Category: Martin, TN

Donating to charity is more than good business citizenship; it can also save tax. Here are three lesser-known federal income tax breaks for charitable donations by businesses.

1. Food donations

Charitable write-offs for donated food (such as by restaurants and grocery stores) are normally limited to the lower of the taxpayer’s basis in the food (generally cost) or fair market value (FMV), but an enhanced deduction equals the lesser of:

• The food’s basis plus one-half the FMV in excess of basis, or
• Two times the basis.

To qualify, the food must be apparently wholesome at the time it’s donated. Your total charitable write-off for food donations under the enhanced deduction provision can’t exceed:

• 15% of your net income for the year (before considering the enhanced deduction) from all sole proprietorships, S corporations and partnership businesses (including limited liability companies treated as partnerships for tax purposes) from which food donations were made, or
• For a C corporation taxpayer, 15% of taxable income for the year (before considering the enhanced deduction).

2. Qualified conservation contributions

Qualified conservation contributions are charitable donations of real property interests, including remainder interests and easements that restrict the use of real property. For qualified C corporation farming and ranching operations, the maximum write-off for qualified conservation contributions is increased from the normal 10% of adjusted taxable income to 100% of adjusted taxable income.

Qualified conservation contributions in excess of what can be written off in the year of the donation can be carried forward for 15 years.

3. S corporation stock donations

A favorable tax basis rule is available to shareholders of S corporations that make charitable donations of appreciated property. For such donations, each shareholder’s basis in the S corporation stock is reduced by only the shareholder’s pro-rata percentage of the company’s tax basis in the donated asset.

Without this provision, a shareholder’s basis reduction would equal the passed-through write-off for the donation (a larger amount than the shareholder’s pro-rata percentage of the company’s basis in the donated asset). This provision is generally beneficial to shareholders, because it leaves them with higher tax basis in their S corporation shares.

If you believe you may be eligible to claim one or more of these tax breaks, contact us. We can help you determine eligibility, prepare the required documentation and plan for charitable donations in future years.

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Estate planning typically focuses on what happens to your assets when you die. But it’s equally important (some might say more important) to have a plan for making critical financial and medical decisions if you’re unable to make those decisions yourself.

That’s where the power of attorney (POA) comes in. A POA appoints a trusted representative (the “agent”) who can make medical or financial decisions on your behalf in the event an accident or illness renders you unconscious or mentally incapacitated. Typically, separate POAs are executed for health care and property. Without them, your loved ones would have to petition a court for guardianship or conservatorship, a costly process that can delay urgent decisions. (Depending on the state you live in, the health care POA document may also be known as a “medical power of attorney” or “health care proxy.”)

A question that people often struggle with is whether a POA should be springing or nonspringing.

To spring or not to spring

A springing POA is effective on the occurrence of specified conditions; a nonspringing, or “durable,” POA is effective immediately. Typically, springing powers would take effect if you were to become mentally incapacitated, comatose or otherwise unable to act for yourself.

A nonspringing POA offers two advantages:

It allows your agent to act on your behalf for your convenience, not just when you’re incapacitated. For example, if you’re traveling out of the country for an extended period of time, your POA for property agent could pay bills and handle other financial matters for you in your absence.

It avoids the need for a determination that you’ve become incapacitated, which can result in delays, disputes or even litigation. This allows your agent to act quickly in an emergency, making critical medical decisions or handling urgent financial matters without having to wait, for example, for one or more treating physicians to examine you and certify that you’re incapacitated.

A potential disadvantage to a nonspringing POA — and a common reason people opt for a springing POA — is the concern that the agent may be tempted to commit fraud or otherwise abuse his or her authority. But consider this: If you don’t trust your agent enough to give him or her a POA that takes effect immediately, how does delaying its effect until you’re incapacitated solve the problem? Arguably, the risk of fraud or abuse would be even greater at that time because you’d be unable to monitor what the agent is doing.

What to do?

Given the advantages of a nonspringing POA, and the potential delays associated with a springing POA, a nonspringing POA is generally preferable. Just make sure the person you name as agent is someone you trust unconditionally.

Contact us with any questions regarding POAs.

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A primary goal of estate planning is asset protection. After all, no matter how well your estate plan is designed, it won’t do much good if you wind up with no wealth to share with your family.
If you have significant assets in employer-sponsored retirement plans or IRAs, it’s important to understand the extent to which those assets are protected against creditors’ claims and, if possible, to take steps to strengthen that protection.

Employer plans

Most qualified plans — such as pension, profit-sharing and 401(k) plans — are protected against creditors’ claims, both in and out of bankruptcy, by the Employee Retirement Income Security Act (ERISA). This protection also extends to 403(b) and 457 plans.

