March 2018

Outsourced Payroll Onboarding: Build in Time for Transition and Results

Posted on March 30, 2018July 23, 2024 by Debra Barcuch

Every company or organization will have different needs for payroll administration based on business and compensation structures, benefit offerings, the specific industry and the state and local tax laws. While determining a good fit for outsourced payroll, anticipate how much time the set-up of such services could take. A long set-up time and possible mistakes could have a significant impact on business management and employee morale. Rather than having our clients input all of their data, we walk them through the data collection process. We also provide consultation on areas where the company has had questions or problems, such as garnishment deductions or shareholder compensation. We alert them to any changes in wage and hour laws or multi-state laws that could affect them.

Our goal is to limit client exposure to penalties as we manage payroll. Common questions include:

Structure of the payroll
How often employees are paid
Direct deposit or by check (or both!)
Structure of the company and number of offices and employees
Location of offices (multi-state?)
Types of benefits
Unusual deductions
Unusual compensation

Collecting this information up front allows us to help clients design an outsourced model that makes sense for them, and doesn’t leave them trying to figure it out for themselves. We find that some clients like to manage parts of the payroll and benefits process themselves, while other parts are best handled through outsourcing.

The Outsourced Payroll Onboarding Process

As a CPA firm dedicated to payroll administration and consulting, Cornwell Jackson has onboarded new clients in less than a month depending on the level of payroll complexity. Our goal is always onboarding within 30 to 45 days. We typically recommend that companies convert at the beginning of a new quarter or pay period — or at year-end — to make the transition align with financial reporting deadlines. A typical onboarding process with our firm looks like this:

Client consultation to design the outsourced model
Client data gathering
Buildout of the payroll account
Payroll set-up checklist to cover all items

Once your company has an efficient model for payroll administration, it is much easier to adjust items as needed through the year. For example, we run across a lot of questions regarding personal use of a company-owned vehicle as a benefit. The ratio of personal use must be calculated for the employees’ W-2s and the benefit run properly through payroll. New hires and promotions also bring with them a wealth of payroll questions, but are more easily handled with an efficient system.

When your CPA is in touch with daily business realities through payroll administration, the long-term value extends beyond payroll accuracy. A dedicated team can consult with you on decisions such as when to hire more employees, when to adjust tax planning and cash flow strategies and timing of bonuses. Payroll efficiency even ties into business valuations as a consideration of overall processes and systems in place to run the business.

Payroll is the most up-to-date KPI in a business — and the most expensive. Business owners we talked to are more than happy to find ways to save money in this area. Are you ready to consider an alternative to your current system of payroll administration? Call the payroll team at Cornwell Jackson.

Download the Whitepaper: With Payroll Outsourcing, Don’t Go it Alone

Scott Bates, CPA, is a partner in the audit practice and leads the firm’s business services practice, which includes a dedicated team for outsourced accounting, bookkeeping and payroll services. He provides consulting to clients in healthcare, real estate, auto, transportation, technology, service, dealerships and manufacturing and distribution. Contact Scott at scott.bates@cornwelljackson.com or 972-202-8000.

Blog originally published May 13, 2016. Updated on March 30, 2018.

Got Bitcoin? Virtual Cryptocurrency Complicates Tax Reporting

Posted on March 28, 2018July 23, 2024 by Debra Barcuch

Bitcoin has been around for nearly a decade. But the tax rules related to “virtual currency” are still evolving. In fact, some Bitcoin investors may be in for a surprise when they file their 2017 returns. Tax matters will become even more complicated for 2018 returns because relevant provisions of the new tax law (the Tax Cuts and Jobs Act) took effect starting in 2018.

The Basics

Here’s what you should know about the brave relatively new world of virtual currency.

Bitcoin emerged in 2009, and it’s currently the most widely recognized form of virtual currency. It may also be referred to as digital, electronic or cryptocurrency.

Unlike cash or credit cards, your local pizza parlor or hair salon isn’t likely to accept Bitcoin payments for routine transactions. However, a growing number of larger businesses — including Overstock.com, the Sacramento Kings and online gaming company Zynga — now accept Bitcoin payments. And the trend is expected to continue.

Bitcoin has an equivalent value in real currency. It can be digitally traded between users. You can also purchase Bitcoin with real currencies (such as U.S. dollars or euros) and exchange Bitcoin for real currencies. The most common ways to obtain Bitcoin are through virtual currency ATMs or online exchanges that typically charge nominal transaction fees.

Once you obtain Bitcoin, you can pay for goods or services using “Bitcoin wallet” software that can be installed on your computer or mobile device. When you make a purchase, the software digitally posts the transactions to the global public ledger. This ensures that the same unit of virtual currency can’t be used multiple times.

Some merchants accept Bitcoin to avoid transaction fees charged by credit card companies and online payment providers (such as PayPal). It’s also popular in certain foreign countries (including Argentina and Iran) where national currencies are susceptible to inflation, corruption, capital controls or international sanctions.

The supply of Bitcoin is capped at 21 million units. As a result, some people have obtained them for investment purposes, hoping that the value will appreciate over time. The Financial Industry Regulatory Authority (FINRA) warns that Bitcoin is highly speculative and investors shouldn’t risk more in Bitcoin than they’re willing to lose.

Some of the limited Bitcoin supply hasn’t been issued yet. These new issues have been reserved for Bitcoin “miners.” These are the people who provide computing power to verify and record virtual currency payments into the global public ledger.

Ups and Downs of Cryptocurrency

Under the tax law, capital gains and losses are recognized when you cash in Bitcoin (and other forms of virtual currency) or use it to pay for goods and services. However, if you’ve held your Bitcoin for less than a year, the gain may be taxed at higher ordinary income tax rates, unless you’re a professional Bitcoin miner or broker.

