December 2017

Plan Ahead in 2018 for Accounting for New Long-Term Contracts

Posted on December 27, 2017July 23, 2024 by Debra Barcuch

Concept of construction and design. 3d render of blueprints and designer tools on the panorama of construction site.

Let’s say that your company established the completed contract method of accounting for long-term contracts that are exempt from Code Section 460 because its gross receipts fell under the $10 million threshold.

As the company grew, it continued to use this accounting method. It had two very good years in 2015 and 2016. In 2017 average annual gross receipts for 2014-2016 exceeded $10 million for the first time. For contracts that were open in 2016, the company will continue to report income from those contracts under the completed contract method. For contracts that were started in 2017, the company will be required to report under the percentage of completion method in accordance with Code Section 460 for every year until the contracts are complete.

However, for contracts started in 2018, because the gross receipts threshold was adjusted to $25 million, those contracts are exempt from complying with Code Section 460. The company will report those contracts under the completed contract method since it is the company’s established accounting method for exempt contracts.

Then again, if it was decided that it made sense to report 2018 contracts under a different accounting method other than completed contract, the company will need to file for a change in accounting method with the IRS. The change is not classified as an automatic change; Form 3115 will need to be filed with the IRS prior to year-end. A user fee (currently $9,500) will also need to be paid in order for the Form 3115 to be processed.

The bottom line is that companies with three-year trailing average gross receipts under the $25 million threshold in 2018 should do an analysis to determine if a change in accounting method makes sense. The analysis should include the following factors:

Whether an overall method of accounting of cash or accrual is the most advantageous;
The amount of taxable income deferred under the various accounting methods for long-term contracts;
The effect of AMT on the owners’ returns given the new AMT exemptions and elevated phase-outs;
The expected growth rate for the company and the length of time before it is expected to reach the $25 million threshold.

With thoughtful consideration and planning, the proper accounting method for long-term contracts can result in the deferral of a significant amount of income tax, which will help your company manage working capital more effectively.

Download the Whitepaper: 2017 Tax Law Impacts Accounting for Long-Term Contracts

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.

Highlights of the New Tax Reform Law for Businesses

Posted on December 21, 2017July 23, 2024 by Debra Barcuch

Text Tax Reforms appearing behind ripped brown paper.

Tax Reform Law – Significant Changes Affecting Business

The new tax reform law, commonly called the “Tax Cuts and Jobs Act” (TCJA), is the biggest federal tax law overhaul in 31 years, and it has both good and bad news for taxpayers.

Below are highlights of some of the most significant changes affecting business. Except where noted, these changes are effective for tax years beginning after December 31, 2017.

Tax Cuts and Jobs Act

Replacement of graduated C-corporation tax rates ranging from 15% to 35% with a flat rate of 21%
Repeal of AMT for C-corporations.
New 20% qualified business income deduction for owners of flow-through entities (such as partnerships, limited liability companies and S corporations) and sole proprietorships — through 2025. This is a highly complex provision with many limitations and nuances. Individuals and trusts with an ownership interest in any non-C corporation business should meet with their tax advisor soon to make sure their business is situated to maximize the deduction for 2018.
Doubling of bonus depreciation to 100% and expansion of qualified assets to include used assets — effective for assets acquired and placed in service after September 27, 2017, and before January 1, 2023
Doubling of the Section 179 expensing limit to $1 million and an increase of the expensing phaseout threshold to $2.5 million
Other enhancements to depreciation-related deductions
New disallowance of deductions for net interest expense in excess of 30% of the business’s adjusted taxable income (exceptions apply). This is another new provision that has traps for the unwary. Business that are highly leveraged should meet with their tax advisor to understand how this provision may affect their tax liability.
New limits on net operating loss (NOL) deductions.
Excess business losses for trusts and individuals are no longer available to offset non-business income and are treated as net operating losses.
Elimination of the Section 199 deduction, also commonly referred to as the domestic production activities deduction or manufacturers’ deduction — effective for tax years beginning after December 31, 2017, for noncorporate taxpayers and for tax years beginning after December 31, 2018, for C-corporation taxpayers
Changes the revenue threshold from average gross receipts for the three previous tax years of $10 million to $25 million:
- Businesses are required to use the accrual method of accounting;
- Businesses are required to capitalize certain non-direct costs under Section 263A;
- Businesses with long-term contracts are required to use the percentage of completion;

New rule limiting like-kind exchanges to real property that is not held primarily for sale.
New tax credit for employer-paid family and medical leave — through 2019
New limitations on excessive employee compensation
New limitations on deductions for employee fringe benefits, such as entertainment and, in certain circumstances, meals and transportation

More to consider

This is just a brief overview of some of the most significant TCJA provisions. There are additional rules and limits that apply, and the law includes many additional provisions. Contact your Cornwell Jackson tax advisor to learn more about how these and other tax law changes will affect you in 2018 and beyond.

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.

2017 Tax Reform: Special Study on Individual Tax Changes in the Tax Cuts and Jobs Act

Posted on December 20, 2017July 23, 2024 by Debra Barcuch

On December 19, the House approved H.R. 1, the “Tax Cuts and Jobs Act,” the sweeping tax reform measure, by a vote of 227 to 203. Shortly thereafter, the Senate encountered some procedural complications and ultimately passed a revised version of the bill later that night by a margin of 51 to 48. The revised version of the bill carries the title “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.” This special report refers to the Act by its former and commonly used name: The “Tax Cuts and Job Act.” The revised bill was again approved by the House on Wednesday, December 20th, and is now on its way to President Trump’s desk for his expected signature.

