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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.


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.


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


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]

Accounting and Tax Planning Sections

Some Clear Math

By Amy Pitter

Now that all the mortarboards have been flipped in the air, college graduates are assessing their career prospects. Amid all the noise surrounding their choices, at least one trend is very clear: Much of the opportunity in the innovation economy goes to the mathematically inclined — research scientists, data analysts, and robotics engineers, to name a few. We just can’t get enough of them.

But let me suggest another high-demand, math-centric occupation that may surprise you: Accounting. It is, in fact, one of the hottest fields for young graduates in the Commonwealth. Why accountants? You can’t have an innovation economy, or anything resembling a healthy economy, without them. Accountants set up the financial controls and systems that help companies prosper. And they are in the middle of the new economy, by, for example, auditing companies for acquisition and providing the financial data for initial public offerings, among many other critical services.

In short, as Massachusetts grows, so does its accounting sector. And as we look to create more pathways for less-advantaged students to join the STEM (science, technology, engineering, and math) economy, accounting holds the potential to be a bridge to have them play a role in the innovation that’s driving Massachusetts’ growth.

Attractive Numbers

This year, many accounting graduates are quickly walking into jobs that pay $53,000. Colleges are seeing placement rates for grads of well over 90% — it’s a whopping 97% at UMass Amherst three months after graduation. And demand will increase as the retirement wave that is expected to drain many sectors also hits accounting. In fact, it’s estimated that 75% of certified public accounts, or CPAs, will retire in the next 15 years.

Despite the strong demand, and its clear-math orientation, accounting has not yet found a place in the roster of STEM occupations considered by students. That’s an avoidable loss for many young students who struggle imagining themselves in a research lab or calculating the algorithms in a computer-science class, but love numbers all the same.

We are going to need many new accountants over the next 10 years, an occupation that not only pays well, but also often leads to additional opportunities and greater earning potential. As Massachusetts business and government leaders look to connect students with the many possibilities in STEM careers, accounting should be part of the mix. Given the clear demand, an advanced-placement course in accounting deserves a place in the high-school curriculum.

As we consider addressing growing income inequality, we need to capture the imagination of students to see themselves in various fields well before they reach college. Here’s the conundrum: even though our fourth- and eighth-grade student test scores, including math, are the highest in the nation, the income gap in Massachusetts is the widest in the country.

As STEM-related occupations account for a larger percentage of the Massachusetts workforce, we risk letting the gap widen, leaving too many kids behind. Accounting beckons as a great opportunity to open more doors for students who come from disadvantaged backgrounds.

Accounting also holds potential to diversify math-oriented fields, which tend to be predominately white and male. That is why we at the Massachusetts Society of Certified Public Accountants hold workshops, focusing on diversity recruiting.

We are also working with the Massachusetts STEM Advisory Council to integrate accounting into their efforts to expand STEM opportunities, specifically through the Early College High School Program.

The society is hopeful the Massachusetts House and Senate will prioritize funding streams for these important programs in the FY17 budget to start building the pipeline of talent. Recognizing accounting as one of many high-growth segments of Massachusetts that often puts professionals on the front lines of innovation is a great place to start.

Amy Pitter is president and CEO of the Massachusetts Society of Certified Public Accountants.

Accounting and Tax Planning Sections

Giving Advice


Hillary Burr

Hillary Burr

While I can’t confirm the percentage of us that are procrastinators, I am comfortable assuming that, when it comes to year-end planning, that percentage skyrockets.
Understandably so, because this time of year is filled with travel, family, and holidays. For those reasons, now is the time to start thinking about year-end. This is particularly true if this will be a high-income year or if you are considering making larger charitable donations before year-end.
Here are some things to think about:

Get Your Advisors Talking
We often work with investment advisors, estate-planning attorneys and sometimes a client’s family office as a team. Each advisor brings a valuable piece to the table to assist in the decision-making process.  Having a handle on how the current year compares to the prior year and the impact on your upcoming tax liability allows your tax preparer to take a team approach with you and any of your other financial and legal professionals in deciding what makes sense for the remainder of the year.
It also allows this team to combine estate planning with income-tax planning.

A Focus on Philanthropy
When you have a high-income year, this is a natural time to consider the benefit that year-end charitable contributions can have.
This could be from selling a business or large holding in your portfolio, a stock-option exercise, or maybe a significant bonus. Often, clients know the amount they are comfortable donating. Your tax professional’s role is in educating you and your team to structure those donations in the most tax-efficient way and to confirm the desired outcome has been achieved.
If you are planning on donating or gifting appreciated securities, have a conversation with your custodian as to when they stop accepting transfer requests. The deadlines can vary by custodian, so having the conversation earlier allows you to ensure that it can be acted upon, as opposed to waiting until the end of the year, when it may be too late to request these transactions.
If you are planning on donating real estate or tangible property, you’ll need time to obtain the proper valuations and get the legal documents in order, so the earlier the better.

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Consider a Donor-advised Fund
An excellent planning tool for charitable giving is a donor-advised fund (DAF). This allows you to take the deduction on your return for the contribution in the current year while allowing you to be thoughtful in your giving. For example, if you are able to give a large amount to a DAF in a high-earning year, you can give smaller amounts away to your favorite charities, keeping annual donations at a level you are comfortable with and allowing you to give the same amount to the charity in your lower-income years. This approach is particularly useful in the last earning years before retirement.
Donor-advised funds can also be used to meet required distributions from a private foundation and can serve as a good opportunity to get younger members of the family involved in charitable giving with the funds in the DAF.

Review of Carry-forwards
If you have larger donations made in previous years that are coming up on their five-year expiration, you may be able to utilize the carry-forward and delay the contribution to January, effectively moving it into the next tax year.
Similarly, if income can fluctuate, as we saw with late capital-gain dividends in 2014, consider whether it makes sense to create a little bit of a carry-forward with your donations and make sure you’re achieving as much tax minimization benefit as you can.

Don’t Miss Out
Not taking action until Dec. 31 can leave you open to changes in the law but could also move a deduction or planning opportunity out another year, meaning April 2017 before you see the benefit. n

Hillary Burr is a CPA and principal with Wolf & Co., an accounting firm in Springfield and Boston; (617) 428-5460; [email protected]

Accounting and Tax Planning Sections

Inaction by Congress Leads to a Challenging Assignment

Kristina Drzal-Houghton

Kristina Drzal-Houghton


Year-end tax planning, which always brings its own challenges, has become even more burdensome this year due to  the inaction of Congress on extending a host of expiring tax breaks, among other issues. But there are still a host of tax strategies that businesses and individuals can enact now while they wait for lawmakers to do their part.

Year-end tax planning for 2015 is particularly challenging because Congress has not yet acted on a host of tax breaks that expired at the end of 2014.

It is uncertain at this time whether the extender provisions will be extended by Congress on a permanent or temporary basis (and whether any such extension would be made retroactive). These extender provisions may be dealt with as part of a broader tax-reform effort. These tax breaks include, for individuals:

• The option to deduct state and local sales and use taxes instead of state and local income taxes;
• Educator-expense deduction;
• Deduction for mortgage-insurance premiums;
• Exclusion of gains on sale of small-business stock;
• Energy-efficiency tax provisions;
• Above-the-line deduction for qualified higher-education expenses;
• Tax-free IRA distributions for charitable purposes by those age 70 1/2 or older; and
• Exclusion for up to $2 million of mortgage debt forgiveness on a principal residence.

For businesses, tax breaks that expired at the end of last year and may be retroactively reinstated and extended include:

• A 50% bonus first-year depreciation for most new machinery, equipment, and software;
• Expanded Section 179 deduction;
• R&D tax credit;
• Section 179D energy-efficiency deductions for commercial buildings;
• Section 45L energy-efficiency credits for multifamily and residential developers; and
• The 15-year write-off for qualified leasehold-improvement property, qualified restaurant property, and qualified retail-improvement property.

TaxPlanningDPartIt’s obvious that taxpayers across the spectrum are affected by these tax provisions. The delayed action on the part of Congress has left taxpayers with questions about how to proceed.

One might think we should be fully able to plan despite uncertainty. Remember, the tax cuts enacted in 2001 and 2003 included sunset provisions, so these cuts began to expire at the end of 2010. Since then, they have been extended for one or two years at a time. On Dec. 17, 2014, the cuts were extended for the tax year 2014 and expired on Dec. 31, 2014.

Although the Senate Finance Committee has voted to extend the provisions for 2015, Congress will not address possible legislation until later in the year. Such action is anticipated, but what exactly can be concluded for this year is unknown at this point. This is not an insignificant item since the tax impact of these expired provisions is significant for millions of taxpayers.

There are those in Congress who hear the voice of the taxpayer and are attempting to address these issues sooner rather than later. There is also a contingent in the House that would make the tax cuts permanent.

The best advice for taxpayers at this point is to:

• Make good business decisions, regardless of the tax implications;
• Reject a strategy that is dependent on Congress extending these provisions;
• Be ready to act if the cuts are extended; and
• Keep in close communication with their CPA to stay abreast of any late-breaking tax developments.

If the continued uncertainty of tax breaks doesn’t have you aggravated enough, contacting the IRS for guidance has become more difficult because budget cuts have resulted in personnel layoffs and reduction in services. On the bright side, your chances of facing an IRS audit are greatly reduced.

Meanwhile, the IRS continues to send out computer-generated notices, usually from document-matching processes. Since IRS notices generated in this way are sometimes incorrect, you should consult your tax professional about the appropriate response.

Business Planning

If you’re a business owner, you are facing another year-end with more tax questions than answers.

One 2015 inflation adjustment applies to the small-business healthcare tax credit. This year the maximum credit is phased out based on the employer’s number of full-time equivalent employees in excess of 10 and the employer’s average annual wages in excess of $25,800, which was $25,400 in 2014.

Of course, a major unknown right now is whether Congress will restore expired tax provisions noted above retroactively to the beginning of 2015, providing some tax relief. Or will extender legislation get trapped somewhere between the Senate, the House, and the Oval Office?

You can’t stake the welfare of your business on possibilities, but there’s some evidence that many of the business tax provisions will be extended.

While you’re waiting for the outcome of the extenders, you need to proceed with your standard tax filings, making sure they are properly filed in a timely manner.

Important guidance to keep in mind is the recently issued U.S. Department of Labor clarification of the definition of an independent contractor, as opposed to an employee. If you are classifying workers as independent contractors to reduce your health-insurance obligations, your share of Social Security and Medicare payments, and unemployment taxes, tread carefully.

If you classify some of your workers as independent contractors who are actually employees, your business could be required to pay unpaid payroll taxes and interest and penalties. It could also be obligated to pay for employee benefits that your company didn’t previously provide, as well as federal penalties.

The basic guidance is an ‘economic realities test.’ In other words, how much control does your company have over the way workers perform their jobs? For example:

• Do the workers in question determine how they accomplish their task, or do you closely supervise them?
• Do they have other clients, or do they work full-time for you?
• Do they receive payment for each job, or do you pay them on your schedule?
• Do they own their own equipment and facilities, or does your company provide equipment, supplies, and office space?

These and other considerations are important in determining a worker’s status. If you have any questions, consult with your CPA about the proper classification of your workers to avoid additional taxes and penalties.

Individual Planning

For 2015, the personal and dependency exemptions were increased to $4,000, from $3,950 in 2014. The standard deductions for all filing statuses received a small boost of between $100 and $200 above the 2014 amounts.

The annual health flexible spending account (FSA) contribution limit increased by $50 to $2,550. Both employee and employer may contribute to this account, but the combined contribution may not be greater than the annual limit.

Taxpayers who have a health savings account under a high-deductible health plan (HDHP) have higher contribution limits this year of $3,350 per individual and $6,650 for a family. The HDHP’s out-of-pocket maximums of $6,450 per individual and $12,900 for a family and minimum deductibles of $1,300 per individual and $2,600 for a family are up somewhat from 2014.

A good tax strategy is to participate in your employer’s 401(k) plan. You may elect to contribute up to $18,000 this year before taxes, and the additional catch-up contribution for employees who are age 50 and above is $6,000. Refer to your employer’s plan to confirm that the catch-up contribution is permitted. These increased contribution limits also apply to 403(b) plans, most 457 plans, and the Thrift Savings Plan.

The IRA contribution limit was not raised in 2015. It is still $5,500, with an additional $1,000 catch-up contribution allowed for people 50 years of age or older.

But rules governing IRA rollovers have changed. As of 2015, you may make only one IRA-to-IRA rollover per year. This does not limit direct rollovers from trustee to trustee.

Whether the estate tax will be repealed is an unknown at this point. Currently, the estate-tax exemption is $5.43 million. Together, a married couple can pass an estate valued at $10.86 million to their heirs without paying federal estate tax because of the portability provision. Taxpayers will have to see what awaits them in 2016.

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Estate-tax planning is incredibly complex. It should be done in concert with a qualified financial adviser or CPA who specializes in estate- and gift-tax planning. You don’t have to be wealthy to engage in estate-tax planning. Middle-income couples have made mistakes in estate planning costing them thousands of dollars. Additionally, for Massachusetts, the minimum taxable estate is considerably lower than the federal amount.

Another inflation adjustment applies to foreign earned income. U.S. citizens and U.S. resident aliens who live abroad are taxed on worldwide income. If you worked outside of the U.S. this year, you may qualify for the foreign earned income exclusion, which means you may qualify to exclude from income for 2015 up to $100,800 of foreign earnings. This amount is adjusted annually for inflation. You may also exclude or deduct certain foreign housing amounts.

As most taxpayers are aware, federal tax law allows a deduction for charitable contributions made to qualified IRS tax-exempt organizations. Before making such contributions, however, you should become familiar with some of the laws and limitations on contributions so you can maximize the tax benefit of the deduction.

The contribution must be made by Dec. 31. A check mailed with a Dec. 31 postmark is acceptable. The organization cannot ‘hold the books open’ for a few days after the end of the year and credit those contributions to the year just ended.

There are limitations on the amount of charitable contributions that you may deduct. For individuals, the limit is 50% of adjusted gross income (AGI) or 30% of AGI if the donation is capital-gain property. Any excess may be carried over to future years.

Corporations are limited to deducting 10% of the corporation’s pre-tax net income. An S corporation carries the contribution to the individual shareholders’ returns, so they are not subject to the 10% limitation.

Beyond the laws and limitations discussed above, some strategies may be employed to maximize the benefit of the deduction. If your itemized deductions are near the amount of the standard deduction, you may wish to bunch contributions in a year in which the standard deduction amount has been exceeded.

In addition, if your AGI exceeds a threshold amount — for example, $309,900 for married filing jointly — your charitable deduction amount will be phased out to not less than 80% of the contribution. If you have unusually large income in a particular year, you may wish to defer your giving to another year to receive a greater benefit.

It is a good strategy to keep a running list of your charitable contributions so you can be prepared to speed up or delay any contributions to maximize your deductions. Along this same line, keeping tabs on your total income for the year, in case you will be subject to the phaseout provisions, will enable you to plan properly.

If you plan to contribute appreciated capital-gain property, you will achieve the maximum benefit if the property is long-term — property held for more than 12 months. You can normally deduct the fair market value of the contribution rather than the cost basis. If held for 12 months or fewer, the deduction is limited to the basis in the property.

Before making such a contribution, you should ascertain that the property does qualify for deduction of the fair market value and is, in fact, appreciated property.

Timing income and expenses can be an important tax-reduction strategy. As you consider your tax plan, determine whether you are likely to be subject to the alternative minimum tax (AMT). The AMT’s function is to level taxes when income — adjusted for certain preference items — exceeds certain exemptions, but the tax rate applied to that income falls below the AMT rate.

Before deciding to accelerate or defer income and prepay or delay deductible expenses, you need to gauge the possible effect of the AMT on these tax-planning strategies. Having a number of miscellaneous itemized deductions, personal exemptions, medical expenses, and state and local taxes can trigger AMT. Our experience is that a vast number of taxpayers in Massachusetts and Connecticut pay the AMT tax as a result of the amount of real estate and state income tax they pay.

After analyzing your specific tax situation, if you anticipate that your income will be higher in 2016, you might benefit from accelerating income into 2015 and possibly postponing deductions, keeping the AMT threat in mind.

Individuals usually account for taxes using the cash method. As a cash-method taxpayer, you can deduct expenses when you pay them or charge them to your credit card. Expenses paid by credit card are considered paid in the year they are incurred.

In addition to charitable contributions discussed earlier, you should decide whether it would be beneficial for you to prepay the following expenses:

• State and local income taxes;
• Real-estate taxes;
• Mortgage interest;
• Margin interest; and
• Miscellaneous itemized deductions.

Taxpayers usually elect to itemize deductions only if total deductions exceed the standard deduction for the year. If itemized deductions are near the standard deduction amount, grouping these deductions in alternating years is often an effective tax-planning strategy. Bunching your deductions can be particularly advantageous for taxpayers with unreimbursed medical and dental expenses, who may deduct the amount in excess of 10% of AGI. For taxpayers age 65 or older, the percentage is 7.5%, but this exception is temporary, slated to expire after Dec. 31, 2016.

TaxPlanningGRAF1115BAlso deductible are unreimbursed employee business expenses, tax-return-preparation fees, investment expenses, and certain other miscellaneous itemized deductions that together are in excess of 2% of AGI

Keep in mind that not only AMT, but the amount of itemized deductions you can claim on your 2015 tax return is reduced by 3% of the amount by which your AGI exceeds the threshold amount.

Taxpayers cannot lose more than 80% of the itemized deductions subject to the phaseout. And deductions for medical expenses, investment interest, casualty and theft losses, and gambling losses are not subject to the limitation.


The U.S. tax code is incredibly complex and can change rapidly, even though it may sometimes seem to be moving along at a snail’s pace. This complexity has given rise to more calls for simplification. For now, taxpayers must still live with the complexity and the changes, as simplification appears to be only a dream.

Although a majority of taxpayers have their taxes prepared by a professional, they are turning in larger numbers to self-prepared returns. Since the online program does the calculations, it seems to be an economical approach to preparing and filing taxes.

However, the program is no substitute for a qualified tax professional such as a CPA. Programs can calculate tax liability, but they cannot substitute for professional advice and guidance. As a CPA, I would equate it to watching a how-to video on YouTube and embarking on repairing my car.

With such complexity in the tax code, a CPA is better able to keep abreast of the changes and can prepare taxes in a manner that determines a taxpayer’s minimum legal tax liability. But minimizing tax liability started last week, last month, last year. Tax planning is a constant in today’s complex world.

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
Stay on the Right Side of the IRS and Minimize Your Tax Liability


TaxAccountingDPartTax planning for 2015 is a venture in uncertainty.

Last December, Congress passed legislation extending a number of expired tax provisions. Unfortunately, they were extended only until Dec. 31, 2014. At this point, we don’t know their status for 2015 and beyond.

There has been a great deal of talk about tax simplification, but currently, it appears to be all talk with no substance and little momentum for achieving true reform.

On April 16, the U.S. House of Representatives voted to repeal the estate tax, but this was seen as a largely symbolic gesture because the U.S. Senate does not appear to have enough votes to pass the legislation. Even if the bill were to survive the Senate, President Obama is likely to veto it. The House is apparently attempting to keep the issue in the forefront with an eye to repeal in 2017.