IRA-based employer plans — such as Simplified Employee Pension (SEP) plans and Savings Incentive Match Plans for Employees (SIMPLE) IRAs — are also protected in bankruptcy. But there’s some uncertainty over whether they’re protected outside of bankruptcy.

IRAs

The level of asset protection available for IRAs depends in part on whether the owner is involved in bankruptcy proceedings. In a bankruptcy context, creditor protection is governed by federal law. Under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), both traditional and Roth IRAs are exempt from creditors’ claims up to an inflation-adjusted $1 million.

The IRA limit doesn’t, however, apply to amounts rolled over from a qualified plan or a 403(b) or 457 plan — or to any earnings on those amounts. Suppose, for example, that you have $4 million invested in a 401(k) plan. If you roll it over into an IRA, the entire $4 million, plus all future earnings, will generally continue to be exempt from creditors’ claims in bankruptcy.

To ensure that rollover amounts are fully protected, keep those funds in separate IRAs rather than commingling them with any contributory IRAs you might own. Also, make sure the rollover is fully documented and the word “rollover” is part of its name. Bear in mind, too, that once a distribution is made from the IRA, it’s no longer protected.

Outside bankruptcy, the protection afforded an IRA depends on state law.

What about inherited IRAs?

In 2014, the U.S. Supreme Court held that inherited IRAs don’t qualify as retirement accounts under bankruptcy law. The Court reasoned that money in an IRA retirement account was set aside “at some prior date by an entirely different person.” But after an inheritance, it no longer bears the legal characteristics of retirement funds because the heir can withdraw funds at any time without a tax penalty and take other steps not required with noninherited IRAs. Therefore, they’re not protected in bankruptcy. (Clark v. Rameker)

Consult with your attorney about protection for retirement accounts in a nonbankruptcy context.

Protect yourself

If you’re concerned that your retirement savings are vulnerable to creditors’ claims, please contact us. The effectiveness of these strategies depends on factors such as whether future creditor claims arise in bankruptcy and what state law applies.

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Does your company have an internal audit function? If so, you may be able to use your internal audit team to streamline financial reporting by external auditors. Here’s guidance on how to facilitate this collaborative approach.

Recognize the benefits

External auditors aren’t required to use internal auditors in any capacity. But collaboration between internal and external audit teams can be a win-win.

Collaboration can help minimize disruptions to normal business operations that sometimes happen during external audit fieldwork. And internal audit personnel may have information that’s useful to the external auditor in obtaining an understanding of the entity and its environment and identifying and assessing risks of material misstatement.

Understand AICPA guidance

In 2014, the Auditing Standards Board (ASB) of the American Institute of Certified Public Accountants (AICPA) issued Statement on Auditing Standards (SAS) No. 128, Using the Work of Internal Auditors. This standard clarifies an external auditor’s responsibilities when using internal auditors.

SAS 128 differentiates between two types of assistance provided by the internal audit function. Specifically, external auditors may consider using internal auditors to:
•Obtain audit evidence, and
•Provide direct assistance under the direction, supervision and review of the external auditor.

One of the most significant changes in SAS 128 is the requirement for the internal audit function to apply a systematic and disciplined approach to planning, performing, supervising, reviewing and documenting its activities. This includes having appropriate quality control policies and procedures.

If the external auditor determines that the internal audit function lacks a systematic and disciplined approach to its activities, the external auditor can’t use the work of the internal auditor in obtaining audit evidence.

Additionally, SAS 128 requires management (or other parties charged with governance) to provide a written acknowledgment that internal auditors providing direct assistance will be permitted to follow the instructions of the external auditor and that the entity won’t interfere in the work the internal auditor performs for the external auditor.

Challenge the status quo

SAS 128 could change the role your internal auditors play on our external audit team. So, before your next audit, let’s evaluate whether your internal audit function meets the requirements of SAS 128. If so, we can leverage our capabilities, ensuring that next year’s fieldwork will run as smoothly and efficiently as possible.

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Now that Affordable Care Act (ACA) repeal and replacement efforts appear to have collapsed, at least for the time being, it’s a good time for a refresher on the tax penalty the ACA imposes on individuals who fail to have “minimum essential” health insurance coverage for any month of the year. This requirement is commonly called the “individual mandate.”

Penalty exemptions

Before we review how the penalty is calculated, let’s take a quick look at exceptions to the penalty. Taxpayers may be exempt if they fit into one of these categories for 2017:

• Their household income is below the federal income tax return filing threshold.
• They lack access to affordable minimum essential coverage.
• They suffered a hardship in obtaining coverage.
• They have only a short-term coverage gap.
• They qualify for an exception on religious grounds or have coverage through a health care sharing ministry.
• They’re not a U.S. citizen or national.
• They’re incarcerated.
• They’re a member of a Native American tribe.

