Dear Clients and Friends: The purpose of this letter is to bring certain tax information to your attention as the calendar year 2013 draws to a close. Please carefully consider these items, and do not hesitate to contact us for further clarification on any of these matters.
THE 2010 HEALTH CARE LAW (“OBAMACARE”) COMETH Are you sure that your business is prepared for the coming penalty regime for failing to offer health insurance to the required employees? We encourage you to consult with your health insurance provider to see whether you are required to provide health insurance, to make sure that your plan is in compliance, and that you are offering insurance to all eligible employees. The penalties are significant for failing to completely comply with these requirements. Action item. Make sure that you are fully in compliance with the 2010 Health Care law by consulting with your employee benefits agent.
NEW 2014 REGULATIONS FOR TANGIBLE PROPERTY Note that after many years of discussion and proposals, these regulations are scheduled to take effect on 1/1/2014. For many years, taxpayers have struggled with the question of where is the line where a new asset needs to be capitalized and depreciated versus expensed. Also, what is the bright line difference between a repair and a capital item? These are tough issues sometimes based on opinion, and a revenue agent on audit might well have a different opinion. The purpose of these new rules is to help provide some clearer rules with less opinion about whether an item is a new asset versus a repair to an old one, and whether the asset needs to be capitalized and depreciated. The rules also talk about materials and supplies used in the business, and whether they can be expensed as paid. The pressing issue with regard to these rules is that all businesses need to have a written capitalization policy in place by 12/31/2013. If such a policy is documented before the first day of 2014, then a $500 capitalization threshold is available as a safe harbor. Without the policy in place before 2014, the safe harbor threshold is only $200. Businesses that both are audited by their CPA firm and have the written policy can use a safe harbor threshold of $5,000. So, it is very important that you have a written capitalization policy in place before 1/1/2014. Note that a “safe harbor” amount means that the IRS will not question a threshold of that amount. A larger threshold can certainly be argued for upon audit, but the safe harbor amount is pre-approved. Action item. Make sure that you have a written capitalization policy in place by 12/31/2013. We can assist you with this requirement.
YEAR END FORM W-2 REMINDERS Remember that several year-end adjustments are needed for your W-2 filings. These include the following – contact us if you need assistance in calculating these amounts:
If you provide a company vehicle to any employee (including company owners), the value of the personal use of the vehicle must be included in the W-2. This is income for federal withholding, FICA, Medicare, and FUTA purposes.
For this and similar non-cash compensation, you obviously cannot withhold tax when there is no cash payment. Therefore, you need to calculate this additional W-2 income before the last payroll of the year so that you can withhold additional tax from the last payroll, if needed.
Action item. Include the income from personal use of auto in the W-2 of any employee with personal auto use. We can assist with this calculation.
If you provide group-term life insurance in excess of $50,000 to employees, the value of the life insurance in excess of the $50,000 must be included in the W-2. We can help with this calculation.
Note – this should not be taken to read that the employer’s payment of the life insurance premium for anyone does not represent taxable compensation. A life insurance plan must meet specific requirements to be considered group-term life.
Action item. Include the income from excess group-term life insurance in the W-2 of all employees. We can assist with this calculation.
For “S” corporations, the amount the company paid for accident and health insurance (including dental, cancer, long-term care, and other policies) must be included in the W-2 of certain shareholders (those owning more-than-2% of the company, and their spouses, children, and other related parties). The amount paid is taxable for federal withholding purposes, but is not taxable for FICA, FUTA, or Medicare purposes.
Note – The Internal Revenue Service has stated its intention to disallow the deduction for health insurance for more-than-2% “S” corporation shareholders if the company fails to include this health insurance in the W-2 of the shareholder.
Action item. Include the amount paid by the company for health insurance for more-than-2% “S” corporation shareholders in their W-2 for 2013. Note also that 2013 Form W-2 will include a box to disclose the amount of health insurance paid on behalf of employees. Other than the above adjustment for more-than-2% “S” corporation shareholders, this amount is not taxable income to the employee. This is only an information disclosure. Employers who send 250 or more Form W-2s are required to comply with this disclosure. Other employers, while not required to complete it, should consider doing so in order to show their employees how much is expended on their behalf. The amount to report is the total value of group health and major medical plans (use COBRA amounts), self-funded plans, and employer contributions to health FSAs (flexible savings accounts) or HSAs (health savings accounts).
