Last week, the much-anticipated Senate version of the American Health Care Act (AHCA) was unveiled as a “discussion draft” for all to see. Renamed the Better Care Reconciliation Act, the importance of this bill cannot
Utilizing the tax advantages of the S Corp for closely-held businesses run by self-employed shareholder-owners requires attention to some basic rules, planning, and documentation so that the transfer of money between the shareholder and corporation is reported correctly. The potential alternative is a costly lesson
Last week, my wife and I welcomed our second child to this world. Let's explore the actual and potential impacts on our federal tax liability as a result of the arrival of our little angel...
Posted by Joseph DeMartinis, CPA
I was talking to a client a few weeks back who said to me, “What do I care? I get a raise at 62 anyway.” He was referring to filing and receiving his social security benefits at age 62 instead of waiting until his full retirement age (FRA). I had to quickly run through a few different scenarios with him and discuss why taking the benefits now instead of waiting may have an adverse effect on his long-term goals. It really resonated with me and made me wonder how many people have the same mindset as that client.
If you’re employed or self-employed, you are most likely paying into your social security benefits. In order to qualify for benefits when you retire, you need to have worked and paid into the social security system for 40 quarters, or 10 years. Your benefit is calculated based on a ratio of your 35 highest years of earnings, using zeroes for any year in which you did not work. There are spousal and survival benefits available, and even if divorced, you may qualify for benefits based on a former spouse’s earnings (restrictions may apply).
Back to the example
Now that we know the basics, let’s jump back to the example I mentioned earlier about my client taking benefits at 62. We will have to make a few assumptions in order to paint a proper picture. Putting aside whether or not there will be a social security system still around when my client retires (that’s a different conversation), let’s assume his FRA is 67 (this is important) and that he will live until 90 (lucky guy!). His FRA benefit is expected to be $24,000 a year, and for the sake of simplicity, we’ll assume no annual cost of living adjustment (COLA). Is this unrealistic? Probably – but there have been three years since 2010 with no COLA. We will also assume he is single and NOT working during the time period discussed, as working while collecting social security benefits can decrease the amount of benefits received.
If he begins collecting at 62 with an FRA of 67, he will have a 30% permanent reduction from his social security benefits. If he takes his benefits at 67 there will be no reduction, and if he waits until 70, he will receive a 24% increase in his benefits.
Breakdown of his monthly benefits
Approximate total payments he would receive over the course of his lifetime
Summary of his break-even ages when comparing the different options
As you can see from the information above, the various break-even points are ages that need to be reached in order for my client to receive the advantage of holding off on receiving his benefits. If he lives until age 78, then it was the right choice for him to hold off his benefits from 62 to 67, and if he lives until 82, then it was the right choice for him to hold off his benefits from 67 to 70.
(I’m not sure I need a disclaimer for a blog post, but obviously the example above was for illustrative purposes and should not be relied upon as a guarantee of benefits. Changing any of the variables above can have a drastic effect on the outcome of the example.)
So what's the right answer?
It depends. I know that seems like a cop-out answer, but in order to know the right answer there are a host of variables that must be discussed with your advisors. Your health, lifestyle, family situation, and need/desire for the income all become factors that must be discussed and prioritized in order to maximize the benefits that you can receive.
No one has a crystal ball. When it is time to start thinking about filing for social security, you should reach out to your accountant and other trusted advisors to weigh your options.
Legal note: Contributors to The REM Cycle are certified public accountants (CPAs), but they’re not your CPAs and this blog does not create or constitute an accountant-client relationship. Contributors are licensed to practice public accountancy in New York State and have based the information presented on U.S. and, where applicable, state laws. All content provided on this blog is for informational purposes only, and should not be seen as accounting advice. Raich Ende Malter & Co. LLP (REM) makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. REM will not be liable for any errors or omissions in this information, nor for the availability of this information. REM will not be liable for any losses, injuries, or damages from the display or use of this information. These terms and conditions of use are subject to change at any time and without notice. You should consult with a CPA before you rely on this information.
Posted by Evan Piccirillo, CPA
Over the last 100 days, we have seen our new President push for many things in any number of directions. The repositioning of certain postures taken during the campaign has ranged from slight to drastic. This in consideration, one word to best sum up the actions of the current administration might be “unpredictable.”
