Author: Stephen Eldridge

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Employee Newsletter Helpful Articles Tax

Self-employed? Save more by setting up your own retirement plan

Self-employed? Save more by setting up your own retirement plan

If you’re self-employed, you may be able to set up a retirement plan that allows you to make much larger contributions than you could make as an employee. For example, the maximum 2014 employee contribution to a 401(k) plan is $17,500 — $23,000 if you’re age 50 or older. Look at how the limits for these two options available to the self-employed compare:

1. Profit-sharing plan. The 2014 contribution limit is $52,000 — $57,500 if you’re age 50 or older and the plan includes a 401(k) arrangement.

2. Defined benefit plan. This plan sets a future pension benefit and then actuarially calculates the contributions needed to attain that benefit. The maximum future annual benefit toward which 2014 contributions can be made is generally $210,000. Depending on your age, you may be able to contribute more than you could to a profit-sharing plan.

You don’t even have to make your 2014 contributions this year. As long as you set up one of these plans by Dec. 31, 2014, you can make deductible 2014 contributions to it until the 2015 due date of your 2014 tax return. Additional rules and limits apply, so contact us to learn which plan would work better for you.
© 2014

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Helpful Articles Tax

Maximizing depreciation deductions in an uncertain tax environment

Maximizing depreciation deductions in an uncertain tax environment

For assets with a useful life of more than one year, businesses generally must depreciate the cost over a period of years. Special breaks are available in some circumstances, but uncertainty currently surrounds them:

Section 179 expensing. This allows you to deduct, rather than depreciate, the cost of purchasing eligible assets. Currently the expensing limit for 2014 is $25,000, and the break begins to phase out when total asset acquisitions for the year exceed $200,000. These amounts have dropped significantly from their 2013 levels. And the break allowing up to $250,000 of Sec. 179 expensing for qualified leasehold-improvement, restaurant and retail-improvement property expired Dec. 31, 2013.

50% bonus depreciation. This additional first-year depreciation allowance expired Dec. 31, 2013, with a few exceptions.

Accelerated depreciation. This break allowing a shortened recovery period of 15 — rather than 39 — years for qualified leasehold-improvement, restaurant and retail-improvement property expired Dec. 31, 2013.

Many expect Congress to revive some, if not all, of the expired enhancements and breaks after the midterm election in November. So keep an eye on the news. In the meantime, contact us for ideas on how you can maximize your 2014 depreciation deductions.

© 2014

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Employee Newsletter News Tax

Watch out for the Wash Sale Rule

Watch out for the Wash Sale Rule

If you’ve cashed in some big gains this year, consider looking for unrealized losses in your portfolio and selling those investments before year end to offset your gains. This can reduce your 2014 tax liability.

But if you want to minimize the impact on your asset allocation, keep in mind the wash sale rule. It prevents you from taking a loss on a security if you buy a substantially identical security (or an option to buy such a security) within 30 days before or after you sell the security that created the loss. You can recognize the loss only when you sell the replacement security.

Fortunately, there are ways to avoid the wash sale rule and still achieve your goals:

  • Immediately buy securities of a different company in the same industry or shares in a mutual fund that holds securities much like the ones you sold.
  • Wait 31 days to repurchase the same security.
  • Before selling the security, purchase additional shares of that security equal to the number you want to sell at a loss; then wait 31 days to sell the original portion.

For more ideas on saving taxes on your investments, please contact us.

© 2014

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Helpful Articles Tax

Installment sales offer both pluses and minuses

Installment Sales Offer Pluses and Minuses

A taxable sale of a business might be structured as an installment sale if the buyer lacks sufficient cash or pays a contingent amount based on the business’s performance. Installment sales also may make sense if the seller wishes to spread the gain over a number of years — which could be especially beneficial if it would allow the seller to stay under the thresholds for triggering the 3.8% net investment income tax or the 20% long-term capital gains rate.

But an installment sale can backfire on the seller. For example:

  •  Depreciation recapture must be reported as gain in the year of sale, no matter how much cash the seller receives.
  •  If tax rates increase, the overall tax could wind up being more.

Please let us know if you’d like more information on installment sales — or other aspects of tax planning in mergers and acquisitions. Of course, tax consequences are only one of many important considerations.

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Construction News Tax

Employee vs Independent Contractor

Employee vs Independent Contractor

An employer enjoys several advantages when it classifies a worker as an independent contractor rather than as an employee. For example, it isn’t required to pay payroll taxes, withhold taxes, pay benefits or comply with most wage and hour laws. However, there’s a potential downside: If the IRS determines that you’ve improperly classified employees as independent contractors, you can be subject to significant back taxes, interest and penalties.

To determine whether a worker is an employee or an independent contractor, the IRS considers three categories of factors related to the degree of control and independence:

1. Behavioral. Does the employer control, or have the right to control, what the worker does and how the worker does his or her job?