Rules regarding IRA rollovers have changed. As of 2015, taxpayers may make only one IRA-to-IRA rollover per year. This does not limit direct rollovers from trustee to trustee.

James Barrett

James Barrett

It should also be pointed out that the penalty for failure to maintain qualifying health insurance takes a big leap in 2015. The penalty is the greater of $325 for each adult and $162.50 for each child (but no more than $975) or 2% of household income minus the amount of the taxpayer’s tax-filing threshold.

Dealing with the IRS has become more difficult as a result of budget cuts that make it difficult to reach IRS personnel by phone or in person at most offices. On the flip side, the chances of being audited by the IRS are at the lowest they have been for years. However, the IRS remains quite proficient at sending out computer-generated notices, usually from document-matching processes.

Inflation Adjustments

As usual, there are some adjustments to a number of tax-related amounts for 2015.

The personal and dependency exemptions were increased by $50 per individual. The standard deduction for all filing statuses increased between $100 and $200, while the additional standard deduction for taxpayers who are age 65 and over or blind increased $50 for both married statuses but did not increase for head-of-household or single filers.

Tax brackets, along with phase-out ranges for itemized deductions, personal exemptions, the AMT exemption, IRAs, and several credits, were increased slightly for inflation.

The personal exemption and itemized deduction phase-out threshold for married filing jointly is now an adjusted gross income of $309,900. For single filers, it is $258,250.

The itemized-deduction phase-out reduces otherwise-allowable itemized deductions by 3% of the itemized deductions exceeding the threshold amount. The reduction cannot reduce itemized deductions below 80% of the otherwise deductible amount.

Certain itemized deductions are not subject to the phase-out — medical expenses, investment-interest expense, casualty and theft losses, and gambling losses.

Business mileage increased Jan. 14 to 57.5 cents a mile, while the deduction for medical or moving mileage dropped by a half-cent to 23 cents. The deduction for charitable mileage remains unchanged at 14 cents.

The new limits for some of the major items are outlined in the accompanying table.InflationAdjusted2015TaxProvisions

Timing of Deductions

As the standard deduction continues to increase each year, fewer and fewer taxpayers are finding that they can itemize deductions.

Statistically, only about one-third of all taxpayers use Schedule A, Itemized Deductions. In addition to the inflation factor, some other influences make itemizing a less attractive option.

First is the increase in the threshold for deducting medical expenses. This threshold had remained at 7.5% of adjusted gross income for a number of years. However, for most taxpayers, the threshold has increased to 10% under the Affordable Care Act.

Another factor affecting itemizing is the decrease in interest rates. As interest rates have declined, so has the amount of interest taxpayers are paying. As a result, the mortgage-interest deduction has declined. Many taxpayers are now finding they no longer have enough deductions to itemize.

When taxpayers find themselves in a situation where they are close to the itemization threshold, they can often decrease their tax liability through the timing of their deductions. This strategy simply involves speeding up or delaying certain deductions, bunching them as much as possible in a particular year.

For example, in a year in which the taxpayer has enough medical expenses to deduct, a good strategy is to pay as many of these bills as possible in that year to take advantage of greater medical deductions.

Another area open to the timing of the deduction is charitable contributions. By delaying or speeding up such contributions, taxpayers can bunch them into one year for maximum benefit. While regarding charitable giving, do not overlook the tax benefit to be derived from non-cash charitable contributions.

Depending on the local property tax laws, it may be possible to pay two years of property tax bills in one calendar year to get maximum benefit from the deduction. However, be aware of early-payment discounts and late-payment penalties that would wipe out the benefits from taking the itemized deduction.

Another related strategy is to consider if you are in the itemized-deduction phase-out area for the current year. If you have an unusually large amount of income in the current year, it may be beneficial to maximize itemized deductions in the following year, when you are not subject to the phase-out.

Keep in mind that the items in question can be deducted only in the year in which they are considered paid. You cannot choose which year to deduct the item if it has been paid.

Bills paid with a credit card can be deducted in the year in which the credit card is charged, not when the amount is paid to the credit-card company. If the provider of the goods or services has been paid, you may take the amount as an itemized deduction.

Non-cash Contributions Can Be Money in Your Pocket

We live in a throwaway society. We buy something, use it, and then discard it when it no longer suits our needs.

Frequently, these items are in good condition and can be useful to others. Making a contribution of these items to a qualified tax-exempt charitable organization is a win-win-win situation. The organization benefits from the revenues generated by the contribution, the donor gets a tax deduction, and someone gets a usable item at a good price.

The accompanying table illustrates the process of deducting the contribution on Form 1040. It is a fairly simple reporting model, with increasing requirements as the dollar value of the contribution increases.NonCashCharitableContributions

If the contribution exceeds $5,000 in value, an appraisal must be obtained. The cost of this appraisal is deductible as a miscellaneous itemized deduction subject to the 2% limitation. The appraisal requirement does not apply to registered securities.

If the donated item is a vehicle, boat, or airplane, the recipient organization is required to issue the donor a Form 1098-C, and the deduction amount will be the proceeds the organization received from the sale of the vehicle or the Blue Book value if it was retained for use in the organization.

Securities and certain other capital assets that have been held for more than 12 months can be donated, and the donor can take a deduction for the fair market value of the asset instead of the donor’s basis. This can yield a large deduction at little cost for assets that have significantly increased in value.

When donating household items, many people have a tendency to stuff their goods into a large garbage bag and tell the tax preparer that they donated “three bags of clothing and household goods, and here’s my receipt from the organization.” This haphazard approach will not stand up to an IRS audit. The taxpayer is required to have an itemized list of the items donated.

Valuing the items that are donated can be a problem and somewhat time-consuming. But a little time can pay significant rewards. Both the Salvation Army and Goodwill publish a valuation guide for donated items, which may be downloaded for free from their respective websites.

Another approach is to use computer programs. Intuit offers It’s Deductible, which is free online at www.itsdeductible.com.

There is also a mobile app for Apple. You simply input information about the charity, proceed to list your donated items, and let the program value them for you. The IRS generally accepts the values assigned by these guides or programs.

Using one of the above methods, a simple spreadsheet or some other system will help keep your donation records up to date and simplify your document gathering at tax time. An organized list may mean a larger deduction for you.

Capital-gain Rates and Net Investment Income Tax

If someone were to ask, “what is the capital-gain tax rate?” the best answer would have to be: “it depends.”

First, you should determine whether the sale is subject to taxation at the ordinary income rate or at the preferred capital-gain rate. A capital asset must be held for more than 12 months to qualify for capital-gain treatment. Otherwise, it is taxed at ordinary income rates, which vary from 10% to 39.6%.

Even if the sale of the asset meets the criteria for capital-gain treatment, the rate can be zero, 15%, 20%, 25%, or 28%. Then there may be an additional 3.8% net investment income tax levied on top of those rates.

It should be noted that the capital-gain rate is a rate that substitutes for the ordinary income rate. The sale is not subject to both regular income tax and the capital-gain tax.

Generally, a capital gain arises from the sale of investment property or real estate. In addition to gains from the sale of capital assets being subject to the capital-gain rate, qualified dividends are taxed at that rate but are not capital gains. The highest capital-gain rate is 28%, levied on gains from the sale of collectibles or qualified small-business stock. Next would be the tax on unrecaptured Section 1250 gains at 25%.

This brings us to the more common capital-gain rates, which are applied to most capital asset sales. This rate varies.

Taxpayers in the 39.6% (highest) bracket will be subject to a 20% capital-gain rate. Those not in the highest bracket but in the 25% or higher bracket must pay at the 15% rate. Taxpayers in the 10% or 15% brackets have a zero capital-gain rate applied.

These rates can be somewhat misleading since some taxpayers will be subject to the 3.8% net investment income tax. This is a surtax on taxpayers whose modified adjusted gross income exceeds $250,000 for married couples filing jointly ($125,000 for married filing single and $200,000 for everyone else).

Estates and trusts are subject to this tax, which can be significant. They will be subject to this tax on the lesser of:

• Undistributed net investment income; or
• Adjusted gross income over the amount at which the highest tax bracket for a trust or an estate begins (currently $12,300).

This tax makes the effective capital gain rate as high as 23.8%.

However, estates and trusts can avoid the tax by making income distributions to the beneficiaries. Since the threshold subject to the tax is significantly higher for individuals, this option could eliminate the tax altogether.

The net investment income tax is levied on income in addition to capital gains. Net investment income includes most dividends, interest, annuities, royalties, rents, and the taxable portion of gains from the sale of property. The regulations defining net investment income take 159 pages to define the term, so consult with your CPA regarding your liability for this tax.

A separate tax was enacted as a part of the Affordable Care Act that also applies to individuals with high incomes. The 0.9% additional Medicare tax is levied on earned income in excess of certain threshold amounts. The thresholds are the same as the ones for the net investment income tax.

However, collecting the tax is somewhat complex. If an individual has wages in excess of $200,000, the employer is required to withhold the tax on earnings in excess of that amount. If neither spouse exceeds the $200,000 threshold but they have a combined earned income in excess of $250,000, they must pay the tax when they file their Form 1040.

As with the additional Medicare tax, taxpayers are advised to consult with their CPA to take steps to mitigate this tax — or at least to be prepared for it.

Home-office Safe Harbor

If your business operates out of your home, the IRS will allow you to take a tax deduction for your home office.

To qualify for the deduction, you are required to:

• Have an area in your home that is exclusively and regularly used as a home office; and
• Use the home as your principal place of business.

If you are an employee, you are subject to these same two criteria. In addition, your home office must be for the convenience of the employer. An employee cannot rent a portion of the home to the employer, use the rented portion to perform services as an employee for that employer, and take a home-office deduction.

The home-office deduction is based on the portion of the home that is used for business. A percentage of many home expenditures can be allocated to the cost of the office. In addition, a depreciation deduction may be included in the cost.

The IRS now offers a simplified safe-harbor option for deducting home-office expenses. Rather than determining the actual expenses incurred in the home, taxpayers may simply deduct $5 per square foot used as an office for the deduction. Keep in mind that using the safe-harbor method means there will be no depreciation recapture when the home is sold.

A taxpayer may choose either deduction method each year. The election is made by filing the return using the method of choice for that year.

Home-office Deduction for a Corporation

The home-office deduction is designed for a sole proprietorship filing a Schedule C. Business owners who choose to incorporate their businesses will lose the advantage of deducting the expenses of a home office because the corporation and the taxpayer become two separate, distinct entities at the time of incorporation.

Three alternatives can be chosen that would allow a home-office deduction in these situations. First, assuming that corporation owners are also employees of their corporations, they could take the employee home-office deduction on their Schedule A as a miscellaneous itemized deduction.

However, this approach has two disadvantages. First, the deduction is subject to the 2% limitation on miscellaneous itemized deductions, potentially eliminating some or all of the deduction. Secondly, taxpayers who do not itemize cannot obtain a home-office deduction.

The second choice is for corporations to pay rent to their owners for use of a home office. This rent is deductible by the corporations, and the owners must report the rent on their Form 1040, Schedule E.

However, an owner can set the amount of rent equal to the expenses associated with the home office and show no gain or loss on the rental activity on the Form 1040. Using this method, the owner can create some personal cash flow since deducting depreciation on the office is an allowable expense.

The third alternative is to have the corporation pay the owner for any out-of-pocket costs of a home office under an accountable plan. Reimbursed expenses must be actual job-related expenses that the owner must substantiate by providing the corporation with receipts or other documentation.

These expenses can include a portion of mortgage interest, property taxes, utilities, insurance, security service, and repairs. They would be reimbursed based on the percentage of the home that is represented by the office area.

These last two methods require some rigorous record keeping. But the bottom line is that either of these approaches can yield benefits to the taxpayer and the corporation.

Tangible Property Regulations

New tangible property regulations went into effect on Jan. 1, 2014. These regulations are far-reaching and designed to guide taxpayers in determining whether an expenditure can be classified as an expense or must be capitalized and depreciated.

In many cases, the answer is clear. Routine ‘ordinary and necessary’ business expenses are normally expensed. These include supplies, payroll, purchased inventory (when sold), small tools, insurance, licenses and fees, and routine maintenance.

At the other extreme are items that are clearly long-lived assets and must be capitalized and depreciated — vehicles, machinery and equipment, buildings, etc. Companies may use a de minimis safe-harbor election to simplify accounting records. This amount is $5,000 if the company has an applicable financial statement (AFS), and $500 otherwise. Expenditures below these amounts may be expensed. An AFS is generally an audited statement filed with the SEC or with a government agency.

Where the major issues come into play is in considering whether a repair can be classified as an improvement to the asset. Under IRS regulations, property is improved if it undergoes a betterment, an adaptation, or a restoration. If it is an improvement, it should be depreciated.

• Fixes a ‘material condition or defect’ in the property that existed before acquisition of the asset;
• Results in a material addition to the property; or
• Results in a material increase in the property’s capacity.

• Returns a property to its normal, efficient operating condition after falling into disrepair;
• Rebuilds the property to like-new condition after the end of its economic life;
• Replaces a major component or substantial structural part of the property;
• Replaces a component of the property for which the owner has taken a loss; or
• Repairs damage to the property for which the owner has taken a basis adjustment for a casualty loss.

• Fits a unit of property to a new or different use.

The definition of the unit of property (UOP) is critical. It helps determine whether an expenditure should be capitalized or expensed.

For example, a building may be defined as a UOP, or each of the enumerated building systems may be defined as a UOP. For non-buildings, the UOP is defined by the IRS as all components that are functionally interdependent, unless the taxpayer used a different depreciation method or recovery period for a component at the time it was placed into service.

There are two additional safe harbors — an election for small taxpayers and a routine-maintenance safe harbor.


Tax laws change at an amazing pace. It is estimated that more than 5,000 changes to federal tax laws have been made since 2001. That’s an average of more than one change per day. The Internal Revenue Code was 73,954 pages in 2013, which makes War and Peace look like a short story.

The information contained in this article was current at the time it was published. However, it is by no means certain that it will remain current for the rest of 2015.

Why bring this up? Simply to emphasize how incredibly complex our tax laws have become. Tax planning is necessary in today’s complex world so that you can stay on the right side of the IRS and minimize your tax liability.

James Barrett is managing partner of Meyers Brothers Kalicka in Holyoke; (413) 536-8510; [email protected]

Accounting and Tax Planning Sections
FASB Proposes Major Accounting Changes for Nonprofits


Katrina Olsen

Katrina Olsen

The Financial Accounting Standards Board (FASB) announced in April several proposed changes to reporting for nonprofit organizations nationwide that will impact the approximately 24,000 nonprofits currently registered with the Massachusetts Attorney General’s Office.

The proposal represents the first major overhaul of nonprofit reporting requirements in more than two decades.

FASB, formed in 1973, serves as the standard-setting body that establishes accounting rules governing the preparation of financial reports by non-governmental entities, including nonprofit organizations.

Changes are expected to be widespread, affecting all areas of the financial statements. Here are a few of the significant changes.

Net Assets

With multiple proposed changes on the table, the greatest impact calls for elimination of the three classes of net assets, the reserves of a nonprofit organization — unrestricted, temporarily restricted, and permanently restricted. If passed, nonprofits would have to report two classes of net assets, ‘net assets with donor restrictions’ and ‘net assets without donor restrictions.’

The current distinction between permanent restrictions and temporary restrictions has become blurred in recent years due to changes in state laws. Many states allow nonprofits to spend from permanently restricted endowment funds under certain circumstances.

FASB hopes simplifying the number of classes of net assets will improve understandability and reduce complexity.

Income Statements

Another significant change would impact the statement of activities, which presents a nonprofit’s income and expenses. The proposed rule would require all nonprofits to report net income or loss from operating activities separate from non-operating activities. This would more clearly show the income and costs directly related to accomplishing the mission of the organization.

Non-operating activities, such as investment earnings or losses, can distort the operating bottom line. This makes it difficult for an interested party to distinguish the financial performance directly related to the nonprofit’s mission.

Cash Flows

A change likely to stir the most controversy among nonprofit accountants is the proposed overhaul of the statement of cash flows, which identifies the organization’s sources and uses of cash. The cash-flow statement is often cited as the most misunderstood statement.

Key stakeholders frequently gloss over the statement of cash flows, considering it unreadable. The FASB’s proposed change would present the statement using the direct method, requiring the reporting of cash receipts from key revenue sources as well as disbursements to suppliers versus employees for wages. It’s anticipated that this change would provide a clearer presentation of cash in and out related to operations.

Proponents argue that the change to the cash-flow statement would provide more useful information to key stakeholders, although some nonprofit advocates take issue with any change that would cause even greater disparity between reporting requirements of nonprofit organizations versus for-profit businesses.

Bottom Line

What’s the bottom line? Truth be told, these reporting changes will require an investment of time for nonprofits and their accountants to implement. Whenever there is any change to accounting rules, there are both benefits and costs.

FASB’s proposal comes at a time when stakeholders have increasingly complained that improvements are needed to the financial-statement presentation for nonprofits to provide better information for decision makers regarding a nonprofit’s financial performance, service efforts, need for external financing, and stewardship of donor funds.

The proposal has been years in the making, dating back to late 2009 with the formation of the Not-for-profit Advisory Committee (NAC) — a group formed to work with FASB to focus on financial-reporting issues affecting the nonprofit sector.

A handful of nonprofit-accounting rule changes have passed in the years since the formation of the NAC; the current proposal represents the most sweeping modification to nonprofit reporting requirements thus far.

Nonprofits and accountants may view these changes as extra work in the short term; however, we can only hope nonprofits will reap the anticipated benefits of providing better information to decision makers.

The FASB-proposed changes are expected to be effective for 2017. In the meantime, FASB invites individuals and organizations to weigh in on them before Aug. 20. To comment, visit the FASB website at www.fasb.org and click on ‘Exposure Documents Open for Comment,’ or email [email protected]

You might notice a comment from me as well.

Katrina Olson is an audit manager with Whittlesey & Hadley, P.C., with offices in Hartford and Holyoke. She specializes in audits of nonprofit organizations.

Accounting and Tax Planning Sections
Careful Planning Can Lessen Your Tax Burden


Kristina Drzal-Houghton

Kristina Drzal-Houghton

U.S. taxpayers are facing more uncertainty than usual as they approach the 2014 tax-planning season. Many may feel trapped in limbo while Congress has been preoccupied with the November midterm election and its results — leaving legislation that could alter the current tax picture up in the air.

Since D.C. lawmakers are unlikely to pass, extend, or modify tax provisions anytime soon, tax planning may seem pointless. But, actually, careful planning is wise regardless of the situation and even more important during uncertain times.

Even though the federal tax laws haven’t changed much from last year, your circumstances may have changed. And some rules that expired on Dec. 31, 2013 may yet be restored, even retroactively, to Jan. 1, 2014. It could be the perfect time for you to get a fresh perspective.

To make sure you’re taking all the appropriate steps to minimize your individual and business taxes, you should anticipate possible changes with the informed guidance of your tax professional.

Tax Strategies for Individuals

Before you can make wise planning decisions about your individual taxes, you need to be aware of your current tax situation.

