August 2016

Why is the IRS Cracking Down on ACA Reporting?

Posted on August 30, 2016July 23, 2024 by Debra Barcuch

Under the Affordable Care Act, individuals without health care coverage will pay tax penalties for their lack of coverage. However, if they are eligible to receive ACA-compliant affordable health insurance coverage through an employer, they must choose to take that coverage or actively waive that coverage. The employers must document when employees were informed of eligibility in accordance with health care plan guidelines. They must also document if and when an employee waived coverage. If the employee accepts coverage, an employer must document the start and end dates of coverage (including data on dependents and their coverage dates for self-insured plans), within the given tax year.

If the employer meets the definition of an ALE or if it is self-insured, this health care coverage information must be reported to the IRS on Form 1095 for purposes of comparing employer data with employee tax data.

Now here is the wrinkle for eligible employees who waive eligible employer coverage. Let’s say one of these employees decides to get health insurance coverage through a state- or federal-sponsored health care exchange, even though the employer offered “affordable” coverage. And let’s say that same employee receives a federal government subsidy to pay for health coverage through the exchange. If the IRS determines that the employee had affordable health coverage through the employer, the employee could be required to pay back the subsidy — and faces additional penalties which could be hundreds or thousands of dollars over a year. This is a primary reason for such scrutiny of ACA compliance — rooting out misuse or abuse of federal health care insurance subsidies among taxpayers who could receive compliant coverage through an employer.

For the purposes of this article, we won’t delve into the question of what is really affordable health care insurance through employers, particularly for family coverage. The fact remains that the IRS requires accurate reporting of the status of all eligible employee health care coverage, and is far less likely to make exceptions for employer good faith efforts in 2016.

Improve administration and payroll systems for ACA reporting

One of the biggest challenges when complying with Affordable Care Act tax reporting for 2015 was that payroll and administration systems weren’t compatible with the data requested.

Employers struggled with missing data or hard-to-interpret data. For example, coverage start dates were difficult to interpret because many were listed as generic “termination” dates. An employer would list the previous plan as terminated on a certain date, then reenact the plan the next day when adding an eligible spouse or dependent.

Employers that tried to handle ACA reporting in-house were challenged not only with reporting requirements, but also the hassle of form rejections. Payroll outsourcing companies and benefits specialists spent countless hours organizing, untangling and resubmitting forms. The best specialists have been preparing since the last tax season filing to improve their processes and collect data earlier.

Continue Reading: ACA and the Small Employer vs. Large Employer Challenge

Cornwell Jackson’s payroll team can help. Partnering with Brinson Benefits, we manage ACA-compliant payroll administration. We can guide employers to the right resources and answer questions about reporting deadlines and other payroll and tax compliance issues. For example, we advise on hourly and salaried employee compliance and new overtime rules, which tie into employee eligibility for benefits and any required ACA reporting. Read our whitepaper on outsourced payroll. Send us your questions and we’ll point you to the experts.

Scott Bates, CPA, is a partner in the audit practice and leads Cornwell Jackson’s Business Services Department, which includes a dedicated team for outsourced accounting, bookkeeping and payroll services. He provides consulting to clients in healthcare, real estate, auto, transportation, technology, service, retail and manufacturing and distribution. Contact Scott at scott.bates@cornwelljackson.com or 972-202-8000.

Sharon Alt is Director of Compliance with Brinson Benefits in the Dallas/Fort Worth area. With a focus on Affordable Care Act regulations, she is responsible for ensuring that Brinson and their employee benefit clients meet all regulatory compliance standards in regards to healthcare benefits administration, particularly with regard to healthcare reform and the Affordable Care Act. She regularly guides clients through the ACA 6055/6056 reporting requirements.

Tax-Savvy Planning Strategies for Inherited IRAs

Posted on August 23, 2016 by Debra Barcuch

tax planning

Say an IRA is inherited by multiple individual beneficiaries or by one or more individuals and one or more charities or other beneficiaries that aren’t “natural persons.” How do these scenarios affect the rules for required minimum distributions (RMDs) that apply after the IRA owner dies? And how can you optimize the tax results for individual beneficiaries?

Here, we answer these questions and explain the importance of the fast-approaching deadline on September 30, 2016, that must be met to change beneficiaries for IRAs that were owned by individuals who died in 2015.

Required Distribution Rules and Penalties for Noncompliance

After an IRA owner’s death, the account beneficiary or beneficiaries must take RMDs each year. RMDs from traditional accounts are generally subject to tax (unless the beneficiary is tax-exempt, such as a charity, or the distribution is attributable to nondeductible contributions), and each withdrawal also reduces the amount left in the account that can continue to grow tax-deferred (or tax-free, in the case of a Roth IRA).

If the RMD rules aren’t followed for a tax year in question, the IRS can assess a penalty equal to 50% of the shortfall (the difference between the required amount and the amount that was actually withdrawn during the year, if anything). That’s one of the most expensive tax penalties on the books. So, complying with the RMD rules isn’t something that can be ignored with impunity.

Inherited IRAs with Multiple Individual Beneficiaries

An inherited IRA is said to have multiple individual beneficiaries when more than one individual is designated as a primary co-beneficiary. For RMD purposes, however, the beneficiaries of a deceased IRA owner’s account aren’t finalized until September 30 of the year following the account owner’s death. This rule allows for creative planning options to achieve better tax results for the beneficiaries. Here are some examples.

When the account owner died before the RBD. The latest date for an original traditional account owner’s initial RMD is April 1 of the year after he or she turns age 70½. That April 1 deadline is referred to as the “required beginning date” (RBD). When the original account owner dies before the RBD (say, at age 70 or younger), beneficiaries can usually follow the life expectancy rule to calculate their annual RMDs.

