March 2017

Tax Victory for Homebuilders in Accounting Stand-Off

Posted on March 13, 2017July 22, 2024 by Debra Barcuch

In a significant case, homebuilders that want to realize income under the completed contract accounting method based on an entire development won a victory.

The United States Court of Appeals for the Ninth Circuit upheld a lower court ruling affirming that a homebuilding group could defer tax under the completed contract method rather than use the percentage-of-completion accounting method.

Background

A long-term contract covers the manufacture, building, installation, or construction of property, if not completed in the tax year in which the contract is signed. Although there are certain exceptions, contractors with these contracts generally must use the percentage-of-completion method, realizing income over time.

Under the regulations for long-term contracts, a job is complete on the earlier of:

1. When the subject matter of the contract is used by the customer for its intended purpose and at least 95% of the total allocable contract costs have been incurred by the taxpayer (the 95% test), or

2. When there is final completion and acceptance. With the completed contract method, however, contractors don’t report any income until a contract is complete, although payments are received before completion. The completion date is determined without regard to whether secondary items in the contract have been used or finally completed and accepted.

The completed contract method may be engaged instead of the percentage-of-completion method in home construction and other real property construction contracts if the contractor:

Estimates that the contracts will be completed within two years of the start date, and

Meets a $10 million gross receipts test. A home construction contract is one where 80% or more of the estimated total contract costs is reasonably expected to be attributable to the building, construction, reconstruction, or rehabilitation of dwelling units contained in buildings containing four or fewer dwelling units, and to improvements to real property directly.

Facts of the Case

Shea Homes Inc. and several subsidiaries formed an affiliated group of corporations. The group built and sold homes in master planned community developments in Arizona, California and Colorado. The communities ranged in size from 100 homes to more than 1,000. The group’s business model emphasized the special features and amenities of master planned communities, which can include parks, golf courses, lakes, bike paths, and jogging trails.

The purchase price of each home included the building, lot, improvements to the lot, infrastructure and common area improvements, financing, fees, property taxes, labor and supervision, architectural and environmental design, bonding and other costs. Income from the sale of homes was based on completion of the entire development, rather than on the sale of each individual home. The IRS disagreed with the group’s use of that accounting method and assessed deficiencies. Eventually, the case went to court.

Round 1. The Tax Court looked at eight representative developments out of 114 that the group built during the tax years in question.

The group contended that completion and acceptance didn’t happen until the last road was paved and the final performance bond required by state and municipal law was released.

The IRS argued that the subject matter of the taxpayers’ contracts consisted only of the houses and the lots upon which the houses were built. Under the tax agency’s interpretation, the contract for each home met the completion and acceptance test when escrow was closed for the sale of each home. It also said that these contracts, which were entered into and closed within the same tax year, weren’t long-term contracts.

But the U.S. Tax Court upheld the group’s interpretation of the completed contract method. It also held that the subject matter of the contracts consisted of the home and the larger development, including amenities and other common improvements.

The court rejected the IRS argument that the subject of the contract was just the lot and the house, and that the common improvements in the development were only secondary items that didn’t affect completion of the contract.

Court’s Interpretation of the Primary Subject

The primary subject matter of the contracts included the house, lot, improvements to the lot, and common improvements to the development, the court ruled. The amenities were crucial to the sales effort and buyers’ purchase decisions as well as to obtaining government approval for the development. Accordingly, the amenities were an essential element of the home sales contracts.

Round 2: On appeal, the IRS tried a different argument. It conceded that the group’s home construction contracts encompassed more than just individual homes and lots and included common improvements of each planned community that the group was contractually obligated to build.

But it asserted that the group had applied the 95% test incorrectly.

The IRS argued that each contract pertained to the particular home and lot plus the common areas, but not the other homes in the community. By taking this approach, the IRS reasoned that the 95% test would be met only when the group incurred 95% of the budgeted costs of the home, lot and common amenities, but not the costs of the other homes.

The Ninth Circuit Court didn’t buy that argument. It said that the group’s application of the 95% test clearly reflected income because the purchasers of the homes were contracting to buy more than the homes’ mere “bricks and sticks.” . They were paying a premium because they expected to enjoy benefits and a certain lifestyle from the community’s amenities.

The Ninth Circuit affirmed the Tax Court’s decision.

