Amazon and Other Internet Retailers to Begin Collecting Michigan Sales Tax
For many people, the best thing about buying from Amazon is sticking it to the state by avoiding the 6% sales tax they would pay if they bought those products locally. These people are engaging in illegal tax evasion, and now Michigan is trying to do something about it.
Last month, Republican Governor Snyder signed a law sponsored by Democratic Senate leaders that will require certain Internet retailers to begin collecting the 6% tax on October 1, 2015. The big retailer that is targeted by this is Amazon, but there are others who are potentially affected, so you may see tax start showing up on other purchases as well. For those who have already been paying the required use tax on these purchases with their annual Michigan income tax return, this law change should ultimately make their tax compliance easier by reducing the likelihood that they are purchasing from vendors who are not charging them tax. But for those who have looked at online shopping as a way to score a 6% discount, it looks like the state is finally catching up with them.
With Michigan passing this law, it joins the roughly half of states in the country that are requiring some form of tax collection or reporting by Amazon and the other big online retailers. Interestingly, while Amazon is in favor of a national solution to this problem, they are fighting the moves by various states to impose solutions at the state level. Essentially, Amazon wants the same rules across the country, and that will never happen if each state is allowed to pass its own laws on this issue.
Amazon’s primary way to fight this recently has been to change its business strategy to avoid the new requirement to collect sales tax. They do this by terminating their relationship with Amazon Associates, people in a state who have their own website that links to Amazon. So far, Amazon has terminated these relationships in six states, and it is possible that Amazon might terminate its Amazon Associates relationships in Michigan in response to this new law. If they do so before October 1st, then Amazon still wouldn’t have to collect Michigan tax.
The bottom line is that Michigan has fired a shot at Amazon, and we’ll wait to see whether Amazon fires back. If they do, then they won’t need to start collecting Michigan tax. If they don’t fire back, then starting on October 1st, you’ll start noticing that 6% tax on your Amazon invoices. Look on the bright side, they might just be saving you from breaking the law.
Are you really backed up?
Most businesses know it is a good practice to make backups of their computer files. You need to be protected against a hard drive crash, fire, malware files that you may download, etc. So you have made your backup to your preferred location: tape drive, USB drive, extra server, or the cloud. But have you ever tested to make sure your backup is working?
Unfortunately, we have had clients who thought their backup process was functioning just fine, but then when they actually needed a backup, they found that the files they needed either weren’t there or couldn’t be restored. Here are some tips for you to make sure your backup is really going to be able to help you when you need it:
- Make sure your backup is set to capture the necessary files. Most backup software these days have a setting that will search your computer for data files that it thinks should be backed up. However, if you use specialized computer software with proprietary file types (other than Office files and PDFs), your backup software may not automatically know that the data files created by that software need to be backed up. You may need to manually set your backup software to include these files.
- Another potential problem is if you have previously overridden the software’s automatic backup settings to, say, only backup certain folders. Make sure that you have not changed your folder structure in a way that prevents the necessary files from being backed up. For instance, maybe you removed a folder level in your filing hierarchy, which would make existing backup paths inaccurate.
- Use your accounting software’s backup function in addition to your overall system backup. For instance, QuickBooks has a main .QBW data file that may very well get picked up in your overall system backup, but not all the QuickBooks data is in that file. Customized invoice templates may not get backed up if you just rely on your overall system backup. You should also be making a QuickBooks backup periodically to make sure to capture those “ancillary” QuickBooks files.
- Test your backups periodically by trying to restore the files in it. As bad as it would be to go to your backup file and find that a document you need didn’t get backed up in the first place, it is probably even more heartbreaking to see the file there waiting to be restored, only to find out that, when you need it most, that backup file can’t be restored because it is corrupted. You don’t need to test every backup you make, but it is a good idea to do a restore test every once in a while.
We hope you will never even need to use your backup, but the above tips should make your backup process even more valuable than it already is. Don’t wait for a disaster to happen to find out whether your backup really worked.
The Fraud Triangle – A Lesson in Accounting Geometry
Need – Opportunity – Rationalization
Do these words raise the hair on the back of your neck? If you are a business owner, they should. This is the fraud triangle – a tool to help identify potential problems in your company. We are all so busy, and we trust the people we work with (otherwise we probably wouldn’t be working with them!), but don’t turn a blind eye to potential problems staring you in the face.
NEED – Well, everyone has needs. But has an employee recently started to talk about gambling a lot? Or that their spouse was laid off or someone in the family is ill? There is nothing you can do about an employee’s need, but be aware that it is part of a decision to step over the line. If an employee is not in a good space, sometimes a little care and empathy will keep the person on the up and up.
OPPORTUNITY – This is where we try to make sure we don’t leave uncounted cash laying around for the taking. Of course we wouldn’t do that! But if you aren’t checking into some financial details occasionally, you are leaving the barn door wide open. The easiest thing to do as a small business owner is to grab the mail every once in a while and open everything. Are there IRS or State correspondence letters indicating that taxes aren’t paid? Are there vendors or credit card bills that you don’t recognize? Follow through and match credit card receipts to the bills and invoices to the vendor if it’s not something you recognize readily. Get the bank statement and review the electronic charges being paid automatically out of your account, and compare cash receipts to your perception of cash flow.
RATIONALIZATION – People like to be treated fairly. If Joe gets perks for the same job that Bill is doing without the perks, there is a sense of unfairness, and a chance that Bill will rationalize padding his expense account ‘to make things even.’ Do you have policies that treat people unfairly? Are you motivating employees to cover up errors or cheat because they need to meet sales goals or quotas for a bonus? These could be legitimate policies with unintended consequences. You yourself work very hard in your business, and you deserve some leeway in running personal expenses as business expenses, right? Everyone does, right? The four-wheeler could be used at the business, right? Well, the receptionist that just had to deal with an upset customer that paid cash works hard too. And if you told her there’s not enough money to give her a raise right before you bought that four wheeler, she has the perfect reason to rationalize that she deserves a small part of that cash. Try to set the tone at the top that transparency and fairness are the order of the day, and it will be harder for someone to rationalize.
In short, don’t rationalize to yourself, keep yourself involved, and do surprise checks on the things that drive your business and the fraud triangle will diminish in size at your business.
“Little GAAP” vs. “FRF for SMEs”
Reading the title to this article, you may think you’ve wandered across an article about an Ultimate Fighting Championship match between two guys with really odd nicknames. But really, it’s an accounting article about a fight between two different accounting frameworks with really odd nicknames. These frameworks were both born a little over a year ago, so now that we’ve had a bit of time to see them in action, let’s report on what we know.
First, a little background… In the wake of the 1929 stock market crash, the American Institute of Accountants (now known as the American Institute of Certified Public Accountants – AICPA), the New York Stock Exchange and the government (in the form of the SEC), decided it would probably be a good thing to have some standards for financial statements. This makes sense, considering that a significant factor in the stock market crash was that no one was really able to rely on the financial reports issued by publicly traded companies. These standards, known as Generally Accepted Accounting Principles (GAAP), were determined by the AICPA until 1973. From 1932 – 1958, GAAP is fairly flexible and more “principles-based” instead of “rules-based,” allowing companies to choose from several options in order to meet their needs.
In 1959, the AICPA shifts gears to begin removing the options from GAAP, so that GAAP will be more uniform regardless of the size and circumstances of a company. At this time, also, the AICPA changes the composition of the board that is responsible for determining GAAP, shifting it toward more spots on the board being filled by CPAs from the largest CPA firms in the country along with financial executives from the publicly-traded companies themselves that would be affected by changes to GAAP. This model for establishing GAAP limped along until 1973, when, under pressure, the AICPA recommended that the responsibility for establishing GAAP would best be served by a full-time independent board. Hence, the Financial Accounting Standards Board (FASB) was established, theoretically independent from the AICPA, the SEC, the big accounting firms, and the publicly-traded companies.
Soon thereafter, the fighting began. Many in the accounting profession, including the AICPA who kind of created this mess in the first place, started saying that GAAP was getting too complex to apply to all companies on a one-size-fits-all basis. Instead, there should be Big GAAP for the publicly-traded companies and Little GAAP for the closely-held businesses. The issue was debated and studied and tabled time and again for about 30 years. Finally, about two years ago, it looked like Little GAAP was going to happen; this would be a whole different set of rules established by the FASB just for small businesses.
Instead, the FASB decided not to make a different set of rules, but rather to just create exceptions to the normal Big GAAP rules. They established the Private Company Council (PCC) to recommend exceptions for small businesses to follow, but the FASB retained control over whether those recommended exceptions would actually be implemented. What happened next? The AICPA got ticked. They called the FASB every name in the book and decided that since FASB wouldn’t write new rules for small businesses, they would do it themselves.
In June 2013, the AICPA issued the Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs) as a self-proclaimed alternative to GAAP. This is to be a self-contained set of standards that doesn’t over-complicate things for small businesses and is only updated once every few years. In theory, it’s a nice thing. In practice… Well, we’ve never seen it in practice yet. And we can’t see where the AICPA is touting the number of companies that are applying FRF for SMES, which you would think they would do if it were becoming widely accepted as they hoped it would. The main problem is that it just isn’t GAAP, and most lenders that want financial statements want GAAP. Instead, FRF for SMEs is what is called an Other Comprehensive Basis of Accounting (OCBOA). It is a very nice OCBOA, but OCBOAs are generally most useful for owners/managers of companies, and they aren’t going to switch from what they currently know and understand to another OCBOA just because it is shiny and new.
In the meantime, the FASB’s Private Company Council (PCC) has finalized Little GAAP exceptions for hedge accounting (a minor annoyance with very limited applicability to small businesses), goodwill accounting (an annoyance but with limited companies affected), and variable interest entities (a big problem when FASB expanded this concept about 10 years ago). Plus, they’re working on additional Little GAAP exceptions for business combinations and stock-based compensation. In other words, the PCC got right down to business, and they are making real changes for small businesses. It would be nice to see them work on Little GAAP exceptions to pension accounting and uncertain tax positions, so we’ll see what the future holds.
What does this all mean for you? A year ago, we might have told you to start pushing your lender to accept financial statements prepared using FRF for SMEs. But since we waited to see how things played out, we can confidently say that Little GAAP as created by the PCC is the way to go. IF you or your lender has any questions about how these financial reporting issues specifically affect you, we would be glad to discuss them with you.
Identity Theft and You
It happened again this tax season. We received notification that a client had already filed a tax return with the IRS, when we know she didn’t. She was the victim of identity theft. Unfortunately, this is a growing ‘enterprise’ and you can expect to be affected sooner or later. So what do you do if someone steals your identity?
