October 2017

Tax Reform 2017 – How New Tax Legislation Will Affect Businesses and Individuals

Posted on October 30, 2017July 23, 2024 by Debra Barcuch

Text Tax Reforms appearing behind ripped brown paper.

Tax reform has taken many twists and turns since April. It appears that any iteration of a tax reform bill will be far from business as usual. Simplification of tax rate tiers and nearly doubling the standard deduction have an overall aim of making individual tax filing easier. However, certain provisions for eliminating deductions are a valid concern among both business owners and individuals. There are good ideas that align with historic tax reform, and others that stray far from it. The best course is to look at your own tax situation from the previous year and consider ways to improve it, while sitting tight on tax news from the Hill. It’s only a framework, so far.

What we Know So Far About the New Tax Legislation

Earlier in 2017, our tax experts at Cornwell Jackson were anticipating what to recommend to clients about a possible change in business structure to manage corporate tax impacts. Initially, both the Trump and Republican tax plans proposed a large federal corporate/business tax rate reduction, putting the new rate for C Corps at 15 or 20 percent. It was a key campaign promise, and comments made by President Trump in March regarding a tax reform package emphasized that he wants to lower the overall tax burden on businesses, regardless of business structure.

Moving into the fourth quarter, President Trump is still promising significant tax cuts and simplification of the tax code. The “United Framework for Fixing Our Broken Tax Code” calls for lower individual tax rates under a three-bracket structure, nearly doubling the standard deduction, and a significant reduction in the corporate tax rate. The framework outlines changing the tax treatment of pass-throughs, expanding child and dependent incentives, and eliminating both the alternative minimum tax and the federal estate tax.

According to a report by Wolters Kluwer, a tax reform package moving through Congress under the reconciliation rules would require only a Senate majority. Any tax cuts would likely have to sunset after 10 years. But 10 years is significant to live with any actual changes.

I will attempt to point out proposed impacts to business owners and individuals in this article, along with how such changes align with historical tax reform and what that may represent for the next decade if we see new legislation for the 2017 tax year.

To drill down to a specific area of the tax reform bill, click on a link below.

Ultimately, consider your business goals and planning for investments or equipment purchases. Consider the current equipment expensing and bonus depreciation rules, the time frame for which your company will need the equipment, and your projected profits when making the decision whether to invest this year or next. The same holds true for estate planning. Planning with the guidance of your trusted advisors keeps you and your family in more control regardless of the next version of federal tax legislation.

As soon as we see some actual legislation from the Hill, there may be more to discuss for you or your company. Think of Cornwell Jackson if you are in need of longer-range planning, reporting support or guidance. And stay tuned!

Download the whitepaper: Tax Reform 2017 – How New Tax Legislation Will Affect Businesses and Individuals

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

Simplifying Health Care Accounting Processes in your Practice

Posted on October 26, 2017July 23, 2024 by Debra Barcuch

The majority of a medical practice’s Key Performance Indicators (or KPIs) will address Health Care Accounting Processes that add to or take away from revenue. By focusing on KPIs, your practice increases practice efficiency and cash flow. Ultimately, you can see who or what is contributing to productivity and losses.

For example, a focus on Work Relative Value Units (wRVUs) per practitioner will show the true work output of each physician or practitioner — creating an opportunity for setting productivity goals. It can also pinpoint real barriers to productivity. Without the baseline measurement, however, you won’t know if practitioners need to boost productivity or if perhaps the practice is underpricing services. Tracking wRVUs can also tie into appropriate physician compensation measured against national benchmarks, and also if the practice needs to hire more staff to reduce the administrative burden on physicians.

Simplifying Health Care Accounting Processes

KPIs can bring to light operational inefficiencies that make a big difference on cash flow. Tracking “charge entry lag” can show how soon charges are entered into the system after the date of service. You can quickly see that a charge entry lag of even three days can lead to an increasing lag on A/R and cash flow over time.

Tracking patient encounters per day against “no show rates” can indicate a breakdown in the appointment reminder process — rather than assuming it’s a productivity issue. Tracking new patients as a percentage of total visits can indicate practice growth — or a need to increase marketing to new patients. Tracking denial rates by payors can indicate an issue with coding or perhaps a breakdown in the process of collecting accurate patient information at registration.

Best practices dictate that KPIs are reviewed weekly to help practices make improvements over the short-term. This diligence avoids long-term impact on profits. By the time quarterly financial reports come out, it is too late to make adjustments, and you have little more than a historical record to file under “missed opportunities.” Instead, identify the KPIs that are most important for your practice efficiency, and talk to your CPA and practice management software provider about the best ways to track them.

Continue Reading: Simplifying Medical Office Accounts Receivable

Cornwell Jackson’s Business Services Department offers a wide range of outsourced financial services to serve small to mid-sized medical and dental practices — including payroll outsourcing and solutions to improve cash flow and productivity. While you focus on care outcomes of your patients, we can address the business side of a healthy practice. Contact us for a consultation or click here to view our whitepaper on medical practice KPIs.

