Challenges to Overcome in 2017

Posted on April 28, 2017July 22, 2024 by Debra Barcuch

There’s reason for optimism among U.S. construction firms in 2017. Economists generally have predicted a 5% upswing in the value of starts this year.

However, the industry continues to grapple with issues involving fraud, worker safety, rising materials costs and unions. And there are also a couple of politically charged issues that might give a boost to the industry (see Two Irons in the Fire below).

Here are four key challenges your company may face as the year progresses.

1. Fraud Exposure

Kroll, an international firm specializing in security solutions, commissioned Forrester Consulting to survey 545 senior executives spanning various industries to determine how fraud affected them in 2016. The resulting annual Global Fraud & Risk Report indicates that incidents of fraud among survey respondents have increased 7% since 2015. An astounding 82% of respondents say they experienced fraud last year.

The types of fraud identified in the the study are far-ranging and include:

Bribery and corruption	Compliance or regulatory breach
Conflicts of interest	Information theft
Intellectual property theft	Internal financial fraud
Market collusion	Theft and misappropriation of funds
Money laundering	Vendor, supplier or procurement fraud

Despite such challenges, the construction industry’s exposure to fraud appears to be declining. Fewer construction, engineering and infrastructure firms reported fraud and cyber threats in 2016 than companies in any other industry represented in the survey. Specifically, fraud was reported by an average of 12% fewer companies in construction than reported on a global scale. Cyber security incidents were reported by 8% fewer construction companies than the average for all industries. Security issues were reported by 5% fewer respondents. The total number of fraud incidents in the industry also declined by 5%.

The reason for fraud most often cited by construction executives is high turnover. Former construction employees reportedly commit:

33% of frauds,
20% of cyber security breaches, and
25% of general security breaches.

Construction firms fight fraud by:

Improving employee training and whistle-blowing programs,
Screening job candidates more closely,
Taking measures in information technology security, and
Enhancing risk management techniques.

Increasingly, new technology is helping firms cope with cyber security threats.

2. Injuries and Safety

Firms are addressing safety risks with increased measures to protect workers from falls, dehydration and other common hazards. However, work-related musculoskeletal disorders haven’t received the same level of attention — at least not yet.

A recent study by the Center for Construction Research and Training shows that these disorders are especially challenging among construction workers. They include muscle, tendon, joint and nerve strain often caused by unusual posture and excessive bending or twisting. Frequent exposure to vibrations may also contribute.

The study examines workplace injury and illness data from various surveys spanning 1992 through 2014. Although the number of musculoskeletal disorders reported in 1992 was nearly three times the number for 2014, they still accounted for about 25% of all nonfatal construction-related injuries. That resulted in a total wage loss of $46 million for the year.

Sick leave due to on-the-job injuries can have a major impact on a firm’s bottom line. Health experts suggest that ergonomic solutions could help limit the number of musculoskeletal disorder cases in the construction industry. Training and using equipment for heavy lifting are also recommended.

3. Building Materials

Figures from the U.S. Bureau of Labor Statistics (BLS) in December 2016 showed that the price of construction materials increased 0.4% from the month before, according to an analysis by the Associated Builders and Contractors trade association. Compared to prices the year earlier, materials were 2.1% more expensive at the end of 2016. Much of the increase was attributed to rising energy costs, which spiked 23.1% in December.

After those figures were published, Moody’s Investors Service released their outlook for 2017. It projected that 2017 will be a profitable year for the building materials market due to construction spending levels and steadily climbing prices. That translates into a growing concern for contractors, especially with workers demanding higher wages.

If prices continue to be pushed upward, companies may have to scale back on project capacity or consider other budgetary cuts to ensure a profit. The situation could be exacerbated if prices escalate beyond expectations.

4. Union Membership

Union representation in the construction industry reached 14.6% in 2016, up 0.6% from 2015, according to the BLS. That upward trend followed two years of decline. In any event, the industry maintains one of the highest union membership rates of any private sector, with only utilities, transportation and warehousing, and telecommunications outpacing it.

The BLS report also indicates that union workers’ earnings were 47% higher than those of nonunion workers in the industry, but they rose at a slightly lower rate over the year. The weekly median pay in 2016 increased:

- 4.8% to $1,146 from $1,093 for union workers,

- 5% to $780 from $743 for nonunion workers, and

9.9% for all construction workers.

In addition to pay differences, union representation among construction workers is significant to firms because of differing approaches on legislative matters, safety requirements and project labor agreements. Dealing with union representation remains a sensitive issue for many construction firms.

The upshot: Experts are indicating guarded optimism for 2017. Although the forecast is far from gloomy, there will be challenges. It would be wise to proactively take steps to help keep your firm going strong.

Two Irons in the Fire

If they go forward, a couple of President Trump’s initiatives could bolster the construction industry in 2017 and beyond.

Pipelines: The president has given the green light to the Keystone XL and Dakota Access pipeline projects that were previously blocked. Besides the construction jobs that might be added to facilitate these projects, less regulation, especially in the area of environmental issues, could also result in increased opportunities for government contracts and other projects.

Border wall: The Customs and Border Protection section of the Department of Homeland Security has started to solicit proposals for building the president’s planned border wall. Even accounting for natural barriers, the construction of the wall would be a massive undertaking and would require a large influx of capital and manpower.

But in this uncertain political climate, it remains to be seen how these will actually play out.

Tax Court Interprets Exceptions to the PAL Rules for Rental Properties

Posted on April 25, 2017July 22, 2024 by Debra Barcuch

Real estate owners who rent their properties often incur tax losses due to depreciation write-offs and other allowable deductions. However, the ability to deduct those losses might be postponed indefinitely by the passive activity loss (PAL) rules. In general, these rules limit deductions for rental property PALs to the amount of income that you have from other passive activities — or until you dispose of the loss-producing property.

