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Month: September 2017

Do you know the tax impact of your collectibles?

Posted on by Debra Barcuch

2017-2018 Tax Update

Many collectibles are more sought after, and more valuable, than ever. But that value has tax consequences when collectibles are sold at a profit, donated to charity or transferred to the next generation. This article explains those tax consequences and some of the applicable IRS rules.

One person’s trash is another person’s treasure. That’s never truer than when dealing with collectibles — those seemingly innocuous objects for which many people will pay good money. In fact, many collectibles are more sought after, and more valuable, than ever. But that value comes with tax consequences when you sell collectibles at a profit, donate them to charity or transfer them to the next generation.

Sales

The IRS views most collectibles, other than those held for sale by dealers, as capital assets. As a result, any gain on the sale of a collectible that you’ve had for more than one year generally is treated as a long-term capital gain.

But while long-term capital gains on most types of assets are taxed at either 15% or 20% (or 0% for taxpayers in the 10% or 15% ordinary-income tax bracket), capital gains on collectibles are taxed at 28% (or your ordinary-income rate, if lower). As with other short-term capital gains, the tax rate when you sell a collectible that you’ve held for one year or less typically will be your ordinary-income tax rate.

Determining the gain on a sale requires first determining your “basis” — generally, your cost to acquire the collectible. If you purchased it, your basis is the amount you paid for the item, including any brokers’ fees.

If you inherited the collectible, your basis is its fair market value at the time you inherited it. The fair market value can be determined in several ways, such as by an appraisal or through an analysis of the prices obtained in sales of similar items at about the same time.

Donations

If you want to donate a collectible, your tax deduction will likely depend both on its value and on the way in which the item will be used by the qualified charitable organization receiving it.

For you to deduct the fair market value of the collectible, the donation must meet what’s known as the “related use” test. That is, the charity’s use of the donated item must be related to its mission. This probably would be the case if, for instance, you donated a collection of political memorabilia to a history museum that then puts it on display.

Conversely, if you donated the collection to a hospital, and it sold the collection, the donation likely wouldn’t meet the related-use test. Instead, your deduction typically would be limited to your basis.

There are a number of other rules that come into play when making donations of collectibles. For instance, the IRS generally requires a qualified appraisal if a deduction for donated property tops $5,000. In addition, you’ll need to attach Form 8283, “Noncash Charitable Contributions,” to your tax return. With larger deductions, additional documentation often is required.

Estate planning

Transfers of collectibles to family members or other loved ones, whether during life (gifts) or at death (bequests), may be subject to gift or estate tax if your estate is large enough. And you may be required to substantiate the value of the collectible.

For estate tax purposes, if an item, or a collection of similar items, is worth more than $3,000, a written appraisal by a qualified appraiser must accompany the estate tax return. Gifts or bequests of art valued at $50,000 or more will, upon audit, be referred to the IRS Art Advisory Panel.

Even if your estate isn’t large enough for gift and estate taxes to be a concern (or the federal gift and estate taxes are repealed, as has been proposed), it’s important to include all of your collectibles in your estate plan. Even an item with little monetary value may have strong sentimental value. Failing to provide for the disposition of collectibles can lead to hurt feelings, arguments among family members or even litigation.

Proper handling

Collecting can be addictive. But the tax implications are difficult to sort out. We can help you determine how to properly handle these transactions.

Download the 2017 – 2018 Tax Planning Guide

A Pair of Key Employer Requirements Put on Hold

Posted on by Debra Barcuch

Under Equal Employment Opportunity Commission (EEOC) regulations promulgated in September 2016, certain employers were required to add compensation data to their annual employee census reports. The affected employers were those having 100 or more employees (50 or more for federal contractors). This additional information would have to be included in 2017 reports submitted by March 31, 2018.

For now, the requirement to report compensation data has been put on hold by the Office of Management and Budget (OMB), a federal agency that assesses the compliance of other agencies with the Paperwork Reduction Act. “Among other things, the OMB is concerned that some aspects of the revised collection of information lack practical utility, are unnecessarily burdensome, and do not adequately address privacy and confidentially issues,” the OMB stated.

This delay may not permanently invalidate the principle behind the expanded reporting rule. However, it does mean that the EEOC must go back to the drawing board and submit a new, less burdensome “information collection package” for review. The OMB also directed the EEOC to remind employers that they still need to submit EEO-1 forms for 2017 by the March 31, 2018 deadline, using the original data elements (on race, ethnicity and gender) but not salary information.

Cost of Compliance

The U.S. Chamber of Commerce had urged the OMB to put the brakes on the expanded EEO-1 form. When it originally proposed its broader scope reporting requirement, the EEOC estimated the added effort involved would cost all impacted employers overall, around $54 million. The Chamber estimated the cost would be closer to $400 million.

The original aim of the EEOC’s expanded reporting format was to “improve investigations of possible pay discrimination which remains a contributing factor to persistent pay gaps.” It also suggested that data, presented in that format, could be useful to employers themselves to help them identify possible patterns of inadvertent race or gender-based pay discrimination.

With these goals in mind, nothing prevents employers today from conducting their own internal analyses to look for any discriminatory pay patterns, and take corrective actions. “The EEOC remains committed to strong enforcement of our federal equal pay laws,” the agency’s temporary leader, Victoria Lipnic, said in response to the OMB’s decision.