How do you calculate RMDs using the life expectancy rule? When all the IRA beneficiaries are individuals, the general rule is that RMDs for each year are calculated using the single life expectancy figures for the oldest beneficiary. The RMD for each year is calculated by dividing the IRA balance as of December 31 of the previous year by the oldest beneficiary’s remaining life expectancy as set forth in IRS tables. The RMD is then split up between the beneficiaries based on their account ownership percentages.

This rule isn’t optimal for a younger beneficiary who wants to stretch out the inherited IRA’s tax advantages by taking smaller RMDs over his or her longer life expectancy. Thankfully, IRS regulations allow a postmortem planning solution: After the IRA owner dies, the IRA can be divided into separate IRAs for each beneficiary.

This strategy is implemented using tax-free direct transfers from the original IRA into new IRAs set up for each beneficiary. That way, a younger beneficiary can take smaller RMDs based on his or her longer life expectancy figures. In turn, this setup allows the younger beneficiary to keep his or her tax-saving IRA going longer.

However, any direct transfers to split up the account must be completed by September 30 of the year after the year of the IRA owner’s death. So if the owner died in 2015, the deadline to divide up the account for tax-saving results is September 30, 2016.

When the account owner died on or after the RBD. A different set of rules applies if the owner of a traditional IRA dies on or after the RBD (for example, at age 72 or older). The first order of business is calculating and withdrawing the RMD for the year of the account owner’s death. (If the account owner died in 2015, the RMD should have been taken last year.)

For subsequent years, RMDs are usually calculated using the beneficiary’s life expectancy figures as set forth in IRS tables. However, if there are multiple individual beneficiaries, RMDs for subsequent years are calculated using the oldest beneficiary’s life expectancy figures.

Once again, this rule isn’t optimal for a younger beneficiary who wants to stretch out the inherited IRA’s tax advantages by taking smaller RMDs over his or her longer life expectancy. Fortunately, again relief can be found in the IRS regulations allowing a deadline of September 30 of the year after the year of the IRA owner’s death to split the IRA into multiple accounts.

Here’s an example of the postmortem RMD planning permitted under this rule.

Example 1: Inherited IRA with Multiple Individual Beneficiaries

Uncle Henry was 73 years old when he died in 2015. His traditional IRA has two equal beneficiaries: son Iggy (age 53) and niece Jenny (age 38). Under the RMD rules that apply for 2016 and beyond, Jenny can achieve better tax results for her share of the inherited IRA if the account is split up into two accounts: one for her and one for Iggy. That way, Jenny can calculate her annual RMDs using her longer life expectancy figures, which will result in smaller RMD amounts and a longer tax-saving life for the inherited IRA. However, the IRA must be divided into separate accounts by no later than the upcoming deadline of September 30, 2016.

When the account is a Roth IRA. To calculate RMDs from an inherited Roth IRA, follow the rules for account owners who die before the RBD. Those rules apply regardless of how old the Roth IRA owner was when he or she died. Again, if there’s a younger beneficiary who’d like to take advantage of his or her longer life expectancy, the Roth IRA can be split up by the September 30 deadline.

Inherited IRAs with a Nonhuman Beneficiary

If an IRA has one or more nonhuman beneficiaries (other than certain types of trusts), it’s the same as having no beneficiaries for RMD-calculation purposes — even when one or more human individuals are also named as beneficiaries.

In this scenario, when the IRA owner dies before the RBD, the account must be completely liquidated by December 31 of the fifth year following the year of the account owner’s death. Obviously, the five-year rule curtails the tax-saving life of the inherited account for any human beneficiaries.

When the account owner dies on or after the RBD — for example, at age 72 or older — the first order of business is calculating the RMD for the year the account owner died. (Again, if the account owner died in 2015, the RMD should have been taken out last year.) RMDs for subsequent years are calculated using the deceased account owner’s remaining life expectancy as if he or she were still alive.

Unfortunately, this rule also results in less-than-optimal tax results for any human beneficiaries who are younger than the now-deceased account owner. They’ll have to take larger RMDs each year, which will deplete the tax-saving IRA more quickly.

The problem can be resolved by paying out the non-natural beneficiary in a lump sum and then removing that beneficiary by September 30 of the year after the year of the account owner’s death. If the account owner died last year, you’ll have until September 30, 2016, to finalize IRA beneficiaries for purposes of calculating RMDs for 2016 and beyond. If the removal strategy is employed, subsequent RMDs are calculated as if the removed beneficiary had never been in the picture.

Here’s an example of the postmortem RMD planning permitted under this rule.

Example 2: Removal of Charitable Beneficiary of Inherited IRA

Ken, age 32, is a 50% beneficiary of his mother Jan’s traditional IRA. Jan died last year at age 66 (before the RBD). The other 50% beneficiary is a charity. Therefore, Jan’s account is considered to have no beneficiary for RMD calculation purposes. Because Jan died before the RBD, the dreaded five-year rule will apply, which means curtailed tax deferral advantages for Ken. The charity doesn’t care about tax deferral because it’s tax-exempt.

The tax-savvy strategy in this situation is to distribute 50% of the IRA balance by September 30, 2016, to cash out the charity. That way, Ken can calculate RMDs for 2016 and beyond using his relatively long single life expectancy figures. He’s only 32 years old, so the tax deferral advantages of the inherited IRA will last much longer than if the RMDs had been calculated using his deceased mother’s life expectancy figures.

Act Now

The September 30 deadline for finalizing beneficiaries can be an important consideration when trying to maximize the tax advantages of an inherited IRA for individual beneficiaries. That deadline is fast approaching for account owners who died in 2015. Contact your tax advisor to fully understand the impact of making beneficiary changes and make any tax-saving moves before it’s too late.

