Benefit

Article Dean Dorton

What is Changing?

Over the coming weeks, we will be sending out more details relating to the new tax law. Given the volume of changes, we will be releasing a more detailed review of a few specific topics at a time.

There are a few employment-related changes in the new tax bill which could require companies to rework internal policies or accounting immediately in 2018.

NEW: Credit for employers providing paid family and medical leave

For tax years beginning after 12/31/17, an employer that offers at least two weeks of annual paid family and medical leave, as described by the Family and Medical Leave Act (FMLA), to all “qualifying” full-time employees (proportionate for non-full-time employees) will be entitled to a tax credit. The paid leave must provide for at least 50% of the wages normally paid to the employee. “Family and medical leave” does not include leave provided as vacation, personal leave, or other medical or sick leave.

A “qualifying employee” is an employee who has been employed by the employer for at least one year, and whose compensation for the preceding year did not exceed 60% of the compensation threshold for highly compensated employees (i.e., compensation did not exceed $72,000).

The credit will be equal to 12.5% of the amount of wages paid to a qualifying employee during such employee’s leave, increased by 0.25% for each percentage point the employee’s rate of pay on leave exceeds 50% of the wages normally paid to the employee (but not to exceed 25% of the wages paid).

Time to repay employer-sponsored retirement loans

Old Law: Retirement plan loans were generally immediately due and payable when the plan terminated or the participant terminated employment. If the loan was not repaid, the plan would offset the loan against the participant’s account. This loan offset may be rolled over by making an equivalent contribution to an IRA or another qualified plan, but this had to be done within 60 days of the date of the offset.

New Law: For tax years beginning after 12/31/17, the period to roll over a loan offset is extended to the individual’s due date for the tax return for the year in which the offset occurred (including extensions).

What does this mean? You should review your company retirement plan loan distribution paperwork and determine whether any prospective modifications need to be made.

Moving/relocation expenses

Old Law: An employer could exclude qualified moving expense reimbursements from an employee’s wages for both income and employment tax purposes. Likewise, employees could claim a deduction for qualified moving expenses.

New Law: For tax years beginning after 12/31/17, qualified moving expense reimbursements are no longer excluded from wages except for Armed Forces on active duty, and are no longer deductible by the employee.

What does this mean? You should review your company policies relating to moving/relocation expenses and adjust them accordingly. Any reimbursements of these expenses to employees or direct payments of moving expenses on behalf of employees (e.g. payments directly to a moving company) should be treated as taxable compensation to the employee going forward.

Employee achievement awards

Old Law: An employer could deduct up to $400 (or up to $1,600 in the case of certain written nondiscriminatory achievement plans) of the value of certain employee achievement awards for length of service or safety. The employee receiving such award can exclude the award from income to the extent that the value of the award does not exceed the employer’s deduction.

New Law: For expenses beginning 1/1/18, the employee’s exclusion and employer’s deduction for employee achievement awards will not apply to cash and so-called “cash equivalents” (gift coupons/certificates, vacations, meals, lodging, tickets to sporting or theater events, securities, and other similar items). However, an employee can still exclude (and an employer can still deduct) the value of other tangible property and gift certificates that allow the recipient to select tangible property from a limited range of items pre-selected by the employer. The prior law annual amounts still apply.

What does this mean? You should review your company policies relating to employee achievement awards. If your company chooses to continue providing cash or cash equivalents, these should be treated as taxable compensation to the employee going forward. Alternatively, you can adjust your company policy to provide only non-cash/cash equivalents achievement awards going forward.

Employer deduction for entertainment, amusement, and recreation provided to employees

Old Law: An employer could fully deduct expenses for recreational, social, or similar activities primarily for the benefit of non-highly compensated employees, provided such activities directly relate to the active conduct of the employer’s business.

New Law: For expenses beginning 1/1/18, this deduction is fully disallowed.

What does this mean? You should segregate these expenses in your accounting system so that they can be appropriately treated under the new law. You should consider your company policy related to these expenses and assess whether prospective changes need to be made.

Employer deduction for meals, food, and beverages provided to employees

Old Law: An employer could fully deduct any food and beverage expense that can be excluded from an employee’s income as a de minimis fringe benefit.

New Law: For expenses beginning 1/1/18, there will be a 50% limitation on the deduction for food and beverages that qualify as a de minimis fringe benefit, including expenses for the operation of an employee cafeteria located on or near the employer’s premises.

What does this mean? You should segregate these expenses in your accounting system so that they can be appropriately treated under the new law. You should consider your company policy related to these expenses and assess whether prospective changes need to be made.

