Tax Lawyer Blog

A Blog written by the Tax Attorneys for Individuals and Businesses

Year-End Tax Planning: Businesses and Business Owners

Dear Subscriber:

This Practice Alert highlights the opportunities and challenges that affect year-end planning for 2016 and includes a checklist of actions that can cut taxes in this year and the years to come.

Take a look and give us a call. We look forward to lowering your tax burden and helping you financially succeed.

Happy Tax Planning,

Steve Moskowitz, Esq.
Founding Partner
Moskowitz LLP, A Tax Law Firm

Strategies for Businesses and Business Owners

Businesses should consider making expenditures that qualify for the business property expensing option. For tax years beginning in 2016, the expensing limit is $500,000 and the investment ceiling limit is $2,010,000. Expensing is generally available for most depreciable property (other than buildings), off-the-shelf computer software, 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 purchases before the end of 2016 will be able to currently deduct all of 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. This opens up significant year-end planning opportunities.

Businesses also should consider making expenditures that qualify for 50% bonus first year depreciation, if bought and placed in service this 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 full 50% first-year bonus write-off is available even if qualifying assets are in service for only a few days in 2016.

  • 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, assuming the costs don't have to be capitalized under the Code Sec. 263A uniform capitalization (UNICAP) rules. To qualify for the election, the cost of a unit of property can't exceed $5,000 if the taxpayer has an applicable financial statement (AFS; e.g., a certified audited financial statement along with an independent CPA's report). If there's no AFS, the cost of a unit of property can't exceed $2,500. Where the UNICAP rules aren't an issue, purchase such qualifying items before the end of 2016.
  • A corporation should consider accelerating income from 2017 to 2016, if it will be in a higher bracket next year. Conversely, it should consider deferring income until 2017, if it will be in a higher bracket this 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 2016. (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 a 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 (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 for 2016. This will permit the corporation to base its 2017 estimated tax installments on the relatively small amount of income shown on its 2016 return, rather than having to pay estimated taxes based on 100% of its much larger 2017 taxable income.
  • If your business qualifies for the domestic production activities deduction (DPAD) for its 2016 tax year, consider whether the 50%-of-W-2 wages limitation on that deduction applies. If it does, consider ways to increase 2016 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 2016, even if the business has a fiscal year.
  • To reduce 2016 taxable income, consider deferring a debt-cancellation event until 2017.
  • To reduce 2016 taxable income, consider disposing of a passive activity in 2016, if doing so will allow you to deduct suspended passive activity losses.
  • If you own an interest in a partnership or S corporation, consider whether you need to increase your basis in the entity so you can deduct a loss from it for this year.

These are just some of the very many year-end steps that can be taken to save taxes. By contacting Moskowitz LLP, we can tailor an individualized plan that will work best for you.

Client Bulletin, April 17 2014

Client Bulletin
April 2014

What’s Inside

Post-April 15 Tax Time

April 15th is a great equalizer because I don't know anyone who enjoys paying taxes. Looking back on the close of this tax season, we prepared hundreds of tax returns during the first part of 2014 and had the opportunity to check in and meet with many clients, some of whom we have served for decades.

Tax is no longer a seasonal business. Large tax bills, tax audits, and tax investigations are a year around reality. Further, we are more cognizant than ever of the effect that tax has on every day business as the tax code continues to increase in size and complexity. Since we are in the profession of minimizing taxes, we have been following the Congressional investigation and review of offshore strategies with quite some interest. The Fortune 500, Microsoft, General Electric, and Big Pharma have taken advantage of the tax code for decades and we encourage smaller businesses to utilize the same benefits, such as offshore entities.

In the next few months, Moskowitz LLP will be providing tax seminars on a variety of topics including utilizing various entities to minimize taxes, captive insurance for smaller businesses, and the tax benefits of real estate investing. Basically, we want to educate individuals and businesses in using tax compliant strategies. In that way, a discerning investor, guided by a properly qualified U.S. and international tax attorney, can achieve tax free income and asset growth, while also protecting assets and avoiding needless tax traps through the utilization of tax treaties between the U.S. and other countries. We will keep you apprised of our efforts. Until then, don't hesitate to reach out to me personally, or our law firm, for all of your tax and legal needs.

Best Wishes,
Stephen M. Moskowitz
Founding Partner

Offshore Bank Account & Asset Alert

Another 106 Banks will be turning over customer information to the United States Department of Justice (DOJ). What does this mean for those with Offshore Bank Accounts and Assets?

The United States has succeeded in obtaining huge fines from UBS (780 million dollars), put Weglin out of business, and induced fear in banking and investment firms worldwide as it continues its offshore bank account asset inquest to quash the evasion of its tax laws and loss of revenues. By offering foreign banks amnesty from criminal and civil tax prosecution and fines, the Department of Justice has secured the turnover of the names and information of additional American citizens, green-card individuals, and entities. Over 106 banks have joined the initiative as of December 31, 2013.