For example, suppose you buy a $2,000 sofa on Overstock.com using Bitcoin. You originally acquired the Bitcoin that you exchanged for the sofa for $1,200 in 2016 using a Bitcoin ATM. Unless you’re a professional Bitcoin miner or broker, you must report an $800 capital gain ($2,000 – $1,200) on your personal tax return.

The transaction would be more complicated if your Bitcoin had been acquired at different dates and prices. Generally, taxpayers would prefer to exchange their highest-value Bitcoin first to minimize the taxable gain or generate a beneficial tax loss.

Initially, Congress was going to crack down on the “specific identification” technique for capital gains and losses in the new tax law, but the provision didn’t make the final cut.

Federal Tax Reporting

The use of virtual currency has triggered many tax-related questions. Unfortunately, the IRS has been slow to catch up with the new technology and has provided only limited guidance.

In a 2014 ruling, the IRS established that Bitcoin and other convertible virtual currency should be treated as property, not currency, for federal income tax purposes. (See “Ups and Downs of Cryptocurrency” at right.)

As a result, businesses that accept Bitcoin payments for goods and services must report gross income based on the fair market value of the virtual currency when it was received. This is measured in equivalent U.S. dollars.

From the buyer’s perspective, purchases made using Bitcoin result in a taxable gain if the fair market value of the property received exceeds the buyer’s adjusted basis in the Bitcoin exchanged. Conversely, a tax loss is incurred if the fair market value of the property received is less than its adjusted tax basis. The character of a gain or loss from the sale or exchange of Bitcoin depends on whether the virtual currency is a capital asset in the hands of the taxpayer.

On the other hand, wages paid to employees using virtual currency are taxable to the employees. Such wages must be reported by employers on W-2 forms. And they’re subject to federal income tax withholding and payroll taxes, based on the fair market value of the virtual currency on the date of receipt.

Payments using virtual currency made to independent contractors, qualifying Bitcoin miners and other service providers are also taxable. The rules for self-employment tax generally apply, based on the fair market value of the virtual currency on the date of receipt. Normally, payers must issue 1099-MISC forms.

A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.

Tax Treatment of Bitcoin Exchanges

One gray area related to virtual currency is how to treat the capital gains and losses realized by taxpayers who invest in Bitcoin and exchange it for real currency (such as U.S. dollars). Previously, some tax experts claimed that these exchanges qualify as “like-kind exchanges” of properties under Section 1031 of the tax code. With a like-kind exchange, no current tax is due on the exchange of investment or commercial properties. To qualify for the favorable tax treatment, the properties you relinquish and receive must be similar in nature.

This was an easy solution for Bitcoin traders. They could fall back on the rules for like-kind exchanges to avoid current tax bills.

But the Tax Cuts and Jobs Act eliminates tax-deferred like-kind exchanges — except for exchanges of real estate — for 2018 and beyond. However, prior-law rules that allow like-kind exchanges of property other than real estate still apply if one leg of an exchange was completed as of December 31, 2017, but one leg remained open on that date.

This change creates a burden for Bitcoin investors who trade in currencies: They must use the price of the Bitcoin when it was acquired and the price on the date of the exchange to calculate the resulting capital gain or loss. Unlike sales of securities, no authority is tracking these figures for investors. In addition, it’s unclear whether investors can deduct transaction costs and accounting fees related to virtual currency investments.

Costly Mistakes

Most taxpayers are unaware of the requirements for reporting virtual currency transactions. For the 2013 through 2015 tax years, the IRS estimates that fewer than 900 taxpayers declared Bitcoin earnings annually.

The IRS plans to ramp up compliance in this area. Underpayments of tax attributable to Bitcoin transactions could be subject to penalties, unless the taxpayer can establish that the failure to properly file was due to reasonable cause.

Bottom Line

The IRS is targeting virtual currency transactions as a potential source of additional tax revenue. But it’s issued very limited guidance on the reporting requirements. For the latest developments on reporting Bitcoin and other virtual currency exchanges, contact your tax advisor.

Court: Company President Is Liable for Unpaid Employment Taxes

Posted on March 27, 2018July 22, 2024 by Debra Barcuch

A U.S. District court recently ruled that a company president was a “responsible person” who was liable for the trust fund recovery penalty. The court found that the president’s failure to pay over employment taxes was willful despite the fact there was a security agreement with a lender requiring the lender’s approval before any payments could be made. In addition, the court wasn’t convinced that the company’s co-owner had more control over the company’s finances than the president did.

Basics about the Trust Fund Recovery Penalty

Under Internal Revenue Code Section 6672, if an employer fails to pay its employment tax liability to the IRS, the tax agency can impose the trust fund recovery penalty against any person who:

Is responsible for collecting, accounting for, and paying over payroll taxes; and
Willfully fails to perform this responsibility.

Facts of the Case

During the four-year period in question, a construction contracting company had

two co-owners. The president managed the company’s field operations and was responsible for the hiring and firing of employees. The co-owner served as the company’s bookkeeper and she managed the finances and office staff. However, the president had signing authority on the business checking account and would sign payroll and vendor checks prepared by the co-owner when she wasn’t available.

The company withheld money from its employee paychecks to pay federal payroll tax obligations. But it didn’t send the money to the IRS. Instead, the funds were diverted to pay creditors, operating expenses and the personal obligations of the co-owners.

