When planning for the future, owner-employees face a variety of distinctive tax challenges and advantages, depending on whether their business is structured as a partnership, limited liability company (LLC) or corporation. It is important to be aware of how the divergent entity types may apply to your particular situation.

Partnerships and LLCs

If you are a partner in a partnership or a member of an LLC that has elected to be disregarded or treated as a partnership, the entity’s income flows through to you (as does its deductions). This income will likely be subject to self-employment taxes — even if the income is not actually distributed to you. This means your employment tax liability typically doubles because you must pay both the employee and employer portions of these taxes. 

Fortunately, the employer portion of self-employment taxes paid (6.2% for Social Security tax and 1.45% for Medicare tax) is deductible above-the-line, thus reducing adjusted gross income. 

But flow-through income may not be subject to self-employment taxes if you are a limited partner or the LLC member equivalent. Flow-through income may be subject to the additional 0.9% Medicare tax on earned income or the 3.8% net investment income tax (NIIT), depending on the situation. 

S and C corporations

For S corporations, even though the entity’s income flows through to you for income tax purposes, only income you receive as salary is subject to employment taxes and, if applicable, the 0.9% Medicare tax. Keeping your salary relatively, but not unreasonably, low and increasing your distributions of company income (which generally is not taxed at the corporate level or subject to employment taxes) can reduce these taxes. The 3.8% NIIT may also apply.

In the case of C corporations, the entity’s income is taxed at the corporate level and only income you receive as salary is subject to employment taxes, and, if applicable, the 0.9% Medicare tax. Nevertheless, if the overall tax paid by both the corporation and you would be less, you may prefer to take more income as salary (which is deductible at the corporate level) as opposed to dividends (which are not deductible at the corporate level, are taxed at the shareholder level and may be subject to the 3.8% NIIT).

How to decide

The entity type that best serves your company’s needs may change over time as you move through divergent business life-cycle stages. Consequently, a routine review of your entity type is advised. Please contact us for help identifying the ideal entity type, or other business strategies, appropriate for your situation.

Need a Vacation from your Vacation Rental? Sales and Lodging Taxes may apply.

The dog days of summer may be nearing an end, but the popularity of vacation rentals remains strong.

While homeowners across the Pikes Peak region happily offer their private residences as short-term rentals through online booking sites like Airbnb, HomeAway or VRBO, some may be unaware of the associated tax liability such as sales and lodging tax. 

For example, the city of Colorado Springs states that “owners or property managers must collect both sales and lodging or LART tax for each stay of less than 30 days” and also requires a sales tax license to operate short-term rentals.

If you operate short-term rentals and have questions about local requirements or how to be compliant, please contact your tax advisor today!

 

Identity Theft

 

If you’re like many Americans, you may not start thinking about filing your tax return until close to this year’s April 18 deadline. You may even want to file for an extension so you don’t have to send your return to the IRS until October 16. However, it can be in your best interest to file early. 

In an increasingly common scam, thieves use victims’ personal information to file fraudulent tax returns electronically and claim bogus refunds. This is usually done early in the tax filing season. When the real taxpayers file, they’re notified that they’re attempting to file duplicate returns. A victim typically discovers the fraud after he or she files a tax return and is informed by the IRS that the return has been rejected because one with the same Social Security number has already been filed for the same tax year. The IRS then must determine who the legitimate taxpayer is.

Tax identity theft can cause major headaches to straighten out and significantly delay legitimate refunds. But if you file first, it will be the tax return filed by a potential thief that will be rejected — not yours.

IRS Safety Tips

Keep Your Computer Secure

Avoid Phishing and Malware

Protect Personal Information

Additional steps:

Find the latest tax tips at IRS Security Awareness Tax Tips.

Source: IRS tips Issue Number: IRS Taxes. Security. Together. Tax Tip Number 12

As you may be aware, there have been several changes in due dates for some federal tax returns, which will be effective for the 2017 filing season or the 2016 tax year for calendar year-end filers. These modifications relate mostly to flow-through entities, including S corporations and partnerships that provide Schedule K-1s (partner’s/shareholder’s share of income, deductions, credits, etc.), containing investment information of partners/shareholders. 

Due dates related to individual tax returns or estimated tax payments will remain the same; however, one new date will take effect next year that affects individuals. 

What does this mean to you? As you gather tax documents for the coming tax season, we have compiled some suggested actions for your consideration to facilitate a smooth process. 

