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Accounting and Tax Planning

Accounting and Tax Planning

Five Hot Tax Topics

The Tax Cuts and Jobs Act represents a seismic shift within the broad realm of accounting and tax planning, and some of the aftershocks may not be felt, and fully understood, for some time. But some things are known, and individuals and businesses should understand their implications.

By Teresa Judycki

For better or worse, the Tax Cuts and Jobs Act was the most significant tax-law overhaul since the Reagan Administration, and there’s potential for more change on the way. With the breadth and depth of this law, it can be hard to determine what might be meaningful to you and your business.

This article will highlight five hot tax topics that may be particularly meaningful for this tax year.

Qualified Opportunity Funds

Taxpayers with large gains from sales of property to an unrelated person should be aware of Qualified Opportunity Funds. Enacted as part of the Tax Cuts and Jobs Act, a new Opportunity Zone program encourages investment in low-income community businesses.

Terri Judycki, CPA, MST

Terri Judycki, CPA, MST

The program allows individual and corporate taxpayers to defer tax on gains from the sale of stock or other assets by investing in an Opportunity Fund, which invests in businesses in Opportunity Zones. The tax is deferred until the earlier of Dec. 31, 2026 or the date the new investment is sold. To defer a gain, the taxpayer must invest within 180 days of the sale.

For example, if a taxpayer sells appreciated securities for $1 million at a $700,000 gain, tax on the $700,000 could be deferred until Dec. 31, 2026 (or earlier if the investment is sold prior to that date) by investing $700,000 in a Qualified Opportunity Fund within 180 days of sale. Capital gains on the new investment are exempt from tax if the investment is held for more than 10 years. Opportunity Funds may be a multi-investor fund or a single-investor fund established by a taxpayer to invest in projects he or she selects.

While there are a few multi-investor funds, many are hesitant to promise tax deferral until the IRS issues proposed regulations in this area, but September news is that the proposed rules are being reviewed and should be issued soon.

Foreign Accounts

For taxpayers with unreported income from foreign accounts, the Streamlined Filing Procedures (SFP) are still available. The Offshore Voluntary Disclosure Program ended Sept. 28, 2018.

Under SFP, taxpayers who can certify that the failure was non-willful can file amended returns and pay a reduced penalty. The IRS also has procedures in place for filing delinquent information returns reporting the existence of a foreign account when there has been no unreported income.

For example, a life-insurance policy with Sun Life may have a cash value that’s now increased to more than $10,000. That is a ‘foreign account’ that must be reported or could be subject to penalties. Consider reviewing any asset that is a foreign account and ensuring that tax filings are current, because penalties are confiscatory and may include criminal penalties.

The civil penalties for willful violations are capped at the greater of $124,588 or 50% of the amount in the account.

Employee Parking

I hoped to be able to provide you with specifics related to employee parking, but that guidance has not been issued as of the date of this writing. Perhaps there will be guidance by the time you are reading this article.

As a reminder, the Tax Cuts and Jobs Act provides that no deduction is allowed for the expense of a qualified transportation fringe, which includes van pools, transit passes, and qualified parking. Qualified parking is parking provided to an employee on or near the business premises of the employer or on or near a location from which the employee commutes to work by commuter highway vehicle or carpool. Tax-exempt organizations are subject to tax on the expense. But what is the ‘expense’ of qualified parking? At the 2018 AICPA Not-for-Profit Industry Conference, a speaker said that guidance had not yet been issued, because those in Treasury could not agree on the meaning of the law.

The cost of a parking permit is easy to quantify, but the law encompasses all expenses of providing parking. There are some practitioners who think a portion of depreciation on a parking lot owned by the business could be disallowed. Some others think the IRS may require apportioning office rent if the lease entitles the tenant to a certain number of parking spaces. As the law applies to amounts paid or incurred after Dec. 31, 2017, it affects computation of taxable income for entities with fiscal years ending in 2018. There are many practitioners hoping for retroactive repeal or postponement.

State and Local Tax Itemized Deduction

In August, the IRS issued proposed regulations in response to state legislation intended to circumvent the $10,000 limit on the state and local tax itemized deduction. A few states have enacted or considered enacting programs permitting state residents to make contributions to state agencies or charities in exchange for state and local tax credits that could be applied to income or property taxes.

In the proposed regulations, IRS restates the general rule that charitable deductions must be reduced by anything of value received in return for the charitable donation. The proposed rules, applicable to contributions made after Aug. 27, 2018, provide that, if a taxpayer receives a tax credit in return for a donation, the tax credit is a benefit to the taxpayer that must reduce the charitable contribution deduction.

It is important to note that these rules apply to programs created in response to the Tax Cuts and Jobs Act as well as to pre-existing programs, such as the Massachusetts program that provides tax credits in exchange for gifts of conservation land.

There has been no response from the IRS to the Connecticut strategy; Connecticut now imposes tax on a pass-through entity instead of on the individual partner or shareholder, which should result in shifting the deduction away from the individual who is subject to the $10,000 limit. The shareholder or partner should now be able to report his or her share of the entity’s income net of the state tax.

Trusts that pay taxes are also subject to the $10,000 limit, but a trust does not have to share the beneficiary’s $10,000 limit, providing a potential benefit.

Alimony

Finally, for those who will be divorced soon, the tax consequences of alimony differ for payments under instruments finalized after Dec. 31, 2018.

Before the Tax Cuts and Jobs Act, alimony was deductible by the payor and taxable to the payee. This resulted in shifting income from the higher-earning spouse paying the alimony to the former spouse who may be in a lower tax bracket. Alimony payments finalized after Dec. 31, 2018 will no longer be deductible by the paying spouse and no longer included in the income of the recipient spouse. There are some workarounds such as division of property where the spouse in the lower tax bracket receives property with the greatest unrealized gain or by using a Qualified Domestic Relations Order to shift retirement assets (along with the tax burden) to the lower-income spouse.

While this change will not affect pre-2019 alimony instruments, it may apply if the parties modify the pre-2019 agreement and state in the modification that the new rules are to apply. If this law change will impact you, be sure to discuss its effects with your attorney.

If you have any questions about the material featured in this article or how it might apply to you specifically, be sure to consult your tax professional or CPA.

Terri Judycki is a senior tax manager with Holyoke-based public accounting firm Meyers Brothers Kalicka, P.C.; (413) 322-3510; [email protected]

Accounting and Tax Planning

New Rules of the Road

By Julie Quink, CPA

Tax-IncentivesIn 2018, nonprofit organizations face implementation of the first major overhaul of accounting standards in two decades. The goal of the overhaul is to improve the communication of financial results for donors and other outside stakeholders and to emphasize transparency in financial reporting.

With these changes, nonprofit organizations can expect significant changes in financial reporting practices. Donors and outside stakeholders can expect enhanced information on liquidity, access to cash and endowments.

What are the significant financial reporting changes for nonprofits?

Some of the major changes in the new standards encompass net asset classification, liquidity and availability, investment returns, reporting of functional expenses, and presentation of statement of cash flows.

Net Assets

The new accounting standards focus on the existence or absence of donor restrictions as opposed to the type of restriction. The new rules provide for two classes of ‘net assets’ — with donor restrictions and without donor restrictions. Previously, nonprofits have reported three required classes of net assets — unrestricted, temporarily restricted, and permanently restricted.

Julie Quink, CPA

Julie Quink, CPA

For underwater endowments, in which the fair value of the endowment at the reporting date is less than the original gift or the amount required to be maintained by the donor or by law, the cumulative amount of losses is netted in assets with donor restrictions under the new classifications. Previously, the accumulated losses were included in unrestricted net assets.

Disclosures relative to underwater endowments now encompass the aggregate amount of original gifts required to be maintained, endowment spending policies, and discussion of actions taken or strategy relative to the underwater status of the endowment. For the nonprofit, a concern may be that the status of and strategy of managing underwater endowments is highlighted in the new financial-statement disclosures.

The goal of the change is to simplify tracking and reporting of donor restrictions and also to enhance disclosures on the nature, amounts, and types of donor restrictions.

Liquidity and Availability

Quantitative and qualitative information is required under the new standards relative to liquidity and availability of liquid assets, which are typically cash and investments.