The company entered into an agreement with a bank for a line of credit. In exchange, the company provided a security interest in its assets, including its accounts receivable. The company also entered into a commercial security agreement with the bank. Under the deal, the company agreed it would not assign, convey, lease, sell or transfer any of the collateral (for example, physical assets, accounts receivable or cash on hand) without the bank’s prior written consent.

The president became aware of the company’s failure to remit withheld payroll taxes to the IRS but he never asked the company to rectify the tax delinquencies with the IRS.

The IRS assessed nearly $1 million in tax penalties against the president, personally, for non-payment of the employment taxes. He challenged the assessment.

The Court’s Ruling

The district court ruled that the president was a responsible person with respect to the company’s failure to remit delinquent employment taxes during the period at issue.

The court found that, throughout the company’s life span, the president was a corporate officer of the business, held company stock, and had the ability to hire and fire staff members. Although his co-owner exercised considerable, if not dominant, control over the company’s finances, it was apparent that she did so effectively by the president’s delegation of that authority, and not because the president lacked the power to control the company’s finances.

In addition, the court found that the president acted willfully in failing to use company funds to pay unpaid payroll taxes. It was undisputed that the president had not even asked the bank for permission to use some of the company’s line of credit to pay the delinquent taxes that both he and the bank knew existed. (Davis, DC CO, 121 AFTR 2d 2018-508)

Congress Raises 401(k) Hardship Withdrawal Limits

Posted on March 26, 2018 by Debra Barcuch

Most 401(k) plans permit hardship withdrawals, though plan sponsors aren’t required to allow them. As it stands today, employees seeking to take money out of their 401(k) accounts are limited to the funds they contributed to the accounts themselves, and only after they’ve first taken a loan from the same account. Loans must be repaid, of course. The theory behind the loan requirement is that employees would be less apt to permanently deplete their 401(k) accounts with hardship withdrawals.

Thanks to the Bipartisan Budget Act (BBA) enacted in February, the rules change, beginning in 2019. Under the BBA, the employees’ withdrawal limit will include not just amounts they have contributed. It also includes accumulated employer matching contributions plus earnings on contributions. If an employee has been participating in your 401(k) for several years, this modification could add substantially to the amount of funds available for withdrawal in the event of a legitimate hardship.

Liberalized Participation Rule

In addition to the changes above, the BBA also eliminates the current six-month ban on employee participation in the 401(k) plan following a hardship withdrawal. This is good news on two fronts: Employees can stay in the plan and keep contributing, which allows them to begin recouping withdrawn amounts right away. And for plan sponsors, it means they won’t be required to dis-enroll and then re-enroll employees after that six-month hiatus.

One thing that hasn’t changed: Hardship withdrawals are subject to a 10% tax penalty, along with regular income tax. That combination could take a substantial bite out of the amount withdrawn, effectively forcing account holders to take out more dollars than they otherwise would have in order to wind up with the same net amount.

For example, an employee who takes out a $5,000 loan from his or her 401(k) isn’t taxed on that amount. But an employee who takes a hardship withdrawal and needs to end up with $5,000 will have to take out around $7,000 to allow for taxes and the 10% penalty.

Hardship Criteria

The BBA also didn’t change the reasons for which hardship withdrawals can be made. Here’s a reminder of the criteria, as described by the IRS: Such a withdrawal “must be made because of an immediate and heavy financial need of the employee and the amount must be necessary to satisfy the financial need.” That can include the need of an employee’s spouse or dependent, as well as that of a non-spouse, non-dependent beneficiary.

The IRS goes on to say that the meaning of “immediate and heavy” depends on the facts of the situation. It also assumes the employee doesn’t have any other way to meet the needs apart from a hardship withdrawal. However, the following are examples offered by the IRS:

Qualified medical expenses (which presumably don’t include cosmetic surgery);
Costs relating to the purchase of a principal residence;
Tuition and related educational fees and expenses;
Payments necessary to prevent eviction from, or foreclosure on, a principal residence;
Burial or funeral expenses; and
Certain expenses for the repair of damage to the employee’s principal residence.

The IRS gives two examples of expenses that would generally not qualify for a hardship withdrawal: buying a boat and purchasing a television.

Finally, a financial need could be deemed immediate and heavy “even if it was reasonably foreseeable or voluntarily incurred by the employee.”

Deadline Extension

Another important and somewhat related change in 401(k) rules was included in the 2017 Tax Cuts and Jobs Act (TCJA) that took effect this year; it pertains to plan loans. Specifically, prior to 2018, if an employee with an outstanding plan loan left your company, that individual would have to repay the loan within 60 days to avoid having it deemed as a taxable distribution (and subject to a 10% premature distribution penalty for employees under age 59-1/2).

The TCJA changed that deadline to the latest date the former employee can file his or her tax return for the tax year in which the loan amount would otherwise be treated as a plan distribution. So, for example, if an employee with an outstanding loan of $5,000 left your company and took a new job on Dec. 31, 2017, that individual would have until April 15 (or, with a six-month fling extension, Oct. 15) 2018 to repay the loan.

Alternatively, the former employee could make a contribution of the same amount owed ($5,000, in this example) to an IRA or the former employee’s new employer’s plan, assuming the new plan permitted it. In effect, that $5,000 contribution to a new plan would be treated the same as a rollover from the old plan.

While this new flexibility might seem like a boon to plan participants, it could also represent a financial trap. Employees typically aren’t accumulating enough dollars to put themselves on track to retire comfortably at a traditional retirement age. Therefore, although you can’t prevent a plan participant from taking advantage of the new rules if they qualify, you can redouble your efforts to help employees understand the importance of thinking of their retirement savings as just that — savings for retirement, and not a “rainy day” fund.

