Menu
Our client portal will be unavailable from 9PM MST, April 26 until 9PM MST April 28th due to a scheduled maintenance.
Office alert – Friday March 15th, 2024.
Due to the road conditions, majority of our staff will be working remotely today.
We want you to be safe, we have a drop off at COS on 3rd floor. If you are planning to come by the Denver and Springs office please make contact with your SKR contact first.
Our client portal will be unavailable from 9PM MST, April 26 until 9PM MST April 28th due to a scheduled maintenance.
Office alert – Friday March 15th, 2024.
Due to the road conditions, majority of our staff will be working remotely today.
We want you to be safe, we have a drop off at COS on 3rd floor. If you are planning to come by the Denver and Springs office please make contact with your SKR contact first.
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.
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.
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).
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.
It’s an age-old conundrum: determining whether a worker is an employee or an independent contractor. While it might seem like a simple question, it’s not. And the IRS is hot on the heels of any contractor who doesn’t understand the difference.
For example, in the traditional employer-employee relationship, the employer is responsible for a number of tasks, such as withholding federal and state income taxes, paying unemployment taxes (FUTA), withholding the employee’s share of FICA and Medicare taxes, remitting the amounts withheld, and paying both the employee and employer portions of FICA and Medicare taxes.
Independent contractors are responsible for their own taxes. In addition to making estimated tax payments for their federal and state income tax liabilities, they’re subject to self-employment tax, which covers both the employer and employee shares of FICA. (They are, however, entitled to a deduction for the “employer’s” portion.)
Because it’s easier and cheaper to collect taxes from a single employer than from multiple independent contractors, the IRS has a strong preference for employee status. If the IRS reclassifies independent contractors as employees, it can go after your company for back taxes that should have been paid, payroll and income taxes that should have been withheld, and penalties and interest.
Additional penalties may apply if the IRS finds that you intentionally disregarded your tax obligations. And, of course, your state may impose penalties of its own. Finally, “responsible persons” — including certain officers, partners and managers — could be personally liable for uncollected taxes.
Even if workers you treat as independent contractors have paid their taxes, you’re not necessarily safe. If the IRS finds they should have been classified as employees, it still may hit you with penalties equal to 20% of your tax liability.
The simplest way to avoid these consequences is to treat workers as employees unless they clearly qualify as independent contractors. The IRS typically examines and weighs numerous factors to determine whether a worker is an employee or independent contractor. These considerations indicate to the agency the degree of control exercised by the employer and the degree of independence of the worker.
For instance, the IRS looks at behavioral control such as instruction (employees usually receive detailed instructions about when, where and how to work) and training (employees often receive training on how to perform their job duties).
The type of relationship is also important. Does the individual receive benefits? Is he or she working for the business indefinitely? Are his or her services critical to the company’s ongoing operations? Affirmative answers to any or all of these questions would bolster an IRS case that the person in question is an employee, not an independent contractor.
Another important issue is financial control. The IRS will look for unreimbursed business expenses, which are usually incurred by independent contractors, not employees. Independent contractors often make significant investments in facilities and equipment as well. Employees don’t.
In addition, employees are usually paid by the hour, week or some other period. But independent contractors generally receive a flat fee or submit an invoice for services. So method of payment is a key consideration. Independent contractors will also often continue marketing themselves while working on a given project and risk suffering a profit loss on every job.
Ultimately, no one factor controls the outcome. You need to examine and weigh all the factors to determine whether a particular worker is an employee or independent contractor.
If you are uncertain about the status of your workers, contact your tax advisor. He or she can help you determine which workers are truly employees and which are independent contractors. In the event that contractors are misclassified, your tax professional can advise you whether the IRS Voluntary Classification Settlement Program is a good option for you.
For additional information on determining status, see the IRS guidelines here.
One of the most common inquiries clients have for their accountants is “What documents do I need to save, and for how long?” Retaining, organizing, and filing old records can become a burden, both at the business and individual levels. As we all strive to achieve a more “paperless” process, how do we determine what warrants taking up valuable office and storage space and what does not?
Records should be preserved only as long as they serve a useful purpose or until all legal requirements are met. To keep files manageable, it is a good idea to develop a schedule so that at the end of a specified retention period, certain records are destroyed.
At Stockman Kast Ryan + Co., we have developed records retention schedules we think you will find helpful. Although it doesn’t cover every possible record, it does cover the most common ones. As always, please feel free to ask us should you have specific questions or concerns.
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.
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
When a business generates a financial transaction, it creates a paper trail. This paper trail is called a “Source Document.” Your bookkeeper or accountant may ask you to provide them with some sort of source document to verify data and record transactions correctly. A good source document should describe the basic facts of the transaction such as the date, the amount, the purpose, and all parties involved in the transaction.
Some examples of source documents include:
The source document is a good internal control and provides evidence a transaction occurred. Providing source documents to your bookkeeper or accountant in a timely manner assists them in preparation of financial statements and accurately analyzing your business activity.
In the Accounting Services Department at Stockman Kast Ryan + Co, we take a balance sheet approach when closing a set of books. This means each account on the balance sheet (assets/liabilities and equity) is reconciled to source documents (bank statements, amortization schedules, payroll and sales tax returns, etc.) before closing the net income for the year. We view all the transactions during the year to capture any reclassifications that may need to be reallocated to a different account as well as reconciling expenses such as payroll.
There are many things to take into consideration when finalizing a Year End Closing.