Can you control when you receive income, or at least determine when deductible expenses are paid? If you can control timing, you have a valuable planning tool that can enable you to reduce your taxable income and tax liability.

Maximize your tax strategies by forecasting income-tax positions for 2014 and, to the extent possible, subsequent years. Evaluate not only the amount of your income but also the types of income you anticipate generating, your marginal tax bracket, net investment income, wages and self-employment earnings, and capital gains and losses.

Before deciding to accelerate or defer income and prepay or delay deductible expenses, you need to gauge the possible effect of the alternative minimum tax (AMT) on these tax-planning strategies. Having a number of miscellaneous itemized deductions, personal exemptions, medical expenses, and state and local taxes can trigger AMT.

The opportunity to take advantage of income timing exists particularly for taxpayers who are:

• In a different tax bracket in 2014 than in 2015;
• Subject to the AMT in one year but not the other;
• Subject to the 3.8% net investment income (NII) tax in one year but not the other; or
• Subject to the additional 0.9% Medicare tax on earned income in one year but not the other.

The 3.8% NII tax and the 0.9% Medicare tax apply when your modified adjusted gross income exceeds threshold amounts. Net investment income includes dividends, rents, interest, passive activity income, capital gains, annuities, and royalties. Passive pass-through income is subject to the NII tax.

The NII tax does not apply to non-passive income, such as:

• Self-employment income;
• Income from an active trade or business;
• Portions of the gain on the sale of an active interest in a partnership or S corporation with investment assets; and
• IRA or qualified plan distributions.

Remember that the additional 0.9% Medicare payroll tax applies to earnings of self-employed individuals and wages in excess of the thresholds in the table above.

After analyzing your specific tax situation, if you anticipate that your income will be higher in 2015, you might benefit from accelerating income into 2014 and possibly postponing deductions, keeping the AMT threat in mind.

On the other hand, if you think you may be in a lower tax bracket in 2015, look for ways to defer some of your 2014 income. For example, you could delay into 2015:

• Collecting rents;
• Receiving payments for services;
• Accepting a year-end bonus; and
• Collecting business debts.

Also, if you itemize deductions, consider prepaying some of your 2015 tax-deductible expenses in 2014. The following expenses are commonly prepaid as part of year-end tax planning:

• Charitable contributions. You may take a tax deduction for cash contributions to qualified charities of up to 50% of adjusted gross income (AGI). When contemplating charitable contributions, consider contributing appreciated securities that you have held for more than one year. Usually, you will receive a charitable deduction for the full value of the securities, while avoiding the capital-gains tax that would be incurred upon sale of the securities.
• State and local income taxes. You may prepay any state and local income taxes normally due on Jan. 15, 2015 if you do not expect to be subject to the AMT in 2014.
• Real-estate taxes. You can prepay in 2014 any real-estate tax due early in 2015. But you should keep in mind how the AMT could affect both years when preparing to pay real-estate taxes on your residence or other personal real estate. However, real-estate tax on rental property is deductible and can be safely prepaid even if you are subject to the AMT.
• Mortgage interest. Your ability to deduct prepaid interest has limits. But, to the extent your January mortgage payment reflects interest accrued as of Dec. 31, 2014, a payment before year end will secure the interest deduction in 2014.
• Miscellaneous itemized deductions. These include unreimbursed employee business expenses, tax-return preparation fees, investment expenses, and certain other miscellaneous itemized deductions that together are in excess of 2% of AGI.

The amount of itemized deductions you can claim on your 2014 tax return is reduced by 3% of the amount by which your AGI exceeds the thresholds, which began as low as $152,000. However, deductions for medical expenses, investment interest, casualty and theft losses, and gambling losses are not subject to the limitation. Taxpayers cannot lose more than 80% of the itemized deductions subject to the phaseout.


Know Your Tax Rates, Exemptions, and Phaseouts

A personal exemption is usually available for you, your spouse if you are married and file a joint return, and each dependent (a qualifying child or qualifying relative who meets certain tests). The personal exemption for 2014 is $3,950.

But the total personal exemptions to which you are entitled will be phased out, or reduced, by 2% of the amount that your AGI exceeds the threshold for your filing status. The threshold amounts for the personal-exemption phaseout are the same as for itemized deductions.

Even when federal income-tax rates are the same for you in both years, accelerating deductible expenses into 2014 and/or deferring income into 2015 or later years can provide a longer period to benefit from money that you will eventually pay in taxes.


Beware the Alternative Minimum Tax Trap

As mentioned previously, determining whether you are subject to the alternative minimum tax in any given year figures prominently in tax planning.

Every year the IRS ties, or indexes, to inflation the AMT exemption and related thresholds based on filing status. If it’s apparent that you will be subject to the AMT in 2014, you should consider deferring certain tax payments that are not deductible for AMT purposes until 2015. For example, you may defer your 2014 state and local income taxes and real-estate taxes, except taxes on rental property, which are not subject to the AMT. Also consider deferring into 2015 your miscellaneous itemized deductions, such as investment expenses and employee business expenses.

However, if the AMT will not apply to your taxes in 2014, but could apply in 2015, you may want to prepay some of these expenses to lock in a 2015 tax benefit. Just be careful that your prepayment does not make you subject to AMT in 2014.

If you do not expect to be subject to the AMT in either year, the age-old strategy of deduction ‘bunching’ could apply. If this is expected to be a high year for miscellaneous itemized deductions, consider accelerating next year’s expenses into this year.

Or, if this is a low year for these deductions, try to defer these expenses for the rest of the year into next year. This method helps you maximize the likelihood that these deductions will result in a tax benefit.


Exploit Long-term Capital Gains

While avoiding or deferring tax may be your primary goal, to the extent there is income to report, the income of choice is long-term capital gain thanks to the favorable tax rate available. Short-term capital gain is taxed at your ordinary income tax rate.

If you hold a capital asset for more than one year before selling it, your capital gain is long-term. For most taxpayers, long-term capital gain is taxed at rates no higher than 15%. But taxpayers in the 10% to 15% ordinary income-tax bracket have a long-term capital-gain tax rate of 0%.

Taxpayers whose income exceeds the thresholds set for the relatively new 39.6% ordinary tax rate are subject to a 20% rate on capital gain.

If the long-term capital-gain rates of 0%, 15%, or 20% are not complicated enough, keep in mind that special rates of 25% can apply to certain real estate, and 28% to certain collectibles. Also, gains on the sale of certain C corporations held for more than five years can qualify for a 0% rate. Talk to your tax adviser before you assume the long-term capital gains rate that would apply.

Remember that you can use capital losses, including worthless securities and bad debts, to offset capital gains. If you lose more than you gain during the year, you can offset ordinary income by up to $3,000 of your losses. Then you can carry forward any excess losses into the next tax year.

However, you should be careful not to violate the ‘wash sale’ rule by buying an asset nearly identical to the one you sold at a loss within 30 days before or after the sale. Otherwise, the wash-sale rule will prevent you from claiming the loss immediately. While wash-sale losses are deferred, wash-sale gains are fully taxable. It’s important to discuss the meaning of nearly, or ‘substantially,’ identical assets with your tax adviser.


Contribute to a Retirement Plan

You may be able to reduce your taxes by contributing to a retirement plan. If your employer sponsors a retirement plan, such as a 401(k), 403(b), or SIMPLE plan, your contributions avoid current taxation, as will any investment earnings until you begin receiving distributions from the plan. Some plans allow you to make after-tax Roth contributions, which will not reduce your current income, but you will generally have no tax to pay when those amounts, plus any associated earnings, are withdrawn in future years.

You and your spouse must have earned income to contribute to either a traditional or Roth IRA. Only taxpayers with modified AGI below certain thresholds are permitted to contribute to a Roth IRA. If a workplace retirement plan covers you or your spouse, modified AGI also controls your ability to deduct your contribution to a traditional IRA.

If you would like to contribute to a Roth IRA, but your income exceeds the threshold, consider contributing to a traditional IRA for 2014, and convert the IRA to a Roth IRA in 2015. Be sure to inquire about the tax consequences of the conversion, especially if you have funds in other traditional IRAs.

In addition to the SIMPLE IRA, self-employed individuals can have a simplified employee pension (SEP) plan. They may contribute as much as 25% of their net earnings from self-employment, not including contributions to themselves. The contribution limit is $52,000 in 2014. The self-employed may set up a SEP plan as late as the due date, including extensions, of their 2014 income tax return.

An individual, or solo, 401(k) is another option for the self-employed. For 2014, a self-employed individual, as an employee, may defer up to $17,500 ($23,000 for age 50 or older) of annual compensation. Acting as the employer, the individual may contribute 25% of net profits, excluding the deferred $17,500, up to a maximum contribution of $52,000.


Withholding and Estimated Tax Payments

If you expect to be subject to an underpayment penalty for failure to pay your 2014 tax liability on a timely basis, consider increasing your withholding between now and the end of the year to reduce or eliminate the penalty. Increasing your final estimated tax deposit due Jan. 15, 2015 may reduce the amount of the penalty but is unlikely to eliminate it entirely.

Withholding, even if done on the last day of the tax year, is deemed withheld ratably throughout the tax year. Underpayment penalties can be avoided when total withholdings and estimated tax payments exceed the 2013 tax liability or, in the case of higher-income taxpayers, 110% of 2013 tax.

Tax Strategies for Business Owners

The main tax issue to keep in mind if you’re a business owner is that a number of tax provisions, such as 50% bonus depreciation, expired at the end of 2013. In addition, the Section 179 deduction has been limited significantly.

Congress may pass legislation to renew or modify these tax breaks — perhaps retroactively. Of course, you can’t count on that possibility, so if you have used these provisions to reduce your taxes in the past, it might be advisable to adjust your withholding and estimated tax payments for 2014.


Special 50% Bonus Depreciation

Through 2013, businesses could use the special bonus depreciation to deduct up to 50% of the cost of such assets as new equipment, computer software, and other qualifying property placed into service by year end. The 50% bonus depreciation did not apply to used equipment. Unless Congress acts, it will not be available at all in 2014.


Section 179 Deduction

Under Section 179 of the IRS Tax Code, businesses could expense the full cost of new and used equipment, including technology, in the year of purchase instead of over a number of years. They still can. However, the amount they can expense has dropped from an upper limit of $500,000 in 2013 to $25,000 in 2014 — a sizable difference. If your company has nearly reached the $25,000 expensing limit, you may want to postpone further purchases until 2015.

The 2014 limit on equipment purchases qualifying for Section 179 treatment is $200,000. After a business reaches the maximum amount, the available tax deduction phases out on a dollar-for-dollar basis. In other words, once a business buys $225,000 of equipment, the deduction is reduced to zero. You should monitor your company’s total purchases to prevent the phaseout.


Repair Regulations

The IRS and the U.S. Treasury have issued final tangible property regulations (TPRs) that become mandatory for tax year 2014. These TPRs will likely require most businesses to file additional tax returns and supporting statements and/or include in their returns certain annual elections. Those new, additional returns are referred to as IRS Form 3115, Change in Accounting Method.

If you have multiple trades or businesses, more than one building, or leasehold improvements, whether or not these are contained in separate legal entities, such as LLCs, or disregarded entities, we may have to prepare numerous, separate Form 3115s, as well as make numerous TPR annual elections. Since the changes required by the TPR are so widespread, starting on the various analysis prior to year end is highly suggested.

While the preparation of the IRS form 3115 will be done, in the majority of cases, by this 2014 tax-return filing, certain new annual elections related to the TPRs are anticipated to be required and/or chosen for every income-tax filing subsequent to your adoption of the new TPRs.

You should discuss with your tax adviser the TPR elections choices. While they will certainly advise you on the alternatives or choices that are available for you regarding these TPR annual method elections, please remember the final choices are yours to make. The three common annual method TPR elections are the following:

• The de minimis safe harbor for writeoff of property acquisitions and non-incidental material and supplies costing less than your book writeoff policy, such as items costing less than a certain dollar amount (for example, less than $500 per item);
• If applicable, the safe harbor for small taxpayers, where you can elect not to capitalize improvements or repairs on eligible building property (i.e., your buildings with depreciable basis less than $1 million per building; and
• The partial asset disposition elections under §1.168(i)-8(d)(2). This election is made annually to enable you to apply this section to a disposition of a portion of a prior asset that you have replaced with a subsequent improvement. An example of the application of this method is where you replace a roof on one of your buildings, and you are then able to write off the remaining depreciable basis of the prior roof. You’d make this election to avoid a situation where you will depreciate two roofs at the same time, instead of recording a loss on the disposition of the original roof.

In addition to filing these changes in accounting methods, and the making of the annual TPR elections outlined above, your internal processes that may have to be modified include:

• Accounting for ‘non-incidental’ material and supplies; and
• Establishment of a capitalization writeoff policy dictating a certain writeoff amount (e.g., “our policy is that we are going to expense all purchases under $500”). If you do not, you may be limited to a $200 per item write-off policy, including the creation of an internal writing of what actions, expenditures, or items would require capitalization (such as improvements, acquisitions, restorations, betterments, adaptions, etc.), as opposed to expenditures that would be categorized as repair and maintenance expenses.

If you do not currently have a written and communicated capitalization policy, we advise you that, in order to take advantage of the annual de minimis writeoff safe harbor described above, you must create and execute that writing and communication before Jan. 1, 2015, if you desire to employ the writeoff policy in next year’s tax returns, since the policy needs to be adopted prior to the beginning of the effected tax year. Also, review your depreciation schedules to see what assets on that list may qualify for writeoff in the 2014 tax year.

In preforming the analysis for these changes, you may find that, in applying the TPRs, your business can benefit from an additional deduction in 2014.



As the 2014 tax season approaches, taxpayers have a lot of questions. Will expired tax provisions be reinstated? If so, will they apply retroactively to the beginning of the year? Will they be altered? Will new tax laws make it through the legislative process?

Most importantly, how will these decisions affect your taxes?

These are legitimate concerns. Unfortunately, no one can predict the future. But we can suggest that you and your tax professionals should diligently watch the tax landscape for pending legislation that could have an impact on your taxes. Your safest course of action in the midst of uncertainty is to remain in close communication with your tax adviser for the latest guidance.


Kristina Drzal Houghton, CPA, MST is a partner with the Holyoke-based accounting firm Meyers Brothers Kalicka, and director of the firm’s Taxation Division; [email protected]

Accounting and Tax Planning Sections
This Checks-and-balances Process Is a Must for Property Owners


Nicholas Yanouzas

Nicholas Yanouzas

Your property manager is awarding significant contracts to related parties.

He or she has changed the name of the payee on a check after the payee has been reported to owners.

Questionable leasing relationships have been developed by your property manager.

These are just some of the insights property owners might see if they were a fly on the wall of property managers who look out for their own best interests, instead of the owner’s.

Real-estate owners commonly hire property managers to run the day-to-day operations of an investment property with an implied trust that their manager will act ethically. A trusted property manager duly performs his or her tasks, and the owner earns the expected return on the investment. Conversely, a less scrupulous property manager takes advantage of a trustworthy owner who does not closely scrutinize transactions of their investments.

MGM Springfield’s plans to launch construction on an $800 million casino project in the spring of 2015 may just provide the confidence needed to inspire new investments in the Springfield area by out-of-town owners gaining interest in a market that is not overpriced compared to Boston and New York. Reviewing the financial operations of a property — the operational review — is often a missed opportunity by owners making real-estate investments. This checks-and-balance process gives owners the power to conduct a periodic review of the activities and transactions conducted by its property manager, details that might get overlooked in the rush of monthly and quarterly closings.

On a recent financial-operations review for a property owner in the Baltimore area, our team exposed various unexpected findings to a rather surprised owner. The owner learned that, upon review of some legal invoices, the property was being sued by the former cleaning company, which cited that the contract with the property was inappropriately terminated. On the same property, the spouse of the property manager owned a construction company that was providing in excess of $500,000 in services to the property without going out to bid and having their invoices paid within 24 hours of submission.

An operational review not only provides exposure to selected transactions, it affords the discretion of a third party to represent the owner when meeting with senior management of the property-management company. This separation allows for a candid and sometimes uncomfortable discussion about the current financial processes and procedures in place. Standardized processes and procedures would be introduced at this meeting, as needed, to provide positive business results for owners, while designing a best-practice model for property managers to implement.

While meeting with a national property-management firm regarding an apartment complex in Boston, it was determined that their process for reviewing tenant applications included a liberal policy on the credit worthiness of prospective tenants. Although this policy was beneficial to improving occupancy, the manager found that they were spending a lot of time and money on collections and evictions. The final recommendation of the operational review allowed the manager to develop a customized policy that protected the interests of the owner, while securing long-term tenants. Now the manager has additional time and resources to devote to the quality of the property, instead of chasing tenants down for rent.

Whether the real-estate investment is new or established, most owners prefer not to pay additional fees for property-management services, beyond the basic contractual terms. Operational reviews can assist owners in drilling down to see how their investment is being managed and what fees to property management are necessary or not. Knowing how assets are being managed, and what all the costs are, allows an owner to make better decisions and ask appropriate questions when selecting a property-management firm.

The ideal outcome for both owner and property manager is to have trust and transparency when issues arise and need to be communicated and resolved. And if that doesn’t happen naturally, then there’s always the operational review to intervene.

Nicholas Yanouzas is an audit partner and head of real estate at accounting and consulting firm Whittlesey & Hadley, P.C., with offices in Holyoke and Hartford, Conn.

Accounting and Tax Planning Sections
Whittlesey & Hadley Expands into the Western Mass. Market

Andrew (Drew) Andrews

Andrew (Drew) Andrews, managing partner of Whittlesey & Hadley

Tom Terry started with the Holyoke-based accounting firm Lester Halpern & Co. back in 1976.

And for as long as he can remember, there have been at least a few bowls filled with various types of candy at the reception desk to tempt visitors as they arrive, depart, or, quite often, both.

“Our clients love the candy, and our employees love it as well,” he told BusinessWest, adding that, when the Hartford-based firm Whittlesey & Hadley initiated discussions to acquire Lester Halpern more than a year ago, he and others at the company — not to mention some customers — made it clear that this was one tradition they wanted to see survive a change in the name over the door.

They needn’t have worried.

Indeed, Andrew (Drew) Andrews, managing partner at Whittlesey & Hadley (or W&H, as it’s sometimes called) has long kept candy at his desk and understands its importance to the broad mission of keeping clients happy.

“I just have to stay away from it myself,” he said with a laugh, adding quickly that continuation of the candy tradition is merely one of many ways the merger with Lester Halpern — the vehicle by which W&H has made its long-planned entry into the Western Mass. market — has been smooth and essentially seamless.

Andrews said there were many things about the Lester Halpern firm that appealed to W&H as it explored various merger opportunities in this market, including its size (nearly 20 accountants and roughly $4 million in annual revenues), location in Holyoke, and the mix and size of clients in the portfolio, which includes a number of tax-exempt entities and closely held businesses.

But it was Lester Halpern’s culture that was perhaps most important to this exercise, because it closely resembles the one at Whittlesey & Hadley, said Andrews, who described it in a number of ways, starting with the word ‘collaborative.’