Avoid Inadvertent Hiring Discrimination

Posted on August 22, 2016July 22, 2024 by Debra Barcuch

The intent to discriminate might not have been a factor. But an East Coast chemical manufacturer will still have to pay $175,000 in back pay and interest to 660 African-American job applicants, who were rejected for entry-level jobs at one of their locations over a one-year period.

The problem was a failure to satisfy the federal Uniform Guidelines on Employee Selection Procedures. In particular, the company’s pre-employment test was deemed to disproportionately screen out a protected group based on criteria that weren’t sufficiently linked to the skills required for the jobs the company was filling.

The original guidelines (updated over the years) were issued by the Equal Employment Opportunity Commission (EEOC) back in 1978, six years after the enactment of the Equal Employment Opportunity Act. While the basic rules aren’t new, they’re subject to constant interpretation in each employment scenario, and in the case of the chemical manufacturer, the employer’s interpretation didn’t hold up. The rules seek to eliminate aspects of hiring systems that could be discriminatory by race, gender, religion or national origin.

“All Selection Procedures”

The EEOC guidance doesn’t apply to pre-employment tests, but “all selection procedures used to make employment decisions, including interviews, review of experience or education from application forms, work samples, physical requirements, and evaluations of performance,” according to the EEOC.

A key principle is the importance of using “validated” testing systems (more on that below). Technically, you’re not required to use tests that have been prevalidated as nondiscriminatory. However, if you’re accused of discriminating and can’t prove the validity of your testing methods at that time, you’ll generally lose the case.

Hiring results that raise red flags are those that lead to a “substantially different rate of selection.” The same applies to the processes of promotion, retention or any other positive employment action. The EEOC defines that as when the selection rate for any race, sex or ethnic group is less than 80% of that for the group with the highest selection rate.

So, for example, if 50% of men pass a pre-employment test and are hired, but only 30% of women pass the test and are hired, the alarm bells sound. In this case, the hiring rate for women was only 30% divided by 50%, which equals 60% of the hiring rate for men. The women’s pass rate would have to be at least 40% to be within the range acceptable to the EEOC.

Note: You don’t need to analyze testing results for every protected group. An exception is made for groups that represent less than 2% of the local work force. That low threshold might be applicable to the “national origin” category, if a relatively obscure country is involved.

Failing the “substantially different rate of selection” test isn’t, on its own, proof of illegal discrimination, however. The EEOC describes it as “a numerical basis for drawing an initial inference and for requiring additional information.” This is where test validation comes in — basically showing that the test gives an accurate measurement of a job candidate’s ability to be successful in the position sought.

Validating Hiring Tests

The Uniform Guidelines draw upon the American Psychological Association’s list of “validity strategies:”

- Criterion-related validity: A statistical demonstration of a relationship between scores on a selection procedure, and job performance of a sample of workers,

- Content validity: A demonstration that the content of a selection procedure is representative of important aspects of the job, and

Construct validity: A demonstration that a selection procedure measures a human trait (for example, creativity), and that the trait is essential for successful job performance.

If you’re accused of discriminatory hiring practices and the EEOC decides to investigate, these are the two steps the investigator typically will take to assess the situation. The examiner will:

Measure the extent to which each element of your selection process has an adverse impact on members of protected groups, and
Ask you for evidence of the validity of any selection mechanism that has been shown to have an adverse impact.

Unfortunately, you can’t give a trial run to validate evidence to the EEOC in advance to gain assurance whether it will pass muster if you face an accusation of discrimination. During an examination, “validity evidence will not be reviewed without evidence of how the selection procedure is used and what impact its use has on various race, sex and ethnic groups,” according to the EEOC.

“Rational” Doesn’t Suffice

Also, it’s not enough to demonstrate a “rational relationship between a selection procedure and the job sufficient to meet the validation requirements of the guidelines,” the EEOC warns. Nor can you present written or oral assertions of validity from any expert. It all comes down to a validity study that the EEOC will “judge on its own merits.”

One of the pre-employment tests used by the chemical manufacturer measured reading, math, listening, the ability to locate information and teamwork. In spite of assertions by the employer that the test accurately predicts a job applicant’s future performance for the job at hand, the EEOC wasn’t convinced.

The bottom line: Before choosing, let alone trying to validate an employment test, determine what knowledge, skills and abilities are essential for the job, to avoid inappropriately screening out applicants. Also, be sure you maintain records of the demographic features of your job applicants to make it possible for you (and perhaps the EEOC) to determine whether your hiring practices are having a disproportionate negative impact on protected groups.

Industrial psychologists and other job experts specialize in these issues, and can help you to avoid falling into any employment discrimination traps.

New ACA Reporting Rules May Still Catch Employers By Surprise

Posted on August 19, 2016July 23, 2024 by Debra Barcuch

The challenges of Affordable Care Act reporting for the 2015 tax year will likely follow companies and organizations into 2016 — and the honeymoon period with the IRS is over. It will take more than careful administration to ensure proper reporting and avoid kicked back forms or penalties for missing or inaccurate data. Benefits brokers that specialize in ACA reporting recommend a combination of careful administration along with support from payroll outsourcing companies. This planning includes a CPA team that can advise on tax and payroll administration.

The IRS late “Christmas miracle” last tax season gave employers extra time to report compliance with ACA affordable health insurance coverage mandates and the status of employee health care coverage. It is not expected to be repeated for 2016.

In fact, company administrators and their CPA or payroll advisors should be gathering data now to be ready to fill out and file relevant parts of Form 1095 by January 31, 2017.