The bill has taken shape at breakneck pace over the past two months, making it difficult for even seasoned tax practitioners to know exactly where things stand. The bill itself is massive and contains many tax law changes, some of which are extremely complex, and many of which go into effect in a matter of weeks.

This special report explains the changes that affect the taxation of individuals. In addition to providing a summary of the changes, it also clearly sets out the effective dates (which in many cases include an expiration date, or “sunset”), the Code section(s) affected, the bill’s section number, and a recitation of prior law to put the amendment into context.

This information will help practitioners prepare for the year ahead, which will likely include squeezing in last-minute tax planning moves in 2017 to take advantage of provisions still on the books that won’t be available next year. For example, a taxpayer who will itemize in 2017 but will likely be taking the larger standard deduction next year may benefit from making charitable contributions this year instead of next and from accelerating certain discretionary medical expenses into this year, for which a retroactively lower “floor” limiting medical expense deductions is in effect. In many cases, 2017 itemizing taxpayers should pay all of 2017 state and local taxes (“SALT”) this year (even if the due date for the last installment is in 2018) and consider making prepayments (e.g., of property taxes) in light of the significant reduction in the SALT deduction going into effect next year. Many taxpayers should also consider ways of deferring income to take advantage of the lower rates going into effect next year.

This report sets out all of these changes, as well as many others including dramatic changes to the tax treatment of alimony and a new rule that disallows the use of a re-characterization to unwind Roth IRA conversions.

Download the Special Study here.

To learn more about how the new tax laws will affect you, contact one of Cornwell Jackson’s tax specialists today.

How the Work World is Changing with Millennials

Posted on December 18, 2017 by Debra Barcuch

Definitions of the Millennial generation vary, but basically these are people who, today, range from 20 to 36 years old. Their distinctive characteristics are attributed to two primary factors:

Most were raised by highly attentive Baby Boomer parents, and
Instant communication via electronic technology has been ubiquitous.

As Millennials left home and went to college, far from being tossed into a sink-or-swim environment, many of them landed instead in a cocoon. For some Millennials, that protective nest was created by institutions trying to accommodate their expectations and included some sheltering from the slings and arrows of normal life. So when Millennials join your workforce, they may assume that pattern of nurturing will continue.

That leaves employers with the choice to accommodate them (within reason), or treat them the way they treated employees of other generations when they first entered the workforce.

How Some Millennials View the World of Work

Many anticipate:

An orderly work environment and clearly articulated directions,
An informal atmosphere that emphasizes collaborative work arrangements instead of a top-down hierarchical structure (notwithstanding the desire for an orderly work environment mentioned above),
A basic understanding of the broader context of their role within your organization,
Enjoyment and stimulation tied to their work, rather than a nose-to-the-grindstone atmosphere,
Recognition of their contributions, as well as regular feedback on performance,
The chance to add their opinions about how things should be done,
Opportunities to acquire new skills,
A sense of purpose in their work,
Work-life balance, and
Communication with co-workers and superiors mostly by email or other electronic means, rather than face-to-face.

Perhaps you’re confident that your management philosophy and work environment already accommodate such expectations. But it’s helpful to take a step back and assess the degree to which that’s true. One telling indicator might be the turnover rate among this generation of employees. Keep in mind, however, that Millennials have been dubbed by the Gallup Organization as the “job-hopping generation” due to their tendency to not stay too long with employers. (In fairness, many jobs these days are done on a contract basis and are designed to end after a specified term, even for Millennials that would choose to stay.)

Motivating this Generation

Here are some recommended steps to maximize the productivity of Millennials and lower their turnover rates:

Provide structure and guidance. While few Millennials are looking for helicopter-style supervisors breathing down their necks, many would like their bosses to be attentive to their efforts and readily available for advice and direction upon request.
Selectively encourage team formation. Group projects were common in school assignments for Millennials, so you may find fewer lone wolves among this group than in earlier generations.
Keep them briefed. They’re anxious to know how they and their workgroup or division is contributing to the performance of the entire organization, as well as how the company as a whole is doing relative to it its peers.
Mix work and play. You probably don’t want to turn your workplace into a Silicon Valley-style field of foosball tables and other impromptu games. However, you can still be open to having an upbeat — and even playful work environment — without making the office into a playground.
Provide feedback, feedback, feedback. Members of the generation when “every player got a trophy” don’t necessarily expect to receive high praise no matter what, but they also don’t want to wonder about their performance. Although it’s important to maintain a documented work appraisal system, Millennials seem to expect and appreciate more frequent casual comments about how they are doing.
Make conversations with employees a two-way street. “360 feedback” is an old concept, but it often has particular appeal for Millennials. And it’s not just about how managers are doing, but about how the company could be better run.
Create training and development opportunities. Like many young people, members of this generation tend to be impatient, and like to see a path to new roles and growth opportunities. Giving them the chance to make their own decisions about the direction of their skills development can be particularly motivational.
Cultivate a “greater good” culture. Part of many Millennials’ common desire for social connection (as manifested in their social media habits) spills over into a longing to do work that has meaning — and a sense that their efforts are ultimately improving society. Emphasize the benefits that your company’s products or services create in your community or beyond, over and above providing a paycheck to its employees.
Pay attention to your digital footprint. Millennial applicants will search the Internet before they interview with your organization. Make sure your website and social media pages reflect the image you want to project.
Prevent work overload. Inevitably, there will be crunch periods when overtime is unavoidable. But many Millennials tend not to be workaholics, so watch for signs of burnout. Provide work schedule flexibility to offset the emotional impact of long stretches of demanding work schedules.