Exceptions to the PAL Rules for Rental Real Estate

Owners of rental real estate may qualify for two special exceptions to the IRS rules on passive activity losses (PALs). Those properties for which you qualify for either of these exceptions are exempt from the PAL rules, and you can generally deduct losses from those properties in the current year.

Small Landlord Exception

If you qualify for this exception, you’re allowed to currently deduct up to $25,000 of passive losses from rental real estate properties, even if you have no passive income. To qualify, you must own at least 10% of the property generating the loss, and you must “actively participate” with respect to the property in question.

To prove active participation, you don’t have to mow lawns or unclog drains. Instead, you must demonstrate that you exercise management control over the property by, say, approving tenants and leases, authorizing maintenance and repairs, and so forth.

Unfortunately, rental properties owned through limited partnerships are specifically excluded from the small landlord exception. Also, many owners will be ineligible, because the exception is phased out for taxpayers with adjusted gross income (AGI) between $100,000 and $150,000 — and it’s completely phased out for taxpayers with AGI at or above $150,000.

Real Estate Professional Exception

To qualify for this exception, you must spend more than 750 hours during the year delivering personal services in real estate activities in which you materially participate. In addition, those hours must be more than half the time you spend working during the year.

Next, you’ll need to prove that you materially participate in one or more rental properties. Examples of simple ways real estate owners can prove material participation are:

Spend more than 500 hours on the activity during the year.
Spend more than 100 hours on the activity during the year and making sure no other individual spends more time than you.
Make sure the time you spend on the activity during the year constitutes substantially all the time spent by all individuals.

You only have to meet one of these requirements to meet the material participation standard for an activity. Additionally, you can elect to combine all rental properties into a single group and treat the combined group as one property for purposes of passing one of the material participation tests. Unfortunately, rental property owners often have little or no passive income. But, if you qualify for one of the special exceptions to the PAL rules for small landlords or real estate professionals, you may be able to deduct losses in the year they’re incurred. (See “Exceptions to the PAL Rules” at right.)

If you’re unsure if you qualify for one of the special exceptions, consider these recent U.S. Tax Court cases that help clarify the IRS guidance.

Taxpayer Qualifies for Exception, Despite Lack of Recordkeeping

The Tax Court recently concluded that a taxpayer who kept poor records was able to provide sufficient oral evidence to qualify for the real estate professional exception to the PAL rules. (Beth Hailstock v. Commissioner, T.C. Memo 2016-146)

In this case, the taxpayer had quit her job with the City of Cincinnati and began buying real estate. Between 2005 and 2009, she had acquired over 30 properties that she rented (or attempted to rent). She spent more than 40 hours each week on the venture and had no other employment. Her tasks included: checking messages for work orders, purchasing materials and supplies, supervising workers doing renovations, and meeting with and conducting background checks on prospective tenants. However, the taxpayer didn’t maintain records of the time she spent on these activities.

However, the Tax Court concluded that the taxpayer’s oral testimony was sufficient to establish that she qualified as a real estate professional and that she met the material participation standard for each of her rental properties by passing the facts and circumstances test. Specifically, her testimony established the substantial amount of time and money that she spent on the rental properties and her extensive and time-consuming duties in operating them.

The Tax Court was also favorably impressed by the fact that the taxpayer reported sizable amounts of rental income for the tax years in question. Therefore, she was allowed to currently deduct her rental real estate losses under the real estate professional exception. However, the Tax Court warned her to keep contemporaneous time logs in the future to prove how much time she spent on the rental properties.

Important note: The taxpayer didn’t elect to aggregate all of her rental properties into one activity for purposes of applying the PAL rules. Therefore, she had to meet the material participation standard for each individual property in order for losses from each property to be exempt from the PAL rules.

No Exception Allowed for Exaggerated Time Logs

In another Tax Court decision, the taxpayers were a married couple who owned two rental properties: a former residence in Massachusetts and an interest in two apartment buildings in Cairo, Egypt. Here, the court concluded that the taxpayers didn’t qualify for the real estate professional exception. (Mahmoud and Jane Makhlouf v. Commissioner, T.C. Summary Opinion 2017-1)

For 2010, the taxpayers claimed substantial losses from the rental properties. They also claimed that they spent significant time managing the properties and, therefore, qualified for the real estate professional exception. To prove they met the material participation standard, the taxpayers provided spreadsheets that documented their heavy involvement in the rental properties.

The IRS had disallowed most of the rental losses on the grounds that the taxpayers didn’t qualify for the real estate professional exception. The Tax Court concluded that the taxpayers failed to prove that they spent more than 750 hours in real property rental activities in which they materially participated, because the hours summarized on their spreadsheets were inflated, duplicative and not supported by contemporaneous recordkeeping.

Married Couple Didn’t Qualify for Exceptions

The Tax Court again sided with the IRS in another case. Here, married taxpayers attempted to deduct losses from real estate activities, but the court concluded that the losses were limited under the PAL rules. (Mary and Bradley Hatcher v. Commissioner, TC Memo 2016-188)

In this case, the husband was a real estate loan originator. The small landlord exception was unavailable because the couple’s income was too high. The real estate professional exception was unavailable because the taxpayers failed to show that either spouse qualified as a real estate professional.

Although the husband actively participated in managing the rental properties and had previously originated real estate loans, he didn’t originate any such loans during the tax year in question or maintain any records to show how much time he devoted to his real estate activities.