Get a notebook. Make a log of everything you do, who you talk to, when, about what, etc. Keep copies of every report or letter you send or receive in the notebook. This problem will take some time to fix and having everything in one place will save you time and frustration.
Contact the 3 credit bureaus (Equifax, Experian, TransUnion) and have them issue a fraud alert and attach it to your statement. Also, have them send you copies of your credit report. They are free when you place the alert and the companies will ask for your social security number. Review the reports and report anything suspicious back to the bureau. Time is of the essence on this step.
Call the police. Write down the name of the local police officer who responds, and provide as much detail as you can, including all fraudulently accessed accounts. Make several copies of the police report.
Fill out an Identity Theft Victim’s Complaint and Affidavit. This is available at www.ftc.gov/idtheft
For falsely filed tax returns, contact the IRS immediately. The IRS Identity Protection Specialized Unit has a toll free number of 1-800-908-4490. There is also a form to fill out, IRS ID Theft Affidavit Form 14039, which can be found at the IRS website.
For State of Michigan returns, the state requires a letter or e-mail with the following information:
Name, Address, last 4 digits of your social security number, and a brief description of what happened. Be sure to include your phone number.
Mail to: Identity theft Unit
Income Tax Division
PO Box 30477
Lansing, MI 48909
E-mail to: Treasury-ReportIDTheft@michigan.gov
Remember that there are also other ways for someone to use and abuse your identity, including medical insurance identity theft and using your child’s social security number. Check your billing statements for insurance, credit cards and get a copy of your child’s credit report.
Be careful with your information and act quickly if you suspect someone is using your information for false purposes. Stay safe!
IC-DISCs: A Funny Name for a Great Tax Benefit
There was a time when your customers were your neighbors. Then they were in the town down the road. Before long, you were doing business with people from a different state. Now, many of you are doing business overseas, or contemplating it. For those of you in the global marketplace, the U.S. tax code may have a nice benefit for you.
While the Interest Charge Domestic International Sales Corporation (IC-DISC) has been around for almost 30 years, it was not very popular until the mid-2000s when dividends were changed from ordinary income tax rates to capital gains tax rates. Even after that change, many people have taken a wait-and-see approach since the tax rate decrease was only temporary. Now that the dividend tax rates are not scheduled to increase, the IC-DISC should definitely be explored for companies exporting their products.
While there are a couple different ways to benefit from an IC-DISC, the way we see the most is for a company to effectively pay a tax-deductible dividend/distribution. This is accomplished by having the operating company pay a commission on export sales to the IC-DISC, with that commission being deductible by the operating company. The IC-DISC does not have to pay tax on the commission it receives; instead it distributes the money to its shareholders in the form of a dividend. The dividend is taxable to the shareholders at capital gains rates of 0% to 20%, while the commission generated a deduction at ordinary income rates of 15% to 39.6%. For instance, a $100,000 commission run through an IC-DISC can generate tax savings of roughly $20,000.
You’re probably thinking it must be really complex or risky in order to get these tax savings. Actually, the IC-DISC is nothing more than a paper corporation, funded with $2,500 of capital, and with a requirement to annually calculate the commission on export sales and file a separate tax return. It really is that simple. For compliance costs of maybe $2,000 per year, you may be able to get tax savings of many multiples of that amount.
An IC-DISC can make sense for any company exporting at least $500,000 per year of products it manufactures here in the United States. Even some companies with lower exports can benefit from an IC-DISC if their export sales are highly profitable. If your company has export sales, we would be glad to talk about an IC-DISC with you.
It’s Time to Get Compliant with Foreign Tax Reporting
It has been nearly 10 years since author Thomas Friedman published The World Is Flat, in which he discussed the trend toward globalization of economies and business activities. In our client base, we have certainly seen an increase in cross-border activity, from sales of products by a U.S.-based company to customer overseas, to foreign ownership of a company located in Michigan, or something in between. Of course, with all this money flowing back and forth across borders, the IRS wants to know about it, and they have some pretty big penalties for failure to tell them about it.
For those of you who receive our annual 1040 Client Organizer, you may recall that there are always several questions about whether you have an interest in, ownership of, or signature authority over any foreign financial accounts. The hope is that these questions would be a starting point for a conversation about any and all foreign dealings you and/or your company may have. But the questions are buried in with so many others, that we worry that some clients may miss the importance of this topic.
Every taxpayer needs to consider the following questions, among others, for knowing whether they need to do any foreign account reporting:
- Do you directly own any foreign stocks or bonds?
- Have you received a gift or inheritance from any foreign individuals, trusts or estates?
- Are you an officer of a corporation not created under the laws of the United States?
- Do you do business with customers in certain countries that are boycotting Israel?
- Do you make payments to any foreign parties for rent, royalties, interest or services performed?
The IRS is both stepping up its enforcement of foreign tax compliance, while also providing for some fairly lenient voluntary disclosures of these foreign activities. In other words, they really want people to come forward voluntarily and will make it worth your while by letting you off much easier than if they find you first.
|The Bottom Line – SPECIAL ALERT: THE REAL IMPACT OF MICHIGAN PROPOSAL 1|
|Proposal 1 Passed! The Personal Property Tax is Dead!!! Actually, Not Really.
Last week, Michigan State Proposal – 14-1: Referendum: Public Act 80 of 2014 was approved by the voters by a very comfortable margin. You can’t tell from the title of the proposal, or the actual language of the proposal, what exactly we were all voting on. Instead, people mostly had to rely on snippets of information here and there, and feel comfortable with the fact that just about everyone who had anything to say about the proposal supported it. Now let’s debunk two of the myths that were going around.
MYTH: Proposal 1 eliminated Michigan’s costly Personal Property Tax (PPT), which was a disincentive for businesses to make investments in equipment.
This was the big rallying cry of all the TV commercials, with heartfelt stories of how Ma & Pa Small Business were still paying PPT on equipment they purchased 50 years ago, and how they would love to buy new equipment but it was just too costly because of the PPT. So Proposal 1 eliminated the PPT, right? Wrong.
Proposal 1 eliminated the PPT only for small businesses with less than $80,000 of equipment value in a tax jurisdiction (township or city). Each year, every business in Michigan needs to analyze the value of their equipment and, if under $80,000, file an exemption affidavit, or, if over $80,000, pay some amount of tax.
If a business has over $80,000 of equipment value in a jurisdiction, the type and amount of tax will depend on whether the business is engaged in manufacturing or not. If not engaged in manufacturing, then the PPT is alive and well as we have known it over the years. If the business is engaged in manufacturing, then the PPT will begin phasing out in 2016 and will be partially replaced by a new State Essential Services Assessment (SESA). The SESA has much lower millage rates than the PPT, and the value on which those millage rates are applied is calculated differently than the PPT, but it is still basically a PPT.
As you can see, the PPT component of Proposal 1 is complex and affects different businesses in different ways. However, it is definitely not true to say that the PPT has been eliminated.
MYTH: Since the revenue from the PPT is going to be partially replaced by the use tax, the use tax is going to grow either by increasing the tax rate or applying it to previously untaxed purchases like groceries or services.
Although the proposal itself included the language “Reduce the state use tax…” and “Prohibit Authority from increasing taxes…” and “Prohibit total use tax rate from exceeding existing constitutional 6% limitation…”, there were still people out there saying that use taxes would increase as a result of Proposal 1. It seems they were basing this on the idea that a part of the state 6% use tax would now be the “local community stabilization share” and would be turned over to a newly-created Local Community Stabilization Authority (LCSA) for disbursement to the local jurisdictions who are no longer collecting as much PPT.
Critics of the LCSA claim that it will be able to do whatever it wants to do with the use tax with no repercussions because the members of the LCSA will be appointed by the governor, not elected by the voters. Actually, the LCSA is really just implemented to receive a certain amount of money from the state based on the loss of PPT revenue to the local jurisdictions, and then the LCSA divides that amount amongst the local jurisdictions. In order to increase the use tax rate or expand the tax base to groceries, services, etc., the Legislature would need to pass a law and the Governor would have to sign the law into effect. It is not in the hands of the LCSA to do this.
It’s No Longer Business as Usual for Health Benefits
IRS Notice 2013-53 announced that the “applicable percentage” for 2012 for purposes of determining percentage depletion for oil and gas produced from marginal properties is 15%, which is the same as it has been every year since 2001. We have no use for this information, and we’re guessing you don’t either. IRS Notice 2013-55 contains a list of 70 Indian tribes that have settled tribal trust cases against the U.S. Again, we have no use for this information, and we’re guessing you don’t either. The point is that we all can generally gloss over things in IRS Notices because they don’t have much applicability to the broad base of U.S. businesses and citizens.
Not so with IRS Notice 2013-54… On Friday the 13th of September 2013, the IRS made a major change in the landscape of employer-provided health benefits, and they did it in a very low-key way. Generally, issues with major interpretations of law, or subject to some controversy, are handled by IRS through Regulations, which require a public comment period before they become final and effective. Although IRS Notices require taxpayers to abide by them just as if they are Regulations, those taxpayers get very little lead time and absolutely no input on the content of the IRS Notice. It is almost as if the IRS is trying to sneak one by taxpayers.
So what exactly did the IRS do in Notice 2013-54, which was effective January 1, 2014? Let’s look at three major areas:
- Does your company have a health reimbursement arrangement (HRA) (otherwise known as a Medical Expense Reimbursement Plan), for purposes of reimbursing employees for their out-of-pocket medical costs like deductibles, co-pays and prescriptions? If so, you now need to also offer a group health insurance plan, and limit participation in the HRA to those who are participating in your group health insurance plan or a group health insurance plan provided by a spouse’s employer. If you don’t do these things, then the HRA can only provide limited benefits, such as dental, vision and long-term care.
- Does your company provide tax-free payments for health insurance premiums to your employees for policies they purchase individually? If so, depending on who you believe, you either have to stop immediately, or you have to run these as an employee salary redirect through a written cafeteria plan. We believe the cafeteria plan scenario works, but there are significant penalties if it doesn’t, so you will want to be very careful with this area and may want to hire a third-party to administer the cafeteria plan. Also, it definitely cannot be used to reimburse premiums for individual policies purchased through the Exchange.
- Does your company allow employees to redirect part of their pay through a health FSA in order to pay up to $2,500 per year of medical expenses using pre-tax dollars? If so, you now must also offer your employees a group health insurance plan, or limit the FSA to only reimbursing for limited expenses, such as dental and vision.