The good news about adapting to your growing younger workforce is that doing so doesn’t come at the expense of alienating older workers. At worst, they’ll probably just be neutral about it. But it’s entirely possible that moving towards being a Millennial-focused organization will spur greater loyalty and productivity among your older employees as well.

Bad Debt Losses: Can You Deduct Loans Gone Bad?

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

The IRS is always skeptical when individual taxpayers claim deductions for bad debt losses. Why? Losses from purported loan transactions often fail to meet the tax-law requirements for bad debt loss deductions.

For example, a taxpayer might try to write off a capital contribution to a business entity that underperformed. Or a taxpayer might have advanced cash to a friend or relative with the unrealistic hope that the money would be paid back, but nothing was put in writing.

To claim a deductible bad debt loss that will survive IRS scrutiny, you must first prove that the loss was from a legitimate loan transaction gone bad — not merely some other ill-fated financial move. Then, you must make another important distinction: Is it a business or nonbusiness bad debt?

Bad Debt Losses

Bad debt losses that arise in the course of the taxpayer’s business are treated as ordinary losses. In general, ordinary losses are fully deductible without any limitations. In addition, partial deductions can be claimed for business debts that partially go bad.

An exception to these general rules occurs when a taxpayer makes an uncollectible loan to his or her employer that results in a business bad debt loss. Under IRS rules, this type of write-off is classified as an unreimbursed employee business expense, which is combined with other miscellaneous itemized deductions (such as investment expenses and tax preparation fees) and is deductible only to the extent that the total exceeds 2% of the taxpayer’s adjusted gross income. In addition, miscellaneous itemized deductions are completely disallowed if you are liable to pay the alternative minimum tax. Unfortunately, this unfavorable exception has been upheld by previous U.S. Tax Court decisions.

Nonbusiness Bad Debts

Bad debt losses that don’t arise in the course of an individual taxpayer’s business are treated as short-term capital losses. As such, they’re subject to the capital loss deduction limitations.

Specifically, taxpayers who incur a net capital loss for the year can deduct up to $3,000 (or $1,500 for those who use married filing separately status) of the net loss against income from other sources (such as salary and self-employment income). Any remaining net capital loss is carried over to the next tax year.

So if you have a major nonbusiness bad debt loss and capital gains that amount to little or nothing, it can take several years to fully deduct the bad debt loss. In addition, losses can’t be claimed for partially worthless nonbusiness bad debts.

Case in Point

A recent U.S. Tax Court decision — Owens v. Commissioner (TC Memo 2017-157) — focused on the issue of whether an uncollectible loan was a business bad debt or a nonbusiness bad debt. Here, the taxpayer began a series of loan transactions in 2002 with Lowry Investments, a partnership that owned the largest commercial laundry business in the San Francisco Bay Area. The business served all the major hotel chains and several hospitals.

The taxpayer worked at two family businesses: Owens Financial Group, Inc. (a mortgage-brokerage company that arranged commercial loans) and the Owens Mortgage Investment Fund. He also made loans for his own account using his personal funds, starting in 1986.

In late 2008, the laundry business filed for bankruptcy, and Lowry Investments followed suit. Then, in early 2009, the founder of Lowry Investments filed for bankruptcy. Lowry’s founder had personally guaranteed the laundry business’s loans, and he claimed that his assets totaled $2.8 million against liabilities in excess of $50 million when he filed for bankruptcy. When all the bankruptcy liquidation proceedings finally concluded in 2012, the taxpayer found that he was unable to recover any of the money he’d loaned to Lowry Investments.

On his 2008 return, the taxpayer claimed a $9.5 million business bad debt loss, which resulted in a net operating loss (NOL) that was carried back to 2003 through 2005 and forward to 2009 and 2010.

The IRS audited the taxpayer and denied his bad debt deduction and the related NOL carrybacks and carryforwards. The IRS argued that the taxpayer’s lending activities didn’t amount to a business. Even if it did, the IRS claimed that the loans were more akin to equity than debt — and even if transactions qualified as debt, they didn’t become worthless in 2008.

The court disagreed with the IRS, concluding that the taxpayer was indeed in the business of lending money during the years in question, as evidenced by written promissory notes between the taxpayer and Lowry Investments that included maturity dates. The court ruled that the taxpayer’s advances constituted bona fide business debts that became worthless in 2008 when Lowry Investments and its founder filed for bankruptcy and left the taxpayer out to dry (so to speak). Therefore, the taxpayer was entitled to the $9.5 million business bad debt deduction that he claimed on his 2008 federal income tax return.

Consult with Your Tax Pro

Before you enter into a business or nonbusiness loan, always seek professional tax advice. Inadequate attention to the relevant rules can lead to unintended and unfavorable tax consequences. For example, the IRS may claim that an ill-fated advance should be classified as a personal gift or a capital contribution, which can’t be written off as a bad debt loss.

Keep Tax Reform in Mind When Making Last-Minute Year-End Moves

Posted on December 11, 2017July 22, 2024 by Debra Barcuch

As 2017 winds down, it’s time to consider making some moves to lower your federal income tax bill and position yourself for tax savings in future years. This year, the big unknown factor is which major tax reform changes will be enacted.

Even if all goes according to the GOP timeline, the changes generally won’t take effect until next year at the earliest. So your 2017 return will follow the current rules. Here are five year-end moves for you to consider.

