Anderson ZurMuehlen Blog

2017 Q2 Tax Calendar: Key Deadlines for Businesses and Other Employers

Here are some of the key tax-related deadlines affecting businesses and other employers during the second quarter of 2017. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

April 18

  • If a calendar-year C corporation, file a 2016 income tax return (Form 1120) or file for an automatic six-month extension (Form 7004), and pay any tax due. If the return isn’t extended, this is also the last day to make 2016 contributions to pension and profit-sharing plans.
  • If a calendar-year C corporation, pay the first installment of 2017 estimated income taxes.

May 1

  • Report income tax withholding and FICA taxes for first quarter 2017 (Form 941), and pay any tax due. (See exception below.)

May 10

  • Report income tax withholding and FICA taxes for first quarter 2017 (Form 941), if you deposited on time and in full all of the associated taxes due.

June 15

  • If a calendar-year C corporation, pay the second installment of 2017 estimated income taxes.

Contact us with questions.

©2017

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Who Can — and Who Should — Take the American Opportunity Credit?

 

If you have a child in college, you may be eligible to claim the American Opportunity credit on your 2016 income tax return. If, however, your income is too high, you won’t qualify for the credit — but your child might. There’s one potential downside: If your dependent child claims the credit, you must forgo your dependency exemption for him or her. And the child can’t take the exemption.

The limits

The maximum American Opportunity credit, per student, is $2,500 per year for the first four years of postsecondary education. It equals 100% of the first $2,000 of qualified expenses, plus 25% of the next $2,000 of such expenses.

The ability to claim the American Opportunity credit begins to phase out when modified adjusted gross income (MAGI) enters the applicable phaseout range ($160,000–$180,000 for joint filers, $80,000–$90,000 for other filers). It’s completely eliminated when MAGI exceeds the top of the range.

Running the numbers

If your American Opportunity credit is partially or fully phased out, it’s a good idea to assess whether there’d be a tax benefit for the family overall if your child claimed the credit. As noted, this would come at the price of your having to forgo your dependency exemption for the child. So it’s important to run the numbers.

Dependency exemptions are also subject to a phaseout, so you might lose the benefit of your exemption regardless of whether your child claims the credit. The 2016 adjusted gross income (AGI) thresholds for the exemption phaseout are $259,400 (singles), $285,350 (heads of households), $311,300 (married filing jointly) and $155,650 (married filing separately).

If your exemption is fully phased out, there likely is no downside to your child taking the credit. If your exemption isn’t fully phased out, compare the tax savings your child would receive from the credit with the savings you’d receive from the exemption to determine which break will provide the greater overall savings for your family.

We can help you run the numbers and can provide more information about qualifying for the American Opportunity credit.

©2017

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2016 IRA Contributions — It’s Not Too Late!

Yes, there’s still time to make 2016 contributions to your IRA. The deadline for such contributions is April 18, 2017. If the contribution is deductible, it will lower your 2016 tax bill. But even if it isn’t, making a 2016 contribution is likely a good idea.

Benefits beyond a deduction

Tax-advantaged retirement plans like IRAs allow your money to grow tax-deferred — or, in the case of Roth accounts, tax-free. But annual contributions are limited by tax law, and any unused limit can’t be carried forward to make larger contributions in future years.

This means that, once the contribution deadline has passed, the tax-advantaged savings opportunity is lost forever. So it’s a good idea to use up as much of your annual limit as possible.

Contribution options

The 2016 limit for total contributions to all IRAs generally is $5,500 ($6,500 if you were age 50 or older on December 31, 2016). If you haven’t already maxed out your 2016 limit, consider making one of these types of contributions by April 18:

1. Deductible traditional. If you and your spouse don’t participate in an employer-sponsored plan such as a 401(k) — or you do but your income doesn’t exceed certain limits — the contribution is fully deductible on your 2016 tax return. Account growth is tax-deferred; distributions are subject to income tax.

2. Roth. The contribution isn’t deductible, but qualified distributions — including growth — are tax-free. Income-based limits, however, may reduce or eliminate your ability to contribute.

3. Nondeductible traditional. If your income is too high for you to fully benefit from a deductible traditional or a Roth contribution, you may benefit from a nondeductible contribution to a traditional IRA. The account can still grow tax-deferred, and when you take qualified distributions you’ll be taxed only on the growth. Alternatively, shortly after contributing, you may be able to convert the account to a Roth IRA with minimal tax liability.

