Charitable Contributions Net Operating Losses and Excess Busoness Loss Limitation Estate and Gift Taxes [...] Read more...
June 15, 2022The Internal Revenue Service on June, 9th announced an increase in the optional standard mileage rate for the final 6 months of 2022. Taxpayers may use the optional standard mileage rates to calculate the deductible costs of operating an automobile for business and certain other purposes. For the final 6 months of 2022, the standard mileage rate for business travel will be 62.5 cents per mile, up 4 cents from the rate effective at the start of the year. The new rate for deductible medical or moving expenses (available for active-duty members of the military) will be 22 cents for the remainder of 2022, up 4 cents from the rate effective at the start of 2022. These new rates become effective July 1, 2022. In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2022. The IRS normally updates the mileage rates once a year in the fall for the next calendar year. For travel from Jan. 1 through June 30, 2022. While fuel costs are a significant factor in the mileage figure, other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs. The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage. Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates. The 14 cents per mile rate for charitable organizations remains unchanged as it is set by statute. Midyear increases in the optional mileage rates are rare, the last time the IRS made such an increase was in 2011. Mileage Rate Changes PurposeRates 1/1 through 6/30/22Rates 7/1 through 12/31/22Business58.562.5Medical/Moving1822Charitable1414 Link to the full article on the IRS website: https://www.irs.gov/newsroom/irs-increases-mileage-rate-for-remainder-of-2022 Link to Optional Standard Mileage Rates IRS Announcement: https://www.irs.gov/pub/irs-drop/a-22-13.pdf https://harrisgroupadvisors.com//services/tax-planning-compliance/ [...] Read more...

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