Are you in compliance with all of the above? If not, you should take steps immediately to explore the options to come into compliance with Notice 2013-54. The penalty for failure to comply can go as high as $100 per affected employee per day. We can help you analyze your options, so contact us today if you need assistance.
Life, Death & Taxes
There are two things certain in this life: Death and taxes. Those simple words truly define our lives. Here at Willis & Jurasek, we have the knowledge and expertise to assist you with taxes and the effects of a death (i.e. estate planning, estate tax returns, gifting etc.) Did you know that no matter your net worth it is important to have a basic estate plan in place? Such a plan ensures that your family and financial goals are met after you die.
An estate plan can consist of several elements. Most likely yours should include a Will, Power of Attorney, Living Will or Health Care Proxy and maybe a Trust. Pulling together all of these legal documents and the information required to complete them can be daunting. Rest assured we can help you every step of the way. When putting together this plan you must be mindful of both Federal and State laws governing estates in addition to the tax impact of your plan. That’s where we come in. We currently have several clients that we assist with their estate planning, whether it is coordinating with the attorney drafting the legal documents, attending meetings with our clients, acting as the trustee(s) or simply talking through with you what we think may work best for you based on our experience.
At the most basic level everybody needs a will. This is a framework to tell the world exactly where you want your assets distributed when you die. You can also name guardians for your children too. Dying without a will, aka “intestate”, can be a long and costly process to your heirs and leaves you no say as to whom gets your assets.
I know what you are thinking…”I don’t need a trust because those are just for the wealthy.” Well, I encourage you to reconsider. Trusts are a legal means of letting you put conditions on how and when your assets will be distributed upon your death. Don’t want your 19 year old to inherit everything at once? Provisions in a trust can protect that from happening. Trusts also allow you to distribute assets to your heirs without the cost, delay and publicity of probate court, which administers wills.
With all the recent activity regarding the uncertainty of the tax laws, it was welcomed when the lawmakers finalized the estate tax exemptions. The estate tax exemption is now set permanently at $5 million (indexed for inflation). This means that in 2014 estates under $5.34 million are exempt from the tax and estates over that amount are taxed up to a top rate of 40%.
I could go on and on and on about estate planning, but also don’t forget about gifting! If you ever want to discuss estate planning, gifting, life, death, taxes, etc. give me a call at 517-788-8660 or send me an email at firstname.lastname@example.org and we can set up a time for us to discuss it all either at our office, your office or over lunch.
Do you have your CPA on speed dial?
As one of the most trusted advisors you have, your CPA should always be available to you. Now-a-days that has become even easier to do with the use of e-mail and cell phones.
If you stop and think about it…who knows more of your personal information than your CPA? We know about your income, your children, your social security numbers and other sensitive information, your estate plan, your business, your long term goals, your retirement plans, how you run your business, which employees are and are not working out, etc. Often times we are the first people that you turn to when there are major life events (i.e. birth, marriage, divorce, death, business start-up, mergers & acquisitions, etc.) because we can assist you and consult with you on essentially everything. Also, we are great at keeping secrets, but you already know that if we have served you well over the years!
We are not just the paper pushers that you imagine…actually we’re almost completely paperless now so I guess we should rephrase that to key punchers…we are your trusted advisor, your confidant and hopefully your friend!
Having a CPA as your advisor allows you personally, and your business, to have access to a wealth of knowledge that would be otherwise unattainable. As CPAs we are able to meet with clients in virtually every income level, industry and facet of life. This provides us with a unique perspective and the opportunity to assist our clients in ways that they may not have even imagined because we have previously assisted a client in a similar situation.
If you are reading this, chances are that you are already one of our clients and for that we say Thank You! It is our pleasure serving you and we hope to continue on with you indefinitely. If there is ever a time that you feel you are not getting the service you think you should be, please contact our office and voice your concerns because your satisfaction is our ultimate goal. We may not be the cheapest in town, but we are the best, which is attributable in full to our clients. If you are satisfied with your services, we ask that you share our information with your friends, business associates, relatives, etc. Word of mouth recommendations are the highest compliments from our clients. If you have someone in mind that may benefit from our services, then please call me at 517-788-8660 or email me email@example.com and we will be happy to approach them. Thanks again for being our clients!
3.8% Medicare Surtax & 0.9% Medicare Surtax & IRS Enforcement…Oh My!
Unless you’ve been living under a rock for the last year, I am sure you have heard that this year there are big changes for some individuals when they file their Federal Income Tax. Some of these changes come from provisions from the PPACA (Patient Protection and Affordable Care Act a.k.a. Obamacare) that took effect this year, placing a 3.8% tax on various forms of investment income for individuals and a 0.9% surtax on wages and self-employment income over a threshold amount.
These are a huge deal because they are both surtaxes, meaning they are in addition to any other tax assessed on income. Both surtaxes apply only if your modified adjusted gross income is over $250,000 married filing joint, or $200,000 single. So, if your top income tax bracket is 39.6%, this 3.8% surtax on net investment income puts your overall federal rate at 43.4%. Secondly, if your wages and/or self-employment income exceed the threshold amounts, you are going to pay the 0.9% surtax on the wages and/or self-employment income over that threshold amount. Generally employees pay Medicare taxes at a rate of 1.45% on all wages. With this new provision certain employees will end up paying 2.35% on wages over the threshold. The employers will be responsible for collecting and remitting these on wages paid (if wages paid from that employer exceed the threshold) and self-employed taxpayers will pay it in with their 2013 tax return.
In an effort to make this extremely clear, what I am saying is that a taxpayer in the highest tax bracket living in Michigan and residing in a city which has a city income tax, will be paying approximately $0.50 in taxes on every $1.00 they earn (over the threshold amounts). Every taxpayer is different and that is why it is essential to do tax planning with your CPA. Some of these impacts can be lessened or even eliminated with proper planning. However I will add a prerequisite to that…sometimes when you are really wealthy and all the planning is said and done, you may just be stuck paying the tax. We are all for tax avoidance, but not tax evasion…correct?
A few general planning items to consider:
- Timing income:In some cases, it may be as simple as timing income so that you don’t have an influx of investment income in the same year as you have high overall income. You can delay or accelerate income to a year that you expect to be below the threshold amounts or you can try to offset gains with losses, etc.
- Non-net investment income products:Some gains are excluded from income for regular tax purposes, and would therefore not be subject to the 3.8% surtax. One example would be the internal buildup of value inside a life insurance policy. A strategy for this would be to use a cash value life insurance policy as a way to accumulate dollars without increasing your net investment income.
- Combine with other planning strategies:If you have charitable giving plans, it may be tax-wise to use charitable techniques that avoid the surtax. A Charitable Remainder Trust (CRT) is a vehicle that can be particularly useful in planning to avoid the impact of the net investment income because the CRT is exempt from the new Medicare Surtax. A planning tip for property having significant appreciation is to transfer it to a CRT, where it can then be sold without the imposition of the 3.8% tax (or the imposition of any regular income tax). By placing an investment in a CRT, you can 1) obtain a charitable tax deduction, 2) avoid taxes on gain in the investment and 3) leave the remainder for the benefit of the charity
These particulars of these new surtaxes, especially the 3.8% net investment income tax, are still being developed by the IRS, so the available planning strategies are kind of a moving target. But if you, or someone you know, is concerned about how the impact of these new taxes, please contact me at 517-788-8660 firstname.lastname@example.org to discuss the issue. At the very least, we can get you prepared for the impact of the taxes before they are actually due. And, if your situation is right, we can do some planning to avoid the taxes going forward.
As if all the Health Care Reform Issues Aren’t Enough…Changes to Flexible Spending Accounts
Flexible Spending Accounts (FSAs) to pay for medical expenses first came about in 1979, as employers were reducing insurance coverage on their employees in order to deal with rising insurance premiums. Here we are almost 35 years later, still dealing with rising health care costs, including companies going through the annual process of figuring out how they are going to keep their premiums in check. In recognition of this, the IRS has made yet another change to the FSA rules, this time allowing for up to $500 of unused amounts to be carried over from year-to-year.
This is actually quite a remarkable change. For years, the biggest deal about an FSA was the “use-it-or-lose-it” rule. That is, you choose at the beginning of the year how much to set aside, you have very limited reasons to change that amount during the year, and if you don’t use it all by the end of the year then your employer gets to keep the unused money. This wasn’t a case of the IRS being arbitrarily mean; the law specifically says that you can’t use an FSA to provide for deferred compensation. So if you set aside money tax-free in one year to be used in a later year, you were deferring compensation, which the law did not allow.
In 2005, the IRS started to bend the “use-it-or-lose-it” rule by ruling that an FSA could be amended to allow any amounts unused at the end of the year to be used during the first 2½ months of the following year. Their rationale was that other areas of tax law said compensation wasn’t deferred if received within 2½ months after the end of a year. This grace period was intended to remove the incentive of employees to go have “unnecessary” medical procedures done, or to stock up on medical supplies, before year-end just to avoid losing the money they had set aside.
Now the grace period has an alternative. The IRS took its rule bend from 2005 and, arguably, has now broken the “use-it-or-lose-it” rule by allowing an FSA to be amended to provide for a carryover of up to $500 to the following year. This time the rationale is that, because of the new $2,500/year cap on amounts that can be contributed to an FSA, the potential for being able to use an FSA to defer compensation is very limited. So, we can still mostly comply with the spirit of the law, even though we are allowing for a technical violation of the law. And who is going to complain? No one. It would literally take an act of Congress to overturn this little freebie that the IRS has thrown our way.
So if you want to take advantage of this new $500 carryover, here are some things you need to know:
- You must amend your cafeteria plan to allow it. If you don’t want to give this new benefit to your employees because of the administrative hassle, then just don’t amend your plan.
- You can do the amendment for your plan year that is already in process, so that your employees don’t have to start going into scramble mode to use the money they’ve previously set aside. In fact, you have until the end of your 2014 plan year to amend your plan retroactive to the beginning of your 2013 plan year.
- You can provide for the $500 carryover OR the 2½ month grace period (OR neither), but not both. If you want to allow one of these “enhanced features” to your employees, the grace period will generally be more beneficial if your employees tend to elect more than $500 each for their FSA, while the carryover will be better if your employees elect $500 or less each per year.
Your Roadmap to Implementing the Affordable Care Act
Last month, “big business” received an unexpected pleasant surprise when the Department of Treasury announced that the health insurance employer mandate in the Affordable Care Act (“ObamaCare”) has been delayed until 2015. While many companies breathed a big sigh of relief and started predicting whether this was just the first step in eliminating this provision completely, now is not the time to just put the Affordable Care Act (the ACA) out of your mind completely. Here are the things you, as a business owner or manager, need to be thinking about right now, and who you might want to consult with regarding these items:
- Even though you may not be required to provide health insurance to your employees, if you are voluntarily providing it, the ACA has some rules you need to follow. Are you covering dependents up to age 26? Are you providing proper annual notices to employees about their coverage? Your insurance agent should be able to assist you with these items.