Calculating the tax

So how much can the penalty cost? That’s a tricky question. If you owe the penalty, the tentative amount equals the greater of the following two prongs:

In terms of the percentage-of-income prong of the penalty, the applicable percentage of income is 2.5% for 2017.

In terms of the dollar-amount prong of the penalty, the applicable dollar amount for each uninsured household member is $695 for 2017. For a household member who’s under age 18, the applicable dollar amounts are cut by 50%, to $347.50. The maximum penalty under this prong for 2017 is $2,085 (300% of $695).

The final penalty amount per person can’t exceed the national average cost of “bronze coverage” (the cheapest category of ACA-compliant coverage) for your household. The important thing to know is that a high-income person or household could owe more than 300% of the applicable dollar amount but not more than the cost of bronze coverage.

If you have minimum essential coverage for only part of the year, the final penalty is calculated on a monthly basis using prorated annual figures.

Also be aware that the extent to which the penalty will continue to be enforced isn’t certain. The IRS has been accepting 2016 tax returns even if a taxpayer hasn’t completed the line indicating health coverage status. That said, the ACA is still the law, so compliance is highly recommended. For more information about this and other ACA-imposed taxes, contact us.

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From the time a business opens its doors, the owner is told “cash is king.” It may seem to follow that having a very large amount of cash could never be a bad thing. But, the truth is, a company that’s hoarding excessive cash may be doing itself more harm than good.

Liquidity overload

What’s the harm in stockpiling cash? Granted, an extra cushion helps weather downturns or fund unexpected repairs and maintenance. But cash has a carrying cost — the difference between the return companies earn on their cash and the price they pay to obtain cash.

For instance, checking accounts often earn no interest, and savings accounts typically generate returns below 2% and in many cases well below 1%. Most cash hoarders simultaneously carry debt on their balance sheets, such as equipment loans, mortgages and credit lines. Borrowers are paying higher interest rates on loans than they’re earning from their bank accounts. This spread represents the carrying cost of cash.

A variety of possibilities

What opportunities might you be missing out on by neglecting to reinvest a cash surplus to earn a higher return? There are a variety of possibilities. You could:

Acquire a competitor (or its assets). You may be in a position to profit from a competitor’s failure. When expanding via acquisition, formal due diligence is key to avoiding impulsive, unsustainable projects.

Invest in marketable securities. As mentioned, cash accounts provide nominal return. More aggressive businesses might consider mutual funds or diversified stock and bond portfolios. A financial planner can help you choose securities. Some companies also use surplus cash to repurchase stock — especially when minority shareholders routinely challenge the owner’s decisions.

Repay debt. This reduces the carrying cost of cash reserves. And lenders look favorably upon borrowers who reduce their debt-to-equity ratios.

Optimal cash balance

Taking a conservative approach to saving up cash isn’t necessarily wrong. But every company has an optimal cash balance that will help safeguard cash flow while allocating dollars for smart spending. Our firm can assist you in identifying and maintaining this mission-critical amount.

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Now that we’ve hit midsummer, if you own a vacation home that you both rent out and use personally, it’s a good time to review the potential tax consequences:

If you rent it out for less than 15 days: You don’t have to report the income. But expenses associated with the rental (such as advertising and cleaning) won’t be deductible.

If you rent it out for 15 days or more: You must report the income. But what expenses you can deduct depends on how the home is classified for tax purposes, based on the amount of personal vs. rental use:
•Rental property: If you (or your immediate family) use the home for 14 days or less, or under 10% of the days you rent out the property, whichever is greater, the IRS will classify the home as a rental property. You can deduct rental expenses, including losses, subject to the real estate activity rules. You can’t deduct any interest that’s attributable to your personal use of the home, but you can take the personal portion of property tax as an itemized deduction.
•Nonrental property: If you (or your immediate family) use the home for more than 14 days or 10% of the days you rent out the property, whichever is greater, the IRS will classify the home as a personal residence, but you will still have to report the rental income. You can deduct rental expenses only to the extent of your rental income. Any excess can be carried forward to offset rental income in future years. You also can take an itemized deduction for the personal portion of both mortgage interest and property tax.
Look at the use of your vacation home year-to-date to project how it will be classified for tax purposes. Adjusting the number of days you rent it out and/or use it personally between now and year end might allow the home to be classified in a more beneficial way.

For assistance, please contact us. We’d be pleased to help.

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As a business evolves, so must its compensation strategy. Hopefully, your company is growing — perhaps adding employees or promoting staff members who are key to your success. But other things can spur the need to fine-tune your compensation strategy as well, such as economic changes or the rise of an intense competitor. A goal for many businesses is to provide equitable compensation.

Do your research

One aspect of equitable compensation is external equity; in other words, making sure compensation is in alignment with industry or regional norms. The U.S. Department of Labor and Bureau of Labor Statistics have a wealth of comparable data on their Web sites (dol.gov and stats.bls.gov, respectively). You might also consult with a professional recruiting firm, some of which offer free or low-cost compensation data.