Applicable large employers (ALEs), those that have 50 or more employees (or full time equivalent), must show compliance with the ACA employer mandate to provide affordable health care coverage to eligible employees. Both ALEs and employers that are self-insured are required to report which employees were eligible for coverage and when. They also have to report which employees waived coverage and which were in fact covered in any month during 2016.

Starting and ending dates of coverage as well as starting and ending dates of dependent coverage (including birth dates and SSNs) are crucial for accurate reporting. Even eligible employees who left the employer sometime during the year must be accounted for.

Experiences from last year illustrate the complexity and financial costs at stake for employers navigating ACA reporting. Well-intentioned employers can get hung up at various stages of employee and payroll administration, data gathering and IRS reporting. They may also not understand if they fall under the definition of ALE if they are a subsidiary with fewer than 50 employees. However, the IRS views all subsidiaries or entities of large companies as falling under the same employer for the ACA reporting obligation.

Penalties can involve hundreds of dollars for each missing form with no limit on the total penalty per employer.

Last year, approximately 9 percent of all Form 1095 forms were rejected.

Some of the most common errors involved the following:

Improper use of EIN numbers
Employee and dependent names and SSNs that didn’t match tax forms (e.g. name changes due to marriage were kicked back)
Discrepancies with employee and dependent start dates and termination dates

When processing through the new Affordable Care Act Information Return System (AIR), some forms were rejected due to the use of apostrophes in last names or an extra space prior to an employer’s name. The IRS is working to improve AIR for 2016 filing, but employers and their advisors should be aware of IRS tips to avoid common errors and expedite processing.

Continue Reading: Why is the IRS Cracking Down on ACA Reporting?

Do You Own a Vacation Rental Home with Limited Personal Use?

Posted on August 17, 2016 by Debra Barcuch

Vacation properties are subject to different federal income tax rules depending on how much personal and rental use they have during the year. Now is a good time to plan how to use your vacation property for the rest of this year with tax savings in mind.

Guidelines on Personal Use

For federal income tax purposes, personal use of a vacation property includes use by:

You,
Other family members, whether or not they pay fair market rent, and
Anyone else who pays less than market rent.

For the purpose of these rules, family members include your spouse, siblings, half-siblings, ancestors (such as parents and grandparents) and lineal descendants (such as children and grandchildren).

Personal use also includes time spent at your property by another party under a reciprocal sharing arrangement, whether or not the other party pays market rent. Under such an arrangement, the parties agree to “swap” properties.

Tax Rules for Vacation Home Rentals

Your vacation home will be treated as a rental property for federal tax purposes if you rent it out for more than 14 days and your personal use does not exceed the greater of:

14 days, or
10% of the rental days.

For example, if you rent your property for 210 days and vacation there for 21 days, your property will be treated as a rental. But if you vacation there for 22 days, the property is considered a personal residence.

If your property qualifies as a rental, follow this six-step procedure to report the income and expenses for federal income tax purposes.

Report 100% of the rental income on your tax return.
Deduct 100% of any direct rental expenses, such as rental agency fees and advertising.
Allocate mortgage interest, property taxes and indirect property expenses between rental and personal use based on actual days of rental and personal use. Indirect expenses include such items as maintenance, utilities, association fees, insurance and depreciation.

Continuing with the previous example, you would allocate 210/231 of the mortgage interest, property taxes and indirect expenses to rental use. Then you would allocate 21/231 of these expenses to personal use.

Deduct as rental expenses the allocable expenses from Step 3.
Stop here if you show a profit. Sorry, you owe taxes. But if you show a loss, you’ll need to figure out whether the potential write-off is limited by the passive activity loss (PAL) rules.

In general, you can only deduct passive activity losses to the extent you have passive income from other sources, such as rental properties that produce positive taxable income. Fortunately, an exception allows you to write off up to $25,000 of passive rental real estate losses even if you have no passive income.

To qualify, you must actively participate in renting the property and have adjusted gross income (AGI) under $100,000. The exception is phased out between AGI of $100,000 and $150,000. Also, the IRS says the exception is unavailable if the average rental period for your property is seven days or less, which is often the case in resort areas. So, many owners of rental properties find their tax losses postponed by the PAL rules.

You’re allowed to carry forward any unused passive losses to future tax years when they can be deducted if you, 1) report enough passive income from other sources, or 2) sell the property.

Deal with mortgage interest, property taxes and indirect operating expenses allocable to periods of personal use. Unfortunately, you can’t deduct the personal-use portion of mortgage interest from a rental property, because it doesn’t qualify as a personal residence for mortgage interest deduction purposes.

In the previous example, the ratio of personal use to total use was 21/231. So, you’d lose out on 21/231 of your mortgage interest and indirect expense deductions. But you can deduct 21/231 of the property taxes as an itemized deduction on Schedule A of your return, but it’s subject to the phase-out rule for high-income folks that normally applies to these deductions.

Mid-Year Tax Strategies

From a federal tax perspective, you may benefit from taking some extra vacation days during the rest of the year. That could move your home from being classified as a rental property for tax purposes to being classified as a personal residence. With a personal residence, you can usually deduct all the mortgage interest and property taxes (part as rental expenses and part as itemized deductions). And you can usually shelter any remaining rental income with allocable indirect operating expenses (such as utilities, maintenance and depreciation).

On the other hand, you may have plenty of passive income or AGI below $100,000 and no problem with the seven-day rule. In these scenarios, you can currently deduct your whole rental loss. If the nondeductible mortgage interest allocable to personal use would be a relatively small amount, consider minimizing your personal use for the rest of the year in order to increase your fully deductible rental loss. You might also be able to rent the place out for more days, which would boost your cash flow.

The rules explained here apply only to vacation home rentals that have limited use by you (or your family and friends). For properties that are classified as personal residences, different tax rules apply. Contact your tax professional for more information on vacation home rentals.