Want to know which option best fits your situation? Contact us.

 

©2017

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U.S. Expands Lists of Earnings that May Be Garnished

Are any of your workers subject to wage garnishments?

The Department of Labor’s Wage and Hour Division (WHD) has revised and clarified its guidance on the meaning of earnings under the Consumer Credit Protection Act (CCPA). The expanded list includes:

  • Lump sum payments: Previously, the department said payments must be periodic to be covered earnings.
  • Cash wages paid directly to employees and the amount of the tip credit claimed by the employer (previously, the division said that tips are gratuities, not compensation).

The revisions are contained in Fact Sheet #30: The Federal Wage Garnishment Law, Consumer Credit Protection Act’s Title III (CCPA).

Other forms of compensation defined as earnings under the law include:

  • Wages,
  • Salaries,
  • Commissions,
  • Bonuses, and
  • Other compensation, such as periodic payments from a pension or retirement program or payments from an employment-based disability payment program.

Crucial Definition

The federal definition of earnings is critical because if the funds aren’t CCPA-protected earnings, states can decide whether to garnish those funds and how much, if any, of those funds to protect from garnishment.

A wage garnishment is any legal or equitable procedure through which a portion of a person’s earnings must be withheld for the payment of a debt. Most garnishments are made by court order.

Other types of legal or equitable procedures for garnishment include IRS or state tax collection agency levies for unpaid taxes and federal agency administrative garnishments for nontax debts owed the federal government.

Title III of the CCPA prevents employers from firing workers because their wages have been garnished for any one debt and limits the amount of an employee’s earnings that may be garnished in a week. The protection doesn’t apply if the earnings are being garnished for a second or subsequent debt.

Garnishment Limit

In addition, Title III limits the amount of earnings that may be garnished in any workweek or pay period to the lesser of:

  • 25% of disposable earnings, or
  • The amount by which disposable earnings are greater than 30 times the federal minimum hourly wage, which currently is $7.25 under the Fair Labor Standards Act.

In no event can the amount of an individual’s disposable earnings that may be garnished exceed the percentages specified in the CCPA. Garnishment limits don’t apply to certain bankruptcy court orders or to voluntary wage assignments where workers voluntarily agree that their employers may turn over a specified amount of their earnings to creditors.

States have their own garnishment laws (see box below). When state and federal garnishment regulations differ, employers must observe the law that calls for the smaller garnishment or prohibits the discharge of an employee when earnings have been subject to garnishment for more than one debt.

Questions over issues other than the amount being garnished or termination must be referred to the court or agency initiating the action. For example, the CCPA contains no provisions controlling the priorities of garnishments, which are determined by state or other federal laws.

Child Support and Alimony

Under court orders for child support or alimony, the garnishment law allows up to 50% of an employee’s disposable earnings, and sometimes up to 60% depending on the situation. An extra 5% may be garnished for support payments that are more than 12 weeks in arrears.

Violations of Title III may result in:

  • The reinstatement of a discharged employee,
  • Payment of back wages,
  • Restoration of improperly garnished amounts, and
  • Criminal prosecution, fines and prison terms if the violations are willful.

The fact sheet provides several detailed examples on computing the amount subject to garnishment. Among them:

1. An employee receives a bonus one week of $402. After deductions required by law, the disposable earnings are $368. In this week, 25% of the disposable earnings may be garnished. ($368 times 25% = $92).

2. An employee paid every other week has disposable earnings of $500 for the first week and $80 for the second week, for a total of $580. In a biweekly pay period, when disposable earnings are at or above $580 for the period, 25% may be garnished. In this example, $145 can be taken (25% times $580). It doesn’t matter that the disposable earnings in the second week are less than $217.50.

3. Under a garnishment order (with priority) for child support, an employer withholds $90 a week from the wages of an employee who has disposable earnings of $295 a week. A garnishment order for the collection of a defaulted student loan is also served on the employer.

If there was no garnishment order (with priority) for child support, Title III’s general limitations would apply to the garnishment for the defaulted student loan, and a maximum of $73.75 (25% times $295) would be garnished each week. However, the existing garnishment for child support means in this example that no additional garnishment for the defaulted student loan may be made. That’s because the amount already garnished is more than the 25% that may be generally garnished. Additional amounts could be garnished to collect child support, delinquent federal or state taxes, or certain bankruptcy court ordered payments.

