Important Update Regarding the Corporate Transparency Act

 


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.

 


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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 28, 2024According to the Association of Certified Fraud Examiners’ (ACFE’s) Occupational Fraud 2024: A Report to the Nations, not-for-profits suffer roughly half the median loss per fraud scheme of for-profit businesses and government entities — $76,000 vs. $150,000. That may sound like good news, except for the fact that most nonprofits are on tight budgets and can’t afford to lose anything. To help keep your nonprofit’s losses at $0, you need to establish and enforce compliance with internal controls that directly address your organization’s risks. Stakeholder training The 2024 ACFE report contains what should be an alarming stat for nonprofits: Nonprofits have the lowest implementation rate of fraud awareness training — 52% for staffers and 49% for management (vs. 82% and 81%, respectively, for public companies). According to the ACFE, organizations without fraud awareness training suffer two times the financial losses of organizations with it. So make sure you include fraud prevention and reporting instruction in your orientation of new staffers and executives, as well as volunteers with financial responsibilities. Also provide periodic refreshers for existing employees. Tips that fraud may be occurring are twice as likely to come from trained staffers than untrained staffers. To boost potential reporting, ensure that all stakeholders — including clients and vendors — know how to report fraud suspicions. The existence of an anonymous tipline or web portal is associated with a 50% reduction in the cost and duration of fraud schemes. Financial statement reviews Nonprofit boards or audit committees typically review financial statements annually or semi-annually. However, the longer fraud goes undetected, the greater the financial loss for the victim organization. Therefore, your organization’s leaders should review financial statements at least quarterly, if not monthly. Board members should also receive regular budget reports that show variances between budget and actual figures, because significant variations can indicate potential fraud. Indeed, with strong management reviews in place, organizations reduce financial losses from fraud by a median 60%, says the ACFE. Segregation of duties Almost all types of organizations benefit from a segregation of duties. This means that no individual should have control over more than one phase of a financial transaction or function. Staffers or board members with access to assets shouldn’t be responsible for accounting for those assets. Nor should an individual have the ability to both initiate and approve a transaction, such as paying a vendor invoice. Don’t let individuals who receive checks also deposit them. Finally, don’t allow anyone who writes checks to also reconcile monthly bank statements. Segregation of duties can be challenging for nonprofits with few staff or those that have shifted to remote work arrangements. If accounting staffers primarily fulfill these roles, try assigning some duties to board members or consider outsourcing functions such as payroll and accounts payable. Also consider using cloud solutions to overcome hurdles related to employees working remotely. Other controls Credit cards have become increasingly common in nonprofits — but they come with the risk of unauthorized usage. If you give credit cards to staffers, board members or volunteers, limit the number of cards in use. Also require a receipt for each purchase (along with documentation of the business purpose). Someone who isn’t an authorized card user should scrutinize card statements and supporting documentation every month for unusual or questionable activity. Another internal control that can reap real benefits is a mandatory vacation policy (generally associated with a 23% reduction in losses). Required time off helps prevent would-be fraudsters from hiding their schemes from colleagues. Not surprisingly, an unwillingness to share duties or take vacation are some of the most common red flags for fraud. Evolving threats Depending on your organization’s size, mission and other factors, you may have other or new threats that should be addressed by internal controls. For example, have you recently reduced your workforce and turned more tasks over to volunteers? Do you have a big fundraising event coming up? These can increase fraud risk. Contact us to discuss your needs. © 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, 2024Construction projects are inherently fraught with risk. That’s why having the right insurance in place is critical for all parties involved. For contractors, however, adequate coverage typically comes at a high price and with abundant red tape when dealing with insurers. One potential solution is a contractor-controlled insurance program (CCIP). What is it? CCIPs are a type of “wrap-up” policy that’s managed by the general contractor and covers most parties to a construction project. However, design professionals, such as architects and engineers, usually aren’t covered. Typically, CCIPs include general liability, workers’ compensation and excess liability coverage. There may also be an option to add other coverage, such as builder’s risk, professional liability or pollution liability. Insurance for commercial vehicles and equipment generally isn’t included. What are the Advantages? Ordinarily, the general contractor and each subcontractor on a project buy their