The qualitative disclosures require analysis of how the organization manages its liquid assets to meet cash needs for expenditures within one year of the statement of financial-position date. The quantitative information regarding the liquid assets and their availability to meet the current-year needs can be presented on the face of the financial statements or in the notes to the financial statements.

Donors, grantors, creditors, and other stakeholders want to understand that these nonprofit organizations that they are evaluating have adequate financial resources to meet obligations as they become due. For the nonprofit organization, a concern is that this liquidity information can highlight potential liquidity shortfalls, which may affect future donations and grants.

Investment Returns

Investment income is to be reported net of internal and external investment expenses. This has been an optional presentation under current standards. The requirement to disclose investment expenses net in investment income has been removed. The netting of fees against income does not suggest that nonprofits should not still manage and monitor investment fees, but assists in eliminating the burden of trying to identify embedded investment fees.

Functional Expenses

Currently, only health and welfare organizations are required to report expenses by function. Under the revised standards, all nonprofits must report expenses by function and must disclose the methodology used for the allocations to program and overhead expenses in the notes to the financial statements.

Nonprofit organizations should have been allocating expenses to programmatic and administrative expenses even though not required to detail the expenses by function. The requirement for functional reporting and disclosures may require nonprofits to review their allocation policies for consistency.

Statement of Cash Flows

The new rules continue to allow nonprofits to choose the method, direct or indirect, by which they present operating cash flows. The new guidance does eliminate the need to add an indirect reconciliation if using the direct method in presenting operating cash flows.

By streamlining the requirements, it is believed that the statement of cash flows will be a more useful statement and result in a reduction of costs to the nonprofit to prepare the financial statements.

Conclusion

The new accounting and reporting standards are intended to provide more transparency to donors and other stakeholders. These changes may, however, have a significant time and financial impact on nonprofit organizations as they implement the new requirements.

Julie Quink, CPA is the managing principal of Burkhart, Pizzanelli, P.C., specializing in the accounting and consulting aspects of the practice. She is also a certified fraud examiner.

Accounting and Tax Planning Sections

Upping the Ante

By Kristina Drzal Houghton, CPA, MST

It’s June. This is generally not the time to be thinking about taxes. In reality, though, businesses and individuals should always be contemplated taxes and how to reduce their burden. And the Tax Cuts and Jobs Act signed into law late last year gives people even more to think about.

Kristina Drzal Houghton

Kristina Drzal Houghton

The Tax Cuts and Jobs Act, (TCJA), signed into law on Dec. 22, 2017, brought the biggest changes to both individual and corporate taxes that we’ve seen in the past 30 years. These changes were primarily effective for tax years 2018 and after. For many reasons I’ll highlight in this article, these changes make starting your planning early extremely important.

I will briefly acknowledge that the TCJA reduced the C-corporation tax rate to a flat 21%, from the previous maximum rate of 34%. Additionally, there were changes made to U.S. taxation of income earned abroad by U.S. C-corporations and their affiliates.

The focus of this article will revolve around planning for individuals and small businesses.

Where to Start

I would suggest having an accountant run mock 2018 returns as a starting point. Running those future numbers can flag potential issues. That said, state revenue departments and the Internal Revenue Service have had little time to process the changes, so much remains in flux. The IRS and states haven’t decided how some provisions of the new tax law will be calculated yet. I expect that the IRS and states will start to share their 2018 guidance later this summer. In the meantime, here are some suggestions:

Rework Your Withholding

The new law means that the W-4 you filled out, however many years ago, may need to be adjusted. The IRS encourages everyone to use the Withholding Calculator, available on irs.gov, to perform a quick ‘paycheck checkup.’ Remember, the new tables don’t reflect all the changes that may affect a taxpayer next year, so they are a somewhat blunt tool.

The calculator helps you identify your tax withholding to make sure you have the right amount of tax withheld from your paycheck at work.

If workers leave their W-4s as is, they could wind up withholding too little, which can bring penalties, or they may get a smaller-than-expected refund next year. Workers in higher tax brackets who receive large bonuses could see a higher tax bill next season if they don’t tweak W-4s, since one of the ways employers can set the withholding rate on ‘supplemental income’ such as bonuses in the new law is to use a flat rate of 22%.

Think About Deduction Planning

A big change that could affect many taxpayers is the tax overhaul’s controversial cap on state and local income tax (SALT) deductions, a provision Democrats have labeled a war on blue-state Americans. The deduction, which used to be unlimited, will be capped at $10,000 next year. The new law’s near-doubling of the standard deduction to $12,000 for single filers and $24,000 for married couples filing jointly does mean fewer will itemize.

States were busy devising workarounds to keep those residents from seeing a big spike in federal taxes next year, but the IRS recently informed taxpayers that proposed regulations will be issued addressing the deduction of contributions to state and local governments and other state-specified funds, for federal tax purposes. The proposed regulations will make clear that the Internal Revenue Code, not the label used by states, governs the federal income-tax treatment of such transfers.

As a result of the decreased SALT deduction and the increased standard deduction, the tax benefit from charitable contributions may be lost if the standard deduction exceeds itemized deductions. One strategy for people who regularly donate to charity is to bunch up into one year what they would have given over multiple years. For those who itemize, charitable donations remain deductible on federal returns and can help lift married taxpayers who file jointly above the $24,000 standard deduction hurdle.

By putting a few years’ worth of donations into a donor-advised fund — many financial-services firms have units that offer them — you can take the deduction the year you put the money in, but distribute the money to charity over multiple years. For taxpayers older than 70½ who are taking required distributions from an IRA, they should consider making distributions to charities directly from their IRA.

Mortgage and Home-equity Loan Deductions

The new tax law lowered the amount of deductible interest expense on ‘acquisition indebtedness.’ For new loans made after Dec. 14, 2017, the maximum interest is limited to a mortgage ceiling of $750,000; previously, this was $1 million. It also eliminated the interest deduction on loans, such as home-equity loans, that are not used to ‘buy, build, or substantially improve’ a home.

New College Savings Plan Uses

The new tax law expands the allowable use of tax-exempt 529 college savings plans for education costs that accrue while your child is between kindergarten and high-school graduation. This added allowable use is limited to $10,000 per year per beneficiary. But be careful — while some states automatically follow the federal code, others choose to decouple from certain parts of it. So, while the U.S. government may say you can use 529 money for K-12 expenses, a state may consider such a withdrawal a non-qualified distribution and could tax the earnings and charge you penalties.

Section 199A Pass-through Optimization

Section 199A, which is a new section of the tax code arising from the Tax Cuts & Jobs Act of 2017, introduces a 20% deduction on qualified business income (QBI) for the owners of various pass-through business entities which include S-corporations, limited liability companies, partnerships, and sole proprietorships — or, really, any business that is not a C-corporation.

The QBI deduction will provide big tax breaks for many business-owning clients, but unfortunately, the new deduction is highly complicated, and it may take some time before the IRS can even provide more meaningful guidance on how it will be applied. However, the reality is that the planning opportunities created by IRC Section 199A are tremendous, and practitioners are already eagerly exploring how they can help clients reduce their tax burden through creative strategies around the QBI deduction.

Business owners will generally fall within one of three categories when it comes to the QBI deduction:

• Business owners below their applicable threshold amount — which is $157,500 of taxable income for all filers except joint filers, and $315,000 for those filing jointly — can enjoy a QBI deduction for the lesser of 20% of their qualified business income or 20% of their taxable income. It does not matter what type of business is generating the income, nor is there a need to analyze W-2 wages paid by the business or depreciable assets owned by the business. The QBI deduction is what it is.

• Business owners over their applicable threshold who derive their income from a ‘specified service’ business (i.e., some specialized trade or service business) — which includes doctors, lawyers, CPAs, financial advisors, athletes, musicians, and any business in which the principal asset of the business is the skill or reputation of one or more of its employees — will have their QBI deduction phased out. The phase-out range is $50,000 for all filers except joint filers, and $100,000 for those filing jointly. Once a business owner’s taxable income exceeds the upper range of their phase-out threshold ($207,500 for individuals and $415,000 for married filing jointly), they cannot claim a QBI deduction for income generated from a specialized trade or service business. Period. End of story. ‘Do not pass go, do not collect $200.’