1. Prepay Deductible Expenditures

If you itemize deductions, accelerating deductible expenditures into this year to produce higher 2017 write-offs makes sense if you expect to be in the same or lower tax bracket next year. If you expect to be in a higher tax bracket next year, the reverse could make sense — but that situation is less likely if tax reform proposals take effect in 2018.

Tax reform considerations related to prepaid expenses. Tax rates would be lower in 2018 and beyond for most taxpayers under congressional tax reform proposals. If you turn out to be in a lower bracket next year, deductions claimed this year will be worth more than the same deductions claimed next year.

In addition, proposed tax reforms would reduce or eliminate many itemized deductions. Both the House and Senate proposals would eliminate the following itemized deductions starting in 2018:

Tax preparation fees,
Foreign property taxes,
State and local income taxes,
Unreimbursed employee business expenses, and
Most other miscellaneous items.

But there are some differences between the House and Senate proposals.

The House tax reform bill would eliminate itemized deductions for 2018 and beyond, except for 1) charitable contributions, 2) state and local property taxes (subject to a $10,000 limit), and 3) a scaled-back home mortgage interest deduction. Specifically, the home mortgage deduction would:

Be subject to a lower debt limit of only $500,000 for new loans vs. $1 million under current law, and
Allow deductions for only one residence vs. two residences under current law and eliminate the deduction for interest of up to $100,000 of home equity debt allowed under current law.

The Senate tax reform bill also would eliminate most itemized deductions, except:

Home mortgage interest, subject to the current-law debt limit of $1 million but with no deduction allowed for interest on home equity loans,
Medical expenses, and
Personal casualty losses in federally declared disaster areas.

Plus, the property tax deductions would be completely eliminated under the Senate bill.

The bottom line is that, under both the House and Senate proposals, increased standard deduction amounts would offset some or all of the itemized deductions lost to tax reform, depending on your specific circumstances. In any case, prepaying deductible items before the end of 2017 will generally help lower this year’s tax bill.

But watch out for the alternative minimum tax (AMT): If you’ll owe AMT for 2017, the prepayment strategy may backfire. That’s because write-offs for state and local taxes are completely disallowed under the AMT rules and so are miscellaneous itemized deductions subject to the 2%-of-AGI rule. So prepaying these expenses may do little or no tax-saving good for AMT victims.

There’s mixed tax reform news for AMT victims. The House bill would eliminate the AMT for 2018 and beyond. (But, of course, that won’t help for 2017.) The Senate bill includes a provision to keep the current individual alternative minimum tax (AMT), but with a higher exemption threshold. An earlier version of the Senate bill repealed the AMT.

Which bills should you consider prepaying for 2017?

Mortgage payment for January. Accelerating the mortgage payments for your primary residence and/or vacation home that are due in January 2018 will allow you to deduct 13 months of mortgage interest in 2017, unless you prepaid for January 2017, in which case you’ll have 12 months of mortgage interest deductions for your 2017 return.

State and local taxes due in early 2018. Prepaying state and local income and property taxes that would otherwise be due in early 2018 will increase your itemized deductions for 2017, thereby reducing your federal income tax bill for this year.

Medical and miscellaneous expenses. Consider prepaying expenses that are subject to deduction limits based on your adjusted gross income (AGI). For example, under current law, medical expenses are deductible only to the extent they exceed 10% of AGI. So loading up on elective procedures, dental care, prescription medicine, glasses and contacts before year end could get you over the 10%-of-AGI hurdle on this year’s return.

Likewise, under current law, miscellaneous deductions — for investment expenses, job-hunting expenses, fees for tax preparation and unreimbursed employee business expenses — count only to the extent they exceed 2% of AGI. If you can bunch these kinds of expenditures into 2017, you’ll have a chance of clearing the 2%-of-AGI hurdle this year.

2. Evaluate Charitable-Giving Options

Prepaying tax-deductible charitable donations that you would otherwise make next year can reduce your 2017 federal income tax bill. Donations charged to credit cards before year end will count as 2017 contributions, even though you won’t pay the credit card bills until early next year.

Charitable deductions claimed this year will be worth more than deductions claimed next year if your tax rate goes down next year, which is likely to happen for most taxpayers if tax reform proposals are enacted.

Your tax advisor may have other creative year-end tax planning ideas for charitably inclined taxpayers to consider. For example, if you own appreciated stock or mutual fund shares that you’ve held for more than a year, you might consider donating the assets to an IRS-approved charity, instead of donating cash. Doing so will allow you to claim an itemized charitable deduction for the full market value at the time of the donation and avoid any capital gains tax hit.

Alternatively, if you own marketable securities that have decreased in value since you bought them, consider selling them and donating the proceeds. This strategy will generally allow you to claim an itemized charitable deduction for the cash donation, as well as take the resulting tax-saving capital loss.

Charitably inclined seniors (over age 70½) can also make up to $100,000 in cash donations to IRS-approved charities directly out of their IRAs. These donations — known as qualified charitable distributions (QCDs) — are tax-free. Although you can’t deduct QCDs from your tax bill, they count as withdrawals for purposes of meeting the required minimum distribution (RMD) rules that apply to your traditional IRAs after age 70½.

So, if you haven’t yet taken your 2017 RMDs, you can arrange to take tax-free QCDs before year end in place of taxable RMDs. That way you can meet your 2017 RMD obligations in a tax-free manner while also satisfying your philanthropic goals.

3. Deduct State and Local Sales Tax Instead of Income Tax

If you’ll owe little or nothing for state and local income taxes in 2017, you can choose to instead deduct state and local general sales taxes on this year’s return. You can deduct a prescribed sales tax amount from an IRS table based on where you live and other factors. However, if you’ve kept receipts that support a larger deduction, you can use that amount instead.

