Anderson ZurMuehlen Blog

Large Employers: Time to Start Planning for ACA Information Reporting

With the U.S. Supreme Court’s June 25 decision upholding the Affordable Care Act (ACA) yet again, employers subject to the act’s information reporting provision can no longer afford to put off planning in the hope that the requirements might go away.

Beginning in 2016, “large” employers as defined by the act (generally employers with 50 or more full-time employees or the equivalent) must file Forms 1094 and 1095 to provide information to the IRS and plan participants about health coverage provided in the previous year (2015).

Fortunately, recent IRS guidance helps clarify the reporting requirements. And a new IRS Q&A document addresses more specific issues that may arise while completing the forms.

Keep in mind that, while some “midsize” employers (generally employers with 50 to 99 full-time employees or the equivalent) can qualify for an exemption from the play-or-pay provision in 2015 if they meet certain requirements, these employers still will be subject to the information reporting requirements.

If your organization is among those required to file Forms 1094 and 1095 and you need help complying with the requirements, please contact us.

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Watch Out for Tax Consequences When Hiring Telecommuters Outside Your State

If you allow employees to telecommute, be sure to consider the potential tax implications. Hiring someone in another state, for example, might create sufficient nexus to expose your company to that state’s income, sales and use, franchise, withholding, or unemployment taxes.

And the employee might be subject to double taxation if both states attempt to tax his or her income — the recent Supreme Court ruling in Comptroller of the State of Maryland v. Wynne addressed a similar issue, although in that case the taxpayers weren’t telecommuters but owners of an S corporation that earned income in other states.

The rules vary by state and also by type of tax — and become even more complicated for international telecommuters. So it’s a good idea to review the rules before you approve a cross-border telecommuting arrangement. If you’re considering hiring employees to telecommute from outside your state, we can help you assess the potential tax impact.

Contact us for more information about tax consequences.

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Before Donating a Vehicle, Find Out the Charity’s Intent

If you donate your vehicle, the value of your deduction can vary greatly depending on what the charity does with it. You can deduct the vehicle’s fair market value (FMV) if the charity:

  • Uses the vehicle for a significant charitable purpose (such as delivering meals-on-wheels to the elderly),
  • Sells the vehicle for substantially less than FMV in furtherance of a charitable purpose (such as a sale to a low-income person needing transportation), or
  • Makes “material improvements” to the vehicle.
    But in most other circumstances, if the charity sells the vehicle, your deduction is limited to the amount of the sales proceeds.

You also must obtain proper substantiation from the charity, including a written acknowledgment that:

  • Certifies whether the charity sold the vehicle or retained it for use for a charitable purpose,
  • Includes your name and tax identification number and the vehicle identification number, and
  • Reports, if applicable, details concerning the sale of the vehicle within 30 days of the sale.

For more information on these and other rules that apply to vehicle donation deductions, please contact us.

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You’re a Real Estate Investor, but Are You a “Professional”?

Income and losses from investment real estate or rental property are passive by definition — unless you’re a real estate professional. Why is this important? Passive income may be subject to the 3.8% net investment income tax (NIIT), and passive losses are deductible only against passive income, with the excess being carried forward.

To qualify as a real estate professional, you must annually perform:
•   More than 50% of your personal services in real property trades or businesses in which you materially participate, and
•   More than 750 hours of service in these businesses during the year.
Each year stands on its own, and there are other nuances. If you’re concerned you’ll fail either test and be subject to the 3.8% NIIT or stuck with passive losses, consider increasing your hours so you’ll meet the test. (Special rules for spouses may help.) Also be aware that the IRS has successfully challenged claims of real estate professional status in instances where the taxpayer didn’t keep adequate records of time spent.
If you’re not sure whether you qualify as a real estate professional, please contact us. We can help you make this determination and guide you on how to properly document your hours.

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100% deduction for certain M&E expenses

Generally, businesses are limited to deducting 50% of allowable meal and entertainment (M&E) expenses. But certain expenses are 100% deductible, including expenses:

•    For food and beverages furnished at the workplace primarily for employees,
•    Treated as employee compensation,
•    That are excludable from employees’ income as de minimis fringe benefits,
•    For recreational or social activities for employees, such as holiday parties, or
•    Paid or incurred under a reimbursement or similar arrangement in connection with the performance of services.
If your company has substantial M&E expenses, you can reduce your tax bill by separately accounting for and documenting expenses that are 100% deductible. If doing so would create an administrative burden, you may be able to use statistical sampling methods to estimate the portion of M&E expenses that are fully deductible. For more information on how to take advantage of the 100% deduction, please contact us.