His oral testimony also showed that he did not pass the more-than-750-hour test. So, the amount of losses the couple could deduct was limited to any income earned from other passive sources. The taxpayers generated no passive income for the tax year in question, so the PAL rules disallowed any write-offs from the rental activities.

Need Help?

For more information on deducting losses from rental properties or to determine whether your real estate activities qualify for special exceptions to the PAL rules, contact your tax advisor. He or she can help you navigate the guidance and substantiate any allowable deductions for rental property losses.

The Ins and Outs of Deducting Legal Expenses

Posted on April 21, 2017July 22, 2024 by Debra Barcuch

Legal expenses incurred by individuals are typically not currently deductible under the federal income tax rules. Instead, they’re most often treated as either personal outlays (which are nondeductible) or as part of the cost of acquiring an asset, such as real estate.

When Can You Claim a Nonbusiness Deduction for Legal Expenses?

As stated in the main article, an individual’s legal expenses aren’t usually deductible. But here are two more exceptions to the general rule that may apply, even if the expenses aren’t business-related:

1. Expenses for Production or Collection of Income and to Handle Tax Matters

You can deduct legal expenses incurred for 1) the production or collection of income, such as legal actions to collect unpaid wages and alimony, or 2) the determination, collection or refund of any tax. However, these types of legal expenses must be treated as miscellaneous itemized deduction items. Miscellaneous itemized deduction items can’t be deducted under the alternative minimum tax (AMT) rules and can be written off only to the extent they exceed 2% of your adjusted gross income under the regular tax rules.

2. Expenses for Certain Discrimination and Whistleblower Claims

You can claim “above-the-line” deductions for legal expenses incurred in certain discrimination lawsuits and for attempts to collect whistleblower awards. You don’t have to itemize expenses to benefit from above-the-line deductions — and they’re fully deductible under the AMT rules. In the latter situation, legal costs usually aren’t deductible right away; instead, they may be capitalized and amortized over a number of years if the asset is used for a business or rental activity.

A recent U.S. Tax Court decision and IRS Private Letter Ruling (PLR) showcase exceptions to the general rule and when taxpayers may be eligible for current deductions for legal expenses.

Tax Court Decision

In Ellen Sas v. Commissioner (T.C. Summary Opinion 2017-2), an employee who was fired by her employer was allowed to write off legal expenses as a miscellaneous itemized deduction.

Here, the taxpayer received a $612,000 bonus from her employer before being terminated for alleged breach of fiduciary duty. When the employer attempted to recover the bonus, the taxpayer counterattacked, alleging employment discrimination.

Eventually, all claims against the employee were dismissed, and she was allowed to keep the bonus. But she incurred almost $81,000 in legal fees — and wanted to deduct them on her personal tax return as part of the expenses for a business that she and her husband operated.

IRS auditors concluded that the legal expenses constituted unreimbursed employee business expenses, which should be classified as miscellaneous itemized deductions. This category of deductions can be claimed only to the extent that they exceed 2% of your adjusted gross income (AGI). But you’re allowed to combine unreimbursed employee business expenses with other miscellaneous itemized deduction items — such as job search costs, fees for tax advice and tax preparation, and expenses related to taxable investments — when attempting to clear the 2%-of-AGI threshold.

Important note: Miscellaneous itemized deductions are disallowed under the alternative minimum tax (AMT) rules. So, if you’re subject to the AMT, these deductions won’t benefit you.

The taxpayer took her case to the Tax Court. But it agreed with the IRS that the legal costs were unreimbursed employee business expenses because they arose from the taxpayer’s business of being an employee (albeit a former employee at the point they were incurred).

IRS Private Letter Ruling

In a recent PLR, the taxpayer had experience managing closely held companies, and he had agreed to serve as the managing shareholder of a newly formed corporation in exchange for a management fee. After another shareholder became dissatisfied with the corporation’s performance, the taxpayer was sued for alleged breach of contract, breach of fiduciary duty and fraud.

The taxpayer incurred legal fees to unsuccessfully defend against these charges and unsuccessfully appeal the initial court decision against him. In addition, he paid fees to accounting consultants and an expert witness. And, he had to pay court-ordered compensatory and punitive damages to his legal adversary, as well as the adversary’s legal fees.

The taxpayer wanted to deduct all of these expenses, which clearly originated in the conduct of his business as the managing shareholder of the troubled corporation. Therefore, the IRS concluded that the taxpayer’s payments to satisfy the final judgment against him (including compensatory and punitive damages and his adversary’s legal costs) and his own legal expenses and related costs to unsuccessfully defend against the claims could be currently deducted as business expenses.

Important note: This conclusion won’t necessarily apply to other taxpayers in the same or a similar situation. By requesting a PLR, a taxpayer asks the IRS, for a fee, to provide guidance on federal income tax questions. PLRs interpret and apply tax laws to that particular taxpayer’s specific set of facts. A PLR helps eliminate uncertainty before the taxpayer’s return is filed — and it’s binding on the IRS if the taxpayer fully and accurately described the proposed transaction in the request and carries out the transaction as described. Technically, a PLR can’t be relied on by other taxpayers. However, as a practical matter, PLRs are often used by tax professionals as guides to the IRS position on issues.

Business vs. Personal

Individuals will sometimes incur legal expenses that are legitimately business-related and, therefore, deductible. But, if you’re audited, the IRS will routinely disallow legal expense deductions unless you can adequately prove that the expenses are indeed business-related (including related to the business of being an employee). In the right circumstances, your tax advisor can help you put together evidence to support deductible treatment for legal expenses.

Time to Launch Your Summer Internship Program

Posted on April 17, 2017 by Debra Barcuch

This time of year there are around 30,000 internships posted online, according to Burning Glass Technologies, a labor market research firm. The top 10 categories are business operations, marketing, engineering, sales/business development, media/communications/public relations, data analytics, finance, information technology development (IT), arts and design, and project management.