A Victory for Deferring Taxes

This case clearly signals a victory for homebuilders that want to realize income under the completed contract method based on an entire development, not the separate sales of individual homes. However, other considerations may come into play. Consult with your tax advisor about the facts of your specific situation. (Shea Homes, Inc., No. 14-72161, CA-9, 8/24/16).

Another Circuit Court Sides with the IRS

The IRS prevailed in a similar case, but with a couple of important differences.

The Fifth Circuit Court of Appeals upheld a U.S. Tax Court decision that a residential land developer’s sale and custom lot contracts constituted long-term construction contracts, but weren’t home construction contracts as defined by tax law. Thus, the developer couldn’t use the completed contract method.

There are two critical distinctions in this case from the Shea Homes case before the Ninth Circuit Court of Appeals:

1. The taxpayer in this case wasn’t a homebuilder, but rather a land developer that sold finished lots to builders that sold the homes to consumers.

2. The tax deferral resulting from the use of the completed contract method by the Shea group was, on average, less than five years. In contrast, the deferral period in the Fifth Circuit case was much longer in a number of instances. (Howard Hughes Company, LLC, 805 F.3d 175, CA-5, 10/27/15)

Court: Outsourced Employees Count for COBRA Purposes

Posted on March 13, 2017July 22, 2024 by Debra Barcuch

A U.S. Appeals Court recently ruled that the outsourced employees of a staffing company did count for purposes of determining whether the company met the small employer exception of the Consolidated Omnibus Budget Reconciliation Act (COBRA). Therefore, the court found the company was subject to the law, and imposed penalties due to the company’s failure to provide a COBRA notice to a terminated employee.

Facts of the Case

A sales manager was employed by a staffing company and was covered by its group health plan.

The employer terminated the sales manager’s employment on January 6, 2012, and cancelled his medical coverage retroactively for the month of January even though his final paycheck had a deduction of $467 for “health.”

The company didn’t provide the employee with a COBRA notice about his right to continuation of coverage. It relied on the small employer exception, which exempts employers with fewer than 20 employees from COBRA requirements.

In response, the employee filed a lawsuit, alleging that the small employer exception didn’t apply to the company, and it had violated the law by failing to provide him a COBRA notice.

The company argued that it employed fewer than 20 employees, and the 396 employees they outsourced to clients didn’t count. It claimed that there was no evidence that Congress intended COBRA to apply to staffing companies that have only a few full-time employees in the company office (such as the sales manager), but also have other outsourced workers with no insurance benefits whose work is directed by the company’s client employers.

The problem: The outsourced employees in this case remained on the staffing company’s payroll and were recruited, screened, hired, trained and supervised by the company even though they performed services for its clients.

The U.S. District Court held that the company’s outsourced employees were its common-law employees, and as a consequence, COBRA’s small employer exception didn’t apply to the company. Thus, the court imposed COBRA penalties of $110 a day on the company and its owner due to its failure to provide a COBRA notice to the terminated employee.

Outsourced Employees

On appeal, the Eleventh Circuit agreed with the district court decision and held that COBRA’s small employer exception didn’t apply to the staffing company. The appellate court reasoned that if the outsourced workers were counted along with the company’s full-time employees, they indisputably employed significantly more than the requisite 20 employees to be subject to COBRA.

The court also noted the company “held itself out as the employer of the staffing workers by claiming federal tax credits for them.”

Although the outsourced workers were at other job sites, the evidence indicated that they remained the staffing company’s employees for purposes of COBRA. Thus, the court affirmed the district court’s imposition of penalties for failing to provide the employee a COBRA notice.

Was it a Qualifying Event?

For COBRA purposes, a “qualifying event” includes termination of an employee “other than by reason of such employee’s gross misconduct.” In this case, the employer argued that the sales manager’s termination wasn’t a qualifying event under COBRA because he was terminated for “gross misconduct.”However, the court also rejected this argument. It stated that the evidence suggested the sales manager was fired because he missed his sales quota (in other words, he was fired for unsatisfactory job performance rather than misconduct). (Virciglio v. Work Train Staffing LLC, 2016, WL 7487725)

Basics about COBRA

COBRA requires group health plans to offer continuation coverage to covered employees, former employees, spouses, former spouses and dependent children when group health coverage is lost due to certain specific events.