What does this mean to foreign account holders:

  • Those who are in compliance with reporting requirements: While invasive to individual privacy, the turning over of your name and data won't affect you. However, it will give the Internal Revenue Service additional means to match data and be sure that all information was properly reported. Thus, we expect an increase in audits related to reported informational returns and the corresponding entries on tax returns (such as, interest income, passive losses, PFIC calculations, etc.)
  • Those who have not reported their foreign bank accounts and assets on FBARs, Form 5471, Form 3520, and Form 8938: It is important for individuals to realize that every bank in the program, or pursued by the U.S. Department of Justice, will provide detailed information about their practices and transactions –including local Banks, Banks around the world, or private banks. Thus, similar to the account holders whose names were turned over by UBS or HSBC (where those making voluntary disclosures after the turnover of information were denied relief because the government’s position was that it was too late if the DOJ had information before the account holder attempted to enter voluntary disclosure) will not be eligible to avail themselves to Offshore Amnesty Initiative Programs, will face significant criminal tax exposure, and a lack of leverage when negotiating criminal and civil tax and penalty settlements.

Moreover, American individual account holders need to know that Swiss Banks have strong relationships with Chinese Banks (there are a number of major Swiss banks in China, Hong Kong, Singapore, and Taiwan). Credit Suisse has an asset management joint venture with the Industrial and Commercial Bank of China. Additonally, both Credit Suisse and UBS have been alleged to have assisted Chinese individuals and their relatives in moving assets to offshore locations, and disclosed the names and information of more than 22,000 clients. What this means is that under the US treaty with China (for example; see Finding Offshore Bank Accounts and Real Estate in China, the United States will also have access to this information as well.

Now that smaller and more private banks have joined the amnesty along with the thousands of individuals who have already participated (and turned over names as part of it) we expect to see an increase in the number of individuals being charged with crimes and given large tax penalties for the tax and money crimes related to having money and assets outside of the United States.

For people with foreign accounts and assets overseas worried about the IRS enforcement regime, here are suggestions:

  • If you have international ties, seek expert advice from an international tax attorney (utilize the confidentiality afforded by the attorney-client privilege) about:
    • When and what you do—and don’t—have to report to the IRS:
    • How will they find you?
      • IRS Reporting forms and requirements,
      • Foreign Retirement Accounts,
      • The number of years for which you have exposure?
      • Amnesty Program Advantages and disadvantages?
    • Entity Planning to Save Tax and Wealth:
      • Smart planning can avoid mandatory tax withholdings, preserve investments, and maximize return on investment

The bottom line is that, it is the IRS and DOJ’s belief that they "have a lot of avenues for getting information now; some of them visible and some of them not visible. Anyone who thinks they can hide their money in Switzerland or elsewhere is full of themselves and has been for a long time," according to Assistant U.S. Attorney, Kathryn Keneally. On March 18, 2014, when addressing the International Tax Enforcement Conference in Washington DC (of which Moskowitz LLP was an attendee), Ms. Keneally went on to state that "just because you [us tax attorneys] don't see the prosecutions originating from bank accounts outside of Europe, doesn't mean they are not going to happen soon." (referring to the fact that the vast majority of offshore bank account holders targeted thus far have been from Swiss and Lichtenstein banks). She then went on to name several areas world-wide, and Korea specifically, where US tax evasion investigations are active.

If you have any questions regarding this information or would like to discuss it further, please do not hesitate to contact us.

Article: Making Expense Accounts Accountable

Business owners who work for their company typically have expense accounts; the same usually is true for many employees. If your company has what the IRS calls an accountable plan, everyone can benefit from the tax treatment. The company gets a full deduction for its outlays (a 50% deduction for most dining and entertainment expenses), while the employee reports no taxable compensation.

A company expense plan judged to be nonaccountable, on the other hand, won’t be as welcome. It’s true that the company can deduct 100% of the payments it makes for meals and entertainment, but it also will have to pay the employer’s share of payroll taxes (FICA and FUTA) on the expense money paid to employees. The employees, meanwhile, will report those payments as wages, subject to income and payroll taxes.

In that situation, the employee can include employee business expenses (minus 50% of those for meals and entertainment) with other miscellaneous itemized deductions, but only miscellaneous deductions that exceed 2% of adjusted gross income can be subtracted on a tax return. Taxpayers who owe the alternative minimum tax can’t get any benefit from their miscellaneous deductions.

Key factors

In order for expense accounts to get favorable tax treatment, they should pass the following tests:

  • Business purpose: There should be an apparent reason why the company stands to gain from this outlay. An employee might be going out of town to see a customer or a prospect, for example.
  • •Verification: Employees should submit a record of their expenses, in order to be reimbursed. Lodging expenses require a receipt, as do other items over $75. Although as a practical matter a receipt should be maintained for every penny spent due to how auditors really look at a tax return.