Employer deduction for meals and entertainment provided to customers

Old Law: An employer could deduct 50% of the cost of meals and entertainment expenses paid on behalf of customers provided they were directly related to the active conduct of that trade or business.

New Law: For expenses beginning 1/1/18, all entertainment, amusement, recreation expense, membership dues for business, recreation and social clubs, and related facility expenses are 100% disallowed regardless of whether or not directly related to the active conduct of a trade or business. However, the 50% deduction for food and beverages associated with the active conduct of a trade or business is retained.

What does this mean? You should segregate these expenses in your accounting system so that they can be appropriately treated under the new law. You should consider your company policy related to these expenses and assess whether prospective changes need to be made.

Employer deduction for qualified transportation fringe benefits

Old Law: An employer could deduct the cost of certain transportation fringe benefit provided to employees (i.e., parking, transit passes, and vanpool benefits), even though such benefits are excluded from the employee’s income.

New Law: For expenses beginning 1/1/18, the employer deduction for qualified transportation fringe benefits is fully disallowed. In addition, except as necessary for ensuring the safety of an employee, the employer deduction for providing transportation or any payment or reimbursement for commuting to work is disallowed.

What does this mean? You should segregate these expenses in your accounting system so that they can be appropriately treated under the new law. You should consider your company policy related to these expenses and assess whether prospective changes need to be made.

Disclaimer

The information presented is not intended to be a full and exhaustive explanation of the tax bills referenced as there are many more provisions. Please consult with your tax advisor regarding the policies that might be applicable to your specific situation.

Article Dean Dorton

Saving for retirement can be tough if you’re putting most of your money and time into operating a small business. However, many retirement plans aren’t difficult to set up and it’s important to start saving so you can enjoy a comfortable future.

So if you haven’t already set up a tax-advantaged plan, consider doing so this year.

Note: If you have employees, they generally must be allowed to participate in the plan, provided they meet the qualification requirements.

Here are three options:

  1. Profit-sharing plan. This is a defined contribution plan that allows discretionary employer contributions and flexibility in plan design. You can make deductible 2016 contributions as late as the due date of your 2016 tax return, including extensions — provided your plan exists on Dec. 31, 2016. For 2016, the maximum contribution is $53,000, or $59,000 if you are age 50 or older.
  2. Simplified Employee Pension (SEP). This is also a defined contribution plan that provides benefits similar to those of a profit-sharing plan. But you can establish a SEP in 2017 and still make deductible 2016 contributions as late as the due date of your 2016 income tax return, including extensions. In addition, a SEP is easy to administer. For 2016, the maximum SEP contribution is $53,000.
  3. Defined benefit plan. This plan sets a future pension benefit and then actuarially calculates the contributions needed to attain that benefit. The maximum annual benefit for 2016 is generally $210,000 or 100% of average earned income for the highest three consecutive years, if less. Because it’s actuarially driven, the contribution needed to attain the projected future annual benefit may exceed the maximum contributions allowed by other plans, depending on your age and the desired benefit. You can make deductible 2016 defined benefit plan contributions until your return due date, provided your plan exists on Dec. 31, 2016.

Contact us if you want more information about setting up the best retirement plan in your situation.

Article Dean Dorton

If you’re charitably inclined, making donations is probably one of your key year-end tax planning strategies. But if you typically give cash, you may want to consider another option that provides not just one but two tax benefits: Donating long-term appreciated stock.

More tax savings
Appreciated publicly traded stock you’ve held more than one year is long-term capital gains property. If you donate it to a qualified charity, you can enjoy two benefits: 1) You can claim a charitable deduction equal to the stock’s fair market value, and 2) you can avoid the capital gains tax you’d pay if you sold the stock. This will be especially beneficial to taxpayers facing the 3.8% net investment income tax (NIIT) or the top 20% long-term capital gains rate this year.

Let’s say you donate $10,000 of stock that you paid $3,000 for, your ordinary-income tax rate is 39.6% and your long-term capital gains rate is 20%. If you sold the stock, you’d pay $1,400 in tax on the $7,000 gain. If you were also subject to the 3.8% NIIT, you’d pay another $266 in NIIT.

By instead donating the stock to charity, you save $5,626 in federal tax ($1,666 in capital gains tax and NIIT plus $3,960 from the $10,000 income tax deduction). If you donated $10,000 in cash, your federal tax savings would be only $3,960.

Tread carefully
Beware that donations of long-term capital gains property are subject to tighter deduction limits — 30% of your adjusted gross income for gifts to public charities, 20% for gifts to nonoperating private foundations (compared to 50% and 30%, respectively, for cash donations).