For example, you might want to deduct the actual sales tax amounts for major purchases, like a vehicle, motor home, boat, plane, prefabricated mobile home, or a substantial home improvement or renovation. You can also include actual state and local general sales taxes paid for a leased motor vehicle. So purchasing or leasing an item before year end could give you a bigger sales tax deduction and cut this year’s federal income tax bill.

State tax deductions affected by federal tax reform. Both the House and Senate tax reform proposals would eliminate the deduction for state and local income taxes (along with the option to deduct state and local sales taxes instead) for 2018 and beyond. So, if you don’t use this strategy in 2017, you’ll probably lose out if tax reform legislation is enacted.

4. Prepay Tuition Cost for Postsecondary Education

If you or your children qualify for either the American Opportunity or Lifetime Learning credits, consider prepaying tuition bills due in early 2018 for academic periods that begin in January through March 2018. Doing so may result in a bigger credit for higher education costs in 2017.

However, these credits are phased out for individuals with income above thresholds. Specifically:

The American Opportunity credit is gradually phased out for single individuals with modified AGI of between $80,000 and $90,000 and married joint filers with modified AGI between $160,000 and $180,000.
The Lifetime Learning credit is also gradually phased out for single individuals with modified AGI of between $56,000 and $66,000 and married joint filers with modified AGI between $112,000 and $132,000.

Tax reform considerations related to higher-education credits. The Senate tax reform proposal would leave the existing rules in place for both higher education credits. The House bill would eliminate the Lifetime Learning credit for 2018 and beyond and liberalize the American Opportunity credit to cover the first five years of undergraduate education vs. four years under the current rules.

If the Lifetime Learning credit is eliminated, no credit will be available for graduate school or other postsecondary education beyond the first five years of undergraduate study. So if you don’t take advantage of the Lifetime credit this year, you could possibly lose out.

5. Time Investment Gains and Losses for Tax Savings

Evaluate investments held in your taxable brokerage firm accounts and identify securities that have appreciated in value. For most people, the federal income tax rate on long-term capital gains is still much lower than the rate on short-term gains. If you plan on selling an investment, try to hold onto it for at least a year and a day before selling in order to qualify for the lower long-term capital gains rate.

Another tax-saving move is to consider selling securities that are currently worth less than you paid for them before year end. The resulting capital losses will offset any capital gains from earlier sales in 2017, including high-taxed short-term gains from securities that you owned for one year or less. In other words, you don’t have to worry about paying a high rate on short-term gains that you’ve successfully sheltered with capital losses.

If your capital losses exceed your capital gains, you’ll have a net capital loss for 2017. You can use it to shelter up to $3,000 of this year’s high-taxed ordinary income from such sources as salaries, bonuses and self-employment income ($1,500 if you’re married and file separately).

Any excess net capital loss is carried over to 2018 and beyond until you use it up. So it won’t go to waste. You can use it to shelter both future short- and long-term gains.

Tax reform considerations when selling securities. These tax planning strategies will continue to be viable regardless of whether congressional tax reform legislation is enacted. Both the House and Senate proposals would retain the existing three federal income tax rates for long-term capital gains and dividends (0%, 15%, and 20%) and the existing rate brackets. So the 2018 brackets would be the same as the 2017 brackets with minor adjustments for inflation.

Act Soon

Right now, nobody is certain whether major tax changes will be enacted or when they’ll go into effect. But these strategies are worth considering regardless of whether tax reform happens. As Congress works on lower tax rates and simplifying the tax law, stay in touch with your CJ tax advisor. Cornwell Jackson is monitoring tax reform and will help you take the most favorable path in your situation.

Common Qualifying Activities and Case Examples of R&D Credit Qualifications

Posted on December 7, 2017July 23, 2024 by Debra Barcuch

According to our project partner, CTI, some specific examples of qualifying research activities that architecture and engineering firms have conducted in the course of business include, but are not limited to, the following:

Experimentation with natural ventilation
Energy analysis of exterior wall systems and building envelope
Occupant thermal comfort conditions
Exterior environmental effects
Design criteria for spatial configuration
Analysis of transient heat transfer for exterior building envelope
Energy analysis of multiple skin wall
Renewable energy systems performance analysis optimization
Performance/cost analysis of PV system
Solar energy design and daylighting analysis for temp regulation
Heat transfer and dew point analysis of exterior wall
Analysis for heat transfer coefficient various materials of walls
Performance and cost analysis of photovoltaic system
Life cycle cost analysis of building integrated photovoltaics
Solar hot water system design and testing

There are also activities that do not qualify for the credit, and it’s important to know some of these examples up front before considering an R&D study:

General capital expenditures
Training
Selling existing products
Travel expenses and administrative expenses
Routine data collection; routine quality control
Marketing or market research
Activity related to management function
Reverse engineering
Funded research (Grants and Contracts)
Research outside of U.S.

Excluded Activities 41(d) (4)(c)

Research after commercial production
Adaptation of an existing business component
Duplication of an existing business component
Efficiency surveys
Research in social sciences

As you can see, the Qualifying Research Expenses (QREs) must be related to new or untried experimentation in design. The research itself must not be funded, but done in the course of normal business activities. The firm assumes all rights and risks for the research.

The final test is defense and representation of an R&D tax credit claim with the IRS. Substantial claims are likely to receive an IRS query or audit. Strong data review, accurate calculation and documentation guidance by an experienced R&D study expert are critical steps to support your firm’s ability to claim this valuable federal credit.