States Weigh In On Law to Promote Uniformity

The Uniform Law Commission last year wrapped up three years of work by finalizing the Uniform Wage Garnishment Act (UWGA). The UWGA is aimed at helping put employers one step closer to having a standardized approach for processing wage garnishments across states.

The UWGA streamlines the garnishment process and ensures nationwide consistency. It’s also intended to cut costs for employers.

The law must still be adopted by state legislatures before becoming effective. So far Nebraska has introduced legislation to adopt the measure and others are expected to follow.

The commission is a 125-year-old organization that drafts legislation to improve commerce between the states. The panel is comprised of commissioners of the 50 states, Puerto Rico and the Virgin Islands.

Contact us

© 2017

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Seniors: Consider These Tax Breaks When Filing for 2016

Are you an “experienced” taxpayer? Here are a couple of age-based tax breaks that seniors shouldn’t overlook when filing their 2016 returns.

1. Claim Your Rightful Medical Expense Deductions

If you’re 65 years of age or older, you may have fallen into the habit of automatically claiming the standard deduction instead of itemizing your deductions. Taking the standard deduction is often the optimal strategy for seniors who pay minimal mortgage interest or state and local income or property taxes. In addition, seniors are entitled to a larger standard deduction than younger people are.

But the standard deduction isn’t always the better option for seniors with significant medical expenses. If you paid Medicare insurance premiums or had other significant health care costs in 2016, itemizing deductions (including medical expense deductions) could result in a lower federal income tax bill.

Which option is better for you? For 2016, you can only deduct medical expenses to the extent that they exceed 10% of your adjusted gross income (AGI) or 7.5%, if either you or your spouse was 65 or older as of December 31, 2016. While surpassing the AGI threshold may seem daunting, many seniors will easily clear the hurdle if they include all of their medical expenses.

When adding up your expenses, remember to count premiums for Medicare insurance, which qualify as health insurance premiums for purposes of the itemized deduction for medical expenses. Specifically, premiums for Medicare Parts A, B, C and D, as well as for Medigap coverage, qualify. (See “Understanding Medicare Insurance Deductions” below.)

Premiums for qualified long-term care (LTC) insurance also count as medical expenses for itemized deduction purposes, subject to the following age-based limits for 2016:

Age as of Dec. 31 Maximum LTC Premium Amount
61 to 70 $3,900
Over 70 $4,870

For each covered person, count the lesser of premiums paid in 2016 or the applicable age-based limit. Beyond insurance premiums, add any out-of-pocket medical costs, such as insurance co-payments and dental and vision care deductibles. These expenditures also count as medical expenses for itemized deduction purposes.

Once you’ve evaluated whether your medical expenses exceed the AGI threshold, consider other categories of expenses that can be itemized, including:

    • State and local income taxes (or state and local general sales taxes if you choose to claim them instead),
    • State and local property taxes,
    • Qualified residence interest on a first or second home, and
    • Charitable donations.

You should itemize if the total of your itemizable expenses exceeds your 2016 standard deduction amount of:

Filing Status Under 65 on Dec. 31 65 or Older on Dec. 31
Single $6,300 $7,850
Married, filing jointly $12,600 $13,850, if one spouse is at least 65;
$15,100, if both spouses are 65 or older
Head of household $9,300 $10,850

Also, bear in mind that the AGI threshold for seniors to claim medical expense deductions is set to increase to 10% of AGI regardless of their age, starting in 2017, thanks to a provision in the Affordable Care Act (ACA). However, that could change if the ACA is repealed or revised — or if Congress passes tax reform legislation that takes effect in 2017.

2. Make Retirement Account Catch-Up Contributions

If you’re 50 or older, you can make extra “catch-up” contributions each year to certain types of tax-favored retirement accounts.

Important note: If you were 50 or older as of December 31, 2016, you have until April 18, 2017, to make a catch-up contribution for the 2016 tax year.

Which retirement accounts qualify for catch-up contributions?

