Potential Tax Consequences of Financial Aid

Sep 25, 2015

With the cost of attending college constantly on the rise, financial aid has quickly ascended to the top of the priority list for students and parents alike. Aid in the form of scholarships and grants are among the most favorable types, as they are essentially free money a student or parent is never obligated to pay back. Federal student loans, while not nearly as favorable as scholarships or grants, are another common type of aid most students seek out. While in most instances, whether the aid is received by way of a scholarship or lent to a student through a loan, this money is not taxable. However, there are some situations where these amounts become considered taxable income.

According to the IRS, scholarship, grant, and fellowship monies are tax-free as long as it is solely used to pay for a student’s tuition, fees, books, or other related supplies. You may notice there is one major expense most students face, not included on this list: room and board. This is often a significant portion of a student’s total cost to attend college, but it is not considered an eligible tax-free expense. As a result, any portion of aid coming from a scholarship, grant, or fellowship used to pay for room and board is includable in the taxable income of the recipient.

In addition, if any of the money received from these awards goes towards a student’s personal expenses, like dorm room supplies or transportation, the portion used for these expenses is also taxable to the recipient. An additional exception applies to those students who receive fellowships. Any portion of the fellowship that was intended as payment for research done by the student, or for teaching assistance they provided, is treated as taxable income.

One of the other most common types of financial aid comes in the form of federal student loans. Many students complete college with thousands of dollars in federal student loan debt. One of the ways the government offers assistance to these students is by offering forgiveness on a portion of this debt at the end of certain repayment plans. Typically, the repayment plan requires a student to make full and timely payments on their loans each month for a certain number of years, like 20 or 25, then at the end of this term, if there is still a portion of the debt remaining, the federal government will offer to forgive this remaining balance. While this comes as a huge relief to those students, it is important to remember that in most cases the amount the government forgives is usually considered taxable income to the student.

Receiving financial aid for college is a major relief for both parents and students, but it is also important to keep in mind the tax consequences that may come with it. Feel free to contact your WVCO tax advisor with any questions. By: Ruben Becerra, Staff Accountant

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Outsourcing and Offshoring: What’s The Difference?

Sep 15, 2015

Typically when a business or organization decides to outsource it is to fulfill a specific set of needs in a more efficient manner than can be done in-house. This might mean gaining access advanced skill sets and experience, advanced technology, and more competitive costs, just to name a few. A huge range of tasks can be outsourced and, therefore, many businesses find it to be a cost-effective option. In addition, outsourcing specific areas of a business provide greater efficiencies. Some of the most common areas to outsource include, human resources, information technology and accounting.

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Ohio Municipal Income Tax Law Changes On the Horizon!

Sep 08, 2015

Over the years, the Ohio Society of CPAs (OSCPA) has voiced its concerns about the Ohio municipal tax system. It is overly burdensome for taxpayers and the OSCPA is calling for change.  At the of 2014, Ohio legislators finally listened and passed House Bill 5 which helps achieve common sense tax reform effective for taxable years beginning on and after January 1, 2016. Municipalities are required to amend their existing income tax ordinances to include certain statements incorporating the bill’s revisions.

A summary of some of the new law’s provisions are:

Pass-through entities

• Unless the municipality is one of the 120 or so previously voted to tax resident S corporation owners at the shareholder level, the municipal net profits tax will now be imposed at the entity level. If the owner is a resident, the municipality may still tax the non-S corporation pass-through income at the individual level.
• Gains and losses generated from different pass-through entities may also now offset each other during the year in which they are generated.

Net operating loss (NOL) carryforwards

• For NOLs first incurred in taxable years beginning on and after January 1, 2017, all municipalities must allow a 5-year carryforward of those losses. There will be a 50% limitation of the carryforward for the first 5 years, with full utilization of carryforwards starting taxable year 2023. Pre-existing losses may continue to be carried forward if current ordinances allow. NOL’s unused due to the 50% limitation are also carried forward 5 years.

Occasional entrant rule 

• The new law increases the number of days (from 12 to 20 per year) an individual may work in a non-principal place of business municipality before incurring income tax liability there. The new law defines a “day” to allocate tax liability to the city where an employee spent the majority of time working that day, and all compensation applies.
• A new provision states small employers must withhold municipal income tax to their fixed location municipality, regardless of the occasional entrant rule, if the employer is a business that has overall gross receipts of less than $500,000.

Residency and payment of withheld taxes 

• Withheld taxes are to be uniformly scheduled to be remitted on a monthly vs. quarterly basis if withholdings are over certain thresholds in the prior calendar year.
• Municipalities are allowed to treat an individual as a resident for income tax purposes only if the individual is domiciled there, and the new law adopts 25 generally recognized common law factors for determining an individual’s domicile.

Taxpayer Bill of Rights

• The new law includes the full version of the state’s Taxpayer Bill of Rights at the local level, and requires municipalities to publish a summary of the taxpayers’ bill of rights and responsibilities online, as well as publish its municipal tax ordinances and regulations.