How many of them will be successful, from the perspective of the employer — and the intern? The answer depends on how many employers think through what they want their interns to accomplish, and how much effort they’re willing to put into managing them.

The biggest mistake employers can make in bringing interns on board is to regard them merely as an inexpensive source of labor, worthy only of performing menial tasks to give a break to full-time staff. With that approach, not only will you have a disgruntled intern on your hands — who may leave you early — but you miss out on the chance to develop a potentially valuable new-hire down the road.

Not Your Personal Assistant

“Interns are there to learn about your business, not to replace your personal assistant,” advises one internship placement service.

It might be better to think of internships as a way to keep your talent pipeline flowing, or a no-fault audition for future employment.

Also, when interns are given the opportunity to learn how to do meaningful jobs, important tasks are accomplished that might otherwise have to be put off. You probably have potentially valuable, but non-urgent, jobs that nobody seems to have time to do. Often, it could be a research project that a smart intern could easily complete.

When an internship is structured to provide “meaningful” work (and it’s promoted that way), you’ll have a lot more highly qualified prospects knocking at your door. Also, keep in mind that students sometimes have more current technical skills in certain areas, such as computer applications and social media, than others who have been out of school for several years or more.

Getting the most out of an internship program requires identifying areas of need by surveying department managers, and then creating a job description. It also requires assigning responsibility for supervising the intern, ideally to a relatively junior (but well-regarded) manager with whom the intern will feel comfortable.

A common approach to internship design, particularly in smaller organizations, is creating a “rotating internship.” Structuring the program to move the intern between multiple departments can be an efficient way of filling manpower gaps caused by summer vacation schedules. It also allows the intern to gain a greater variety of experience — something interns generally seek.

What Attracts Interns

Here are some more features that prospective interns say are important to them:

A clear job description that lets them know, in advance, what they will be doing, as a way to seek a good fit before coming on board,
Meaningful work — even if a few unglamorous clerical tasks are assigned from time to time,
The chance to be a bona fide team member allowed to participate in relevant staff meetings,
Regular feedback and access to supervisors for guidance and mentoring, and
Reasonable compensation.

Yes, compensation. While interns generally aren’t expecting high pay, few will work for free. In fact, it may not even be legal to not pay an intern anything below minimum wage. In a for-profit setting, the Fair Labor Standards Act (FLSA) generally applies to interns. There are some exceptions, however.

Free Labor?

“The determination of whether an internship or training program meets the exclusion depends upon all of the facts and circumstances of each such program,” says the Labor Department (DOL). Here are six criteria the DOL uses in making the determination. The more of these points that apply, the stronger the case for exemption from the FLSA:

The internship, even though it includes work in the actual facilities of the employer, is similar to training which would be given in an educational environment;
The internship experience is for the benefit of the intern;
The intern doesn’t displace regular employees, but works under close supervision of existing staff;
The employer that provides the training derives no immediate advantage from the activities of the intern; and on occasion its operations may actually be impeded;
The intern isn’t necessarily entitled to a job at the conclusion of the internship; and
The employer and the intern understand that the intern isn’t entitled to wages for the time spent in the internship.

However, even if you might not be obligated to satisfy the same standards applicable to regular employees, consider that you might be limiting your pool of applicants by seeking only volunteers. And, if you run the program well, you’ll probably get more than your money’s worth.

How do you find qualified candidates? A basic web search using the phrase “how to find summer interns” yields links both to job matching services specializing in internships, as well as the top general job boards that post internship positions.

Spring Cleaning: When Can You Purge Your Old Financial Records?

Posted on April 14, 2017July 22, 2024 by Debra Barcuch

Feeling the urge to purge? April 18, 2017, was the deadline for individuals and C corporations to file their federal income tax returns for 2016 (or to file for an extension). Before you clear your filing cabinets of old financial records, however, it’s important to make sure you won’t be caught empty-handed if an IRS auditor contacts you.

Still Not a Paperless Society

E-filing is on the upswing. According to the Data Book released by the IRS in March, about 69% of tax returns were filed electronically in fiscal year 2016, up from about 65% in fiscal year 2014.

You might think those numbers suggest we’re close to becoming a paperless society, at least when it comes to filing income taxes. That would be a wrong assumption.

Even if you recently filed your 2016 tax return electronically, you probably printed out a hard copy for your files. Add that paper to the financial reports, bank statements, receipts and other documents you may have been holding onto for years and it’s likely your filing cabinets and closets are overflowing with paper.

For Individuals

In general, you must keep records that support items shown on your individual tax return until the statute of limitations runs out — generally, three years from the due date of the return or the date you filed, whichever is later. That means that now you can generally throw out records for the 2013 tax year, for which you filed a return in 2014.

In most cases, the IRS can audit your return for three years. You can also file an amended return on Form 1040X during this time period if you missed a deduction, overlooked a credit or misreported income.

So, does that mean you’re safe from an audit after three years? Not necessarily. There are some exceptions. For example, if the IRS has reason to believe your income was understated by 25% or more, the statute of limitations for an audit increases to six years. Or, if there’s suspicion of fraud or you don’t file a tax return at all, there is no time limit for the IRS to launch an inquiry.

Here are some basic guidelines for individuals.

Completed tax returns.

Many tax advisors recommend that you hold onto copies of your finished tax returns forever. Why? So you can prove to the IRS that you actually filed. Even if you don’t keep the returns indefinitely, you should hang onto them for at least six years after they are due or filed, whichever is later.

Backup records.