Scott Bates, CPA, is a partner in the audit practice and leads Cornwell Jackson’s Business Services Department, which includes a dedicated team for outsourced accounting, bookkeeping and payroll services. He provides consulting to clients in auto, healthcare, real estate, transportation, technology, service, retail and manufacturing and distribution.

Contact Scott at scott.bates@cornwelljackson.com or 972-202-8000.

Keeping Delivery on Time

Posted on October 25, 2017July 23, 2024 by Debra Barcuch

If you’re like most manufacturers, your on-time delivery rate could use some improvement. While it’s most critical in a “Just in Time” environment, it’s an issue for every manufacturer in terms of building customer satisfaction and maintaining a competitive edge.

A number of factors influence the ability to deliver on time. Here are a few to consider:

Improvement begins with measurement.

On-time delivery is measured as the percentage of time that goods reach customers’ loading docks by the due date. That number in and of itself is important, but you can add power by routinely analyzing the figure to see what contributed to both meeting and missing due dates.

Quote realistic due dates.

Unrealistic due dates have consequences — and none of them are good. You may have to go into overtime, disappoint the customer or bump another customer’s order. Take into consideration historical output data, as well as current and expected plant capacity. Don’t quote on a best-case scenario. Factor in some wiggle room for an equipment breakdown or another big customer wanting a rush order. Of course, if the customer needs the order sooner than your realistic due date, you have to be willing to add capacity.

Adopt or upgrade finite capacity and scheduling software.

Managing the many variables affecting production is almost impossible to do manually. Computer programs can help enable your company to create realistic plans and schedules displayed on monitors throughout the plant. More importantly, it helps you react to changes and communicate them quickly. Software also enables you to generate “what if” scenarios so you can be prepared for unexpected events, such as an employee’s absence or a delay in getting materials.

Simplify your shop floor configuration.

Do you have a traditional functional layout in which, for example, all welding work goes to a welding department? Consider converting to customer-focused cells arranged so that work flows logically from raw material to finished goods. This model is better at adapting to change than the functional model and flexibility is a key benefit of cells in terms of achieving on-time delivery.

Shorten customer lead times.

The shorter the time between order entry and delivery, the fewer uncertainties you have to deal with. Manufacturers with short customer lead times tend to have the highest on-time delivery rates.

Transparent Appraisals: A Key to Customer Satisfaction

Posted on October 19, 2017July 23, 2024 by Debra Barcuch

The automobile dealership industry has undergone a transformation in recent years with the availability of online used car values. Armed with this information, your customers are driving harder bargains and that translates into smaller profit margins for your dealership on both new and pre-owned sales transactions.

Combine this with the fact that many dealerships are finding that their service departments are more profitable than their showroom floors. Seeking ways to increase profitability, many dealers are offering accessories, extended warranties, financing and even insurance to help boost bottom line results. While these may help in the short-term, over the long-term the decrease in the volume of new customers may eventually slow the feed of business to the service department.

So, what can dealers do to survive — and thrive — given the current marketplace conditions? In addition to finding new customers, you need to help ensure that your current customers keep coming back. Not only does it take fewer resources to keep current customers than secure new ones, but satisfied customers come back and often refer business. A great place to begin is by examining some of the processes that have been established to serve your customers. One such process, commonly referred to as the appraisal process, has been known on many occasions to breed dissatisfaction. Have you taken a close look at your dealership’s appraisal process lately?

Dealer vs. Customer: Meeting of the Minds

When you get down to the heart of the matter, there are two key questions that your dealership generally must answer to close a deal on the sale of a new or preowned car. These include:

1.What is the customer willing and prepared to pay for a vehicle?

2. What is the dealership willing to pay for the trade-in vehicle?

While these seem to be fairly straight-forward, the answer to the second question typically has a direct impact on the answer to the first question. No longer a clandestine process, prospective customers have a wealth of trade-in value information available at their fingertips, and it is this information that gives them power. Unfortunately, their research does not always account for all relevant factors as they formulate their own answer to question #2. As dealers know, the answer to the second question usually lies in the marketability and profitability of the vehicle given the overall condition, both mechanical and cosmetic.

To make a sale — a sale that ensures profits for your dealership and satisfies your customers — there must be a meeting of the minds between you and the prospective customer when it comes to the value of the trade-in. Some would even suggest that the process of making these two numbers one in the same has a greater impact on closing rates and customer satisfaction than any other part of the sales process. With this in mind, dealers like you must learn how to both present, and sell, a realistic trade-in amount to the customer while maintaining the integrity of the dealership’s brand. To achieve this, your sales team must make the appraisal process transparent by demonstrating marketability and not just your dealership’s opinion of value.