• Business owners over their applicable threshold who derive their income from a business that is not a specialized trade or service business may also have their QBI deduction at least partially phased out, but the full deduction may be ‘saved’ based on how much they pay in W-2 wages and/or how much depreciable property they have in the business. Business owners with qualified business income from non-specified service businesses whose taxable income exceeds the upper range of their phase-out threshold can still take a QBI deduction equal to or less than the greater of:

1. 50% of the W-2 wages paid by the business generating the qualified business income; or

2. 25% of the W-2 wages paid by the business generating the qualified business income, plus 2.5% of the unadjusted basis of depreciable property owned by the business.

A careful analysis of the rules above will lead one to realize that, when it comes to maximizing a business owner’s opportunity for a QBI deduction, strategies will fall into one of three main buckets:

• Income-reduction strategies, such as trying to lower taxable income by increasing deductions or spreading out the income over multiple taxpayers, to stay below the income threshold where the specified service business or wage-and-property tests kick in;

• ‘Income alchemy’ strategies, where we try to transform income derived from a specified service business into income derived from a company that is not a specified service business, to avoid the phase-out (for those over the income threshold); and

• Business strategies, such as changing an entity, revisiting compensation models, and revisiting business assets, to more favorably characterize business income in the first place.

Relook at Filing Separate Returns for Married Couples

The tax code has long limited married couples filing separate returns from taking advantage of a number of tax breaks, either by barring those tax breaks entirely under the ‘married filing separately’ status, or phasing them out at very modest income thresholds. As a result, in the past, it’s rarely been a tax-efficient move for married couples to file separate returns, except in highly unusual circumstances. That will likely still be the case for most married couples, but the creation of the QBI deduction does tilt the balance somewhat for some couples.

Should You Revoke S-corp Status?

The hot question since the passage of the Tax Cuts & Jobs Act of 2017 and Section 199A is, “should I revoke S-corp status and go to C-corp?” The answer is no.

While the TCJA reduced C-corporation tax rates to 21%, the QBI reduces the maximum rate on pass-through income to 29.6% (80% of 37%). Previously, the maximum tax rate on pass-through income was 39.6% plus the effect this income had on itemized deduction and personal exemption phase-outs, producing an even greater effective rate.

This rate exceeded the prior maximum C-corporation rate of 34%. Owners elected to operate their businesses in pass-through entities for many reasons beyond the current year’s tax. None of these considerations have changed.

For most small businesses and their owners, the key point is to acknowledge that TCJA creates a tremendous number of planning opportunities. New strategies with QBI will certainly continue to be developed with time and further guidance from the IRS, but even in the present, there exists enough reasons to reach out to your advisors and have them help them reduce your tax liabilities.

Kristina Drzal Houghton, CPA, MST is a partner and director of the Taxation Division at Holyoke-based Meyers Brothers Kalicka; (413) 536-8510.

Accounting and Tax Planning Sections

The Fraud Triangle

By Julie Quink, CPA

Julie Quink

Julie Quink

As a culture, we generally believe that people are honest and are trustworthy. Failures like Enron and WorldCom, whose combined fraud losses totaled $46 billion, have raised an awareness of the costs of fraud and have highlighted the need for management to understand and monitor the business risks within their organizations.

What Is Fraud?

Fraud is an intentional act that results in misrepresenting financial information (lying) or misappropriation of assets (stealing). The misrepresentation of financial information typically encompasses misstating earnings to meet market or company expectations and to meet compensation-plan benchmarks. Misappropriation of assets is the taking of company assets, whether cash and equivalents, inventory or supplies, for personal benefit and use.

Statistics indicate that:

• 10% of employees would never, ever commit fraud;

• 10% of employees are actively exploring ways to commit small-scale fraud against their employer, which could include padded mileage and expense reports, small-scale theft of supplies and other materials; and

• 80% of employees would never commit fraud unless certain factors are present.

The factors that would provide the motivation for 80% of employees to consider committing fraud are termed the Fraud Triangle. These factors include:

• Pressure — a financial need created by gambling addictions, substance and alcohol abuse, family illness, or extramarital affairs;

• Opportunity — the ability to access cash or items easily convertible to cash (inventory); and

• Rationalization — the feeling of entitlement or the feeling that there is no other way to financially meet the pressure unless taken from their employer.

Otherwise honest employees may commit fraud under these circumstances.

Indicators that an employee may be committing fraud include the appearance that the employee is living beyond their lifestyle, suspected or known substance or alcohol abuse, and resistance to relinquishing control of duties to others.

Common Ways Fraud Occurs

Generally, misrepresented financial results are accomplished through fictitious transactions or adjustments recorded in accounting records.

Fraud is an intentional act that results in misrepresenting financial information (lying) or misappropriation of assets (stealing).”

The most common ways that an individual can misappropriate funds are:

• Creating fictitious employees on the payroll system and generating payroll checks that the fraudulent employee cashes — the ghost- employee scheme;

• Creating fictitious vendors and generating checks to the fraudster for goods and services never received by the company — the ghost-vendor scheme; and

• Taking customer checks or cash before being deposited into the bank and modifying the accounting records to conceal the theft.

Preventing Fraud

According to the 2018 Report to the Nations published by the Assoc. of Certified Fraud Examiners, 50% of fraud and corruption cases are detected by a tip. Meanwhile, weaknesses in internal control are responsible for nearly 50% of all frauds, and losses are up to 50% higher when collusion of fraudsters exists.

When considering effective prevention and detection techniques, it is critical to:

• Implement a whistleblower policy that provides a mechanism for confidential communication of suspected impropriety;

• Assess areas of risk and evaluate internal controls over the most susceptible business cycles, including cash receipts, cash disbursements, and payroll; and

• Review financial and operational trends to determine routine and unusual patterns.

Simple techniques to strengthen internal controls over significant business cycles include the receipt of unopened bank statements by owner for independent review of monthly activity, and varying of procedures relative to the review the payroll journals or signing of vendor checks, if another individual is typically responsible for those areas. Inquiry and observation, such as camera systems, in areas that pose a concern may act as a deterrent for the occurrence of fraud due to the mere fact that someone is reviewing activity or inquiring.

When techniques fail to prevent and detect fraud, it is important to gather and review evidence. It is recommended that legal counsel be involved in suspected fraud and investigations at the onset. Legal counsel will likely engage an accountant to assist in the review of evidence and documents.

Business owners and management cannot afford not to be aware of fraud indicators and assess the associated risks within their own organizations. Awareness of who puts your organization at risk, review of trends, and simple monitoring tasks can assist in preventing fraud losses, which can create significant, unplanned costs for an organization.

Julie Quink, CPA is the managing principal of Burkhart, Pizzanelli, P.C., specializing in the accounting and consulting aspects of the practice. She is also a certified fraud examiner.

Accounting and Tax Planning Sections

A Time to Plan

taxplanningbw1117a

It’s never a bad time for companies to assess their tax situation and plan ahead, but with the end of 2017 approaching — and plenty of uncertainty over potential tax reform clouding the picture — it’s an especially good moment to start formulating a strategy to save tax dollars down the line. Here’s a checklist of actions based on current tax rules that may help businesses do just that.

By Kris Houghton, CPA

Taxes and the possibility of tax reform have been in the news so frequently, many are just tuned out on the subject. However, with year-end approaching, it is a good time to think of planning moves that will help lower your tax bill for this year and possibly the next.

Kristina Drzal-Houghton

Kristina Drzal-Houghton

For many years, experts have suggested the approach of deferring income until next year and accelerating deductions into this year to minimize taxes. This time-honored approach could turn out to be even more valuable this year if Congress succeeds in enacting tax reform that reduces business tax rates beginning next year in exchange for slimmed-down deductions.

Regardless of whether tax reform is enacted, deferring income also may help you minimize or avoid AGI-based phaseouts of various tax breaks that are applicable for 2017. Except in general terms, I will refrain from comparing the current tax laws to proposed legislation since its enactment in its current form is very speculative.