Any written evidence that supports figures on your tax return, such as receipts, expense logs, bank notices and sales records, should generally be kept for at least the three-year period.

Important note: There are some cases when taxpayers get more than the usual three years to file an amended return. You have up to seven years to take deductions for bad debts or worthless securities, so don’t toss out records that could result in refund claims for those items.

Real estate records.

Keep these for as long as you own the property, plus three years after you dispose of it and report the transaction on your tax return. Throughout ownership, keep records of the purchase, as well as receipts for home improvements, relevant insurance claims and documents relating to refinancing. These help prove your adjusted basis in the home, which is needed to figure the taxable gain at the time of sale, or to support calculations for rental property or home office deductions.

Securities.

To accurately report taxable events involving stocks and bonds, you must maintain detailed records of purchases and sales. These records should include dates, quantities, prices, dividend reinvestment and investment expenses, such as broker fees. Keep these records for as long as you own the investments, plus the statute of limitations on the relevant tax returns.

IRAs.

The IRS requires you to keep copies of Forms 8606, 5498 and 1099-R until all the money is withdrawn from your IRAs. With the introduction of Roth IRAs, it’s more important than ever to hold onto all IRA records pertaining to contributions and withdrawals in case you’re ever questioned.

If an account is closed, treat IRA records with the same rules as securities. Don’t dispose of any ownership documentation until the statute of limitations expires.

Issues affecting more than one year.

Records that support figures affecting multiple years, such as carryovers of charitable deductions, net operating loss carrybacks or carryforwards, or casualty losses, need to be saved until the deductions no longer have effect, plus seven years, according to IRS instructions.

For Businesses

The record-retention guidelines are slightly different for businesses. Here are the basics.

Employee records.

Keep personnel records for three years after an employee has been terminated. Also maintain records that support employee earnings for at least four years. This timeframe should cover various state and federal requirements. (However, don’t throw away records that might involve unclaimed property, such as a final paycheck not claimed by a former employee.)

Timecards specifically must be kept for at least three years if your business engages in interstate commerce and is subject to the Fair Labor Standards Act. However, it’s a best practice for all businesses to keep the files for several years in case questions arise.

Employment tax records.

Keep four years from the date the tax was due or the date it was paid, whichever is longer.

Travel and entertainment records.

For travel and transportation expenses supported by mileage logs and other receipts, keep supporting documents for the three-year statute of limitations.

Sales tax returns.

State regulations vary. For example, New York generally requires sales tax records to be retained for three years, while California requires four years, and Arkansas, six. Check with your tax advisor.

Business property.

Records used to substantiate the cost and deductions (such as depreciation, amortization and depletion) associated with business property must be maintained to determine the basis and gain (or loss) on the sale. Keep these for as long as you own the asset, plus seven years, according to IRS guidelines.

Proper Disposal Protocol

Regardless of whether you’re tossing out personal or business financial documents, always shred them thoroughly first. Also, use proper disposal protocol for any computers and other electronic equipment (such as printers and copiers) that may contain financial data. Simply deleting files using File Manager isn’t enough. Unless you use proper disposal protocol, tech-savvy hackers may be able to recreate sensitive data from the device’s hard drive when it was thrown out, donated to a charity, or returned to the lessor after the lease term expired.

If you have any questions regarding financial records retention, contact your tax advisor for more information.

Employer’s Parking Arrangement Doesn’t Qualify for Tax-Free Treatment

Posted on April 12, 2017 by Debra Barcuch

The IRS has issued an Information Letter that explains the tax treatment of an employer who provided parking to employees in an unconventional way. In the arrangement, the employer purchased parking spots from a parking vendor and then allowed employees who wanted to use the parking spots to pay the employer for them using the employees’ own after-tax compensation. The IRS stated the arrangement doesn’t qualify for tax-free treatment.

The Law

Under the Internal Revenue Code, employers that provide an employee with a “qualified transportation fringe” can exclude the benefit from the employee’s gross income. A “qualified transportation fringe” includes “qualified parking.” The tax code defines “qualified parking” as parking an employer provides that’s located on or near the employer’s business premises.

Parking is considered be provided by the employer if:

It’s on property that the employer owns or leases;
The employer pays for it; or
The employer reimburses the employee for parking expenses.

The Facts of the Case

Here are some of the details involved in this case:

The employer paid the parking vendor directly for the parking spots.
Employees who wished to use the secure parking had to agree, in writing, to reimburse the employer by having the monthly parking fee deducted from their paychecks in the month prior to using the parking.
The employees couldn’t get a refund of the withheld funds if they didn’t use the parking.
The cost of the parking was less than the federal statutory limit ($255 a month in 2017).
The employees weren’t given the option of choosing between taxable cash compensation and parking. As a result, the employer didn’t exclude the cost of the parking from the taxable wages of the employees who elected to use it. Instead, the employer simply deducted the cost of the parking from the employees’ after-tax wages.

The IRS Response

The employees who elected to use the parking spots asked the IRS whether the amounts deducted from their wages for parking could be excluded from their income and wages as a qualified parking benefit.

In responding, the IRS stated the arrangement didn’t meet the requirements to be considered qualified parking under the tax code. (IRS Information Letter 2017-0007) These type of letters are provided by the IRS National Office in response to requests from taxpayers for general information. They are for informational purposes only and don’t constitute a ruling.

The IRS noted that if the employer instead decided to reimburse employees for qualified parking expenses, it could do so either by providing the reimbursements in addition to the employee’s regular wages or, alternatively, the employer could provide the reimbursements in place of pay. Reimbursements provided in place of pay are called “compensation reduction arrangements.” Under compensation reduction arrangements, the employer permits the employees to elect to reduce their taxable compensation in order to receive tax-free reimbursements for parking expenses that the employees have actually incurred.

