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 vs. LIFO

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.

Other considerations

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

In order to take advantage of two important depreciation tax breaks for business assets, you must place the assets in service by the end of the tax year. So you still have time to act for 2016. 

Section 179 deduction 

The Sec. 179 deduction is valuable because it allows businesses to deduct as depreciation up to 100% of the cost of qualifying assets in year 1 instead of depreciating the cost over a number of years. Sec. 179 can be used for fixed assets, such as equipment, software and leasehold improvements. Beginning in 2016, air conditioning and heating units were added to the list.
 
The maximum Sec. 179 deduction for 2016 is $500,000. The deduction begins to phase out dollar-for-dollar for 2016 when total asset acquisitions for the tax year exceed $2,010,000.
 
Real property improvements used to be ineligible. However, an exception that began in 2010 was made permanent for tax years beginning in 2016. Under the exception, you can claim a Sec. 179 deduction of up to $500,000 for certain qualified real property improvement costs.
 
Note: You can use Sec. 179 to buy an eligible heavy SUV for business use, but the rules are different from buying other assets. Heavy SUVs are subject to a $25,000 deduction limitation.

First-year bonus depreciation 

For qualified new assets (including software) that your business places in service in 2016, you can claim 50% first-year bonus depreciation. (Used assets don’t qualify.) This break is available when buying computer systems, software, machinery, equipment, and office furniture. 
 
Additionally, 50% bonus depreciation can be claimed for qualified improvement property, which means any eligible improvement to the interior of a nonresidential building if the improvement is made after the date the building was first placed in service. However, certain improvements aren’t eligible, such as enlarging a building and installing an elevator or escalator.

Contemplate what your business needs now

If you’ve been thinking about buying business assets, consider doing it before year end. This article explains only some of the rules involved with the Sec. 179 and bonus depreciation tax breaks. Contact us for ideas on how you can maximize your depreciation deductions.
As the end of 2016 approaches, it's time for employers to think about filing Forms W-2 and 1099. Forms W-2 are issued to employees to report compensation, withholding tax, and other items related to compensation. Forms 1099 are most commonly issued by businesses for payments in excess of $600 to vendors for services, rent, and other miscellaneous types of income. Forms 1099 do not need to be issued for purchases of inventory or other products.  
 

Filing Deadlines

 
For calendar year 2016, the due date for sending Forms W-2 and 1099 to employees and vendors remains January 31, 2017.  
 
In previous years, the due date for sending copies of these forms to the Social Security Administration (SSA) and to Internal Revenue Service (IRS) was the end of February. But for calendar year 2016, the due date for sending copies of the forms to SSA and IRS has been moved up to January 31, 2017.  
 
The IRS indicates that receiving the forms earlier will make it easier to verify income and withholding reported on individual income tax returns and to hopefully identify potentially fraudulent requests for refunds.   
 

Penalties

 
The IRS continues to impose strict penalties for late or non-filers as well as for those with incomplete or erroneous information. And it is important to note that separate penalties may apply: one for the filing and one for the payee statement. For example, if you fail to file a correct Form 1099-MISC with the IRS and  don't provide a correct Form 1099-MISC statement to the payee, you may be subject to two separate penalties.   
 
As in prior years, business owners are required to attest to having filed these forms on their business income tax returns.

Additional Notes on Forms 1099

In order to complete Form 1099, the business needs to obtain the name, address, tax entity type, and tax ID number for the vendor. If the vendor is an LLC, the business needs to know if the LLC is taxed as a single-member LLC, a partnership, or an S-corporation. Forms 1099 do not need to be issued to S-corporations or C-corporations unless the corporation is an attorney’s office.   
 
Form W-9, Request for Taxpayer Identification Number and Certification, can be used to gather this information. Ideally, the form should be completed prior to payment to the vendor. We recommend businesses have a policy that vendors must complete and return Form W-9 before the business issues payment to avoid the scenario of scrambling at year end to get information that may be difficult to gather.
 
If the vendor uses a “DBA” (doing business as), that should be indicated on the W-9 and this name also needs to be shown on the Form 1099. Forms 1099 must be filed with the name registered with the IRS tax return and EIN. You may not use a Social Security number along with a business name.
 
