Gift-giving and Taxes

May 25, 2017

The recipient of a gift need not worry about the tax consequences; receipts of gifts are non-taxable events.  However, that is not always the case for the giver.  Every year the IRS allows for the tax-free transfer of a specified amount of monetary gifts. For 2017 this amount stands at $14,000 per person, per year.  Amounts given to any one individual, by any one individual, during a tax yearbring about no consequences as long as they are at or below $14,000.  For example, a husband and wife can each give $14,000 in cash ($28,000 total) to each of their grand-kids every year, with no resulting tax or return filing consequences.

Gifts in excess of this annual exclusion can also be tax-free; however, these gifts are required to be reported against the givers lifetime gift and estate exemption.  The total lifetime exemption for 2017 stands at $5.49 million per individual.  Gifts made during the year in excess of the annual exclusion ($14,000) require the giver to file a gift tax return.  This return discloses the excess gifts given annually as well as tracking their lifetime excess/remaining exclusion.  Typically annual gift returns come with no tax due; however, these returns reduce the tax-free amount allowed upon death and could have potential tax consequences down the road.

Bottom line?  If you have a large estate and make any large gifts during the year, consult your tax advisor.  We may be able to offer advice on how to better structure these transactions.

– Courtney Elgin, CPA

Categories: Other Resources, Tax Compliance, Tax Planning


Home Sweet Office

May 10, 2017

Do you have a room in your home that you use just for your business? If so, you could claim a deduction on your tax return for your home office.

Before we get ahead of ourselves, we should acknowledge that you will have to meet certain requirements. However, most are able to deduct a percentage of the costs of running the home such as utilities, rent, insurance, depreciation, mortgage interest, real estate taxes, some casualty losses, repairs, and improvements as related to the portion of your home used for business.

A “home”, as defined by the IRS, can be a condo, house, apartment, mobile home or boat (with provided amenities). The home can be rented or owned,  however, to qualify for the home office deduction you must meet two tax law requirements:

  1. You must regularly use part of your home exclusively for a trade or business.
  2. You must be able to show that you use your home as your principal place of business meaning you meet patients, clients, or customers at your home or you use a separate structure on your property exclusively for business purposes.

Regular use: 

The IRS doesn’t offer a clear definition of regular use – only that you must use a part of your home for business on a continuing basis, not just for occasional or incidental business. You should qualify by working a couple days a week for a few hours.

Exclusive use: 

Exclusive means that you must use a portion of your home only for your business. If you use a portion of your home for work but also for personal use then you will not meet that requirement. However, you are able to use a portion of a larger room as long as your personal activities do not enter that area.  There are two exceptions to the exclusive use rule. If you run a qualified daycare out of your home or store inventory or product samples then you do not have to meet the exclusive use test.

If you are storing inventory or samples in your home, you can still qualify for the home business expense even if you are not using that space exclusive for your business.The inventory will need to be stored in a certain location such as the garage, a closet, or bedroom.  However, you will not get the deduction if you have an office or business location outside of your home.

Remember you can only claim this deduction if you are running a business. If the IRS believes it’s a hobby the deduction will not be honored.

– Brittany Jennings, Staff Accountant

Categories: Audit & Accounting, Other Resources, Tax Compliance, Tax Planning


Tax Implications Of A Divorce

Jun 24, 2016

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.

Categories: Other Resources, Tax Compliance, Tax Planning


Independent Contractor or Employee?

Jun 16, 2016

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

Categories: Other Resources, Tax Planning


Donating Excess Inventory to Charity

May 24, 2016

Getting rid of excess or obsolete inventory can provide much needed warehouse space.  Some businesses may choose to donate excess inventory to charity. However, it is important to be aware of the tax regulations involved in this type of charitable giving.

A donation of inventory to a qualified organization is potentially tax deductible as a charitable contribution. The amount that is deductible is the smaller of the donated inventory’s fair market value on the day it is contributed or its basis.

The basis of contributed inventory is any cost incurred for the inventory in an earlier year the business would otherwise include in its opening inventory for the year of the contribution. The business must remove the amount of the charitable deduction from its opening inventory. It is not part of the cost of goods sold.

Manufacturing_Inventory3

If the donated inventory’s cost is not included in opening inventory, the inventory’s basis is zero and the business may not claim a charitable contribution deduction. In this scenario, the business treats the inventory’s cost as it would ordinarily be treated under its method of accounting.

Under a special rule, a C corporation that donates inventory to a qualified charity that will use the donated items for the care of the ill, the needy, or infants may qualify for an enhanced (above-basis) deduction. Similarly, any trade or business that donates food inventory meeting certain standards may qualify for an enhanced deduction.

Categories: Non-Profit, Tax Compliance, Tax Planning