If you have questions about the tax implications of your fringe benefits (or of your employees), consult with your tax advisor.

Update on Home Mortgage Interest Deductions

Posted on April 10, 2017 by Debra Barcuch

If you own a home with a mortgage, you should receive an IRS form from your lender each year with information that is used to claim an itemized deduction for qualified residence interest. For 2016, that form should include additional information that could trigger unwanted attention from the IRS. Here’s what you should know about the IRS rules that apply to home mortgage interest deductions and the changes in the IRS mortgage interest reporting form.

IRS Rules for Deducting Home Mortgage Interest

Unlike most other types of personal interest, home mortgage interest that meets the definition of “qualified residence interest” can be claimed as an itemized deduction on your federal income tax return. Here’s a closer look at the terminology underlying this deduction.

A qualified residence includes your principal residence and up to one additional personal residence. If you own two or more additional residences, you can specify which one is treated as the second residence for each tax year for the purpose of applying the qualified residence interest rules.

Qualified residence interest is defined as interest on up to $1 million of “acquisition debt” plus interest on up to $100,000 of “home equity debt.”

Acquisition debt is debt that is:

Incurred to acquire, construct, or substantially improve a qualified residence, and
Secured by a qualified residence.

Home equity debt is debt (other than acquisition debt) that is secured by a qualified residence. Unlike acquisition debt, the proceeds from home equity debt can be used for any purpose without affecting the deductibility of the interest under the regular tax rules. However, interest on home equity debt is deductible under the alternative minimum tax (AMT) rules only to the extent the debt proceeds are used to acquire, construct or substantially improve a qualified residence.

Important note: If you’re married and file separately from your spouse, you can deduct half of the eligible mortgage interest paid on your separate returns.

Basic Reporting Requirements

By law, home mortgage lenders must provide certain information each year to borrowers on Form 1098, “Mortgage Interest Statement.” The IRS also receives a copy of this form, which includes the following information:

The name and address of the borrower,
The amount of interest received by the lender from the borrower during the previous calendar year, and
The amount of mortgage points received by the lender from the borrower during the previous calendar year and whether such points were paid directly by the borrower.

The IRS also may require additional information to be reported on Form 1098. For instance, IRS regulations require Form 1098 to include the borrower’s taxpayer identification number (TIN), which is the borrower’s Social Security Number if he or she is a citizen.

Recent Legislation Adds New Requirements

For Forms 1098 issued to payers after December 31, 2016, the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 added the following new information reporting requirements:

The mortgage origination date,
The outstanding principal balance, and
The address of the property that secures the mortgage (or a description if the property doesn’t have an address).

Home mortgage lenders must report the amount of the outstanding mortgage principal as of the beginning of the calendar year for which the Form 1098 is provided. Knowing the outstanding mortgage principal balance allows the IRS to more easily identify taxpayers who attempt to deduct interest on loan balances above the combined $1.1 million limit for acquisition debt and home equity debt.

Knowing the address of the property securing the mortgage allows the IRS to more easily identify taxpayers who attempt to claim mortgage interest deductions for more than two residences.

Effect on 2016 Tax Returns

Your mortgage lender should have included this additional information on the 1098 forms that were issued to you earlier this year. Those forms report information for calendar year 2016, and the IRS can use the additional information to check home mortgage interest deductions claimed on your 2016 federal income tax return. Those deductions present a potentially enticing audit target, because they cost the federal government over $300 billion of tax revenue each year.

Based on the additional information reported on your Form 1098 for 2016, the IRS will know if you claim mortgage interest deductions for more than two residences or interest deductions for more than $1.1 million of combined acquisition debt and home equity debt. These issues could trigger an audit — and result in an unfavorable outcome.

You also may raise a red flag if the amount of your qualified residence interest deduction differs from the combined mortgage interest reported on your Form(s) 1098. This sometimes legitimately happens if, for example, you have more than $1.1 million of combined acquisition debt or own more than two homes.

Get It Right

The bottom line is that the IRS now has the information to monitor qualified residence interest deductions more closely than in previous years. So, it’s important to understand the rules and calculate your deduction carefully.

Your tax advisor can help you comply with the IRS rules, including amending previous returns that may have been filed with incorrect information. Although the rules on qualified residence interest may seem straightforward, there are some lesser-known nuances that could affect the amount you can write off.

Avoid the Traps of Unequal Pay

Posted on April 10, 2017 by Debra Barcuch

On average, women are paid less than men, but the difference may be smaller than you think. You may have heard widely quoted statistics which can be misleading, such as the belief that women earn 76 cents for every dollar that men make. While men do make more, the gap narrows when you adjust for differences in job category and tenure. Still, a gap exists, and one compensation management software company calls it the “uncontrolled gender pay gap.”

That software company, PayScale, claims that when data is adjusted to allow an apples-to-apples comparison, women make about 98 cents for every dollar a man makes, although this varies by industry.

The gap might be smaller than previously thought, but is it justified? Pay equity advocates have had some recent successes in challenging common practices that may contribute to gaps, such as asking job candidates for their pay history before formulating a job offer. Specifically, the practice will be banned in Philadelphia in May. And beginning next year, employers in Massachusetts will face that restriction.

Locked In

The concern is that women are, in effect, locked in to lower pay scales due to past pay discrimination. Employers are sometimes reluctant to bring in a new employee at a substantially higher rate of pay than he or she is or was already making, if the purpose is only to keep new workers on par with current employees in similar jobs. That’s understandable, because paying more than appears necessary defies financial common sense. But there’s more to the story.