Once forms are received, the IRS matches the names and tax identification numbers with income tax returns. The business will receive a notice if the identification number reported on the 1099 doesn’t match IRS records. If incorrect information isn’t corrected, IRS will notify the business to withhold 25% from future payments and remit this to the IRS. This is referred to as “backup withholding” and can be a cumbersome process. 
 
Instructions and forms can be found on the IRS website at www.irs.gov.  We are happy to answer questions and can complete these forms for you or train you how prepare the forms using QuickBooks.   
 

Changes to Deadlines & Penalties at a Glance
Form Deadline
2016 Forms W-2, W-3,  and certain Forms 1096 and 1099-MISC  January 31, 2017
2016 Forms 1099-MISC, if reporting nonemployee compensation payments in box 7 January 31, 2017
Late Filing of Forms W-2, W-2G, 1098 and 1099 Penalty
2016 information returns filed less than 30 days late $50 per return with a maximum fine up to $186,000
2016 information returns filed over 30 days late, but filed before August 1, 2017 $60 per return with a maximum penalty of $532,000
2016 information returns filed after August 1 or not at all $260 per return with a maximum penalty of $500,000. 
2016 information returns not filed due to intentional disregard of the rules $530 per return with an unlimited maximum penalty!

 

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. 

 

We are quickly approaching the end of 2016. Now is the time to consider some year-end tax savings strategies for your business, before the year – and the opportunity – slips away.

Good News Bad News

The good news is that we have more certainty from a tax perspective this year because Congress made permanent many long-favored tax breaks (called extenders) late last year. The national elections, however, bring a fair amount of uncertainty to tax and financial planning.

Important Considerations

No matter the results of the election, though, there are important considerations to keep in mind as your business plans for year-end:

Defer or Accelerate?

Since tax rates in 2016 and 2017 are the same, in many cases it might make sense to plan ahead to defer income into 2017 and accelerate deductions into 2016. You will, of course, need to confer with your business tax advisor and take into consideration your tax accounting method and other elements of your tax planning process.

Section 179 Expensing and Bonus Depreciation

If you are contemplating the purchase of business assets, consider using the Section 179 expense deduction to claim significant write-offs for the cost of new and used equipment, software additions, and improvements to interiors of leased nonresidential buildings. The maximum amount of qualifying property that a business can expense for 2016 is $500,000. If the total of qualifying property purchased in 2016 exceeds $2,010,000, the amount of the Section 179 limitation is reduced dollar for dollar equal to the amount of excess purchases.

A couple of cautions to keep in mind: 

The 50% bonus depreciation deduction is also available for new property purchased in 2016. The combination of Section 179, 50% bonus depreciation and normal first year depreciation provides significant possibilities for reducing taxable income.

There are many factors that go into the decision to acquire business assets—many of them non-tax factors. However, the Section 179 deduction and other depreciation deductions should play a role in your decision making process and could enable your business to obtain property you need earlier and at reduced after-tax costs.

We can help

If you are uncertain about what steps make sense for your business to take before year-end, call us. We can discuss your particular situation and offer advice on what makes sense for you and your business.

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 a Records Retention Schedule 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.

Records Retention

 

If you have incomplete or missing records and get audited by the IRS, your business will likely lose out on valuable deductions. Here are two recent U.S. Tax Court cases that help illustrate the rules for documenting deductions.

Case 1: Insufficient records

In the first case, the court found that a taxpayer with a consulting business provided no proof to substantiate more than $52,000 in advertising expenses and $12,000 in travel expenses for the two years in question. 

The business owner said the travel expenses were incurred “caring for his business.” That isn’t enough. “The taxpayer bears the burden of proving that claimed business expenses were actually incurred and were ordinary and necessary,” the court stated. In addition, businesses must keep and produce “records sufficient to enable the IRS to determine the correct tax liability.” (TC Memo 2016-158)

Case 2: Documents destroyed

In another case, a taxpayer was denied many of the deductions claimed for his company. He traveled frequently for the business, which developed machine parts. In addition to travel, meals and entertainment, he also claimed printing and consulting deductions.

The taxpayer recorded expenses in a spiral notebook and day planner and kept his records in a leased storage unit. While on a business trip to China, his documents were destroyed after the city where the storage unit was located acquired it by eminent domain.