Exempt Employee Threshold

Right on the heels of the OMB action came an important ruling by the U.S. District Court for the Eastern District of Texas. That court finalized the preliminary injunction it had issued last November, blocking implementation of new DOL overtime pay regulations that would dramatically affect many employers and employees. Those regulations were originally unveiled in May 2016 and were set to take effect on December 1, 2016.

For now at least, the opinion issued by the court means that the threshold below which all employees would be eligible for overtime pay, regardless of the nature of their jobs, remains unchanged, at $455 per week ($23,660 annualized). Under the regulations blocked by the court, that weekly wage threshold would have slightly more than doubled, to $913 ($47,576 annualized).

The regulations also called for an automatic inflation-based readjustment of the pay threshold at regular intervals. The Texas court rejected that part of the regulations, too, on the same basis as it rejected the main part of the regulation — that the DOL had exceeded the authority it had been granted under the Fair Labor Standards Act.

Action Already Taken

In the months before the new regulations were officially rejected by the Texas court, many employers had already prepared to incorporate the changes. Some took steps to ensure that employees whose earnings were between the old, lower threshold and the new, higher one didn’t put in overtime hours. Many also raised the salaries of workers with earnings that were already just below the $47,576 threshold, to meet or slightly exceed that amount. By so doing, they hoped they would still come out ahead by not having to worry about paying time-and-a-half to those employees who satisfied the exempt status duties test.

After the Texas court imposed the preliminary injunction blocking the new regulation last November, few employers that had already taken those steps reversed themselves, particularly  pay raises, on the basis of the court’s action. The feeling was that taking back pay raises ultimately would have proven more costly to the employer than leaving them in place, given the damage it would do to the morale of affected workers.

What Can Employers Expect Now?

While the plans for change have been sidelined for now, it doesn’t mean that employers will never face the same issues. First, even before the Texas court had issued its final ruling, under  the Trump Administration, the DOL had announced it was planning to reconsider the regulations that had been suspended by the Texas court. Specifically, the DOL asked for input on what an appropriate threshold might be. This seems to indicate that while the DOL believed the threshold should be raised, the original plan might have raised it too high.

Also, the U.S. Court of Appeals for the 5th Circuit is reviewing the case, and could, in theory, overturn the lower court’s decision. Chances are, employee advocacy groups are currently urging the court to do so.

Bottom line: There’s little reason for employers to change whatever course of action they chose just before the DOL regulations were supposed to go into effect. An employment law attorney or HR advisor can help you take a closer look at the issue as it applies to your specific situation.

DPAD May Work For You – Even If You Aren’t A Manufacturer

Posted on by Debra Barcuch

2017-2018 Tax Update

The domestic production activities deduction, also known as “DPAD,” is meant to encourage domestic manufacturing. It’s often referred to as the “manufacturers’ deduction” (or “Section 199 deduction”). But, as this article notes, this potentially valuable tax break can be used by many other types of businesses besides manufacturing companies.

Don’t ignore the “manufacturers’ deduction” it may work for you even if you’re not a manufacturer

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

Understanding the acronyms

Before trying to calculate the Sec. 199 deduction, it helps to understand the acronyms involved. One important factor is qualified production activities income (QPAI), which is the amount of domestic production gross receipts (DPGR) exceeding the cost of goods sold and other expenses allocable to that DPGR. Most companies will need to allocate receipts between those that qualify as DPGR and those that don’t ― unless less than 5% of receipts aren’t attributable to DPGR.

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

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

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

Other activities can also qualify, including some related to motion pictures and television programs — as long as at least 50% of total compensation was paid for services performed by actors, production personnel, directors and others in the United States. In addition, some retailers can claim the Sec. 199 deduction to offset income they receive for cooperative advertising programs with vendors.

The Sec. 199 deduction is limited to 50% of Form W-2 wages paid to employees and allocable to DPGR. Most businesses can’t claim the Sec. 199 deduction if they didn’t pay W-2 wages. It’s possible, however, to get a flow-through deduction via another entity even if you ― or your business ― wouldn’t otherwise be eligible.

Simplifying the calculations

Although determining what costs are allocable to DPGR can get complicated, some smaller companies can simplify their calculations. Under the Small Business Simplified Overall Method, costs are allocated between DPGR and non-DPGR based on relative gross receipts.

For example, say a company’s total cost of goods sold and other expenses is $400,000, its total gross receipts are $1 million, and, of this, $750,000 (or 75%) is attributed to DPGR. To determine its QPAI, the company subtracts $300,000 (or $400,000 × .75) from its DPGR of $750,000. That leaves QPAI of $450,000.

This approach typically can be used by businesses with no more than $5 million in annual average gross receipts, businesses that are eligible to use cash-basis accounting, and farmers who aren’t required to use accrual accounting.

The Simplified Deduction Method, another method for calculating QPAI, can be used by most businesses whose assets are no more than $10 million, or whose average gross receipts don’t exceed $100 million. This approach is similar to the Small Business Simplified Overall Method in that most expenses are allocated between DPGR and non-DPGR based on gross receipts. But the allocation isn’t used for cost of goods sold.

Determining whether and how

If your business can claim the Sec. 199 deduction, you may be able to deduct 9% from the lesser of your QPAI or taxable income, which could boost your cash flow. We can help you determine whether and how the deduction could work for you.

Download the 2017 – 2018 Tax Planning Guide

Do You Pay Employees to Be On Call?

Posted on by Debra Barcuch

Federal law and regulations, and, often, those at the state level, try to guide employers on the question of paying nonexempt workers for being on call. Sometimes your own judgment needs to be exercised as well.