- And even if you don’t provide health insurance to your employees, you still have a written notice you need to provide to your employees to advise them about the health insurance exchanges. This notice needs to be provided to all current employees by October 1, 2013, and then for any new hires after that, you need to provide the notice within 14 days of hiring. You can find a template for this notice here:http://www.dol.gov/ebsa/pdf/FLSAwithoutplans.pdf
- If you provide a healthcare FSA (flexible spending account) or an HRA (health reimbursement arrangement) to your employees, has your plan been amended to comply with ACA changes, such as the $2,500 annual FSA limit and no reimbursements for over-the-counter drugs without a prescription? Your employee benefits consultant (which could be Willis & Jurasek) can help you with plan amendments. Also, if you are contributing to your employees’ medical costs through an FSA or HRA, are you paying your per person PCORI fee on Form 720? Your insurance provider may have discussed this with you, or Willis & Jurasek can help.
- While the employer mandate may not be effective until 2015, did you know that whether you are subject to the mandate or not is based on your number of employees in 2014? Are you planning to stay under 50 full-time equivalent employees to avoid the mandate? Do you know how to measure for the 50 full-time equivalent employees threshold? Willis & Jurasek can help you determine whether you will be subject to the mandate and the cost of non-compliance with the mandate. From there, your insurance agent can assist you with finding a health insurance plan that meets the requirements of the mandate.
- If you are already providing health insurance to your employees, are you getting full benefit of the available tax credit based on premiums paid? Willis & Jurasek can help you understand the eligibility requirements for the tax credit and, if you meet those requirements, calculate the credit for you.
- Outside of the direct realm of health insurance, but part of the ACA, are the two new taxes on high-income individuals. First, there is the 0.9% Additional Medicare Tax on high-wage earners that went into effect for 2013. Is your payroll system updated to start withholding this tax on any employees with a W-2 over $200,000? Second, there is the 3.8% Net Investment Income Tax on unearned income if your total income exceeds $250,000 (for married filing jointly). This tax also went into effect for 2013, but there are ways to plan to minimize or even eliminate this tax. Willis & Jurasek can help you design these plans, and then you may need to consult with your investment advisor to put components of the plan in place.
As you can see, the Affordable Care Act has many components to it; we’re just hitting the highlights with the above discussion. We encourage you to involve all members of your financial team in the implementation of these provisions in your business. We’ll be glad to assist you with the matters in our areas of expertise, and we can point you in the right direction to talk to your insurance agent, employee benefits consultant, investment advisor or attorney for areas outside of our expertise.
The Truth About the Cost of Education
The best advice I’ve ever heard about sending your kid to college is this: Your kid can get a loan to go to college but you can’t get a loan to retire on. While this is excellent advice, none of us wish for our children to come out of college with $100,000 in debt! Here’s some food for thought on education expenses.
- “I hear that you can cut ties with your children and they can get more financial aid.”
This is true, but with a lot of strings attached. The proper term is “emancipated minor.” This is a legal status, determined by a court in your state of residency. It must be determined before the child turns 18. The emancipated minor then fills out the FAFSA forms without any parental financial information and receives qualified education grants. Otherwise, the child is dependent on his/her parents and must include parental financial information on the FAFSA. This is true even if the child does not live with the parents, and/or the parents can’t or won’t contribute to the child’s education. This continues until the child is 24. If the child is older than 21 but not yet 24, is ‘unaccompanied’ (no family reliance) AND is homeless or self supporting and at risk of being homeless, the child can indicate on the FAFSA that there are special circumstances and call the school of choice to explain.
- “I don’t want my child to have to emancipate themselves, and obviously homelessness is not a great option. Any other ways that my kid can leave my income and assets off the FAFSA?”
As mentioned above, at age 24, a student becomes independent for financial aid purposes. Other factors allowing the student to be treated as independent are: married on day of filing the FAFSA, enrolled in graduate school, providing more than half the support for a household including individuals the student can claim as a dependent on their tax return, in the military or a veteran of the military.
- “What can I expect from financial aid?”
Obviously, this will differ according to school policies and the parent and student financial information submitted. Your child can get a federal direct unsubsidized loan for $5,500 up to $20,500 per year, if they enroll at least half time. The loan is in the student’s name, the interest rate is 6.8% and the student owes the interest while still in college. It is not contingent on financial need. This is the best way to have your student earn a ‘vested interest’ in his or her education. Other monies include scholarships – I can’t stress it enough APPLY EARLY AND OFTEN!! – and other federal loans. There is a nice summary of federal programs at www.studentaid.ed.gov (loan programs fact sheet) that lays out who can borrow what and when. There is one more option…..
- “I’m not financially needy and I’m not rich – I’m just the average middle income American. What can I do?”
If you have unborn or young children, the best thing you can do is educate yourself about the tax deferred options for savings. The simplest one to start is a Coverdell Education Savings Account (ESA). It can be opened at any bank and set up for any designated beneficiary under age 18. So mom and dad, uncles and aunts, grandparents and friends can contribute money, as long as their adjusted gross income is less than $220,000 ($110,00 for singles). The total that can go into the account(s) for one beneficiary in any given year is maxed at $2,000. The neat thing about the ESA is that it can be used for private or religious elementary and high school education! So instead of buying the baby something else he doesn’t need, have the family contribute to an ESA.
The next thing to do is set up a 529 plan. You will need some help with this, as there are several options available. The basic idea is the same as the ESA – saving money now and the earnings are tax free if you pull them out for education. There are differences from the ESA – there is no adjusted gross income limit for the contributors, and there is no yearly limit on the total contribution (although a contributor can only donate up to $65,000 at one time, and the total 529 plan cannot exceed around $300,000). This type of plan can be used for college and graduate school, but not for private or religious K-12 education. There are two types of 529 plans – prepaid tuition plans and savings plans. You do not have to buy a 529 plan in your current state of residence. You will need to analyze the returns on the plans; where, when and how the funds can be used; any state imposed limits; and state tax return credits when you set one up.
Planning ahead while your kids are young is the best way to show them that education is important to you. While your kids should have a vested interest in their education, your help will be appreciated!
Good Non-Profit Governance Leads to Good Relations with the IRS
If you are an Executive Director or a member on the board for a local nonprofit, odds are if I were to ask the question on how you’re organization performed this past year, or what your charity does, you would be able to go into detail for days. However, if I were to ask about your organization’s governance and policies, would I get a deer in the headlights type stare? While knowing how your organization is performing and whether it is meeting its exempt purpose is very important, so is having and following good governance practices and policies. If you ignore these issues, questioning can arise under the watchful eye of the IRS.
Each year when your organization fills out its Form 990 that goes to the IRS, there is a series of questions on the form that address various governance practices and related policies. Although some of these questions are generally not required to be answered under the Internal Revenue Code, the IRS considers such policies and procedures to improve tax compliance. Their stance is that without the appropriate policies and procedures in place the susceptibility for excess benefit transactions, operation for nonexempt purposes, and activities that are inconsistent with an organization’s exempt status are greater. While this might not always be true for all nonprofits, I would generally have to agree that with the appropriate governance practices and policies in place an organization can stay more in line with their defined purpose.
The following are some of the governance items and policies to keep in mind, and what the IRS considers to be important as well.
– The composition of your governing board, its voting members, those who are not independent, and any relationships (family or business) amongst those members.
– Who controls the organization and can that person(s) enforce decisions upon the other members of the board or elect other members of the board?
– Are the organization’s meetings documented as well as those of its related committees?
– Is a copy of the Form 990 distributed to all its members before it is filed and what is the review process?
– Are a conflict of interest policy, whistleblower policy, and document retention/destruction policy in place? If so is compliance with these polices monitored frequently?
– Are any of the board members compensated?
– How is the compensation of the Executive Director, CEO, key employees or other management officials determined and how much is their compensation?
All of the above examples are questions that can be found on Form 990 in some round about way and for certain areas such as the compensation questions, the IRS particularly might look at an individual of the organization that is making over $100,000. Not to say that this is unreasonable in anyway but it is important to have the proper documentation and policies in place to satisfy the IRS that this level of compensation is reasonable.
In conclusion, the IRS has found a statistically significant correlation between following good governance practices and proper tax compliance. A written mission statement, procedures that ensure use of the organization’s assets are consistent with its exempt purpose, review of Form 990 by the whole governing board, and other policies and procedures help to keep the organization on track. It is also important to remember that noncompliance with a written policy can be more harmful than not having a policy at all. Whether a particular policy, procedure, or governance practice is adopted is ultimately in the hands of the organization and many times it depends on its size, type, and culture. Accordingly it is important to consider what is most appropriate for your organization in assuring sound operations and compliance with tax law. If you have any questions on you organization’s governance and policies feel free to contact the staff at Willis & Jurasek.
Lessons Learned from Tax Season
You (and we) made it through another tax season. Whether you experienced the pain of writing a big check to the IRS on April 15, or had the joy of getting an unexpected tax refund, there are lessons to be learned in the process of filing your taxes. Here are some of those lessons to keep in mind.
- Generally, from a purely economic standpoint, refunds are bad. Not that you can get a great return on your money having it sit in the bank, but you are guaranteeing yourself zero return when you loan your own money to the IRS all year via withholding. Instead, think about your debt and applying the extra tax withholding to that. Let’s say you have a car loan at 6% interest, and you got a $4,800 tax refund this year. You cost yourself $144 in interest this year by letting the IRS sit on your money instead of paying an extra $400/month on your car loan.
- That said, there is understandably a psychological aspect to the refund thing. Be honest with yourself, would you really pay the extra $400/month on your debt? Or would it be gone with nothing to show for it? The idea of forced savings via withholding is a good strategy to allow for big-ticket purchases if you don’t have the discipline to save (or pay down debt) otherwise. Just remember, though, that it is your money in the first place, not some gift from Uncle Sam to waste.
- Whichever route you choose to go with setting your withholding to try to break even, or to get a big refund, your Form W-4 is the key to getting there. Check out this handy withholding calculator that will give you the best guidance on how to fill out your W-4 so that your employer can withhold the amount of money that you want withheld:http://www.irs.gov/Individuals/IRS-Withholding-Calculator.