own policies. Then, each subcontractor names the general contractor and owner as “additional insureds,” and each subcontract contains complex indemnity provisions. Multiple insurers and policies may lead to coverage gaps. In turn, claims can lead to costly disputes and delays as the parties sort out their respective responsibilities. By wrapping up coverage under a single policy, a CCIP can help parties avoid coverage gaps and minimize disputes and litigation over who’s at fault or responsible for damages if incidents occur. And the general contractor may be able to negotiate broader coverage, higher limits and lower premiums than the subcontractors could on their own. Plus, by eliminating the need for subcontractors to secure their own insurance coverage, a CCIP can expand the pool of potential bidders. This can be an important advantage given today’s shortage of skilled labor. When work gets underway, the general contractor wields great control over all aspects of risk management on a project, including insurance of course. Because CCIPs are highly loss-sensitive, most general contractors are strongly motivated to minimize claims through a comprehensive, centralized and well-enforced safety program. If a claim does arise, having only one administrator tends to accelerate the claims process and reduce the cost thereof. And the Disadvantages? As you might expect, there are risks and costs for the general contractor setting up the CCIP. Although the program can eventually streamline insurance administration, the initial burden of finding and negotiating coverage can be daunting. In fact, given the complexity of CCIPs, many contractors find them suitable only for larger projects. Managing subcontractor enrollment can also be an arduous task, and the subcontractors who sign up may present risks all their own. Because subcontractors aren’t operating under their own insurance policies, there’s less incentive for them to limit their losses. Also, because CCIPs are essentially “no-fault” policies — that is, coverage is provided regardless of who’s at fault — subcontractors may be more likely to submit false claims. There’s also financial risk. In the unlikely event that claims exceed a CCIP’s coverage limits, the general contractor might be financially responsible for the difference. Who can Help? If you’re looking to enhance project risk management, reduce insurance costs and streamline claims, consider a CCIP. Just bear in mind that we’ve given examples of only a few of the potential disadvantages; there may be others. Contact our firm for help weighing all the pros and cons. © 2024   Construction & Engineering Page   Real Estate Page   [...] 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, 2024For construction businesses, financial management is notoriously complex. Contractors have to deal with the ebbs and flows of their respective markets, project-based pricing and collections, rising operating costs, and various other factors — not the least of which is bad weather! Yet effective financial management is essential for your company to thrive. Here are some ways to better manage your money. Follow Strong Billing Procedures Healthy cash flow — one of the most important aspects of financial management — depends on your business’s ability to both meet contractual obligations and receive timely payments. To this end, establishing a standard billing schedule for every job will make managing accounts less complicated and help you keep track of monthly revenue. When drafting contracts, clearly include payment amounts and when they’re due — as well as penalties for late payments. Equally important, clearly outline a process for change order approvals and invoicing that allows you to bill for additional work as soon as possible. Diligently follow the billing schedule as projects or project phases are completed. To help ensure prompt payment, make sure invoices are well-designed, detailed and include any necessary proof-of-work documentation. If you don’t already, offer electronic payment options to make paying quicker and easier. Last, be sure to set up automated reminders to regularly follow up on unpaid invoices. Excel at Materials Management Effective financial management also depends largely on how cost-efficiently you procure, store and use construction materials. Implement strategies to optimize all three of these actions while minimizing waste. Begin by taking a hard look at how you capture, organize and share materials-related data across your projects. Do you have a centralized system for doing so? Are you tracking losses and proactively addressing how to prevent theft, mistakes and mismanagement? With the right system in place and technology supporting it, you can minimize excessive and unnecessary spending on materials. From there, be sure you’re addressing the timely delivery of materials. Supply chain slowdowns or disruptions aren’t in the news as much anymore, but they’re still a challenge for many contractors. Some construction companies maintain inventories of critical and long-lead items to ensure they’ll have the necessary materials as jobs come up. But doing so entails paying for storage facilities and investing time and resources into inventory management. Another strategy is to diversify your supplier base and include alternative local suppliers who can deliver materials of similar type and quality. Keep a Close Eye on Labor Nearly all businesses need to confront the tricky issue of “rightsizing” their workforces and paying employees competitively. Construction companies have the added challenge of doing all this in the midst of a