“At some firms, people are very protective, taking the attitude, ‘that’s my client,’” he explained. “The better answer is, ‘that’s the firm’s client,’ and what’s best for the firm’s client is what we’re going to do. That’s our philosophy, and it’s the philosophy that existed here [at Lester Halpern], and that’s one of the reasons why this transition has gone so well.”

The similarity in corporate cultures extends to the way the two firms treat staff members, he went on, adding that, at the new/old company, the preferred term is ‘team members,’ not ‘employees,’ and the phraseology speaks volumes.

“We’re very concerned about everyone’s welfare, and we have very low turnover in our shop in Hartford,” he explained. “And they [Lester Halpern]seem to have the same culture of being very concerned for their team members’ needs.”

There have been a few minor challenges to overcome since the acquisition became official on Aug. 1 — the receptionist sitting just behind the candy dish has to get in the habit of saying the company’s new name when people call, and it’s taken some practice to pronounce and spell Whittlesey properly, said Terry, adding that, overall, there have been few, if any, problems.

“You read in articles that there are always going to be some bumps and there are always going to be some issues,” he said of the transition process. “But this has gone as smoothly as a transition possibly can.”

Tom Terry

Tom Terry says the merger of Lester Halpern and Whittlesey & Hadley has been essentially seamless.

And this solid start has only heightened the level of confidence as W&H seeks to gain market share in the competitive Western Mass. region, said Andrews, adding that he believes the Holyoke-based operation can match the Hartford office’s recent track record of roughly 8% to 10% growth a year.

He says to key to meeting this goal is to stress the additional resources that this ‘new’ firm can bring to the table through its operation in Hartford, and then deliver a broader array of services.

“We’re just a new player in town with added resources,” he explained. “We can provide more depth and other things that a 100-person firm can provide that a 20-person firm just can’t provide. So there’s more potential to the existing clients and the potential clients.”

For this issue and its focus on accounting and tax planning, BusinessWest talked with Andrews and Terry about this merger and what the future could hold. They both said that, while there is, indeed, a new name in this market, this is essentially the same old firm, only one that can now better serve clients.

By All Accounts

Tracing the history of the firm he joined as a staff accountant in 1984, Andrews said it was started by Bill Whittlesey in Hartford as a solo practice in 1961. He later expanded with the hiring of Bob Hadley as a staff accountant; he would become a partner in 1965.

The firm has achieved steady growth over the past 55 years or so, reaching $16 million in annual revenues and more than 100 employees at the start of this year.

Andrews, who became a partner in 1996 and managing partner in 2008, noted that, while the vast majority of clients’ firms are based in Connecticut, W&H has done some business in Western Mass. over the years, and recently made it a strategic initiative to do considerably more in the 413 area code.

Indeed, the question eventually became how, not if, the company would expand into this market, he told BusinessWest, adding that, while there were a few options, only one of them made real sense.

“We thought this was an area we really wanted to expand into, because we see a lot of similarities in culture to Hartford in this area,” he noted. “But, as in Hartford, if you’re not in the marketplace — even though it only took me 25 minutes to drive here from my office in Hartford — you’re a foreigner; you really need to live and breathe in the marketplace. I was invited once to an event that one of the banks held at the Basketball of Hall of Fame; I went with one of my partners. Everyone seemed to know each other, but no one knew us, and we felt like outsiders.

“We explored the possibility of simply opening an office, hanging out a shingle here — putting someone there and seeing what happens,” he went on. “But we didn’t think that would make a lot of headway, so we started exploring whether there was a local firm that had similarities to us in terms of how we deliver client service, how we treat employees, and wanted to get in with a larger firm so they could offer more services to their existing client base.”

W&H did some research, relying heavily on team members who lived in this area for insight, and eventually started talking with Terry and others at Lester Halpern.

“And, of course, with accounting firms, it takes a lot longer than with regular businesses to pull something like this off,” Andrews told BusinessWest, adding that talks began in January 2013, were then set aside for tax season, picked up again later in the year, and completed several months ago. “That’s because accountants, in general, are conservative, and accountants, in general, are very individualistic and like to do things their way, even though we all tend to do things in a similar fashion; it’s all about getting to know each other.”

Both Andrews and Terry said a good amount of due diligence went into making sure the fit was right between the two firms, and this research ultimately concluded that it would be an effective match.

“They [Whittlesey & Hadley] did their homework, but we did ours, too, as far as finding a partner to team up with,” he explained. “We were pretty confident that we picked the right partner, and that’s turned out to be the case. Our cultures match perfectly, our philosophy in terms of how we work with our clients — they’re very similar.

“And our clients are very similar as well,” he went on. “We both have a similar focus, with a strong not-for-profit sector in our work, but also an equally strong for-profit sector as well.”

Numbers Game

As he talked with BusinessWest about his firm’s prospects in this market, Andrews acknowledged that Western Mass. is generally considered a low- or no-growth area.

Which means that, if W&H is going to reach that goal of 7% to 8% growth for the Holyoke office, it will have to take market share from existing firms. And he believes it has the assets and attributes needed to do that.

For starters, it has the base that Lester Halpern has built over the years, he said, as well as accountants who are well-known in the Western Mass. market and understand the needs of clients here.

“We’ve tried to figure out a way to get into different markets without merging with a firm already in a market, and we haven’t been able to figure that out real well,” Andrews explained. “So that’s why we’ve gone this merger route. And one of the keys to it is to listen to the people that are already here, because they’re successful here.

“Even through we’re not that far away from each other, this is a different marketplace,” he went on. “And what succeeds in Hartford may not succeed in Western Mass. So we’re learning from our partners here, and we’re trying to do what they’ve been successful at doing since 1959 and leverage that.”

But Whittlesey & Hadley also has the resources of a much larger firm thanks to the staff, and it’s expertise, in Hartford, he went on, adding that these resources could become a strong selling point.

“As we’ve grown, pretty much organically, and become a larger firm, we’ve found that we’re better able to attract different types of talent and have in-house resources that traditionally aren’t available in smaller firms because there aren’t as many people,” he explained. “For instance, I have experts in different areas, and if my client has a complicated tax issue that’s very unique, I might have someone who’s dealt with it and is an expert on it. When you have a larger firm, you have different talents and skill sets, and you can provide a more-in-depth package of services to your existing client base.”

Terry agreed, and told BusinessWest that, in just the first 20 days of operating under the W&H umbrella, there were instances where he called on that expertise Andrews mentioned, and to the benefit of clients.

“There have been three instances already where clients have had questions that I would not have been able to answer,” he explained. “But because of the very strong tax department that’s located down in Hartford, I’ve been able to use those resources — and we’re only three weeks into it.

“We’re really just getting started,” he went on, “and to have that resource is extremely helpful.”

One of the challenges ahead for W&H is to make the region more familiar with the company’s name, acronym, and operating culture, said Andrews, adding that the firm intends to be visible, with some aggressive marketing as well as involvement with many area business organizations and their events and programs.

Ultimately, though, word of mouth will carry the most weight, he said, adding that, if the company can provide the depth and quality of service that he believes it will, that will be the best way to get the word out and build market share.

The Bottom Line

On the day BusinessWest visited the W&H facility on Bobala Road, the company’s new signage was not yet in place — it will be arriving later this month.

And outwardly, there were few, if any, signs (literally or figuratively) that anything had changed. Indeed, there were three bowls at the reception desk containing everything from chocolate to jellied candy.

But some change has come to the business beyond a new name, said Andrews and Terry, adding that, mostly, there is new opportunity to make this operation a stronger force in the local accounting market. n

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

Accounting and Tax Planning Sections
Making Your Tax Return a Year-round Commitment


Tax season can often be a stressful time of year for just about everyone. The key to reducing this stress is keeping records organized and accessible.

Christopher Marini

Christopher Marini

This will make the preparation process run as smoothly as possible and create a system of backup for the numbers on a return, which is referred to as an audit trail. If your audit trail is accurate and easy to follow, it will help you potentially avoid additional taxes in the event that you are selected for an audit.

By following the eight tips below, your next tax return will be quicker and more accurate than ever before.

1. Keep All Documents Together

By ensuring that all tax-related documents are kept in the same spot, you can eliminate questions such as ‘where did I put that?’ or ‘did I ever receive that?’ This could potentially save hours spent searching a home or, even worse, weeks spent waiting for an additional copy to be mailed to you. Documents received throughout the year may include real-estate and excise-tax bills, medical bills, co-pays, and prescriptions. In addition to those documents, and your own records maintained throughout the year, here is a brief list of the most common forms people receive after year end:

• W2 (wages)
• 1099-MISC (independent contracting)
• 1099-DIV (dividend income)
• 1099-SSA (Social Security proceeds)
• 1098 (home mortgage taxes/interest)
• K1 (partnership income)
• 1099-INT (interest income)
• 1099-B (capital gains)
• 1099-R (retirement distributions)
• 1098-T (higher-education tuition)

2. Stay on Top of Withholdings

If you had a large amount of taxes due in past years, you may find yourself in a similar situation this year. There are several methods available to ensure you withhold enough taxes throughout the year to avoid the burden of having to make a single large payment and incurring any related penalties.

One potential way is to change how much you are withholding from your W2. Your company’s HR department can help you change this on your Form W4. Lower numbers mean more tax is withheld, so if you are claiming a 2 and owe taxes, consider changing to a 1 or 0. Another possible method to help withhold enough is by using estimated tax payments. Estimates are quarterly prepayments of taxes, which are often used by business owners or individuals with a high level of income. Also, remember to inform your tax preparer of any life changes, such as marriage, divorce, birth of a child, or death of a spouse, which can affect how much withholdings are needed.

3. Regularly Update Mileage Logs (Form 4562/2106)

If you own a small business or have unreimbursed mileage expenses from a job, you are able to claim this as a deduction on your return. You can claim this deduction using the standard mileage rate or actual expenses. The key to either method is having supporting documentation to help keep your audit trail accurate.

In order to calculate your deduction properly, it is important to keep detailed records of your mileage. One quick and easy strategy you might try is purchasing a small pocket notebook and keeping it in your center console. Whenever you use your vehicle for a business trip, simply set your odometer and jot down the miles (excluding commuting mileage).

If you forget to set the odometer, Google Maps is always a useful tool. At the end of the year, add up all the trips in the notebook to arrive at your total business mileage. Additionally, remember to keep your receipts for parking and tolls, and add them up at year end as well.

4. Summarize Higher-education Costs (Form 8863)

Each higher-education institution you or your child attends is required to issue a 1099-T; however, there is often additional information to consider that is not included on a 1099-T. This includes amounts paid for books, a well as scholarships and grants received that were not paid directly to the school.

Because it is important to capture all activity, consider making a summary sheet of all education costs and assistance received. Costs should include all amounts from the college bill in addition to textbooks. Remember to keep copies of all book receipts as backup documentation.

5. Keep Track of Fair Rental Days (Schedule E)

If you rent out a vacation home, it is necessary to know how many days it was rented at fair rental value. Your tax preparer will also need to know how many days the home was used by either yourself or any family member.

To do this, try keeping a miniature monthly calendar at home, exclusively for the purpose of keeping track of usage. For any day that it is used personally or by a family member, put a ‘P’on the day for ‘personal.’ For any day that it is rented to someone at fair rental value, put an ‘R’ on that day for ‘rented.’ At the end of the year, go through your calendar and determine the amount of days used personally and rented out.

6. Substantiate Business Revenue and Expenses

For small business owners who file a Schedule C, E, or F, it is important to keep detailed and supported records. Purchasing a computer program, such as QuickBooks, will help you keep better track of business data. To maintain a proper audit trail for your business, be sure to maintain supporting documentation for each transaction you enter into your software.

For the very small businesses, it may not be cost-effective to purchase financial software. If you fall into this category, try keeping a bin at your desk to store copies of each check for revenue and receipts for expenses. Then, on a monthly basis, use a blank spreadsheet or notebook to record all data from the bin. This will be much easier than trying to summarize all 12 months at once. Keep in mind that charge-card statements cannot be used to substantiate deductions; rather, detailed receipts are needed.

7. Keep a Log of Childcare Expenses (Form 2441)

Parents who both have earnings can deduct expenses paid to a childcare provider, which includes day cares, independent sitters, and summer camps. For each expense, keep records of which child the expense relates to. Additionally, you will need to request the EIN or SSN for each provider.

Keep a log of these expenses at home, and update it each time you write a childcare check. To create an even more effective audit trail, include copies of checks paid to each childcare provider or ask them to provide you with a statement of annual amounts paid. At year end, use the log to create a summary sheet, totaling by child and then provider.

8. Maintain Records of Charitable Contributions (Schedule A)

Make your donations with checks or online. The IRS will not allow a deduction for unsupported cash donations. Additionally, remember to take copies of each check or online payment as proof of each payee and amount. At the end of the year, create your summary sheet, breaking down the amounts paid to each organization, with the supporting copies attached behind as additional backup documentation. There are more stringent rules for larger donations, so be sure to consult your tax preparer.

Also, if any benefit is received as a direct result of the contribution, it must be subtracted from the contribution amount. For example, if you donated $1,000 to the Jimmy Fund and received two Red Sox tickets valued at $50 each, you could deduct only $900.

By following whichever of these eight tips apply to you, you will make your next tax return quicker and easier to prepare, and more accurate. Additionally, in the event you are ever audited, you can feel confident in the ability of your backup documentation to uphold the figures presented on your return.

So, this year, challenge yourself to get organized, and make your tax return a year-round commitment.

Chris Marini is an audit and accounting associate with the Holyoke-based public accounting firm Meyers Brothers Kalicka, P.C.; (413) 322-3549; [email protected]

Accounting and Tax Planning Sections
Take Steps Now to Reduce Your Tax Burden Later

TaxPlanningARTThe first half of 2014 has produced little in the way of major tax legislation, but tax-planning opportunities still exist.

This mid-year tax-planning article focuses on plans that may take a little more time to implement rather than on strategies that must be executed in the limited time remaining at year-end.

Tax Planning for Individuals

Managing Your Income

Income-tax planning typically involves some combination of three strategies:

• Earn income taxed at favorable tax rates, such as long-term capital gains or qualified dividends;
• Avoid income bubbles, which can cause you to be subjected to a higher marginal tax rate in the ‘bubble year’ than your normal, or average, marginal tax rate; and
• Delay the payment of tax by deferring the receipt of income to a later year or accelerating the payment of deductible expenditures into the current year.

James Barrett

James Barrett

Managing your income to minimize your tax has become more challenging with the advent of complex tax provisions such as the alternative minimum tax (AMT) and the 3.8% surtax on net investment income. The former causes you to lose any tax benefit from otherwise tax-deductible expenditures, such as state income taxes and real-estate taxes on your home. The latter subjects your investment income to a premium tax rate if your adjusted gross income (AGI) exceeds a stated threshold.

When you are estimating your income for 2014, you may want to consider several target figures:

Paying Your Income Taxes

If you do not pay enough tax throughout the year, penalties may apply. But with proper planning, the penalties are avoidable.

If it appears that you will be subject to an underpayment penalty, you may be able to reduce or eliminate the penalty by initiating or increasing your quarterly estimated tax payments. If you’re employed, instructing your employer to withhold more from your pay can even eliminate penalties that accrued earlier in the year. A quirk in the penalty rules treats withheld taxes — even withholding that occurs late in the year — as if they had been taken evenly throughout the year.

While most people want to avoid unnecessary penalties, it is seldom a good idea to pay more than the law requires or to pay your taxes earlier than necessary. Why let the government hold your money only to return it to you next year as a tax refund — with no interest?

Your goal should be to pay just enough to avoid an underpayment penalty but not so much as to create a large refund. If it looks as if you have been paying too much tax, cut back on your withholding or lower your remaining quarterly estimated tax payments.

Funding Your Retirement Plans

Contributing to a tax-qualified retirement plan can reduce your current tax obligations and help you save for your retirement in a tax-efficient manner. Contributions and the earnings on them provide tax deferral on earnings until you receive distributions.

In the case of Roth IRAs, the tax deferral may be permanent. So the sooner you make the contribution, the sooner your tax-deferred earnings begin. If you already have a plan in place, consider making a contribution now rather than waiting until the last minute.

The following limits apply for the 2014 tax year:

• Participants in a 401(k) plan can defer up to $17,500 ($23,000 for ages 50 or older);
• The IRA contribution limit is $5,500 ($6,500 for ages 50 and older);
• Simple IRA participants can defer up to $12,000 ($14,500 for age 50 and older);
• Self-employed individuals can contribute 20% of their self-employment income up to $52,000.

IRAs and Roth Accounts

Anyone with earned income, including alimony, is generally eligible to contribute to an IRA. That means that a child who has a job can set up an IRA and begin saving for retirement.

Claiming a deduction for your contribution to a traditional IRA is another matter. It depends on your income and whether you (or your spouse if you are married) are covered by an employer-sponsored retirement plan. Contributions to a Roth IRA are never deductible.

• If neither you nor your spouse is covered by an employer’s plan, you may choose to deduct your contribution to your traditional IRA.
• At higher income levels — modified adjusted gross income above $70,000 for singles and $116,000 for joint filers — no deduction is allowed if you (and your spouse if you are married) are covered by an employer’s plan.
• If you are married and only one of you is covered by an employer’s plan, the spouse who is not covered may claim the deduction, unless your joint modified adjusted gross income exceeds $191,000.

Many people find the long-term benefits of contributing to a Roth IRA or a Roth 401(k) outweigh the short-term financial benefits of tax-deductible contributions. While Roth contributions are not tax-deductible, none of the income earned in the Roth account will ever be subject to income tax unless there are early distributions.

In addition, the Roth account is not subject to the lifetime required minimum distribution rules that apply when you reach age 70½.

Eligibility to contribute to a Roth IRA depends on the amount of your income. No contribution is allowed if your modified adjusted gross income for 2014 exceeds $129,000 for singles or $191,000 for joint filers.

You can make a direct rollover from your traditional IRA or other qualified retirement plan into a Roth IRA. However, you must pay tax on the rollover amount. There is no income limit associated with Roth rollovers.

‘Magic-age’ Years

Is 2014 a magic-age year for you? There are two ages that affect retirement plans, and both involve a ‘half birthday.’ Once you reach age 59½, the extra 10% penalty no longer applies to distributions from your qualified retirement plans, including IRAs.

But if you reach age 70½ during 2014, you must begin to receive minimum distributions from your traditional IRAs. Although the first annual distribution need not be taken until April 15, 2015, you may want to take the first distribution during 2014, to avoid the need for two distributions in 2015.

Changes to the 60-day Rollover Rule

This year (2014) will be the last year that you can obtain multiple short-term tax-free loans from your IRAs. A withdrawal from your IRA is treated as a tax-free transaction if you redeposit the amount into the same or another IRA no later than 60 days after the date you made the withdrawal. Note that the IRS may waive the 60-day requirement under some circumstances, for example, such as an error by your financial institution.

You are allowed only one tax-free rollover per year. The one-year waiting period begins on the date you receive the IRA distribution, not on the date you roll it back into another IRA.

For years, the IRS had said that the one-year waiting period applied separately to each of your IRAs. After the Tax Court interpreted the rule differently in its Bobrow decision (TC Memo 2014-21), the IRS decided to treat all of your IRAs as one IRA for the purposes of the one-year waiting period. However, the IRS says it will not apply this more restrictive interpretation to any rollover that involves a distribution from an IRA before Jan. 1, 2015.