The Republican Party currently controls the executive and legislative branches of government and has long taken issue with current tax law. With both the means and impetus to achieve meaningful tax reform, the stage was set for quick and sweeping changes to the U.S. tax code. Many experts were predicting just that: a tax overhaul, effective January 1, 2017.
Last week, the Trump administration, through Treasury Secretary Mnuchin and National Economic Director Cohn, reaffirmed its intent to reform the U.S. tax code. The stated purpose of the plan is to lighten the financial burden of U.S. taxpayers, promote economic growth, and simplify compliance… and not add to the deficit. In a word: Huge.
The plan has been called many things by pundits and news organizations, ranging from “a disaster” to “the savior” of the administration. The White House describes it as “the biggest cut ever” and “phenomenal.” Many arguments have been presented over the potential fallout of such reform, as citizens try to predict:
- Will this increase the deficit?
- Will the tax cuts make up for the difference in tax revenue on their own by stimulating economic growth?
- Who will benefit most—the wealthy, the poor, me (one can only hope)?
- Can’t we please forget about the AMT?
- And of course, will the reform disproportionately help the President’s personal tax burden?
Unfortunately, those questions will continue to go largely unanswered. The full nature and impact of Trump’s tax reform policy is still hard to ascertain. Very little in the way of detail has been given to the major bullet points of the plan – in fact, the proposal presented last Wednesday was only one page in length and lacked any true elaboration.
To the administration’s credit, their position on tax reform has not changed drastically from what was put forth on the campaign trail (read about that here); however, the message needs to be clarified to sufficiently inform the American people. Seeking that clarity, most have looked to the conservative tax blueprint drawn up by Kevin Brady and Paul Ryan, but we have already seen the President and others in the party sour to that plan, specifically the border adjustment tax proposed therein.
In spite of the 100-day timeframe, it is still impossible to gauge Trump’s tax reform policy with any degree of accuracy. Perhaps the next 100 days will bring potential tax reform into better focus, but many of the experts I mentioned earlier are pushing expectation of anticipated tax reform back to 2018. Additionally, in-fighting among factions of the GOP could delay new law for even longer than that.
For now, we will all have to deal with the Code as it is and wait anxiously to see if any changes are in store for the future. Sad.
Posted by Evan Piccirillo, CPA
Time constraints coupled with the sheer volume of work makes tax season an incredibly stressful time for taxpayers and tax preparers. Taxpayers will have to compile all of their tax information for the prior year and send it over to their accountant who will no doubt have a series of uncomfortable, probing questions. The ever-present apprehension of having to write a large check looms overhead like a coming storm. Tax preparers will spend countless hours poring over tax documents and IRS code sections trying to efficiently turn around tax returns, leaving no deduction or credit on the table. The late nights and delivery food build up in preparers’ systems and erode their constitutions transforming them into mere husks of their former selves.
As each grain of sand runs through the hourglass, it feels as if the noose is tightening.
For taxpayers, the procrastination builds on itself like a cancer. Dealing with all of this is painful, so why not put it off until tomorrow? All of a sudden the calendar page turns and it is April 1st… not only has nothing been sent to the preparer’s office, the envelopes on many tax documents are still sealed and sitting in a pile on the desk. In a frenzy, the documents (still sealed) are shoved into a large manila folder and mailed out, without a proper care and review. Are some things missing? Probably, but we have time right? We can count on our trusted preparers! There are still two weeks left!
For tax preparers, the work piles up and it seems impossible that there is a chance it will be completed on time. Each day more packages arrive. Each day the lists grow. The arms on the clock spin at an astonishing rate. How many returns did we get out today? None! This client still has open items, that client has yet to return their electronic filing authorizations, and by the way, they have a new trust return this year. Tensions grow high and at any point a tiny spark could burst into a raging fire. It is a marvel that we are able to maintain a level of calm in such conditions.
As the deadline comes into view just over the horizon, it feels like a blessing and a curse at the same time. Knowing that it will soon come to an end is little solace when all one can think about is the final sprint to the finish line. Tax preparers, many of whom have now fallen into the same rut as those for whom they are servicing, will likely still need to finish their own tax returns. Many taxpayers are now growing anxious about making the deadline in addition to what they might owe in tax and that added stress pours like a waterfall over the preparers.