Survey: Employers Adapt Quickly to Withholding Tax Changes

Posted on March 22, 2018July 22, 2024 by Debra Barcuch

Most employers had no problems meeting the February 15, 2018, deadline to begin using the 2018 federal income tax withholding tables, which reflect changes made by the Tax Cuts and Jobs Act (TCJA). However, many employees question how the TCJA will affect them.Those are findings of a recent American Payroll Association survey of 1,000 payroll and finance professionals. The Tax Reform Membership Survey found that about 97% of respondents said they began using the tables by the February 15 deadline. Nearly 84% of participants said that the tax law didn’t place any additional burden on year-end processing. Almost 63% noted that they process payrolls in-house.

The annual withholding tables typically come out in December but were delayed until January 11 due to the enactment of the TCJA. Employers only had until February 15 to begin using the tables. Of the survey respondents, about 17% said they started using the tables between January 15-19, 27% started the week of January 22, and about 32% began the week of January 29.

Changes in the Law

The TCJA brings many modifications, effective Jan. 1, 2018, including:

Lower personal income tax rates,
Elimination of personal exemptions,
Significantly increased standard deductions for 2018 to $24,000 for married joint-filing couples, $18,000 for heads of households, and $12,000 for others, and
Elimination of some tax-free benefits.

On the other hand, many employees have expressed concerns about the long-term impact the law will have on their finances. Fourteen percent of employers said they received a large number of employee questions, but the majority, 61% say they received only a few inquiries. Among the most common questions were:

How will this affect my income taxes next year?
Will my taxes go up or down?
Should I change my W-4?
Will I need to complete a new Form W-4 to make sure I’m not being under withheld?
How should I adjust my withholding allowances?
How do I increase the withholding to avoid owing money at the end of 2018?
Do I need to change my exemptions to match my new tax liability?
Why is my net pay increasing?
How will this affect the bicycle commuter benefit?
What’s the effect of moving expenses paid to a moving company?

“Input from our survey made it clear employees are worried they’ll be negatively affected by the new law once tax time 2019 rolls around,” said Michael O’Toole, Esq., Senior Director of Publications, Education, and Government Relations for the APA. “It will be important for employees to quickly review their withholdings once the new Form W-4 is available to make sure they are not under withholding on their federal taxes.”

Reaching Out to Employees

Asked if they had been proactively communicating with employees to let them know how the TCJA could affect their paychecks, about 57% said yes, 10% said they plan to do so; 30% said no.

The APA has more than 20,000 members who represent 17,000 employers.

Things to Ask your CPA about Payroll Outsourcing

Posted on March 20, 2018July 23, 2024 by Debra Barcuch

For many small businesses, payroll may be handled in-house. And yet, the laws and regulations surrounding employee compensation and benefits can challenge owners and back office staff to stay efficient and compliant. Payroll ties directly into individual and company tax reporting as well as employee benefit compliance. If and when companies choose payroll outsourcing, they must weigh the potential benefits against the ability of the payroll provider to deliver a high level of customer service and communication. Companies and industries differ on how they structure payroll and benefits. Laws and regulations also vary state by state. Consulting on payroll structure, schedules, regulatory changes and reporting, therefore, should be part of the relationship while still being cost effective for the company. It’s helpful to start this discussion with your CPA.

What to Ask your CPA about Payroll Outsourcing

Some CPA firms offer payroll administration as part of basic or strategic accounting services. The level of administration and services vary widely. The potential benefit of having your CPA firm handle payroll administration, however, is that the team understands the world of taxes and accounting. They can streamline payroll reporting, deposits and filing schedules into the audit or tax deadlines they already handle for the business.

However, not every CPA firm offers payroll administration. Due to its complexity, it’s also important that the firm has a staff of professionals dedicated to this area of your business. If, in fact, the firm offers a focused niche in payroll administration and consulting, there are several benefits to the arrangement:

Expanded resources to monitor new compliance issues
Reduced overhead costs (assuming a packaged engagement with other services)
Multi-state payroll experience
Corrected instances of overpayment or underpayment
Managed filing and payment schedules with IRS, state and local tax authorities
Limited client exposure to potential penalties
Consulting on software options and efficient payroll structures
Streamlined communication with other tax, audit and business needs

At Cornwell Jackson, we offer payroll administration and consulting services to our clients. We have invested in software and training for a team dedicated to this service, including certification as a CPP through the American Payroll Association.

The need was evident after too many instances of misclassification 1099 errors as well as W2 mistakes at tax time. We also noted mistakes in HSA and life insurance reporting and general improper reporting of cash and non-cash benefits. Our clients were paying for payroll administration, and then paying our firm to fix mistakes. We realized that our experience could help reduce or prevent problems before they even happen — and reduce our clients’ expenses.

After investigating the value our firm could provide in this area, we learned about many differences between payroll providers. When discussing payroll administration with your CPA firm or an outsourced service, there are several questions you should ask:

How much experience does the provider have in payroll administration — and is there a dedicated team?
Will the team walk you through data collection and set-up or are you on your own?
Who is your go-to contact to ask questions about liabilities or deadlines?
Is the provider NACHA compliant for ACH direct deposits?
Can you arrange for payroll tax payments on a schedule that supports cash flow along with compliance?

This last question is an important business consideration that most companies don’t know about. Some payroll services withdraw all funds from the business account for payroll transfers and taxes all at once, even if taxes aren’t due for a few weeks. If your receivables come in the first week of the month and payroll taxes are due on the 15^th of the month, you can schedule payments in a way that supports cash flow while still being compliant. In addition, payroll services may not provide guidance on industry-specific issues like auto dealer comps or law firm shareholder bonuses, for example. Business owners must carefully consider the level of expertise a provider has in your industry.