Regardless of whether tax reform is enacted, deferring income also may help you minimize or avoid AGI-based phaseouts of various tax breaks that are applicable for 2017.”

The following is a checklist of actions based on current tax rules that may help you save tax dollars if you act before year-end.

Year-end Tax-planning Moves for Businesses and Business Owners

• Businesses should consider making expenditures that qualify for the business-property-expensing option.

For tax years beginning in 2017, the expensing limit is $510,000, and the investment-ceiling limit is $2,030,000. Expensing is generally available for most depreciable property (other than buildings), off-the-shelf computer software, air-conditioning and heating units, and qualified real property-qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property. The generous dollar ceilings that apply this year mean that many small and medium-sized businesses that make timely purchases will be able to currently deduct most if not all their outlays for machinery and equipment.

What’s more, the expensing deduction is not prorated for the time that the asset is in service during the year. The fact that the expensing deduction may be claimed in full (if you are otherwise eligible to take it), regardless of how long the property is held during the year, can be a potent tool for year-end tax planning. Thus, property acquired and placed in service in the last days of 2017, rather than at the beginning of 2018, can result in a full expensing deduction for 2017.

• Businesses should also consider making expenditures that qualify for 50% bonus first-year depreciation if bought and placed in service this year (the bonus percentage declines to 40% next year). The bonus-depreciation deduction is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 50% first-year bonus write-off is available even if qualifying assets are in service for only a few days in 2017.

• Businesses may be able to take advantage of the ‘de minimis safe-harbor election’ (also known as the book-tax conformity election) to expense the costs of lower-cost assets and materials and supplies. To qualify for the election, the cost of an item of property can’t exceed $5,000 if the taxpayer has a certified audited financial statement along with an independent CPA’s report. Otherwise, the cost of an item of property can’t exceed $2,500.

• Businesses contemplating large equipment purchases also should keep a close eye on the tax-reform plan being considered by Congress. The current version contemplates immediate expensing — with no set dollar limit — of all depreciable asset (other than building) investments made after Sept. 27, 2017, for a period of at least five years. This would be a major incentive for some businesses to make large purchases of equipment in late 2017.

• A corporation should consider deferring income until 2018 if it will be in a higher bracket this year than next. This could certainly be the case if Congress succeeds in dramatically reducing the corporate tax rate, beginning next year.

• A corporation should consider deferring income until next year if doing so will preserve the corporation’s qualification for the small-corporation AMT exemption for 2017. Note that there is never a reason to accelerate income for purposes of the small-corporation AMT exemption because, if a corporation doesn’t qualify for the exemption for any given tax year, it will not qualify for the exemption for any later tax year.

• A corporation (other than a ‘large’ corporation) that anticipates a small net operating loss for 2017 (and substantial net income in 2018) may find it worthwhile to accelerate just enough of its 2018 income (or to defer just enough of its 2017 deductions) to create a small amount of net income for 2017. This will permit the corporation to base its 2018 estimated tax installments on the relatively small amount of income shown on its 2017 return, rather than having to pay estimated taxes based on 100% of its much larger 2018 taxable income.

• If your business qualifies for the domestic production activities deduction (DPAD) for its 2017 tax year, consider whether the 50%-of-W-2 wages limitation on that deduction applies. If it does, consider ways to increase 2017 W-2 income, e.g., by bonuses to owner-shareholders whose compensation is allocable to domestic-production gross receipts. Note that the limitation applies to amounts paid with respect to employment in calendar year 2017, even if the business has a fiscal year. Keep in mind that the DPAD would be abolished under the tax-reform plan currently before Congress.

Year-End Tax-planning Moves for Individuals

• Higher-income earners must be wary of the 3.8% surtax on certain unearned income. The surtax is 3.8% of the lesser of: (1) net investment income (NII), or (2) the excess of modified adjusted gross income (MAGI) over a threshold amount ($250,000 for joint filers or surviving spouses, $125,000 for a married individual filing a separate return, and $200,000 in any other case).

As year-end nears, a taxpayer’s approach to minimizing or eliminating the 3.8% surtax will depend on his estimated MAGI and NII for the year. Some taxpayers should consider ways to minimize (e.g., through deferral) additional NII for the balance of the year, others should try to see if they can reduce MAGI other than NII, and other individuals will need to consider ways to minimize both NII and other types of MAGI.

• The 0.9% additional Medicare tax also may require higher-income earners to take year-end actions. It applies to individuals for whom the sum of their wages received with respect to employment and their self-employment income is in excess of an unindexed threshold amount ($250,000 for joint filers, $125,000 for married couples filing separately, and $200,000 in any other case).

Employers must withhold the additional Medicare tax from wages in excess of $200,000 regardless of filing status or other income. Self-employed individuals must take it into account in figuring estimated tax. There could be situations where an employee may need to have more withheld toward the end of the year to cover the tax. For example, if an individual earns $200,000 from one employer during the first half of the year and a like amount from another employer during the balance of the year, he would owe the additional Medicare tax, but there would be no withholding by either employer for the additional Medicare tax since wages from each employer don’t exceed $200,000.

• Realize losses on stock while substantially preserving your investment position. There are several ways this can be done. For example, you can sell the original holding, then buy back the same securities at least 31 days later. It may be advisable to discuss year-end trades with a qualified advisor.

• Postpone income until 2018 and accelerate deductions into 2017 to lower your 2017 tax bill. This strategy could enable you to claim larger deductions, credits, and other tax breaks for 2017 that are phased out over varying levels of adjusted gross income (AGI). These include child tax credits, higher-education tax credits, and deductions for student-loan interest. Postponing income is also desirable for those taxpayers who anticipate being in a lower tax bracket next year due to changed financial circumstances. Note, however, that, in some cases, it may pay to actually accelerate income into 2017.

• If you believe a Roth IRA is better than a traditional IRA, consider converting traditional-IRA money invested in beaten-down stocks (or mutual funds) into a Roth IRA if eligible to do so. Keep in mind, however, that such a conversion will increase your AGI for 2017.

• It may be advantageous to try to arrange with your employer to defer, until early 2018, a bonus that may be coming your way. This could cut as well as defer your tax if Congress reduces tax rates beginning in 2018.

• Consider using a credit card to pay deductible expenses before the end of the year. Doing so will increase your 2017 deductions even if you don’t pay your credit-card bill until after the end of the year.

• If you expect to owe state and local income taxes when you file your return next year, consider asking your employer to increase withholding of state and local taxes (or pay estimated tax payments of state and local taxes) before year-end to pull the deduction of those taxes into 2017 if you won’t be subject to alternative minimum tax (AMT) in 2017. Pulling state and local tax deductions into 2017 would be especially beneficial if Congress eliminates such deductions beginning next year.

• Estimate the effect of any year-end planning moves on the AMT for 2017, keeping in mind that many tax breaks allowed for purposes of calculating regular taxes are disallowed for AMT purposes. These include the deduction for state property taxes on your residence, state income taxes, miscellaneous itemized deductions, and personal-exemption deductions. If you are subject to the AMT for 2017, or suspect you might be, these types of deductions should not be accelerated.

• You may be able to save taxes by applying a bunching strategy to pull ‘miscellaneous’ itemized deductions, medical expenses, and other itemized deductions into this year. This strategy would be especially beneficial if Congress eliminates such deductions beginning in 2018.

• Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retirement plan). RMDs from IRAs must begin by April 1 of the year following the year you reach age 70½. That start date also applies to company plans, but non-5% company owners who continue working may defer RMDs until April 1 following the year they retire. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn.

Although RMDs must begin no later than April 1 following the year in which the IRA owner attains age 70½, the first distribution calendar year is the year in which the IRA owner attains age 70½. Thus, if you turn age 70½ in 2017, you can delay the first required distribution to 2018, but if you do, you will have to take a double distribution in 2018 — the amount required for 2017 plus the amount required for 2018.

Think twice before delaying 2017 distributions to 2018, as bunching income into 2018 might push you into a higher tax bracket or have a detrimental impact on various income-tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2018 if you will be in a substantially lower bracket that year.