It builds and builds, panic turns to madness, the only thing fueling us is the little bit of adrenaline left in the tank. Focus in such a torrent comes at a premium, and only the hardiest can maintain. Frantically, the last of the returns are finalized and somehow all clients are either filed timely or on extension. And then finally, as if waking from a nightmare, it is over.
Now that tax season is at an end, spring can truly begin. Both taxpayers and tax preparers can breathe a collective sigh of relief and gather their wits. Tax preparers can perhaps take some days off to be with their families, who at this point might have forgotten what they look like. Taxpayers can worry about all of the other things in their life that need attention. We can all forget what a test of wit and fortitude it has been until next year (actually four or five months).
So I say to you all as emphatically as I might: Happy End-of-Tax-Season!
Posted by Gigi Boudreaux, CPA, MBA
Editor’s Note: There is no “TrumpWatch” this month, as David Roer is busy doing what he does best – being a tax accountant. As you can imagine, we’re all pretty busy here at the REM Cycle. You’re probably aware that things are hectic for us during tax season, but what does an accountant actually do? What’s it actually like? We asked Gigi Boudreaux to explain.
I’m often asked about my life and experiences during tax season. To appease the curiosity, here’s a breakdown of a typical day for me during the height of tax season.
I arrive at work well before 9:00 AM in an attempt to get settled before the chaos begins. My office feels like I only left a few minutes ago. The only difference is me – I’m wearing different clothes, carrying a different lunch, and starting the new day with a fresh attitude. It’s going to be a good, productive day!
First thing I do every day, open my email. I have already glanced at my inbox earlier this morning, but decide to wait until I arrive at work to manage the myriad emails that arrived overnight. Most of the emails are junk. Delete! I am constantly unsubscribing, but the junk keeps coming. Do I want to rent a private jet? Really?! At least I got a chuckle out of that one. I move on to the important emails. One contains e-file authorizations I’ve been waiting for. Great! Wait – client only sent Federal authorizations. Ugh. Another email is from one of my partners, “Can you please handle a complicated issue for me? I had someone else, but I think you will handle it better and faster.” This will set me back a bit, but I’ll do my best. I hardly ever say no.
Soon after I arrive, a colleague enters my office, clearly distressed. She needs to take time off for a family issue. She says, “I know it’s tax season, but it is very important.” I tell her that family always comes first and that we will work together to make it work.
People start to arrive, coffee starts to brew, and my phone starts to ring. Calls from clients include, “Did you get my fax? Where do I sign on the e file authorization? Is my return done yet?” A call from an IRS agent, “I have been out sick for a month so I haven’t looked at your case, but now I am back. Can you get me several documents ASAP?” I reply sheepishly, “Uh…it’s tax season.” Agent: “So?” Then, I am part of a conference call with our IT department and our software provider, because all three scan machines in our NYC office are offline, which is kind of a big deal. While on the conference call, my husband calls in to see how I’m doing. I’ll call him back later.
The managing partner arrives, practically bouncing off the walls with energy and enthusiasm. Not sure I can match his energy, but he has inspired me to step it up.
A colleague (who is also a friend) emails me to say she’s made a quiche for lunch. Do I want some? Yes, of course! This will be the highlight of my day. It’s so silly what makes me happy this time of year.
An extremely distressed coworker who has lost a tax return file calls: “Can you please help me?” I stop what I am doing and we find the return. I get enormous satisfaction from helping her.
Later in the day, I have a scheduled phone call with a client who has been waiting for my attention for a day, which is a long time to wait. I am conscious of this. It’s a long call and we address all of the issues on his list. He is happy with the advice. I hang up and wonder how I’m going to bill that time; he’s never going to pay for it. Yet, he is content and so am I.
I receive a text from my sister-in-law: “Hey, can I stop by later today to drop off my tax stuff?” I respond, “I won’t be home till very late.” She sighs, “Really? How late? I also need to use your printer to get one of my tax documents because my printer is broken.” Frustrated that she still doesn’t understand the hours I work after so many years, I suggest she come on the weekend. I know she is counting on her refund.
Client calls: “Can you tell me how much money I made? And I have several questions about my tax return.” This takes time, but by the end of the conversation, he understands and is thankful. I am happy to have helped.
My daughter texts from college: “Mom, I think I failed Logic. Can you talk?” Of course. Although I cannot make time for my husband, there is always time for her. I guess I need to work on that.