Improve Your Firm’s Chance of Submitting the Winning Bid

Posted on August 16, 2016 by Debra Barcuch

Safety First Like the saying “You gotta be in it to win it,” many construction firm owners submit many bids for local jobs to be in it.

But to thrive and survive, you need to do more than just be in the bidding process. Your firm must be able to submit bids that have a reasonable chance of approval. And your firm must win often enough to thrive.

There’s no foolproof method for developing and submitting winning bids. Still, by following some basic principles, you can improve your chances.

Bidding is an art, not a science. Usually, the bidding process is reserved for the general contractor, but the architect and others might participate.

Although contracts may be awarded to the lowest bidder, the process often involves more than just cost. It also may involve the qualifications of the firm making the bid. Having an excellent reputation for quality and timely work may be just as important, if not more so, than offering the lowest price.

Use of Construction Bid Software

To help develop more successful bids, your firm might consider using some of the many bidding software programs available. Typically this software is used as part of the cost estimation and budgeting process. You also may subscribe to a database of construction costs, updated monthly. Although your firm may choose to maintain its own database to better reflect local pricing.

Materials and labor costs are critical parts of the equation. The software defines the materials and labor hours for a particular project and then calculates the job cost from the database. All you need to do is find a job defined in the database and the software does the “grunt work.” This reduces the possibility of leaving out some costs.

The software also lets you compare final job costs to the initial bid and fine tune your final bid by, for example, inserting lower or higher costs for materials and labor.

Construction bid software is relatively inexpensive. Most programs range from between $50 and $250, depending on the features. Usually, the program will be designed to work with Excel spreadsheets, although some are stand-alone.

Among the multiple benefits of this software are that it:

Helps general contractors keep track of financial data on a daily or even hourly basis,
Stores budget information in one location for easy access, and
Reduces to near zero the chances for errors in mathematical computations that can often crop from the human factor.

Five Steps of Bidding

Once you have acquired estimating software and become proficient at using it, you’ll be better equipped to submit bids. Although the process may vary, partly because of regional differences, there are essentially five important steps.

Assess the location and conditions of the job you’re bidding on. Notably, you must learn to say “no” to jobs that don’t make sense for your firm for such reasons as distance, extreme heat or cold or hazardous conditions. To be financially successful, you must know when to walk way from jobs where you’ll almost certainly lose money.
Itemize the materials that will be needed. Normally, you should figure on a 10% to 15% add-on for waste and service charges. If you acquire the materials yourself, it cut into your profit margin, but it may be necessary to secure the job.
Compare the work with jobs your firm has previously completed. This is where experienced construction firms gain an edge. For those just starting out, it’s inevitable that you will bid too high or too low for some jobs. Chalk it up to experience and learn from it. Over time, you should be able to work more expeditiously and efficiently, which will make it easier to estimate the time and costs required to complete a job.
Multiply your hourly rate by the hours estimated for the job and add the cost of materials. Tack on a percentage for overhead expenses such as insurance, licensing and transportation. Determine if your result makes sense from a client’s perspective. If your instincts tell you that the final number needs adjustment, take another look.
Submit the bid along with a detailed schedule. Most important, the client will want a firm completion date.

Best Position

Bidding can mean the difference between a successful business and going under. By using the latest software and other tools at you disposal, you can position your firm for the optimal opportunities.

Seven Popular Bidding Programs

The number of software programs available can be overwhelming. The following is a list of seven that are currently popular:

Quick Bid
Prebuilt ML
B2W Estimate
Co-construct
Stack
Clear Estimate
Plan Swift

For reviews of these and other products, go here.

Compare and Contrast the Republican and Democratic Tax Platforms

Posted on August 15, 2016July 22, 2024 by Debra Barcuch

With both major political party conventions finally behind us, it’s time to focus on the upcoming national election. Among their many differences, the Republicans and Democrats have widely divergent tax platforms. While platforms are always relatively nonspecific and not necessarily synced with what the presidential candidates have in mind, it’s still good to know what tax positions the two parties and their presidential candidates have staked out. Here’s a quick summary.