Traditional IRAs. Deductible contributions to traditional IRAs can create tax savings. But many seniors have too much income to qualify for a deduction. If you don’t qualify for deductible IRA contributions, you can always make nondeductible contributions and thereby benefit from the traditional IRA’s tax-deferred earnings advantage. The maximum catch-up contribution for traditional and Roth IRAs (combined) is $1,000 for 2016.

Roth IRAs. Contributions to Roth IRAs don’t generate any up-front tax savings, but — assuming you’ve had at least one Roth IRA open for over five years — you can take tax-free withdrawals from Roth IRAs after age 59½. There are also income restrictions on Roth contributions. Again, the maximum catch-up contribution for traditional and Roth IRAs (combined) is $1,000 for 2016.

Employer-sponsored qualified retirement accounts. Some company retirement plans also allow employees to make catch-up contributions. If permitted under your plan, you can make extra salary-reduction contributions of up to $6,000 to your 401(k), 403(b) or 457 account, starting the year you turn 50.

Salary-reduction contributions are subtracted from your taxable wages, resulting in a federal income tax deduction. If your state has a personal income tax, you’ll generally get a state tax deduction, too. You can use the resulting tax savings to help pay for part of your catch-up contributions — or you can set the tax savings aside in a taxable account to further increase your retirement-age wealth.

Important note: It’s too late to make a catch-up contribution to your company plan for the 2016 tax year. But it’s not too early to make one for the 2017 tax year.

Relatively modest catch-up contributions can accumulate into a large sum over time. To illustrate, suppose you turned 50 in 2016 and decide to contribute an extra $1,000 to your IRA each year for the next 15 years. Assuming a modest 4% annual return on investment, you’ll accumulate about $22,000 in your retirement savings account by the time you turn 65.

As an added bonus, making larger deductible contributions to a traditional IRA can also lower your annual tax bills. (Additional Roth IRA contributions won’t lower your annual tax bills, but you’ll be able to take more tax-free withdrawals later in life.)

The incremental savings can be even greater if your company’s retirement plan allows catch-up contributions. For example, if you turn 50 in 2016 and contribute an extra $6,000 to your company plan for each of the next 15 years, you’ll accumulate about $131,000 by the time you turn 65, assuming a modest 4% annual return. Plus, contributions to employer-sponsored plans are deductible, which lowers your annual tax bills.

Contact Your Tax Advisor

Seniors may be eligible for some special tax breaks that aren’t available to younger people. Before filing your 2016 tax return, contact your tax advisor to make sure you take advantage of any special breaks that may be available.

Understanding Medicare Insurance Deductions

Don’t forget to include all Medicare and supplemental insurance costs when totaling up your medical expenses for 2016. Here are descriptions of the major types of Medicare coverage:

Medicare Part A: Hospital insurance coverage. Most eligible individuals are automatically covered for Part A without paying any premiums, because the premiums are considered paid from Medicare taxes on wages while you or your spouse was working. However, if you didn’t pay Medicare taxes while you worked and you’re not eligible for free coverage, you could have paid a monthly premium of up to $411 for 2016, depending on your income.

Medicare Part B: Medical insurance coverage. Even if you don’t qualify for Medicare Part A coverage, you may be eligible to enroll in Medicare Part B coverage. This insurance covers doctor bills for treatment in or out of the hospital, as well as the costs of medical equipment, tests and services provided by clinics and laboratories. It doesn’t cover other medical expenses, such as routine physical exams or medications.

For 2016, you probably paid the standard monthly premium of $104.90 ($1,259 per covered person for the year). Higher-income individuals paid more — up to a monthly maximum of $389.80 for 2016 (up to $4,678 per covered person).

Medicare Part C: Private Medicare Advantage health plan coverage. This coverage is supplemental to government-provided Part A and Part B coverage. Premiums vary depending on the plan. If you have Part C coverage, you don’t need Medigap coverage (below).

Medicare Part D: Private prescription drug coverage. Premiums for this coverage vary depending on the plan. People with higher income levels pay a surcharge called the “adjustment amount” in addition to the basic premiums. For 2016, the adjustment amount could have been up to $69.10 per month (up to $829 per covered person).

Medigap insurance. This is private supplemental insurance that functions as an alternative to Part C coverage. Premiums vary depending on the plan.