The most straightforward example of a standby situation is when you ask employees to stay at the job site even when they’re off duty. “An employee who is required to remain on call on the employer’s premises is ‘working while on call,'” according to the Department of Labor’s (DOL’s) Wage and Hour Division. It’s also sometimes called “being engaged to wait.” A more precise definition of this type of work is when you require employees to stay so close by that they aren’t free to use the time as they choose.

Overtime Pay Requirement

The Fair Labor Standards Act doesn’t dictate how much employees who are “engaged to wait” should be paid, though of course you must meet minimum wage and overtime requirements. As always, remember that your state or local laws might be more restrictive. California law, for example, has plenty to say on this topic, and some municipalities are also weighing in with local ordinances.

But consider this possibility: suppose you have an employee who is normally paid $18 an hour, or a salary equivalent to that based on a 40-hour workweek. You could drop that employee’s pay rate when he or she is in “working on call” status. After all, many employees who are pinned down at your worksite but not actually working might not think it’s such a bad deal to be paid below their normal wage rate while not working, even though it means they’re not free to leave. However, from your perspective, that could be more trouble than it’s worth from a recordkeeping standpoint, particularly if the time periods are short.

Also, keep in mind that those same “working while on call” hours count toward the calculation of overtime pay. If employees are pursuing activities, such as reading novels or playing cards or video games, for a few hours and those hours push them over the 40-hour workweek overtime threshold, time-and-a-half pay is due.

Ambiguous Situation

Where things get trickier is when an employee is on call, but doesn’t need to be at your worksite. If the employee is deemed to be “waiting to be engaged” (as opposed to being “engaged to wait”), compensation isn’t mandatory. But, just because you don’t require the employee to stay at your worksite doesn’t guarantee he or she has “waiting to be engaged” status. “Additional constraints on the employee’s freedom could require this time to be compensated,” according to the DOL.

Some of those “additional constraints” were laid out in a landmark federal appeals court case in 1994 (Berry v. County of Sonoma). They include the following:

  • Whether there are excessive geographical restrictions on employees’ movements,
  • Whether the frequency of calls to work or return to work is unduly restrictive,
  • Whether a required response time is unduly restrictive,
  • Whether the on-call employee can easily trade his or her on-call responsibilities with another employee, and
  • The extent of personal activities engaged in during on-call time.

Even this additional detail leaves room for interpretation, because terms such as “excessive” and “unduly” are in the eye of the beholder, and sometimes the beholder is a judge. For example, in a recent class action case, one retailer sensed that an appellate court would side with employees (despite being successful at the trial court level) on a matter of interpretation and has tentatively settled with about 36,000 employees at a cost of $12 million. (Casas v. Victoria’s Secret Stores LLC)

Facts of the Case

The issue was the retailer’s on-call shift scheduling policy, which the company abandoned even before the case was settled. In California, home to many of the retailer’s employees, if employees are required to report to work only to be told they aren’t needed that day, the employer must pay them two to four hours at their regular pay rate.

The question being addressed in this case was whether employees who had to only phone in to determine whether they had to report to work, were also entitled to such pay. The argument was that since those employees had to be prepared to go to work (for example, by making child care arrangements) and put other possible plans on hold (such as working at a second job), they too should be entitled to that pay.

As with so many murky labor legal issues, an ounce of prevention is worth a pound of cure. Without giving away the store, establish policies (and make them clear in your employee handbook) that employees will consider fair, rather than test the limits of the law. The following policies should help:

  • Pay them something for being on standby when it’s unclear how a judge would rule if you end up in court.
  • When possible, rotate on-call duty between exempt and nonexempt employees, so that nonexempt employees won’t feel they’re being singled out, and
  • Maximize the amount of time they would have to report to work in an on-call situation, so that they can make arrangements and wrap up other activities they may have been engaged in.

As always, it’s prudent to consult with a labor law attorney before implementing any new policy.

The IRS Tangible Property Regulations, Commonly Known As: The Repair Regulations

Posted on by Debra Barcuch

If you don’t know what Repair Regulations are all about, just mention them to a CPA and watch the look of defeat wash over their face. These new regulations are long, they are complex, they are confusing, and at times they seem to contradict themselves. To launch into a complete and thorough explanation of them would look more like a novel, and honestly, I don’t think anyone out there has a complete understanding of the rules (not even the IRS). That being said, accountants, business owners, controllers, and CFO’s at minimum need to understand the concepts as well as what needs to be done now in order to fall into basic compliance with these new regulations. Let’s dive in…

First, why did these changes come about? For years, the IRS has been battling with taxpayers over their capitalization policies. The IRS has taken numerous taxpayers to court over their assertion that the taxpayer is expensing items that should be capitalized. In these cases, the tax court has overwhelming ruled in favor of the taxpayer. In light of these defeats, the IRS decided to re-write the capitalization rules in order to “build a fence” around these results and come up with a more well-defined definition of what must be capitalized.

Second, the good news. There is now a defined De Minimis Safe Harbor Election, the maximum of which is $5,000 for each unit of property. This means that if it is your company’s policy to expense purchases of $5,000 or less and you buy a computer for $3,200, you can expense that for tax purposes as well and the IRS won’t challenge it. The maximum of $5,000 is automatic for companies who have an audited financial statement or who present financials to a regulatory agency. All other entities can make similar elections, but the maximum amount may be subject to scrutiny by the IRS. Also, you must have written policy in place before the beginning of the tax year in order to meet IRS guidelines.