Continue Reading: Outsourced Payroll Onboarding: Build in time for transition and results

Blog originally published April 18, 2016. Updated on March 20, 2018.

Are Roth IRAs Still Beneficial under the New Tax Law?

Posted on March 19, 2018July 22, 2024 by Debra Barcuch

The Roth IRA remains an attractive retirement planning vehicle for many individuals after the changes made by the Tax Cuts and Jobs Act (TCJA). Here’s what you need to know about Roth IRAs and Roth IRA conversions under the new law.

Tax Advantages

Roth IRAs offer several important tax advantages over traditional IRAs. First and foremost, unlike traditional IRA withdrawals, qualified Roth IRA withdrawals are federal-income-tax-free — and they’re usually state-income-tax-free, too. In general, a qualified withdrawal is one that’s taken after the Roth account owner has met both of the following requirements:

- The owner has had at least one Roth IRA open for over five years, and

The owner has reached age 59½, become disabled or died.

For purposes of meeting the five-year requirement, the clock starts ticking on the first day of the tax year for which you make your initial contribution to your first Roth account. That initial contribution can be a regular annual contribution, or it can be a conversion contribution.

The second reason Roth IRAs are beneficial is that they’re exempt from the required minimum distribution (RMD) rules. So, unlike with traditional IRAs, you don’t have to start taking RMDs from Roth IRAs after reaching age 70½. Roth IRAs can be left untouched for as long as you live. This important privilege makes your Roth IRA a great asset to leave to your heirs (unless you need the money to help finance your own retirement).

New Tax Law Eliminates Reversal Privilege for Roth IRA Conversions

Did you know that the Tax Cuts and Jobs Act (TCJA) contains a provision that negatively affects Roth IRA conversions?

Under prior law, you had until October 15 of the year after an ill-advised conversion to reverse it to avoid the conversion tax hit. Thanks to the TCJA, for 2018 and beyond, you can no longer reverse the conversion of a traditional IRA into a Roth account. This elimination of the conversion reversal privilege is permanent.

However, the IRS recently clarified, in Frequently Asked Questions (FAQs) posted on its website, that, if you converted a traditional IRA into a Roth account in 2017, you can reverse the conversion as long as it’s done by October 15, 2018. (That deadline applies regardless of whether you extend the deadline for filing your 2017 federal income tax return to October 15.)

In IRS jargon, a Roth conversion reversal “recharacterizes” the Roth account back to traditional IRA status. Your Roth IRA trustee or custodian (or tax advisor) can help you fill out the requisite paperwork.

When do reversals make sense? Suppose you converted two traditional IRAs (Accounts A and B) into two Roth IRAs in 2017. The value of Account A has increased since the conversion date. Unfortunately, Account B has plummeted in value, and it’s now worth significantly less than it was on the conversion date. In this situation, you’d be required to pay income tax on Account B’s value on the conversion date — and some of that value is now gone.

Fortunately, through October 15, 2018, you have the option of recharacterizing Account B back to traditional IRA status. After the reversal, it’s as if the ill-fated conversion never happened, so you won’t owe any 2017 income tax on the conversion of Account B. And you can still leave Account A in Roth IRA status.

Annual Roth IRA Contributions

The idea of making annual Roth IRA contributions makes the most sense for those who believe they’ll pay the same or higher tax rates during retirement. Higher future taxes can be avoided on Roth account earnings, because qualified Roth withdrawals are tax-free. The downside is that you get no deductions for making Roth contributions.

If you expect to pay lower tax rates during retirement, current tax deductions may be worth more to you than tax-free withdrawals later. So, you might be better off making deductible traditional IRA contributions, assuming your income is below the phaseout threshold (below).

Roth contributions also make sense when you’ve maxed out on deductible retirement contribution possibilities but you want to sock away additional money for retirement.

There are limits to annual Roth IRA contributions, however. The maximum amount you can contribute for any tax year is the lesser of:

- Your earned income for the year (including wages, salaries, bonuses, alimony and self-employment income), or

The annual contribution limit for that year.

For 2018, the annual Roth contribution limit is $5,500 (or $6,500 if you will be age 50 or older as of year end). In addition, for 2018, eligibility to make annual Roth contributions is phased out between modified adjusted gross income (MAGI) of $120,000 and $135,000 for unmarried individuals. For married joint filers, the 2018 phaseout range is between MAGI of $189,000 and $199,000.

The deadline for making annual Roth contributions is the same as the deadline for annual traditional IRA contributions, which is the original due date of your return. For example, the contribution deadline for the 2018 tax year is April 15, 2019. However, you can make a 2018 contribution anytime between now and then. The sooner you contribute, the sooner you can start earning tax-free income.

Important: Making contributions to traditional IRAs is off limits for the year you reach age 70½ and beyond. In contrast, people age 70½ or older can still make annual Roth IRA contributions (assuming the eligibility requirements explained above are met). So, Roth IRAs can be a smart savings tool for older individuals as well as for younger ones.

In addition, if you’re an employee, research whether your employer offers a Roth 401(k) option. This retirement savings tool is similar to a Roth IRA: It allows you to make after-tax contributions. Qualified withdrawals from a Roth 401(k) are generally federal and state tax-free. But these accounts are not exempt from the RMD rules. And, unlike Roth IRAs, there are no income level phaseouts for contributing to Roth 401(k) accounts, so they can be a tax-wise move for higher income individuals who are above the income thresholds for contributing to a Roth IRA.