Those qualifying events include:

Death of a covered employee, Termination or reduction in the hours of a covered employee’s employment for reasons other than gross misconduct, A covered employee becoming entitled to Medicare, divorce or legal separation of a covered employee and spouse, and A child’s loss of dependent status (and coverage) under the plan. COBRA sets rules for how and when continuation coverage must be offered and provided, how employees and their families may elect continuation coverage, and what circumstances justify terminating continuation coverage.

Employers can require individuals to pay for COBRA continuation coverage. The premium the employer charges can’t exceed the full cost of the coverage, plus a 2% administration charge.

COBRA generally applies to private-sector group health plans maintained by employers with at least 20 employees on more than 50% of its business days in the previous calendar year. Both full and part-time employees are counted. Each part-timer counts as a fraction of a full-timer, with the fraction equal to the number of hours that the part-timer worked divided by the hours an employee must work to be considered full time.

Notice Responsibilities

Group health plan administrators must give each employee and each spouse of an employee who becomes covered under the plan a general notice describing COBRA rights. The general notice must be provided within the first 90 days of coverage.

After receiving a notice of a qualifying event, the plan must provide the qualified beneficiaries with an election notice, which describes their rights to continuation coverage and how to make an election. The election notice must be provided to the qualified beneficiaries within 14 days after the plan administrator receives the notice of a qualifying event.

— Source: U.S. Dept. of Labor, “Employer’s Guide to Group Health Continuation Coverage under COBRA”

Issues to Keep in Mind

COBRA’s small employer exception focuses on the total number of employees — not just on the number covered by the health plan. This court case illustrates that employee status isn’t determined on the basis of a worker’s title or job location, but on factors enumerated by IRS and the courts.

Although the court didn’t address the issue, it would appear that the outsourced employees wouldn’t only be counted for purposes of the small employer exception, but they also would be entitled to COBRA rights to the extent they participated in the company’s group health plan and experienced a qualifying event under COBRA.

If you have questions about your company’s responsibilities under COBRA, consult with your HR or employee benefits advisor or your employment attorney.

Revised OSHA Regs Have Kicked In

Posted on March 10, 2017 by Debra Barcuch

The first part of the new OSHA “illness and injury” reporting regulations is straightforward enough. It states that those who are already required to file these reports must now submit the forms electronically, via a secure OSHA website. Companies not currently required to file injury and illness reports aren’t affected by the new rules.

Electronic reporting, says OSHA, will allow the agency to “use its enforcement and compliance assistance resources more efficiently.”

Electronic Filing Timetable

The requirement to report electronically varies by the size of the company, which is calculated according to its peak employment during the prior calendar year. Be aware that a single employer can have more than one establishment, defined by OSHA as “a single physical location where business is conducted or where services or industrial operations are performed.”

Companies with at least 250 employees must electronically submit injury and illness information from OSHA forms 300, 300A and 301. These companies must begin submitting information from form 300A electronically as of July 1, and information from all forms by July 2018.

Smaller companies (those with at least 20 employees) are also subject to the same timetable if they operate in one of 66 industries deemed by OSHA to be “high risk.” These industries range from agriculture to waste treatment, from psychiatric and substance abuse hospitals to museums. Even if you don’t think of your industry as “high risk,” it would be prudent to reference OSHA’s classification system.

Companies with fewer than 20 employees that are already subject to OSHA reporting in non-high-risk industries can continue reporting on paper forms.

Combating Retaliation

The thornier provision of the new OSHA regulations is intended to improve on certain existing rules which were put in place to prevent employer retaliation after an employee reports a work-related illness or injury. Before the new regulations took effect, OSHA was limited in its ability to punish an employer that it believed had discharged or discriminated against an employee based on a complaint. First, the employee needed to file a complaint with OSHA within a month of the alleged retaliation.

Under the new rule, OSHA will be able to go after employers it believes has retaliated, even without an employee complaint, and even if the employer “has a program that deters or discourages reporting through the threat of retaliation.” This change, OSHA believes, gives the agency “an important new tool in encouraging employers to maintain accurate and complete injury records.”

What Will OSHA Look for?

A key area that OSHA will review in looking for retaliation is whether a company has a post-accident drug testing policy. The mere existence of a policy isn’t problematic but might be if an employer uses it to threaten employees who file work-related accident or injury reports. Here’s OSHA’s statement: “Drug testing policies should limit post-incident testing to situations in which employee drug use is likely to have contributed to the incident, and for which the drug test can accurately identify impairment caused by drug use.”