YEAR END FORM 1099 INFORMATION REPORTING REQUIREMENTS As we approach 2014, we wanted to review the rules concerning the filing of Form 1099 for 2013, which must be furnished to recipients by 1/31/14. Form 1099 and the summary Form 1096 must be paper filed to the Internal Revenue Service by 2/28/14 or e-filed by 3/31/14 (see electronic filing requirements later in this discussion). Every person engaged in a trade or business must file an information return for payments made to another person in the course of the payor’s trade or business totaling $600 or more in any calendar year. A “person engaged in a trade or business” includes not only those so engaged for gain or profit, but also non-profit organizations, such as tax-exempt organizations and governmental bodies. This requirement includes payments of $600 or more for –
Fees and other compensation for services. Commissions reduced by any repayment of current year’s (but not prior year’s) commissions. Interest and dividends. If the company pays dividends or is in the business of paying interest, the threshold is reduced to $10 or more. Rents except for those paid to real estate agents. Rent paid by the real estate agent to the landlord is reportable gross (not net) of any commissions retained. Taxable prizes and awards paid in the course of business, such as by radio and television broadcasting companies, and incentive awards such as those given to distributors by manufacturers. Fees paid for professional services to attorneys, physicians, and similar service providers. Royalties, annuities, pensions, and other gains, profits, and income.
This requirement does not apply to the following types of payments –
Wages or other compensation reported on Form W-2. Payments of any type to corporations other than medical and health-care payments and attorney fees. Payments of bills for merchandise, telephone, freight, storage, and similar charges. This exception does not apply when the merchandise is incidental to the receiving of services, such as auto or copier repairs from unincorporated providers. Payments to employees under an “accountable” plan of expense reimbursement. Salaries or profits paid or distributed by a partnership to the individual partners. Trust or estate payments to beneficiaries. Personal (non-business) payments for rent, interest, services, etc. Qualified achievement or safety awards of tangible personal property valued at $400 or less.
Some other rules of note –
For legal services, all payments of $600 or more for legal services must be reported, even if the payments are to a corporation. For reporting purposes, it does not matter that the attorney retains only a portion of the payment as his or her fee, but that the payment is made to the attorney. Payments which included backup withholding must be reported on a 1099, regardless of the amount. Sometimes the structure of the business arrangement makes it difficult to determine when the payment was made. For information reporting purposes, amounts that are credited to, or set aside for a taxpayer during a calendar year are constructively received and should be reported, although not actually received by the taxpayer. For this rule to apply there must be no substantial limitation or restriction as to the time or manner of payment, or condition upon which payment is to be made. The amount payable must be available to the taxpayer so
that he may draw it at any time and its receipt brought entirely within his own control and disposition. Where a payment is made in property other than money, the fair market value of the property at the time of payment is the amount subject to reporting. Direct sales of at least $5,000 of consumer products sold to a buyer for resale anywhere other than a permanent retail establishment must be reported on Form 1099-MISC. Note that those who file 250 or more information returns are required to submit these forms electronically. Failure to comply with this requirement brings a significant penalty. We can assist you with this compliance.