- Were you surprised by how long it took to get your tax return done, or how much it cost? These are things that drive up our fees because they require extra time and attention on our part:
- Disorganized records – If you just shove all your tax records into a file without any sort of order, we either have to organize it ourselves or jump around in our software to enter it all. Unfortunately, we see too many clients sending in a file that will look like this: property tax bill, W-2, charitable receipt, mortgage statement, interest income, charitable receipt, etc.
- Lack of summaries/totals – For things like charitable contributions, medical expenses, and business & rental expenses, we don’t need to see every scrap of paper. You need to keep every scrap in case the IRS comes asking, but you can keep your tax prep fees down by putting together a spreadsheet summarizing these items, and then just sending us the receipts/invoices on things you may have a question about.
- The complexity of your investments – If your broker is getting you into “exotic” investments like hedge funds, publicly-traded partnerships, or options; or is “actively managing” your account to the point where you might wonder if he is churning your account, this is costing you in tax preparation as well as the broker’s own fees. The exotic investments often result in the issuance of a Schedule K-1 to you, which has more complex reporting than just owning mutual funds or stocks. And all that buying and selling of stocks needs to be reported on your tax return, even though you didn’t take any money out of the brokerage account. Just be sure that you’re getting enough of a return on your investment to account for your broker’s fees and the extra you have to pay your accountant to handle the tax reporting.
- If you received estimated tax payment coupons for next year, they are just that… estimates. Generally, these are based on your prior year income in order to safe harbor you from underpaid estimate penalties for the current year. But your income might increase or decrease significantly, causing you to be underpaid or overpaid when you file your next tax returns. Even if the estimates are based on a tax projection for the current year, it is very difficult to project in March or April what your income will be for the whole year if you own a business and/or have lots of investments. The best time to talk about your taxes is before a major event or transaction happens when we can plan for it, not April 1stof the following year when all we can do is damage control.
Thank you for your business and/or referrals this past tax season. We look forward to continuing to work with you in a mutually beneficial way throughout the upcoming year.
Don’t Ignore the Formalities
You know how it is as the owner of a small business. Accounting and formalities are usually the last thing on your mind. Growing your customer base, dealing with employees, finding trustworthy vendors… Those are the things you worry about. So when a bill needs to get paid, you pay it out of whatever checkbook has money – the company’s, your personal, the real estate LLC’s – and figure the bean counters will sort it out later.
And the bean counters do sort it out. They tally up that over the years you have loaned the company $150,000 because bills needed to get paid in order to keep the company afloat and keep you employed. And the bean counters recommend that you write up a promissory note with fixed repayment terms and that you charge interest on the loan. But those are formalities, and you might have to get an attorney to do it, and those aren’t the types of things that grow your business, so you ignore the bean counters’ advice.
Then the unthinkable happens. The company loses its biggest customer and has to shut the doors. You’re never going to get your $150,000 back. It’s little consolation, but at least you’re going to get a $50,000 tax write-off for that $150,000 you loaned to the company. That’s what Juan Herrera thought, until the Tax Court told him he had to repay the $50,000 of tax because his write-off was really only $450/year for 50 years (Herrera will probably be dead before he can claim it all).
The Tax Court decided the case completely on the fact that the $150,000 was not a bona fide debt. Without a bona fide debt, there cannot be a bad debt deduction for the person who “loaned” the money. And if it doesn’t qualify as a bad debt deduction, it will be a capital loss that can only offset capital gains plus $3,000/year of ordinary income. How could Herrera have made this $150,000 a bona fide debt? He could have had a written promissory note with fixed repayment terms and charged interest. If only he had listened to the bean counters…
The IRS likes formalities, and when it doesn’t see those formalities being attended to, it tends to look more harshly on a taxpayer. One of the first things requested in every corporate audit is the corporate record book. This would be the bylaws, stock certificates, minutes of shareholder and directors’ meetings. They want to make sure you are really acting like a business. And part of acting like a business is having agreements with outside parties for things like loans and leases.
Without these formal agreements, or if the formal agreements are unreasonable and/or aren’t actually being followed, the IRS has broad powers to recharacterize transactions in a less tax-friendly way. All of a sudden that loan is really contributed capital, and the $5,000/month you get for leasing the building to the company is really a $2,000/month lease and a $3,000/month dividend (not deductible by the company). And since you didn’t turn in formal expense reports for your business meals or mileage logs for your company car, those things are now extra taxable compensation to you. If you don’t observe formalities, you shift the power to the IRS.
So next time your bean counter blathers on about getting your corporate records up-to-date, or writing up a promissory note, or tracking your business miles, just remember Juan Herrera. Remember how he couldn’t be bothered to write up a promissory note and charge some interest. And remember that he’ll probably be dead before he gets all his tax write-offs. Don’t be Juan Herrera.
Don’t Forget to File Your Forms 1099-MISC
Computers and technology have made things much easier in some aspects, and much harder in others. For the IRS, the art of matching people to their reported revenues has been made easier due to technology. This makes it even more important to have the correct information to report to the IRS.
Many businesses use vendors that require Forms 1099-MISC to be filed, and they do not even realize it. The person that comes in and cleans your office, the company that mows your lawn, or how about the electrician that fixed your lights? These vendors may require a Form 1099-MISC each year if you pay them $600 or more during the year. Of course, it is not as black and white as that, but those are some examples. Basically, a vendor who is not a corporation that provides a service to you requires a Form 1099-MISC. We can assist you in determining which vendors require Forms 1099-MISC and which do not. When in doubt, have them fill out a Form W-9 to go on record as saying they do not need to be issued a Form 1099-MISC. Most vendors have no problem filling out the form for you to keep on record, and it will help eliminate your company’s risk of IRS penalties.
Like I said, it is not as black and white as it may first appear, so let’s look at three other areas that cause some confusion. First, your landlord. If your business pays rent to a non-corporate landlord, even if they are a related party, you must provide the landlord (and the IRS) with a Form 1099-MISC. Second, your attorney. If your business pays for legal services, it must issue a Form 1099-MISC to the attorney, even if the law firm is a corporation. (Apparently even the IRS doesn’t trust attorneys.) Third, service vendors who are LLCs. Whether you have to issue them a Form 1099-MISC depends on whether they have elected to be taxed as a corporation or not, and the best way for you to find that out is to have them fill out a Form W-9. If they are taxed as a partnership, you need to issue them a Form 1099-MISC.
The IRS has been working towards increasing the amount of forms required for reporting income, so they can ensure that everyone is reporting all of their income. The stricter requirements on Forms 1099-MISC and W-9 are another way they are trying to increase the likelihood of everyone reporting all their income they have for a year. If you do not request the information, and therefore do not have it when filing your Forms 1099-MISC at year end, the IRS may send you a notice requiring you to withhold 28% from payments to the recipient until you can furnish the IRS with the correct information. You may also be subject to penalties for not filing Forms 1099-MISC. In order to avoid penalties for yourself and the withholding for your vendors, have them fill out the Form W-9 which should be updated on a yearly basis to be in compliance with the IRS.
If you are concerned about your level of compliance with the IRS requirements on reporting payments to your vendors, please contact us at Willis & Jurasek so we can help you navigate this increasingly risky area.
The Risks and Rewards of Paying Per Diems
If you are in a business where you have employees out on the road, you probably know the beauty of per diems. First, there is the administrative ease of paying someone a flat rate per day they are on the road and not having to worry about expense receipts. Second, you might view it as a bit of a non-taxable perk to your employees since they get the full per diem tax-free whether or not they spend it all, so they might live frugally on the road and pocket the balance.
But there is more to the story, because there is increased IRS scrutiny in this area. We have recently seen two of our clients (one in construction, the other in professional services) get audited by the IRS on the per diems they paid. Also the IRS has recently released guidance regarding whether a taxpayer is subject to the 50% meals & entertainment deductibility limitation on per diems paid. Let’s explore these risk areas and talk about some strategies.
The 50% Deductibility of Per Diems
It comes as a surprise to some people that they can’t deduct 100% of their per diems paid, since they view this as an unavoidable cost of doing business. Sure, they understand that executives or salespeople can’t wine and dine customers and get a full tax deduction, but these per diems are often being paid to manual laborers who are probably just eating at McDonald’s. But the law is clear that a per diem paid for meals is subject to the same 50% deductibility limit as that fancy dinner with the client. So when you pay a $46 meals & incidental expenses (M&IE) per diem (this is the current Federal CONUS rate for most areas), you will only get to deduct $23 on your tax return. How can you get around this?
Some taxpayers get around this by saying the per diem they are paying is a combined rate for lodging and M&IE. Nothing says you have to pay an employee the full combined government-sanctioned per diem rate (currently $123), so theoretically you could pay $46 and treat it as for lodging and M&IE. Then, you would only treat 40% of the $46 as M&IE, meaning the other 60% is fully deductible (in addition to the 40% being half-deductible). This gets you a tax deduction of $37 instead of the $23 above if the per diem is considered all M&IE. Effectively, a combined per diem is 80% deductible. In order for this strategy to work, you better be able to prove to IRS’ satisfaction that you did not directly pay or reimburse for lodging for the employee, and also that the employee actually incurred lodging costs.
Pigs get fat and hogs get slaughtered, and some taxpayers feel that the ability to deduct 80% of their combined per diem is not good enough. So they want to argue that the per diem they pay is all for lodging and none for M&IE, thus 100% deductible. Well, the IRS is on to that trick and, via legally binding Revenue Procedures, they have prevented this argument from working. The Associated General Contractors of America has been lobbying for a lodging-only per diem for some time but has not had any success. Therefore, this is not currently a viable strategy.
As a side note, the 50% deductibility limit on meals is increased to 80% deductible for workers subject to the Department of Transportation’s “hours of service” limits. This is a different issue than the combined per diem being 80% deductible above. So if you pay per diems to employees subject to these DOT rules, be sure to track those per diems separately.
Recent IRS Developments re: Which Taxpayer is Subject to the Limited Deductibility of M&IE Per Diem
So, if you can’t make the per diem 100% deductible by playing with the lodging vs. M&IE proportions, what other strategies do you have?
One is to treat the per diem as taxable compensation to your employees. This may upset your employees on the surface, but if there is enough of a tax rate differential between your company vs. your employees, then you might be able to make this a win-win situation where the company and the employees both end up with more money in their pockets after tax. This will likely only work in limited situations, and it will be an intensive calculation to arrive at that balance between wages vs. per diem, but it could work. Then your employees would claim the per diem rate as an itemized deduction for employee business expenses on their Form 1040, subject to the 50% limitation for the M&IE portion of the per diem.