OSHA also states that “drug testing that is designed in a way that may be perceived as punitive or embarrassing to the employee is likely to deter injury reporting.”

Before OSHA can claim that an employer’s post-accident drug testing policy is evidence of the intent to discourage accident reporting, the agency has to make a reasonable case. How? An example would be when an accident involves more than one employee, but only the employee who reported the accident was subjected to a drug test.

Root Causes

Suppose, on the other hand, OSHA concludes that the employer’s drug-testing policy serves “as a tool to evaluate the root causes of workplace injuries and illness in appropriate circumstances,” as stated in agency guidelines. In that case, it would likely not be troubled by such a policy.

Employers may also protect themselves by establishing formal and logical criteria that may trigger drug testing. For example, when an accident results in a minimum level of property damage or severity of injury, a drug test will be the norm.

In addition, for employers that have a mandatory post-accident drug testing requirement, periodic checking to see if the policy has positively resulted in curbing future accidents may be helpful. In cases where no positive impact is discernible, employers might consider eliminating the policy.

Finally, be sure you’ve complied with the longstanding OSHA requirement that you post OSHA’s Job Safety and Health “It’s the Law” poster at your worksite. This is a list of worker rights that includes employees’ ability to “raise a safety or health concern with your employer or OSHA, or report a work-related injury or illness, without being retaliated against.”

Beat OSHA to the Punch

With OSHA heating up its efforts to find and eliminate retaliation, employers would be wise to proactively review their policies when an injury or illness report is filed. Even where there’s no intent to retaliate, if the appearance of “payback” is there, you could be in hot water. Remember, OSHA no longer requires an employee complaint if it wants to raise the hood on your processes and take a look. Beat them to the punch by ensuring your company gets and stays in compliance.

SCENARIO #4 – Sale of Proved Up vs. Undeveloped Interests

Posted on March 10, 2017July 23, 2024 by Debra Barcuch

The working interest owner of a portfolio of proved up leases has fully recovered its cost of the leasehold through depletion and would like to sell its holdings at a gain. The leases have increased in value because they have proven that there is oil and gas in economically viable quantities but all well locations have not been drilled.

There are two components to the gain. The first is actual appreciation of the property, relating to the increase in value from proving up the non-drilled (i.e. undeveloped) portion of the leases. The second is a result of recovering the costs the working interest owner has in the property via depletion. With proper planning, the owner will experience two different tax rates. Any gain received on the appreciation in value related to the undeveloped leasehold will be taxed at capital gains rates. However, the gain attributable to the producing leasehold as a result of recovering costs through depletion will be taxed as ordinary income.

To maximize the capital gains treatment, the selling party will try to allocate as much value as possible to the nonproducing leases in the purchase agreement and as little as possible to the proved up leases. The buyer may be more interested in allocating value to the physical equipment on the producing leases in order to accelerate cost recovery through depreciation and depletion. It can be a tricky negotiation process, but can be sweetened for the seller by one more possible option.

Mineral interests are considered real property and qualify for like-kind exchange treatment (1031s). If the nonproducing piece of the transaction is significant, the seller can shelter gains through a like-kind exchange of real property (e.g. hotels, more raw land, apartment buildings, etc.). The exchange may increase the value of the gain in the long run, depending on the property exchanged. The seller must disclose to the potential buyer that a 1031 exchange is involved and must draft the contract properly to shelter the nonproducing portion of the property. To the extent the seller receives cash as part of the deal or has too large a percentage of value allocated to producing property, the transaction may have limited tax deferral options as a 1031 exchange.

Conclusion: For the seller of proven leases with significant undeveloped acreage, there are significant tax planning opportunities depending on how the contract is written. Proper planning may result in shifting of gain from ordinary rates to long term capital gains rates. The seller may also choose to pursue a like-kind exchange of the mineral rights for another qualifying real estate investment. This option can shelter the gains while adding a tangible asset to the seller’s portfolio.

To view other scenarios and learn more about this topic, visit: Oil & Gas Update: Tax Implications of Buying and Selling Mineral Rights

The oil and gas industry has experienced booms and busts of varying lengths since the dawn of mineral exploration. The current climate for O&G suggests continued consolidation, however forecasts by industry experts anticipate the boom may be back by 2018. For any owners or buyers of mineral interests, the market may be ripe for making deals now — with a careful eye toward the tax implications of buying and selling mineral rights. No two deals are alike, and it’s important to learn the potential tax impact and the types of taxes you may be paying.