Action item. Make sure that your company is in compliance with 1099 disclosure requirements. We can assist if needed. New issue – 1099s for rental enterprises – Beginning in 2013, an additional 3.8% tax applies to net investment income. Net rents are included in the definition of this income, unless both (1) the taxpayer with the rental income is not passive with regard to this rental, and (2) the rental enterprise is an active business. Some taxpayers with rental income may look to restructure their rental arrangement in order to take the position that the rental is a business on its own (as opposed to a rental with minimal activity and expense risk, such as a triple-net lease). The issue is that these rental enterprises may not have filed 1099s in the past, since the 1099 requirements apply only to payments in the course of a trade or business. If this is your situation, reconsider whether the rental enterprise should file 1099s, since it may be difficult to argue that the rental is a business exempt from the 3.8% tax, yet is not a business subject to 1099 filing requirements. See us if you would like to further discuss this new tax and how it might apply to you. Action item. Consider if your rental activity requires 1099 filings for 2013. We can help you with this. IDENTITY THEFT We also want to ask you to please be careful and protect yourself and your business against the growing identity theft problem. Identity theft occurs when someone uses your identification information, like your name, Social Security Number, or credit card number without your permission to commit fraud or other crimes. They may acquire this information via data entry of your data on unsecure websites, getting insider information from businesses or organizations that may have your personal information, or by tricking you into releasing the information. We are also seeing fraudulent tax filings in the name of legitimate taxpayers in order to seize their tax refunds. The United States Federal Trade Commission estimates that millions of Americans have their identities stolen each year. Please refer to the FTC web page to learn more on how to protect yourself from identity theft - http://www.ftc.gov. One of the best ways to protect you is to use a credit monitoring service. There are several good credit monitoring services available online that cost about $150-$200 per year. We think this is a small investment for highly needed protection.
NC EMPLOYERS REQUIRED TO USE E-VERIFY FOR NEW EMPLOYEES Note that effective 7/1/2013, employers of more than 25 employees are required to use the E-Verify federal system to ascertain the work eligibility of newly hired employees. This internet-based system is free. Some important things to remember:
E-Verify cannot be used as a pre-job screening process. E-Verify cannot be selectively used – it must be used on all new employees. It is only for new employees; it cannot be used on existing employees. E-Verify can only be used after a candidate has accepted an offer of employment and both parties have completed the Form I-9. The employer’s choice of List B Documents, related to Form I-9, must contain a photograph in order to be confirmed using the E-Verify system. If an employee does receive a “tentative non-confirmation” they need to be allowed time to correct any error and you cannot ask for additional documentation. They must be given time to correct this error. You must update your personnel manuals, as well as your posted notices, to incorporate the company’s enrollment in the E-Verify program. Civil penalties for violations begin at $1,000.
Sign up at https://e-verify.uscis.gov/enroll/. Action item. Make sure that the person within your company who processes new employees knows about this requirement.
NEXUS Are you sure that you aren’t doing business in new state(s)? Talk with us if this may be the case. Note that states are increasingly aggressive at pursuing out-of-state businesses for sales/use and income taxes. Some indications that you may be doing business in that state include sending salespersons into that state, having payroll, leasing property, buying assets, etc. Action item. Consult with us if you have activity outside of your home state.
BUSINESS DEPRECIATION For 2013, the amount of available business depreciation under Section 179 is limited to a maximum of $500,000 (only $25,000 for NC.) Similarly, business “bonus” depreciation under Section 168(k) allows a 50% write-off in the first year for qualifying assets, but this provision does not extend into 2014. Follow us via email or Twitter and we will let you know what happens with this Code Section. Twitter tax updates are posted to @MHowellTax or email us at firstname.lastname@example.org to be added to our email update list. Remember that in order to claim a depreciation deduction, it is not enough that the capital item is purchased. It must be “placed in service,” which means that it is ready, available, and capable for its assigned function.
WORK OPPORTUNITY CREDIT Are you hiring employees from groups that have historically struggled to find employment? A tax credit might be available. These include –
Veterans (higher credit if disabled) Ex-felons Recipients of assistance under “TANF” (Temporary Assistance for Needy Families) Referrals from vocational rehabilitation
Please see us to discuss tax credit opportunities. Note that certain actions are required before hiring to be eligible for the credit.
LIFE INSURANCE If your business has purchased and owns life insurance on employees, or is considering doing so, note that your business needs to comply with the “Notice and Consent” procedures. Failure to follow these rules can result in a future collection on the insurance policy becoming taxable income. Contact your insurance representative to make sure that this requirement has been addressed. Action item. If the company carries life insurance on any employee, consult with your life insurance agent to make sure that you are in compliance with the “notice and consent” rules.