Democratic Party Tax Platform	Republican Party Tax Platform
The 2016 Democratic national platform was adopted on July 25. It includes generalized goals that you might expect from the Democrats, such as closing tax loopholes that benefit wealthy individuals and supporting small businesses by providing tax relief and simplifying the tax code. More specific proposals include: Helping fund Social Security by taxing certain individuals with annual earnings above $250,000, Creating a surtax on multimillionaires and restoring fair taxation on multimillion-dollar estates to ensure that wealthy individuals pay their fair share of federal taxes, Expanding the earned income tax credit program for low-wage workers who aren’t raising children, Expanding the child credit by making more of it refundable and/or indexing it to inflation, Reducing the tax penalties and simplifying the reporting requirements for Americans living abroad, Clawing back tax breaks for companies that ship jobs overseas, cracking down on inversions and other methods that companies use to “dodge their tax responsibilities,” and ending tax deferral on foreign business profits, Implementing a tax on financial transactions to curb excessive speculation and high-frequency trading, Providing tax incentives for clean energy and other green business practices, while eliminating special tax breaks and subsidies for fossil fuel companies, and Repealing the Affordable Care Act’s (ACA’s) 40% excise tax on high-cost health insurance, which is scheduled to take effect in 2020.	The 2016 Republican national platform was adopted on July 18. In general, the Republicans want to promote economic growth and eliminate unspecified special-interest loopholes, while being mindful of the tax burdens that are imposed on the elderly and families with children. More specific proposals include: Making the Internal Revenue Code so simple and easy to understand that the IRS becomes obsolete and can be abolished, Removing all marriage penalties from the tax code, Repealing the Affordable Care Act (ACA) and any ACA-related tax increases, Replacing the ACA with an approach to improving healthcare that’s based on competition, patient choice and timely access to treatment, Considering options to preserve Social Security benefits without tax increases, Reducing the corporate tax rate to be on a par with (or below) the rates of other industrialized nations, Simplifying the tax rules for U.S. citizens who live overseas, including repealing the Foreign Account Tax Compliance Act (FATCA) and the Foreign Bank and Asset Reporting (FBAR) requirements, Adopting a balanced-budget amendment that would impose a government spending cap and require a supermajority approval for any tax increases (except in the case of war or legitimate emergencies), Tying any new value added tax or national sales tax to the simultaneous repeal of the Sixteenth Amendment, which authorizes the federal income tax, and Opposing any legislation that would impose a carbon tax on businesses or individuals.
Clinton on Taxes	Trump on Taxes
So far, Democratic presidential nominee Hillary Clinton has provided more specific details on her tax proposals than her opponent. Some of these ideas elaborate on (or contrast with) her party’s platform. *Individuals.* Clinton’s plans include higher income tax rates for wealthy individuals. She advocates a 4% fair-share surcharge on individuals who earn more than $5 million per year. And she’d ask the wealthiest to contribute more to Social Security. In addition, she proposes limiting certain itemized deductions for high-income individuals and disallowing IRA contributions for individuals who have large IRA balances. *Capital gains.* Clinton proposes a graduated tax rate regime where the capital gains tax rate decreases from 39.6% to 20% over a six-year period. (The 3.8% net investment income tax would still apply, however.) The idea is to encourage long-term investing. The biggest impact would be on assets held for more than one year but not more than two years: Tax rates on gains from those assets would nearly double. *Businesses.* Clinton would like to impose new restrictions and tax increases on U.S. companies with foreign operations. Her plans also include a risk fee on large banks and financial institutions, as well as curbing tax subsidies for oil and gas companies. She’d also offer a 15% tax credit for employers that share profits with workers and a $1,500 tax credit to businesses for each new apprentice that they hire and train. *Estate tax.* She proposes reducing the federal estate tax exemption to $3.5 million (from $5.45 million) and the lifetime federal gift tax exemption to $1 million (from $5.45 million). Her plans also would raise the federal estate and gift tax rate to 45%. *Healthcare.* Clinton proposes a 20% credit to help taxpayers offset caregiving costs for elderly family members (up to a maximum credit of $1,200). In addition to liberalizing the existing premium tax credit to make healthcare coverage more affordable, she’d establish a tax credit of up to $5,000 per family for buying health coverage on ACA exchanges.	Republican presidential nominee Donald Trump has several ideas to simplify our tax system, which don’t always sync with the Republican platform. Here’s what’s been discussed on his website or on the campaign trail to date. *Individuals.* Trump proposes fewer tax brackets and lower tax rates for individuals. His plan now calls for three federal income tax brackets: 12%, 25% and 33%. Currently, individuals can fall into seven federal income tax brackets: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. He’d also like to abolish the alternative minimum tax. His plans would curtail some existing individual write-offs, but he’d retain the deductions for home mortgage interest and charitable donations that the tax code currently allows. He also recently proposed making U.S. families’ child-care costs tax-deductible. *Capital gains.* His proposed tax rates on long-term capital gains and dividends would be 0%, 15% and 20%. *Businesses.* Trump proposes cutting the corporate tax rate to 15% (from the current 35%). His proposed 15% tax rate would also apply to business income from sole proprietorships and business income passed through to individuals from S corporations, limited liability companies and partnerships. He’d impose a cap on business interest deductions. Trump would eliminate the tax deferral on overseas profits and allow a one-time 10% rate for repatriation of corporate cash that’s held overseas. His plan also ends the current tax treatment of carried interest for speculative partnerships that don’t grow businesses or create jobs and are not risking their own capital. *Estate tax.* Trump would like to eliminate the federal estate tax. *Healthcare.* Trump would like to repeal the ACA and any ACA-related tax increases, including the 3.8% net investment income tax on wealthy individuals. But he would let individuals fully deduct health insurance premium payments.

7 Tax-Savvy Ways to Give to Charity

Posted on August 15, 2016 by Debra Barcuch

Charitable giving is on the rise. And the momentum is expected to continue, given the natural disasters and human tragedies that have happened in recent months.

Highlights of the Giving USA Report

A recent report, Giving USA 2016: The Annual Report on Philanthropy for the Year 2015, shows charitable-giving trends based on contributions made by individuals, foundations, estates and corporations. Here’s the breakdown of where donations came from and how much they increased in 2015:

Source	Amount donated	Increase from 2014 to 2015
Living individuals	$264.58 billion	3.8%
Foundations	$58.46 billion	6.5%
Charitable bequests	$31.76 billion	2.1%
Corporate giving	$18.45 billion	3.9%
Total	$373.25 billion	4.1%

Contributions from living people accounted for about 71% of the total donations, underscoring the importance of individual donations. For a free copy of this report, visit The Giving Institute’s website.

Last year, charitable donations reached an all-time high of approximately $373.25 billion, according to Giving USA 2016: The Annual Report on Philanthropy for the Year 2015. This report is published jointly by the Giving USA Foundation, a public-service initiative of The Giving Institute and the Indiana University Lilly Family School of Philanthropy.

Besides fulfilling their philanthropic needs, donors may also benefit from charitable deductions on their personal tax returns. If you’re considering donating to a new cause or a long-standing favorite one, remember that gift-giving may come in many different forms. Here are seven ways you can offer support:

Monetary Contributions

If you donate cash to a qualified charity, your gift is generally tax deductible. The same holds true for cash-equivalent contributions, such as an online payment to the charity using a credit or debit card.