Additionally, there is a Routine Maintenance Safe Harbor Election available. Per the IRS, routine maintenance is the inspection, cleaning, and testing of property and the replacement of damaged and worn parts with comparable and commercially available and reasonable replacement parts. To be considered routine, the taxpayer needs to reasonably expect to perform the activities more than once during the 10-year period beginning at the time the property is placed in service. There are no dollar limits on this safe harbor. If you have a $1,000,000 piece of manufacturing equipment that breaks down, and it costs $175,000 to replace parts and get it running again, all that cost is an expense, not subject to capitalization. This election must be made annually by the taxpayer.

Finally- the bad, and there’s a lot of it. It’s complex, and it’s mostly facts and circumstances. To start, what must be capitalized? The IRS states that Improvements that are Betterments, Restorations and Adaptations must be capitalized. There is no bright-line test for any of these, and they are all subject to interpretation, so the answer to what is considered a Betterment, Adaption, or Restoration is- it depends. Additionally, the IRS throws around this concept of Unit of Property, and all these tests of whether something is an improvement or not is made at the Unit of property level. For everything other than buildings, a unit of property is defined as a group of functionally interdependent components. A building is considered a unit of property, but within that building there are nine building systems that are considered to be separate units of property. HVAC, Plumbing, Electrical systems, Escalators, Elevators (why aren’t those two combined?), Fire protection and alarm, Security Systems, Gas Distribution and the dreaded other. What that means is if you replace 9 out of 10 air conditioners in a building, that may only be considered a repair if you were looking at the building as the unit of property, but since the HVAC is a separate unit of property the replacement of a combination of items that compose a substantial structural part of a unit of property, it would be considered a Restoration.

More bad news. Since the IRS considers that they have completely changed the way we as taxpayers account for repairs and capitalizations, they consider everyone who has historical fixed assets to now be using an improper method of accounting. What does this mean? It means everyone, according to the IRS, needs to file one or multiple Applications for Change in Accounting Methods. There is some relief from filing an Application for Change in Accounting Method if you have average annual gross receipts of $10,000,000 or less, however it may still be more beneficial for you to file the change even if you fit under this exception.

So what does it all mean? It means the IRS made it harder to figure out if you should capitalize or expense the costs of acquiring tangible property. So let’s get down to your action items as a taxpayer. First, if you have significant fixed assets and you didn’t file a Form 3115 Applications for Change in Accounting Method with your tax return this year, talk to your CPA about whether or not you need to. Also, if you have a robust fixed asset schedule, there may be opportunities to file an accounting method change and actually get a tax benefit. Second, check to see if you made the proper elections with the filing of your return this year.  Third, account for fixed asset additions and dispositions as you normally would, but talk to your CPA about it because the treatment may be different this year. Of course, you can always call us at Cornwell Jackson, and we would be glad to sit down and talk you about what you need to do account for and plan around these law changes as well as determine if there are any tax benefits hiding in your depreciation schedule.

If you would like to learn more about how this topic might affect your business, please email or call us at 972.202.8000.


Gary Jackson, CPA, is a tax partner at Cornwell Jackson. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience at Cornwell Jackson and in providing tax planning to individuals and business leaders across North Texas.

Contact him at gary.jackson@cornwelljackson.com.

This post was originally published on May 15, 2015, and has been updated for content and accuracy. 

Help Veterans on Your Staff Thrive

Posted on by Debra Barcuch

A survey of veterans by Syracuse University’s Institute for Veterans and Military Families found that half of the respondents left their first civilian jobs within a year, and 65% left within two years. A commonly cited reason was culture shock. Employers that make a point of hiring veterans — and those that don’t — owe it to themselves and the vets to prevent rapid turnover.

Consider the following characteristics of the military culture and work environment, and think about any contrasts to your own. In the military, generally speaking:

  • Employees know precisely where they stand in the pecking order due to the clear gradations of the ranking system,
  • Steps required for promotion are well-defined,
  • Communication is clear and direct,
  • Punctuality is demanded,
  • Respect for those of superior rank is expected and received,
  • Mutual trust is the norm, and
  • Whining and excuses for nonperformance are not tolerated.

Fish out of Water?

Unless all of the above characteristics precisely describe your workplace culture, you may be able to understand how an employee just returning from military duty might feel like a fish out of water. While a veteran might find a more unstructured and informal working environment a welcome change from the military, a period of adjustment will likely be needed.

According to BelKat Solutions, LLC, a consulting company that helps civilian employers to integrate veterans successfully into their workforce, a “veteran-informed” organization:

  1. Creates a plan to integrate veterans, and informs all of its employees about that plan,
  2. Puts in place activities that support that plan for all stages of employees’ careers, and
  3. Offers solutions to some of the transition issues vets may encounter upon entering civilian life.

In other words, integrating veterans for the long term isn’t a “one-and-done” proposition.

Employers need to be aware that what seems to be attitude problems on the part of vets might really indicate a bumpy transition to civilian work life. “Behavior that an employer or fellow employees may perceive as arrogance, entitlement, or aggressiveness or as being judgmental, frustrated, or apathetic may in fact be a transitional response that can be successfully addressed in an informed environment,” said Belkat.

Four-Step Program

Whether or not you have made a special effort to recruit veterans, once they’re on board, a long-term strategy for keeping them there and flourishing has four basic components, some of which also apply to any other kind of new-hire. The first is assimilation.