seemingly never-ending skilled labor shortage. One thing that can help is quantifying your labor needs as precisely as possible. Determine how many workers are needed to complete each typical job task or how many are needed to work on each phase of the types of projects you usually perform. Obviously, you’ll need historical data to make such determinations, so be sure you’re capturing this information. Compensation, benefits and taxes are also major factors. Indeed, knowing your true labor costs — often referred to as labor burden rate — is a mission-critical financial-management activity for construction businesses. Embrace Technology Using up-to-date and secure financial management software and mobile devices tailored to the construction industry can help streamline financial activities related to estimating, job costing, payroll and invoicing. The right combination of tech assets can help: Automate calculations and processes, Create more accurate estimates, Track a variety of costs and accurately allocate them to projects, and Generate the necessary documentation for your records, as well as for financial reporting. As always, however, selecting the right tech tools for your construction business’s distinctive needs and comfort level is the hard part. Choose your purchases and upgrades carefully — always with the goal of improving the clarity of your finances and your control of them. Lay the Foundation Managing cash flow, materials, labor and technology costs for your hardworking construction company may seem as difficult as laying a solid foundation on unstable soil. But with the right personnel, policies, procedures and computing tools in place, it can be done. We’d be happy to help you review your construction company’s approach to financial management and target areas for improvement.© 2024   Construction & Engineering Page   Real Estate Page   [...] 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...
April 8, 2024Stay abreast of the continuing new regulations impacting the nonprofit industry, and catch up on new key trends in the nonprofit industry!   HIGHLIGHTS FROM THIS ISSUE Engaging Donors at Every Level: A Checklist OMB Issues the 2022 Compliance Supplement GASB Statement No. 99  Executive Compensation Excise Tax: Challenging and Strategies Salary Increase Budgets Jump for Nonprofits Click below to view the file.     Nonprofit and Government Page   [...] Read more...
April 8, 2024When’s the last time you evaluated your not-for-profit’s social media strategy? Are you using the right platforms in the most effective way, given your mission, audience and staffing resources? Do you have controls to protect your nonprofit from reputation-damaging content? These are important questions — and it’s critical you review them regularly. At the very least, you need a social media policy that sets some ground rules Annual Reviews As you know, the social media landscape changes quickly. The platform that’s hot today may be decidedly not hot tomorrow. So review your online presence at least once a year to help ensure you’re dedicating resources to the right spaces. Most nonprofits maintain a presence on Facebook and LinkedIn because that’s where likely donors tend to be. But if you’re an arts nonprofit or visually oriented, Instagram may be a better venue. And if your constituents are teenagers or young adults, you’re most likely to find them on TikTok. In general, fresher, frequently updated accounts get more traffic and engagement. So try not to overextend your organization by posting on multiple platforms with only limited staff resources. Determine where you’ll get the most bang for your buck by surveying supporters and observing where peer nonprofits post. Content Monitoring Social media is 24/7, and incidents can escalate quickly. So closely monitor your accounts, as well as conversations that refer to your nonprofit. A “social listening” tool that scans the web for your nonprofit’s name can be extremely helpful. But the best defense against reputation-busting events is a formal social media policy. Your policy should set clear boundaries about the types of material that are and aren’t permissible on your nonprofit’s official accounts and those of staffers. For example, it should prohibit employees, board members and volunteers from discussing nonpublic information about your organization on their personal accounts. With organizational accounts, limit access to passwords and regularly check posts and comments. Content from your feeds can easily go viral and create controversy. Make sure your staff knows when to engage with visitors, particularly difficult ones, and maintains a zero-tolerance policy for offensive comments. Crisis Plan Mistakes, or even intentionally damaging posts, can occur despite comprehensive policies. Create a formal response plan so you’ll be able to weather such events. The plan should assign responsibilities and include contact information for multiple spokespersons, such as your executive director and board president. Identify specific triggers and a menu of potential responses, such as issuing a press release or bringing in a crisis management expert. Be sure to include IP staffers or consultants on your list. Hopefully, a crisis won’t occur. But if it does, you’ll want to sit down and review your plan’s effectiveness after the situation has been resolved. Select and Protect These days, no nonprofit can afford to ignore social media. Just make sure you’re applying your time and effort to the right platforms and protecting your accounts from those who would harm your organization. © 2024     [...] Read more...