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Got ISOs? You need to understand their tax treatment

Incentive stock options allow you to buy company stock in the future at a fixed price equal to or greater than the stock’s fair market value on the grant date. If the stock appreciates, you can buy shares at a price below what they’re then trading for.

ISOs must comply with many rules but receive tax-favored treatment:

  • You owe no tax when ISOs are granted.
  • You owe no regular income tax when you exercise ISOs.
  • If you sell the stock after holding the shares at least one year from the exercise date and two years from the grant date, you pay tax on the sale at your long-term capital gains rate. You also may owe the 3.8% net investment income tax.
  • If you sell the stock before long-term capital gains treatment applies, a “disqualifying disposition” occurs and any gain is taxed as compensation at ordinary-income rates.

There also might be alternative minimum tax consequences in certain situations. If you’ve received ISOs, contact us. We can help you determine when to exercise them and whether to immediately sell shares received from an exercise or to hold them.

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Tax Extenders: Three Credits for Businesses on Your 2014 Returns

The Tax Increase Prevention Act of 2014 (TIPA) extended through Dec. 31, 2014, a wide variety of tax breaks, including many tax credits — which are particularly valuable because they reduce taxes dollar-for-dollar. Here are three credits that businesses may benefit from when they file their 2014 returns:

  1. The research credit. This credit (also commonly referred to as the “research and development” or “research and experimentation” credit) rewards businesses that increase their investments in research. The credit, generally equal to a portion of qualified research expenses, is complicated to calculate, but the tax savings can be substantial.
  2. The Work Opportunity credit. This credit is available for hiring from certain disadvantaged groups, such as food stamp recipients, ex-felons and veterans who’ve been unemployed for four weeks or more. The maximum credit ranges from $2,400 for most groups to $9,600 for disabled veterans who’ve been unemployed for six months or more.
  3. The Sec. 45L energy-efficient new home credit. An eligible construction contractor can claim a credit for each qualified new energy efficient home that the contractor built and that was acquired by a person from the contractor for use as a residence during 2014. The credit equals either $1,000 or $2,000 per unit depending on the projected level of fuel consumption.

Wondering if you qualify for any of these tax credits? Or what other breaks extended by TIPA could reduce your 2014 tax bill? Contact us!

© 2015

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Foreign Account Tax Withholding Rules Update

Erin Stockwellby Erin Stockwell, CPA, senior manager

After June 30, 2014, Foreign Account Tax Compliance Act (FATCA) withholding rules came into effect.  These withholding rules apply to certain payments made to non-US entities, and are in addition to the withholding rules for payments to non-US persons (including entities) that have been in place for years.  FATCA withholding is 30% and is required when certain documentation is not in place at the time the payment to the non-US entity is made.  If you make payments to non-US entities, you may be considered a withholding agent, meaning it is your responsibility to obtain the required paperwork and withhold if necessary.  A withholding agent that is required to withhold with respect to a payment but fails either to withhold, or to deposit any tax withheld, is liable for the amount of tax not withheld and deposited.  In addition, payments and associated withholding must be reported to the IRS by the assigned due date, which varies depending on the form required.

We understand this is a new and confusing law.  If you have questions, please contact Erin Stockwell, senior manager, by email or at 406.727.0888.

Client Letter for the Foreign Account Tax Compliance Act FATCA

Foreign Account Tax Compliance Act-IRS webpage

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New Streamlined Offshore Procedures

Dana Cade

Dana Cade, manager

By Dana Cade, CPA, manager

At the end of June 2014, the IRS released changes to its 2012 Offshore Voluntary Disclosure Program (OVDP) and its 2012 Streamlined Program for Non-US taxpayers. These changes became effective July 1, 2014.  The good news is the IRS has recognized that many taxpayers who are out of compliance have not done so willfully.  To assist these taxpayers, the IRS has expanded the streamlined program to accept non-willful taxpayers residing in the US.  Penalties are greatly reduced, if not eliminated, for non-willful filers.

Streamlined Procedures

The new streamlined offshore procedures are limited to taxpayers who have been non-willfully out of compliance with US tax laws. The procedures are divided into two categories: one for non-resident US taxpayers, and the other for resident US taxpayers.  Taxpayers in either category are required to file amended (US) or missing (non-resident) returns (including but not limited to Forms 3520A, 352A, 5471, 5472, 8938, 926 and 8621) for the past three years and foreign account forms for six years (FBAR and 8938, as applicable).