The assimilation phase can include such activities as:

  • Explaining job goals and how performance is measured and rewarded,
  • Reviewing the organization’s structure and how leadership communicates with employees,
  • Explaining administrative processes, and
  • Facilitating team-building exercises.

The needs of veterans with recent combat experience might require extra attention, after an assessment of any special sensitivities. Such an assessment might have implications, for example, for the noise level or degree of privacy in the new hire’s immediate work environment.

Beyond basic assimilation, a tailored training and development initiative can serve to identify and address any skill or other gaps in the veteran’s professional development that need to be filled. For example, a veteran who didn’t have a “desk job” in the military (nor in any previous setting) might lack familiarity with basic or the latest versions of desktop computer software.

The two remaining components of a long-term veteran transition strategy recommended by Belkat involve career growth and compensation. About the former, it’s important to understand that in the military, the stairways to the top for non-commissioned and commissioned officers are generally well-defined. Identifying those routes in your organization, to the extent they can be described, is very important to vets. But if a particular job doesn’t lead to career growth, that must be made clear as well.

More than a Rank

Keep in mind that in the military, people are often first defined by their rank, instead of by the nature of their job. A computer specialist with the rank of sergeant would more likely be described as a sergeant than a programmer, if a one word description were required.

Compensation, including intangible rewards such as special recognition, is no less important to vets than any other employees. Keep in mind, however, that in the military opportunities for special monetary awards are more limited. Recognition for service members has more commonly taken the form of medals and commendations, so take time to go over the pay system. If it’s been a while since they’ve worked in civilian jobs, they may have unrealistic expectations of what kind of salaries and raises are possible.

Plenty of resources are available that delve more deeply into the topic of helping veterans transition to a successful civilian career. This includes talking to professional acquaintances who have already been down this road. Unless you’re a veteran yourself, chances are the insights you will gain will carry you and your newly transitioned vets far.

New Agenda Is Set for Manufacturing

Posted on by Debra Barcuch

The Manufacturing Leadership Council (MLC) has identified the several important issues facing manufacturers over the next 12 months.

The council recently released its 2017 to 2018 Critical Issues roadmap to Manufacturing 4.0. (M4.0). The new  agenda “focuses on the technological, organizational and leadership changes” that manufacturers” must coordinate as they pursue a more efficient, agile and data driven future,” said David R. Brousell, co-founder of the MLC, one of the world’s foremost organizations supporting manufacturing executives. “From country to country, M4.0 initiatives and programs are underway, reshaping the competitive environment and raising the stakes for all companies,” Brousell added.

A Pivotal Point

M4.0 creates the smart factory. In smart environments, systems communicate with each other, as well as humans, resulting in real-time decisions and cross-organizational services for participants of the value chain. According to the MLC, the manufacturing sector is at a pivotal point. The changes ahead are expected to transform the competitive environment, how work is performed, how firms will be organized and what leadership must do.

There are several elements to M4.0:

  • Production and supply networks predict firms’ needs and are rapidly reconfigured to meet changing demands,
  • Products are customized and connected,
  • Supply chains are visible, traceable, resilient to risks, analyzed in real-time and responsive to customer requests and changes in the marketplace,
  • Enterprises are cross-functional, collaborative and highly integrated, often around a single framework that connects elements in a process that are typically in silos and provides a view of an asset throughout the manufacturing lifecycle (digital thread) that stretches from design to deployment, and
  • Leaders and employees are digitally savvy and ready and willing to adapt to challenges and grasp new opportunities.

What’s on the Agenda?

MLC’s roadmap addresses the following seven critical issues:

1. Factories of the future.

Both large and small manufacturers need to understand and embrace the potential of new and evolving materials and technology for production models. The new factories that result will be more cost-efficient, responsive and flexible.

Areas of focus:

  • Migration paths, roadmaps, maturity models and frameworks to help companies move from current to future production models,
  • End-to-end digital integration of manufacturing and engineering processes and functions, and
  • Agile and modular production models that deliver on the promise of M4.0.

2. Collaborative manufacturing enterprises.

To maximize the potential of M4.0, firms must create more collaborative, cross-functional and integrated structures, both within and outside their organizations. These structures will stretch across the value chain and improve decision-making in multiple activities.

Areas of focus:

  • How manufacturing fits into collaborative value chains that unify the firm’s overall mission and key activities,
  • Digital threads that constantly connect all functions of the business, and
  • Cross-functional processes and organization structures that harness multiple areas of expertise to make faster and better decisions, reduce time to market and boost competitiveness.

3. Enterprise innovation.

Manufacturers will be driven to expand their products and services by developing and managing rapid, collaborative and often disruptive processes.

Areas of focus:

  • Best practice approaches that focus on ways technology can help deliver innovative ideas and improvements faster from the plant floor to the supply chain to new products and services,
  • Collaborative innovation approaches that leverage the ideas and development resources of employees, suppliers, partners, customers, and others to create products and improve processes, and
  • Methods for manufacturers to play an active role in gaining a competitive advantage and enhancing customer experiences.

4. Transformative technologies.

Companies should learn how to identify, adopt and scale the most promising technology. This will help them gain speed, agility, efficiency and competitiveness, as well as drive new business models and improve customer experiences.

Areas of focus:

  • The latest developments in the Internet of Things (IoT), 3D printing, advanced analytics, modeling and simulation, and other emerging technology,
  • Best practice approaches for selecting, justifying costs and deploying new M4.0 technology, and
  • Strategies for encouraging and using standards and architectures that support open, interoperable systems.