Given the philosophical diversity of the country, it’s unlikely that laws such as those enacted in Philadelphia and Massachusetts will take the entire country by storm. But even without such laws, “Employers should start thinking about the ramifications of stopping previous-pay discussions, whether or not their locality passes measures banning these inquiries,” according to the Society for Human Resource Management.

Why? For one thing, debate and discussion about this topic is building even in remote areas of the country. Over time, more female (and also some male) job hunters may simply decline to reveal their pay history.

Response Ready

There’s a good chance that, at some time in the future, you’ll encounter job applicants who simply won’t reveal their pay history. Suppose you get an application without pay data, from someone who, otherwise, seems well-suited to the position. Will you refuse to consider that person? If so, this could mean missing out on an excellent candidate. Instead, be prepared to continue assessing the candidate without regard to pay history.

You should already have some kind of system in place that you use to establish pay ranges for particular jobs, based both on the value of that job to the organization, and the prevailing pay for positions at your company. This is important even when you’re not hiring, because your current employees need to have some level of confidence that their pay isn’t arbitrarily determined.

By refusing to consider an applicant who won’t reveal his or her pay history, you could be doing your company a disservice. That is, you could miss out on hiring the best candidate for the job, and in the process, may even end up paying more than necessary to another applicant.

If a candidate you are interested in is reluctant to reveal his or her pay history, ask for a range, or general idea of what the person expects as a starting wage. If you end up in the same pay ballpark, you can proceed from there. Just make sure you go to the interview with some pay research under your belt, so you don’t undervalue the job or offer more than you should. Chances are, the applicant already has a good idea how much a job is worth, and so should you.

Armed with some research, you may be able to overcome concerns about a perceived “low” pay range by explaining your process for evaluating performance and the possible pay increases that can result from a strong performance review.

Gender Gap in Your Pay Scale?

Polls taken by PayScale reveal that many workers consider this a hot-button issue, even if you’ve never heard it mentioned. That’s why PayScale warns, “If your employees don’t think you’re doing enough to address gender inequity, they might already have one foot out the door.”

As mentioned earlier, do you pay less to a worker who has returned to a job after a long absence (typically a woman who took time off to raise children)? If so, consider whether time on the job improves performance. If not, does it really make sense to pay her less? You could find yourself accused of pay inequity, based on gender. The potential ill will is probably not worth the money saved.

Hiring the right people at the right pay is crucial to your organization’s success. Compensation and recruiting consultants can provide more insights on these topics if you are unsure about whether you’re doing the right thing.

How to Reduce Your Workforce Without Committing Age Discrimination

Posted on April 9, 2017 by Debra Barcuch

As employers generally know, employees age 40 and over represent one of the “protected classes,” given special priority in employment discrimination cases. You are no doubt aware of the U.S. Civil Rights Act of 1964 and the Age Discrimination in Employment Act, not to mention state and local laws that are sometimes even tougher than federal.

You also need to be mindful of these two laws:

The Older Workers Benefit Protection Act (OWBPA), and
The Worker Adjustment and Retraining Notification (WARN) Act.

If your company is being scrutinized for possible age discrimination, a key area of focus — apart from whether the discrimination was intentional — is if it had a “disparate impact.” Disparate impact is when an action, such as a layoff of multiple employees, adversely affects one protected class more than others.

Sub-Groups

A U.S. Court of Appeals recently held that in looking for age-based employment discrimination, employers view actions in terms of the possible disparate impact on precise categories of protected classes. In other words, they shouldn’t just lump together all affected employees who are over age 40, but should instead look at the effect on those over 40, over 50, and over 60.

When the data was analyzed in that way, it was clear that most of the impact was felt among the older groups. In the spirit of “look before you leap,” here are important steps to take to minimize your exposure to an age discrimination lawsuit. The first is to determine the principles that you will be guided by in deciding who will be laid off.

Operational Rationale

The principles should be logical in the context of your operating requirements. For example, you may have originally hired an employee because he had particular skills your company needed. Now, years later, changes in your operations have made those skills irrelevant. Eliminating his position would certainly appear to be a reasonable, non-discriminatory criterion.

When you must lay off a group of employees who all possess the same level of skills, it’s generally acceptable to retain those with the most tenure or the best performance ratings. By doing so, even if the net result was a disproportionate negative impact on workers in the 40+ age category, you’ll be on a much stronger legal footing to beat back a discrimination claim.

The OWBPA law was enacted in 1990 to, among other things, address a perceived abuse by some employers. The perception was that older workers were pressured into accepting severance payments in exchange for forfeiting their right to subsequently sue the former employer for discrimination. The law doesn’t ban employers from offering such deals, but sets standards around the practice.

No Pressure Tactics

Specifically, the OWBPA requires that:

Employees must be given 21 days do decide whether to accept such an offer when it is given to them individually, and 45 days if given to them as a group,
Employees must be given seven days to back out of such an agreement,
Something of value must be offered to employees in exchange for their acceptance of the agreement, and
When the deal is offered to a group of employees, the agreement must spell out the criteria for establishing the group of employees given this offer, and include their ages.

The other federal law to give special attention to before downsizing is the WARN Act, which isn’t specifically aimed at addressing layoffs of older workers. It’s a more general law that governs notification requirements for companies with at least 100 full-time employees that are planning to conduct a large reduction in force (RIF).

The WARN Act requires covered employers to give employees a 60-day heads-up of a planned layoff. Employees to be laid off must be told whether the layoff is to be permanent or temporary. If temporary, they must be told the expected duration of the layoff and the process by which employees will be selected for rehire.

Exempted Employers

In some circumstances, layoff notification is not required. Examples include when fewer than 50 employees at a particular work location are to be affected, when employees were brought on board originally with the understanding that they were being hired for a project with a known end date, and if a site is closed down due to a labor strike.