Important note. To determine if an organization qualifies as a charitable organization, go to the IRS Exempt Organizations Select Check. Giving money to an individual or a foreign organization is generally not deductible, except for donations made to certain qualifying Canadian not-for-profits. Political donations also don’t qualify for a deduction.

The deduction limit for your total annual donations, including cash gifts, is 50% of your adjusted gross income (AGI) (or 30% to the extent donations are made to a private foundation). Any excess may be carried forward up to five years. In addition, the tax code imposes strict recordkeeping requirements for charitable contributions. For example, if you make a cash donation of $250 or more, you must obtain a contemporaneous written acknowledgment from the charity that states the amount of the donation and whether any goods or services were received in exchange for it.

Gifts of Property

You may also donate property — such as marketable securities, artwork or clothing — to a qualified charitable organization. In some situations, this can result in an extra tax break: For property that would have qualified for long-term capital gains treatment had you sold it — such as marketable securities you’ve owned longer than a year — you may deduct the full fair market value of the property. Thus, the appreciation in value while you owned the property will never be taxed.

For you to deduct the fair market value of gifts of appreciated tangible personal property, the property must be used to further the charity’s tax-exempt mission. For instance, if you give a work of art to a museum, it has to be included in its collection, rather than auctioned off at a fundraiser. Gifts of appreciated property are limited to 30% of your AGI, subject to the same five-year carryforward rule as cash gifts.

For you to deduct gifts of clothing or household goods, the items generally must be in good used condition or better. Your deduction equals the current fair market value of the item, which likely is substantially less than what you paid for it.

For a donation of property worth $250 or more, you must obtain a contemporaneous written acknowledgment from the charity describing the property, including a statement of whether any goods or services were received in exchange for the donation and a good-faith estimate of the gift’s value. Note that an independent appraisal generally is required for a charitable gift of property valued above $5,000 other than publicly traded securities.

Quid Pro Quo Contributions

In some cases, a charitable donor may receive a benefit in return for the contribution. These are referred to as “quid pro quo contributions.” If you make a donation at least partially in exchange for goods or services exceeding $75, the charity should provide you with a good faith estimate of the goods and services received and the amount of payment exceeding the value of the benefit. Your deduction is limited to the difference between these amounts.

For example, suppose you attend a charitable fundraising dinner. You pay $200, but the charity values the meal at $50. In this case, your deduction is limited to $150. Low-cost trinkets and nominal gifts, such as a mouse pad featuring the charity’s logo, won’t reduce your deduction.

Volunteer Services

Unfortunately, you can’t deduct the value of the time you spend helping out a qualified charity. But you may be eligible to write off out-of-pocket expenses you pay on behalf of the organization. This includes such items as travel, mailing costs and lodging at a convention where you’re an official delegate. But travel expenses aren’t deductible if the trip is merely a disguised vacation.

If you have to buy special clothing for your charitable activities — such as a Boy Scout or Girl Scout uniform for a troop leader — the cost is deductible. And any uniform cleaning costs also may be deductible as a miscellaneous expense, subject to the usual 2%-of-AGI floor.

Donor-Advised Funds

A donor-advised fund may appeal to someone who wants to retain some control over how the charity will spend his or her contributions. Typically, these funds are established with a reputable institution that vets charities for you and doles out money based on your recommendations. A minimum deposit of at least $5,000 may be required.

As with other donations to qualified charities, contributions to a donor-advised fund are fully deductible within the usual rules and limits. Donor-advised funds are usually easy to set up and maintain because the institution does all the administrative work for you. If you want to stay out of the limelight, you can even arrange to make your gifts anonymous. The increase in the popularity of donor-advised funds has been documented in the Giving USA reports in recent years.

Booster Clubs

Do you support your alma mater or a local college by contributing to its athletic booster club? Typically, these clubs enable you to purchase preferred seating at the school’s sporting events. For example, booster club members might receive priority ticket ordering privileges for home football and basketball games.

Under the current rules, you can deduct 80% of the cost of a donation made to a booster club. Any part of the payment that goes toward the purchase of actual tickets is nondeductible. But you might want to grab this tax break while it’s still available: The Obama administration has advocated its repeal and support for repeal is also growing in Congress.

Conservation Easements

Usually, you must give something away in order to claim a charitable donation deduction. However, under the rules for conservation easements, you can donate an interest in real estate to a qualified organization, such as a government unit or publicly supported charity, without relinquishing ownership and still qualify for a deduction. The donation generally preserves or protects the land or building in its current state so it can be viewed or studied.

The amount of the deduction is based on the difference between the fair market value of the land with and without the easement. Under special rules, the annual deduction is limited to 50% of AGI (or 100% for farmers and ranchers), as opposed to the usual 30%-of-AGI limit. Any excess may be carried forward for up to 15 years instead of five years. This tax break was recently made permanent by the Protecting Americans from Tax Hikes Act of 2015.

The catch is that the gift must be made in perpetuity. In other words, you or your heirs can’t alter the property or rescind the organization’s rights to the property at a later date.

Considering a Charitable Donation?

There are many creative gifting options available to philanthropic individuals — and many types of donations also qualify for a tax break on your federal return. But special tax rules may apply, so consult with a tax adviser to help ensure that your donation is deductible and your recordkeeping is sufficient.

Outsourcing is Not a Bad Word

Posted on August 10, 2016July 23, 2024 by Debra Barcuch

Professional Service Organizations (PSO) often deal in Human Capital (i.e. they sell time), which creates pressure to manage quickly but not always effectively. Even as they advise business owners, leaders in a PSO neglect many of the same operational and financial issues in their own organizations. Before client service and profits begin to decline, PSO leaders must identify their operational inefficiencies and decide if they have the resources internally or externally to address them. A well-managed PSO anticipates change with the right key performance indicators — helping leaders look ahead instead of always over their shoulders.