Transparent Appraisals: Using Information Technology to Your Advantage

To achieve transparency, both independent and franchised dealers have turned to automated systems to pull credible, third-party data for their geographic area or even nationally, in some cases. AutoTrader, for example, gives information regarding dealer asking prices whereas J.D. Power provides selling price data. Providers of wholesale price data may include Manheim or ADESA. AutoCheck and CARFAX offer detailed vehicle history reports. Still yet, other sources such as vAuto provide extremely valuable information regarding supply and demand as well as the average number of days a vehicle sits in inventory. Even the most price sensitive dealers can access the information they need at a nominal monthly fee. In fact, online options are available that pool data from these and other familiar sources.

While prospective customers may have access to some of these sources, it is up to you to present this relevant, third-party data in its proper context. By sharing specific reports from credible sources, you can even up the playing field by using this information as the foundation for the appraisal of your customer’s trade-in. Adjustments can then be made for mechanical issues, body damage, interior wear and tear, etc. Likewise, adjustments can be made for features and benefits such as an automatic transmission, a sunroof, heated leather seats, or even an iPod jack. Using this method to generate a final appraisal value — a method where customers can see exactly how the trade-in value was derived — will likely satisfy even the most skeptical customer.

Concluding Thoughts: Successfully managing customer satisfaction is essential for the long-term growth of your dealership — from increasing current customer loyalty to securing new customers. Employing automated systems for the purpose of sharing credible, third-party information related to vehicle trade-in values can help. This data not only makes the appraisal process transparent, but improves customer satisfaction and ultimately serves to protect your dealership’s brand. Remember, dissatisfied customers can and will broadcast their displeasure — and they can use technology again in the form of online blogs and social networking websites.

Simplifying Staffing: Back-office Efficiency Ties to Physician Productivity

Posted on October 17, 2017July 23, 2024 by Debra Barcuch

After working with a variety of physicians and specialty care groups on back-office functions, we have discovered one universal truth: most physicians prefer serving patients than dealing with accounting. However, staffing, processes and collections are critical to a profitable practice. With more physicians working for small practices or for other physicians than ever before, this whitepaper shares tips for simplifying accounting while also making staffing and processes more efficient to support practice profits and physician productivity.

In an article I wrote for Magazine this year, one of my key points emphasized the importance of high physician productivity. Physicians who spend increasing time on administrative duties can contribute to more than 50 percent of practice losses. It’s simple math. If they are not billing time for patient care, then they are not billing.

And yet, math (or accounting as we call it) is often what trips up a small to mid-sized practice group on the path to profits. It’s not only the accounting itself, but also the processes and controls in place to manage it. Physician group owners can spend a lot of time worrying over reimbursement from a variety of third-party payor models as well as compliance to support reimbursement, but the building blocks of efficient accounting lie with staffing, processes and accounts receivable. For example:

Staffing: If your administrative staff is not trained on reducing cancellation rates or inviting patients to set up a payment plan, these are potential points of loss.
Processes: Online scheduling options, automated appointment reminders and online bill pay can all help to streamline customer service and cash flow.
Accounts Receivable: Software that combines accounting with your payroll and reporting can help produce reports for partners as well as bankers to review revenue projections and make better business decisions such as the right time to purchase new equipment or buy a building.

We find that streamlined accounting processes on their own can improve practice efficiency and physician productivity. Give your staff the right tools and the autonomy to improve efficiency. Understand your key performance indicators. Track your numbers regularly through simplified reports. Let’s look at a few ways this can be accomplished in a small to mid-sized practice.

Simplifying Staffing Ties to Physician Productivity

Traditionally, physicians groups will hire part-time staff in scheduling and bookkeeping to bookend the practice delivery. The patient gets scheduled, treated and sent a bill. The physicians still wear many hats to oversee the business and also serve patients.

Practice management systems can help to centralize insurance submissions, accounting, billing, payroll and reporting. There are many practice management software solutions available to practices today, and it’s important that these systems are cost-effective, user friendly and compatible with other systems in the practice. Problems occur, however, when administrative employees are not properly trained on all of the tools and capabilities of the system, but also if they don’t understand the goals of the practice.

For example, the three main areas staff should be focused on include:

Risk management. Make sure referrals and insurance authorizations are checked at registration and that patient co-pays are collected.
Claims management. Make sure all services are billed properly through the system.
Make sure that no-shows are reduced through appointment reminders and rescheduling options as quickly as possible.

If you are limited in administrative staffing — which every small to mid-sized practice should be — consider which back-office functions can be outsourced to professionals who specialize in them, including human resources, payroll administration, performance management and even recruitment. Also, there is IT support, legal expertise and medical billing. The right vendors will be efficient and pass along savings through fewer errors, a third-party perspective on best practices and healthier accounts receivable.

As an exercise, tally up the salary and benefits of a full-time equivalent employee to perform an office function correctly — as well as the cost of system upgrades, training, supplies and office space. Then look at the percentage a vendor will charge to handle the function for you.