Partnerships (Form 1065) — The due date is moved from April 15 to March 15 or the 15th day of the third month after the year-end.

S Corporation (Form 1120S) — No change, due dates remain March 15, allowing for preparation of Schedule K-1s as they relate to individuals and organizations 

C Corporations (Form 1120) — Due date moved from March 15 to April 15; in most cases, returns will be due on the 15th of the fourth month after the year-end. However, although the due date of these returns has been pushed back a month, we encourage clients to submit the financial information necessary to complete these returns as soon as possible.

Individuals and Businesses — Foreign Bank and Financial Accounts Report (FBAR) (Report 114) — This form is required for individuals and businesses with a financial interest in, or signature authority over, at least one financial account located outside of the United States, and the aggregate value of all foreign financial accounts exceeding $10,000 at any time during the calendar year reported.

This due date change is the most significant for individual taxpayers; forms are now due April 15 rather than June 30. (For 2017 the due date is April 18 because April 15 falls on a Saturday and the Washington D.C. Emancipation Day holiday will be observed on April 17.) However, for the first time, a six-month extension to Oct. 15 will be available.

Please include any and all information related to foreign accounts when submitting your individual, partnership or corporate tax return documentation.

 

We understand that adjusting to this new system can be overwhelming. We have included a quick reference guide for tax deadlines from the AICPA HERE. Please feel free to contact our office (719-630-1186) if you have any questions or concerns related to due dates, your tax returns or any other tax or financial concern. 

 

The IRS has again extended the deadline for employers subject to the Affordable Care Act’s (ACA’s) information reporting requirements to meet their obligations to employees. Last year, the IRS extended the 2016 deadlines for reporting 2015 information, giving employers an additional two months to provide employees Form 1095-B, “Health Coverage,” and Form 1095-C, “Employer-Provided Health Insurance Offer and Coverage.” The latest extension, however, extends the deadline for reporting 2016 information only 30 days, from January 31, 2017, to March 2, 2017. And, unlike the last extension, this one doesn’t include the deadline for filing the required forms with the IRS. 
 

Reporting requirements for ALEs

 
The ACA created Section 6056 of the Internal Revenue Code (IRC), which requires all applicable large employers (ALEs) — generally those with at least 50 full-time employees or the equivalent — to report to the IRS information about what health care coverage, if any, they offered to full-time employees. Employers generally must report this information on Form 1094-C, “Transmittal of Employer-Provided Health Insurance and Coverage Information Returns” and the aforementioned Form1095-C no later than February 28, or March 31 if filed electronically, of the year following the calendar year to which the reporting relates. This deadline hasn’t been extended.
 
Sec. 6056 also requires ALEs to furnish statements to employees that the employees can use to determine whether, for each month of the calendar year, they can claim a premium tax credit. The statements, which can be Form 1095-C or a substitute form, generally must be provided by January 31 of the calendar year following the calendar year to which the Sec. 6056 reporting relates — unless the IRS extends this deadline. The extension to March 2 for 2016 reporting in 2017 is automatic; employers needn’t submit any documentation to receive the benefit of it.
 

Reporting requirements for self-insured and smaller employers

 
Sec. 6055 of the IRC, also created by the ACA, requires health care insurers, including self-insured employers, to report to the IRS using Form 1094-B, “Transmittal of Health Coverage Information Returns,” and the previously mentioned Form 1095-B. The 2016 calendar year information must be reported by February 28, 2017, or, if filed electronically, March 31, 2017. This deadline hasn’t been extended.
 
Sec. 6055 also requires self-insured employers to furnish health care information to covered employees in statements, which can be Form 1095-B or a substitute form. With the extension, the employee statements must be provided by March 2, 2017. 
 
Every self-insured employer must report information about all employees, their spouses and dependents who enroll in coverage under the reporting requirements for insurers. This reporting is required even for self-insureds not subject to the ACA’s employer shared-responsibility provisions or the ALE reporting requirements. Self-insured ALEs must comply with the insurer requirements in addition to the Sec. 6056 requirements. 
 
Further, non-ALE employers must comply with the Sec. 6056 requirements if they’re members of a controlled group or treated as one employer for purposes of determining ALE status. The employers that compose such a controlled-group ALE are referred to as “ALE members,” and the reporting requirements apply separately to each member. 
 