• Make gifts sheltered by the annual gift-tax exclusion before the end of the year and thereby save gift and estate taxes. The exclusion applies to gifts of up to $14,000 made in 2017 to each of an unlimited number of individuals. You can’t carry over unused exclusions from one year to the next. Such transfers may save family income taxes where income-earning property is given to family members in lower income-tax brackets who are not subject to the kiddie tax.

• If you were affected by Hurricane Harvey, Irma, or Maria, keep in mind that you may be entitled to special tax relief under recently passed legislation, such as relaxed casualty-loss rules and eased access to your retirement funds. In addition, qualifying charitable contributions related to relief efforts in the Hurricane Harvey, Irma, or Maria disaster areas aren’t subject to the usual charitable deduction limitations.

These are just some of the year-end steps that can be taken to save taxes. Consider meeting your tax advisor to discuss your unique tax situation so they can tailor a plan that will work best for you.


Kristina Drzal-Houghton, CPA, MST is the partner in charge of Taxation at Holyoke-based Meyers Brothers Kalicka, P.C.: (413) 536-8510.

Accounting and Tax Planning Sections

Tax Incentives for Business Owners

By Brenden Healy, CPA

Brenden Healy, CPA

Brenden Healy, CPA

Whether we like it or not, taxes are a part of any business strategy. From the federal level on down, tax obligations go side-by-side with running a business. And while the economy is getting better for much of the country, business owners need to continue to improve their bottom line. One good way to strengthen business cash flow is by taking advantage of tax credits or tax incentives. Business owners sometimes do not harvest these opportunities, most often because they don’t know about all the options available to them or because they don’t fully understand the requirements.

Capturing these benefits requires knowing to look for them, which can be an issue in the diverse tax rules of the IRS or state taxing authorities. Here are some tax opportunities that every business owner should know about:

• Research and Development Tax Credit: This credit was introduced as an incentive to encourage new innovation in the U.S., but remains one of the most overlooked tax opportunities out there. There’s a lot of misconception that a research-driven credit must be limited to modern, large tech firms that are putting out new products. However, the purpose of this credit is to fuel innovation and development, which is relevant to a variety of industries, of all sizes. Recent changes in IRS regulations have opened up this tax credit to many industries. Manufacturing, investment-management services, software development, and even construction are major industries that can take advantage of this tax-savings opportunity, but it can be applied to other industries in certain scenarios.

• Export Sales: The IRS allows companies that produce goods in the U.S. and then export them outside the border to take advantage of a reduced tax rate for some of the profits relating to those export sales. This is accomplished by converting the business income related to the exports into long-term capital-gain income, which is usually taxed at about half the normal business tax rate.

• Write-Off of Asset Purchases: This incentive is one of the most beneficial ones for small businesses. The IRS continues to allow generous write-offs for purchasing equipment, machines, computers, etc. through the Section 179 tax-expensing election with a 2017 deduction limit of about $500,000, or the 50% ‘bonus’ depreciation deduction, which could be used after that spending cap is reached.

• New IRS Capitalization-policy Rules: Just by making a special election on the tax return, a small business can adopt a policy of expensing items purchased during the year, up to $2,500 for each item. As an example, if a business buys 10 computers for $1,500 each, it could expense the full $15,000 of computers under this capitalization policy rule.

• Roof Repairs and Other Building Maintenance Costs: The IRS is also allowing real-estate owners to take advantage of writeoffs relating to building maintenance items. Under new IRS rules, certain roof repairs and other building maintenance items can be expensed in the year they are completed, instead of capitalizing those costs and depreciating them over a 39-year period of time, which was the old requirement.

• ‘Segregation’ of Building Costs for Tax Expensing: When a business owner buys a new building or makes significant improvements to a building, there can be ways to expense those costs faster than the normal, 39-year depreciation life that the tax law allows. By identifying certain costs such as non-structural items, wall coverings, or specialty lighting, the IRS allows the building owner to expense these costs at a faster rate. Thus, performing a ‘cost-segregation study’ can create large tax writeoffs up front instead of waiting 39 years to recover the investment.

• Compensation and Retirement Planning: The IRS also allows business owners to put away large amounts towards their retirement as well as the retirement of key employees of the business. By properly designing a compensation strategy and deferred-compensation planning options, business owners can take care of their key employees while saving tax money.

Leveraging tax incentives can greatly help buffer a company’s bottom line, but more often than not, business owners don’t know what’s available to them. It’s crucial that business owners have open conversations with their accountant about the work of the company to see if there are opportunities available. While these programs can be complex and difficult to navigate, they can save a business a significant amount of money.


Brenden Healy, CPA, is a partner at Whittlesey with significant experience in consulting with business owners to identify tax incentives and strategic planning for their future.

Accounting and Tax Planning Sections

A Different Kind of Number Crunching

sixsigmadpart3Since its introduction more than 30 years ago, the data-driven process-improvement methodology known as Six Sigma has been most closely associated with the manufacturing sector. But, as recent initiatives undertaken by the accounting firm Meyers Brothers Kalicka clearly show, this ‘lean’ concept can be utilized by companies in any business sector to improve efficiency and buy employees time — literally.

Melyssa Brown joked that when she earned her green belt in Six Sigma last year, she was disappointed when all that arrived in the mail confirming that accomplishment was a piece of paper, a certificate.

“I was thinking, hoping that maybe there would actually be a green belt — I could use an accessory like that,” she told BusinessWest, tongue firmly planted in cheek, adding quickly that just about everything else about Meyers Brothers Kalicka’s deep dive into this data-driven process-improvement methodology has been about what she and others at the Holyoke-based accounting firm expected.

And then some.

Our interaction with the client is better, and our delivery of services to the client is better. And internally, it has put everyone on the same page; it’s put everyone together behind a commitment to move forward and not stand still, because you can’t grow that way.”

Indeed, they were expecting that incorporation of this lean, quality-control program, developed by Motorola in 1986 and popular within the manufacturing sector, would be intense, time-consuming, and somewhat difficult because it constituted a significant change in how things were done.

They were right.

But they also expected it would achieve real results and provide powerful evidence that Six Sigma can work in the service sector as well as it does in the realm of manufacturing. And they were right again.

“Our interaction with the client is better, and our delivery of services to the client is better,” Brown, a senior manager in the auditing department at MBK, said of the net gains from the firm’s investments in Six Sigma. “And internally, it has put everyone on the same page; it’s put everyone together behind a commitment to move forward and not stand still, because you can’t grow that way.”

Elaborating, Brown said that, through Six Sigma, the company has been able to chart how the all-important time of partners, associates, and others at the firm is spent, with a critical eye toward making processes more efficient, thus essentially providing personnel with more time with which to better serve clients and serve more of them, critical elements in any company’s efforts to increase profits and improve market share.

Getting more specific, Brown said MBK has undertaken a few Six Sigma projects, both involving client interaction, the time spent accumulating needed information for tax and audit work, and efforts to bring more efficiency to those efforts.

Melyssa Brown

Melyssa Brown says MBK’s Six Sigma projects have effectively given employees at the firm more of that most precious commodity — time.

“To do audit and tax work, you clearly need to get information from the client — we need some numbers to work with,” she explained. “It comes down to, when you have that interaction, how it’s done, and how it’s followed up.”

In short, there were inefficiencies with all those steps in the process, she went on, and, therefore, some diligent work was undertaken to mitigate them.

“From these processes, we’ve put structures in place to help us monitor and conduct better interactions with the client, because that’s what’s important to them — and us,” she went on, adding that the goal was and is to make these interactions easier for the client and more productive for the firm.

Fast-forwarding a little, Brown said the firm has created an online portal, or drop box, if you will, for client information that can be accessed by all those servicing that particular client. This innovation has significantly reduced the time, trouble, and anxiety involved with collecting and accessing that data, as will be explained in more detail later.

As noted, the company’s experience shows how Six Sigma can be applied to businesses not traditionally associated with this methodology, said Brown, who was a member of a panel that delivered that very message to assembled members of the Employers Assoc. of the NorthEast several weeks ago.

“Everyone has a back office,” Brown explained. “And while people think of Six Sigma in terms of manufacturing processes, those back-office functions can be made more efficient as well.”

For this issue and its focus on accounting and tax planning, BusinessWest departs from more traditional discussions about taxes, audits, legislation, and compliance, and takes a hard look at a different form of number crunching.