Rollovers between Roth IRAs are subject to the same 60-day rule and one-year waiting period that apply to rollovers between traditional IRAs. After 2014, all of your Roth IRAs will be treated as one Roth IRA for purposes of the one-year waiting period between rollovers.

Rollovers from employer retirement plans to IRAs do not count for purposes of the one-year waiting period. Similarly, conversions of regular IRAs to Roth IRAs are not considered. The one-year waiting period also does not apply to trustee-to-trustee transfers between traditional IRAs or between Roth IRAs.

Making Your Home Energy-efficient

While most of the residential energy tax credits expired at the end of 2013, one remains in effect — the credit for qualified expenditures made for residential energy-efficient property placed in service before Jan. 1, 2017. The IRS defines qualified expenditures for residential energy-efficient property to include:

• Qualified solar electric property expenditures for use in a qualifying dwelling unit;
• Qualified solar water-heating property expenditures for property that heats water for use in a qualifying dwelling unit, if at least half of the energy used by the property for such purpose is derived from the sun;
• Certain qualified fuel-cell property expenditures;
• Qualified small wind-energy property expenditures for property that uses a wind turbine to generate electricity for use in connection with a qualifying dwelling unit; and
• Certain qualified geothermal heat-pump property used to heat a dwelling unit or as a thermal energy sink to cool the dwelling unit, which meets the requirements of the Energy Star program.

The residential alternative energy credit is equal to 30% of the cost of eligible solar water heaters, solar-electricity equipment, fuel-cell plants, small wind-energy property, and geothermal heat-pump property.

You may rely on a manufacturer’s certification that property is eligible for the credit, so long as the IRS has not withdrawn the manufacturer’s right to make the certification.

Complying with the ACA

Starting in 2014, lower-income individuals may be eligible for a tax credit to help pay for health-insurance coverage purchased through an affordable insurance exchange established by the Affordable Care Act. The credit is refundable, so those with little or no income-tax liability can still benefit. The credit also can be paid in advance to the insurance company to help cover the cost of premiums.

Starting in 2014, the individual shared-responsibility provision calls for each person to have minimum essential coverage for each month, qualify for an exemption, or make a payment when filing his or her federal income-tax return. The open-enrollment period to purchase health insurance coverage for 2014 through the Affordable Insurance Exchange ran from Oct. 1, 2013 through March 31, 2014.

Keeping Good Records

Every April, most people resolve that they are going to keep better tax records … next year. While it is obvious that, if you do not keep good records, you are likely to overlook legitimate tax deductions, the result could be even harsher.

In the Durden decision (TC Memo 2012-140), the Tax Court disallowed a couple’s charitable-contribution deduction to their church even though they could prove the payments with canceled checks. The tax law requires a contemporaneous written acknowledgment from the charity for gifts of $250 or more.

In this case, the couple obtained the required letter after their tax return was being examined by the IRS. The court denied the deduction because the letter was not issued prior to the due date of the tax return as required by the tax law.

Business Activities

Whether you own your business or work for someone else, a number of tax-saving opportunities could be available to you if you stay alert and keep good records.

Changing Jobs

Costs you incur in seeking new employment may be deductible if you itemize. And if you have to relocate, the cost of moving yourself and your family may be deductible — even if you don’t itemize.

As with most provisions of the tax law, a review of the technical rules is necessary to determine whether you qualify. Be sure to contact your tax adviser.

Hiring Your Children

If you own a business and have children, consider putting them to work during summer vacation or after school. You will be able to deduct their wages, as long as you make their pay commensurate with what you would pay non-family employees for the same services.

For 2014, each child can earn as much as $6,200 and pay zero income tax. A child who earns $11,700 and contributes $5,500 to a traditional IRA will also pay zero income tax.

Honing Your Job Skills

Parents of college-age students are generally aware of education tax credits like the American Opportunity Credit. If you undertake training to maintain or enhance your job skills or if you pursue an additional degree, you may qualify for the Lifetime Learning Credit or be able to deduct the cost of your education or training as an itemized deduction.

Talk with your tax adviser. Not only are you never too old to learn, but you’re also never too old to claim a tax benefit.

Working from Home

If you operate a business from your home and use a distinct room or area solely for business activities, you may qualify for a home-office deduction. The IRS has simplified the record-keeping requirements but not the qualification requirements. In rare cases, employees who are required by their employer to work from home may also qualify for this deduction.

Caring for Dependents

Working couples with young children and those caring for aged relatives often incur costs associated with hiring outside caregivers so that they can work or go to school. Some of these costs may qualify for the dependent-care tax credit. Qualifying costs may include day camp and similar activities during the summer months.

Establishing a Retirement Plan

If you own a business, you may be able to avail yourself of a defined-benefit type of retirement plan. These plans often allow higher retirement contributions than other types of plans. The higher retirement benefit must be weighed against the additional cost of providing comparable retirement benefits for your employees.

To qualify for a tax deduction in 2014, your retirement plan generally must be in place before the end of the year. Exceptions are IRA and SEP (simplified employee pension) plans, which can be set up through April 15, 2015.

Small employers — generally those with 100 or fewer employees — that set up a qualified retirement plan may be eligible for a tax credit of up to $500 per year for three years. The credit is limited to 50% of the qualified startup costs.

Writing Off Capital Expenditures

Generous business-tax write-off rules, like bonus depreciation, expired at the end of 2013. And the expensing election limit under Section 179 has been reduced to $25,000 for 2014, but only if the total amount of qualified asset purchases does not exceed $200,000.

Depreciating Vehicles

For passenger automobiles first placed in service during 2014, the deduction limitations for the first three tax years are $3,160, $5,100, and $3,050, respectively, and $1,875 for each succeeding year. For trucks and vans first placed in service in 2014, the depreciation limitations for the first three years are $3,460, $5,500, and $3,350, respectively, and $1,975 for each succeeding year.

In past years, bonus depreciation made the first-year limitation much higher. However, since bonus depreciation expired on Dec. 31, 2013, the new limits will apply for 2014 unless Congress acts to reinstate bonus depreciation retroactively to Jan. 1, 2014.

Repairing Older Assets

For tax years beginning in 2014, new rules are in effect for determining when expenditures can be deducted as a repair expense and when they must be treated as the cost of a new asset subject to depreciation. All businesses should review their repair/capitalization policies to assure that they are in compliance with the new rules.

Monitoring Passive Activities

Complex rules govern the tax treatment of business activities in which the owner does not materially participate. If these so-called passive activities produce a loss, that loss may not be currently deductible. If the passive activity is profitable, the income could be subject to the 3.8% surtax on net investment income.

If you are the owner of a business, it’s a good idea to keep detailed records of the hours you spend working in the business. This record keeping is especially important if you have another full-time job or if the potentially passive activity is not your primary business endeavor.

Estate Planning

For 2014, the unified credit for estate and gift taxes has been raised so that the tax applies only to estates greater than $5.34 million. And the estate-tax exclusion is portable, so if you and your spouse have combined estates that do not exceed $10.68 million, you can avoid the estate tax without the necessity of including language in your will creating a bypass trust.

The annual gift-tax exclusion for 2014 remains at $14,000 per person. Therefore, if you are married, you can gift up to $28,000 per donee, or recipient, this year without any federal gift-tax ramifications by using the gift-splitting rules. Gifting is a good way to reduce your taxable estate and may be an important element of your estate plan.

You may have executed your current will and estate plan without consideration of the increased unified credit amount and the portability feature of the new estate-tax law. If so, a review is in order to make sure your assets will be handled in the most tax-efficient manner.

Offshore Account Disclosures

If, during 2013, you had a financial interest in, or signature authority over, at least one financial account located outside the U.S., and the aggregate value of all your foreign financial accounts exceeded $10,000 at any time during the calendar year, you must file electronically with the Treasury Department a Financial Crimes Enforcement Network (FinCEN) Form 114, Report of Foreign Bank and Financial Accounts (FBAR).

The new Form 114 replaces TD F 90-22.1 and is due to the Treasury Department by June 30, 2014. The form must be filed electronically and is available only online through the BSA E-Filing System website (bsaefiling.fincen.treas.gov/main.html).

In Conclusion

Tax planning is an ongoing process. Your tax picture can change — sometimes dramatically — during the course of a year, and you need to react accordingly. Implementing thoughtful mid-year strategies now may help you lessen the taxes you face in April 2015.

One final thought: saving taxes is generally a good strategy. But making a bad business, investment, or personal decision just to save some tax dollars is never a good strategy.

James Barrett is managing partner of Meyers Brothers Kalicka in Holyoke; (413) 536-8510; [email protected]

Accounting and Tax Planning Sections
Many of These Changes Will Impact Individuals and Businesses


Several well-known tax breaks have expired in 2014, and absent Congressional action to renew them, they will not be available for taxpayers in 2014.

There has been discussion by the Senate and the House to renew some or all of the expired provisions, but no laws have been passed. While indications are that at least some of these provisions may eventually be extended, if the expiration of these commonly used tax provisions has a significant impact on you or your business, you may want to prepare by adjusting withholdings and estimated tax payments just in case.

Expired Provisions Affecting Individuals

Mortgage-insurance Premium Deductions

Homeowners were allowed to deduct qualified mortgage-insurance premiums by treating them as home-mortgage interest.

Mortgage Debt Relief

Generally, cancelled or forgiven debt is considered taxable income. However, up to $2 million of cancelled principal-residence mortgage debt could be excluded from taxable income if the debt was discharged on or after Jan. 1, 2007, and before Jan. 1, 2014, as a result of foreclosure, short sale, or mortgage restructuring.

State and Local General Sales-tax Deduction

Taxpayers had the option to deduct sales tax instead of state income tax in years before 2014. This provision was especially beneficial for individuals who lived in states with no income tax.

Educator Out-of-pocket Expenses Deduction

For many years, elementary and secondary school teachers enjoyed an above-the-line deduction of up to $250 for out-of-pocket expenses for school and classroom-related expenses.

Tuition and Fees Deduction

Taxpayers were able to deduct above-the-line qualified higher education expenses. Taxpayers will no longer get this deduction for 2014, but the Lifetime Learning Credit and American Opportunity Credit will still be available for college students.

Non-business Energy Credit

This credit for the installation of qualified energy-efficiency improvements, such as insulation, windows, doors, and roofs, as well as certain water heaters and qualified heating and air-conditioning systems, expired Dec. 31, 2013.

Expired Provisions Affecting Businesses

Expanded IRC Section 179 Expensing

For tax years beginning in 2010 and through 2014, taxpayers were allowed to expense up to $500,000 for eligible property additions that they would have otherwise capitalized and depreciated over their useful lives, provided the eligible additions did not exceed $2 million. The Section 179 deduction dropped to $25,000 for tax years beginning on or after January 1, 2014.

Bonus Depreciation

A bonus depreciation deduction was allowed for qualifying fixed assets acquired and placed in service from 2007 through 2013. The rate was generally 50%; however, for qualifying assets placed in service from Sept. 9, 2010 through Dec. 31, 2011, the rate was 100%. For 2014 and future years, there is no current bonus depreciation allowed except on long-production property and certain non-commercial aircraft, for which the expiration was extended by one year to Dec. 31, 2014.

Retail and Restaurant Improvements

Certain qualified business assets were allowed a shorter life for depreciation purposes. Qualified leasehold improvements and restaurant improvements, placed in service from Oct. 23, 2004 through Dec. 31, 2013, were depreciated over 15 years. Qualified retail-store improvements, placed in service from Jan. 1, 2009 through Dec. 31, 2013,were also depreciated using a 15-year life. For these types of additions placed in service in 2014, the depreciable life generally reverts back to 39 years but depends upon the individual type of expenditure.

R & D Tax Credit

Taxpayers were allowed a tax credit equal to 20% of the excess of qualified research expenses for the current year over the prior year, basic research payments made to qualified organizations, and specific energy-research-consortium expenditures paid or incurred through Dec. 31, 2013.


There are many well-known and popular tax breaks that expired prior to 2014. On April 28, 2014, the Senate introduced the EXPIRE (Expiring Provisions Improvement, Reform, and Efficiency) Act of 2014 to extend more than 50 expired tax breaks and benefits. That same day, the bill was approved by the Senate Finance Committee but has advanced no further due to disagreements on procedural issues. The House has taken a different approach, and the House Ways and Means Committee has passed 12 separate tax bills, including seven for business-tax extenders and five related to charitable deductions.

One of the business-extender bills, a simplified research-credit bill which would make the extension permanent, was passed by the House, and it is expected that the remaining 11 bills will be considered prior to the August recess. Given the different approaches by the House and Senate, reaching agreement may be a challenge. n

Mark J. Corey is a senior tax manager in the Springfield office of Wolf & Co., P.C. Wolf is a leading regional certified public accounting firm with offices in Springfield, Boston, and Albany, N.Y., which provides accounting, tax, and consulting services to individual and business clients.

Accounting and Tax Planning Sections
Effective Planning Now Can Lower Your Tax Burden

Kristina Drzal-Houghton

Kristina Drzal-Houghton

Tax planning is inherently complex, with the most powerful tax strategies often relying as much on clairvoyance as they do on calculations.
As 2013 begins to wind down, the need for a crystal ball lessens, and the ability to strategize with more certainty is upon us. This developing certainty provides opportunities for individuals and businesses to manage tax liabilities through tax-planning techniques.
Year-end tax planning has always been arduous, but early 2013 legislation complicated the tax structure by layering in new tax brackets and income buckets, bringing a multi-dimensional complication to tax planning this year.
In this article we focus on tax-planning techniques that can be executed during the remainder of 2013, but specific facts and circumstances may open up other opportunities or limit some of the tactics discussed.
Tax Strategies for Business Owners
Business equipment. Significant tax benefits remain available for business equipment purchases during 2013. A 50% bonus depreciation deduction is available for qualified property placed in service during 2013. The deduction is set to expire for 2014. To qualify for bonus depreciation, equipment must be new and placed in service by year-end.
Section 179 expensing rules provide full expensing for up to $500,000 of qualifying property placed in service during 2013. However, the full deduction is available only if the total amount of qualifying property placed in service in 2013 does not exceed $2 million. The Section 179 deduction limit is scheduled to be drastically reduced in 2014.
• Planning point: If you are planning to purchase a significant amount of machinery and equipment for your business in the next year or two, consider accelerating your order so the assets are delivered and placed into service by Dec. 31, 2013. To take full advantage of the Section 179 deduction, monitor total purchases to prevent its phaseout.
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 carry-back refund. This type of refund may be of particular value to a financially troubled business that needs a fast cash transfusion to keep going.
There also are a number of different kinds of debt-cancellation or debt-reduction transactions that may generate taxable income in 2013 if not deferred until 2014.
Retirement Plans. Starting a small-business retirement-savings plan is easier than you think and offers significant tax advantages. Employer contributions are deductible from the employer’s income, employee contributions are not taxed until distributed to the employee, and investments in the program grow tax-deferred. Further, the tax law offers a small incentive of a $500-per-year tax credit for the first three years of a new SEP, SIMPLE, or other retirement plan to cover the initial setup expenses for certain small employers.

Individual Tax-rate Management
In prior years, the main concern was that, if you reduced your regular income tax too far, the alternative minimum tax (AMT) would step in to appropriate your hard-earned tax savings. There are now additional dynamics to consider, when certain thresholds are exceeded, in the form of a 3.8% net-investment-income (NII) tax levied on investment income, a 0.9% Medicare payroll tax levied on wages and self-employment earnings, and a multi-tiered, long-term capital-gains tax-rate structure.
These new taxes, beginning in 2013, apply when adjusted gross income exceeds certain thresholds ranging from $200,000 for single filers to $250,000 for married taxpayers. For these thresholds and most others mentioned in this article, married filing separate uses one-half the married threshold.
Additionally, the 39.6% tax bracket returns this year after a long hiatus for taxpayers above thresholds ranging from $400,000 of taxable income for single filers to $450,000 for married filers.
Net investment income tax. The 3.8% NII tax now applies to most investment income. For individuals, the amount subject to the tax is the lesser of (1) the net investment income; or (2) the excess of modified adjusted gross income (MAGI) over the applicable threshold amount.
NII includes dividends, rents, interest, passive-activity income, capital gains, annuities, and royalties. Passive pass-through income will be subject to this new tax, but non-passive will not. Self-employment income, income from an active trade or business, and portions of the gain on the sale of an active interest in a partnership or S corporation with investment assets, as well as IRA or qualified plan distributions, are not subject to the NII tax.
• Planning point: Weighing a decision about selling marketable securities to meet current cash needs? Consider using margin debt for replacement securities. The interest on the debt will be deductible, subject to the investment-interest limitation, which could reduce your NII for purposes of the new tax.
• Planning point: To the extent your NII is income from a passive activity, increasing your material participation in the activity between now and the end of the year can reduce the amount of income subject to the NII tax. Proceed with caution, though, because a change in participation level may impact other short- and long-term tax obligations.
• Planning point: As you near the applicable threshold, consider revising the timing of distributions from retirement plans to manage your net investment income. While the distributions themselves are not NII, the distributions increase your MAGI, which could subject more of your investment income to the NII tax.
Increased maximum tax rates on long-term capital gains. While avoiding or deferring tax may be your primary goal, to the extent there is income to report, the income of choice is long-term capital gain income thanks to the favorable tax rates available. The available rates differ depending on the taxpayer’s tax bracket.
Taxpayers in the 39.6% bracket will now pay a 20% long-term capital gains and qualified dividends rate. Additionally, those above the previously noted thresholds will pay the 3.8% tax in addition to the increased capital-gains rate.
• Planning point: The netting rules provide an opportunity to manage the net gain or loss subject to taxation, making it prudent to review your investment gains and losses before the close of year to determine whether additional transactions prior to year-end may improve your tax outlook.
Recognition of same-sex marriage for federal tax purposes. Beginning in 2013, legally married same-sex couples must file a joint or married-filing-separately return. The rules do not extend to cover domestic partnerships. The ruling is retroactive, opening up a refund opportunity in certain circumstances for those who were previously prohibited from joint filing. Amended returns may be, but are not required to be, filed for tax years still open by statute of limitations.