Another option a company could use in order to get their per diems paid to be 100% deductible is to pass the deduction limit on to their customers. The IRS recently released guidance on when and how this is permissible. Essentially, as long as the company and its customer agree in writing, and the company bills the customer an amount that is a direct reimbursement of the per diems paid to its employees, then the customer can be the taxpayer subject to the deduction limit on the M&IE portion of the per diem. There are two primary instances where this strategy could work. First, if the customer is a governmental entity or a not-for-profit organization, then they wouldn’t care about the limit on M&IE since they don’t pay taxes anyway. Second, especially for construction contractors, generally what the customer is buying is an asset that will be depreciable over 15 to 39 years, so by passing the limit on to the customer, it would only reduce their depreciation deduction a little bit each year over that time frame. So although the customer would ultimately pay more tax, much of the tax would be paid long in the future (as compared to immediately for the construction contractor), so possibly the contractor and the customer could work out an adjustment to the contract to make this a win-win situation.
As you can see, per diems are not an area where you can just recklessly cut some checks and not worry about the consequences. There are a host of risks and strategies in this area for your company, in addition to possible risks for your employees. If your company pays per diems, or is considering paying per diems, make sure to discuss this area with your accountant.
Don’t Let ICE Hurt Your Business
All employers are required to have a Form I-9 on every employee to prove the employee’s citizenship or eligibility to work in the United States.
Recently, we have heard of audits being done regarding Forms I-9. These audits are performed by US Immigration and Customs Enforcement (ICE) agents. The ICE agents show up unannounced and are looking to see if you have properly filled out Forms I-9 on your employees. They don’t leave until you have either produced the forms or admitted your non-compliance. You should have a Form I-9 for everyone in your employ, including the business owners if they are receiving a payroll check.
It is important to follow the directions on this form for both the employee and the employer. Make sure the boxes are all filled out and the employee and employer have signed the form. It is required to review certain documents pertaining to the employee’s eligibility for employment in the US. Copies of those documents may be kept but if you keep copies for one employee, you must keep copies for all employees. If you do have employees whose US employment eligibility expires after a certain time you need to have the employee fill out a new form after their eligibility expires showing proof they are eligible for employment once again.
It is also recommended to keep the Forms I-9 separate from the employee’s personnel file and at the business location. This is because if the ICE agents request to look at the documents, you only give them the Forms I-9, not the entire personnel file for each employee. The agents also expect you to be able to produce the forms within a matter of minutes. Fines for failing to comply with Form I-9 requirements begin at $110 for each form and can be as much as $16,000.
To obtain a copy of Form I-9, go to www.uscis.gov, click on the “Forms” tab at the top of the page, locate the Employment Verification (Form I-9) form under the “Most Searched Forms” on the right hand side of the page and then click on the “Download Form I-9” at the top of the page.
Three Ways You Are Hurting Your Business
At Willis & Jurasek, we are more than tax geeks and accounting nerds. We are trusted business advisors who take what we learn from working with hundreds of businesses and try to “spread the wealth” by advising all our clients about some of the best practices we see in the business world. Unfortunately, we also see some “worst practices,” and in this article we are trying to spread some cautionary tales to keep others from making the same mistakes.
- Relying too much on family– You may have heard of the tax benefits of hiring family members to work in your business. It is true that these can be significant, but this does not mean that many or all of the key roles in your business should be filled by family members. For instance, if your entire corporate board of directors is made up of family members, you are not getting the valuable outsiders’ perspective that other business people can bring to your organization.
If your spouse or children have talents that will enhance the business, then by all means hire them and utilize those talents. But if you are just putting Johnny on the payroll because you just want to help him out, have you considered that this might be counter-productive? Let’s suppose you are getting to the point of devising an exit strategy from your business because you want to retire. You know that your child(ren) can’t or don’t want to own and operate the business, so you are considering selling to a third-party buyer. Often the price that buyer will pay is based on a multiple of the net income of your business; in this case let’s say a buyer will pay 5 times net income. If Johnny is on payroll at $50,000, he is probably really costing the company $60,000 when considering payroll taxes, benefits, increased insurance costs, etc.
Using a multiple of 5 times net income, this means that having Johnny on payroll might cause your business to sell for $300,000 less than it otherwise would, presuming the service he provides to the business could be absorbed by other employees and/or by someone not as costly.
- Falling in love with your hard assets – We see too many clients sitting on too much inventory and/or pieces of equipment. Some are so bad that they could definitely be called “pack rats,” with a few possibly even border-line hoarders. One of the common traits of these individuals is that they tend to work in businesses where they create things “out of thin air,” such as construction or custom manufacturing.
What is wrong with not being able to let go of your hard assets? These items represent cash tied up in your business that you could use for more productive purposes: pay down debt, reward key employees, contribute to your retirement. If there is inventory covered in dust on your shelves, or you have a piece of equipment that hasn’t been used in years, you can and should strongly consider breaking the emotional attachment to those tangible items and converting them to cash.
You may say that those items aren’t really tying up cash because you might only be able to sell them for pennies on the dollar, if at all. You may have a point. It may be difficult to find a buyer, or you may just have to sell the items for scrap. But even doing this you will still be freeing up cash because you will no longer be insuring those items or paying personal property tax on the equipment.
- Not shopping around– I know this point could be considered a bad one to make because it argues against loyalty and because someone might take the idea to shop around for a CPA firm. (We know we’re not the cheapest firm in town, but we feel pretty confident we’re the best.) But the point about shopping around isn’t always necessarily to find the best price, but to find the best value.
What cost in your business has been increasing the most recently? For many of you, the answer is health insurance. Yet, I met recently with a business owner who wasn’t sure when the last time he shopped around for health insurance was. I told him about how we do it. We don’t get the cheapest policy available, but each year we ask our insurance agent to provide us different options with different levels of coverage so that we can see if one is available that is a better compromise between price and benefits received vs. just accepting the same policy as the year before and being stuck with a 15% – 20% annual premium increase. That compromise, or balance, between price and benefits received is the heart of finding the best value.
Health insurance is just one example. Maybe advances in technology make it so that your materials provider is no longer your best value. Even though they are just down the street and pretty cheap, the equipment they use is old, so there is a high defect rate in their product and they can’t quickly respond to your requests. But maybe in the next town over there is a vendor with new equipment, and/or employees with better skill sets, who can provide you parts at a slightly higher cost but with 50% less defects and a turn-around time that is one week faster. The problem is, you won’t know unless you shop around.
The above three things are pretty big deals, but they are just the tip of the iceberg in terms of all the ways business owners shoot themselves in the foot on a daily basis. If you need assistance with any of these, or want to hear more about areas for improvement in your business, please contact us today.
Summer Camps as Tax Credits
The school year is coming to a close, and pretty soon your kids will be sitting home bored, playing on the computer or watching TV. Instead, why not send them to summer camp and get the government to pay 20% – 35% of the cost via a tax credit?
For all of you parents out there with children under the age of 13, the cost of summer camp for your kids might qualify for the child and dependent care credit. If your child went to a summer camp, and the cost was incurred so that you as parents could work it may be eligible. There are some instances where this does not hold true, for instance, summer school and tutoring programs are not eligible for the credit. These would be treated as educational services not child care.
To be eligible for the credit, the camps must be day camps, not overnight camps. They can be special day camps for computers, theater, and baseball just to name a few. So, not only are your children learning something new at these camps, but parents are able to take advantage of the tax credit on their end. Daycare has been a familiar item when discussing possible credits with parents, but this opens things up for parents. Not only will you be able to switch up the routine for your child in the summer, but there may be a benefit for you come tax time.
As with so many tax credits, there are some hoops to jump through in terms of your income, amounts paid for child care, etc. If you are interested in more information about this summer camp opportunity, please contact us.
401(k) Retirement Plans Administrators – Is Your Plan In Compliance?
Recent studies have indicated that as many as 77% of 401(k) plans are not in compliance with applicable rules and regulations. Why such a high percentage? 401(k) plans fall under the jurisdiction of the Department of Labor (DOL) and the Internal Revenue Service, so there are overlapping rules and regulations. Typically, plan sponsors are conscientious, but the DOL has identified several areas to watch:
- Plan document failure. OK, your company started a 401(k) plan and you have the big binder of documents to prove it. But are those documents up to date? Recent amendments to your plan should have included the HEART act and the PPA Technical Corrections Act. One way to make sure you are current is to touch base with the plan service provider at least twice a year and ask if there are any changes you need to make. Most service providers have information on their websites, but it is nice to have confirmation from a real person that you are up to date. Another issue to watch: if you amend one section, other sections of the plan document need to agree to the amendment.
- Failure to follow the terms of the plan document. Recent examples of problem areas include:
-Someone is laid off and comes back. Are they still a plan participant?
-What is the definition of a year of eligibility versus a year of service?
-Can someone over 59 ½ and still working for you take an in-service distribution?
All the answers are hidden in your plan document, but are sometimes hard to decipher. If you have questions regarding your 401(k), start with your document. Your service provider and your auditor are also good references. Whenever you consult the document or a person for their advice, document the date, time and decision-making process.
The following issues are covered in your plan document, but are misunderstood so often they are worth a separate mention:
- Know the definition of compensation. Use the definition in the plan, which could be different than Medicare wages or gross payroll. Proper initial set up in your payroll system is essential for this step. Special pays, bonuses or insurance deductions may have an effect.
- Include alleligible employees. All plans have age and service requirements, and once an employee meets those definitions, s/he becomes a participant. Your service provider will ask for yearly census information, and it is a best practice to include all employees in your census information, even ineligible employees. When you reconcile your census data to your annual payroll reports, many errors can be caught.
- Follow the plan’s loan provisions. Can an employee have more than one loan at a time? What happens if an employee with an outstanding loan is terminated? What interest rate is being charged? Many loans are going paperless, but you as administrator need to know that the service provider is following the plan’s procedures.
- Follow the plan’s hardship withdrawal terms. Important: your definition of hardship and the DOL’s definition of hardship are notthe same! The hardship definition and the amount of the withdrawal are very specific in this area. If you are approving the withdrawal, make sure you know the rules.
- Deposit elective deferrals on a timely basis. What is a timely basis? The official definition is “as of the earliest date on which such amounts can be reasonably segregated from the employer’s general assets.” For plans with fewer than 100 participants, there is a safe harbor time period for deposits made within 7 days after the date of the payroll deduction. What should larger plans do? Many use the IRS Form 941 Medicare and Social Security deposit rules, but the DOL has indicated that is not a safe harbor. We suggest the following:
–Come up with a formal procedure, such as a statement that you are using the same day as your 941 deposit.
