Tax Implications Of A Divorce

Divorce can be stressful enough without discovering down the road the assets weren’t divided equitably even when spouses were in agreement about the division of their property. Failing to take taxes into account may be to blame when one spouse receives a smaller net share than expected.

Here are some issues to consider if divorce is on your horizon.

Taxable or Not Taxable?

Legal_Balance3Payments from one spouse to the other can have tax consequences for both spouses depending on how the payments are designated. Alimony generally is deductible by the spouse who pays it and is taxable to the recipient. Child support isn’t tax deductible by the person paying it nor is it taxable income to the recipient.

Who Claims the Exemptions? The IRS has specific rules for determining which spouse is entitled to claim the dependency exemptions for the couple’s children. Who claims the exemption can also affect eligibility for certain tax credits, such as the child tax credit. Typically, the custodial parent claims the dependency exemption. However, parents can also choose to alternate claiming the exemption. And couples with more than one child may decide to split the exemptions.

The QDRO and Retirement Benefits

A qualified domestic relations order (QDRO) is a court order that specifies the property rights regarding qualified retirement plan assets of a spouse or dependent during a divorce. A QDRO allows the transfer of all or a portion of the assets in a qualified retirement plan from one spouse to the other without loss of the plan’s tax advantages. A QDRO should be carefully executed to avoid costly mistakes.

What’s Its Future Worth?

The value of assets that seem equal may no longer be equal once taxes come into play. Selling an asset in the future may create a tax liability. So spouses will need to consider more than current value when dividing investments and similar property.

Issues related to dividing assets during a divorce can be complex. Couples should seek professional advice.

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Stop Wasting Time

While our blog focuses on cost accounting, today's topic may not be specifically related, but I do believe it has significance. Years ago, my clients had me focused on tax-related matters which resulted in a heavy workload January through April with a stress-free summer. However, now as a consultant for WVC's affiliate, WVC RubixCloud, I no longer have break. I find myself  extremely busy with a constant flow of action items. Sometimes I even struggle to find time to get everything accomplished.

Do you share in these same issues? Do you have good intentions and intend to get things done, however, by the end of the day you have barely accomplished anything off of your to do list and more often than not, added to it? I have to guess that you are like me and have very similar issues. What do you do about it?

Micellaneous_Time6Why do we have such great intentions and are unable to act on them? Often times, we tend to check items off our list which are the easiest or the fastest to complete. These are certainly the ones we know how to do. It is very easy to ignore the difficult task or the ones which involve extra planning or research. These tasks get placed on back burner which generally means they never get resolved due to time constraints.

I suspect many of you are nodding along with me in agreement. Most importantly, what are we going to do about it? How do we stop putting these important tasks on the back burner? Have you ever thought maybe if you take the time to really get your software system running or figure out your variances, you may actually save you time? That your information may be more accurate more reliable more timely and more simple? Stop a minute and think about what it would look like to just click a button or two to generate a report instead of exporting and manipulating data in Excel. Think if you could quickly know the answer as to why data is different than expected when asked by your superior. Next time you're tempted to put a task on the back burner, instead say to yourself let me put this Excel spreadsheet on the back burner and get my tasks in line and make my job more efficient,

Categories: Cost Accounting

Protect Your Business with a Buy-Sell Agreement

The unexpected can always happen. That’s why, if you’re the co-owner of a business, you need to prepare for the possibility that you — or the other owner — won’t be at the helm one day. The fact is, either of you could die tomorrow. What would happen then?

Business_Handshake7When you enter into a buy-sell agreement, you face this issue head on. A buy-sell agreement is a legal contract between you and the company’s other owners. In it, you each agree that your ownership interest will be sold (or offered for sale), at a certain price, to the company or to each other when you die. Often, the company or the owners buy life insurance policies so they’ll have the cash to make any agreed-upon purchase.

Tax Advantages Buy-sell agreements offer more than simple protection for you and your family. You may also gain estate-tax benefits. Your estate can usually value your business interest according to the price or formula set in the agreement. This lets you plan in advance for what that value will be.

Buy-sell agreements can also help your estate avoid time-consuming and costly battles with the IRS. When an estate includes a closely held business interest, the IRS may see a red flag. The IRS wants to be sure that estates don’t come up with artificially low values for businesses in order to save taxes. If you have a buy-sell agreement in place, and follow all the tax law rules, the IRS is likely to accept your value.

What’s Your Interest Worth? The key to making the value in your buy-sell agreement stick is to make sure that it is a “fair market” price. If you and the other owners aren’t relatives, this shouldn’t be a problem. You’ll probably bargain with one another to get the best deal possible. However, if you intend to pass your interest in the company on to a child or other family member, the IRS may argue that you and your close relative didn’t negotiate a fair price. That’s why it may be best to provide in the buy-sell agreement that a qualified professional will value the company annually or at the time of the sale.

Our team of business valuation experts can help you plan for the future through a buy-sell agreement. If you have questions or concerns about your business, contact Jack Hagmeyer at hagmeyer@wvco.com

 

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Independent Contractor or Employee?