Penalty relief for inaccurate reporting

 
The IRS is also providing the same good faith transition relief from certain penalties related to the ACA information return requirements that it provided for 2015 returns. The relief applies only to incorrect and incomplete information reported on a statement or return — it doesn’t apply to a failure to timely furnish or file a statement or return.
 
In determining whether the penalty relief applies, the IRS will consider whether an employer or other provider of coverage made reasonable efforts to prepare for reporting the required information to the IRS and furnishing it to employees and covered individuals. Reasonable efforts might include gathering and transmitting the necessary data to a third party to prepare the data for submission to the agency or testing its ability to transmit information. The IRS also will take into account the extent to which the employer or other coverage provider is taking steps to ensure that they can comply with the reporting requirements for 2017.
 

Act now!

 
With the deadline extension for furnishing statements to employees halved from the previous extension — and no extension to the deadline for reporting to the IRS — employers should begin collecting the necessary information for compliance as soon as possible. They also should formalize their processes and procedures to ensure timely compliance in future years, as the IRS has explicitly stated that it doesn’t anticipate extending the deadlines or the penalty relief for reporting for 2017. 
 
Although with the changes in Washington, it’s possible some or all of the ACA could be repealed, that doesn’t necessarily mean the reporting requirements won’t still be in effect for 2017. So it’s best to be prepared.
 
If you have questions about complying with the ACA’s information reporting requirements, don’t hesitate to contact us. We’d be pleased to help.

The unexpected election of Donald Trump as President of the United States, along with Republicans retaining control of both chambers of Congress, will likely result in an overhaul of the U.S. tax code. 

Based on Trump’s tax reform plan released earlier this year, tax law changes may include a reduction in tax rates for some individual taxpayers and corporations, the elimination of several tax breaks, a restructuring of U.S. taxes on income from abroad, the elimination of the estate tax, and a partial or full repeal of the Affordable Care Act.

Political capital and control

Even though Trump won the electoral college, he lost the popular vote by a slim margin, thus possibly limiting his political capital. Republicans retain control of the Senate but didn’t reach the 60 members necessary to become filibuster-proof. So their simple majority won’t be enough to pass legislation in the Senate. In the House, Republicans retain control by a margin similar to their current one. 
This outcome likely will result in less opposition from Democrats and a greater opportunity to enact significant tax law changes in the coming year. Yet it also likely will require Republicans to compromise on some issues in order to get their legislation through the Senate. 

Proposed tax changes for individuals and businesses

President-elect Trump’s tax reform plan includes the following changes that would affect individuals:

Proposed changes that would affect businesses include:

Bear in mind that uncertainty has surrounded the details of President-elect Trump’s tax reform plan. However, during the course of the campaign, some of its provisions have gelled with the House Republicans’ tax plan. 

Planning uncertainties

With President-elect Trump soon to be in the White House and continued Republican control of the Senate and the House, major tax law changes likely are on the horizon. However, at this time it’s difficult to determine which provisions of the ambitious tax reform plan will be signed into law. This uncertainty makes tax planning difficult. We can help develop a plan that can take into account all of the variables. 

 

There are three common penalties assessed against taxpayers: underpayment, late payment, and late filing.  These penalties are fairly easy to avoid if you plan ahead.  Generally, tax returns for individual taxpayers are due April 15th and any unpaid tax is also due.  If you fail to meet this deadline, or you did not pay enough taxes during the year through Federal withholding or estimated tax payments, you may be liable for IRS underpayment of estimated tax, late payment, and/or late filing penalties in addition to any tax you owe. 

Underpayment of Estimated Tax Penalty

Probably the most common type of penalty is the underpayment of estimated tax penalty.  This can affect any taxpayer but most often impacts taxpayers who are not W-2 wage earners.  Since income taxes are not directly withdrawn and remitted to the IRS during the year via payroll, the burden falls on the taxpayer to pay estimated tax payments through the year.  These estimates must be paid in four equal quarterly installments which are due on April 15, June 15, September 15, and January 15.  

The underpayment penalty consists of the interest on the underpaid amount for the number of days the payment is late.  Interest is charged at the Federal rate for underpayments which is currently set at 3% for the first quarter of 2016 and 4% for the second quarter of 2016.  Since estimates are required to be paid each quarter, you may be liable for an underpayment penalty even if all tax has been paid.