Year-end Timing Strategies
Managing the alternative minimum tax. The AMT applies when income, as adjusted for certain preference items, exceeds certain exemptions, but the rate applied to that income falls below the AMT rate, essentially acting as a tax-leveling mechanism. Residents of states with high income and property taxes, like Connecticut and Massachusetts, are more likely to be subject to the AMT because these state taxes are not deductible when computing AMT income.
The AMT exemptions are subject to phaseouts when AMT income exceeds $115,400 for single filers and $153,900 for married joint filers.
Delaying or prepaying expenses. As a cash-method taxpayer, you can deduct expenses when you pay them or charge them to your credit card. Payment by credit card is considered paid in the year the charge is incurred. Expenses that are commonly prepaid in connection with year-end tax planning include:
Charitable contributions. A tax deduction is available for cash contributions to qualified charities of up to 50% of adjusted gross income (AGI) and up to 30% (20% for gifts to private operating foundations) of your AGI for charitable gifts of appreciated property.
• Planning point: Consider contributing appreciated securities that you have held for more than one year. Usually, you will receive a charitable deduction for the full value of the securities, while avoiding the capital-gains tax that would be incurred upon sale of the securities.
State and local income taxes. Consider prepaying any state and local income taxes normally due on Jan. 15, 2014, or with the filing of the return if you do not expect to be subject to the AMT.
• Planning Point: If you expect to owe state and/or local income tax when you file your return for 2013, consider paying that amount before Dec. 31, 2013. Although you relinquish your cash in advance, the benefit from accelerating the tax deduction and lowering your current federal income tax could be significant. It is particularly powerful if the deduction could be lost through the AMT in 2014. Just be careful that your prepayment does not make you subject to AMT in 2013.
Real-estate taxes. Like state and local income taxes, real-estate tax levies due early in 2014 can often be prepaid in 2013. For real-estate taxes on your residence or other personal real estate, just be mindful of the AMT in both years. Real-estate tax on rental property is deductible whether or not you are subject to AMT, and it can be safely prepaid.
Mortgage interest. There are limits on your ability to deduct prepaid interest. However, to the extent your January mortgage payment reflects interest accrued as of Dec. 31, 2013, a payment prior to year-end will secure the interest deduction in 2013.
Other itemized deductions. Miscellaneous itemized deductions, like many deductions, are deductible only if you itemize your deductions and are not subject to AMT. Where miscellaneous itemized deductions differ is with the requirement that the total deductions exceed 2% of your AGI to be deductible.
Itemized deduction phaseout. After a three-year hiatus, 2013 marks the return of the phaseout of certain itemized deductions for higher-income taxpayers. For affected taxpayers, itemized deductions are reduced by 3% of the amount by which AGI exceeds thresholds ranging from $250,000 for a single filer to $300,000 for married joint filers.
However, deductions for medical expenses, investment interest, casualty and theft losses, and gambling losses are not subject to the limitation. Taxpayers cannot lose more than 80% of the itemized deductions subject to the phaseout.
Exemption phaseout. A personal exemption is generally available for you, your spouse if you are married and file a joint return, and each dependent (a qualifying child or qualifying relative who meets certain tests). In 2013, the exemption amount is $3,900, subject to a reinstated phaseout of the exemption for higher-income taxpayers. These phaseout thresholds begin at the same AGI limits discussed for itemized deductions above.
Retirement-plan distributions. If you are over age 59½ and your 2013 income is unusually low, consider taking a taxable distribution from your retirement plan, even if it is not required, to use the unusually low tax rate for the period. More powerful still, consider converting the funds to a Roth account.
• Planning point: If you expect to be in a higher tax bracket in the future, consider converting your traditional IRA into a Roth IRA during your lower-income years. You will be paying taxes early, but future appreciation of the assets in your account may escape income taxes entirely.
IRA distributions to charity. If you are over age 70½, you can make a tax-free distribution of up to $100,000 from your IRA to a qualified charity before Dec. 31, 2013. Under current law, this opportunity will not be available for 2014.
Note that this opportunity is doubly powerful beginning in 2013. In addition to prior tax benefits, now the IRA is not included in your MAGI, and thus this strategy may reduce exposure to the new 3.8% NII tax.
Worthless securities and bad debts. Both worthless securities and bad debts could give rise to capital losses. Since no transaction generally alerts you to this deduction, you should review your portfolio carefully.
• Planning point: If you own securities that have become worthless or made loans that have become uncollectible, ensure that the losses are deductible in the current year by obtaining substantive documentation to support the deduction.
Contributing to a retirement plan. You may be able to reduce your taxes by contributing to a retirement plan. If your employer sponsors a retirement plan, such as a 401(k), 403(b), or SIMPLE plan, your contributions avoid current taxation, as will any investment earnings until you begin receiving distributions from the plan. Some plans allow you to make after-tax Roth contributions, which will not reduce your current income, but you will generally have no tax to pay when those amounts, plus any associated earnings, are withdrawn in future years.
You and your spouse must have earned income to contribute to either a traditional or a Roth IRA. Only taxpayers with modified AGI below certain thresholds are permitted to contribute to a Roth IRA. If a workplace retirement plan covers you or your spouse, modified AGI also controls your ability to deduct your contribution to a traditional IRA. There is no AGI limit on your or your spouse’s deduction if you are not covered by an employer plan. If your modified AGI falls within the phaseout range, a partial contribution/deduction is still allowed.
• Planning point: If you would like to contribute to a Roth IRA, but your income exceeds the threshold, consider contributing to a traditional IRA for 2013, and convert the IRA to a Roth IRA in 2014. Be sure to inquire about the tax consequences of the conversion, especially if you have funds in other traditional IRAs.

Other Personal Tax-planning Considerations

Withholding/estimated tax payments. With higher rates in effect for 2013, more taxpayers may find themselves exposed to an underpayment penalty. Underpayment penalties can be avoided when total withholdings and estimated tax payments exceed the 2012 tax liability or, in the case of higher-income taxpayers, 110% of 2012 tax.
• Planning point: If you expect to be subject to an underpayment penalty for failure to pay your 2013 tax liability on a timely basis, consider increasing your withholding between now and the end of the year to reduce or eliminate the penalty. Increasing your final estimated tax deposit due Jan. 15, 2014 may reduce the amount of the penalty, but is unlikely to eliminate it entirely. Withholding, even if done on the last day of the tax year, is deemed withheld ratably throughout the tax year.
Losses from pass-through business entities. If your ability to deduct current-year losses from a partnership, LLC, or S corporation may be limited by your tax basis or the ‘at-risk’ rules, consider contributing capital to the entity or, in some cases, making a loan to the entity prior to Dec. 31, 2013, to secure your deduction this year.
• Planning point: If you anticipate a net loss from business activities in which you do not materially participate, consider disposing of the loss activity by Dec. 31, 2013. Assuming sufficient basis exists, all suspended losses become deductible when you dispose of the activity. Even if there is a gain on the disposition, you may still benefit from having the long-term capital gain taxed at 23.8% (inclusive of the NII tax) with the previously suspended losses offsetting other ordinary income.
American opportunity tax credit (AOTC). The AOTC for college costs has been extended for five years through 2017. A credit of up to $2,500 may be claimed during the first four years of college. The credit phases out for AGI in excess of $80,000 for single taxpayers and $160,000 for married taxpayers filing a joint return.
• Planning point: If your income is too high for you to qualify for the AOTC, consider gifting your children the funds necessary to pay the qualified education expenses, making them eligible to claim the AOTC.
Energy credit. The $1,500 credit for new windows and doors has expired, but a credit of up to $500 for residential energy property is still available if prior years’ credits were not taken.
Estate and gift taxes. For 2013, taxpayers are permitted to make tax-free gifts of up to $14,000 per year, per recipient ($28,000 if married and using a gift-splitting election, or if each spouse uses separate funds). By making these gifts annually, taxpayers can transfer significant wealth out of their estate without using any of their lifetime exclusion.
• Planning point: Consider making similar gifts early in 2014. Each year brings a new annual exclusion, and a gift early in the year transfers next year’s appreciation out of your estate.
• Planning point: Additional gifts can be made using the lifetime gift exclusion, which is $5.25 million ($10.5 million for married couples) in 2013. Future exclusions are indexed for inflation. The recent increases to the exclusion make it a good time to review any existing estate and gift plans to ensure they best meet your needs.
• Planning point: When combined with other estate and gift-planning techniques, such as Section 529 plans to help fund your children’s or grandchildren’s college education, the potential exists to avoid or reduce estate and gift taxes while transferring significant wealth to other family members.


The changes initiated during 2013 added layers of complexity to an already difficult tax system, but with a purposeful, informed plan in place, taxpayers can still reap significant benefits. Consult your tax advisor so they can best support you in building your plan for 2013 and beyond.

Kristina Drzal Houghton, CPA, MST is a partner with the Holyoke-based accounting firm Meyers Brothers Kalicka, and director of the firm’s Taxation Division; [email protected]

Accounting and Tax Planning Sections
Medicare Tax Implications of the Affordable Care Act


Michael J. Rowe, CPA

Michael J. Rowe, CPA

The Affordable Care Act (ACA), signed into law in 2010, made two significant changes to Medicare tax for high-income taxpayers for years beginning after 2012. This article will provide a broad overview of the changes, explain how to reflect the additional taxes on an individual’s personal tax returns, and provide possible strategies to mitigate these taxes.

New 3.8% Surtax on Net Investment Income
Before the ACA, there was no Medicare tax on unearned income. The ACA imposes an additional Medicare tax of 3.8% of the lesser of: (1) net investment income, or (2) the excess of modified adjusted gross income over a threshold amount ($250,000 for joint returns or surviving spouses, $125,000 for a married individual filing a separate return, or $200,000 for all other taxpayers).
The threshold amounts are not indexed for inflation, so as time passes, more taxpayers will be subject to the tax.
Modified adjusted gross income is adjusted gross income increased by any amount excluded from income as foreign earned income, net of deductions and exclusions disallowed with respect to the foreign earned income. As a practical matter, most U.S. residents do not have foreign earned income, so modified adjusted gross income would be the same as adjusted gross income.
Net investment income is the excess of the following items over deductions allocable to those items:
• Gross income from interest, dividends, annuities, royalties, and rents, unless they are derived in the ordinary course of a trade or business to which the 3.8% surtax does not apply;
• Other gross income derived from a trade or business to which the 3.8% surtax does apply; and
• Net gain attributable to the disposition of property other than property held in a trade or business to which the 3.8% surtax does not apply.
Gross income does not include items that are not included in gross income for income-tax purposes.
The 3.8% surtax applies to a trade or business only if it is considered a passive activity or if it is a trade or business of trading in financial instruments or commodities.
The additional Medicare tax is considered a tax for estimated payment purposes. An individual cannot request additional withholding specifically for the additional Medicare tax, but may increase his or her overall withholding using Form W-4.
The 3.8% surtax is calculated on Form 8960, which will be included in the individual’s tax return.
There are a few potential strategies to minimize additional net investment income in the current year:
• Consider taking taking capital losses to offset capital gains;
• Consider the installment method of reporting gains, if possible;
• If salary and other non-investment earnings plus net investment income approximate the threshold above, try to avoid, if feasible, additional income before year-end. This will defer, and possibly eliminate, the 3.8% surtax;
• If you have a one-time significant gain which brings you close to the threshold, try to defer, if possible, the recognition of additional income; and
• The surtax applies to passive activities, but not income from an activity in which a person is a material participant. It may be possible, with the advice of a tax advisor knowledgeable in the passive-activity rules, to increase participation in an activity in order to qualify as a material participant.

New 0.9% Medicare Tax on Wages and Self-Employment Income
The ACA increases the employee portion of the Medicare tax by an additional tax of 0.9% of wages and self-employment income received in excess of the threshold amounts as follows: $250,000 for joint returns, $125,000 for a married individual filing a separate return; or $200,000 for all other taxpayers.
As with the threshold amounts for the 3.8% surtax discussed above, these threshold amounts are not indexed for inflation, so as time passes, more taxpayers will be subject to the tax.
Unlike the current 1.45% Medicare tax on wages, the additional tax on a joint return is on the combined wages of the employee and the employee’s spouse.
The employer is required to withhold the additional 0.9% Medicare tax on wages in excess of $200,000, regardless of the person’s filing status or wages paid by another employer. It is possible that the person will owe more than the amount withheld. In that case, the employee should consider making estimated tax payments or increasing their withholding using Form W-4. If the person is self-employed, then he or she should consider increasing estimated tax payments.
If an employer withholds more than is required (for example, if an employee earns more than $200,000 but the joint return has total wages less than $250,000), then the excess withholding can be claimed as a credit on the employee’s income-tax return.
The 0.9% Medicare tax is calculated on Form 8959, which will be included in the individual’s tax return. To reduce or defer this 0.9% Medicare tax, consideration should be given to deferring income, if possible, to next year if income is above the threshold, especially if a non-recurring event occurred this year that increases wage and/or self-employment income above the threshold amount.

These new Medicare taxes will impact most high-income taxpayers. This has been a broad overview of the rules and planning strategies. There are more complicated rules and strategies beyond the scope of this article, especially with regard to investments in partnerships and subchapter S corporations.
For more information, you can go to www.irs.gov and search for “net investment income tax” or “additional Medicare tax,” or contact your tax advisor.

Michael J. Rowe is a principal with Wolf & Co., P.C., which has offices in Boston, Springfield, and other locations; (617) 428-5437; www.wolfandco.com

Accounting and Tax Planning Sections
There Are Financial Milestones That Come Along with Many Birthdays

Jim Kenney

Jim Kenney

As Baby Boomers age, I’ve found a great many of them to be unaware of some of the financial milestones that came with each birthday.

Having always been a numbers guy, I thought it might be a good time to share some important financial-planning thoughts for some of these important digits.



The 401(k) annual contribution provision allows for a catch-up contribution of $5,500, increasing the allowable contribution to $23,000 in 2013. IRAs have a $1,000 catch-up provision, and the SEP-IRA maximum contribution goes to $51,000.



If you are 55 or older and you lose your job, then you are allowed to take a distribution from your 401(k) plan without incurring the 10% penalty.  Keep in mind that you will still have to pay taxes on the amount distributed.


59 1/2

This is the age when you can begin taking withdrawals from whatever type of retirement account that you have without having to pay that dreaded penalty. If the original contributions weren’t taxed, then the withdrawals will be. However, Roth IRAs are tax- and penalty-free if the account is at least five years old.



You can begin collecting Social Security benefits (this can occur earlier if you are disabled) if you are willing to take a haircut on your benefit of about 25%. Also, if you continue to work and make above a certain amount, the benefits may be further reduced. This decision takes some planning and needs some thoughtful consideration.



You can now apply for Medicare. (You will be automatically enrolled if you already started collecting on your Social Security benefits.) Most financial planners recommend you take this step three months in advance of your birthday.



At the IRS designated full retirement age, you can begin collecting your full retirement benefits regardless of whether or not you are still working. If you delay collecting until age 70, your benefit will increase by 8% per year.



That 8% increase benefit stops at age 70, so I can’t think of a good reason not to take advantage of the Social Security system that you contributed to.


70 1/2

You are now required to take withdrawals from your tax-advantage retirement accounts unless you are still working or it is in a Roth IRA that you either started or inherited from your spouse. The required distributions are computed based on a life-expectancy formula and must be withdrawn by Dec. 31 (first-year distributions can be delayed until April 1 of the next year, but that will double year two’s income). You should consider consolidating your IRAs to make the calculation easier.

That’s a quick look at your decisions by the numbers. Now it’s time to crunch the numbers and make some decisions.


James P. Kenney, CPA, MBA is a member of the firm with Wolf & Co., P.C., which has several offices in the Northeast, including Springfield; (413) 747-9042.

Accounting and Tax Planning Sections
It’s Not Too Early to Start Thinking About Next Year

Cheryl Fitzgerald

Cheryl Fitzgerald

It’s never too early to start thinking about tax-planning ideas for 2013 for businesses and individuals.
With some of the new Obamacare taxes kicking in for 2013, as well as tax increases from the American Tax Relief Act of 2012, the sooner you start planning, the more you’ll be able to minimize your taxes.
Here are some things to think about.

• General depreciation: New assets generally acquired and placed in service before Jan. 1, 2014 continue to be eligible for 50% bonus first-year depreciation.
Start planning for your acquisitions now so that assets that need to be ordered will be received and installed before the expiration of this provision. Buying a used asset does not qualify for the additional bonus depreciation; it must be a new asset, and not just new to you. Section 179 is still available for used assets.
• Qualified leasehold improvement depreciation: Qualified leasehold improvement property placed in service before Jan. 1, 2014 is depreciated over a reduced 15-year period. There are related party limitations, but if improvements qualify, this is a significant benefit over the 39-year life which is scheduled to return on January 1, 2014.
• Business tax extenders: The Tax Relief Act also extended many business-tax credits and other provisions. Notably, it extended through 2013 the research and development credit. Other business provisions extended through 2013 are the work opportunity tax credit, the employer wage credit for employees who are active-duty members of the uniformed services, and numerous other business credits.

• Tax rates: 2013 brings us a new rate bracket that begins with the 39.6% rate. The threshold amounts are keyed to taxable income and are: $450,000 for married individuals filing joint returns and surviving spouses, $425,000 for heads of household, $400,000 for single individuals, and $225,000 for married individuals filing separate returns.
Therefore, for those within the new 39.6% range, above-the-line deductions and exclusions — and strategies to maximize them — now become ever-more valuable. At these same thresholds, the top capital-gains rate increases from 15% to 20%.
The Medicare portion of the FICA tax on wages increases from 1.45% (2.9% for self-employed) to 2.35% (3.8% for self-employed) for wages over $200,000. Individuals or couples with multiple W-2s may not have this tax withheld by their employer, but will be subject to the additional tax upon filing their 2013 income-tax return. To avoid a surprise liability on April 15, 2014, individuals with multiple sources of wages may want to consider increasing their federal withholding.
• 3.8% net investment income surtax: For years beginning in 2013, under the Patient Protection and Affordable Care Act of 2010, a new-investment income (NII) surtax applies. The NII surtax on individuals generally equals 3.8% of the lesser of:
• NII for the tax year, or
• The excess, if any, of modified adjusted gross income ($250,000 for filing status of married filing jointly or surviving spouse, $125,000 for filing status of married filing separately, and $200,000 for any other filing status).
NII includes not only interest, dividends, and capital gains, but also income from passive activities such as partnerships and rental real-estate income. One category of income notably excluded is flow through income from an S corporation in which the shareholder actively participates.
This gives a significant advantage to flow through K-1 income over W-2 wages taken by the shareholder, since that is subject to the 2.9% employee/employer combined Medicare tax and the added 0.9% when wages exceed $200,000. Although it appears simple that a shareholder would want to minimize their wages, rules related to reasonable compensation as well as state-tax consideration make this a complex planning area involving the business and individual.
Given that the thresholds are lower for the 3.8% tax than the 20% maximum tax on net capital gains, capital gains subject to the 20% tax invariably will also be subject to the additional 3.8% surtax, while net capital gain subject to the 3.8% surtax will not necessarily be subject to the maximum 20% rate.
Individuals who planned large capital-gain transactions prior to Dec. 31, 2012 most likely benefited from an 8.8% savings. If the sale qualified for installment-sale reporting, this additional tax might be an incentive to elect out-of-installment sale treatment.
• Roth conversions: This lifts most restrictions and now allows participants in 401(k) plans with in-plan Roth conversion features to make transfers to a Roth account at any time.
Those making such conversions may be recognizing a large amount of income that may push them into a higher income or capital-gain threshold bracket and result in the NII surtax applying. Timing conversions, doing them over a period of years, and/or reducing capital-gain recognition events during those years are strategies now worth considering.
• IRA distribution: The Tax Relief Act extends, through Dec. 31, 2013, the provision allowing tax-free distributions from individual retirement accounts to public charities by individuals age 70 1/2 or older, up to a maximum of $100,000 per taxpayer each year. Taking advantage of this provision for charitable giving may also help reduce exposure to one or more of the threshold amounts discussed earlier.
• Phaseout of itemized deductions and personal exemptions: The phaseout of these items are reinstated, but at modified adjusted gross income thresholds of $250,000 for single taxpayers, $275,000 for heads of household, and $300,000 for married taxpayers filing jointly.