Outsourcing has gotten a bad reputation ever since it became interchangeable with the concept of sending services to cheaper third-world countries — everything from IT help desks to customer service centers, simple tax returns and even some forms of legal assistance.

When we talk about outsourcing, we still use the term in a traditional sense, which is the delegation of non-core functions that will positively support firm revenue and professional or owner productivity. Commonly in small to mid-sized PSOs, such functions can include accounting and payroll, HR, IT and marketing.

At a certain scale, organizations will choose to manage such functions in-house. As a rule, however, growing companies can ramp up faster through an effective arrangement with outside consultants and vendors. The best outsourced partnerships act just like an in-house department with the same level of dedication and collaboration, but without the same overhead costs. In addition, the experts in these functions can educate leaders on KPIs, efficiencies, product and process selection and ultimately the selection of in-house staff when the time is right.

Some outsourcing functions, such as accounting and payroll, also provide a level of risk management by delegating sensitive financial and benefit information to highly trained professionals who consistently perform these functions for a variety of clients. Of course, you will want to obtain referrals and pursue due diligence to secure the right vendor relationship — one that understands your industry, workforce regulations or financials.

Often smaller companies will hire an office manager to handle their accounting, billing, taxes and payroll functions. However, growth in clients and employees quickly places a large burden on the original office manager to keep up with A/R and collections, payroll changes and financial reporting.

Rather than continue to hire support staff, PSOs should hire for the position most needed and augment back-office needs with services from their CPA. This move keeps the ratio of billable staff high, which leads to positive revenue per billable consultant and higher utilization.

Not all CPAs are equal in the level of accounting, payroll or tax services they can offer. Some provide the minimum in bookkeeping while others can support strategic planning, CFO-level consulting and related automation to increase the efficiency of KPI reporting and analysis.

A big question for owners is how well the outsourced relationship will align with existing processes, staff and the overall business model. In fact, will the outsourced relationship make the organization more efficient or just more expensive?

Here are the benefits you should look for:

Owners and senior staff can focus on core, billable services
Processes are added that increase efficiency and ease of reviewing ROI
Communication is seamless and timely
The link between business goals, operations and profits improves
Leaders are updated on changes or opportunities to optimize the service

At Cornwell Jackson, our tax and business services teams have worked with clients for many years to optimize back-office functions, but also assist with business strategy and planning. We have supported PSOs in determining the best KPIs, the optimal level of staffing and timely introduction of accounting tools and processes that enhance their growth. For more information on how your PSO can face today’s growth challenges head-on with a qualified outsourced relationship, contact us.

Mike Rizkal, CPA is a partner in Cornwell Jackson’s Audit and Attest Service Group. In addition to providing advisory services to privately held, middle-market businesses, Mike oversees the firm’s ERISA practice, which includes annual audits of approximately 75 employee benefit plans. Contact him at mike.rizkal@cornwelljackson.com.

Employer Proved COBRA Notice WAS Mailed to Employee

Posted on August 8, 2016 by Debra Barcuch

Federal Court

In a recent case, a federal district court ruled that an employer didn’t violate the Comprehensive Omnibus Budget Reconciliation Act (COBRA) — even though an employee who resigned from the company claimed that she never received notices that she was entitled to continue her health insurance benefits.

COBRA Facts

COBRA was passed in 1986 to provide continuation of group health coverage that otherwise might be terminated.
Employers with 20 or more employees are generally required to offer COBRA coverage and notify employees of its availability.
COBRA gives certain former employees, retirees, spouses, former spouses and dependent children the right to temporary continuation of health coverage at group rates. This is only available when coverage is lost due to specific “qualifying events.”
Qualifying events include voluntary or involuntary termination for reasons other than gross misconduct, reduction in hours, divorce, death of the covered employee and other situations.
Group health coverage for COBRA participants is usually more expensive than coverage for active employees. However, it’s generally less expensive than individual health coverage.

— Source: The U.S. Department of Labor

Under the law:

A plan administrator is required to give each participant a notice of certain health insurance coverage rights 44 days after a “qualifying event,” such as the termination of the participant’s employment.
If a plan administrator fails to provide the required COBRA notice, it may be “personally liable to such participant or beneficiary in the amount of up to $110 per day from the day of such failure.”

Facts of the Case

The employer submitted as evidence an affidavit by the delivery manager of its plan administrator, who is responsible for ensuring that COBRA notices are sent to departing employees, as directed by the employer. The affidavit stated that based on the delivery manager’s review of the computer records, the COBRA notices were sent to the employee by regular mail on March 7, 2014, and on February 17, 2015.

Court’s Decision

According to the U.S. District Court for the Western District of Michigan, the affidavit properly supported the employer’s contention that it complied with COBRA by having notices mailed to the employee.

The court noted that several other courts have specifically found that: “Several courts have specifically found that employers are in compliance with Section 1166(a) when they send COBRA notices via first class mail to an employee’s last-known address.” (Perkins v. Rock-Tenn Services, Inc., DC MI, 1:15-cv-8, 6/6/16)

Bottom line: The fact that the employee didn’t receive the COBRA notices didn’t mean that the employer failed to comply with the law. The court stated there was “no genuine dispute that (the company) complied with COBRA.”

Documentation Is Key

Many employers do their best to provide required COBRA notices to employees — but some fall short when it comes to documenting that notices were sent. If a federal government investigator requests proof that you mailed notices, you’ll need to provide it. So you must document the sending of notices. And you should adhere to the established procedures you have in place.

For more information, consult with your CJ Employee Benefits specialist, HR professional or employment attorney.

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