Generally, we will make the final year-end adjustments to the balance sheet to zero out the owners’ distributions/draws for the upcoming year as well as to record depreciation. Occasionally, we have additional tax adjustments that may also affect your books.
We know that closing out your books for the year can be a daunting task. But taking the time to prepare now will likely save you both time and money later. “Clean” books make the tax preparation process that much easier and efficient. If you have questions regarding any of the suggestions listed here, please let us know.
When President Obama signed into law the 21st Century Cures Act on December 13, 2016, most of the media coverage focused on the provisions related to medical innovation. But the law also includes some good news for small businesses that have been prohibited in recent years from providing their employees with Health Reimbursement Arrangements (HRAs). Specifically, as of January 1, 2017, qualified small employers can use HRAs to reimburse employees who purchase individual insurance coverage, rather than providing employees with costly group health plans.
Employers can use HRAs to reimburse their workers’ medical expenses, including health insurance premiums, up to a certain amount each year. The reimbursements are excludable from employees’ taxable income, and untapped amounts can be rolled over to future years. HRAs generally have been considered to be group health plans for tax purposes.
The Affordable Care Act (ACA) prohibits group health plans from imposing annual or lifetime benefits limits and requires such plans to provide certain preventive services without any cost-sharing by employees. According to previous IRS guidance, “standalone HRAs” — those not tied to an existing group health plan — didn’t comply with these rules, even if the HRAs were used to purchase health insurance coverage that did comply. And businesses that provided the HRAs were subject to fines of $100 per day for each affected employee.
The IRS position was troublesome for smaller businesses that struggled to pay for traditional group health plans or to administer their own self-insurance plans. The changes in the 21st Century Cures Act give these employers a third option for providing one of the benefits most valued by today’s employees.
The law incorporates an earlier bill known as the Small Business Healthcare Relief Act in creating an exception from the ACA penalties for “Qualified Small Employer Health Reimbursement Arrangements” (QSEHRAs). These HRAs won’t be treated as group health plans. Employees won’t be required to pay taxes on the employer’s contribution, nor will the employer be liable for payroll taxes on it.
In addition, when an employer offers an HRA, all employees generally must be eligible unless they’re within their first 90 days on the job, under age 25, part-time or seasonal workers, covered in a collective bargaining unit, or certain nonresident aliens.
Employers that offer QSEHRAs must comply with some notice requirements. At least 90 days before each plan year begins (or on the first day a new employee is eligible), the employer must provide eligible employees a notice stating:
Failure to provide timely notice will subject an employer to a $50 penalty for each employee, up to $2,500 annually. Notice will be considered timely for 2017 if provided by March 31, 2017.
In addition, employers must report the value of any QSEHRA benefit on employees’ Forms W-2, beginning with forms issued in January 2018 for 2017. Future IRS guidance on such reporting is expected.
An employee’s eligibility for subsidies for individual insurance will be affected by his or her eligibility for a QSEHRA. If the QSEHRA makes health insurance “affordable” (meaning Silver-level coverage would cost no more than 9.69% of the employee’s household income), the employee won’t qualify for a subsidy. If the QSEHRA doesn’t make health insurance affordable, the employee can receive a subsidy but the amount will be reduced by the amount of the HRA benefit.
Although President-elect Trump and the Republican Congress have promised to repeal the ACA, the QSEHRA exception in the 21st Century Cures Act could complicate matters. If smaller employers take advantage of the exception, the individual insurance market is likely to expand and the risk pool is likely to diversify. This could both stabilize premiums and give more citizens a stake in preserving some of the ACA’s provisions.
If you need guidance on your insurance or other benefits planning during this uncertain time, we can help.
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.
If your business involves the production, purchase or sale of merchandise, your inventory accounting method can significantly affect your tax liability. In some cases, using the last-in, first-out (LIFO) inventory accounting method, rather than first-in, first-out (FIFO), can reduce taxable income, giving cash flow a boost. Tax savings, however, aren’t the only factor to consider.
FIFO assumes that merchandise is sold in the order it was acquired or produced. Thus, the cost of goods sold is based on older — and often lower — prices. The LIFO method operates under the opposite assumption: It allocates the most recent costs to the cost of sales.
If your inventory costs generally rise over time, LIFO offers a definite tax advantage. By allocating the most recent — and, therefore, higher — costs first, it maximizes your cost of goods sold, which minimizes your taxable income. But LIFO involves more sophisticated record keeping and more complex calculations, so it’s more time-consuming and expensive than FIFO.
LIFO can create a problem if your inventory levels begin to decline. As higher inventory costs are used up, you’ll need to start dipping into lower-cost “layers” of inventory, triggering taxes on “phantom income” that the LIFO method previously has allowed you to defer. If you use LIFO and this phantom income becomes significant, consider switching to FIFO. It will allow you to spread out the tax on phantom income.
If you currently use FIFO and are contemplating a switch to LIFO, beware of the IRS’s LIFO conformity rule. It generally requires you to use the same inventory accounting method for tax and financial statement purposes. Switching to LIFO may reduce your tax bill, but it will also depress your earnings and reduce the value of inventories on your balance sheet, which may place you at a disadvantage in comparison to competitors that don’t use LIFO. There are various issues to address and forms to complete, so be fully informed and consult your tax advisor before making a switch.
The method you use to account for inventory can have a big impact on your tax bill and financial statements. These are only a few of the factors to consider when choosing an inventory accounting method. Contact us for help assessing which method will provide the best fit with your current financial situation. ©2016