I meet with potential new client. Meeting new people and hearing about how passionate they are about their business is always exciting and interesting. It is contagious. This one looks promising, but you never know.
Okay, now it’s time to start my productive day and get down to doing work. I glance out the window and suddenly realize its dark outside. Clock reads 8:00 PM! Really?! I haven’t even addressed the first item on my daily to-do list. Well, I guess it’s going to be another long night.
The chaos of tax season is challenging and exciting and maddening all at the same time. You can see that there is so much more than simply putting numbers on a form and telling people how much money they owe to Uncle Sam. On any given day, I am an advisor, a technician, a juggler, a therapist, and a mentor. Why do I keep coming back each day? The satisfaction of being able to help others, clients and coworkers alike, truly inspires and motivates me. When I go home at the end of a long day, there is nothing better than knowing that I did something good for someone today.
Posted by Lisa S. Goldman, CPA, TEP
The Treasury Department has clamped down on a key reporting exemption that was previously enjoyed by foreign-owned, single-member limited liability companies (SMLLCs). This change has significant impacts on any foreign person or entity with holdings in U.S. SMLLCs that are disregarded for federal income tax purposes. Previously, these entities were exempt from the comprehensive record maintenance and associated compliance requirements that applied to 25% foreign-owned domestic corporations. Now, substantially any transaction between U.S. domestic disregarded entities and their foreign owners, including any of the owner’s related entities, may be reportable.
These regulations are part of a larger effort by the Treasury Department to increase financial transparency. Entities subject to these regulations will continue to be treated as disregarded for other federal tax purposes. The Treasury Department explained that there is a class of foreign-owned U.S. entity (typically SMLLCs) that has no obligation to report information to the IRS or even obtain a tax identification number. According to the government, these “disregarded entities” could be used to shield the foreign owners of non-U.S. assets or bank accounts. By treating domestic disregarded entities that are wholly owned by a foreign person as a domestic corporation separate from its owner (for these limited reporting and compliance requirements), the regulations enable the IRS to determine the existence and magnitude of any tax liability and share information with tax authorities in other countries.
Previously, certain disregarded entities and their foreign owners may not have had an obligation to file a tax return or obtain an Employer Identification Number (EIN). The final regulations require foreign owned domestic disregarded entities to:
- Obtain EINs from the IRS
- Annually file Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business
- Identify “reportable transactions” between the LLC and any related parties, including the LLC’s foreign owner
- Maintain supporting books and records
These rules treat U.S. disregarded entities as stand-alone foreign-owned domestic corporations. Therefore, they are now required to file Form 5472 with respect to reportable transactions between the entity and its foreign owner or other foreign related parties. Transactions are reportable as if the entity were a corporation for U.S. tax purposes. These entities also are required to maintain records sufficient to establish the accuracy of the information return and the proper U.S. tax treatment of such transactions.
Please see the regulations for examples of reportable transactions that require reporting, elimination of certain reporting exemptions, and overlap rules affecting controlled foreign corporations and foreign sales corporations.
The final regulations require the domestic reporting corporations to have the same tax year as their foreign owner if that foreign owner has an existing U.S. reporting obligation. If the foreign owner has no U.S. return filing obligation, then the domestic reporting corporation must report on a calendar year basis.
The final regulations are effective December 13, 2016, and apply to tax years beginning on or after January 1, 2017, and ending on or after December 13, 2017.
Posted by David Roer, CPA
Although the attention has been on who will build the border between the U.S. and Mexico this past year, an even hotter topic in the coming months may be the potential border, both figurative and literal, between the Republican-led House of Representatives and Trump.
The Border Adjustment Tax is being discussed vehemently these days, both in Congress and in the White House. House Speaker Paul Ryan and the GOP are strong advocates for it, while President Trump has been outspoken against it (although, in recent weeks, has started to warm up to the idea. Tremendous!).
Before delving into the minutiae, let’s start with the basics: as touched on in prior TrumpWatch columns, the current U.S. corporation tax rate is 35%.
Under current law, corporations are taxed on their net profits, meaning the tax is based on the company’s gross income minus expenses. These expenses are made up of direct cost of goods sold, various operating costs (general administrative expenses, interest expense, advertising, etc.), as well as depreciation, which allows you to write off the cost of a fixed asset over several years, depending on the asset type. To quote Kramer from Seinfeld:
“Jerry, these big companies, they write off everything! ... I don’t know what that means, but they do, and they’re the ones writing it off!”