This underpayment penalty will generally not apply if the tax due, after subtracting any tax withheld, is less than $1,000 or the taxpayer had no tax liability for the prior year return that covered 12 months.

The IRS has provided a safe harbor to help taxpayers avoid these penalties.  Individuals are subject to an underpayment penalty unless total withholding and estimated tax payments equal the smaller of:

There are special rules for farmers and fishermen so please contact us if at least two-thirds of your gross income is from farming or fishing.

Late Payment Penalty

If you do not pay the tax you owe by the April 15 filing deadline, you will most likely face a failure-to-pay penalty.  The failure-to-pay penalty is .5% of the unpaid balance and applies for each month or part of a month after the due date.  This penalty starts accruing the day after the filing due date.  The penalty is capped at a maximum of 25% of the unpaid tax due. 

If you timely requested an extension of time to file your individual income tax return and paid at least 90% of the taxes owed with the extension request, you may not face a failure-to-pay penalty.  However, you must pay any remaining tax due by the extended due date (generally October 15).         

Late Filing Penalty

One of the most punitive penalties is for failing to file your tax return on time when you owe tax.  The failure-to-file penalty starts at 5% of your unpaid taxes for each month or part of the month the return is late.  The penalty is capped at 25% of the unpaid balance due.  There will be no penalty imposed if there is no tax due with the tax return filing.  If you file your return more than 60 days after the due date or extended due date, the minimum penalty for late filing is the smaller of $135 or 100% of the unpaid tax.

The silver lining with the late filing penalty is that there is no reason to ever incur a late filing penalty.  As long as you file an extension by the April 15th due date, you automatically get an additional 6 months to file the tax return.  So even if you cannot pay the tax, you should still file a return or an extension.  

If both the 5% failure-to-file penalty and the .5% failure-to-pay penalty apply in any month, the maximum penalty you will pay for the month will be 5%.   
  
Penalties for late payment and late filing will not be imposed if the taxpayer can show that the failure was due to reasonable cause, rather than to willful neglect.  Some of the reasonable cause requests that have been approved in the past include death or serious illness of the taxpayer or an immediate family member, unavoidable absence of the taxpayer on the filing due date, and the destruction of the taxpayer’s residence or business.  

The U.S. Department of Labor (DOL) has released a final rule that makes significant changes to the determination of which executive, administrative and professional employees — otherwise known as “white-collar workers” — are entitled to overtime pay under the Fair Labor Standards Act (FLSA). The rule will make it more difficult for employers to classify employees as exempt from overtime requirements. In fact, the DOL estimates that 4.1 million salaried workers will become eligible for overtime when they work more than 40 hours in a week.
 
The changes will have a tax impact as well: Employers’ payroll tax liability will increase as they pay overtime to more employees who work in excess of 40 hours a week or pay higher salaries to maintain overtime exemptions. 

Current requirements for white-collar exemptions

To qualify for a white-collar exemption from the overtime requirements under current federal law, an employee generally must satisfy three tests:
  1. Salary basis test. The employee is salaried, meaning he or she is paid a predetermined and fixed salary that’s not subject to reduction because of variations in the quality or quantity of work performed.
  2. Salary level test. The employee is paid at least $455 per week or $23,660 annually.
  3. Duties test. The employee primarily performs executive, administrative or professional duties.
Neither job title nor salary alone can justify an exemption — the employee’s specific job duties and earnings must also meet applicable requirements.
 
Certain employees (for example, generally doctors, teachers and lawyers) aren’t subject to either the salary basis or salary level tests. The current regulations also provide a relaxed duties test for certain highly compensated employees (HCEs) who are paid total annual compensation of at least $100,000 and at least $455 per week.

Significant changes under the final rule

The DOL issued a proposed rule in July 2015, revising the 2004 regulations, and received more than 270,000 comments in response.
 
The revisions in the final rule, which take effect December 1, 2016, mainly relate to the salary level test. The rule increases the salary threshold for exempt employees to the 40th percentile of weekly earnings for full-time salaried workers in the lowest-wage Census region (currently the South) — $913 per week or $47,476 per year. 
 
In response to what the DOL described as “robust comments” from the business community, the final rule allows up to 10% of the salary threshold for non-HCE employees to be met by nondiscretionary bonuses, incentive pay and commissions, as long as these payments are made on at least a quarterly basis. Thus, an employee’s production or performance bonuses could push him or her over the threshold and into exempt status (assuming the other tests are satisfied).
 