Time Is of the Essence

Brown told BusinessWest she became the company’s point person on Six Sigma … well, because each senior manager at the firm has a ‘niche,’ as she called it, and at that moment in time, she didn’t have one.

So Six Sigma became her niche.

Backing up a little, Brown said she and others at the firm were in attendance for a presentation on Six Sigma presented by a consultant and hosted by CPA America, a trade organization the firm has belonged to for some time. That seminar came about just as the firm was aggressively exploring methods for achieving process improvement, thus bolstering the bottom line.

“We had tried several other ways to become better at improving efficiency,” she explained. “But we needed that outside person’s view of what the best course of action might be.”

Brown underwent green-belt training, which introduces an overview of the key concepts, in Ohio, and took on a project involving one of her clients to earn that aforementioned certificate in 2016.

Summing up what’s been happening at the firm since, Brown said MBK has essentially embraced ‘lean,’ a concept that, as noted earlier, is usually associated with manufacturing, but can be applied to virtually any business sector.

Lean is a transferable and systematic approach for discovering, analyzing, prioritizing, and correcting time-wasting activities that exist in business processes, Brown told BusinessWest — and her audience at the EANE roundtable in May.

Elaborating, she said ‘lean’ is a mindset, or a culture, to reduce waste, something that exists in every operation and can be reduced — but only, in most all cases, through careful analysis of data and development of new ways to do business.

And, as Brown noted, this approach can generate positive results not only on the factory floor, but also in back-room operations such as billing and accounts receivable, accounts payable, payroll, monthly reconciliations, and financial reporting.

With that, she returned to the projects undertaken by MBK, and specifically that online portal she discussed. It came about through the Six Sigma process of analyzing a specific process or method of doing business, taking it apart, and putting it back together again — without the wasted steps, energy, time, and profit.

To get her points across, she undertook an exercise in ‘before and after.’

“Before, we would send a list of needed information via e-mail, in Word or Excel, and the client would either send us documents via e-mail, save it to a jump drive, or find some other way to get it to us,” she explained. “But it was never really clear if we had a certain piece; we would say, ‘do we have an accounts-receivable list?’ and they would say, ‘yes, you have it,’ and someone here would say, ‘I don’t think I do.’”

Now, with the online portal, such exchanges are a thing of the past, she went on, and so is the time lost looking for information or trying to verify whether the firm has it or not.

The bottom line, as they say in this business, is that the firm can now serve clients better and more efficiently, and use the time saved to serve other clients or solicit new ones.

And all of these things can be measured.

“In the end, our goal in this is to issue financial statements to clients earlier or get tax returns done and out to the client sooner than we used to, and we can measure this,” she explained.

Meanwhile, the system improvements are enabling individual service providers to make better use of their time, she went on, adding that, in many cases, it is now possible to do some audit-preparation work in October or November, thus creating more time during the extremely hectic months and weeks prior to April 15.

“You’re getting a head start on the client,” she noted, “which frees us up during tax season, when we’re all a little stressed.”

The end result, she said, is the creation of more time.

“Before, we may have thought that we needed to hire more people to get the work done,” she noted. “Now, we can get the same amount of work done with fewer hours and the same amount of people — or more work, because you’re taking on new projects with the time that you’ve saved.”

Looking forward, Brown said the firm is looking at other ways to put Six Sigma to use.

Indeed, after projects involving the tax and audit functions, the company is looking at possible initiatives involving billing and administration and making them more efficient.

“There are lots of opportunities — you just have to crack open the shell,” said Brown, who told BusinessWest that this is her general advice to all those who own or manage service businesses.

She noted that too many businesses in this sector are not embracing Six Sigma, in part because they don’t fully understand how it can be applied to their sector. But once educated to the contrary, many are put off by what amounts to a considerable commitment to this culture in terms of time, expense (usually, a consultant must be hired and new technology acquired), and needed buy-in from everyone at the company.

Those willing to make such a commitment, she said, should take the dive.

“This can’t be the flavor of the month,” she explained. “The tone at the top has be, ‘we’re going to make this work — this is our new way of doing business and operating.’”

It All Adds Up

As noted, Brown doesn’t have an actual green belt, like the ones awarded to those engaged in the martial arts.

But through the firm’s implementation of Six Sigma principles, she and others at MBK have something far more meaningful — additional time, the most precious commodity that exists in business today.

It came about through hard work and a deep dive into processes and ways of doing business, with an eye toward continuous improvement.

Historically, such words, phrases, actions, and, yes, results have generally been restricted to the world of manufacturing. But as Brown noted and MBK has shown, any service business can generate the same types of positive outcomes.

They just have to crack open the shell.

George O’Brien can be reached at [email protected]

Accounting and Tax Planning Sections

Dollars-and-sense Fundamentals

By Kristina Drzal-Houghton, CPA MST

dolarssensetaxdpartTax planning can be a guessing game, especially in a year when new leadership in Washington could make significant changes to the tax code. But there are a number of basic strategies that businesses and individuals may put in play as year end approaches.

Tax planning for 2016 is significantly different than in recent years.

In late 2015, many tax provisions were made permanent, thus appearing to remove the many uncertainties that made tax planning much more of a guessing game in the past. This tax-planning article generally is oriented toward the time-honored approach of deferring income and accelerating deductions to minimize 2016 taxes.

Kristina Drzal-Houghton

Kristina Drzal-Houghton

Given that this is an election year, consideration should be given to the possibility of the new administration making changes to the tax code. Contrary to traditional thinking, in specific situations, you may decide it is most beneficial to pay more taxes now.

For individuals, deferring income also may help minimize or avoid AGI-based phaseouts of various tax breaks. Businesses, like individuals, should decide when and how to shift income and deductions between 2016 and 2017. Although C corporations will generally benefit from the deferral of income and the acceleration of deductions in the same way as individuals and pass-though entities, there are a number of special rules that should be taken into account.

Year-end tax planning for 2016 must take account of the many temporary ‘extender’ tax provisions still in the code. Extender provisions are business tax deductions, tax credits, and other tax-saving laws which have been on the books for years but which technically are temporary because they have a specific end date.

The majority of these extenders are in effect through 2016, presenting an opportunity to take advantage of them before year’s end when their continued renewal may be uncertain. However, some of these extender provisions are in effect through 2019. And, in a radical change from prior years, many of what were traditionally the most important extender provisions have been made permanent, allowing the opportunity for long-term planning in many cases. Most importantly, there are a number of these extender and other provisions that have been modified in various ways by late 2015 legislation that the taxpayer should be alert to.

Business Planning

Corporate rate planning. A C corporation is subject to the 39% ‘bubble.’ Corporate taxable income between $100,000 and $335,000 is taxed at the rate of 39% to phase out the benefits of the 15% and 25% brackets that apply to a corporation’s first $75,000 of taxable income.

Taxable income between $75,000 and $100,000, and between $335,000 and $10 million, is taxed at 34%. Taxable income over $10 million is taxed at 35%, except that there is also a 38% bubble that applies to corporate taxable income between $15 million and $18,333,333 to eliminate the benefit of the 34% rate.


List of Accounting Firms in Western Mass.


Many small C-corporation businesses utilize year-end bonus planning to maximize the benefit of the lower tax brackets. This can be a real balancing act with many items to consider, including the additional cost of Social Security and Medicare taxes, timing of the bonus payment to owners, and IRS rules on excessive compensation. When doing this planning, you must be careful to not run afoul of any bank-loan covenants.

Qualifying for the small-corporation AMT exception. The tentative minimum tax of a corporation is zero for any tax year that it qualifies as a small corporation meeting a ‘gross receipts test.’ A corporation will qualify if:

• The corporation’s average annual gross receipts for all three-tax-year periods beginning after Dec. 31, 1993 and ending before the tax year do not exceed $7.5 million; and

• The corporation’s average gross receipts do not exceed $5 million for the corporation’s first three-tax-year period taken into account above.

Thus, a corporation should consider deferring income to 2017 if necessary to keep average annual gross receipts for the three-tax-year period 2014 through 2016 at $7.5 million or less. This will preserve the AMT exemption for 2017.