SOCIAL SECURITY LIMIT FOR 2014 The Social Security wage maximum for 2013 was $113,700. However, effective 1/1/2014, the limit becomes $117,000. Please make sure that your payroll tax system is updated in January to reflect the new limit.
PENSION LIMITS FOR 2014 Some pension limits for 2014 are increased, while others are unchanged. The 2014 amounts include –
401(k) or 403(b) maximum deferral - $17,500 (plus additional catch-up of $5,500 for those who turn age 50 or higher in 2014). These deferrals are unchanged from 2013. 401(k) maximum contributions from all sources in 2014 is $52,000 ($57,500 for those 50 or older). These maximums were $51,000 and $56,500 in 2013. SIMPLE plans maximum deferral - $12,000 (plus additional catch-up of $2,500 for those age 50 or higher in 2014). These deferrals also are unchanged from 2013.
Consider whether your 401(k) plan should offer a Roth deferral option. For those who defer at the maximum amount, a Roth option allows the individual (economically speaking) to defer an additional amount for the tax on their deferral contribution. Also, a comparability profit sharing allocation plan can benefit small businesses by allowing owners to reach or approach the $51,000 total contribution limit ($56,500 with catch-up) for 2013 with less total required funding than a profit sharing plan that is integrated with social security. To make this change for 2013, your plan document would need to be amended by 12/31/2013. DMJ Wealth Advisors’ qualified plan representative, W. Brad Mann, JD, QPFC, ChFC, CLU (email@example.com or 336.275.9886) can help you analyze whether this makes sense for you.
TRAVEL PER DIEM RATES FOR 2014 The standard business mileage rate for 2014 has not been released as of this writing (compared to $0.565 for 2013). Follow @MHowellTax and you will know as soon as this amount is available. The per diem travel rates for hotels has increased, but the rates for meals and incidentals are unchanged. These rates actually took effect on 10/1/2013. The reimbursement rates are –
High cost areas – o Lodging o Meals and incidental expenses Low cost areas – o Lodging o Meals and incidental expenses
- $186 (previously $177) - $65 - $118 (previously $111) - $52
For NC and adjoining states, the only designated high cost areas are the following (unchanged from prior year with exception of Charleston, SC) –
Washington DC metro area of Virginia, Virginia Beach, VA (from 6/1 to 8/31), Kill Devil Hills, NC (from 6/1 to 8/31), and Charleston, SC (from 3/1 to 5/31).
No area of Tennessee is so designated.
FOREIGN BANK OR INVESTMENT ACCOUNTS If you and/or any of your officers have any interest or signatory authority over any non-U.S. bank or investment accounts, please note that certain Treasury Department disclosures are probably required. The IRS has been aggressively auditing taxpayers in this area and penalties for noncompliance are stiff. Foreign accounts include bank accounts, hedge funds, brokerage accounts, and other investments. Talk with us if you think that this requirement may apply to you.
NC WITHHOLDING ON CONTRACTORS Please note that, if you pay contractor compensation (not wages) of more than $1,500 during a year, and that person has an Individual Tax Identification Number (“ITIN”), you must withhold 4% of compensation and remit that to the North Carolina Department of Revenue. What is an ITIN? It is a number issued to a foreign national who does contractor work in the U.S. What does an ITIN look like? This is the hard part – it looks like any other 9 digit identification number, such as an employer identification number (EIN) or social security account number (SSAN). Exception – an ITIN begins with the number 9, and has a 7 or 8 as the fourth digit. Examples are 9xx7x-xxxx or 9xx-8x-xxxx. If your business might pay contractor compensation to a foreign national working in the U.S., please alert the person who would process these payments to look for this requirement.
DMJ PORTAL IS AVAILABLE DMJ has a secure portal available for you to upload the electronic files that you need to send to us. We can also leave a copy of your return here for your use throughout the year for financial aid, mortgages, or other needs. Speak to your DMJ representative if you want to gain access to the portal.
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Davenport, Marvin, Joyce & Co., LLP Certified Public Accountants The technical information in this newsletter is necessarily brief. No final conclusion on these topics should be drawn without further review and consultation. Please be advised that, based on current IRS rules and standards, the information contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty assessed.