This seems like such a simple question. However, many companies and employees never take the time to consider their position. This is one of the most important decisions in the tax world. In fact, it goes well beyond taxes as it involves workers’ compensation, unemployment insurance, state and federal wage and labor laws, pension laws, nondiscrimination laws and more.

From an employer’s perspective, it’s often preferable to hire freelancers and contractors instead of employees. An employer is not required to pay for all the benefits offered to regular employees, such as health insurance, bonuses, 401(k) plan contributions, and so on. As a result, employers experience considerable incentives when utilizing independent contractors. More often than not, such employment follows the regulations set forth by the law. Nevertheless, some employers have been accused of misclassifying workers who should be considered employees as contractors instead.

The IRS has issued guidelines on the matter, stating "if you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees." Meanwhile, "If you can direct or control only the result of the work done -- and not the means and methods of accomplishing the result, then your workers are probably independent contractors." The distinction is important because there are penalties for misclassification.

For businesses of all sizes, the fines are everywhere and they’re not cheap. Take a look:

  • The Department of Labor ordered three construction companies to pay $491,100 in back wages and damages to 99 employees who were misclassified as independent contractors, in addition to another $108,900 in civil fines.
  • A prominent shipping company settled a series of class action lawsuits alleging worker misclassification for a total of $27 million. Previously, the IRS had already ordered the company to pay $319 million in back taxes and penalties.
  • The San Diego Union Tribune, owned by The Copley Press Inc., was ordered by a state court judge in California to pay $6.1 million in legal fees to the attorneys for a class of over 1,200 paper carriers to whom the court had earlier awarded $3.2 million in damages and another $1.75 million in interest. The final cost of the verdict against the newspaper for misclassification of the paper carriers as independent contractors totaled $11 million.
The IRS has given guidelines to its agents to determine worker status. In the past, a list of 20 factors compiled by the IRS had been used in court decisions to determine worker status. The list, sometimes called the “20-Factor Test” is still used as an analytical tool, although some of the factors are no longer as relevant as they once were.

Basically, the IRS’ 20-Point Checklist focuses on three main factors:

  • How much control the employer has over the worker’s behavior and work results. (Who controls training, where and what time the person works, what equipment they use?)
  • How much control the employer has over finances? (Does the employer have primary control over the person’s profit or loss?)
  • What is the relationship between the parties? (Does the worker receive benefits? Is it a long-term relationship?) Estimates are that 20% of businesses misclassify workers, so make sure your business understands the difference.
By: Mark Dietrich, Accountant

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Role of A Cost Accountant

I recently spoke with a client concerning their cost accounting department. This particular organization was a manufacturer of automotive related products with a sophisticated cost system. The company had a number of full-time employees specifically devoted to maintaining and developing the costing system. Our conversation, however, involved the various expectations and standards this CFO should anticipate from the cost department.

Of course, there is a different answer for virtually every business which maintains a costing specialty area. However, from my perspective, what cost accountants do can generally be broken down into three general areas.

Business_Meeting6First is to maintain cost information on the products the company is producing. This maintenance includes a constant review of existing standards, noting changes in processes or products which result in a change of cost. The goal of the cost accounting team is to maintain up-to-date and accurate product costs. Such information should be based on actual data being produced on the floor or to original standards and rates that were used to develop the cost at the beginning of the period. This is an ongoing assignment which requires frequent attention and constant focus on what is occurring on the shop floor. In addition, the job requires the ability to anticipate needs from the management team related to product costing.

Second, cost accountants provide management controls of operations. Many costing systems are still based on the standard cost method which includes variance reporting by department, by product, by a person, or by a process. Such reporting can be utilized to compare standard cost data in relationship to actual results. In some cases, reporting of such management information is completed very regularly, maybe hourly or maybe daily, and issued in reports to the various management team members. However, other components may be reported on less frequently. For instance, overhead variance calculations should probably be done no more frequently than once a month. These variance calculations are generally done for the purpose of improving management control and usually result in very specialized periodic reporting to a variety of individuals. based solely on their ability to impact or improve the costing results based on the data that they have been provided to them from the cost accounts.

The third general category of assignments cost accountants frequently work on are related to specialized projects. I have worked with accounting teams which were charged with determining the profitability of certain parts, or a specific manufacturing location. Others have included assignments related to make vs. buy or outsourcing of a product to a foreign country. In this particular instance, special assignments included those related to products previously produced by the company and analyzing costs to determine if it would be more cost-effective to have these parts produced elsewhere. There are also special projects which help to determine how efficient a specific apartment may be or how efficient a given process is over the another. Other cost accounting specialized projects include assistance with determining a capital expenditure and the criteria to be included on simple payback or rates of return to assist management in making a capital improvement decision.

As I think about the wide array of assignments in which cost accountants are associated, I believe this general list of categories included the most common. However, as I said earlier, every firm is different and can include a wide diversity of other assignments that are unique to their industry or their location.

Categories: Cost Accounting