Tax returns 

• Establishes a uniform tax base applicable to all municipal corporations levying an income tax (with a few exceptions) by further defining the income that municipal corporations can tax and the income that they may not tax.
• Authorizes corporate taxpayers to elect to file using a federal consolidated group for municipal net profit tax purpose.
• A municipal income taxpayer may receive a refund of overpaid taxes only if the amount overpaid is more than $10. Likewise, income and net profit taxpayers will not be required to remit tax due that is less than $10. However, even if the tax due is less than $10, taxpayers must still file the tax return.
• Form 2106 expenses (unreimbursed employee business expenses) are deductible to the extent deducted for federal tax purposes.
• Taxpayers may file an affidavit with a municipal tax administrator to certify the taxpayer is no longer required to file tax returns in the municipality.
• Taxpayers will receive an automatic municipal tax filing extension if they timely filed a federal extension. Specifies that taxpayers that do not request an automatic federal extension may request an automatic municipal tax return extension. This extension does not extend the due date for remitting tax.
• Authorizes taxpayers to use an alternative method of apportioning income and allows tax administrators to require the use of an alternative method if the statutory formula does not fairly represent the extent of the taxpayer’s business activity in a municipality.
• Requires all municipalities levying an income tax to comply with a uniform annual tax return filing schedule, with some exceptions. Synchronizes municipal return filing dates with state filing dates. Makes consistent with federal, state and current municipal tax law the tax return due date for entities with a fiscal year-end other than a calendar year-end.
• Limits the amount of penalties and interest (federal short-term rate plus 5%) that may be charged for the failure to file returns or pay taxes on time, and makes all penalties discretionary.
• Adopts the “Mailbox Rule” for annual tax returns as well as for quarterly estimated tax returns, meaning taxpayers are considered to timely file any tax return if it is placed in the mail and postmarked by the due date.

By: Brent Ringenberg, CPA

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Tax Implications of A Fiscal Year-End

Sep 03, 2015

For a majority of businesses, tax years are pretty straight forward. The calendar turns over to a new year and so does your business. These businesses use a calendar year-end, and the year on tax forms aligns with the year of operations. However, those businesses not on a calendar year-end fiscal years can be much more confusing.

According to the 2014 instructions for most business tax returns, the 2014 return is used for “fiscal years that begin in 2014 and end in 2015.” In other words, a business with a fiscal year-end will use the tax form for the year in which the fiscal year starts. Therefore, if a business has a fiscal year that starts July 1, 2014 and ends June 30, 2015, it will have a 2015 fiscal year end, but a 2014 tax year.

To add an additional layer of confusion, if the business which has the fiscal year-end is a flow-through entity and the K-1 recipient is on a calendar year, the K-1 recipient will report the income on their tax return in the year in which the business’ fiscal year ends. Going back to the example of a business whose fiscal year starts July 1, 2014 and ends June 30, 2015, the income will be reported on the K-1 recipients’ 2015 return even though it is provided on a 2014 K-1. As noted above, the information is provided on the 2014 K-1 because it is the business’ 2014 tax year.

An additional issue causing complications with fiscal year-end tax returns is that many tax policies are passed on a calendar year-end basis. For example, bonus depreciation tax policies are frequently passed subsequent to year-end and are retroactively applied to the beginning of the year. If a fiscal year ends and the tax return is due prior to bonus depreciation being extended, the business will not be able to take bonus depreciation on any fixed asset additions from January 1 through the fiscal year-end. Then if bonus depreciation is subsequently extended, the business would have to file an amended return if they want to claim bonus depreciation for that period.

So if a fiscal year-end can cause so many issues, why would a business elect to use a fiscal year-end? The most common reason is to match revenues with expenses. If a business has seasonality, a fiscal year-end can be used to ensure that all activity of one season is included in a single year. For example, the NFL uses a year-end of March 31 because the season is still in progress at December 31. A business might also want to use a fiscal year-end if they have cycles with very large amounts of inventory during certain parts of the year and low amounts at other times. Choosing a year-end when inventory is low allows for easier inventory valuation and also tends to be a slower time of the year, which allows additional time to be spent preparing information for the tax return.

Even though fiscal year-ends can cause some confusion and complications, for some businesses it is the best choice. If you have questions about your fiscal year-end, or if you feel that switching to a fiscal year-end would be beneficial for your business, our team at William Vaughan Company would be happy to assist you and provide the answers you need.

By: Mark Sawyer, Senior Accountant

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Employee Benefits: What To Present

Sep 01, 2015

In a recent study, 76% of workers said the benefits package an employer offers is extremely or very important in their decision to accept or reject a job.*

If benefits are that important to your employees, they are critical to your bottom line. Attracting and retaining top-notch employees generally translates into growing and retaining business. Thus, you financial professional is an important ally.

The right stuff

Benefits don’t fit neatly into a one-size-fits-all approach. The best benefits package is one that meets the needs of your firm. Your financial professional can help design the right benefits package to fit your budget.

Bring in a pro

Use the upcoming open enrollment season to showcase your benefits and their value — and to engage your employees so they make informed decisions. Make it a goal to achieve 100% participation in your 401(k) plan, meaning that all employees make all their benefit elections (keep in mind that waiving coverage is an election).

Keep it simple

One reason employees may not be participating is that they don’t understand their options. You can remove that roadblock by providing easy-to-understand materials in a variety of ways (such as one-on-one and group meetings, benefit fairs, enrollment kits and intranet and online tools). Your financial professional will be happy to help with your communication strategy.

If your benefits package is changing this year, highlight the differences and be candid with your employees about why changes are being made. Be prepared for questions. And allow plenty of time for your employees to consider their options. (Three weeks is generally thought to be a reasonable length of time.)

Plan a 401(k) Day

Yes, there really is a 401(k) Day. Originally, it was observed the Friday following Labor Day. These days, employers decide when and how to celebrate the popular retirement plan. Since open enrollment period is all about benefits, why not publicize the benefits of your 401(k) retirement plan at the same time.

• ebri.org Notes, Vol. 35, No. 11, November 2014

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