Roth Conversions

The quickest way to get a significant sum into a Roth IRA is by converting a traditional IRA to Roth status. The conversion is treated as a taxable distribution from your traditional IRA, because you’re deemed to receive a payout from the traditional account for the money that will go into the new Roth account. So converting your IRA before year end will trigger a bigger federal income tax bill for this year — and possibly a bigger state income tax bill, too. The good news: There are no income limits on Roth conversions, and the amount you convert isn’t hit with the 10% early IRA withdrawal penalty tax even if you are under age 59½.

More good news for conversions: Today’s federal income tax rates might be the lowest you’ll see for the rest of your life. For most individuals, the tax rates for 2018 through 2025 will be lower than what you paid in prior years. In 2026, the pre-TCJA rates and brackets are scheduled to come back into force, but many people doubt that will happen.

So, if you convert your traditional IRA into a Roth IRA in 2018, you’ll pay today’s low tax rates on the extra income triggered by the conversion and completely avoid the potential for higher future rates on all the postconversion income that will be earned in your new Roth account. That’s because qualified Roth withdrawals taken after age 59½ are totally federal-income-tax-free after you’ve had at least one Roth account open for over five years.

To be clear, the best candidates for the Roth conversion strategy are people who believe that their tax rates during retirement will be the same or higher than their current tax rates.

A word of caution: Converting a traditional IRA with a significant balance could push you into a higher tax bracket. For example, if you’re single and expect your 2018 taxable income to be about $100,000, your marginal federal income tax bracket is 24%. Converting a $100,000 traditional IRA into a Roth account in 2018 would cause a big chunk of the extra income from the conversion to be taxed at 32%. (For 2018, the 32% tax bracket starts at $157,501 for single people.) But if you spread the $100,000 conversion equally between 2018 and 2019, the extra income from converting would be taxed at 24% (assuming Congress leaves the current tax rates in place through at least 2019).

To Roth or Not to Roth?

Should you incorporate a Roth IRA into your retirement savings program? Roth IRAs offer significant tax advantages, if you’re eligible to make annual contributions or if you convert a traditional IRA into a Roth account. Today’s comparatively low federal income tax rates under the TCJA provide an extra incentive to consider the Roth conversion strategy right now. Contact your tax advisor to help understand the pros and cons of Roth IRAs and Roth conversions under the new tax law.

Good News! More Families May Be Eligible for the Child Credit in 2018

Posted on March 16, 2018July 22, 2024 by Debra Barcuch

The Tax Cuts and Jobs Act (TCJA), which was signed into law on December 22, 2017, made significant changes to the child credit. This credit is generally available to taxpayers with children under the age of 17, but the new law adds a new (smaller) credit for other dependents. Here are the details.

Old Rules

Under prior tax law, the child credit was $1,000 per “qualifying child.” But the credit was reduced for married couples filing jointly by $50 for every $1,000 (or part of $1,000) by which their adjusted gross income (AGI) exceeded $110,000. The phaseout thresholds were $75,000 for unmarried taxpayers and $55,000 for married couples filing separately.

To the extent the $1,000-per-child credit exceeded your tax liability, it resulted in a refund of up to 15% of your earned income (for example, wages or net self-employment income) above $3,000. For taxpayers with three or more qualifying children, the excess of the taxpayer’s Social Security taxes for the year over the taxpayer’s earned income credit for the year was refundable. In all cases, the refund was limited to $1,000 per qualifying child.

Important: These “old” rules still apply to tax returns that you’re filing for the 2017 tax year (which must be filed or extended by April 17, 2018).

New Law

For 2018 through 2025, the TCJA doubles the child credit to $2,000 per qualifying child under the age of 17. It also allows a new credit of $500 for any dependent who isn’t a qualifying child under age 17. There’s no age limit for the $500 credit, but the tax tests for dependency must be met.

Examples of dependents who qualify for the new credit include:

A qualifying 17- or 18-year-old,
A full-time student under age 24,
A disabled child of any age, and
Other qualifying (nonchild) relatives if all the requirements are met.

The TCJA also substantially increases the phaseout thresholds for the credit. For 2018 through 2025, the total credit amount allowed to a married couple filing jointly is reduced by $50 for every $1,000 (or part of $1,000) by which their AGI exceeds $400,000 (up from $110,000 under prior law). The threshold is now $200,000 for all other taxpayers.

So, if you were previously prohibited from taking the credit because your AGI was too high, you may now be eligible to claim the credit. But, beware, these phaseouts are not indexed for inflation.

In addition, under current law, the refundable portion of the credit has been increased to a maximum of $1,400 for each qualifying child. And the earned income threshold has been decreased to $2,500 (from $3,000 under prior tax law) — which could potentially result in a larger refund. The $500 credit for dependents other than qualifying children is nonrefundable.

Say Goodbye to Dependency Exemptions … For Now

The new tax law isn’t all good news for families. For the 2017 tax year, you can claim an exemption of $4,050 from taxable income for each qualifying dependent (subject to phaseouts at higher income levels). But that deduction has temporarily been suspended, for 2018 through 2025.

Many families still expect to come out ahead under the new law, however. That’s because credits reduce your tax bill dollar for dollar. By contrast, exemptions and deductions only reduce your taxable income, which is the amount that you’re taxed on.

However, families with older kids may be at a disadvantage under the new law. Why? Under prior law, dependency exemptions were available for qualifying dependents up to age 24 if they were full-time students. But a young person is ineligible for the child credit starting the year he or she turns 17. (However, older kids may still qualify for the new $500 credit for nonchild dependents, as well as various education credits, under the new law.)