Talk to the tax team at Cornwell Jackson about your potential R&D qualifying activities. We can review your data to discover qualifying research expenses and help you decide if an R&D study would be financially valuable for your firm.

Download the Whitepaper: Take Another Look at R&D Credit Qualification

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 in both managing Cornwell Jackson and in providing tax planning to individuals and business leaders across North Texas. Contact him at gary.jackson@cornwelljackson.com.

Resolving Overtime Pay Disputes

Posted on December 6, 2017July 23, 2024 by Debra Barcuch

The federal overtime law can lend itself to differing interpretations. In those cases, workers may challenge how an employer applies the rules.

Under the Fair Labor Standards Act (FLSA), eligible employees must be paid time-and-a-half their regular pay rate when they work more than 40 hours a week, unless there’s an exemption. Here are three examples of when employees challenged their employer’s application of the law.

1. Bonuses and shift differentials. The Wage and Hour Division (WHD) of the Department of Labor (DOL) reached a settlement with a Midwest health care management company regarding overtime violations at 23 skilled nursing and assisted living facilities. The company agreed to pay $165,379 to 594 workers in back wages and damages.

The WHD found that the company violated the FLSA when it failed to include non-discretionary bonuses and shift differentials in calculating overtime rates. The omissions also triggered violations of the recordkeeping provisions of the FLSA.

In addition to paying the back wages and damages, the company agreed to use a new payroll service and software.

Failing to accommodate bonuses and shift differentials in overtime pay is a common FLSA violation, particularly in the health care industry.

2. Employees working multiple jobs. In another case, the U.S. Third Circuit Court of Appeals ruled that a Pennsylvania county didn’t willfully violate the FLSA when it calculated overtime.

Two employees worked two separate part-time jobs. The county tracked and paid these employees for each of their two individual jobs, but later discovered that it had failed to aggregate the hours for both jobs, resulting in a failure to pay the overtime rate.

The county didn’t dispute that it violated the FLSA’s overtime provisions. The issue at hand was whether the violations were willful. This issue matters because a finding of willfulness expands the limitations period for claims under the FLSA.

The court ruled that although there was evidence the county made bureaucratic errors that perhaps could be attributed to “government morass,” its failure to pay correctly didn’t rise to a level of “recklessness or ill will” that might have demonstrated willfulness. (Souryavong v. Lackawanna County, CA-3, Dkt. No. 15-3895, 9/20/17)

Top Court Definition of “Willfulness”

Under the U.S. Supreme Court’s long-standing definition, willfulness includes situations when the employer, at the time of its FLSA violation, either knew its conduct was prohibited by the law or “showed reckless disregard” for the matter. Simply acting unreasonably is insufficient. In other words, there must be an element of actual awareness. (McLaughlin v. Richland Shoe Co., U.S. Sup. Ct., 486 U.S. 128, 5/16/88)

The county employees argued that the violations were willful in this case because:

- The county made the same mistake with another employee who held two separate jobs,

- The county’s Human Resources director sent out an email to county officials raising the concern that employees working multiple jobs might file labor grievances, and

County officials testified that they were generally aware of the FLSA and its requirements.

The court, however, found no evidence that the county was “specifically aware” of the multiple-job FLSA overtime problems. The court also noted that the problem was addressed within a year of the email raising concerns — much sooner than another case where the court did find willful violation.

3. Requests for overtime pay. In yet a third case, the Seventh Circuit Court of Appeals upheld a lower court’s decision that a city wasn’t liable for paying overtime wages to off-duty police officers working on mobile devices. (Allen v. City of Chicago, CA-7, Dkt. No. 16-1029, 8/3/17)

The officers were members of an organized crime bureau. Although the officers had scheduled shifts, they were sometimes required to work hours when they would ordinarily be considered off-duty. To assist its officers, the police department issued mobile devices that could be used during off-duty work.

Under the police department’s procedure, officers were required to submit time slips to obtain overtime pay. The officers regularly used this system, but during the period covered by the lawsuit, many officers didn’t submit slips for work done on the mobile devices.

Was Unwritten Policy the Problem?

The main issue was whether the unwritten policy prevented or discouraged the officers from submitting overtime slips. Although an employer’s duty to pay overtime arises even when it doesn’t request the work or the work hasn’t been reported, the FLSA stops short of requiring employers to pay for work they didn’t know about and had no reason to know about.

Some plaintiffs testified that the culture of the organized crime bureau would frown on submitting slips for work using the mobile devices, but others, including some plaintiffs, had submitted slips for such work and were never denied compensation. Some supervisors knowingly approved slips submitted for such work; others probably did so without knowing it since the slips didn’t indicate whether the work was done on a mobile device.

No one ever told plaintiffs not to submit slips for that work, and no one was ever reprimanded or disciplined for submitting such slips. All told, the court concluded, the evidence didn’t bear out the common culture plaintiffs alleged and there was no FLSA violation.

Moral of the Examples

It isn’t unusual for situations to fall between the cracks of the usual overtime applications. Hire a reputable payroll provider you can trust and look to your Human Resources department for guidance.

20/20 Vision: A Look at the Future of the Industry

Posted on December 6, 2017 by Debra Barcuch

Believe it or not, 2018 is right around the corner, which means that the start of a new decade in 2020 isn’t that far off.

So the question is: Do you have 20/20 vision? In other words, how do you see your industry, and your firm’s place in it, during the next few years?