Download Now: Oil & Gas Update: Tax Implications of Buying and Selling Mineral Rights

Scott Allen, CPA, joined Cornwell Jackson as a Tax Partner in 2016, bringing his expertise in the Construction and Oil and Gas industries and 25 years of experience in the accounting field. As the Partner in Charge of the Tax practice at Cornwell Jackson, Scott provides proactive tax planning and tax compliance to all Cornwell Jackson tax clients. Contact him at Scott.Allen@cornwelljackson.com or 972-202-8032.

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

Posted on March 8, 2017 by Debra Barcuch

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:

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).
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.
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.

Q&A on Potential Border Taxes

Posted on March 8, 2017 by Debra Barcuch

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.

Is the United States Declaring War?

Don’t expect other countries to take a new U.S. tariff plan lying down.

Foreign nations could initiate legal actions in U.S. courts or through the WTO. What’s more, countries like China or Mexico could respond with their own tariffs on specific companies and goods. Of course, some nations already have tariffs in place, such as the Chinese levy on imported automobiles.

There’s no way of knowing what the full impact of a global trade war would be. But most economists believe there would be more losers than winners once the dust settles.

Remember RMDs this Tax Season

Posted on March 6, 2017July 22, 2024 by Debra Barcuch

Did you know that, once you turn age 70½, you must start taking mandatory annual withdrawals from your traditional IRAs, including any simplified employee pension (SEP) accounts and SIMPLE IRAs that you set up as a small business owner?

Beyond Your IRAs

Different rules and conditions may apply to RMDs from inherited accounts and your qualified employer-sponsored retirement plans, including:

401(k) plans,
403(b) plans,
457(b) plans,
Profit sharing plans, and
Other defined contribution plans.

If the retirement plan account is an IRA or the account owner is a 5% owner of the business sponsoring the retirement plan, the RMDs must begin once the account holder is age 70 ½.

The rules regarding RMDs can be complex, so be sure to contact your tax advisor to ensure you’re in compliance. These mandatory IRA payouts are called required minimum distributions (RMDs). And there’s a stiff penalty if you fail to take timely distributions.

Unfortunately, taking RMDs also will cause you to report additional taxable income on your federal income tax return. This will increase your federal income tax liability and possibly your state income tax liability, if applicable. Here are the rules regarding RMDs and a tax-smart strategy for meeting your RMD obligations.

If You Hit the “Magic Age” in 2016

Your first RMD must be taken by no later than April 1 of the year after the year you turn 70½. So, if you hit the “magic age” last year, the April 1 deadline for you to take your initial RMD is almost here. Remember, however, that this initial RMD is for the 2016 tax year, even though you still don’t have to withdraw it until April 1, 2017.

If you fail to withdraw the full RMD amount by April 1, 2017, the IRS will charge you a penalty equal to 50% of the shortfall (the difference between the RMD amount you should have taken for the 2016 tax year and the amount you withdrew through April 1, 2017).

If you already took one or more traditional IRA withdrawals last year that equaled or exceeded the amount of your RMD for the 2016 tax year, you can ignore the April 1 RMD deadline. Just remember to take your second RMD, for the 2017 tax year, by December 31, 2017. The calendar year-end deadline applies for all future years too.

Calculating RMDs

For the 2016 calendar year, the RMD amount that you must withdraw by April 1, 2017, if you turned 70½ in 2016 — or were required to withdraw by December 31, 2016, if you previously turned 70½ — equals the combined balance of all your traditional IRAs (including any SEP accounts and SIMPLE IRAs) as of December 31, 2015, divided by a life-expectancy factor based on your age as of December 31, 2016.

You can choose to withdraw that amount from any one of your traditional IRAs or from several IRAs. If your spouse also has one or more traditional IRAs set up in his or her own name, the RMD rules apply separately to those accounts. So, if your spouse turned 70½ last year, he or she may need to heed the April 1 deadline, too.

Important note: Roth IRAs established in your name are exempt from the RMD rules for as long as you live. So, you can continue to invest the full amount of your Roth IRA balances and continue to produce tax-free income throughout your lifetime.

Consider a Tax-Free Alternative

Instead of taking taxable RMDs, individuals who have reached age 70½ can make annual cash donations to IRS-approved charities directly from their IRAs. These so-called qualified charitable distributions (QCDs) come out of your traditional IRA free from federal income tax. (Other IRA distributions, including RMDs, are generally at least partially taxable.)