Your tax advisors can help you take advantage of the tax breaks that may be available for raising children and caring for other family members.

Claiming Your Credit

To claim the credit, you must include the qualifying child’s Social Security number (SSN) on your tax return. Under prior law, you could also use an individual taxpayer identification number (ITIN) or adoption taxpayer identification number (ATIN).

If a qualifying child doesn’t have an SSN, you won’t be able to claim the $1,400 credit. But you can claim the $500 credit for that child using an ITIN or ATIN. The SSN requirement doesn’t apply for nonqualifying-child dependents, but you must provide an ITIN or ATIN for each dependent for whom you’re claiming a $500 credit.

Consult a Tax Pro

Thanks to the TCJA, more families will receive tax breaks to help offset the costs of raising kids and taking care of other nonchild dependents. If you have children under 17 or other dependents, contact your tax advisor to determine if these changes can benefit you.

The Most Common Types of Restaurant Theft

Posted on March 15, 2018July 23, 2024 by Debra Barcuch

restaurant employee embezzlement In regards to restaurant theft of food or supplies, at your POS, in accounting processes, or of intellectual property, mitigating the risk of loss through theft is an ongoing challenge. Automation has improved security in transactions as well as back-office functions. But with top concerns in the restaurant industry being wholesale food costs and building and maintaining sales volume, the reduction of theft can improve those concerns for restauranteurs.

Restaurant Theft of Food/Beverages/Supplies

Stealing food, beverages and supplies from restaurants can be coordinated by employees or in combination with vendors. There is outright stealing of food from the inventory, but there are also instances where vendors will agree to short shipments or deliver lower quality food while providing kick-backs to staff involved in ordering or inventory.

Free meals and drinks given to friends and family outside of alotted comps are another form of food theft. Employees also may walk away with supplies and quality equipment. At a minimum, employees may graze too much while on duty.

To protect against food and beverage theft, there are several precautions restaurant owners and management can take:

Regular stock checks, performed at unpredictable times or right before deliveries
Comparison of purchase orders against deliveries at the time of delivery
Monitoring of bartender habits when pouring drinks for consistency in volume
Review of comp practices against alottment
Policies enforced on employee meals and break habits
Security camera monitoring

There is a big difference between babysitting staff and developing a workplace environment in which employees are engaged in loss prevention. Restaurant owners and managers need to communicate with all employees about the costs of food loss, including costs passed on to patrons in the form of increased prices or even removing popular but pricier menu items. Increased menu prices or menu changes may reduce customer volume as well as tips. Another consequence of theft? Management can reduce hours per employee.

Theft at POS

There are many ways that employee theft can occur at the point of sale. Automated systems can reduce some loss, but not all. Common forms of theft at POS include cash taken from the register, voiding ordered items, dropping sales or improperly ringing up items and inflating tips.

At the bar, patrons may be charged for premium drinks and served well drinks with the bartender/server pocketing the difference.

Noticing lower profit margins even with the same number of meals and drinks can be a red flag that receipts are not matching sales. More subtle signs of theft can be a change in employee morale as honest staffers witness others taking advantage of the system.

More restaurants are transitioning to automated point of sale software programs, including programs that can be run from tablets as servers circulate. This eliminates data inputs to a central POS kiosk. The advantages of automation for loss prevention include the ease of tracking orders by employee ID (no more badge swiping), more transparent payment tracking against orders, and even integration with accounting and inventory systems. Tracking tip records can also uncover theft if percentages are higher than the industry average of 5-15 percent, or higher than historically at the establishment.

As employees learn systems, there are ways to get around safeguards. For example, many employee thefts occur through discount or loyalty programs, in which the employee inputs a discount for the customer but the customer pays full price. Delaget, an expert in loss prevention, found that four in 10 discount codes are fraudulent. The most common discount theft was manager code theft.

Some solutions offered for this type of theft included monitoring discount codes through the POS system as well as instituting a manager discount policy and including a fingerprint (biometric) security feature.

Watch for changes in employee behavior such as defensiveness or acting secretive. Also, if your prices haven’t changed, but customers seem to be complaining about price hikes, this could signal fraudulent price inflation at the POS.

Restaurant Theft in Accounting

When most business owners think of theft, they think about the back office functions. In this area, the thefts are likely more elaborate and damaging to the operation. Restaurant closures due to employee theft are most often caused through extensive management or ownership fraud.

The person responsible for end-of-day reconciliations has one of the greatest opportunities to manipulate voids, cancel checks and perform other register manipulation — leading to thousands and sometimes millions of dollars in loss over time. More elaborate accounting fraud schemes occur through underreporting earnings on the balance sheet or setting up fake accounts payable. Small and infrequent deposit losses also add up.

Cash transactions are also a big source of loss when not monitored regularly against petty cash reconciliations. Cash is the most coveted form of theft, particularly for employees who suddenly experience an outside issue or concern that requires quick payment. Bleeding the till should include certain safeguards, such as sealing cash in an envelope with the manager’s name written across the back or moving cash when there are few employees around.

A strong loss prevention program should include a combination of proven automated technology, regular reports and analysis and good supervision by trusted staff. Incorporating a third-party review of the books adds another layer of control and analysis that can discover discrepancies in inventory, receipts, margins and general accounting methods that require a second look.

Sometimes, it’s the accounting system or analytics that are hiding opportunities for lower costs and higher profits. Managers may not be tracking the right KPIs or comparing A to B in a way that indicates losses. Incorporating better processes to leverage information from the restaurant’s POS and bookkeeping systems can identify operational improvements that support cost and theft reduction. For example, review of franchise and sales tax rates as well as permit and licensing fees can reveal overpayments.