April 8, 2024Even if your not-for-profit organization rarely needs to reimburse staffers, board members or volunteers, reimbursement requests almost certainly will occasionally appear. At that point, will you know how to pay stakeholders back for expenses related to your nonprofit’s operations? If you have a formal reimbursement policy, you will. Plus, you’ll be able to direct individuals with reimbursement questions to your formal document and minimize the risk of disagreements. 2 Categories In the eyes of the IRS, expense reimbursement plans generally fall into two main categories: 1. Accountable plans. Reimbursements under these plans generally aren’t taxable income for the employee, board member or volunteer. To secure this favorable tax treatment, accountable plans must satisfy three requirements: 1) Expenses must have a connection to your organization’s purpose; 2) claimants must adequately substantiate expenses within 60 days after they were paid or incurred; and 3) claimants must return any excess reimbursement or allowance within 120 days after expenses were paid or incurred. Arrangements where you advance money to an employee or volunteer meet the third requirement only if the advance is reasonably calculated not to exceed the amount of anticipated expenses. You must make the advance within 30 days of the time the recipient pays or incurs the expense. 2. Nonaccountable plans. These don’t fulfill the above requirements. Reimbursements made under nonaccountable plans are treated as taxable wages. Policy items Your reimbursement policy should make it clear which types of expenses are reimbursable and which aren’t. Be sure to include any restrictions. For example, you might set a limit on the nightly cost for lodging or exclude alcoholic beverages from reimbursable meals. Also be sure to require substantiation of travel, mileage and other reimbursable expenses within 60 days. The documentation should include items such as a statement of expenses, receipts (showing the date, vendor, and items or services purchased), and account book or calendar. Note that the IRS does allow some limited exceptions to its documentation requirements. Specifically, no receipts are necessary for: A per diem allowance for out-of-town travel, Non-lodging expenses less than $75, or Transportation expenses for which a receipt isn’t readily available. Your policy should require the timely (within 120 days) return of any amounts you pay that are more than the substantiated expenses. Standard Rate vs. Actual Costs Finally, address mileage reimbursement, including the method you’ll use. You can reimburse employees for vehicle use at the federal standard mileage rate of 67 cents per mile for 2024, and volunteers at the charity rate of 14 cents per mile. Unlike employees, however, volunteers can be reimbursed for commuting mileage. Alternatively, you can reimburse employees and volunteers for the actual costs of using their vehicles for your nonprofit’s purposes. For employees, you might reimburse gas, lease payments or depreciation, repairs, insurance, and registration fees. For volunteers, the only allowable actual expenses are gas and oil. What Makes Sense You don’t need to craft a reimbursement policy on your own. We can help ensure you include the elements that make sense given your nonprofit’s size, mission and activities and update it as your organization grows and evolves. © 2024     [...] Read more...
March 19, 2024Boise, Idaho (March 6, 2024) – Harris is pleased to announce that it has a received a significant investment from DFW Capital, a private equity investment firm. This capital will allow Harris to continue to achieve its vision, to stay at the forefront of the profession, and to continue advancement in technology, improving operations and expansion into new markets at an accelerated pace. Additionally, the firm will have the ability to provide additional resources and value to employees, clients and the community—the very core of the Harris mission. Josh Tyree, the current President for Harris, has been with the firm since 2009. He is eager to build on this partnership with DFW, to expand both organically and through investment into other accounting service organizations. “We are looking forward to this new venture and all the possibilities it opens up for our firm and our clients. Working with DFW will allow us to achieve our firm’s vision, to grow into new markets and to gain new opportunities for our clients, while still maintaining our current model, core beliefs and values.” Harris’s Chief Practice Officer, Cheryl Guiddy said, “This investment allows us to expand on our client service in a way that will help us stand out from others in the industry. I am looking forward to the benefits it will provide as we continue to adapt to the changing landscape in our industry.” Robert Shappee, the Chief Financial Officer adds, “This partnership puts Harris in an exciting financial situation, allowing the firm to capitalize on and support its clients and the industries and communities who have shown us support over the years.”   [...] Read more...