We are not advocating that you necessarily terminate or reduce your administrative staff. In fact, by freeing up their time to focus more on patient service and follow-up, you will better leverage internal staff to support efficient scheduling and maintaining the office practice management system. They can also promote patient use of any online self-serve tools you have in place or will soon have in place.

Continue Reading: Simplifying Processes in Health Care Practices

Contact Scott at scott.bates@cornwelljackson.com or 972-202-8000.

Rules for Auto-Enrollment 401(k)s

Posted on October 16, 2017July 23, 2024 by Debra Barcuch

The Pension Protection Act, passed in 2006, gave a major boost to automatic enrollment 401(k) plans. These plans enable companies to include employees in their plans unless they choose to opt out of participation. Now, new proposed regulations provide guidance for default investments. Auto-enrollment plans were available before the law passed. But the Pension Protection Act overcomes certain state law hurdles that hindered these plans in the past. Employers can limit the automatic feature to new-hires or extend it to the existing workforce. To further encourage retirement savings, the new law makes it easier for employers to automatically increase the percentage of an employee’s salary directed to the account.

“Too many workers, some overwhelmed by investment choices or paperwork, are leaving retirement money on the table by not signing up for their employers’ defined contribution plan,” said Former U.S. Labor Secretary Elaine L. Chao. “This regulation would boost retirement savings by establishing default investments for these workers that are appropriate for long-term savings.”

One likely side effect of installing an auto-enrollment plan is larger allowable salary reduction contributions for higher-paid employees, because lower-paid workers are contributing more.

Prior to the Pension Protection Act, plan sponsors were often reluctant to assume the responsibility for making investment decisions without specific direction from participants. Thus, the sponsors typically sought to minimize exposure by limiting default investments to money market funds and other conservative vehicles.But once a company decides on an automatic enrollment plan, the question is: Where to invest the money?

Now plan sponsors have more options. Under the new Labor Department regulations, a participant is treated as exercising sufficient control over the account assets if these six basic requirements are met:

Assets invested on behalf of participants are allocated to “qualified default investment alternatives.”
Participants have the opportunity to direct investment of the assets in their accounts (but not direct the assets).
Participants must receive adequate notice.
Materials provided to the plan about investments are made available to participants.
Participants have sufficient time to transfer assets.
The 401(k) plan must offer a range of investment alternatives.

Default investments should be diversified to minimize the risk of large losses. In addition, if a participant chooses not to direct the investment of assets in his or her account, age is the only objective and readily available factor for making an investment decision on his or her behalf. Other factors — including risk tolerance and total investment assets — do not have to be taken into account.

In summary: The Pension Protection Act can result in key changes for your company’s plan. According to the Labor Department, approximately one-third of eligible workers do not participate in their employer-sponsored 401(k) plans. With the new regulations, your company can increase participation dramatically. Consult with your tax adviser and benefits professional to find out how to take advantage of the new law and to help ensure compliance.

Taxable vs. Tax-Advantaged Accounts

Posted on October 12, 2017July 23, 2024 by Debra Barcuch

When investing for retirement, people usually prefer tax-advantaged accounts, such as IRAs, 401(k)s or 403(b)s. But investments such as municipal bonds and passively managed index mutual funds may be better for traditional taxable accounts. This article unpacks why the more tax efficient an investment, the more benefit investors get from owning it in a taxable account, and vice versa.

Where you hold your investments matters

When investing for retirement or other long-term goals, people usually prefer tax-advantaged accounts, such as IRAs, 401(k)s or 403(b)s. Certain assets are well suited to these accounts, but other investments make far more sense for traditional taxable accounts. Knowing the difference can help bring you closer to your financial goals.

Understand how they’re taxed

Where you own assets matters because of how they’re taxed. Some investments, such as fast-growing stocks, can generate substantial capital gains, which generally occurs whenever you sell a security for more than you paid for it.

When you’ve owned that investment for over a year, you recognize long-term gains, taxed at a maximum rate of 20%. In contrast, short-term gains, recognized when the holding period is one year or less, are taxed at your ordinary-income tax rate — maxing out at 39.6%.

Meanwhile, if you own a lot of dividend-generating investments, you’ll need to pay attention to the tax rules for dividends, which belong to one of two categories:

Qualified. These dividends are paid by U.S. corporations or qualified foreign corporations. Assuming you’ve met the applicable holding period requirements, qualified dividends are, like long-term gains, subject to a maximum tax rate of 20%.

Nonqualified. These dividends — which include most distributions from real estate investment trusts (REITs) and master limited partnerships (MLPs) — receive a less favorable tax treatment. Like short-term gains, nonqualified dividends are taxed at your ordinary-income tax rate.

Taxable interest (such as from corporate bonds and most U.S. government bonds) also is generally subject to ordinary-income rates.

Finally, there’s the 3.8% net investment income tax (NIIT) for higher-income taxpayers to consider. But the NIIT might be repealed under health care or tax reform legislation. (Contact us for the latest information.)

Tax-efficient investments

Generally, the more tax efficient an investment, the more benefit you’ll get from owning it in a taxable account.