Even if you aren’t covered by the WARN Act, if you’re planning a layoff (which includes older workers), you can reduce your chances of landing an age discrimination charge with some extra care. Give the employees advance warning of the layoff and explain to them why the force reduction must occur. Offering severance benefits and support in finding alternative employment — not necessarily in exchange for a waiver of your right to sue — can also defuse the situation.

Finally, once the soon-to-depart employees have been notified, it’s usually a good idea (depending partly on the size of the reduction) to inform the rest of the workforce about what’s happening. This shuts down the rumor mill, and indicates that there’s nothing about the action that needs to be hidden.

Given the high stakes involved, if you’re anticipating the need to carry out a reduction in your workforce for the first time, it can be helpful to get advice from an HR expert before you pull the trigger.

Women in Construction: A Slow Upward Trend

Posted on April 7, 2017 by Debra Barcuch

Women have made strides in the construction industry, but despite the inroads, they have a long way to go before reaching parity with their male counterparts, especially when compared to other industries.

According to a U.S. Bureau of Labor Statistics report published late in 2015, the last available report of its kind, women accounted for 47% of all employed people in the United States. However, the share of women represented in specific occupations varied greatly. For example, 90% of registered nurses, 81% of elementary and middle school teachers, and 63% of accountants were women. In comparison, the federal study showed that women represented only 9.3% of construction workers.

For decades, sexism was prevalent in the industry, with only occasional breakthroughs before the feminist movement really started taking hold in the latter half of the 20th Century. While strides have been made on job sites and in executive suites since then, fighting against age-old habits remains an uphill battle.

Early Conditioning

Women have faced barriers in practically every industry and profession — pioneers often speak of shattering the glass ceiling on compensation and job positions — but the construction industry has been particularly intimidating. As a result, female participation remained on the low side.

As girls grew up, many were conditioned to look for jobs in education and health care. Construction was often characterized as male-only or at least dominated by men.

Other factors deterred the growth of women in the industry. Some women turned to other careers because of sexist attitudes and a desire to be taken more seriously. Others pointed to safety and health concerns. And without a sufficient number of leaders who could serve as mentors, the needle didn’t move far in construction.

Three Areas of Change

Nevertheless, advances have been made as women gain more traction. This is exemplified by significant changes in three areas:

1. Stereotypes. Women are no longer pigeonholed as teachers or nurses. Increasing numbers of people are thinking more broadly, including girls and their parents during the formative years and decision makers at construction firms. It’s no longer your granddaddy’s construction company.

Technology also is having a major influence. As technological advances are made in construction, women who previously might not have joined worked crews on-site now participate from the home office. More industry leaders are visiting (and sometimes recruiting at) high schools, technical schools and colleges to get the message across about available opportunities. And women are being encouraged to take courses that can lead to further advancement in the industry.

2. Harassment. Inappropriate practices simply aren’t tolerated. Managers and supervisors who would have looked the other way in the past are now on high alert. Stricter human resources policies are being developed and observed.

In addition, females on construction crews are speaking up. Previously, they may have been silent about sexual harassment for fear of losing their jobs. However, by shining a light on inappropriate behavior, improvements are being made. Groups such as the National Association of Women in Construction and Chicks with Bricks are lending support.

3. Safety. All construction workers, male and female, face risks on a daily basis. But the work may be more even more hazardous for women because protective gear and equipment generally is designed to accommodate average-sized men. Women may have difficulty finding properly fitting protective equipment.

Increasingly, firms are starting to use equipment and clothing that is designed for women on construction jobs. Similar accommodations are being made for men of smaller stature.

As with sexual harassment, women might not report issues about construction safety for fear of losing their job. However, laws enforced by the Occupational Safety and Health Administration (OSHA) offer some protection.

OSHA also provides information, training, and assistance to workers and employers in an attempt to improve safety for women on construction jobs. It offers webinars relating to these issues as well.

Note: When an employee signs a formal complaint, it is more likely to result in an OSHA inspection.

The Road Ahead

The construction industry increasingly is becoming a better option for women, featuring competitive pay, career training and the opportunity for growth. While women still have to fight for equal pay in this country across the board, the gender wage gap is shrinking.

In fact, certain numbers favor women in construction. According to a recent U.S. Census Bureau report, full-time female construction workers made about 93.3% of what male workers were paid compared to 79.5% of what male employees were paid overall.

Women are also being given more opportunities to take on higher-paid positions, such as construction managers and construction site inspectors, where they can utilize communication and management skills. Also, more females are taking on an entrepreneurial role, including fields that were previously dominated by males, such as construction.

A Brighter Future?

According to the U.S. Census Bureau, there are slightly more than 150,000 women owning businesses overall in 1997 and that number roughly doubled during the next decade. This bodes well for more female construction firm owners in the future.

It seems that women are gaining ground in the construction industry and we can expect this trend to continue.

One Woman’s Story

Adeleen Shea drew plenty of dirty looks when she walked through malls under construction in her distinctive pink hardhat and conservative business suit.

At the time she was a project coordinator just out of college. Now she is general manager at Commonwealth Building Inc., in Quincy, MA, and has been in the construction business for 36 years.

When she started, seeing a woman on construction sites was a rarity, especially in certain areas like the Midwest, and some crews resented her presence. Shea says that the situation has improved, but it’s still not ideal.

“It’s better than it was,” she notes, “but being a woman in the construction industry remains a challenge.” Significantly, she refers to an undertone where workers believe that a woman is “taking away a job that would have been a man’s job.” The construction workplace is evolving, but the pace is slower than in many other industries.

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