Unlike cash donations to charities, you can’t claim itemized deductions for QCDs. However, the tax-free treatment of QCDs equates to a 100% deduction, because you’ll never be taxed on those amounts.

As an added bonus, a QCD coming from a traditional IRA counts as a distribution for purposes of complying with the RMD rules. Therefore, if you turned 70½ last year and haven’t yet taken your RMD for last year, you can arrange for one or more QCDs between now and April 1, 2017, to meet all or part of your RMD obligation for the 2016 tax year. In other words, you can substitute one or more tax-free QCDs for the RMD that you would otherwise have to take by April 1, 2017, and pay taxes on.

Following QCD Guidelines

A QCD must meet the following requirements:

It can’t occur before the IRA owner turns 70½.
It must meet the requirements for a 100% deductible donation under the itemized charitable deduction rules. If you receive any benefits that would be subtracted from a donation under the normal charitable deduction rules — such as tickets to a sporting or social event — the IRA distribution isn’t considered a QCD, and you’ll owe taxes on it.

In addition, there’s a $100,000 limit on total QCDs for the year. But if you and your spouse both own IRAs, you’re each entitled to a separate $100,000 annual QCD limit.

Need Help?

Individuals who are 70½ or older should be aware of the RMD rules and the deadlines that apply in the year they turn 70½ and beyond. If you have questions or want more information about RMDs, or you’re interested in taking advantage of the QCD option, contact your tax advisor.

There’s Still Time to Set Up a SEP for 2016

Posted on March 5, 2017 by Debra Barcuch

Simplified Employee Pensions (SEPs) are stripped-down retirement plans intended for self-employed individuals and small businesses. If you don’t already have a tax-favored retirement plan set up for your business, consider establishing a SEP — plus, if you act quickly enough, you can claim a deduction for your initial SEP contribution on your 2016 tax return.

Putting SEPs to Work for You

Because SEPs are relatively easy to set up and can allow large annual deductible contributions, they’re often the preferred retirement plan option for self-employed individuals and small business owners — unless they have employees. (See “Beware of Requirements to Cover Employees” at right.)

The term “self-employed” generally refers to:

A sole proprietor,
A member (owner) of a single-member limited liability company (LLC) that’s treated as a sole proprietorship for tax purposes,
A member of a multimember LLC that’s treated as a partnership for tax purposes, or
A partner.

If you’re in one of these categories, your annual deductible SEP contributions can be up to 20% of your self-employment income. For a sole proprietor or single-member LLC owner, self-employment income for purposes of calculating annual deductible SEP contributions equals the net profit shown on their Schedule C, less the deduction for 50% of self-employment tax. For a member of a multimember LLC or a partner, self-employment income equals the amount reported on their Schedule K-1, less the deduction for 50% of self-employment tax claimed on their personal income tax return.

If you’re an employee of your own corporation, it can establish a SEP and make an annual deductible contribution of up to 25% of your salary. The contribution is a tax-free fringe benefit and is, therefore, excluded from your taxable income.

For 2016, the maximum contribution to a SEP account is $53,000. For 2017, the maximum contribution is $54,000. However, there’s no requirement to contribute anything for a particular year. So when cash is tight, a small amount can be contributed or nothing at all.

As with most other tax-advantaged retirement plans, assets in a SEP can grow tax-deferred, with no tax liability until withdrawals are made. Early withdrawals (before age 59½) are generally subject to a 10% penalty, in addition to income tax. Certain minimum distributions are generally required beginning after age 70½.

Beware of Requirements to Cover Employees

Establishing a SEP is more complicated if your business has employees. Specifically, contributions may be required for any employee who:

1. Is age 21 or older,

2. Has worked for your business during at least three of the past five years, and

3. Receives at least $600 of compensation.

Your business can deduct any contributions made for employees. Because SEP contributions made for employees vest immediately, a covered employee can leave your company at any time without losing any of his or her SEP money. For this reason, SEPs generally aren’t preferred by businesses with more than a few trusted employees.

Setting Up Your Plan

A SEP is fairly simple to set up, especially for a one-person business. Your financial advisors can help you complete the required paperwork in just a few minutes. A key benefit of SEPs is that you can establish your plan as late as the extended due date of the return for the year in which you claim a deduction for your initial SEP contribution.