As discussed in our most recent TrumpWatch on international taxation, U.S. corporations are taxed on profits earned overseas and repatriated back to the U.S.
The proposed GOP plan, backed by House Speaker Ryan and Kevin Brady, Chairman of the House Ways & Means Committee, would create a destination-based-cash-flow-tax-with-a-border-adjustment, aka DBCFT (maaaaaybe we’ll just stick with “Border Adjustment Tax” for short).
This proposal indicates that a U.S. company would pay tax on where the goods are sold (i.e., where they end up), not where they are produced. In other words, the proposal would push towards the “consumption tax” concept instead of the “income tax” concept. In addition, the proposal would look to reduce the corporate rate and tax domestic revenue minus domestic costs from 35% to 20% (although Trump’s still proposing a reduction to 15%).
As much as I love to bold and underline words, there actually is a reason for the emphasis on “domestic.” Current law allows for companies to be able to deduct the cost of imported costs and materials from their revenues. The proposal would eliminate this concept: since we’d be shifting to a “consumption tax” (again, taxation on where the goods are consumed), import costs would not be an allowable deduction. Contrarily, exports and other foreign sales would be made tax-free (remember, tax only on where the goods were consumed). The goal: keep businesses, production, and manufacturing within the U.S.
While losing deductions for imported materials may be detrimental to several companies (like retailers, who derive a bulk of their goods from imports), several economists have noted that this shift in taxation may increase the value of the dollar; thus, if the dollar were to increase, those same imported goods would be less expensive. In simple terms: the increase of the dollar may offset the tax increase to importers. Importantly, consumers will most likely pay more for those products.
Just for comparison’s sake, most other countries use what’s referred to as the Value Added Tax (VAT) system. This is, for all intent and purpose, the same as the proposed Border Adjustment Tax, the only difference being under the VAT, a company cannot deduct wages, while under the proposed plan, wage-deduction would be fair game.
As things stand, there still is that figurative border between the House’s proposal and Trump’s own corporate tax reform proposal (despite Trump warming up to the concept). Either way, the months ahead should prove to be very interesting as to what ultimate corporate tax reform the U.S. will be adopting in the near future.
Stay tuned to the REM Cycle for further TrumpWatch updates.
Posted by Evan Piccirillo, CPA
New York State is so demanding already in terms of personal information required to file your individual tax return. They want your name, address, social security number, date of birth, your income, employer’s name and address… the list goes on and on. Starting in 2016, we get to add another piece of sensitive data to that list: your driver’s license information.
In an effort to strengthen identity fraud protection, New York has added this required information as a new layer to identity verification within their electronic filing system. Taxpayers must provide this information to their preparers to comply with the new rule. New York accepts a valid driver’s license or state-issued ID to satisfy this requirement. A third option exists: if you don’t have either (or are deceased, in which case you’re probably not reading tax blogs), then your preparer can “opt out” of providing the information.
New York is emphasizing that this is required for all taxpayers and is advising preparers that they must collect and enter this information to their tax software. The “opt out” should only be used when the taxpayer doesn’t have such a document (or has passed on). New York State’s official FAQ publication posted on the Tax Department’s website regarding compliance states:
Q. If my client is known to have a valid driver license or state-issued ID, but chooses not to disclose it, can I check the No Applicable ID box without repercussion? Am I required to disclose this (similar to when a taxpayer refuses to e-file)?
A. As with any return data, you should submit the information as it’s provided by your client.
Interpret that answer at your own risk, but at an FAE conference in January of 2017, Nonnie Manion, the Executive Deputy Commissioner of the New York State Department of Taxation and Finance, advised preparers to “just check the “No Applicable ID” box for now” in cases where the taxpayer has an ID issued by any state other than New York.
I applaud New York’s effort to combat identity fraud, which is a real issue facing taxpayers everywhere, but putting even more sensitive identity data in a single place seems like it is begging identity thieves to increase their efforts to target tax preparers. For taxpayers attempting to safeguard their information, sharing information is a major activity to avoid. In a way, New York’s effort is in direct opposition of basic identity protection.
I just hope that in 2017, New York doesn’t require your first pet’s name and the street where you grew up as additional layers of electronic filing identity verification. For now, New York taxpayers will have to provide to their preparers one of the three options New York State is willing to accept.