Consider municipal bonds (“munis”), either held individually or through mutual funds. Munis are particularly attractive to tax-sensitive investors because their income is exempt from federal income taxes and sometimes state and local income taxes as well. Because you don’t get a double benefit when you own an already tax-advantaged security in a tax-advantaged account, holding munis in your 401(k) or IRA would result in a lost opportunity.

Passively managed index mutual funds or exchange-traded funds, and long-term stock holdings, are also generally appropriate for taxable accounts. Over time, these securities are tax efficient because they’re more likely to generate long-term capital gains, whose tax treatment is relatively favorable. Securities that generate more of their total return via capital appreciation or that pay qualified dividends are also better taxable account options.

Investments that generate ordinary income

What investments work best for tax-advantaged accounts? Taxable investments that tend to produce much of their return in ordinary income, for one. This category includes corporate bonds, especially high-yield bonds, as well as REITs, which are required to pass through most of their earnings as shareholder income. Most REIT dividends are nonqualified and therefore taxed at your ordinary-income rate.

Another tax-advantaged-appropriate investment may be actively managed mutual funds. Funds with significant turnover — meaning their portfolio managers are actively buying and selling securities — have increased potential to generate short-term gains that ultimately get passed through to you. Because short-term gains are taxed at your higher ordinary rate, these funds would be less desirable in a taxable account.

Think beyond taxes

The above concepts are only general suggestions for taxable and tax-advantaged accounts. You may, for example, need more liquidity in your taxable account than you do in your IRA account. In this case, you might decide to hold a high-turnover equity fund or high-yield bond investments in the taxable account because you value flexibility more than favorable tax treatment.

Just keep in mind the benefits and risks — including the risk that your investments will lose value — associated with any investment decision, and know that tax issues can be complex. We can help you make the best choices for your situation.

Download the 2017 – 2018 Tax Planning Guide

Could Travel Per Diems Simplify Employee Expense Reimbursements?

Posted on October 11, 2017July 23, 2024 by Debra Barcuch

The process of submitting and approving expense reports for business travel can be an administrative hassle if your business reimburses employees for actual travel expenses. Fortunately, the IRS offers simplified alternatives that can save time and reduce recordkeeping.

Per Diems vs. “High-Low” Rates

Instead of reimbursing employees for their actual expenses for lodging, meals and incidentals while traveling, employers may pay them a per diem amount, based on IRS-approved rates that vary from locality to locality. If your company uses per diem rates, employees don’t have to meet the usual recordkeeping rules required by law.

Receipts of expenses generally aren’t required under the per diem method. Instead, the employer simply pays the specified allowance to employees, although they still must substantiate the time, place and business purpose of the travel. Per diem reimbursements generally aren’t subject to income or payroll tax withholding or reported on the employee’s Form W-2.

Important note: Per diem rates can’t be paid to individuals who own 10% or more of the business.

Under the “high-low method,” the IRS establishes an annual flat rate for certain areas with higher costs of living. All the locations within the continental United States that aren’t listed as “high-cost” automatically fall into the low-cost category. The high-low method may be used in lieu of the specific per diem rates for business destinations. Examples of high-cost areas include San Francisco, Boston and Washington, D.C. (See the chart below for a complete list by state.)

Under some circumstances — for example, if an employer provides lodging or pays the hotel directly — employees may receive a per diem reimbursement only for their meals and incidental expenses. There is also a $5 incidental-expenses-only rate for employees who don’t pay or incur meal expenses for a calendar day (or partial day) of travel.

Slight Increases for 2018

The IRS recently updated the per diem rates for business travel for fiscal year 2018, which starts on October 1, 2017. Under the high-low method, the per diem rate for all high-cost areas within the continental United States is $284 for post-September 30, 2017, travel (consisting of $216 for lodging and $68 for meals and incidental expenses). For all other areas within the continental United States, the per diem rate is $191 for post-September 30, 2017, travel (consisting of $134 for lodging and $57 for meals and incidental expenses). Compared to the prior simplified per diems, both the high- and low-cost area per diems have increased $2.

The following costs aren’t included in incidental expenses:

- Transportation costs between places of lodging or business and places where meals are taken, and

Mailing costs of filing travel vouchers and paying employer-sponsored charge card billings.

Accordingly, eligible taxpayers using per diem rates may separately deduct, or be reimbursed for, transportation and mailing expenses.

The IRS also modified the list of high-cost areas for post-September 30 travel. The following localities have been added to the high-cost list:

Oakland, Calif.,
Lewes, Del.,
Fort Myers, Fla.,
Hyannis, Mass.,
Petoskey, Mich.,
Portland, Or., and
Vancouver, Wash.

On the other hand, these areas have been removed from the previous list of high-cost localities:

Sedona, Ariz.,
Los Angeles, Calif.,
Vero Beach, Fla., and
Kill Devil, N.C.