And don’t donate stock that’s worth less than your basis. Instead, sell the stock so you can deduct the loss and then donate the cash proceeds to charity.

If you own appreciated stock that you’d like to sell, but you’re concerned about the tax hit, donating it to charity might be right for you. For more details on this and other strategies to achieve your charitable giving and tax-saving goals, contact us.

Article Dean Dorton

By investing in qualified small business (QSB) stock, you can diversify your portfolio and enjoy two valuable tax benefits:

  1. Tax-free gain rollovers. If within 60 days of selling QSB stock you buy other QSB stock with the proceeds, you can defer the tax on your gain until you dispose of the new stock. The rolled-over gain reduces your basis in the new stock. For determining long-term capital gains treatment, the new stock’s holding period includes the holding period of the stock you sold.
  2. Exclusion of gain. Generally, taxpayers selling QSB stock are allowed to exclude up to 50% of their gain if they’ve held the stock for more than five years. But, depending on the acquisition date, the exclusion may be greater: The exclusion is 75% for stock acquired after Feb. 17, 2009, and before Sept. 28, 2010, and 100% for stock acquired on or after Sept. 28, 2010. The acquisition deadline for the 100% gain exclusion had been Dec. 31, 2014, but Congress has made this exclusion permanent.

The taxable portion of any QSB gain will be subject to the lesser of your ordinary-income rate or 28%, rather than the normal long-term gains rate. Thus, if the 28% rate and the 50% exclusion apply, the effective rate on the QSB gain will be 14% (28% × 50%).

Keep in mind that these tax benefits are subject to additional requirements and limits. For example, to be a QSB, a business must be engaged in an active trade or business and must not have assets that exceed $50 million.

Consult us for more details before buying or selling QSB stock. And be sure to consider the nontax factors as well, such as your risk tolerance, time horizon and overall investment goals.

Article Dean Dorton

It’s not unusual for the IRS to conduct audits of qualified employee benefit plans, including 401(k)s. Plan sponsors are expected to stay in compliance with numerous, frequently changing federal laws and regulations.

For example, have you identified all employees eligible for your 401(k) plan and given them the opportunity to make deferral elections? Are employee contributions limited to the amounts allowed under tax law for the calendar year? Does your 401(k) plan pass nondiscrimination tests? Traditional 401(k) plans must be regularly tested to ensure that the contributions don’t discriminate in favor of highly compensated employees.

If the IRS uncovers compliance errors and the plan sponsor doesn’t fix them, the plan could be disqualified.

What happens if qualified status is lost?

Tax law and administrative details that may seem trivial or irrelevant may actually be critical to maintaining a plan’s qualified status. If a plan loses its tax-exempt status, each participant is taxed on the value of his or her vested benefits as of the disqualification date. That can result in large (and completely unexpected) tax liabilities for participants.

In addition, contributions and earnings that occur after the disqualification date aren’t tax-free. They must be included in participants’ taxable incomes. The employer’s tax deductions for plan contributions are also at risk. There are also penalties and fees that can be devastating to a business.

Finally, withdrawals made after the disqualification date cannot be rolled over into other tax-favored retirement plans or accounts (such as IRAs).

Voluntary corrections

The good news is that 401(k) plan errors can often be voluntarily corrected. We can help determine if changes should be made to your company’s qualified plan to achieve and maintain compliance. Contact us for more information.

Article Dean Dorton

Tax credits reduce tax liability dollar-for-dollar, making them particularly valuable. Two valuable credits are especially for small businesses that offer certain employee benefits. Can you claim one — or both — of them on your 2015 return?

Retirement plan credit

Small employers (generally those with 100 or fewer employees) that create a retirement plan may be eligible for a $500 credit per year for three years. The credit is limited to 50% of qualified startup costs.

Of course, you generally can deduct contributions you make to your employees’ accounts under the plan. And your employees enjoy the benefit of tax-advantaged retirement saving.

Small-business health care credit

The maximum credit is 50% of group health coverage premiums paid by the employer, provided it contributes at least 50% of the total premium or of a benchmark premium. For 2015, the full credit is available for employers with 10 or fewer full-time equivalent employees (FTEs) and average annual wages of $25,000 or less per employee. Partial credits are available on a sliding scale to businesses with fewer than 25 FTEs and average annual wages of less than $52,000.

To qualify for the credit, online enrollment in the Small Business Health Options Program (SHOP) generally is required. In addition, the credit can be taken for only two years, and they must be consecutive. (Credits taken before 2014 don’t count, however.)

Take all the credits you’re entitled to

If you’re not sure whether you’re eligible for these credits, we can help. We can also advise you on what other tax credits you might be eligible for when you file your 2015 return.