The commerciality doctrine was created along with the operational test to address concerns over not-for-profits competing at an unfair tax advantage with for-profit businesses. But even business activities related to your exempt purpose could fall prey to the commerciality doctrine, resulting in the potential loss of your organization’s exempt status. Several factors considered The operational test generally requires that a nonprofit be both organized and operating exclusively to accomplish its exempt purpose. It also requires that no more than an “insubstantial part” of its activities further a nonexempt purpose. Your organization can operate a business as a substantial part of its activities as long as the business furthers your exempt purpose. But under the commerciality doctrine, courts have ruled that some organizations’ otherwise exempt activities are substantially the same as those of commercial entities. They consider several factors when evaluating commerciality, including: • Whether an organization has set prices to...[ Read More ]
The Financial Accounting Standards Board (FASB) recently gave private companies long-awaited relief from one of the most complicated aspects of financial reporting — consolidation of variable interest entities (VIEs). Here are the details. Old rules Accounting Standards Codification (ASC) Topic 810, Consolidation, was designed to prevent companies from hiding liabilities in off-balance sheet vehicles. It requires businesses to report on their balance sheets holdings they have in other entities when they have a controlling financial interest in those entities. For years, the decision to consolidate was based largely on whether a business had majority voting rights in a related legal entity. In 2003, in the wake of the Enron scandal, the FASB amended the standard to beef up the guidelines on when to consolidate. New rules The updated standard introduced the concept of VIEs. Under the VIE guidance, a business has a controlling financial interest when it has: The power...[ Read More ]
A bad hire can lead to more than just disappointment. Disgruntled employees may draw bad publicity; file complicated, expensive lawsuits; and even disclose or destroy sensitive data. Many employers are adding background checks to their hiring processes for these reasons. If you’re thinking about joining them, here are some dos and don’ts to follow. What you should do First and foremost, create a background check process that complies with federal laws that protect applicants from discrimination. Although several laws may come into play, the Fair Credit Reporting Act (FCRA) specifically sets out federal requirements for background checks. Under the FCRA, background checks can seek out information regarding an applicant’s creditworthiness, as well as his or her “character, general reputation, personal characteristics, or mode of living.” The FCRA’s most fundamental requirement is that you inform job applicants, or those to whom you have made contingent job offers (the contingency being the...[ Read More ]
The phrase “payroll record-keeping” may conjure images of pay-stubs and W-4s. But there are other aspects that often fly under the radar and lead to administrative slip-ups. Here are three examples. 1. Fringe benefit records The tax code provides an explicit record-keeping requirement for employers with enumerated fringe benefit plans, such as: Health insurance, Cafeteria plans, Educational assistance, Adoption assistance, and Dependent care assistance. You’re required to keep whatever records are needed to determine whether the plan meets the requirements for excluding the benefit amounts from employees’ taxable income. Tax code provisions regarding fringe benefit records don’t specify how long records pertaining to fringe benefits should be kept. Presumably, they’re subject to the four-year rule that’s widely applicable to payroll record-keeping. Thus, you should retain them for at least four years after the due date of any federal income, Social Security and Medicare taxes for the return period to which...[ Read More ]
The dawning of 2019 means the 2018 income tax filing season will soon be upon us. After year end, it’s generally too late to take action to reduce 2018 taxes. Business owners may, therefore, want to shift their focus to assessing whether they’ll likely owe taxes or get a refund when they file their returns this spring, so they can plan accordingly. With the biggest tax law changes in decades — under the Tax Cuts and Jobs Act (TCJA) — generally going into effect beginning in 2018, most businesses and their owners will be significantly impacted. So, refreshing yourself on the major changes is a good idea. Taxation of pass-through entities These changes generally affect owners of S corporations, partnerships and limited liability companies (LLCs) treated as partnerships, as well as sole proprietors: Drops of individual income tax rates ranging from 0 to 4 percentage points (depending on the bracket)...[ Read More ]
A tried-and-true year end tax strategy is to make charitable donations. As long as you itemize and your gift qualifies, you can claim a charitable deduction. But did you know that you can enjoy an additional tax benefit if you donate long-term appreciated stock instead of cash? 2 benefits from 1 gift Appreciated publicly traded stock you’ve held more than one year is long-term capital gains property. If you donate it to a qualified charity, you may be able to enjoy two tax benefits: If you itemize deductions, you can claim a charitable deduction equal to the stock’s fair market value, and You can avoid the capital gains tax you’d pay if you sold the stock. Donating appreciated stock can be especially beneficial to taxpayers facing the 3.8% net investment income tax (NIIT) or the top 20% long-term capital gains rate this year. Stock vs. cash Let’s say you donate...[ Read More ]