5. Next-generation leadership.

M4.0 requires manufacturing leaders and their teams to be forward-thinking and act quickly. That means embracing new behaviors and engaging the talent and skills of the current and next generation workforce.

Areas of focus:

  • Effective leadership role models, behaviors and mindsets, and
  • Employee transition, development and engagement strategies for the next generation of workers.

6. Cybersecurity.

As factory floors, supply chains and products are more closely connected through technology in the M4.0 world, firms face increased vulnerability to external cyber threats and internal disruption. They must identify the effective cybersecurity processes to ensure continuity, data security and IP protection.

Areas of Focus:

  • Uncover points of cyber vulnerability and prevention to help bolster data security,
  • Bridge the gap between IT and operations to coordinate and improve cybersecurity strategies, and
  • Develop best practice policies, training, behaviors and education in cybersecurity, including an understanding of the global regulatory environment.

7. Sustainability.

Along with innovation comes responsibility. Successful engagement with customers, partners and the next-generation workforce also requires manufacturers to become more transparent about their environmental and socially responsible practices.

Areas of focus:

  • Design products for easier reuse, remanufacture, refurbishment or recycling at end of life,
  • Develop M4.0 production strategies that streamline production processes, to increase efficiency, reduce costs and waste and keep at their highest utility and value at all times, and
  • Create holistic, sustainable manufacturing business models, supported by collaborative cross-sector partnerships and deeper community engagement.

Jump to the Forefront

Some manufacturers have already implemented many of these best practices, putting them well on their path to M4.0. Make sure that your firm is at the forefront of the revolution that is changing the sector from top to bottom.

Is it time to revisit the R&D research tax credit?

Posted on by Debra Barcuch

2018 Tax Update

2015’s PATH Act made the research credit permanent and expanded its benefits to certain start-ups and other small businesses that were unable to take advantage of it in past years. This article highlights the research credit and its expansion under the PATH Act.

Is it time to revisit the research tax credit?

If your business hasn’t been claiming the research credit (often referred to as the “research and development,” “R&D” or “research and experimentation” credit), now may be a good time to revisit this valuable tax break. In December of 2015, the Protecting Americans from Tax Hikes (PATH) Act made the credit permanent after 34 years of being temporary, including numerous extensions. The PATH Act also expanded the credit’s benefits to certain start-ups and other small businesses that were unable to take advantage of it in past years.

A quick overview

The research credit is complex, but in a nutshell it allows businesses to claim a nonrefundable credit equal to 20% of the amount by which their qualified research expenditures (QREs) exceed a base period amount. You can carry back unused credits one year and forward up to 20 years. Be aware that the research has to be conducted within the United States (including Puerto Rico and U.S. possessions).

To determine the base period amount, your ratio of QREs to gross receipts from 1984 to 1988 is calculated and then applied to your average gross receipts for the previous four tax years. (The base period amount cannot be less than 50% of your current-year QREs, however.)

There are alternative methods of calculating the credit for companies that didn’t exist from 1984 to 1988, lacked sufficient QREs or gross receipts during that period, or otherwise have trouble qualifying for the traditional research credit. These include an alternative incremental credit (AIC) and a simplified credit. Whichever method you use, the net cash benefit of research credits typically is 6.5% of QREs.

Research activities that qualify

Many companies overlook the research credit because they think it’s limited to companies that conduct laboratory research, such as biotech, pharmaceutical or high-tech firms. But the credit is available to any company that invests in developing new or improved products or processes, including retail and consumer product companies and even service providers. To qualify, research activities must:

  • Strive to discover information that’s technological in nature,
  • Relate to a new or improved “business component,” such as a product, process, computer software, technique, formula or invention,
  • Be designed to eliminate uncertainty concerning the development or improvement of a business component, and
  • Be part of a “process of experimentation.”

Generally, QREs include supplies, W-2 wages for employees conducting research, and 65% of consultants’ fees.

New benefits for smaller businesses

Before the PATH Act, it was challenging for smaller companies to take advantage of research credits, even if they conducted a significant amount of qualified research activities. One obstacle, particularly for partnerships and S corporations, was the alternative minimum tax (AMT), which often restricted or even eliminated the owners’ ability to use the research credit. The PATH Act solves this problem by allowing businesses with average gross receipts of $50 million or less during the previous three years to claim the credit against the AMT.

Similarly, start-up businesses historically hadn’t been able to take advantage of research credits because they have little or no tax liability. To allow start-ups to enjoy the benefits of the credit without having to wait until they start generating taxable income, the PATH Act permits companies in operation for less than five years with less than $5 million in gross receipts to claim the credit against up to $250,000 in employer-paid FICA taxes.

Get the credit you deserve

If your company commits resources to developing new or improved products or processes, consult us to see if you qualify for research credits.

© 2017

Maximize Tax Deductions for New Business Vehicles

Posted on by Debra Barcuch

The new 2018 car and truck models are already in the showrooms.

If you’re in the market for one or more vehicles for your construction business, look past the sticker prices when you weigh your decision. Don’t forget to factor in all the tax aspects into the equation.

Generally, your firm can claim tax deductions for business vehicle expenses, but there are numerous twists and turns along the way. Notably, the tax law includes several limits to ensure that business owners don’t go overboard. (For simplicity, let’s assume for purposes of this article that you’re purchasing a vehicle, although comparable rules apply to vehicles leased for business purposes.)