What You Can Expect

Let’s take a look at where the specialists think the industry will be heading in 2018 and beyond. Some of the changes can be expected — such as those relating to advances in technology — but others aren’t as obvious. Here are five trends to focus on.

The Internet of Things (IoT).This term has been used to sum up technological innovations. Notably, the IoT allows firms to gather intelligence that can lead to better decision-making. For example:

Wearables, or computerized devices embedded in clothing or other items, can help track workers on sites and create alerts for hazardous situations or when equipment needs repair,

Drones can track a site’s progress faster, more accurately and cheaper than aircraft and human surveyors,

High-tech equipment such as tablets used in the field help determine time spent on specific tasks, and

Tracking applications such as GPS systems can show where workers are at all times.

As construction firms continue to rely on technological efficiency to improve the bottom line, the IoT is likely to become even more significant on job sites in the future. The challenge will be sorting through the reams of data to find what can best be used at your firm.

Virtual and augmented reality. Strides continue to be made in virtual reality (VR) and augmented reality (AR). And the buzz around these technologies is growing louder as we head into 2018.

Reality technology enables parties to collaborate before the first hole is dug. Without getting out into the field, stakeholders can tour sites from their computers or other electronic devices. This lets firms visualize a site before it is built and detect and fix potential problems.

However, there’s room for improvement. Enhancements are needed to make this technology more cost-effective and work better with available software.

Modular construction. Off-site assembly — also referred to as prefabrication (“prefab”) construction — isn’t new. But some observers expect it to begin taking off in a big way in 2018 as costs have declined and quality and performance have improved.

Using modular construction in a controlled, factory-type setting, can help eliminate some of the typical hindrances in the field, especially weather. It’s also easier to maintain quality control standards.

Although growth in this area has been slow, usage is picking up steam, particularly when it comes to HVAC construction and energy consumption.

Materials and labor.Most experts see constructions costs rising significantly in 2018 — after remaining relatively flat in recent years — while labor shortages still abound. While cost increases appear inevitable, the possibility that rising inflation could exacerbate the problem has the specialists concerned. At some point, escalating costs my cause projects to be put off or removed from drawing boards.

A lack of technical training in schools and the aging workforce, suggests firms can expect to struggle to attract, retain and train workers. Already some firms have had to increase pay to to retain workers and this is expected to continue as the shortage of skilled workers persists. In addition, the costs of recruiting and training workers have grown.

The combination of these factors is forcing many firms to look for ways to cut costs.

One possible solution is a greater use of internships as firms attempt to hire workers straight out of secondary school. But construction firms need to do more to convince young people that advances in technology mean that construction is no longer strictly a blue-collar job.

Safety and fraud. Unfortunately, for years the construction industry has led the way in workplace injuries and fatalities. According to the Bureau of Labor Statistics, in 2015, the industry topped the list of worker deaths, with 937 fatalities, the highest number since 2008 and an increase of about 4% from 2014. Although the construction industry accounts for most worker deaths, it ranked fourth in highest fatal injury rates among all industries.

Nevertheless, improvements are being made, again in part due to technology. Specialists expect this trend to continue in 2018.

To this end, firms are encouraged to use safety apps that can send vital information about safety protocols to each worker in the field with little effort. If your firm is still experiencing a high number of incidents, it should examine its procedures for complying with Occupational Safety and Health Administration (OSHA) requirements and other standards.

As law enforcement officials and agencies like OSHA have taken more notice of safety in recent years, scrutiny of construction firms has heightened. It isn’t likely to abate.

Construction firms are also warned to be on the alert for fraud involving billing and misappropriation of funds. As detection methods improve, fraud investigation is expected to increase.

What’s Next?

Overall, the outlook for the construction industry over the next few years appears favorable, particularly as technology improves and is used more widely.

According to Construction Labor Contractors (CLC), the industry is expected to have one of the largest increases in real output and reach close to $1.2 trillion by 2020. Efforts to boost the U.S. infrastructure should help with the output.

Because the U.S. population is expected to grow from 321.2 billion to 338 billion in 2020, there will be an increased need for residential housing. In addition, the construction employment agency cites factors such as consumer spending and governmental investments in tourism, office buildings and retail space as reasons why commercial construction will also grow.

Talk to the Pros

Take stock with your legal and financial advisors to determine how well suited you are for the changes ahead.

IRS Increases Annual Gift Tax Exclusion for 2018

Posted on December 5, 2017July 22, 2024 by Debra Barcuch

The IRS has announced that the annual gift tax exclusion is increasing next year due to inflation. After five years of being stuck at $14,000, the exclusion will be $15,000 per recipient for 2018 — its highest point ever.

Annual Gift Tax Exemption

Here’s what the recent increase in the exclusion may mean for you, including how annual gift-giving can lower your taxable estate.

The federal gift tax applies to the giver of a gift, not the recipient, for amounts above a specified level. Most gifts are sheltered from gift tax by the annual gift tax exclusion and the lifetime gift tax exemption (or both).

For starters, you can give gifts valued up to the annual gift tax exclusion amount each year without ever touching the lifetime exemption. For 2017, the exclusion is $14,000 per recipient. In 2018, it increases to $15,000 per recipient.

Unlike most other IRS inflation-based adjustments, the annual gift tax exclusion increases only in increments of $1,000. Thanks to relatively low rates of inflation, it’s taken five years for the annual exclusion amount to increase.

To illustrate how it works, suppose you have three adult children and seven grandchildren. In 2017, you could give each family member $14,000 — for a grand total of $140,000 — without owing any gift tax. In 2018, you could give $15,000 to each recipient for a total of $150,000.