2. Financial. Does the employer control the business aspects of the worker’s job? Does the employer reimburse the worker’s expenses or provide the tools or supplies to do the job?

3. Type of relationship. Will the relationship continue after the work is finished? Is the work a key aspect of the employer’s business?

Determining the proper classification under these factors may not be easy. If you’re concerned you may have misclassified workers, please contact us. We’re more than happy to talk with you about it.

© 2014

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News Tax

Consider the Sec. 83(b) election to save tax on restricted stock awards

Consider the Sec. 83(b) election to save tax on restricted stock awards

Restricted stock is stock that’s granted subject to a substantial risk of forfeiture. Income recognition is normally deferred until the stock is no longer subject to that risk or you sell it. You then pay taxes on the stock’s fair market value at your ordinary-income rate.

But you can instead make a Section 83(b) election to recognize ordinary income when you receive the stock. This election, which you must make within 30 days after receiving the stock, can be beneficial if the stock is likely to appreciate significantly. Why? Because it allows you to convert future appreciation from ordinary income to long-term capital gains income and defer it until the stock is sold.

There are some potential disadvantages, however:

  • You must prepay tax in the current year — which also could push you into a higher income tax bracket or trigger or increase the additional 0.9% Medicare tax.
  • Any taxes you pay because of the election can’t be refunded if you eventually forfeit the stock or sell it at a decreased value.

If you’ve recently been awarded restricted stock or expect to be awarded such stock this year, work with us to determine whether the Sec. 83(b) election is appropriate for you.

© 2014

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Financial News

High-Stakes Policy Decisions Loom in 2013

High-Stakes Policy Decisions Loom in 2013

by Eugene A. Lugwig
January 31, 2013
Published in American Banker

An enormous number of new rules are slated to be finalized a result of Dodd-Frank, Basel III and other regulatory initiatives. The result will be the largest augmentation of the banking rulebook in history. Yet how these rules will be finalized is far from certain.

Here are a few areas where the stakes are highest:

Community Banking
Unless you have spent time working with community banks, it is hard to appreciate how profoundly modest changes in rules and supervision can affect them. Many compliance burdens have nothing to do with safety and soundness. I still remember my early years as comptroller of the currency, when a community bank CEO called to complain about the number of examiners we’d sent to his main branch. The examiners had taken up all the spaces in his parking lot, and the bank could not do business.

Of course, I solved this problem quickly by asking my examiners to park elsewhere. Other burdens are not so easily addressed, but reducing the unnecessary burden on community banks is critical to their survival. Today, community banks are larger enterprises than they were 10 years ago. They should be defined by the products they offer and their willingness and ability to serve their communities, not by their size. By this standard, and almost without exception, banks with less than $10 billion in assets are community banks. The same is true of many banks with up to $50 billion in assets.

The Basel III proposals– which create a new definition of capital and a new, U.S.-only standardized approach to the calculation of risk-weighted assets– could be profoundly disruptive to such community banks. U.S. regulators understandably want to make the Basel standardized approach more risk-sensitive, but small banks with no international presence should be exempt from it. This initiative is not required or even suggested by Dodd-Frank, and it should not be part of the sheaf of new compliance obligations facing community banks.

The Volcker Rule
Like it or not, the Volcker rule is here to stay. The issue is not whether proprietary trading should be pushed out of banking organizations– it is whether the rule allows for appropriate market-making and hedging activities, as Dodd-Frank demands.

There are two dangers here: narrowness and complexity. The final Volcker rule could be drawn too narrowly for banks to make markets for clients, facilitate the issuance of securities or engage in hedging activities that are critical to bank safety and soundness. It could also be so complex as to become a trap for the unwary, resulting in disruptive, contentious examinations and enforcement actions that make market-making and hedging activity impossible to conduct economically.

Housing
As proposed, the Basel III and Qualified Residential Mortgage rules make loans to first-time and low-income homeowners much less accessible and likely more costly. A large down-payment requirement, like the 20% one in the proposed QRM rule, would have the greatest impact on home ownership for low and moderate-income Americans. Private mortgage insurance is not incorporated as a way to bridge this problem.

This is, of course, problematic in a variety of ways. But other pending rule changes present their own implementation challenges. They include tougher servicing standards, high-cost loan appraisals, loan officer training and loan originator compensation. Taken as a whole, they are likely to force basic changes to the business models of mortgage originators and servicers.

Ring fencing and free trade
A variety of rules and proposals, both in this country and abroad, move us towards the application of national regulations, national organizational structures, in-country capital, and even national accounting treatment for global banking organizations. This balkanization is fertile ground for a potential disaster.