–Consistently apply that date. Do not deposit funds early (on or before the pay date), as this demonstrates your capability to segregate funds sooner than your stated policy.
Communication between the company payroll manager, the TPA agent and the auditor can alleviate many compliance issues. Remember, that if your plan is over 100 participants at the beginning of the year, you will most likely need an audit. Please call our office and we will be happy to help.
How To Prevent Paying Taxes on Your Former Employees
Often the state sends correspondence to employers that gets ignored or put off because of a lack of understanding of the importance of the forms. One of the most important forms that the Unemployment Insurance Agency (UIA) sends is Form 1575, Monetary Determination. This is the first notice sent to all employers within the base period (typically the past four calendar quarters) that a former employee has applied for unemployment. Pay close attention to the notice, specifically the reason that the employee has given for separation from your company. If the employee stated that they are no longer working because of lack of work when in reality they were actually fired, you have to provide additional information to the state within ten days of the mailing date of the notice. If you do not respond timely, the state will assume the employee qualifies, and the weekly benefits will get charged to your account. These amounts ultimately affect your unemployment tax rate.
An employee should not be able to collect unemployment if they voluntarily quit or if they are fired for any of these reasons: misconduct, intoxication, theft, assault and battery, willful destruction of property, drugs or refusal of suitable work. But proving these things is key to preventing a claim from being a “he said/she said” situation, in which case the employee almost always wins.
The employer’s burden of proof involves proper documentation by the proper individual(s) that the firing was for misconduct connected with the work or that the employee voluntarily left work. Each incident leading to the firing should be documented at the time of the incident by the employee’s supervisor, and this documentation should be shared with the employee and put in their employment file. Also, the act of firing the employee should be directly related to an incident for which the employee does not have an adequate excuse. For instance, in a court case, an employee who was regularly tardy was fired after a particular incident of being tardy, but he was allowed to collect unemployment (affecting the company’s unemployment tax rate) because he had a valid excuse for being tardy that one particular time.
Simply firing an employee because they have unsatisfactory performance will not make them ineligible for unemployment. Remember – proper documentation is very important and do not ignore correspondence from UIA as this could end up costing you more tax dollars.
As always, do not hesitate to contact us with any of your payroll or unemployment questions. Also, there is an Employer Advocacy Program available at no cost that can assist you with preparing for and participating in hearings to fight unemployment benefit claims. You can sign up for this program by calling 1-800-638-3994.
Tax Ignorance is Expensive Bliss
Ignorance can be bliss, but it can also be expensive. Our clients that have been subject to a Michigan use tax audit can attest to this, and those that haven’t been subject to a use tax audit would be wise to learn about their risks and how to minimize those. Here are some of the things we would advise in order to avoid a large tax bill from the State of Michigan:
- Know the basics of your industry – There are laws specific to construction companies, manufacturers, certain service providers, etc. For instance, even if a construction company doesn’t buy the materials it uses in a job, it is considered the user of those materials and can be subject to use tax on them. And manufacturers are entitled to a tax exemption for a portion of their utilities purchased.
- Educate the right people – It is not enough for the owner of the business and/or one accounting person to know the sales/use tax rules. Make sure the people engaging in the transactions subject to tax know the rules. This may be your purchasing department, when buying items across state lines; or your estimators when bidding a job with a governmental entity. For most businesses, it is too much of a burden to make one person responsible for the company’s use tax compliance.
- Get registered for use tax, and pay some tax at least annually – Depending on the auditor and his/her supervisor, you may be subject to a 10-year audit period instead of the normal 4-year audit if you are not registered for or paying use tax. Registration is as simple as checking a box. And paying can be a one time per year matter. If you think you have no tax due, be advised that I have heard that from many clients who are about to be audited, and every one of them has owed tax in the audit.
- Develop a system for tracking non-taxed purchases – There is too much complexity in the law to expect that you will capture every transaction that should have use tax assessed on it, but that doesn’t mean you shouldn’t try to at least capture some transactions. At the very least, you should identify major non-Michigan vendors you purchase from and, if they are not charging you sales tax, track those purchases so you can self-assess use tax on them.
- Keep your business and your personal separate – On top of the other problems with running personal expenses through your business (IRS audit exposure, reduces value of your business, possible piercing of the corporate veil), having the company pay for personal expenses makes those purchases much more likely to be subject to a use tax audit. While the use tax is applicable to individuals too, the audit rate for individuals is a very small fraction of the audit rate for companies, especially in the construction and manufacturing industries.
- Save records of your fixed asset purchases – In every use tax audit, you will need to show the auditor that you paid sales tax on the equipment you bought over the past four years (10 years if you aren’t registered for and/or paying use tax). If you don’t have purchase documentation, the assumption is that no tax was paid, so make sure to save those invoices in a special place.
- Call your accountant – Unsure of whether you should pay sales/use tax on shipping? What about a construction project for a church? Are there any tax exemptions for safety equipment? And what about if you are renting equipment from a related entity? Guess who has the answer to all those questions and many more.
The good news is that Willis & Jurasek can help you with all of the above issues. We can help you put procedures in place to lessen your risk going forward, help you “come clean” with the state at a reduced cost on past sins, or represent you in a tax audit. Don’t let tax ignorance and a big bill from the state ruin your bliss. Call Willis & Jurasek today to schedule an appointment to discuss your use tax issues.
Could Your Company Plastic Cause a Financial Meltdown?
Embezzlement is not a word business owners want to hear when discussing company finances. Unfortunately though, our office has seen time and time again that embezzlement has occurred through the use of a company credit card. Credit cards can make purchases convenient for the company, and the idea of a cash rebate sounds enticing in these economic times, but, without proper monitoring, your company could be out tens of thousands of dollars before you know it. Credit card use is easy to abuse as charges can be relatively minor and may go unnoticed. However, properly implemented controls can keep you from becoming a victim.
If your company does have credit cards, follow these guidelines for use:
- Have a written policy for use – Specify when the cards can be used, what they can be used for, if approval should be obtained before use, any dollar limits for purchases, when receipts are required, as well as penalties for violating the policy. Any individual who has or uses a company card should read the policy and sign an acknowledgement.
- Monitor the statements – If the individual paying the bill has access to a card, someone else should review the statement to determine what is being charged to ensure there are no unauthorized charges. No one should be exempt from having their purchases reviewed or monitored. Fraudulent charges may not be significant amounts, but small purchases add up quickly over time.
- Follow-through – A policy is only as good as the implementation and follow-through. Ensure active and timely participation and protect the use of a card as you would cash.
- Work with your bank – Banks often have programs that provide the opportunity to restrict what categories a card can be used for so you are able to limit it to just the allowable uses (i.e. allow travel but not entertainment, etc.). Other programs allow you to provide cards to employees that work similar to a prepaid card. An administrator can transfer cash to a card before expenses are incurred and an employee is then limited by the balance on the card. A word of caution though – the other guidelines should still be implemented and utilized for good controls or the use of these can be abused as well.
The use of credit cards can certainly make life a bit easier, but without proper controls, your company could be the next embezzlement. If you would like to discuss the internal controls of your business, don’t hesitate to contact us for a consultation.
Cross-Training: Are You Prepared?
In the unlikely event that one of your employees is hit by a bus, is your company prepared to handle the job responsibilities without him or her? Although it probably won’t be the result of a bus accident, at some point you will encounter a situation that requires your organization to pick up the job duties of an absent employee. This is where the benefits of cross-training become apparent. Cross-training is teaching an employee to do a different part of the organization’s work and can be done either within a department or across departments.
Emergency situations aren’t the only time cross-training can be effective. Cross-training provides multiple benefits for the company: flexibility as workloads or job flow changes, easier scheduling when multiple people have skills and knowledge in more than one area, and the ability to continue with business if something unexpected happens such as an employee quitting. In addition, a cross-trained individual can be used as a component of your accounting system’s internal controls.
As great as cross-training is for companies, it actually has benefits for the employees as well: increasing skills, providing new challenges, expanding knowledge of the company’s business, and easing their minds that while on vacation or out sick, work is not piling up because someone else is able to handle the job responsibilities.
I can hear some of you now though, “My business is too small – there is no one to cross-train.” Let me assure you, you’re not alone. For companies where cross-training isn’t an option, we recommend having written procedures in place that would allow someone to step into a role and perform the tasks required. The written procedures should include things such as where to find information necessary for processing, what reports need to be run, who to contact with questions, and step-by-step instructions for important procedures. Also make sure someone has access to login information for anything that requires a password.
It may seem like quite a bit of work upfront to cross-train employees or prepare a procedures manual, but the benefits are worth the effort.
The Tax Benefits of Vacationing
I know what you are thinking, what is this guy talking about being able to get tax breaks for taking a vacation? While this comment in itself is not entirely true, there are many ways in which you can mix business trips with pleasure and still reap the tax benefits.
For example if the trip was originally set up for business purposes, the airfare and other roundtrip transportation costs are fully deductable. This is also true for anything paid out of pocket for lodging as well fifty percent of any meal costs while conducting the business portion of the trip. So let’s say that you are self-employed and take a five day business trip across the country, but at the end of the business portion of the trip you decide to stay a few extra days for some relaxation. Since the entire airfare or transportation costs are fully deductable, then in essence your personal days on the trip would also be tax deductable. However any lodging and meals after the business portion is complete, is not deductable.
This same concept is also true for an employer that sends an employee on a business trip and reimburses the employee for the out of pocket expenses paid by him or her. Only the business portion paid by the employee that is reimbursed by the employer is deductable, however it is an extra perk that neither FICA tax or income tax withholdings are required to be paid on the reimbursement. Now let’s say that you are an employee and the employer reimburses you for the entire trip, including the personal portion. While the portion that is not business related would become taxable income to the employee, it would still be fully deductable to the employer because they are in concept deductable wages.
Another example of a tax break when mixing business trips with pleasure is when the business portion of the trip is on a Thursday, Friday, and the following Monday, however on Saturday and Sunday it is not feasible to travel back home. In this situation the lodging and fifty percent of meals paid on Saturday and Sunday are also deductable because they fall under the Internal Revenue Code’s “Common Sense” rule, even though business was not conducted on those given days.
There are really no cut and clear rules on what is considered a business trip versus a personal vacation, and rather taken on a case by case situation based on the facts and circumstances of each case. However it is must to document, document, document, this way there is no guessing involved when taking certain deductions. This article just briefly touches some of the benefits of mixing business trips with pleasure, if you have any questions or concerns feel free to contact me or any of our tax professionals at Willis & Jurasek.