The annual gift exclusion is available to each taxpayer. If you’re married and your spouse consents to a joint gift — also called a “split gift” — the annual exclusion amount is effectively doubled to $28,000 per recipient for 2017. So, in the previous example, a married couple with ten family members could gift up to $280,000 in 2017 ($300,000 in 2018) completely exempt from gift tax.

Section 529 Plans: Make Five Years of Gifts in a Year

Normally, a gift made directly to a family member to pay for college education costs would be covered by the annual gift tax exclusion, up to the limit of $14,000 in 2017 ($15,000 in 2018). But there’s a special tax break available for transfers to a Section 529 plan, a type of education savings program that’s run by individual states.

For a transfer to a Sec. 529 plan, the tax law allows you to make a one-time contribution that’s effectively treated as if it’s made over five years for gift tax purposes. In other words, you can gift the equivalent of five years’ worth of contributions in a single year.

For instance, if your grandson plans to attend college next year, you and your spouse may be able to transfer up to $150,000 to a 529 plan designating him as the beneficiary ($15,000 x 2 spouses = $30,000 x 5 years = $150,000). The entire transfer in 2018 will be exempt from gift tax. That could pay for most, if not all, of the college expenses he’s likely to incur. Contact your tax pro for more information.

Lifetime Estate and Gift Tax Exemption

In addition, if you gift an amount that’s above the annual gift tax exclusion, you can also tap into the lifetime estate and gift tax exemption. The lifetime exemption effectively shelters from tax $5 million, indexed for inflation. The inflation-indexed amount for 2017 is $5.49 million per donor. It increases to $5.6 million for 2018.

However, if you tap into the lifetime gift tax exemption, it erodes the estate tax exemption amount that would be available when you die.

For instance, suppose an unmarried individual gives gifts to family members valued at $1,150,000 in 2018. After the annual gift tax exclusion is applied to $150,000 of gifts, the lifetime exemption can shelter the remaining $1 million from gift tax. That leaves an available estate tax exemption of $4.6 million if the individual dies in 2018 (assuming the decedent hadn’t ever tapped into his or her lifetime exemption in a previous year).

Exceptions to the Rules

Be aware that the following gifts are generally gift-tax exempt, preserving the full annual gift tax exclusion and unified exemption:

Gifts from one spouse to the other spouse,
Gifts to a qualified charitable organization,
Gifts made directly to a health care provider for medical reasons, and
Gifts made directly to an educational institution for a student’s tuition.

For instance, if your granddaughter attends college, you might pay her tuition directly to the school for the 2017-2018 school year. The payments don’t count against the annual gift tax exclusion so you could still give her $14,000 in 2017 and $15,000 in 2018. Furthermore, you may take advantage of a special tax break for gifts made to a Section 529 plan for a student beneficiary. (See “Section 529 Plans: Make Five Years of Gifts in a Year” at right.)

Filing Requirements

Do you need to file a gift tax return? For any gifts below the annual gift tax exclusion, you’re not required to file a gift tax return. However, you still may want to file one to establish the value of certain gifts of property with the IRS.

A gift tax return is required if you individually exceed the annual gift tax exclusion amount or a joint gift with your spouse collectively exceeds the amount. For the latter, each spouse must file an individual gift tax return for the year in which they both make gifts.

The deadline for gift tax returns is April 15 of the year following the year of the gift, the same as the due date for personal income tax returns. (The deadline is moved to the next business day if it falls on a weekend or holiday.) So, for gifts made in 2017, you must file a gift tax return by April 17, 2018. However, if you extend your federal income tax filing to October 15, 2018, the extension also applies to your gift tax return.

Year-End Gifts

This year end, estate planning is complicated by the potential for sweeping tax law changes. The current House bill would essentially double the life estate and gift tax exemption to $10 million (adjusted for inflation). After 2023, the estate and generation-skipping tax would be entirely eliminated and the gift tax rate would fall to 35%. The Senate bill also would double the exemption, but it doesn’t propose an estate or generation-skipping tax repeal or lower the gift tax rate. These proposals could change significantly over the next few weeks, however.

Absent any radical developments, there still would be an incentive to give lifetime gifts from a tax perspective. For instance, you might gift securities or other assets to younger family members in lower tax brackets for two key reasons:

1. To reduce the size of your taxable estate. As long as a federal estate tax remains in effect, this could still be beneficial, especially to elderly taxpayers.

2. To transfer income-producing assets to younger family members in lower tax brackets. This could create income tax savings for your family over time.

Generally, the value of the assets for gift tax purposes is their fair market value. However, if you give away property, such as stock that has appreciated in value, the recipient must use your basis (usually, the original cost) to compute the taxable gain if he or she subsequently sells the property. Depending on your situation, you might arrange to sell property first and give the cash proceeds to another family member. The subsequent gift is covered by the annual gift tax exclusion.

Plan Ahead

Transferring wealth for your family typically calls for long-term planning. To maximize the tax benefits, you should engage in a systematic series of gifts over several years. For example, you may arrange to give five family members gifts totaling $70,000 ($14,000 x 5) in 2017 and $75,000 ($15,000 x 5) in 2018. All of the gifts would be exempt from gift tax.

Your tax advisor may suggest other creative and sophisticated estate planning tools, including family limited partnerships (FLPs) and intentionally defective grantor trusts (IDGTs), designed to maximize the benefits of the $5.49 million exemption in 2017 ($5.60 million in 2018). Consult with your advisors before year end to discuss your short- and long-term options.

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