Taxpayers who qualify to file under the new streamlined procedures will need to sign a certification to that effect. The certification must also include a statement that all of the FBARS are now filed.  The taxpayer must sign under penalty of perjury that his/her failure to meet US tax obligations was non-willful conduct and that the offshore penalties have been computed accurately.  A worksheet providing these calculations must be attached.

Before discussing the new program and procedures, it’s important to distinguish between non-resident US taxpayers and resident US taxpayers. “Non-resident US taxpayer” means a US citizen or green card holder who, for any of the most recent three years for which a US tax return was due, didn’t have a US abode and was physically outside the country for (this purpose) at least 330 days, or a non-US citizen or non-green card holder who doesn’t meet the substantial presence test for that same period.  There is no penalty for non-residents.  “Resident US taxpayer” means a US citizen, lawful permanent resident, and those meeting the substantial presence test.

Qualifying for the Procedures

To qualify for the Domestic Offshore Procedures, the taxpayer must meet the following requirements:

  1. Depending on filing status, one (single) or both (married) must fail to meet the non-residency requirement.
  2. Have previously filed (in a timely manner) a US return, if required, for each of the most recent three years for which the US tax return due date or extended due date has passed.
  3. Failed to report gross income from a foreign financial asset and pay tax as required by law. If the taxpayer reported gross income from the foreign asset and paid all taxes related to that asset, this requirement maybe satisfied if the taxpayer failed to file an FBAR and/or other international informational return, such as IRS forms , 3520, 3520-A, 5471, 5472, 8938, 926, and 8621.
  4. The failures enumerated in number three above must have resulted from non-willful conduct, which includes negligence, inadvertence, mistake, or conduct that is the result of a good faith misunderstanding of the requirements.

Some things to note:

  • A miscellaneous 5% penalty on the highest FBAR (FinCen) balance for the past six years will be assessed in most cases, plus tax and interest due with the returns.
  • Failure to file foreign informational forms leaves the statute of limitations open until the forms are filed.
  • If a taxpayer is already working on an OVPD under an older program, he/she might qualify for the miscellaneous 5% treatment under the new program but would still have to file additional tax returns and FBARS.
  • There may be other factors that preclude a resident US taxpayer from getting the favorable 5% penalty.

Changes to the Offshore Voluntary Disclosure Program (OVDP)

The objective of the new Offshore Voluntary Disclosure Program remains the same as the original program: to bring taxpayers who have used undisclosed foreign accounts and assets (including those held through undisclosed foreign entities) to avoid or evade tax into compliance with US tax and related laws. Some of the changes that have been made to the OVDP are significant. For example, under the 2012 OVDP, the noncompliance penalty was 27.5% of the highest balance of noncompliant foreign assets. Under the 2014 OVDP, the penalty could increase to 50%, depending on which banks held the taxpayer’s account.

So why should a taxpayer make the voluntary disclosure? Taxpayers holding undisclosed foreign accounts and assets, including those held through undisclosed foreign entities, should do it because it enables them to become compliant, avoid substantial civil penalties, and generally eliminate the risk of criminal prosecution for all issues relating to tax noncompliance and failing to file FBARs.  In contrast, taxpayers simply filing amended returns or filing through the Streamlined Filing Compliance Procedures risk criminal prosecution.  Making a voluntary disclosure also provides the opportunity to calculate, with a reasonable degree of certainty, the total cost of resolving all offshore tax issues.  Taxpayers who do not submit voluntary disclosure risk detection by the IRS and the imposition of substantial penalties, including the fraud penalty and foreign information return penalties.  They also face an increased risk of criminal prosecution.  The IRS remains actively engaged in identifying those with undisclosed foreign financial accounts and assets.  This information is increasingly available to the IRS under tax treaties, through submissions by whistleblowers, and from other sources, and it will become more available under the FATCA and Foreign Financial Asset Reporting (IRC § 6038D). For more information on International Tax issues, contact Dana Cade, Senior Manager, by email or by phone at 406.442.1040.


Anderson ZurMuehlen’s International Tax Information

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Got a Canadian Retirement Plan? IRS Simplifies Procedures

Are you a taxpayer who holds an interest in one of Canada’s popular retirement plans? The IRS recently announced that it is making it easier to get favorable tax treatment and making reporting requirements simpler for eligible individuals with Canadian registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs). For more information select here, or contact Erin Stockwell, Senior Manager, by email or call 406.727.0888.

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