Notwithstanding the imbalances and shocks that have been so painfully evident in recent years, we should not lose sight of the fact that free trade, including free trade in banking and other financial services, has produced a considerable rise in global economic well-being. The U.S. has historically played a leadership role in promoting free trade. Since World War II, it has sounded the trumpet against a return to the disasters of the Smoot-Hawley Tariff Act.

However, global economic strains have pushed us ever closer to a patchwork system of territorial financial rules, which press global banks to calculate capital and liquidity on a country-by-country basis. They move institutions away from global governance and towards a territorial system that is inefficient and ultimately unsafe. The Basel accords are not always perfect, but they are far superior to isolationism. Surely we can develop a global set of rules that protect national interests yet foster trade and growth.

Shadow banking
One toxic byproduct of rules that are too complicated or unnecessarily burdensome is the growth of the shadow banking system. Virtually all recent financial reforms are aimed at banking organizations, along with a small number of nonbanks that are systemically important at a global level. This leaves ample room for nonbanks to take up financial activities without the growing compliance overlay that banks face. As a result, one of the fundamental goals of financial reform– to improve market stability– is threatened by that very same reform.

These are only a few of the many issues where major changes could occur this year. Regulators have been wise to take their time to try to get these important changes right. Because these changes are so momentous in terms of economic well-being and growth, considered and judicious efforts should take precedence over speed.

Eugene A. Ludwig is a founder and the chief executive of Promontory Financial Group LLC. He was the comptroller of the currency in the Clinton administration.
(c) 2013 SourceMedia. All rights reserved.

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Helpful Articles

Handle Shareholder Loans with Caution

Handle Shareholder Loans with Caution

If you’re a shareholder in a closely held C corporation, you are permitted to take loans or advances from the company. It’s convenient and, typically, as a shareholder, you won’t have to pay taxes on the proceeds. What’s not to like about this opportunity?

Clearly, it’s a convenient benefit. Still, you should be careful that, when borrowing from your corporation, the loan is arranged in a businesslike manner. Otherwise, the IRS could reclassify your loan or advance as a dividend, which would be taxable to you individually and not deductible by the corporation.

The Right Way To Arrange a Shareholder Loan
Generally, whether a disbursement to a shareholder will be considered a bona fide loan for tax purposes depends on whether, at the time of the distribution, the shareholder intended to repay it and the corporation intended to require repayment. When borrowing from your corporation, be sure the terms of the loan are in writing. The loan document should also clearly state that a reasonable interest rate is being charged on the loan. Finally, have the note signed and dated by you and your corporation.

If the IRS audits you or your business, it will most likely review the loan carefully to determine whether the transaction is a bona fide loan or a constructive dividend. The IRS looks at numerous factors to help make that determination, such as:
The security given for the advance
The shareholder’s ability to repay the advance
Whether the loan matures on a specific date
The extent to which the shareholder controls the corporation
The amount of the loan or advance
Whether the corporation makes systematic attempts to obtain repayment
The earnings and dividend history of the corporation
How the corporation records the advances on its books and records

Our firm would be happy to help you avoid any possible tax-related missteps if you are considering taking a loan or an advance from your closely held corporation.
A dividend is taxable to the individual and not deductible by the corporation.

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Strategies To Maximize Your Bonding Capacity

Strategies To Maximize Your Bonding Capacity

What would your surety find if it reviewed your firm’s financial statements today? The reality is that what your surety finds on the financial statements will determine whether you receive bonding and the amount you will be charged. Your fiscal year-end statements generally will form the basis for your bonding credit for the full year.

As a contractor, you need to show your company in the best light possible to secure bonding at a competitive rate. You can take several steps now to make your company more attractive to sureties.

Plan Properly
Make sure you are prepared to provide accurate, timely financial information. Your surety will likely require basic year-end financial statements — including a balance sheet, an income statement, and a cash flow statement — along with a variety of supplemental financial information.

Be sure to include details on your accounts receivable, a detailed listing of the inventory your firm is carrying, and an explanation of your over- and underbillings. Don’t forget to include information on your revenue recognition method as well as a detailed list of jobs/projects pending (your backlog).

In addition, sureties will want to see corporate tax returns for at least several years. You should also be willing to provide sureties with a listing of completed contracts and contracts in progress as well as data on your administrative, sales, and general expenses.

Increase Working Capital
Having a strong working capital position can greatly improve the chances of securing the bonding you need. One way you can boost working capital is by converting short-term debt into long-term debt through refinancing. Let’s say, for example, you tapped into your $450,000 line of credit to buy two large construction vehicles for $150,000. By refinancing the vehicles with a four-year term loan, only 12 months of the principal payments generally will be classified as short-term debt. This approach will improve your current ratio and increase your working capital.

Control Over- and Underbillings
Large overbillings may point to a future cash flow squeeze. Substantial underbillings could indicate potential losses, unreasonable profit estimates, inadequate estimating, and poor billing systems.