Expensing deductions. Businesses that want to accelerate year-end deductions by buying machinery and equipment have a formidable array of tax tools to work with this year: generous expensing under Code Sec. 179, an expensing safe harbor under the capitalization regulations that has been liberalized for smaller businesses, and 50% bonus first-year depreciation for those eligible new assets that can’t be expensed under Code Sec. 179 or the regs’ safe harbor.

For qualified property placed in service in tax years beginning in 2016, the maximum amount that may be expensed under the Code Sec. 179 dollar limitation is $500,000, and the beginning-of-phaseout amount is $2,010,000. Besides taking advantage of the Code Sec. 179 rules, some businesses may be able to buy much-needed machinery and equipment at year-end and currently deduct the cost under a ‘de minimis’ safe-harbor election in the capitalization regs.

First-year depreciation deduction. Most new machinery and equipment bought and placed in service in 2016 qualifies for the 50% bonus first-year depreciation deduction. Bonus first-year depreciation has been extended through 2019 with a number of modifications, including a gradual reduction over that time (50% for qualified property placed in service in 2015 through 2017, 40% for 2018, and 30% for 2019).

Deduction for qualified production activities income. Taxpayers can claim a deduction, subject to limits, for 9% of the lesser of (1) the taxpayer’s ‘qualified production activities income’ for the tax year (i.e., net income from U.S. manufacturing, production or extraction activities, U.S. film production, U.S. construction activities, and U.S. engineering and architectural services), or (2) the taxpayer’s taxable income for that tax year (before taking this deduction into account). This deduction generally has the effect of a reduction in the taxpayer’s marginal rate and, thus, should be taken into account when making decisions regarding income-shifting strategies.

Net operating losses and debt-cancellation income. A business with a loss this year may be able to use that loss to generate cash in the form of a quick net-operating-loss-carryback refund. This type of refund may be of particular value to a financially troubled business that needs a fast cash transfusion to keep going. Also, a debtor who anticipates having the debt cancelled or reduced should consider steps to defer the resulting taxable income until 2017.

Accelerating or deferring income can save estimated tax requirements. Corporations (other than certain ‘large’ corporations, see below) can avoid being penalized for underpaying estimated taxes if they pay installments based on 100% of the tax shown on the return for the preceding year. Otherwise, they must pay estimated taxes based on 100% of the current year’s tax.

However, this 100%-of-last-year’s-tax safe harbor isn’t available unless the corporation filed a return for the preceding year that showed a liability for tax. A return showing a zero tax liability doesn’t satisfy this requirement; only a return that shows a positive tax liability for the preceding year makes the safe harbor available.

A corporation (other than a large corporation) that anticipates a small net operating loss (NOL) for 2016 and substantial net income in 2017 may find it worthwhile to accelerate just enough of its 2017 income (or to defer just enough of its 2016 deductions) to create a small amount of net income, and thus a small positive tax liability, for 2016. This will permit the corporation to base its 2017 estimated tax installments on the relatively small amount of tax shown on its 2016 return, rather than having to pay estimated taxes based on 100% of its much larger 2017 taxable income.

Also, by accelerating a small amount of income from 2017 to 2016, the corporation might be able to pay tax on that income at a lower rate — e.g., 15% instead of 25% or 34% — if doing so converts its 2016 NOL to a small amount of taxable income. However, where a 2016 NOL would result in a carryback that would eliminate tax in an earlier year, this income-acceleration strategy should be employed only if the value of the carryback is less than the value of having to pay only a small amount of estimated tax for 2017.

Individual Planning

Individuals who own pass-though entities such as S corporations, partnerships, or trusts should consider many of the above planning ideas in conjunction with provisions specifically applicable to the individual taxpayer.

Effective year-end tax planning also must take into account each taxpayer’s particular situation and planning goals, with the aim of minimizing taxes. For example, higher-income individuals must consider the effect of the 39.6% top tax bracket, the 20% tax rate on long-term capital gains and qualified dividends for taxpayers taxed at a rate of 39.6% on ordinary income, the phaseout of itemized deductions and personal exemptions when income is over specified thresholds, and the 3.8% surtax (Medicare contribution tax) on net investment income for taxpayers whose income exceeds specified thresholds.

While many taxpayers will come out ahead by following the traditional approach (deferring income and accelerating deductions), others, including those with special circumstances, should consider accelerating income and deferring deductions. Most traditional techniques for deferring income and accelerating expenses can be reversed to achieve the opposite effect.

For instance, a cash-method professional who wants to accelerate income can do so by speeding up his business’ billing and collection process instead of deferring income by slowing that process down. Or, a cash-method taxpayer who sells property in 2016 on the installment basis may realize a large long-term capital gain can accelerate income by electing out of the installment method.

Inflation adjustments to rate brackets, exemption amounts, etc. For both 2016 and 2017, some individuals will benefit from inflation adjustments in the thresholds for applying the income-tax rates, higher standard deduction amounts, and higher personal-exemption amounts.

Capital gains. Long-term capital gains are taxed at a rate of (a) 20% if they would be taxed at a rate of 39.6% if they were treated as ordinary income; (b) 15% if they would be taxed at above 15% but below 39.6% if they were treated as ordinary income; or (c) 0% if they would be taxed at a rate of 10% or 15% if they were treated as ordinary income. And the 3.8% surtax on net investment income may apply.

Strategies for matching capital gains and capital losses to make the most of these rules should be considered.

Low-taxed dividend income. Qualified dividend income is taxed at the same favorable tax rates that apply to long-term capital gains. Converting investment income taxable at regular rates into qualified dividend income can achieve tax savings and result in higher after-tax income. However, the 3.8% surtax on net investment income may apply.

Traditional IRA and Roth IRA year-end moves. One can convert traditional IRAs to Roth IRAs. And one can then ‘recharacterize’ (i.e., elect to treat a contribution made to one type of IRA as made to a different type of IRA) that conversion and can even, possibly, reconvert the recharacterized transaction.

Changes in an individual’s tax status may call for acceleration of income. Expected 2017 changes in an individual’s tax status, due, say, to divorce, marriage, or loss of head of household status, must be considered.

Alternative minimum tax (AMT). Watch out for the AMT, which applies to both individuals and many corporations. A decision to accelerate an expense or to defer an item of income to reduce taxable income for regular tax purposes may not save taxes if the taxpayer is subject to the AMT.

Time value of money. Any decision to save taxes by accelerating income must take into account the fact that this means paying taxes early and losing the use of money that could have been otherwise invested.

Obstacles to deferring taxable income. The code contains a number of rules that hinder the shifting of income and expenses. These include the passive activity loss rules, requirements that certain taxpayers use the accrual method, and limitations on the deduction of investment interest.

Charitable contributions. The timing of charitable contributions can have an important impact on year-end tax planning. Individual taxpayers who are at least 70½ years old can contribute to charities directly from their IRAs without having the amount of their contribution included in their gross income. By making this move, some taxpayers reduce their tax liability even more than they would have if they had received the distribution from their IRA and then contributed the amount distributed to charity. Some taxpayers, who could take advantage of this tax break for this year, should consider deferring until the end of the year their required minimum distributions (RMDs) for 2016.

Energy tax incentives. There are two different credits available for taxpayers who make qualifying energy-saving improvements to their homes. Tax credits are available for non-business energy property placed in service in 2016 (but not in 2017) and for residential, energy-efficient solar property placed in service before 2022 (but a gradual phaseout applies).

Bottom Line

Since tax planning can be vastly different from entity to entity or individual to individual, there is no standard checklist or formula that can be followed. Sometimes the benefits enjoyed today may not outweigh their effect on the future.  This is why careful consideration — in conjunction with your tax adviser — should be given to customizing your strategy.

Kristina Drzal-Houghton, CPA MST is the partner in charge of Taxation at Holyoke-based Meyers Brothers Kalicka, P.C.; (413) 536-8510.

Accounting and Tax Planning Sections

The Best Time to Start Thinking About It Is … Now

By Thomas Wood, CPA

The retirement party. It’s a familiar sight these days.

We’ve all been to our fair share, given the aging of the Baby Boom generation, and they all summon a wide variety of emotions, especially for those left to carry on.