Q&A on Potential Border Taxes

Q&A on Potential Border Taxes

Many people are talking about a border tax these days, but how many know what proposals from the White House and Congress really mean?
The highly debated proposal from President Donald Trump would impose a tariff, or border tax, on manufactured goods imports from certain countries, most notably China and Mexico. Republicans in Congress agree that action is needed, but have proposed an alternative border adjustment tax. With the news coming out of Washington D.C. confusing at times, there are several critical questions relating to both plans. This Q&A attempts to clear up some of the issues.

Q. How would the proposed Trump plan work?

A. The aim of the tariff, or border tax, is to discourage U.S. companies from importing goods from certain firms outside the United States, particularly some that have set up shop in Mexico and elsewhere to produce goods for the U.S. market. Although details have remained vague, Trump has said that the tariff would be “very major” and could be as high as 35%, a figure he once proposed should apply to automobiles made by U.S. companies in Mexico. The tariff would be accompanied by Trump’s proposed across-the-board reduction in corporate tax rates to 15%.

This plan, however, would likely violate the North American Free Trade Agreement (NAFTA). But Trump has long advocated changing that pact and other trade agreements and has threatened to pull out of NAFTA.

Q. What about the Republican plan?

A. Leading Republicans in the House of Representatives — notably Speaker Paul Ryan (Rep.-WI) — would include a border adjustment tax as part an overhaul of the corporate tax system. Along with reducing corporate income taxes to 20%, that plan would shift taxation to a territorial-based system in which companies are taxed where income is earned. The cost of imported parts or goods for use or sale in the United States would no longer be tax-deductible, while income from exports would be excluded from tax. This approach is designed to bring manufacturing and other firms back into the country.

Initially, Trump characterized this tax plan as being “too complicated,” but later signaled a willingness to work with the House leadership. If this approach is implemented, companies would have to factor in the higher cost of imports, minus any deduction.

However, the plan may violate World Trade Organization (WTO) rules. The WTO permits border adjustments for indirect levies (such as value added taxes), but a direct tax on income may be banned.

Q. What is the history of imposing tariffs?

A. Prior to the introduction of the federal income tax in 1913, tariffs were the main source of revenue for the U.S. government. They reached a high in 1930 when tariff legislation was passed to protect workers during the Great Depression. After other countries responded with their own high tariffs, the United States gradually cut back. These reductions were subsequently enhanced by WTO efforts to lower tariffs.

Currently, U.S. tariffs are assessed on a wide number of goods, ranging from automobiles to running shoes. Non-agricultural products, which account for the vast majority of goods imported into the United States, have an average import tariff of 2%. About half of all industrial goods entering the country are exempt from tariffs. Since 1994, NAFTA has gradually eliminated U.S. tariffs applying to Canada and Mexico.

Q. What is expected to happen if the Trump tariff is imposed?

A. For starters, by raising costs for U.S. importers, the proposed Trump tariff would encourage companies to increase domestic production, while eliminating some of the benefits of manufacturing in countries with lower wages. The Trump administration expects that the tariff would help restore manufacturing jobs as domestic production climbs.
But critics assert that the border tax would also likely result in higher prices for U.S. consumers, especially if other countries react negatively, as many expect them to do (see Is This a Declaration of War? below). Ultimately, a trade war could produce shock waves around the world and could even conceivably lead to a recession or, worse, a depression.

Q. Does President Trump have the authority to impose his tariff plan?

A. Some of Trump’s actions since he took office have raised constitutional issues that haven’t yet been resolved. But it appears that he would be standing on relatively firm ground with tariff-related actions. Congress has the constitutional power to regulate commerce with foreign countries, but that power has often been delegated to the president.

For example, under the Trade Act of 1974, Trump may be able to impose tariffs on countries that violate trade agreements or engage in unfair trade practices. That law effectively allows the president to levy temporary surcharges of up to 15% for as long as 150 days. (Back in 2009, former President Obama relied on this provision to apply a tariff on tire imports from China.) Alternatively, Trump might rely on emergency powers that would allow him to restrict imports in the name of national security.

Q. Could Congress override Trump’s tariff plan?

A. Yes, but it takes a two-thirds majority in both houses of Congress to override a presidential veto. Based on the current makeup of both chambers and the general support that Republicans have shown the new president thus far, this scenario would appear to be unlikely.

Furthermore, if any actions are found to violate NAFTA or the WTO, President Trump has the potential option of simply bowing out of those agreements. In other words, if a tariff plan is implemented, it is likely to stand up to scrutiny.