The rule also updates the HCE threshold above which the relaxed duties test applies. It raises the level to the 90th percentile of full-time salaried workers nationally, or $134,004 per year. 
 
The final rule continues the requirement that HCEs receive at least the full standard salary amount — or $913 — per week on a salary or fee basis without regard to the payment of nondiscretionary bonuses and incentive payments. Such payments will, however, count toward the total annual compensation requirement.
 
The standard salary and HCE annual compensation levels will automatically update every three years to maintain the levels at the prescribed percentiles, beginning January 1, 2020. The DOL will post new salary levels 150 days before their effective date.

The duties test

The final rule makes no changes to the duties test. In the proposed rule, the DOL had sought comments regarding the effectiveness of the test at screening out workers who aren’t bona fide white-collar workers. 
 
But it determined that the new standard salary level and automatic updating will work with the duties test to distinguish between overtime-eligible workers and those who may be exempt. Moreover, as a result of the revised salary level, employers won’t need to consider the duties test as often — if a worker’s pay doesn’t satisfy the salary level test for exemption, the employer needn’t bother assessing the worker’s duties.

Compliance options

According to the DOL, employers have a range of options when it comes to complying with the changes to the salary level (although it doesn’t require or recommend any method). Options include:
 
Review and do nothing. After completing an internal review, you might choose to do nothing if your white-collar workers fall short of the new salary level but don’t ever work more than 40 hours per workweek.
 
Raising salaries. You may want to raise the salaries of employees who meet the duties test, have salary near the new salary level and regularly work overtime. Paying them at or above the salary threshold will maintain their exempt status.
 
Paying overtime above a salary. You could continue to pay employees a salary covering a fixed number of hours, which could include hours above 40. For example, you might:
And, of course, you might reorganize workload distributions or adjust employee schedules to redistribute work hours in excess of 40 across current staff. You could also hire additional employees to reduce or eliminate overtime hours worked by your current staff.

The big picture

As noted, the cost of the new overtime rules is more than just the increased compensation; it also includes additional payroll tax liability on that compensation, as well as administrative costs to comply. This is a complex and complicated issue; and we recommend you consult your employment advisor with questions or concerns.

If you have a financial interest or signature authority over a foreign financial account, you may be required to file FinCEN Form 114a, otherwise known as the Report of Foreign Bank and Financial Accounts (FBAR). A US citizen must file if the aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year. The deadline of June 30th may not be extended.

What every landlord should know about reporting of rental income and expenses

Accounting for rental income might at first seem like a simple concept, but in practice it may not be so simple. What is the difference between “rental income” and “advance rent”? How does one account for a security deposit, or property or services received in lieu of rent? How is personal use of a vacation home or other rental property treated? This article addresses those questions.

Rental income is any payment received or accrued for occupancy of real estate or the use of personal property. Rental income is generally included in gross income when actually or constructively received. Cash basis taxpayers report income in the year received, regardless of when it was earned. 

Advance rent is any amount received before the period that it covers. Landlords are required to include advance rent in rental income in the year received, regardless of the period covered or the accounting method used by the taxpayer. An amount received by a landlord from a tenant for cancelling a lease constitutes income in the year in which it is received since it is essentially a substitute for rental payments.

Do not include a security deposit in income when received if it is to be returned to the tenant at the end of the lease. If part or all of the security deposit is retained during any year because the tenant does not live up to the terms of the lease, include the amount retained in income for that year. If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Include it in income when received.

Expenses of renting property can be deducted from gross rental income. Rental expenses are generally deducted by cash basis taxpayers in the year paid.  

If the tenant pays any expenses that are the landlord’s obligations, the payments are rental income for the landlord and must be included in income. These expenses may be deducted if they are otherwise deductible rental expenses. Property or services received in lieu of rent are reportable income as well. Landlords should include the fair market value of the property or services provided by the tenant in rental income. Services at an agreed upon or specified price are assumed to be at fair market value unless there is evidence to the contrary. There are specific rules related to leasehold improvements so please contact your tax advisor prior to entering into these transactions.

Personal use of a vacation home or other rental property requires that the expenses be allocated between the personal and rental use. If the rental expenses exceed rental income, the rental expenses will be limited.

If you have questions about how to treat expenses and income related to your rental property, our tax advisors would be happy to assist you.