Note: Certain tourist-attraction areas only count as high-cost areas on a seasonal basis. Starting on October 1, the following tourist-attraction areas have changed the portion of the year in which they are high-cost localities:

Aspen, Colo.,
Denver/Aurora, Colo.,
Telluride, Colo.,
Vail, Colo.,
Bar Harbor, Maine,
Ocean City, Md.,
Nantucket, Mass.,
Philadelphia, Pa.,
Jamestown/Middletown/Newport, R.I., and
Jackson/Pinedale, Wyo.

Rules and Restrictions

Companies that use the high-low method for an employee must continue to use it for all reimbursement of business travel expenses within the continental United States during the calendar year. The company may use any permissible method to reimburse that employee for any travel outside the continental United States, however.

For travel in the last three months of a calendar year, employers must continue to use the same method (per diem method or high-low method) for an employee as they used during the first nine months of the calendar year. Also, employers may use either:

1. The rates and high-cost localities in effect for the first nine months of the calendar year or

2. The updated rates and high-cost localities in effect for the last three months of the calendar year, as long as they use the same rates and localities consistently for all employees reimbursed under the high-low method.

Company Deductions

In terms of deducting amounts reimbursed to employees on the company’s tax return, employers must treat meals and incidental expenses as a food and beverage expense that’s subject to the 50% deduction limit on meal expenses. For certain types of employees — such as air transport workers, interstate truckers and bus drivers — the percentage is 80% for food and beverage expenses related to a period of duty subject to the hours-of-service limits of the U.S. Department of Transportation.

Example: A company reimburses its marketing manager for attending a June trade show in Philadelphia based on the $284 high-cost per diem. It may deduct $250 ($216 for lodging plus $34 for half of the meals and incidental expense allowance).

Need Assistance?

Could using travel per diems work for your business? Contact us to discuss the pros and cons of per diem substantiation methods. We can help you implement travel expense reimbursement policies and procedures that will pass IRS scrutiny.

The High-Cost Area List for 2018

State	Key City
California	Mill Valley/San Rafael/Novato (October 1-October 31; June 1-September 30)
	Monterey (July 1-August 31)
	Napa (October 1-October 31; May 1-September 30)
	Oakland (October 1-October 31; January 1-September 30)
	San Francisco
	San Mateo/Foster City/Belmont
	Santa Barbara
	Santa Monica
	Sunnyvale/Palo Alto/San Jose
Colorado	Aspen
	Denver/Aurora
	Grand Lake (December 1-March 31)
	Silverthorne/Breckenridge (December 1-March 31)
	Steamboat Springs (December 1-March 31)
	Telluride
	Vail (December 1-March 31; July 1-August 31)
Delaware	Lewes (July 1-August 31)
District of Columbia	Washington, D.C.
Florida	Boca Raton/Delray Beach/Jupiter (January 1-April 30)
	Fort Lauderdale (January 1-April 30)
	Fort Meyers (February 1-March 31)
	Fort Walton Beach/DeFuniak Springs (June 1-July 31)
	Key West
	Miami (December 1-March 31)
	Naples (December 1-April 30)
Illinois	Chicago (October 1-November 30; April 1-September 30)
Maine	Bar Harbor (October 1-October 31; July 1-September 30)
Maryland	Ocean City (July 1-August 31)
Massachusetts	Boston/Cambridge
	Falmouth (July 1-August 31)
	Hyannis (July 1-August 31)
	Martha’s Vineyard (June 1-September 30)
	Nantucket (June 1-September 30)
Michigan	Petoskey (July 1-August 31)
	Traverse City/Leland (July 1-August 31)
New York	Lake Placid (July 1-August 31)
	New York City
	Saratoga Springs/Schenectady (July 1-August 31)
Oregon	Portland (October 1-October 31, March 1-September 30)
	Seaside (July 1-August 31)
Pennsylvania	Hershey (June 1-August 31)
	Philadelphia (October 1-November 30; April 1- September 30)
Rhode Island	Jamestown/Middletown/Newport (October 1-October 31; June 1-September 30)
South Carolina	Charleston (October 1-November 30; March 1-September 30)
Utah	Park City (December 1-March 31)
Virginia	Virginia Beach (June 1-August 31)
	Wallops Island (July 1-August 31)
Washington	Seattle
	Vancouver (October 1-October 31; March 1-September 30)
Wyoming	Jackson/Pinedale (June 1-September 30)

– Source: IRS

How to Maximize Tax Breaks for Work-Related Education Costs

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

School is back in session. So, it’s time for a refresher on tax breaks for work-related education expenditures. Here’s what individual taxpayers need to know.

Are You Self-Employed?

Self-employed individuals may be eligible to deduct qualified work-related education expenses on their business tax forms. Self-employeds don’t have to worry about the 2%-of-adjusted-gross-income limit for itemized deductions or the alternative minimum tax rules. But they should heed the warnings about undergraduate degrees and MBAs provided in the main article.