Thomas Wood

Thomas Wood

Indeed, once you get past the cake, balloons, and bittersweet nostalgia, you have to face the fact that you just lost a valued member of your management team. This is when many nonprofit organizations begin to address their succession planning. Even if it is only unspoken, there is a general consciousness that a retirement is coming, but when it comes to resignations, there is usually a lack of any advanced notice.

The effects of sudden turnover resonate strongest for nonprofit entities. For one, employees are driven by the mission and therefore tend to stay for a long time, making them unwritten resources. In addition, everyone wears more than one hat, so multiple aspects of the organization are affected.

A few unplanned departures can have a great impact on multiple facets of the organization, resulting in lost institutional knowledge. It also takes more time to replace a position because the skill set for many nonprofit organizations is program-specific, which limits the pool of potential candidates.

So when is the best time to start thinking about succession planning? Like everything else in life, an ounce of prevention is worth a pound of cure. As cliché as it sounds, the key is to address succession planning before it ever becomes an issue.

A process should be developed to identify and monitor management positions that are at risk. From there, you can take three simple steps to mitigate succession-related issues: 1) update your procedures manual annually, 2) cross-train staff, and 3) develop from within.

Every nonprofit has a handful of individuals who have been around forever. They are the ones who know everything. The first step to proper succession planning is to document what they do. It sounds simple, but how often does your organization update its employee handbook or procedures manual? Make sure the manual is reviewed by the person actually performing the duties. Having a current procedures manual will make sure that institutional knowledge isn’t lost.

Once your procedures are up to date, start cross-training your staff. Not only will it be helpful in the event of unforeseen turnover, but it is an important internal control. Cross-training is a temporary solution, but it can buy you time to find the perfect candidate.

Nonprofits have mission-specific programs, which can make it difficult to find qualified replacements for program leaders. Often times, very specific job requirements, including years of experience and advanced degrees, limit the candidate pool. Now, you could hire an expensive headhunter who might come up with a handful of so-so replacements, but there is another option, albeit more long-term: hire from within.

Identify potential leaders within your organization, and then create a long-term development plan. Unlike outside recruits, internal hires already understand the organization, fit in with the culture, and are passionate about the mission.

Senior management isn’t the only group that can benefit from succession planning. A healthy nonprofit is usually the result of an involved board of directors; a strong board takes time to develop and needs to be maintained. Typically, most nonprofit boards have a nominating or governance committee charged with finding and vetting future directors. Term limits and classes will keep the board fresh and prevent all the responsibility from falling on a few individuals.

So, the next time your nonprofit has a retirement party, enjoy a piece of cake and don’t worry — because you’ll be ready.

Tom Wood, a certified public accountant with Whittlesey & Hadley, P.C., has more than eight years of experience in public accounting, with a practice concentration in accounting and auditing services to nonprofits and foundations including preparation of consolidated financial statements and Form 990. He is a member of the American Institute of Certified Public Accountants and the Connecticut Society of Certified Public Accountants ; [email protected]

Accounting and Tax Planning Sections

Driving Home Some Points About This Intriguing New Business

AccountingDPlayersARTThe rise of Uber and similar transportation services like Lyft have been a boon for people looking to make some extra money on their own schedule. But they have also given rise to a number of taxation issues. For anyone looking to turn their personal vehicle into a part-time taxi service, here’s a handy guide to IRS rules for tax filing, expense deductions, and more.

By Sean Wandrei

You know your city has arrived when a transportation network company is operating in town.

Uber has been in the Springfield area for some time now. Uber has been in major U.S. cities since 2011 and is now in 66 countries and 449 cities worldwide. New companies, such as Lyft, are also popping up in these markets (Lyft is now in Boston). With the casino arriving in 2018, it is safe to assume that this industry could be expanding locally.

For those of you who do not know what Uber is, here is a quick crash course. Uber is a transportation service that allows passengers to connect with drivers in the area via a smartphone app. Prices are predetermined before the transaction occurs, and all fares are paid via the app with a credit card. Generally, no cash is exchanged. Uber is basically a taxi service where the driver uses his or her own automobile.

Of course, since transactions are occurring, there are tax ramifications for the driver. An Uber or Lyft driver is not an employee of Uber or Lyft. The drivers are independent contractors who are considered self-employed individuals. Drivers have to calculate their taxable income and pay federal and state income and self-employment tax on the profits.

Generally, drivers report income and expenses on Schedule C of IRS Form 1040. While most taxpayers will file as a self-employed individual on Schedule C, some may want to think about limiting the liability that they could be exposed to.

The taxpayer could file paperwork to make the entity a single-member limited-liability corporation (SMLLC). While there are additional costs (that are deductible) to create and maintain the SMLLC, it could be worth it for the liability protection in case of an accident or lawsuit. The IRS does not recognize a SMLLC for tax purposes, so a self-employed taxpayer would file Schedule C if it was an SMLLC or not.

Uber drivers earn revenues from the fares they collect from driving passengers. All the fares that a driver receives have to be reported as revenue even if no tax documents (1099-Misc or 1099-K) are received. As of this writing, Uber issues tax documents to all drivers no matter the fares earned. Lyft only issues 1099-K if the total fares are $20,000 or greater and there are 200 or more transactions (the minimum threshold set by the IRS).

Since most of these transactions occur with a credit card, form 1099-Misc would not be issued since that form is for cash payments in excess of $600. Any cash tips that are received should also be reported as a part of gross income. Ordinary and necessary business expenses, which are defined as common and accepted in the general industry or type of activity in which the taxpayer is engaged, can be deducted from the revenues to arrive at the taxable net income which is subject to both income and self-employment tax.

Driver Deductions

Let’s take a look at some of those expenses that an Uber driver could deduct. The first, and most obvious, expense is for the automobile driven. There are two deduction methods available for automobile expenses — the standard mileage method (the easiest to calculate) and the actual vehicle expenses. The taxpayer has a choice of what method to use.

Generally with expenses, you are going to select the method that will generate the largest deduction. One thing to note about the method choice: if the taxpayer elects to use the standard mileage method, he or she must do so during the first year the automobile is placed in service.  Under the standard mileage method, the taxpayer determines the expense by multiplying the business miles driven during the year by the standard mileage rate (54 cents per mile for 2016). The tax form that Uber issues lists the miles driven while on fare, but those probably would not be the total business miles driven during the year. There are miles driven while not on fare that would be considered business miles, such as miles driven searching for the next fare, which could be deducted.


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Proof of these miles must be maintained in a daily log listing the business miles driven during the year. The other method for deducting automobile expenses, the actual vehicle expense, is more record-intensive. All actual business-use expenses incurred to operate the automobile during the year can be deducted. These expenses usually include gas, tires, repairs, maintenance, insurance, registration, and depreciation. Only the expenses directly related to the business can be deducted. The deductible costs are calculated by multiplying the actual costs incurred by the percentage of business use of the automobile.

Some other expenses that may be overlooked that could be deducted are car washes, USB and mobile-phone chargers, wireless plans, commissions paid, tolls, parking fees, floor mats, spare tire, flat-tire kit, jumper cables, AAA membership, supplies, music apps like Spotify, ice and snow scrapers, mobile routers such as a MiFi, and food and drink for passengers (limited to 50% deduction by law).

Only the portion of these expenses related to the driving business can be deducted. Any portion of an expense related to personal use is not deductible. Any expenses that are not listed above that are ordinary and necessary for the business could be deducted as well.

Some other expenses that could be deducted, which are not that common, include the home-office deduction and any health insurance paid for the driver and his or her family. The rule with deductions is that the taxpayer must prove the expenses were incurred, so all receipts from the expenses should be saved in case the IRS audits the tax return.

As sole proprietors, drivers are responsible for both income and self-employment tax on the profits. So it’s important to make sure all of the business deductions incurred are properly deducted.

While driving for Uber or Lyft can be a fun and easy way to make some extra cash, it is important to understand the tax issues that could arise from being a driver. As always, you should see your tax professional if you have any tax questions.

Sean Wandrei is a lecturer in Taxation at the Isenberg School of Management at UMass Amherst. He also practices at a local CPA firm; [email protected]