February 21, 2024by Terry Kissler, CPA Insights on 2023 tax return changes and anticipated tax revisions post-2025, including adjustments to deductions, tax bracket and estate tax limits. As we turn the calendar and gear up for another tax season, it’s never too soon to look ahead and prepare for the upcoming landscape of the tax world. Our profession and taxpayers alike can take some solace in the fact that for 2023, there weren’t a whole lot of changes that will impact the 2024 filing season. By now, the COVID-19 relief packages, which so abruptly altered our rules and filings, have since fizzled out for the most part. I’ll touch on a couple of those changes that we as taxpayers got to enjoy the last few years that no longer are in effect. However, the purpose of this article is to look ahead to what’s changing down the road. Let’s start with the immediate changes you’ll notice on your 2023 tax returns. As part of the COVID-19 relief tax packages, the IRS incentivized business owners to spend money at their local restaurants. For 2021 and 2022, business meals were 100% deductible to the business. For 2023, the deductibility of business meal expenses reverted back to 50%. You also may notice some standard inflation adjustments for various retirement plans and health savings plans. On your individual returns, there will be an increase in the standard deduction and, of course, a shift in tax brackets. To highlight a few of these changes, this is what you’ll see: The standard deduction for married couples has increased from $25,900 to $27,700, while single individuals will see that rise from $12,950 to $13,850 The maximum 401(k) contribution limit has gone from $20,500 in 2022, up to $22,500 in 2023. For your Roth and traditional IRAs, you’ll see that limit go from $6,000 ($7,000 if age 50 or older) to $6,500 ($7,000 if age 50 or older) in 2023. Keep in mind, you have until April 15 of 2024 to max out your 2023 IRA contribution. Changes to Know Let’s shift gears to tax changes a little further on the horizon. These we can actually plan for and be prepared when it happens. The Tax Cuts and Job Act (TCJA), put into action on Jan. 1, 2018, drastically changed the federal tax code. These changes, however, will sunset after 2025, meaning in 2026 our tax laws as we’ve grown to know and understand will shift back to how it was in 2017 – adjusted for inflation, of course. Here is what to expect, just to name a few important points: The tax bracket rates will change. The lowest bracket of 10% for low-income earners should remain the same. But the rates on the various brackets working up to the highest earners will increase by 1% to 4%, depending on the bracket. The high standard deductions that taxpayers have enjoyed over the past several years, along with the increased child tax credit, are set to expire and return back to pre-TCJA levels. This means it’s likely more individuals will be itemizing deductions again. Charitable donations have been deductible as an itemized deduction up to 60% of your adjusted gross income (100% during the COVID-19 relief years) and will return back to 50% of adjusted gross income after the TCJA expires. For example, if your adjusted gross income (AGI) is $100,000, you could deduct up to $50,000 as charitable donations on your tax return. Any donations above that would be carried forward to deduct in a later year. Since the TCJA rules came into effect, we’ve seen drastic changes in estate tax exemption limits. Pre-TCJA, the estate tax exemption for individuals was $5.49 million, and married couples was $10.98 million. We’ve seen those figures climb to $13.61 million for individuals and $27.22 million for married couples in 2024. The inflation-adjusted estimate for 2026 estate tax exemption limits is currently around $7 million for individuals and $14 million for married couples. With the distinctly higher limits we’re experiencing now, the next two years may be your prime opportunity to transfer assets out of your control and into that of your heirs. As farmers and ranchers, your most valuable asset is likely the land you own. Keep in mind, that upon your passing, that land, along with all your other assets, gets valued as of the date of your death and added to that estate limit. So if you are someone whose land, investments, cash and other assets (including your ownership if these assets are held in LLCs or other entities) exceed those $7 or $14 million dollar values, it very well could impact those beneficiaries of your estate. Don’t wait to speak to your attorney and accountant about these possible issues. These are just a few examples of changes to be aware of. Your trusted tax adviser can help you navigate these changes, along with others that will change the tax landscape in the near future. This article was featured as a blog on the AG Proud Idaho website, February 12, 2024. Link to full article here.   Construction & Engineering Page Real Estate Page [...] 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...

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