American Opportunity Credit

The American Opportunity credit equals 100% of the first $2,000 of qualified postsecondary education expenses plus 25% of the next $2,000 of qualified education costs (subject to certain income-based phaseouts). The maximum annual credit is $2,500, and it’s potentially available regardless of whether your classes are work-related.

Qualified expenses include:

Tuition,
Mandatory enrollment fees, and
Books and other course materials.

What costs are not eligible? You can’t claim the American Opportunity credit for the costs of student activities, athletics, health insurance, or room and board.

You’re ineligible for the American Opportunity credit if you’ve already completed four years of undergraduate college work as of the beginning of the tax year. You’re also ineligible for the credit if you’re married and don’t file jointly with your spouse. On a more favorable note, you can claim the credit for your own expenses and additional credits for your spouse and dependent children if they also have qualified expenses.

To qualify for this credit, you must attend an eligible institution. Fortunately, most accredited public, nonprofit, and for-profit postsecondary schools meet this definition, and some vocational schools do, too. The two main criteria are that 1) the school must offer programs that lead to a recognized undergraduate credential, such as Associate of Arts, Associate of Science, Bachelor of Science (BS) or Bachelor of Arts (BA), and 2) the school must qualify to participate in federal student aid programs. Additionally, the American Opportunity credit is allowed for only a year during which you carry at least half of a full-time load, for at least one academic period beginning in that year.

You do have to be a fairly serious student to be eligible for the credit, but you don’t have to go to school full time or actually intend to complete a degree or credential program.

Finally, the American Opportunity credit may be partially or completely phased out if your modified adjusted gross income (MAGI) is too high. For 2017, the MAGI phaseout ranges are:

Between $80,000 and $90,000 for unmarried individuals, and
Between $160,000 and $180,000 for married joint filers.

Lifetime Learning Credit

The Lifetime Learning credit equals 20% of up to $10,000 of qualified education expenses, with a maximum credit amount of $2,000. In addition to applying this credit to the costs of the first four years of full-time undergraduate study, you can use this credit to help offset costs:

When you’re carrying a limited course load or after the first four years of undergraduate study (when the American Opportunity credit is unavailable),
For part- or full-time graduate school coursework, or
For miscellaneous courses to maintain or improve your job skills.

The credit is potentially available regardless of whether your classes are work-related. Only one Lifetime credit can be claimed on your return, even if you have several students in the family. You also can’t claim both the American Opportunity and Lifetime Learning credits for the same student for the same year. However, you can potentially claim the American Opportunity credit for one or more students and the Lifetime Learning credit for another.

The requirements for the Lifetime Learning credit are similar to the requirements for the American Opportunity credit. Qualified expenses are tuition, mandatory enrollment fees, and course supplies and materials (including books) that must be purchased directly from the school itself. Other expenses — including optional fees and room and board — are off limits.

In addition, the school you attend must be an eligible institution. If you are married and don’t file jointly with your spouse, you are ineligible for the Lifetime credit, and the credit is phased out if your modified adjusted gross income (MAGI) is too high. However, the ranges for the Lifetime credit are lower than for the American Opportunity credit, which means they’re more likely to affect you. For 2017, the MAGI phaseout ranges are:

Between $56,000 and $66,000 for unmarried individuals, and
Between $112,000 and $132,000 for married joint filers.

Employer-Provided Educational Assistance Plan

If you’re fortunate enough to work for a company that offers an educational assistance plan, you can potentially receive up to $5,250 in annual tax-free reimbursements for your education costs. These plans are also called Section 127 plans. The tax rules permit Sec. 127 plans to cover just about anything that constitutes education, including graduate coursework, regardless of whether it’s job-related. However, some plans only reimburse for education that is, in fact, job-related. That’s up to your employer.

There are only two restrictions under the tax rules:

The education must be for you, the employee, rather than a family member, and
The plan can’t pay for courses involving sports, games or hobbies unless they relate to company business.

Employer Reimbursements for Job-Related Education

Your employer can also give you an unlimited amount of tax-free reimbursements to cover qualified education expenses. In a nutshell, you have qualified expenses if the education:

Is required by your employer or by law or regulation in order for you to retain your current job, or
Maintains or improves skills required in your current job.

Qualified expenses don’t include the cost of education that sets you up for a new occupation or profession. If your employer pays for that kind of education, the payments count as taxable compensation — unless they’re run through a Sec. 127 educational assistance plan.

Deductions for Job-Related Education Costs

If your employer doesn’t provide any financial assistance, you still may be able to write off all or a portion of your qualified education expenses as a miscellaneous itemized deduction for unreimbursed employee business expenses. These expenses are combined with other miscellaneous itemized deduction items, such as union dues, investment expenses, and fees for tax preparation and advice. If the sum total of all your miscellaneous expense items exceeds 2% of your adjusted gross income (AGI), you can write off the excess.