Granted, job roles within smaller companies make it difficult to directly compare position responsibilities in the market and get reliable salary comparison data. A company’s degree of competitiveness and ability to pay what the market bears can also be challenging.

Yet, to achieve and maintain external equity, you must consider the going market rate. Especially in a business where employees believe they can receive better pay for doing the same job elsewhere, workers have little incentive to remain with an employer — therefore, you must be concerned with external equity.

Pinpoint a range

From both a marketplace perspective and an internal company viewpoint, it’s important to group together jobs of similar value. This also gets at the concept of internal equity, which essentially means that employees feel they’re being paid fairly in terms of the value of their work as well as compared to what others in the company who have equivalent responsibilities are paid.

Once you’ve grouped jobs together, develop competitive salaries around the market rates for those positions. A typical salary range consists of a minimum, a maximum and a midpoint (or control point).

The minimum is the lowest competitive rate for jobs within that range and normally applies to less experienced staff. The maximum represents the highest competitive rate for jobs in a given range. This is typically a premium rate for “star” employees and industry veterans.

The midpoint represents the competitive market rate for fully performing workers in jobs assigned to that range. Think of it as a guideline for slotting various positions and individuals in appropriate salary ranges.

Find the right approach

These are just a few concepts involved with establishing the right approach to compensation. Please contact us for help with your company’s specific needs.

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Debt is an integral part of many for-profit companies’ strategic plans, yet it has traditionally carried a stigma in the not-for-profit world. That view is changing as more organizations borrow money for major capital purchases, new program funding and other reasons. But before your nonprofit borrows, it’s important to understand that it takes prudent financial management and reliable donor support to pay back a loan.

Exhaust other options

You may think your organization has a good rationale for borrowing, but that doesn’t mean lenders — or even your supporters — will agree. One of the primary criteria watchdog groups such as Charity Navigator and CharityWatch use to evaluate nonprofits is the percentage of available funds spent on programs. If a large portion of your budget is tied up in debt repayment, that’s likely to affect how the public, including prospective donors, perceives your organization.

What’s more, lender covenants may prevent you from borrowing for other purposes — and thus limit strategic flexibility — until your existing debt is paid off. And debt makes periods of economic uncertainty that much more challenging. So it’s best to exhaust other funding sources before applying for a loan.

Are you prepared?

Even if you determine your nonprofit can handle the risks of borrowing, you need to make your case to lenders. Before approaching a lender, make sure you have:

The odds of qualifying for a loan are better if you’ve already established relationships with lenders. Your reason for applying also plays a big part in the decision. Seeking money to make a major purchase or to stabilize cash flow (with a line of credit) is more likely to be successful than applying for a loan to start a new program.

Reasonable certainty

Borrowing may be a good option if you know how your organization will repay the loan. But to help ensure you avoid any negative consequences of borrowing, please contact us.

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The Financial Accounting Standards Board (FASB) has amended U.S. Generally Accepted Accounting Principles (GAAP) to clarify the guidance on reporting restricted cash balances on cash flow statements. Until now, Accounting Standards Codification Topic 230, Statement of Cash Flows, didn’t specify how to classify or present changes in restricted cash. Over the years, the lack of specific instructions has led businesses to report transfers between cash and restricted cash as operating, investing or financing activities — or a combination of all three.

The new guidance essentially says that none of the above classifications are correct.

FASB members hope the amendments will cut down on some of the inconsistent reporting practices that have been in place because of the lack of clear guidance.

Prescriptive guidance

Accounting Standards Update (ASU) No. 2016-18, Statement of Cash Flows (Topic 230) — Restricted Cash, still doesn’t define restricted cash or restricted cash equivalents. But the updated guidance requires that transfers between cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents be excluded from the entity’s operating, investing and financing activities. In other words, the details of those transfers shouldn’t be reported as cash flow activities in the statement of cash flows at all.

Instead, if the cash flow statement includes a reconciliation of the total cash balances for the beginning and end of the period, the FASB wants the amounts for restricted cash and restricted cash equivalents to be included with cash and cash equivalents. When, during a reporting period, the totals change for cash, cash equivalents, restricted cash and restricted cash equivalents, the updated guidance requires that these changes be explained. These amounts are typically found just before the reconciliation of net income to net cash provided by operating activities in the statement of cash flows.

Moreover, a business must provide narrative and/or tabular disclosures about the nature of restrictions on its cash and cash equivalents.

Effective dates

The updated guidance goes into effect for public companies in fiscal years that start after December 15, 2017. Private companies have an extra year before they have to apply the changes. Early adoption is permitted. Contact us if you have additional questions about reported restricted cash or any other items on your company’s statement of cash flows.

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