In order to reduce the effort of dealing with multiple receipts, employers are allowed to give employees predetermined mileage and per diem travel allowances. Substantiation of other elements besides the amounts spent (time, place, business purpose) are still required. If the amounts of those allowances don’t exceed the amounts provided to federal employees, the process can be considered an accountable plan. (Excess allowance amounts are taxable wages.) Per diem rates can be found at www.gsa.gov/portal/category/104711.

Example: XYZ Corp. asks a marketing manager, Jill Matthews, to take a two-day business trip to Atlanta to demonstrate new products. The federal rate for Atlanta (lodging, meals and incidentals) on the federal per diem website is $189 per day. As required by the XYZ accountable plan, Jill accounts for the dates, place, and business purpose of the trip. XYZ reimburses Jill $189 a day ($378 total) for living expenses; her expenses in Atlanta are not more than $189 a day. In this situation, XYZ does not include any of the reimbursement on her Form W-2, and Jill does not deduct the expenses on her tax return.

  • •Refunds: Employees must return any amounts that were advanced or reimbursed if they were not spent on substantiated business activities.
  • Timeliness: Substantiation and any required refunds should be made within a reasonable amount of time after the expense was incurred. Those times vary, but IRS publications indicate that substantiation should be made within 60 days, and any employee refunds should be made within 120 days. For a plan to be accountable, reimbursements and allowances should be clearly identified.

They can be paid to employees in separate checks. Alternatively, expense payments can be combined with wages if the distinction is noted on the check stub. Our law office can help you check to see that your company’s employee expense plan is accountable, and, thus, qualifies for the resulting tax treatment.

Funding Your Business:
The Temptation to Utilize IRA Funds

You may have recently taken a look at your IRA and thought - can I use these funds to start a new business?

There are relatively few restrictions on the types of permissible IRA investments. Life insurance and certain collectibles are the only prohibited investments. In addition, an IRA may not, with limited exceptions, commingle its assets with other property.

However, when using IRA funds to invest in a business, an IRA owner needs to be aware of the Code’s prohibited transaction rules. Sec. 4975 prohibits certain transactions between a plan and disqualified persons with respect to the plan.

Prohibited transactions defined: The Code prohibits direct transactions and what are referred to as self-dealing transactions. Specifically, Sec. 4975(c)(1) prohibits any direct or indirect sale or exchange, or leasing, of any property between a plan and a disqualified person; any lending of money or other extension of credit between a plan and a disqualified person; any transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan; and any act by a disqualified person who is a fiduciary whereby he or she deals with the income or assets of a plan in the fiduciary’s own interest or for his or her own account.

Disqualified persons: With respect to an IRA, the long list of disqualified persons (Sec. 4975(e)(2)) includes any fiduciary to the plan (when acting outside his or her official capacity), service providers to the plan (when acting outside of their official capacity); any family members of any fiduciary or service provider to the plan; and any business in which a fiduciary or service provider has a 50%-or-more ownership stake (direct or indirect). In other words, virtually all parties involved in an IRA relationship, their family members, and certain organizations with which the IRA owner has an affiliation are disqualified persons.

Tax consequences: Sec. 4975 imposes a 15% excise tax on the amount involved in a prohibited transaction, and if the transaction is not reversed within a certain period, an additional 100% excise tax applies. However, in the case of an IRA, if the IRA owner caused or participated in the prohibited transaction, there is no excise tax. Instead, under Sec. 408(e), the IRA loses its tax-favored status, and the assets of the IRA are deemed distributed as of the first day of the year in which the prohibited transaction occurred. The deemed distribution results in the IRA owner’s having to include the amount distributed (less any basis) in income.
Therefore, it is important for you to consult with your tax advisor before deciding to use IRA funds for business.

--- Did You Know? ---

Many people contact us when they have been in accidents and have been injured to request that we analyze any potential personal injury claims that they may have. Please do not hesitate to contact us with any legal matter or question. We will discuss the tax and non-tax aspects of your case.

Tax Calendar

MAY 2014

May 12

Employers. For Social Security, Medicare and withheld income tax, file Form 941 for the first quarter of 2014. This due date applies only if you deposited the tax for the quarter in full and on time.

May 15

Employers. For Social Security, Medicare, withheld income tax and nonpayroll withholding, deposit the tax for payments in April if the monthly rule applies.

JUNE 2014

June 16

Individuals. If you are not paying your 2014 income tax through withholding (or will not pay enough tax during the year that way), pay the second installment of your 2014 estimated tax.

If you are a U.S. citizen or resident alien living and working (or on military duty) outside the United States and Puerto Rico, file Form 1040 and pay any tax, interest, and penalties due for 2013. If you want additional time to file your return, file Form 4868 to obtain four additional months to file. Then, file Form 1040 by October 15.

Corporations. Deposit the second installment of estimated tax for 2014.

Employers. For Social Security, Medicare, withheld income tax, and nonpayroll withholding, deposit the tax for payments in May if the monthly rule applies.