© 2017

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Deduct All of the Mileage You’re Entitled to — But Not More

Rather than keeping track of the actual cost of operating a vehicle, employees and self-employed taxpayers can use a standard mileage rate to compute their deduction related to using a vehicle for business. But you might also be able to deduct miles driven for other purposes, including medical, moving and charitable purposes.

What are the deduction rates?

The rates vary depending on the purpose and the year:

Business: 54 cents (2016), 53.5 cents (2017)

Medical: 19 cents (2016), 17 cents (2017)

Moving: 19 cents (2016), 17 cents (2017)

Charitable: 14 cents (2016 and 2017)

The business standard mileage rate is considerably higher than the medical, moving and charitable rates because the business rate contains a depreciation component. No depreciation is allowed for the medical, moving or charitable use of a vehicle.

In addition to deductions based on the standard mileage rate, you may deduct related parking fees and tolls.

What other limits apply?

The rules surrounding the various mileage deductions are complex. Some are subject to floors and some require you to meet specific tests in order to qualify.

For example, miles driven for health-care-related purposes are deductible as part of the medical expense deduction. But medical expenses generally are deductible only to the extent they exceed 10% of your adjusted gross income. (For 2016, the deduction threshold is 7.5% for qualifying seniors.)

And while miles driven related to moving can be deductible, the move must be work-related. In addition, among other requirements, the distance from your old residence to the new job must be at least 50 miles more than the distance from your old residence to your old job.

Other considerations

There are also substantiation requirements, which include tracking miles driven. And, in some cases, you might be better off deducting actual expenses rather than using the mileage rates.

So contact us to help ensure you deduct all the mileage you’re entitled to on your 2016 tax return — but not more. You don’t want to risk back taxes and penalties later.

And if you drove potentially eligible miles in 2016 but can’t deduct them because you didn’t track them, start tracking your miles now so you can potentially take advantage of the deduction when you file your 2017 return next year.

© 2017

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Do you Need to File a 2016 Gift Tax Return by April 18?

Last year you may have made significant gifts to your children, grandchildren or other heirs as part of your estate planning strategy. Or perhaps you just wanted to provide loved ones with some helpful financial support. Regardless of the reason for making a gift, it’s important to know under what circumstances you’re required to file a gift tax return.

Some transfers require a return even if you don’t owe tax. And sometimes it’s desirable to file a return even if it isn’t required.

When filing is required

Generally, you’ll need to file a gift tax return for 2016 if, during the tax year, you made gifts:

  • That exceeded the $14,000-per-recipient gift tax annual exclusion (other than to your U.S. citizen spouse),
  • That exceeded the $148,000 annual exclusion for gifts to a noncitizen spouse,
  • That you wish to split with your spouse to take advantage of your combined $28,000 annual exclusions,
  • To a Section 529 college savings plan for your child, grandchild or other loved one and wish to accelerate up to five years’ worth of annual exclusions ($70,000) into 2016,
  • Of future interests — such as remainder interests in a trust — regardless of the amount, or
  • Of jointly held or community property.

When filing isn’t required

No return is required if your gifts for the year consist solely of annual exclusion gifts, present interest gifts to a U.S. citizen spouse, qualifying educational or medical expenses paid directly to a school or health care provider, and political or charitable contributions.

If you transferred hard-to-value property, such as artwork or interests in a family-owned business, consider filing a gift tax return even if you’re not required to. Adequate disclosure of the transfer in a return triggers the statute of limitations, generally preventing the IRS from challenging your valuation more than three years after you file.

Meeting the deadline

The gift tax return deadline is the same as the income tax filing deadline. For 2016 returns, it’s April 18, 2017 (or October 16 if you file for an extension). If you owe gift tax, the payment deadline is also April 18, regardless of whether you file for an extension.

Have questions about gift tax and the filing requirements? Contact us to learn more.

 

© 2017

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Factoring Uncertainty into the Value of Your Business

 

Businesses currently face numerous uncertainties in the marketplace. As President Trump and Republican congressional leaders work toward fulfilling their campaign promises, tax laws could substantially change, the estate tax could be repealed, and various laws and regulations (including the Dodd-Frank and Affordable Care Acts) could be repealed or revised. Interest rates and inflation could both rise. Economic relationships with other countries could also change. Some of these changes could be good for your business, while others could have negative effects on the value of your business.