Two Methods

Briefly stated, you may deduct vehicle expenses in one of two ways.

1. Actual expense method. This method allows you to deduct your actual expenses based on the percentage of business use. For example, if you use a pickup truck 80% for business and 20% for personal use, you may write off 80% of your qualified expenses, including such items as oil and gas and insurance (see box below, What You Can Actually Deduct”). Plus, you’re in line for depreciation deductions, subject to certain limits.

With either method, you must keep detailed contemporaneous records as proof in case the IRS challenges your deductions. For instance, you must record the date, location, distance and business purpose of each trip. Bear in mind that the recordkeeping for the actual expense method is even more burdensome because you must account for every deductible item.

2. Standard mileage rate. Using this method, you rely on a simplified standard mileage rate to deduct vehicle expenses. The IRS sets the rate annually. For 2017, it’s 54.5 cents a mile (plus related tolls and parking fees). For example, if you drive the pickup truck 10,000 business miles in 2017, your deduction amounts to $5,450 (54.5 cents x 10,000) plus tolls and fees.

Potentially Larger Deduction

The actual expense method may justify the extra hassle, as it frequently produces a larger annual deduction than the standard mileage rate. In particular, you may get a tax boost from the rules allowing you to recoup a vehicle’s cost through depreciation deductions, subject to tax law limits.

Under current law, you generally can claim three tax breaks:

  1. A generous current deduction under Section 179 (the expensing deduction) for the cost of qualified business property placed in service during the year, including vehicles,
  2. A 50% bonus depreciation deduction if the property is eligible, and
  3. A depreciation deduction under the Modified Accelerated Cost Recovery System (MACRS) if there are any remaining costs.

For qualified business property, you may be able to claim all three, but with vehicles you likely will reach the max under Section 179 because of the so-called luxury car limits.

“Luxury Car” Limits

However, to deter taxpayers from claiming excessive deductions for top-of-the-line vehicles, Congress imposed “luxury car” limits, which actually kick in for moderately-priced cars, trucks and vans. For vehicles placed in service in 2017, the maximum deductions are as follows:

For example, again using the 80% business use example, the maximum first-year deduction for a van placed in service in 2017 is $9,248 (80% of $11,560).1Based on 50% bonus depreciation

Despite these restrictions, construction firm owners still have an ace up their sleeves.

Thanks to a special tax law provision, a qualified heavy-duty SUV with an unloaded gross vehicle rate of more than 6,000 pounds is exempt from the luxury car limits. In this case, the maximum deduction is capped at $25,000, far more generous than the usual luxury car limits. In addition, the vehicle is eligible for bonus depreciation and regular MACRS depreciation deductions.

Form of Ownership Matters

Keep in mind that the form of business ownership involved may affect the way vehicle deductions are handled:

  • Generally, sole proprietors claim the deductions on their personal tax returns by attaching Schedule C.
  • If a corporation reimburses business-related expenses to an employee who owns the vehicle, the firm generally deducts the reimbursements and the employee doesn’t report any taxable income.
  • For vehicles owned by a corporation, the corporation can deduct the full amount of the vehicle expenses, but personal driving benefits are taxable to employees.

This is just a brief overview of a complex set of rules relating to business ownership. Consult with your tax advisor regarding your situation.

Year-End Strategies

If you’re ready to buy a new vehicle for your business, there may be additional tax incentives for buying a 2018 model before the end of the year.

Significantly, in the first year of ownership, you’re entitled to claim the three major tax breaks listed above, regardless of when in the year the vehicle is placed into service. In other words, you can buy a pickup truck late in December, drive it to a job site the last week in the year and still qualify for the full first-year tax benefits.

Caveat: MACRS deductions may be reduced if the cost of property placed in service during the last quarter of the year exceeds 40% of the cost of all property (not counting real estate) placed in service that year.

Similarly, if you’re going to opt for an SUV that meets the requirement for the maximum $25,000 write-off, place it in service at the end of the year and maximize the deductions for the first year of ownership.

If you’re buying a new vehicle late in the year, it’ll be easier to keep track of your actual expenses for a short time if this would be beneficial. For vehicles acquired prior to 2017, you can generally switch from the actual expense method to the standard mileage rate in a subsequent year, including certain adjustments, but not the other way around if you previously claimed accelerated depreciation.

Possible Savings of Thousands of Dollars

These rules are complex, but construction firm owners may be able to save thousands of tax dollars with some astute year-end moves. Talk to your tax advisor to ensure you understand all the potential tax ramifications when shop to buy a new vehicle for your business.

Real Estate Investors: Let’s Talk about Like-Kind Exchanges

Posted on by Debra Barcuch

Are you thinking about divesting a real estate investment and then replacing it with another property? If you sell appreciated property outright, you’ll incur a taxable gain, which lowers the amount available to spend on the replacement property. But you may be able to defer your tax bill (or even make it disappear) with a Section 1031 like-kind exchange.

Unfortunately, there are rumors that upcoming tax reform legislation could eliminate the time-honored like-kind exchange privilege. So, while tax breaks for like-kind exchanges are still in place, it could be a good idea to complete any like-kind exchanges that you’re considering sooner rather than later. Here’s what you need to know about like-kind exchanges under the current tax rules.

Beware of the Boot

To avoid any current taxable gain in a like-kind exchange, you must not receive any “boot” in the transaction. Boot means cash or other property that isn’t of a like kind to the relinquished property. When mortgaged properties are involved, boot also includes the excess of the mortgage on the relinquished property (the debt you get rid of) over the mortgage on the replacement property (the debt you assume).