2018 Year End Planning

Posted December 17, 2018

Year-end planning for 2018 takes place against the backdrop of a new tax law-the Tax Cuts and Jobs Act-that makes major changes in the tax rules for individuals and businesses. We have compiled a checklist of actions that may help you save tax dollars if you act before year end. Not all actions will apply in your particular situation; however, you (or a family member will likely benefit from some of them. Please review the following list and contact us if you have any questions. Businesses & Business Owners: Pass-through Income Deduction Businesses (other than C corporations) may be entitled to a deduction of up to 20% of their qualified business income. Expensing vs. Capitalizing A 100% bonus first year depreciation deduction for machinery and equipment bought used (with some exceptions) or new, if purchased and placed in service in 2018. For 2018, the expensing limit is $1,000,000, and the...[ Read More ]
The Tax Cuts and Jobs Act (TCJA) provides a valuable new tax break to noncorporate owners of pass-through entities: a deduction for a portion of qualified business income (QBI). The deduction generally applies to income from sole proprietorships, partnerships, S corporations and, typically, limited liability companies (LLCs). It can equal as much as 20% of QBI. But once taxable income exceeds $315,000 for married couples filing jointly or $157,500 for other filers, a wage limit begins to phase in. Full vs. partial phase-in When the wage limit is fully phased in, at $415,000 for joint filers and $207,500 for other filers, the QBI deduction generally can’t exceed the greater of the owner’s share of: 50% of the amount of W-2 wages paid to employees during the tax year, or The sum of 25% of W-2 wages plus 2.5% of the cost of qualified business property (QBP). When the wage limit...[ Read More ]
The Tax Cuts and Jobs Act (TCJA) liberalized the eligibility rules for using the cash method of accounting, making this method — which is simpler than the accrual method — available to more businesses. Now the IRS has provided procedures a small business taxpayer can use to obtain automatic consent to change its method of accounting under the TCJA. If you have the option to use either accounting method, it pays to consider whether switching methods would be beneficial. Cash vs. accrual Generally, cash-basis businesses recognize income when it’s received and deduct expenses when they’re paid. Accrual-basis businesses, on the other hand, recognize income when it’s earned and deduct expenses when they’re incurred, without regard to the timing of cash receipts or payments. In most cases, a business is permitted to use the cash method of accounting for tax purposes unless it’s: 1. Expressly prohibited from using the cash method,...[ Read More ]
Meal, vehicle and travel expenses are common deductions for businesses. But if you don’t properly document these expenses, you could find your deductions denied by the IRS. A critical requirement Subject to various rules and limits, business meal (generally 50%), vehicle and travel expenses may be deductible, whether you pay for the expenses directly or reimburse employees for them. Deductibility depends on a variety of factors, but generally the expenses must be “ordinary and necessary” and directly related to the business. Proper documentation, however, is one of the most critical requirements. And all too often, when the IRS scrutinizes these deductions, taxpayers don’t have the necessary documentation. What you need to do Following some simple steps can help ensure you have documentation that will pass muster with the IRS: Keep receipts or similar documentation. You generally must have receipts, canceled checks or bills that show amounts and dates of business...[ Read More ]