For example, say your business is a sole proprietorship or a single-member LLC that’s treated as a sole proprietorship for tax purposes. If you establish a SEP and make your initial SEP contribution by April 18, 2017 — the deadline for filing your 2016 federal income tax return — you can deduct the contribution on your 2016 tax return.

Important note: If you extend your 2016 return, you have until October 16, 2017, to set up the plan and make a deductible 2016 contribution.

Need Help?

SEPs can be a smart way for many small businesses to save tax. You still have time to retroactively set up a SEP for the 2016 tax year and make a contribution that can be deducted on your 2016 return. If you have questions or want more information about SEPs and other small-business retirement plan options, contact your tax or financial advisor.

A Fresh Look at Incentive Compensation

Posted on March 4, 2017July 22, 2024 by Debra Barcuch

Bonuses: They’re not just for senior executives anymore. Many companies now offer performance-based incentives to rank-and-file personnel, too. But serious problems can occur when these incentives are too strong, poorly designed or insufficiently monitored.

For example, in a widely reported recent case, a large national bank set aggressive sales goals that came with financial rewards. To meet their goals, bank employees opened new credit card accounts in customers’ names without their knowledge or consent. The resulting fallout was a major embarrassment for the employer.

For some perspective, the accompanying table highlights results of the most recent WorldatWork member survey for 2017 variable pay budgets:

2017 Variable Pay: Budgets as a Percent of Total Compensation

Nonexempt hourly nonunion	Nonexempt salaried	Exempt salaried	Officer/executive
Mean	5.5%	6.3%	12.6%	36.6%
Median	5.0%	5.0%	12.0%	35.0%
Source: WorldatWork 2016-2017 salary survey

Desired Behavior

Before thinking about the potential size of a bonus award, it’s important to consider what kind of behavior your company is hoping to motivate. According to the same WorldatWork survey, most employers tie bonuses and incentive compensation to multiple objectives.

Specifically, 70% based bonuses on a combination of organizational, divisional and individual performance. About one-third use more limited criteria. The determination of whether a single criterion or multiple criteria should be used in the bonus formula, and which one or ones, typically varies according to two factors:

Company philosophy. You may want to instill in your workforce a spirit of cooperation by showing employees that, at least in part, their financial destinies are linked to coworker performance. If that’s the case, your bonus formula might include organizational performance metrics, such as overall customer relationships or how well the company communicates internally and externally.
Individualized assessment of employee motivation. If you focus on differences in how particular employees are motivated, you might conclude that individual performance is the appropriate criterion for some and organizational performance for others. Then your approach might be to custom-fit your bonus formula to the individual or department. For instance, you could base bonuses on production or on contributing new ideas.

Harmonized Pay Plan

When establishing (or overhauling) a bonus plan, it’s important to harmonize incentives with your strategy on base pay. Let’s say you try to give at least modest annual raises to employees whose performance is merely acceptable, and perhaps larger raises to top achievers. In that case, you might be less ambitious with your bonus program.

Obviously there are only so many dollars available in the compensation budget. Also, think about the message you want to communicate through your pay plan. If you give automatic raises, even small ones, you’re saying that, performance aside, all a person has to do to get a raise is stick around for another year. If what you’re really hoping to say is that improved performance will pay off, a small standard raise, even if paired with a small bonus, is unlikely to be motivational.

If you’ve moved away from the practice of cost-of-living style raises, you may be able to award larger bonuses that do have the power to motivate. Also, that doesn’t lock you into an ever-growing base pay commitment.

Keep in mind, a generous bonus could be a waste of money if its structure isn’t carefully considered and communicated effectively to employees. In designing the bonus, you need to determine the specific behavior you wish to reward, and how it will be measured. Then communicate your expectations clearly to your employees.

Avoiding Pitfalls

Be aware of the possibility that some employees will be motivated to produce results that look good in the short run, but could have harmful effects long term. This is of particular concern when financial criteria such as revenue generation or operating profits are involved.

For example, if sales goals are highly aggressive and the bonus will represent a substantial proportion of the employee’s income, the risk of ethical lapses can be high. That means careful supervision will be important — particularly with newer employees.

When bonuses are based on the bottom line, guard against a manager’s aggressive cost-cutting that can produce deceptive short-term results but negatively affect growth in later years.