Bottom Line
So, as you can see, 2013 tax planning needs to incorporate the interplay that one idea may have on another.
Additionally, it is important to monitor your tax planning as the year goes on instead of waiting until the end of the year. It is never too early to think about these things in order to help minimize some potential taxable transactions that occur throughout the year.

Cheryl Fitzgerald is a senior tax manager with the certified public accounting firm Meyers Brothers Kalicka, P.C. in Holyoke; (413) 536-8510.

Accounting and Tax Planning Sections
Despite Ambiguity, This Is Still a Time for Tax Planning

We have a challenging year before us on the tax-planning front, with expiring provisions leading to uncertain future rates and pending elections leaving us with little in the way of legislative expectations.

Historically, the last few months of the year are used to implement tax-planning techniques to manage individuals’ tax liability for the current year with the relative certainty that comes from having the majority of the year behind us. This year, the only certainty appears to be everyone’s uncertainty.

Ambiguity in the tax realm can have a paralyzing effect on planning, but a wait-and-see approach can lead to lost opportunities or last-minute scrambles to seize the remains of an opportunity. Although the tax future remains unclear, planning opportunities remain. There are gifting provisions that are largely considered once-in-a-lifetime opportunities and rates that may be the lowest to be seen in a while. They provide an opening to make meaningful tax-planning decisions before 2012 comes to a close.

The focus in this piece is on tax-planning techniques that can be initiated during the remainder of 2012. But, depending on one’s facts and circumstances, these are just the beginning of the opportunities that might be available. If you think any of these strategies apply to you, be sure to contact your tax professional or advisor.


Changes on the Horizon

Despite the quiet year for tax legislation, significant changes are before us for 2013. Two years ago, when faced with a comparable series of expiring provisions, the can was legislatively kicked down the road. Conclusive action was deferred in favor of short-term extension solutions.

Here we stand, nearly two years later, with a similar collection of rate reductions, deductions, credits, and incentives set to expire as the calendar flips from one year to the next. In addition, two new taxes stemming from healthcare-reform legislation become effective in January.

Absent any late-year legislation, the significant changes on the horizon in 2013 are as follows:

• Two new taxes established under the Patient Protection and Affordable Care Act will go into effect on Jan. 1 — a 0.9% tax on wages and self-employment income, and a 3.8% contribution tax on investment income;

• Individual tax rates will universally climb, with the highest rate rising from 35% to 39.6% before accounting for the new taxes stemming from the act. Including the 3.8% UIMC tax, the top rate on investment income will rise to 43.4%. The current 10% rate bracket expires, reverting back to 15% as the lowest tax rate. The UIMC tax is explained below;

• Federal estate and gift-tax rates will increase from 35% to 55%, and the exclusion amount will drop from $5.12 million to $1 million;

• A series of tax rules designed to reduce what is commonly referred to as the ‘marriage penalty’ will sunset at the end of this year, raising taxes for many dual-income couples;

• Preferential tax rates on capital gains and dividends, currently 15% for most individuals, will expire at the end of the year, with the tax rate on long-term capital gains returning to 20% and qualified dividends losing preferential treatment altogether, returning to the ordinary income rates of up to 43.4%;

• Limitations on itemized deductions and personal exemptions will return in 2013 for higher-income taxpayers;

• It is anticipated that millions of additional taxpayers will become subject to the alternative minimum tax (AMT) with the expiration of the ‘AMT patch’; and

• The child tax credit will be reduced by half for 2013.


Business Tax Strategies

Kristina Drzal-Houghton

Kristina Drzal-Houghton

• Section 179 Expensing: IRS Code Section 179 provides businesses the option of claiming a full deduction for the cost of qualified property in its first year of use rather than claiming depreciation over a set period of years. For 2012, the Section 179 dollar limitation is $139,000, with a $560,000 investment limitation.

The dollar limitation for 2013 is scheduled to drop to $25,000, with a $200,000 investment limitation. Businesses might want to consider accelerating scheduled purchases into 2012 to take advantage of the higher limits.

Businesses with a fiscal year-end should note that the $139,000 deduction limit applies to property purchased and placed in service during tax years beginning in 2012.

• Bonus Depreciation: Property not qualifying for an immediate tax write-off under the expensing election may qualify for an increased first-year depreciation deduction under bonus depreciation rules. This deduction is equal to 50% of the cost of qualifying property purchased and placed in service by Dec. 31, 2012.

Unlike the Section 179 deduction, bonus depreciation is not limited in amount or by an investment limitation, and it can create a current-year net operating loss.

• Changes to Repair Regulations: Comprehensive repair and capitalization regulations issued by the IRS late in 2011 may open up planning opportunities.

A new de minimis expensing rule allows a business to deduct certain amounts paid or incurred to acquire or produce a unit of tangible property if the company has an allowable policy. There is an overall ceiling limiting the total expenses a company may deduct under the de minimis rule. Accounting policies and existing depreciation schedules should be reviewed to determine whether changes in accounting methods should be filed and adjustments taken. In many cases, the change will result in accelerated expensing.

• Corporate Dividends: Traditional C corporations face double taxation on distributed earnings. Profits are taxed at the corporate level, and dividends paid out to shareholders are again subject to tax at the individual level. With the maximum 15% tax rate for qualified dividends during 2012 rising to 43.4% for 2013, this may be the year to consider paying out accumulated earnings that the corporation is not otherwise using.

• Health Insurance Tax Credit: A tax credit is available for an eligible small employer to purchase health insurance for employees. To qualify as an eligible small employer, the company must:

— Pay for at least 50% of the premium cost for employees;

— Generally have no more than 25 full-time equivalent employees employed during the year; and

— Pay its full-time equivalent employees annual wages averaging no more than $50,000.


Individual Tax-planning Strategies

• Planning for the New Healthcare Taxes: Effective Jan.1, a 0.9% hospital insurance (HI) tax applies to wages and self-employment income, while a 3.8% Medicare contribution (UIMC) tax applies to investment income. Neither tax becomes applicable until income exceeds the established threshold noted in the table below.

The HI tax may be managed through withholding for employees, but in certain circumstances, such as for dual-income households or in years of employer transitions, withholding may not fully cover the wages subject to the HI tax.

For the purposes of the UIMC tax, net investment income has been defined to include dividends, rents, interest, passive-activity income, capital gains, annuities, and royalties. Specifically excluded from the definition are self-employment income, income from an active trade or business, gain on the sale of an active interest in a partnership or S corporation, IRA or qualified plan distributions, and income from charitable remainder trusts.

For individuals, the amount subject to the UIMC tax is the lesser of your net investment income, or the excess of your modified adjusted gross income, which is generally your adjusted gross income with certain foreign earned-income adjustments, over the applicable threshold amount.

For both taxes, the applicable thresholds are as follows:

Keep in mind that the UIMC tax applies if you have net investment income and your modified adjusted gross income is above the threshold. The impact of the tax may be minimized through shrewd management of your net investment income, proximity to the thresholds, or both.


Year-End Tax Planning Strategies

Bearing in mind the new Medicare taxes and the scheduled changes in tax rates, traditional year-end tax planning techniques may need to be reversed to take advantage of the known lower rates of 2012.

• Shifting Taxable Income Between Years: When you’re expecting stable rates in the future, the traditional year-end strategies are largely focused on deferring income and accelerating deductions. But with the rates set to rise for most taxpayers, the better tax answer may come from an opposite approach.

Income accelerated into 2012 could potentially result in a significantly lower rate than the same income recognized during 2013. Because rates remain relatively uncertain, now may not be the time to accelerate income. But having a plan in place should the rates hold will allow taxpayers to act deliberately as the rates become more certain.

• Managing the AMT: When undertaking tax planning, both regular and AMT tax liabilities need to be evaluated. At times, certain deductions may need to be shifted between years to manage the alternative minimum tax.

• Paying Estimated State Income Taxes: The payment timing of the fourth-quarter estimated state-tax payment, generally due Jan. 15, 2013, has some flexibility. It may be paid before year end for a current-year federal itemized deduction. The alternative minimum tax should be considered before employing this tax-planning tool because state income taxes are not deductible for AMT purposes.

• Fulfilling Charitable Goals: An alternative to cash donations is the contribution of appreciated assets. When contributing assets, you can deduct the fair market value of certain property and avoid paying taxes on the appreciation. However, if you would like to donate securities that have declined in value, you will likely want to sell them first to realize the loss and then gift the proceeds to your organization of choice. In some circumstances, particularly when there is expiring capital loss, a direct donation may not be the most effective tax-planning tool.

• Funding Retirement Plans: For retirement contributions to qualify for a deduction in 2012, contributions must be in place usually before the end of the year. The exceptions to the rule are IRAs and SEP (simplified employee pension) plans. An IRA can be created and funded by April 15, 2013, and a SEP by the extended due date of your tax return.

• Converting to a Roth IRA: Roth IRAs have long-term advantages over traditional IRAs because money grows and can be distributed tax-free. Some taxpayers find that the benefits of tax-free withdrawals in the future are in line to be greater than the tax cost on conversion.

Converting before-tax earning plans — 401(k)s, traditional IRAs, etc. — to the after-tax Roth IRA creates taxable income in the year of conversion. The upfront tax cost does not make conversion the right answer for every taxpayer, but for taxpayers with certain circumstances, conversion can be an extremely powerful tool.

• Paying with Credit Cards: As a reminder, paying tax-deductible expenditures, including charitable contributions, with a credit card secures the deduction in the current year, even if you do not actually pay the credit-card company until the following year.

• Deducting Losses from Pass-through Entities: If you are expecting a 2012 loss from a partnership, LLC, or S corporation, ensuring that you have sufficient tax basis will help to secure your ability to deduct the loss. You may be able to increase your tax basis prior to year end, but given the rates for 2013 as enacted, you might want to purposely avoid doing so until 2013 to push the loss into the higher rates of 2013.


Capital Gains and Losses

You should consider a few basic rules when planning for capital gain or loss transactions:

• Gains and losses from securities sales generally are recognized on the trade date as opposed to the settlement date. So a December trade will be a 2012 transaction, even if the settlement date is in the following year;

• Sales at a loss reduce other capital gains, and a net capital loss in excess of capital gains of up to $3,000 is available to be used to offset other income, with excess losses being carried forward to future years; and

• Before you sell an asset to recognize a gain, check your holding period. Capital assets held for over a year are eligible for a significantly lower tax rate than those held less than a year.


Estate- and Gift-tax Planning

Absent congressional action, the $5.12 million estate and gift-tax exemptions and current top tax rate of 35% will revert to a $1 million exemption with a top tax rate of 55% beginning Jan. 1, 2013. Moreover, the estate-tax exemption will no longer be portable between spouses.

Because of the reversion to a lower exemption and a higher tax rate, what could be a once-in-a-lifetime opportunity exists to transfer significant assets to the younger generation without incurring any estate and gift tax. Also note that:

• The annual gift tax exclusion for 2012 remains at $13,000. It is expected to rise to $14,000 for 2013;

• If you are married, you can avoid federal gift-tax ramifications by gifting up to $26,000 per donee, or recipient, in 2012 under the gift-splitting rules. Annual gifting is a relatively simple method to reduce your taxable estate; and

• Along with the high gift-tax exemption, the generation-skipping transfer-tax exemption is also $5.12 million during 2012. So, the door is open to bypass children and transfer significant wealth to future generations.

Developing an overall tax strategy under ambiguous circumstances can feel daunting. But the deliberate, informed implementation of a plan for what is known now can also protect against what remains to be seen — as what is unknown becomes known.


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

Accounting and Tax Planning Sections
There Are a Host of Vanishing Tax Provisions for Small Businesses

Jana Bacon

Jana Bacon

It has been difficult to miss all the hoopla over vanishing tax provisions. This article addresses the more common provisions affecting small businesses, including the fixed-asset expensing provisions, bonus depreciation, depreciation of specialized real-estate assets, the research credit, the new-markets tax credit, and the Work Opportunity Tax Credit (WOTC).

Section 179 and Bonus Depreciation

Since 1997, Internal Revenue Code Section 179 has allowed for the deduction of certain qualified expenditures that normally would be required to be capitalized and depreciated. Section 179 property is defined generally as tangible personal property acquired and placed in service in connection with the active conduct of a trade or business. Over the years, the maximum allowable deduction amount has varied.

For 2011, the maximum allowable deduction was $500,000 and was reduced dollar-for-dollar as qualified expenditures exceeded $2 million. For 2012, the maximum allowable deduction is $139,000 with reduction as expenditures exceed $560,000. For 2013, the maximum amount is currently scheduled to decrease to $25,000 with the phase-out beginning at $200,000.

Bonus depreciation is another tax benefit scheduled to disappear after this year. In 2011, 100% first-year bonus depreciation applied to qualified tangible personal property additions with no limit. In 2012, that was reduced to 50% first-year bonus depreciation.

Although there has been considerable discussion about the fate of these provisions — because we have no idea whether they will be reinstated by Congress or, if so, at what levels — businesses may wish to take advantage of the higher Section 179 amount and/or bonus depreciation for this year by acquiring and placing in service qualified tangible personal property purchases prior to Dec. 31, 2012.


Cost Recovery for Specified

Real Property

Qualified leasehold improvements and qualified restaurant property placed in service between Oct. 22, 2004 and Dec. 31, 2011, and qualified retail-improvement property placed in service between Jan. 1, 2009 and Dec. 31, 2011, were subject to straight-line depreciation over a 15-year period. For such property placed in service after 2011, however, straight-line depreciation over a 39-year period is required.

Also, because these assets were previously considered 15-year property, they had qualified for Section 179 expensing and bonus depreciation. Effective Jan. 1, 2012, they no longer qualify for either.


Research and Experimentation Credit

The tax credit for research and experimentation expenses (R&E credit) was originally enacted in 1981, and applied to amounts paid or incurred on or before Dec. 31, 1985. The credit had been extended 14 times since then but expired on Dec. 31, 2011. The R&E credit had been allowed to expire only once before from July 1, 1995 through June 30, 1996. The traditional R&E credit provision had allowed a taxpayer to claim a credit equal to 20% of the amount by which the taxpayer’s qualified research expenditures exceeded a base amount.

The base amount reflects past research expenditures that were incurred over a fixed period of time, so the credit was really a credit on incremental increases in research costs. The credit was generally available on both in-house and contract research costs. Also available was an alternative simplified credit, which was only partially incremental and utilized a rolling three-year base period and a 14% credit rate.


New Markets Tax Credit

Originally enacted in 2000 for investments made after Dec. 31, 2000, the new markets tax credit provided a credit on qualified investments to promote economic and community development in low-income communities. The credit was taken over a seven-year period and totaled 39% of qualified equity investments made in a qualified community-development entity (CDE).

CDEs were required to invest in qualified low-income community business, and applications were required by CDEs to obtain an allocation of a portion of the credit authorized for the year. The last amount authorized was $3.5 billion for 2011.


Work Opportunity Tax Credit

Enacted in 1997, the work opportunity tax credit (WOTC) provided a credit to employers on wages paid to eligible employees who began work for the employer before Jan. 1, 2012. The amount of the credit ranged from $2,400 to $9,000 per each eligible employee, depending upon the type of eligible employee. Eligible employees included qualified members of families receiving assistance under the Temporary Assistance for Needy Families (TANF) program, qualified veterans, qualified ex-felons, designated community residents, vocational rehabilitation referrals, qualified summer youth employees, qualified members of families in the Supplemental Nutritional Assistance Program (SNAP), qualified Supplemental Security Income recipients, or long-term family-assistance recipients.

To qualify for the credit, the employee had to complete at least 120 hours of service for the employer. The credit has been extended for wages paid through Dec. 31, 2012 only for qualified veterans.

The uncertainty of whether Congress will reinstate or extend these tax benefits makes planning extremely difficult.  Pay close attention after this year’s elections to see if any new or extending tax legislation is enacted that may affect your business.

Please note that this article contains only a general discussion, so you should consult your tax advisor for additional information or assistance.


Jana Bacon is a member of the firm at Wolf & Company, P.C. and focuses on tax compliance and planning services; (413) 747-9042.

Accounting and Tax Planning Sections
And with It Come Questions and Uncertainty for Taxpayers

Nicholas LaPier, CPA

Nicholas LaPier, CPA

On Jan. 1, the country may find itself falling back into recession, personal income taxes will go up, federal government spending will be cut, and unemployment most surely will rise. The good news, however, is that the federal deficit will undoubtedly be somewhat reduced.

This fiscal cliff, as it’s called, refers to a frenzy of fiscal changes that, collectively, have a far-ranging impact on all taxpayers and the economy. These changes in law are a result of a dizzying variety of tax laws enacted, altered, modified, or extended during the past 10 to 12 years. Congress’s failure to agree on its own budget cuts last summer forced the automatic spending sequestration of approximately $1.2 trillion in non-discriminatory spending cuts, across all line items, to be made over the next decade.

The Congressional Budget Office (CBO), a non-partisan arm of the U.S. Congress, estimates that the federal government could collect more than $200 billion more in personal income taxes in 2013 as a result of the changes in the personal income-tax laws. In addition, the CBO estimates that the expiration of the currently popular payroll tax cut of 2% on Social Security taxes will generate another $90 billion in revenue.

Obviously these gains are desperately needed to help balance the books of the U.S. government. However, they, in conjunction with the automatic spending sequestration, which is estimated to save the government $109 billion in 2013, will still fall well short of balancing the budget.

Other fiscal changes include the return of the 55% estate-tax rate. This item is actually a popular topic of discussion among most legislators, and has better curb appeal in getting reversed. However, the discontinuance of federally extended unemployment benefits is a hot potato, and their expiration could have a more serious impact on the U.S. economy, which relies heavily on consumer spending.

Other than a possible recession, the biggest impact of the fiscal cliff would be felt by individual taxpayers as the infamous Bush tax cuts are all reverted back to levels not seen since 2000. Gone would be the 10% income-tax rate and the imposition of a maximum 39.6% personal income-tax bracket. Also set to expire is the maximum 15% tax rate on long-term capital gains and qualified dividends.

In 2013, long-term capital-gains tax could be as high as 20%, and qualified dividends would be taxed at an individual’s ordinary tax rate, which could be as high as 39.6%. Both of these items, otherwise known as unearned income, would also be subject to an additional 3.8% surtax for taxpayers with adjusted gross income over certain levels.

The alternative minimum tax (AMT) will come into play for another 30 million taxpayers. The AMT is an archaic part of the tax code, first enacted in 1969 to increase the effective tax paid by taxpayers who, for a variety of reasons, were not paying any personal income taxes. The AMT basically increases the effective tax you pay by disallowing certain deductions that are allowed under the regular tax code.

Ironically, ever since the Bush tax cuts, more people became subject to the AMT because the built-in minimum tax rates of 24-26% had essentially wiped out the 10% and 15% tax brackets for higher earners. The CBO estimates that, even with the increase in the regular tax rates, the reduction in AMT income thresholds will still increase overall personal tax revenues. Taxpayers who reside in states where they pay higher real-estate taxes and a state income tax tend to be the victims of the AMT.

For residents in Massachusetts or Connecticut, it is very probable that an average married couple whose combined income is more than $100,000 will have the AMT.