I’m Supposed to do WHAT with These Outstanding Checks?
It probably comes as no surprise to you, but the State of Michigan needs money. So at the same time they are rewriting the tax laws, they are also dredging up old laws designed to bring in more money to Treasury’s bank accounts. Several years ago they began placing emphasis on the use tax that has been around, but only lightly enforced, since the 1930s. This year they are focusing on the unclaimed property reporting laws which have been around since 1947.
Were you aware that for the last 60+ years your business may have had an obligation to turn over money to the state? The idea is that when you have cut a check that has not been cashed, or when a customer has overpaid you (two of the most common scenarios for most small businesses), that money is not yours to keep. After a certain “dormancy period,” that money needs to be turned over to the state for safekeeping and to allow the rightful owner of that money to find it.
That information is “old news,” but what is new is the state’s extra efforts to enforce the law. Recently some of our clients have received a letter from the state detailing changes to the law. For one thing, most dormancy periods have been standardized at three years; the major exception is that paychecks become dormant after only one year.
Reporting is required to be done each year by July 1 for any unclaimed property that has passed its dormancy period as of March 31. According to the letter received by some of our clients, failure to comply with the unclaimed property laws may result in an audit of the last 10 reporting years.
If you have any questions or need assistance with reporting your unclaimed property, the professionals at Willis & Jurasek are here to help.
Is it Time to Step Up to MAS90 Accounting Software?
It is safe to say that almost every business today uses some kind of accounting software. But a common question that business owners ask themselves is: Am I using the most suitable software for my business, or is there something else out there that I should be considering? Willis & Jurasek has helped many of our clients with this question in the past, and have provided support and training with specific products such as QuickBooks and Peachtree. With our recent addition of the Grand Rapids office, which is certified as a MAS90 business partner, we now have an additional resource in this area. To provide some idea of who can benefit from this additional resource, this article will try to address questions such as, what is MAS90 software, what type of entity is a good candidate for it, what are the pros and cons of it, and what level of investment would it require?
For convenience of discussion, accounting software today can be categorized into four broad categories; low end, midrange, vertically integrated, and high end software. We will compare the low end and midrange categories in this article. Some aspects of each of the above questions can be answered by seeing where your company and MAS90 fit into these categories:
– For small businesses, in the low end software category the most common programs are QuickBooks and Peachtree. These products are characterized by a low price, generally under $1,000, are easy to use without much training, offer a fixed feature set with no access to the source code to make modifications to the program, and were initially developed for only a single or several users. These products are generally purchased in retail stores, and have a very large customer base, measured in the millions of copies sold.
– For midsized business, in the midrange software category the most common programs are MAS 90 and Great Plains Dynamics. These products offer a broad feature set, extensive internal non-programing type customization capabilities, access to source code for program modification, and a higher price range, in the $5,000 – $50,000 range for software alone, plus implementation. These products were originally developed to support companies with 5 – 100 users, and are generally purchased from value added resellers, which are independent firms that both sell the software and provide implementation and support. These products have customer bases approaching or in the hundreds of thousands.
A trend over time has been for products to strive to migrate upward as technology improves. For example, both QuickBooks and Peachtree have created versions which support larger user counts as high as 30 users. Another trend is cloud based computing, where the complete product or portions of the product are available as web based software that is hosted remotely and available anywhere. QuickBooks is also an example of this, with a web based version available, and this can blur the above categorization by allowing multi-office companies access to a common QuickBooks database.
What is MAS 90 Software?
MAS 90 and 200 Enterprise Resource Planning (MAS 90) is software published by Sage Software, Inc. Sage is one of the largest accounting software publishing companies in the world, with 2.9 million customers in North America alone. MAS 90 has very strong core applications such as accounting (general ledger, accounts receivable, accounts payable, payroll), human resources management, customer resource management, fixed assets management, and internet e-business manager. It also has a very broad range of applications for more specific areas such as distribution (inventory, sales order, purchase order) manufacturing (bill of material, work order, material requirements planning), and project management (job cost, timesheet).
Who is MAS90 a good fit for?
MAS 90 would be a good fit for many midsized profit motivated companies that have outgrown low end software, and need from 5 – 100 ERP users or have 1M – 100Million of sales. MAS90 has been designed with the needs of these companies in mind, such as strong financial reporting, high transaction volume capability, multi-location options, a strong audit trail, deep functionality, and is customizable. Smaller companies may find the audit trail and batch processing capacities cumbersome if they have no need for them, and the breadth of capabilities offered by the MAS90 may require more training than a simpler product would require. However, as a company grows, the need for such features grows, and their omission may result in poor financial decisions due to lack of financial reporting, or in fraud and confusion due to lack of transaction integrity, so the true ongoing cost of missing these capabilities could become many times greater than cost of the additional investment to obtain them.
Bill of Materials processing and inventory management seems to be an area where MAS90 has developed a particularly good reputation. With good support for multiple warehouses, serial numbers, substitute items, bar codes, split cases, fractional selling, effective dates for price changes, physical counts, picking lists, shipping weights, alias names, and more, MAS 90 is well suited for many tough inventory/distribution/light manufacturing needs. These capabilities are often weak or unavailable in lower end products, but are mission critical to many midsized businesses. If the omission of these capabilities costs an additional employee, reduces customer service, or requires additional third party software, the true ongoing cost of the missing pieces could be many times greater than the initial upfront software investment of an integrated solution.
What are the Pros and Cons of MAS 90?
-Market leading product that is well tested, well proven and well designed, backed by one of the largest accounting software publishers in the world.
-Exceptionally strong support network of independent resellers and accountants developed over a 30 year period, including Willis & Jurasek, PC.
-Breadth of capabilities and robust developer network require less external add-ons, and many industry specific features are already included or available as integrated third party applications. External integration capabilities with validation of inputs make it a good foundation for integration with industry specific solutions or web sites.
-Product is developed for mid-market businesses, so supports higher transaction volumes, audit trail, etc. required by midsized businesses.
-Supports comprehensive financial reporting, inquiry, and general ledger segments with expanded chart of accounts, features missing in low end and many vertical products.
-Makes the company more likely to attract the type of employees with the experience, educational requirements, and work philosophy suitable to a midsized company.
– Customizable user screens, reports and forms.
-Greater software integrity than most industry-specific products which have less users and therefore a smaller development budget and less product testing.
– Generally better accounting capabilities than industry-specific products. Many of these products will be strong in the unique requirements of a specific industry but weak in most other areas, including core accounting capabilities and overall product design.
-Requires greater initial upfront investment than low end products.
-Batch processing and inability to edit posted transactions (for audit trail and integrity purposes) can be cumbersome and require more training than low end products.
-Less potential employees available experienced in midrange software than for low end products.
-May not natively support certain industry specific functionality of an industry-specific or high end product.
What level of investment is required for MAS 90?
Midrange accounting software requires a significant initial investment in terms of money, staff training, implementation time and disruption of daily processes as you move up the learning curve. There is a wide range of pricing dependent on the number of modules and users, and the amount of training and conversion assistance required, but the software and implementation for a $10 million distributor needing 10 users might be around $40,000. We fully understand this is not a commitment to be taken lightly, but we believe that a strong enterprise resource planning system is an essential asset for a mid-sized business and are willing to provide a needs analysis, software demonstration and detailed proposal if your company may be a good fit for MAS90.
Tips for Surviving an IRS Audit
The IRS has a veritable army of tax examiners (they don’t like the word “auditor”) and collectors, numbering 31,000 in 2008 and projected to increase to over 37,000 within the next decade. And behind those examiners and collectors are tens of thousands of supervisors, appeals officers, lawyers and others supporting their work. Against this backdrop, you may feel that the best you can do to stay in good graces with the IRS is to simply hope you never get audited.
It is true that a very small percent of tax returns get audited: slightly under 1% for people making less than $200,000, slightly under 3% for people making between $200,000 and $1 million, and under 1% for most small businesses (with S corporations and partnerships being under 0.5%). But that doesn’t mean you should just cross your fingers and hope for the best. Those broad statistics include a lot of people for whom there is no reason the IRS would ever want to waste resources looking at their return; for instance, they receive a couple W-2s, some interest income, and don’t itemize. Assuming you don’t fall into that category, your chances of being audited could be substantially higher than the statistics show.
What should you do in order to have the best chances of surviving your audit relatively unscathed? Here are some tips:
- Document the nonfinancial things. Of course you know that you will have to support direct expenses with a paid invoice or receipt, but beyond that there is some additional record-keeping you might need to do.
- Business usage of automobile – Where and when you went and for what business purpose. The IRS generally is not going to allow 100% business usage of an automobile without stellar documentation.
- Participation in an activity – If you have rental properties or a side business, you should be keeping a log of what you do for the business and how long it takes you. Sometimes this documentation will prove that you have made certain active/material participation requirements that will allow you to claim losses from the activity.
- Issue Form 1099-MISC to non-employees. Too many businesses put themselves at risk by agreeing to not issue a 1099-MISC to an independent contractor. While it may be out of the kindness of your heart to play along with this game (for instance, the individual’s rent will increase because it is based on income), the IRS does not look too kindly on a business aiding another in the process of tax evasion. As such, the penalty can be that your business will effectively lose out on the deduction for those amounts that should have been reported on a 1099-MISC. You can end up paying the IRS 50% or more of the amount you paid the individual to whom you did not issue a 1099-MISC.
- Keep records of large sources of non-taxable bank deposits. In many audits of small businesses, the auditor will do a bank deposit analysis to try to determine if you are receiving income that is not being reported on your tax return. The general presumption by the IRS is that all deposits into your bank accounts are from taxable sources of income. You need to have information to show them otherwise if you are making deposits of funds received as a gift, loan, inheritance, repayment of a loan made to others, etc.
- Keep your corporate minutes and record book up-to-date. In the audit of a corporation, one of the first things the IRS always asks for are the corporate records. This is to ensure that the formalities of the corporate legal structure are being honored. If they are not, the IRS can potentially “pierce the corporate veil” and pursue the shareholders for any tax due by the corporation.
- Tell your accountant everything. It is tempting to say that what your accountant doesn’t know can’t hurt you, but without knowing everything we can’t help you either. We are your advocates within the confines of the law and our ethical obligations as professionals. For instance, if we go in to the initial interview with the auditor saying that all income has been reported on the tax return, only to have the bank deposit analysis later reveal regular deposits from your side business, then we end up with a credibility problem with the auditor. Not only will the auditor possibly dig deeper to try to find other problems with your tax return, but it also makes it more likely that discretionary penalties could be assessed against you if they feel you lied to them.