It’s also critical that employees actually have the ability, within the confines of their job responsibilities, to influence the desired outcomes that you’ve communicated. For instance, if greater accuracy is a stated objective, is it reasonable to expect an employee to find a way to reduce errors?

Naturally, not all bonus criteria are measurable. Some goals, such as “improve the level of cooperation among employees in your department,” will require a subjective assessment. But you can still give midyear feedback and possibly coaching as well.

Finally, before an incentive compensation plan is cast in stone, you may find it useful to discuss it with the employee. People are motivated differently, so connecting on an individual basis where possible may be helpful. That gives you the opportunity to modify the plan if he or she raises important and valid concerns that hadn’t occurred to you.

Still Have Questions?

Designing an effective compensation program isn’t necessarily an intuitive process, but it also isn’t rocket science. Detailed written resources exist to help you establish general policies. Two places to find reliable help are the Small Business Administration website, at sba.gov, and SCORE.org, a nonprofit association dedicated to helping small businesses meet common challenges

SCENARIO #3 – Lessee vs. Developer

Posted on March 4, 2017July 23, 2024 by Debra Barcuch

A mineral rights lessee decides that the timing is right to flip his lease portfolio of undeveloped leases to a large oil and gas company, which in turn will develop the land for production. He isn’t in the business of E&P, but wants to retain an overriding royalty interest in the future oil or minerals produced. He negotiates a deal with the E&P company which will receive a 100% working interest (but receives only 80% of the revenue). In exchange, the mineral rights lessee will receive cash and carves out a 5% overriding royalty interest for himself (the remaining 15% of revenue will cover royalties owned by the original lessor).

In this scenario, the lessee/flipper carves out an ongoing interest in the property. Because the carved out interest has differing characteristics than the transferred interest, this transaction does not qualify for sale treatment. He does not get to deduct the cost of acquiring the mineral rights against the cash he receives from the E&P company. The cash payment is taxed as ordinary income and any royalties he receives in the future will be taxed as ordinary income. Essentially the transaction is treated as a sublease and taxed the same way as the original leasing transaction.

If, however, the lessee/flipper doesn’t retain any economic interest in the property, the transaction will essentially be treated as a property sale and he can offset proceeds by deducting his cost in acquiring the mineral rights. The net gain will be taxed as a capital gain.

Finally, assume the lessee/flipper decides to retain a fractional working interest rather than an override. He sells a 95% working interest to the E&P company and retains a 5% working interest. On the face of it, this transaction looks nearly identical to the transaction described above. However, since the retained interest has the same characteristics as the sold interest, the transaction qualifies as a sale. The proceeds the lessee/flipper receives will be offset by the proportionate share of the cost of acquiring the lease and the resulting gain will be taxed as a capital gain.

As you can see, there is a higher tax cost to retaining a piece of the action through a carve out — the royalties — because the lessee/flipper is gambling that the royalties from production will far outweigh his costs for retaining that 5%.

As for the E&P company, the cost of acquiring the leases are capitalized and will be recovered through depletion once the property begins production.

Conclusion: Retaining an overriding royalty interest after selling a working interest is a gamble that production will more than compensate for foregoing sale treatment.

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Background

Facts of the Case

Court’s Interpretation of the Primary Subject

A Victory for Deferring Taxes

Another Circuit Court Sides with the IRS

Facts of the Case

Outsourced Employees

Was it a Qualifying Event?

Basics about COBRA

Notice Responsibilities

Issues to Keep in Mind

Electronic Filing Timetable

Combating Retaliation

What Will OSHA Look for?

Root Causes

Beat OSHA to the Punch

Are any of your workers subject to wage garnishments?

Crucial Definition

Garnishment Limit

Child Support and Alimony

States Weigh In On Law to Promote Uniformity

Q. How would the proposed Trump plan work?

Q. What about the Republican plan?

Q. What is the history of imposing tariffs?

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

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

Q. Could Congress override Trump’s tariff plan?

Is the United States Declaring War?

Beyond Your IRAs

If You Hit the “Magic Age” in 2016

Calculating RMDs

Consider a Tax-Free Alternative

Following QCD Guidelines

Need Help?

Putting SEPs to Work for You

Beware of Requirements to Cover Employees

Setting Up Your Plan

Need Help?

2017 Variable Pay: Budgets as a Percent of Total Compensation

Desired Behavior

Harmonized Pay Plan

Avoiding Pitfalls

Still Have Questions?

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