Another area of concern is on the new 3.8% Medicare tax surtax that will be payable on unearned income, mostly by taxpayers in higher tax brackets (for example: a married couple with combined income of more than $250,000). This new tax could cause many people to shift their taxable investments, which may have an impact on financial markets.

With the expiration of the 2% Social Security tax cut, which was first enacted in 2011 and extended into 2012, an employee or self-employed individual should expect to pay up to an additional $2,202 more in Social Security tax in 2013.

So what does all this really mean? The fiscal cliff is getting nearer as Dec. 31 approaches, and without congressional action, the economy could very well give back the gains it recently made after the last recession from December 2007 to June 2009. Many experts suggest that, even though the country is not in a recession, the Jan. 1 fiscal changes will have a negative effect on the economy.

Government spending cuts will increase unemployment, higher income taxes will decrease consumer spending, and small-business owners may cut or curtail hiring. Meanwhile, investors may start shifting their portfolios to avoid the higher taxes on unearned income like capital gains and dividends. Basic uncertainty over fiscal policy and taxation is enough to make citizens pause and maintain the status quo; that alone will stymie an already semi-stagnant economy.

As a professional tax practitioner, I have learned to plan based on the tax code currently in effect. That code is complex and ever-changing. Changes in tax rates are a large part of careful tax planning, so making rash decisions or no decisions at all could increase your total tax burden.

We last saw major tax law changes at the end of 2010, but 11th-hour politics prevailed, and some tax relief was had as we headed into 2011. All taxpayers should stay abreast of the tax law changes, now and in the future, through self-awareness and professional support. Cautious optimism is my rule of thumb; the tax code is always in flux, and only over the long haul will proper tax planning really be effective, cliff or no cliff.


Nicholas LaPier, CPA, is the principal at Nicholas LaPier CPA P.C. in West Springfield; (413) 732-0200; www.lapiercpa.com

Accounting and Tax Planning Sections
What Is the Alternative Minimum Tax, and Who Will Be Paying It?

Sean Wandrei

Sean Wandrei

Created in 1969, the alternative minimum tax, or AMT, was the result of a public outcry to congress that the rich and wealthy were not paying their fair share of taxes. Based on testimony by the secretary of the Treasurer, 155 individuals with an adjusted gross income above $200,000 didn’t pay any tax on their 1967 income-tax returns.
Accordingly, the AMT was designed as a safeguard to keep those individuals from slipping through tax loopholes. The AMT is a tax system that is calculated in parallel with an individual or corporation’s ‘regular’ tax. The higher of the two tax calculations is the one that must be paid. We will focus on AMT as it applies to the individual.

How the AMT Is Calculated
To calculate the AMT, all ‘preference’ items are added back to regular taxable income to arrive at AMT income. Then an AMT exemption is deducted from the AMT income to determine the AMT taxable income.
Preference items include state and local income taxes, sales and property taxes, accelerated depreciation, deductible medical expenses, miscellaneous itemized deductions, certain tax-exempt income, certain credits, incentive stock options, personal exemptions, and the standard deduction. These preference add-backs are items that many families who own their homes in high-income-tax states use as deductions on their regular income-tax return.
Why You May Have to Pay It
Based on the above information, there are certain taxpayers who are more likely to pay the AMT.
Large families fall into the AMT because they must add back all of their exemptions for AMT purposes. A family with a filing status of married filing jointly with four children, for example, get six personal exemptions for regular tax purposes. These six exemptions must be added back to calculate the AMT.
State and local taxes paid are also taken into consideration when determining whether the taxpayer is subject to the AMT. State and local income taxes paid are a deduction for regular tax and must be added back to calculate the AMT. The add-back includes not only state income tax, but also property taxes and excise taxes paid. From 2004 through 2007, residents of California, Connecticut, the District of Columbia, Maryland, Massachusetts, New Jersey, and New York paid the most ATM. These are all high-income-tax states.

What Does This Mean to You?
As it stands now, the exemption for 2011, for a married couple, is $74,450 (other filing statuses have different exemption amounts). The exemption is scheduled to revert back to the 2000 exemption amount of $45,000 for a married couple in 2012. That is 40% less than what it was. If this happens, then the amount of income that can be shielded from the AMT will be less, and more people will be pulled into the AMT. That would amount to an estimated 25 million additional taxpayers paying AMT.
The good news (if there is such a thing with taxes) is that Congress usually extends the increased AMT exemption amount. Congress tends to postpone dealing with difficult issues until it has to. So we may not know until the end of 2012 if there is going to be a patch that spares the additional 25 million taxpayers from the AMT in 2012.

How Can You Avoid the AMT?
It is difficult to plan to avoid the AMT because the regular and AMT tax systems run parallel with each other, leaving you to pay the greater of the two.  Sometimes reducing one tax could increase the other tax. The best advice would be to look at your overall tax picture and start from there. You will need to know what items could cause you to be caught in the AMT and the relationship between your regular tax and the AMT. From there, you can implement a strategy that is right for you. You should review your plan if anything changes in your life or with the tax law.
One item that a taxpayer can control based on timing is the payment of estimated state income-tax payments and real-estate taxes. Since taxes paid are preference items and are added back to calculate the AMT, it may not be best to prepay those taxes prior to the end of a particular year. If you are subject to the AMT in that year, you won’t receive a tax benefit from paying early (say, in December). However, if you wait until after year end, you may have the opportunity to deduct your tax payment in the following year.
On the opposite side, if in one year you have a significant item of income resulting in a large state tax amount due with your return the following April, you will likely be subject to AMT in the year of payment since the tax will be disproportionately large compared to your income. Therefore, prepaying may be advised. Again, planning and understanding your own situation are key to determining what the best course of action is.
As always, it is best to plan and then plan some more to help reduce your overall tax bill. Calling your tax professional is a good way to start, and avoid paying more taxes than you should.

Sean Wandrei is a tax manager with Meyers Brothers Kalicka, P.C. His technical concentrations are in multistate taxation as well as real-estate entities; (413) 536-8510.

Accounting and Tax Planning Sections
Or, a Primer on How to Make Friends with Your Auditor

Donna Roundy, CPA

Donna Roundy, CPA

Summer has passed, and it’s time to focus on the balance of the year, which includes preparing your fiscal records for your accountant. Generally, the focus at year end is tax-motivated — keeping your money in your pocket rather than Uncle Sam’s. Another focus for many, however, is getting information together for their auditor.
While preparing for an audit can seem arduous, there are many benefits of having an audit. An auditor can help you analyze and better understand your company’s financials and show you where improvements within your company can be made. An audit assesses any risks to your company, as well as the efficiency and quality of your company’s processes. One of the most important benefits of an audit could be the realization of fraud and illegal activities taking place within your company.
Recognizing and optimizing the benefits of an audit can help your company become more efficient and more profitable. This article will describe the steps involved in preparing for an audit, and how to optimize the value of an audit for your company.
Many organizations must prepare for a year-end audit at the end of each fiscal year. Whether your business is public, private, or nonprofit, you may be required to have an audit performed on your company. This requirement can be government-required (such as for nonprofit organizations). It can also come from a variety of other groups, such as investors, financial institutions, or a board of directors.
‘Audit’ is not a word many business owners want to hear, but with preparation and focus, an audit can go smoothly and prove to be a valuable exercise.
The best time to start preparing for the audit is right after the auditors leave at the beginning of the year. A significant focus of an audit is on internal controls and the organization’s policies and procedures. Sometimes your auditor may, either verbally or in writing, make suggestions to better segregate duties or create a step of review. Discuss with your fiscal director how best to implement those suggestions.
Due to these changes and possibly due to changing staff levels, the flow of information in your company may change subtly in ways that will require your policies and procedures manual to be updated. Providing your auditor with updated procedures is important because he or she needs to assess risk and ascertain that things are actually happening as intended.
Soon after Jan. 1, begin to close your books for the current fiscal year. Transactions should be posted to the year in which it occurred, including receivables and sales, inventory purchases, cost of goods sold, and operating costs. You also must reconcile all sub-ledgers to make sure they are accurate with your trial balance. Performing reconciliations for all balance-sheet accounts to accurately prepared schedules and third-party statements (bank statements, loan and vendor statements) is a large part of preparing your books for year end.
If you are finding that significant adjustments are necessary at this time, look back to the monthly closing process and see where procedures need to change. A monthly close is a mini-year end, and reconciliations should be performed in a timely manner. If this isn’t happening, the reports being used are inaccurate, and decisions are being made based on wrong information.
Normally your auditors will provide you with a list of the items they need for the audit. Gathering together the entirety of this list and having it in one place for the auditors the first day they walk in has a few benefits. Saving your auditor time from having to ask for things they’ve already asked for makes him or her more efficient, which can mean a lower fee. The auditor will need your time and attention during the audit, so it’s less stressful for you if you don’t also have on your agenda to pull together items they need throughout the day. More preparation can make the audit process easier for you and your company.
Auditors will be looking for a variety of information before they begin the audit. This information will include company bylaws, corporate charters, state registrations, formal policies, a procedure manual, and loan and lease agreements. Annually you must provide to your auditors any new loan or lease agreements and minutes from shareholders or board of directors meetings through the date of your audit. Any information explaining events during the fiscal year that could potentially have an impact on the financial statements must also be provided to your auditor.
Inform your employees when the audit will begin and how long the audit will last. Indentify which employees will be working with the auditors side-by-side on a day-to-day basis. You must make sure that these employees have an open schedule during the audit period. There also must be a workspace prepared for the auditors based on their needs.
Your responsibilities during the audit process are just as important as the steps taken leading up to the audit. Be prepared to explain your procedures for any of the following processes: payroll, cash receipts, accounts receivables/sales, computer systems and software, and how you identify and implement controls to minimize fraud risks. Set aside time during the audit to ask questions of the auditor or to answer any questions the auditor may have.
An audit of cash can provide a business with validity and accuracy of the cash flow within the company, as well as provide a better understanding of where errors may occur and tests to make sure they are not occurring.
Accounts receivables is frequently the largest asset a company can have. An auditor looks at all levels of accounts receivable to help you better understand the risks that could occur and the red flags to look for to prevent these risks.
Inventory audits are designed to keep track of a company’s products and merchandise. This procedure often leads to the influencing of future policies and decision-making within companies.
For your income and expenses, the auditor will typically prepare an expectation of what your income and expense balances should be. This will be based on your organization and your discussions with the auditor. Be prepared to explain fluctuations for accounts that may fall outside of these expectations. Audits performed on income and expenses are some of the most necessary of all.
Income or revenue is required to be recorded for tax purposes. If not properly kept track of, your tax return could be misleading causing larger problems in the long run. An audit of expenses ensures that internal controls are being followed, the reasonableness of your expense costs, and timeliness of the invoice to ensure reliability of the expense. Expense audits also ensure that vendors are real businesses and exist, as well as the accuracy of all contracts, invoices, and signatures.
An audit should be a positive and productive experience. When your staff and the auditors work together, you will save money, the audit will be completed efficiently, and the transaction or requirement that created the need for the audit can be fulfilled. You and your staff will also be in a greater position to understand the financial, data-system, and workflow-process needs of your firm, which will enable you to better plan for future challenges and capitalize on future opportunities.

Donna Roundy is a senior audit manager with the Holyoke-based certified public accounting firm Meyers Brothers Kalicka, P.C.; (413) 536-8510.

Accounting and Tax Planning Sections
Understand the Many Ways It Can Impact Your Bottom Line

Bruce Fogel

Bruce Fogel

Everybody knows that the government is out of money and needs to raise cash. However, do you understand the financial impact that the 2010 health care legislation will have on your family?
This isn’t just about everybody being required to carry health insurance. It is much more. The government is using this legislation as a revenue builder, and you will be paying the bill. So what will your cost be?

Individual Mandate
The new federal law requires that non-exempt individuals must maintain qualifying health-insurance coverage for themselves and their dependents or face a tax penalty after 2013. Similar to Massachusetts law, those without qualifying health coverage will be required to pay a tax penalty. The federal penalty will be the greater of: (a) $695 per year, up to a maximum of three times that amount, or $2,085, per family, or (b) 2.5% of household income over the threshold amount of income required for income-tax-return filing.
The penalty will be phased in according to the following schedule: $95 in 2014, $325 in 2015, and $695 in 2016 for the flat fee; or 1.0% of taxable income in 2014, 2.0% of taxable income in 2015, and 2.5% of taxable income in 2016. Beginning after 2016, the penalty will be increased annually by a cost-of-living adjustment.
Exemptions will be available for a variety of reasons, including but not limited to, financial hardship,  those without coverage for less than three months, illegal aliens, prisoners, those for whom the lowest cost plan option exceeds 8% of household income, and those with incomes below the tax-filing threshold (in 2011 the threshold for taxpayers under age 65 is $9,500 for singles and $19,000 for couples).

Premium Assistance Tax Credits for Purchasing Health Insurance
A refundable tax credit is available to certain individuals who are not eligible for Medicaid, employer-subsidized health insurance, or other acceptable health coverage, and who get health insurance by enrolling in a qualified health plan through a state-run insurance exchange for tax years after 2013. While the credit generally will be payable directly to the insurer, individuals can elect to purchase health insurance out of pocket and then claim the credit on their Form 1040.
Based on the information provided to the exchange, the individual receives a premium-assistance credit based on income, and IRS pays the premium-assistance credit amount directly to the insurance plan in which the individual is enrolled. The individual then pays to the plan in which he or she is enrolled the dollar difference between the premium-assistance credit amount and the total premium charged for the plan. For employed individuals who purchase health insurance through an exchange, the premium payments are made through payroll deductions.
The premium-assistance credit will be available for individuals and families with incomes up to 400% of the federal poverty level ($43,320 for an individual or $88,200 for a family of four, using 2009 poverty level figures) who are not eligible for Medicaid, employer-sponsored insurance, or other acceptable coverage.

Higher Medicare Taxes on
High-income Taxpayers
High-income taxpayers will be subject to a tax increase on wages and a new levy on investments as well.

Higher Medicare Payroll Tax on Wages
Under current law, wages are subject to a 2.9% Medicare payroll tax with employees and employers paying 1.45% each. Self-employed people pay both halves of the tax, but are allowed to deduct half of this amount for income-tax purposes. While the payroll tax for Social Security applies to earnings up to an annual ceiling ($106,800 for 2011 and increasing to $110,100 for 2012), the Medicare tax is levied on all earnings without limit.
Under the provisions of the new law, which goes into effect in 2013, most taxpayers will continue to pay the 1.45% Medicare hospital-insurance tax, but single people earning more than $200,000, and married couples earning more than $250,000, will be required to pay an additional 0.9% (2.35% in total) on the excess over those base amounts. Self-employed individuals will pay 3.8% on earnings over the threshold.

Medicare Payroll Tax Extended to Investments
As part of the revenue-generation aspect of the new laws, beginning in 2013, a Medicare tax will, for the first time, be applied to net investment income. A new 3.8% tax will be imposed on such income of single taxpayers with adjusted gross income above $200,000, and joint filers over $250,000. Net investment income includes interest, dividends, royalties, rents, gross income from a trade or business involving passive activities, and net gain from disposition of property (other than most property held in a trade or business) reduced by properly allocable deductions to such income.
The new tax is intended to apply only to income in excess of the $200,000/$250,000 thresholds. For example, if a couple earns $200,000 in wages and $100,000 in capital gains, $50,000 will be subject to the new tax ($300,000 minus $250,000).
Additionally, while not directly applicable to individuals, this new tax is also applicable to estates and trusts. In such situations, the tax is 3.8% of the lesser of (a) undistributed net investment income, or (b) the excess of AGI over the dollar amount at which the highest estate- and income-tax bracket begins.

Threshold for Medical-expenses Deduction Raised
Under current law, taxpayers can include in their itemized deductions unreimbursed medical expenses for regular income-tax purposes (not AMT) only to the extent that those expenses exceed 7.5% of the taxpayer’s AGI.
As noted, the new law raises the threshold for itemized medical expense deductions from 7.5% of AGI to 10%, effective for tax years beginning after Dec. 31, 2012. However, it should be noted that the threshold for individuals age 65 and older (and their spouses) will remain unchanged at 7.5% through 2016.

Reimbursement Limited for Some OTC Medications
Qualified medical expenses, which are expenses that can be reimbursed tax-free through a health reimbursement account (HRA), health flexible savings account (FSA), health savings account (HAS), or Archer Medical Savings Account (MSA), no longer include over-the-counter medicines (except for insulin, which continues to qualify), unless prescribed by a doctor, effective for tax years beginning after Dec. 31, 2010.

Increased Penalties on Non-qualified Distributions
from HSAs and Archer MSAs
The penalty tax on distributions from a health savings account or an Archer MSA that are not used for qualified medical expenses has been increased to 20% (from 10% for HSAs and from 15% for Archer MSAs) of the disbursed amount, effective for distributions made after Dec. 31, 2010.

FSAs Limited to $2,500
An FSA is one of a number of tax-advantaged financial accounts that can be set up through a cafeteria plan of an employer. It allows an employee to set aside a portion of his or her earnings to pay for qualified expenses as established in the cafeteria plan, most commonly for medical expenses, but often for dependent care or other expenses. Under current law, there is no limit on the amount of contributions to an FSA. Under the new law, however, allowable contributions to health FSAs will be capped at $2,500 per year, effective for tax years beginning after Dec. 31, 2012. The dollar amount will be indexed for inflation after 2013.

Dependent Coverage in Employer Health Plans
Effective as of March 30, 2010, the new law extended the general exclusion for reimbursements for medical-care expenses under an employer-provided accident or health plan to any child of an employee who has not attained age 27 (whether they qualify as a dependent or not) as of the end of the tax year.
This change is also intended to apply to the exclusion for employer-provided coverage under an accident or health plan for injuries or sickness for such a child. A parallel change is made for voluntary employee benefit associations (VEBAs) and 401(h) accounts. Also, self-employed individuals are permitted to take a deduction for the health insurance costs of any child of the taxpayer who has not attained age 27 as of the end of the tax year.

Excise Tax on Tanning Services
The new law imposes a 10% excise tax on indoor tanning services. The tax, which will be paid by the individual on whom the tanning services are performed, but collected and remitted by the person receiving payment for the tanning services, will take effect July 1, 2010.

Liberalized Adoption-credit and Adoption-assistance Rules
For tax years beginning after Dec. 31, 2009, the adoption tax credit is increased by $1,000, made refundable, and extended through 2011. The employer-provided adoption-assistance exclusion is also increased by $1,000.

Bottom Line
These are some of the highlights of the 55-page health care legislation that was signed into law by President Obama on March 30, 2010. It affects every American citizen to varying financial degrees and phases, in different aspects, at various timeframes. If you have questions about how it will affect your family, it would be wise to consult with your tax advisor.

Bruce M. Fogel, Esq. is a partner with Bacon Wilson, P.C. in Northampton. He is a member of the firm’s estate-planning, elder, real-estate, and business departments. He has extensive experience in matters relating to income, gift, and estate taxes, and he focuses on the tax implications of all legal transactions. He also co-hosts the “Taxes and Assets” radio show on WHMP-AM; (413) 584-1287;
[email protected]

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