Theft of Intellectual Property

One area of theft not always talked about is a loss of intellectual property. Again, in close-knit restaurant communities, owners and staff want to protect proprietary processes, recipes and even certain aspects of branding that make the overall restaurant experience unique. Analyze the areas of the business that add the most value or profit, and look for ways to protect those assets.

There is a fine line, however, between encouraging creative development in the kitchen and limiting ownership of that creativity by staff such as head chefs. Each situation is unique and can’t be covered by generic nondisclosure or confidentiality agreements. But it is worth the conversation to maintain a competitive position in your market.

Cornwell Jackson has worked with retail businesses, including restaurants for decades, and provides direction on compliance as well as business advisory services. We help restaurant owners and franchisors determine policies and procedures, investments in technology and the viability and timing of additional locations. If you have questions around employee theft and how our team can support your accounting processes and daily POS or reconciliation methods, contact us for a consultation.

Download the Whitepaper: Protect Your Restaurant from Employee Embezzlement

Scott Bates, CPA, is a partner in Cornwell Jackson’s audit practice and leads the business services practice, including outsourced accounting, bookkeeping, and payroll services. He is an expert for clients in restaurants, healthcare, real estate, auto and transportation, technology, service, construction, retail, and manufacturing and distribution industries.

Article originally published on March 7th, 2016. Updated in 2018.

Know the Details of the Family and Medical Leave Tax Credit

Posted on March 14, 2018 by Debra Barcuch

The Tax Cuts and Jobs Act enacted at the end of last year will give your company a tax credit if you initiate a new paid family and medical leave benefit. Although the IRS has yet to issue its interpretive regulations, the text of the law itself gives you enough to go on to at least consider whether doing so would be a worthwhile exercise.

The Basics

In case you missed it, here’s a recap of the basics. First, the tax credit is available this year and next, but it could be extended beyond 2019 if Congress decides it’s working well. It primarily relies on leave eligibility criteria laid out by the Family and Medical Leave Act.

The size of the credit tops out at 25% of the wages paid to employees during their new family leave benefit. To qualify for that maximum credit, employees must be paid 100% of their wages during the leave period.

For your company to get the minimum credit (12.5% of wages earned), employees must be paid at least 50% of their normal earnings. The credit percentage inches up (toward the maximum of 25% credit) as the proportion of wages paid to the employee on leave increases.

More Nuts and Bolts

This tax credit is for new programs only, so it cannot be claimed for paid time off programs that you already have in place. Also, the minimum duration of the new family leave benefit is two weeks, and it must be offered both to full- and part-time employees who have been on board for a year or longer. You can’t take the credit against benefits paid to employees earning more than $72,000, a figure will be inflation-indexed in following years.

If you decide to take advantage of the tax credit, you’ll need to define the new benefit in writing for employees. The description should then go in your employee handbook, assuming you have one.

Should you take advantage of this program? People and organizations that have been advocating for paid family and medical leave for many years always marshal justifications for doing so based on concrete benefits to the employer. They assert that such policies improve employee productivity and make workers more loyal. No doubt in many instances that’s true but, of course, there’s no guarantee it that will happen at your company.

What Else Should You Consider?

Here’s some more food for thought:

To what extent will you actually be able to use the tax credit? The answer depends not only upon how many employees take advantage of it, but also the size of your tax liability. If you’re not anticipating much of a tax bill for 2018 and 2019, the credits might not do you much good from a purely financial standpoint.
How much money are we really talking about? Assume the following: You have 100 employees earning an average of $40,000. Your benefits call for full wage replacement, entitling you to the maximum 25% tax credit. And, over the course of a year, 25 employees use the new benefit, averaging two weeks each (the minimum leave to qualify for the credit). Based on those assumptions, the pre-tax added cost of the benefit would be around $38,462, and the 25% tax credit would reduce it on an after-tax basis to $28,847, if your company’s tax liability exceeds the credit amount.
What happens if you launch a paid family and medical leave benefit based on the prospect of its diminished after-tax cost but Congress doesn’t extend the program after 2019? At that point, you might find it difficult to pull the plug on this benefit.
What if you were already giving serious consideration to providing a paid family and medical leave benefit without expecting a new financial incentive? The tax credit would be icing on the cake.
Even if you weren’t contemplating such a program, are you having challenges attracting and keeping new and old employees on board? Unless the benefit is abused, its dollar cost might be well worth the possible boost it would give to your reputation as a good place to work.
Do you have the administrative capacity to judge the merits of paid borderline family and medical absence requests? It’s possible that you’ll experience more leave requests once employees know they’ll be paid during that leave period than when they weren’t.

Employee Attitudes

It’s also important to try to gauge how much employees would value this benefit. You might want to poll your workers on their preference for some new benefit possibilities, not just paid family and medical leave.

For example, you might consider giving them a choice between paid family and medical leave and a larger match to their 401(k) contributions, using a match amount that would be similar in cost to a paid leave plan. Such a survey might reveal a strong employee preference for the higher 401(k) match. If so, those results could make the choice an easier one.

It’s true that not all tax incentives are the right fit for every company. Even so, this new tax credit for paid family and medical leave is certainly worth a look. Ask your trusted financial advisor to run the numbers so you can make an informed decision.

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Old Rules

New Law

Say Goodbye to Dependency Exemptions … For Now

Claiming Your Credit

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Restaurant Theft of Food/Beverages/Supplies

Theft at POS

Restaurant Theft in Accounting

Theft of Intellectual Property

Download the Whitepaper: Protect Your Restaurant from Employee Embezzlement

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What Else Should You Consider?

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