Collect Accounts Receivable
Boosting your efforts to collect money owed to your firm can improve your cash position. In addition, billing all contracts before year-end will lower net underbillings.

Reduce Inventories
Try to reduce inventory toward the end of the year since sureties typically discount the value of inventory on the balance sheet.

Review Estimates
Check estimates on contracts in progress to be sure they are accurate.

Reduce Prepaid Expenses
Prepaying expenses doesn’t really improve your financial position from the perspective of a surety.

Avoid Loans and Advances
Don’t deplete your cash position by making large cash advances to employees or loans to shareholders.

Control Debt
Maintain a low debt-to-equity ratio and try not to tap into your available line of credit.

Review Planned Equipment Purchases
If your debt levels seem high compared to other contractors of a comparable size, it might be smart to review any plans you have to buy new equipment. You don’t want to increase the outstanding debt on your balance sheet at year-end or deplete your cash reserves. Consider delaying planned purchases or look into leasing.

Meet Your Financial Obligations
Make sure you meet the terms and conditions of any loan covenants and other financial agreements your firm has entered into.

Talk to Us
Many construction firms end their annual reporting cycle on December 31, but it’s not too early to start planning now. We would be happy to help you with that planning.

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Cloud Computing: What Banks Need to Know

Cloud Computing: What Banks Need to Know

Moving IT operations to the “cloud” offers substantial benefits, but many banks are reluctant to embrace cloud computing because of concerns about information security, data reliability and regulatory compliance. These concerns are legitimate, particularly when outsourced cloud services are provided over the Internet. Banks exploring these services should conduct thorough due diligence and take other steps to manage the risks.

New term is old concept
Although the term is relatively new, the concept isn’t. Essentially, cloud computing means pooling computing resources (servers, processing, memory and network bandwidth) to provide centralized services, such as software, platforms and infrastructure, to users.

Banks that have worked with service bureaus or similar third-party providers already are familiar with “private” clouds, which offer the greatest security. Here, the cloud infrastructure is provisioned for exclusive use by a single bank. It’s owned, managed and operated by the bank or a third party (or both) and may be located on or off the bank’s premises.

A “public” cloud infrastructure is provisioned for open use by the general public and is owned, managed and operated by the cloud provider on the provider’s premises. Other options include “community” clouds, which are designed for use by groups with shared concerns, and various hybrid approaches.

Benefits stack up
Cloud servers run applications and store data. Individual users can tap this computing power with scaled-down PCs using a Web browser or other interface software. Because the cloud infrastructure delivers the applications, processing power and storage capacity, the bank can enjoy reduced IT costs.
IT personnel also spend less time installing, maintaining and upgrading individual computers.

Centralized resources allow the bank to deliver new applications quickly and enhance performance and efficiency by providing users with access to applications and up-to-date data from anywhere and at any time. Centralization also can make backup easier, cheaper and faster.

Outsourced solutions offer additional benefits, including:
Greater cost savings. By spreading costs among multiple customers, cloud providers take advantage of economies of scale, which can reduce a bank’s IT costs and help them save on maintenance costs and energy consumption.
Pay-as-you-go. Banks can avoid large up-front capital investments in favor of a pay-per-use or subscription model. When properly configured, the scalability of cloud computing allows banks to adjust their service levels upward or downward to meet their needs.
Business agility. Additional capacity, software and other computing resources are available on demand, which may enable banks to respond more quickly to customer demand for new products and services, such as online and mobile banking.
Business continuity. Cloud computing provides a high level of redundancy and the ability to move data around rapidly, which can result in enhanced business continuity and disaster recovery protection at a lower cost.

Public cloud computing offers the greatest benefits, but its shared data environment raises significant security concerns. With properly vetted cloud partners and other precautions, however, banks can minimize these concerns or even achieve greater security than they could on their own. For example, a cloud provider may be better equipped to implement multifactor authentication and other controls designed to prevent hackers from obtaining customer information.

Risks must be managed
Financial institutions are subject to a variety of laws and regulations designed to protect sensitive customer information. And while certain IT services may be outsourced, complying with these laws is the bank’s responsibility.

Banks that use cloud providers should conduct thorough due diligence. (See the sidebar “Due diligence tips.”) Their contracts should clearly spell out vendors’ responsibilities with respect to how and where customer data is stored and transmitted. They should also have procedures for evaluating vendors’ internal controls and monitoring vendor performance.

Testing the waters
To get started with cloud computing, consider using a public cloud for activities that don’t involve confidential customer information — such as marketing or back-office applications — while using a private cloud or traditional systems to handle more sensitive applications.
As the banking industry becomes more comfortable with the cloud and vendors respond to the industry’s unique information security needs, public cloud computing will likely grow in popularity.