History Lesson

Business valuation professionals are no strangers to dealing with market uncertainties — and neither are business owners and investors. The approach to valuing a business interest doesn’t change because of the uncertainties surrounding the current political environment.

Under the market and income approaches, the value of a business continues to be a function of expected economic returns and market, industry and specific company risk. These fundamentals didn’t change during other events that caused uncertainty earlier in the 21st century, such as the terrorist attacks on September 11, 2001, or the Great Recession that lasted from December 2007 to June 2009.

Key Considerations

Here are some considerations when valuing a business in today’s volatile political climate.

Public market returns. The inputs that valuators use to determine discount rates and pricing multiples are typically based, in part, on data from the public stock and bond markets. So far, public markets have reacted to the election results in a positive manner. In general, the proposed changes to taxes and business regulations are likely to lower expenses and increase cash flow for many businesses.

Company-specific risks. A factor that has changed substantially is the risk associated with specific companies and industries — and valuators face challenges as they attempt to measure these risks. For example, proposed regulatory changes might increase the value of companies that operate in the energy sector or the manufacturing sector. On the flipside, they might adversely affect the value of companies that operate in the government contracting or health care sectors.

Known (or knowable) information. Many private business valuations are prepared with a year-end effective date, because it corresponds to the cut-off date for their annual financial statements. Valuation experts can only use information known or knowable at the date of the valuation. But what did we know as of December 31, 2016?

Valuation experts constantly monitor market conditions. Realistically, at the end of 2016 and even today, there are many unknowns. The specific details of tax reforms and other regulatory proposals haven’t been fully put into effect or made into law. Since we can only speculate on what will happen in the future, business valuators must focus on the likelihood that the subject company will achieve its expected future income. The risk that a company won’t meet its financial forecasts is factored into its discount rate.

Contact a Valuation Pro

Experienced appraisers understand the importance of reacting to events that cause added uncertainty with an objective, measured response, rather than a knee-jerk response. In today’s marketplace, they understand that politicians have many divergent plans that may (or may not) be approved or take effect.

In the meantime, business owners and investors should stay calm and carry on. A valuation professional can help you stay atop the latest tax and regulatory changes and understand how they could impact your company’s expected return and risk profile in the future.

Contact Dan Vuckovich at 406.727.0888 for questions or more information.

© 2017

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The “Manufacturers’ Deduction” isn’t Just for Manufacturers

The Section 199 deduction is intended to encourage domestic manufacturing. In fact, it’s often referred to as the “manufacturers’ deduction.” But this potentially valuable tax break can be used by many other types of businesses besides manufacturing companies.

Sec. 199 deduction 101

The Sec. 199 deduction, also called the “domestic production activities deduction,” is 9% of the lesser of qualified production activities income or taxable income. The deduction is also limited to 50% of W-2 wages paid by the taxpayer that are allocable to domestic production gross receipts.

Yes, the deduction is available to traditional manufacturers. But businesses engaged in activities such as construction, engineering, architecture, computer software production and agricultural processing also may be eligible.

The deduction isn’t allowed in determining net self-employment earnings and generally can’t reduce net income below zero. But it can be used against the alternative minimum tax.

How income is calculated

To determine a company’s Sec. 199 deduction, its qualified production activities income must be calculated. This is the amount of domestic production gross receipts (DPGR) exceeding the cost of goods sold and other expenses allocable to that DPGR. Most companies will need to allocate receipts between those that qualify as DPGR and those that don’t — unless less than 5% of receipts aren’t attributable to DPGR.

DPGR can come from a number of activities, including the construction of real property in the United States, as well as engineering or architectural services performed stateside to construct real property. It also can result from the lease, rental, licensing or sale of qualifying production property, such as:

  • Tangible personal property (for example, machinery and office equipment),
  • Computer software, and
  • Master copies of sound recordings.

The property must have been manufactured, produced, grown or extracted in whole or “significantly” within the United States. While each situation is assessed on its merits, the IRS has said that, if the labor and overhead incurred in the United States accounted for at least 20% of the total cost of goods sold, the activity typically qualifies.

Contact us to learn whether this potentially powerful deduction could reduce your business’s tax liability when you file your 2016 return.

 

 

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