The IRS says an undergraduate degree automatically prepares you for a new profession, so costs to obtain a BA or BS aren’t qualified education expenses, and you can’t deduct them. The IRS makes the same argument about Master of Business Administration (MBA) degrees, but several U.S. Tax Court decisions disagree. Those decisions say MBA costs are qualified expenses if the extra degree simply maintains or improves skills needed in your current job, which is often the case.

The IRS also says the cost of a law school degree can’t be deducted because law school prepares you for a new profession, even if you don’t actually intend to practice law.

Finally, the cost of any other advanced degree that prepares you for a new profession isn’t deductible. For instance, if you’ve been working as a car rental agency representative since you graduated with a BS in chemical engineering, you can’t deduct the cost of going back to school to obtain a master’s degree or doctorate in chemical engineering to prepare you to enter that field.

Unfortunately, under the current alternative minimum tax (AMT) rules, you get no write-off for miscellaneous itemized deduction items. So if you’re subject to AMT, you may be ineligible for any work-related education deductions.

Lessons Learned

The issue of tax breaks for education expenses can be confusing. There are multiple breaks with multiple sets of rules, and several breaks may potentially be available for the same expenses. Your tax professional can sort out the rules and advise you on how to get the most tax savings from your work-related education expenses.

Federal Contractors Get a Minimum Wage Increase in 2018

Posted on October 9, 2017July 23, 2024 by Debra Barcuch

The U.S. Department of Labor’s Wage and Hour Division (WHD) has announced that the minimum wage rate for federal contractors will increase from $10.20 per hour to $10.35 per hour, effective January 1, 2018.

Background Information

On February 12, 2014, President Obama signed Executive Order 13658 which established a minimum wage rate for federal contractors. The executive order required parties who contract with the federal government to pay workers performing work on or in connection with covered federal contracts at least:

$10.10 per hour beginning January 1, 2015; and
An amount determined by the Secretary of Labor in accordance with the methodology in the executive order, beginning January 1, 2016, and annually thereafter. The rate was increased to $10.15 per hour, effective January 1, 2016 and $10.20, effective January 1, 2017.

Tipped Employees

The executive order also requires annual adjustments to the minimum cash wage rate for tipped federal contract employees. The WHD has announced that the minimum cash wage for tipped employees performing work on or in connection with a federal contract will increase from $6.80 per hour to $7.25 per hour, effective January 1, 2018.

The contractor must increase the cash wage paid to a tipped employee to make up the difference if a worker’s tips combined with the required cash wage of at least $7.25 per hour don’t equal the hourly minimum wage rate for contractors as noted above. Certain other conditions must also be met.

Minimum Wage for Other Employees

The minimum wage amount listed above is only for federal contractor employees. Under the Fair Labor Standards Act (FLSA), the federal minimum wage for covered non-exempt employees who aren’t employed by federal contractors is $7.25 per hour. Many states and municipalities also have their own minimum wage laws. If your business operates in a state or municipality that has a higher minimum wage than the federal level, your employees are entitled to the highest rate.

What Employers in Some States Must Pay

Some examples of states with minimum wage per-hour rates currently higher than the federal rate are Washington ($11.00), Massachusetts ($11.00), Oregon ($10.25), Connecticut ($10.10), Vermont ($10.00), Arizona ($10.00), Rhode Island ($9.60), New York ($9.70), Colorado ($9.30), Maryland ($9.25), Maine ($9.00), Michigan ($8.90), West Virginia ($8.75),South Dakota ($8.65), New Jersey ($8.44), Illinois ($8.25), Florida ($8.10) and New Mexico ($7.50).

Some states have different minimum wage rates for large and small employers and impose other requirements. For example:

In California, the minimum wage is $10.00 for employers with less than 25 employees and $10.50 for those with 26 or more.
Large employers in Minnesota (defined as enterprises with annual receipts of $500,000 or more) have a minimum wage rate of $9.50 per hour while small employers (enterprises with annual receipts of less than $500,000) have a minimum wage rate of $7.75 per hour.
In Ohio, employers with annual gross receipts of $299,000 or more must pay $8.15 per hour and those with annual gross receipts under $299,000 must pay $7.25 per hour.
In Nebraska, employers with four or more employees have a minimum wage of $9.00 per hour.
Nevada requires employers that provide no health insurance benefits to pay $8.25 per hour and employers that do provide health insurance benefits to pay $7.25 per hour.

Federal and State Tipped Employee Rules

An employer of a tipped employee is required to pay $2.13 an hour in direct wages if:

That amount plus the tips received equals at least the federal minimum wage,
The employee retains all tips and the employee customarily, and
The employee regularly receives more than $30 a month in tips.

Many states also have their own laws related to tipped employees. Again, if an employee is subject to both federal and state laws, he or she is entitled to the law that provides the greater benefits. Some states (including California, Oregon, Nevada, Montana, Minnesota and Alaska) require employees to pay tipped employees the full state minimum wage.

Contact your Cornwell Jackson payroll advisor if you have questions about minimum wage issues in your situation.

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