If you receive any boot, you’re taxed in the year the property is sold on a gain equal to the lesser of:

  1. The value of the boot, or
  2. Your overall gain on the transaction based on fair market values.

So, if you receive only a small amount of boot, your exchange will still be mostly tax-free (as opposed to completely tax-free). On the other hand, if you receive a significant amount of boot, you could have a large taxable gain.

The easiest way to avoid receiving any boot is to swap a less valuable property for a more valuable property. That way, you’ll be paying boot, rather than receiving it. Paying boot doesn’t trigger a taxable gain for you.

What Constitutes Like-Kind Property?

You can arrange for tax-free real property exchanges as long as the relinquished property (the property you give up in the exchange) and the replacement property (the property you receive in the exchange) are of a like kind. Under Internal Revenue Code Section 1031 and related guidance, “like-kind property” is liberally defined. For example, you can swap improved real estate for raw land, a strip center for an apartment building or a boat marina for a golf course.

But you can’t swap real property for personal property without triggering taxable gain, because real property and personal property aren’t considered like-kind. So, you can’t swap an apartment building for a cargo ship. You also can’t swap property held for personal use, such as your home or boat. Inventory, partnership interests and investment securities are also ineligible for like-kind exchanges. As a result, the vast majority of tax-free like-kind exchanges involve real property.

In 2002, the IRS clarified that even undivided fractional ownership interests in real estate (such as tenant-in-common ownership interests) can potentially qualify for like-kind exchanges. For example, if you sell an entire commercial building, you don’t need to receive an entire commercial building as the replacement property in order to complete your tax-free exchange. Instead, you could receive an undivided fractional ownership interest in a building as the replacement property.

What Happens to the Gain in a Like-Kind Exchange?

Any untaxed gain in a like-kind exchange is rolled over into the replacement property, where it remains untaxed until you sell the replacement property in a taxable transaction.

However, under the current federal income tax rules, if you still own the replacement property when you die, the tax basis of the property is stepped up to its fair market value as of the date of death — or as of six months later if your executor makes that choice. This beneficial provision basically washes away the taxable gain on the replacement property. So your heirs can then sell the property without sharing the proceeds with Uncle Sam.

The like-kind exchange privilege and the basis step-up-on-death rule are two big reasons why fortunes have been made in real estate.

However, as noted earlier, the like-kind exchange privilege could possibly be eliminated as part of tax reform. Even if that doesn’t happen, the estate tax might be repealed, which could also ultimately reduce the tax-saving power of like-kind exchanges.

Why? An elimination of the step-up in basis at death might accompany an estate tax repeal. For example, with the 2010 federal estate tax repeal (which ended up being temporary and, essentially, optional), the step-up in basis was eliminated, and that could happen again. An elimination of the step-up in basis would mean that a taxpayer inheriting property acquired in a like-kind exchange would have the same basis in the property as the deceased, and thus could owe substantial capital gains tax when he or she ultimately sells the property.

What’s a Deferred Like-Kind Exchange?

It’s usually difficult (if not impossible) for someone who wants to make a like-kind exchange to locate another party who owns suitable replacement property and also wants to make a like-kind exchange rather than a cash sale. The saving grace is that properly executed deferred exchanges can also qualify for Section 1031 like-kind exchange treatment.

Under the deferred exchange rules, you need not make a direct and immediate swap of one property for another. Instead, the typical deferred like-kind exchange follows this four-step process:

  1. You transfer the relinquished property (the property you want to swap) to a qualified exchange intermediary. The intermediary’s role is to facilitate a like-kind exchange for a fee, which is usually a percentage of the fair market value of the property exchanged.
  2. The intermediary arranges for a cash sale of your relinquished property. The intermediary then holds the resulting cash sales proceeds on your behalf.
  3. The intermediary uses the cash to buy suitable replacement property that you’ve identified and approved in advance.
  4. The intermediary transfers the replacement property to you.

This series of transactions counts as a tax-free like-kind exchange, because you wind up with like-kind replacement property without ever taking possession of the cash that was transferred in the underlying transactions.

What Are the Timing Requirements for Deferred Like-Kind Exchanges?

For a deferred like-kind exchange to qualify for tax-free treatment, the following two requirements must be met:

1. You must unambiguously identify the replacement property before the end of a 45-day identification period.

The period starts when you transfer the relinquished property. You can satisfy the identification requirement by specifying the replacement property in a written and signed document given to the intermediary. That document can list up to three properties that you would accept as suitable replacement property.

2. You must receive the replacement property before the end of the exchange period, which can last no more than 180 days.

Like the identification period, the exchange period also starts when you transfer the relinquished property.

The exchange period ends on the earlier of: 1) 180 days after the transfer, or 2) the due date (including extensions) of your federal income tax return for the year that includes the transfer date. When your tax return due date would reduce the exchange period to less than 180 days, you can extend your return. An extension restores the full 180-day period.

Will Like-Kind Exchanges Survive Possible Tax Reform Efforts?

Under the current tax rules, like-kind exchanges offer significant tax advantages, but they can be complicated to execute. Your tax advisor can help you navigate the rules.

Looking ahead, it’s uncertain when and if tax reform will occur and whether the tax benefits of a like-kind exchange will survive any successful tax reform efforts. So, if you own an appreciated real estate investment and you’re contemplating swapping it out, it may be advisable to enter into a like-kind exchange sooner rather than later.

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