There’s a way for taxpayers to claim expenses if substantiating documents are lost through circumstances beyond their control (for example, in a fire or flood). However, the court noted that a taxpayer still has to “undertake a ‘reasonable reconstruction,’ which includes substantiation through secondary evidence.”

The court allowed 40% of the taxpayer’s travel, meals and entertainment expenses, but denied the remainder as well as the consulting and printing expenses. The reason? The taxpayer didn’t reconstruct those expenses through third-party sources or testimony from individuals whom he’d paid. (TC Memo 2016-135)

Be prepared

Keep detailed, accurate records to protect your business deductions. Record details about expenses as soon as possible after they’re incurred (for example, the date, place, business purpose, etc.). Keep more than just proof of payment. Also keep other documents, such as receipts, credit card slips and invoices. If you’re unsure of what you need, check with us.

In addition to providing for your own retirement needs, a qualified retirement plan also offers valuable tax savings for the dental practice, and can help attract and retain quality employees. The good news is that you don’t need to invest in a complicated plan. There are several retirement plans that actually look, act and feel like a traditional 401(k) plan —without the cost and complexity. This is not an all-inclusive list, but is intended to discuss a couple of the more popular plans for dental practices. 
 

SIMPLE IRA

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a good start-up plan for small dental practices that do not currently sponsor a retirement plan. You agree to match up to 3 percent of an employee’s salary dollar-for-dollar or make a 2 percent non-elective contribution for each eligible employee. If the employee contributes 2 percent of salary, the practice matches that 2 percent. If an employee contributes 10 percent, the practice is only on the hook for the 3 percent match. 
 
Pros: 
 
Affordable to set up and maintain — Just use the forms provided by the IRS, set up the plan and notify your employees. You may be eligible for a tax credit of up to $500 per year for each of the first three years for the cost of starting the plan.  Administrative costs are minimal, and no annual IRS reporting is required. 
 
Matching contributions are deductible — Money you put in for employees is deductible as a business expense. 
 
Employees have control of their retirement savings — Employees can terminate their salary reduction contributions, and may roll over their funds to a traditional IRA or another employer’s retirement plan at any time. 
 
Cons:
 
Contributions are mandatory — As the employer, you are required to make contributions to your employee’s accounts each year — even if the practice is having a lean year. You can choose whether to make a matching contribution up to 3 percent of salary or a 2 percent non-elective contribution for each eligible employee. You must give written notice of the funding percentage annually to each participant no later than 120 days after the plan year ends. You can also reduce the matching percentage, but not below 1 percent, and not for greater than 2 out of every 5 years. 
 
Employer contribution limits  could be lower — The maximum contribution amount for an employee is $12,500 for 2016  — quite a bit lower than other retirement plans. Employees older than 50, can make an additional $3,000 catch-up contribution each year Employers are limited to the amount of contributions discussed above. 
 
There is a deadline for opening — SIMPLE IRA accounts must be opened by October 1 in order to make contributions for that tax year.
 

SEP IRA

A Simplified Employee Pension (SEP) IRA is a good choice for solo practitioners or those with just a few employees. Contributions are paid directly into an IRA created for each employee, and the same investment, distribution and rollover rules as a traditional IRA apply. Contributions to a SEP are tax deductible, and the practice pays no taxes on the earnings on the investments. The employee is also free to supplement the SEP-IRA with another retirement plan. 
 
Pros:
 
Easy set-up and maintenance — Just like a SIMPLE IRA, set up is simple and fees are minimal. In addition, there are no annual filing requirements with the IRS.
 
Larger employer contributions are possible — The practice may contribute up to the lesser of $53,000 (2015-2016) or 25 percent of compensation for each  participant. 
 
You don’t have to contribute every year — You are not locked into making annual contributions. In fact, you decide each year whether, and how much, to contribute to your employees’ SEP-IRAs. 
 
Cons:
 
The employer makes all of the contributions — Unlike a SIMPLE IRA, where part of the contribution can be taken out of employees’ salary, a SEP IRA requires the employer to make 100 percent of the contributions.
 
Contribution percentage must be the same for everyone — You cannot pay yourself a higher contribution percentage than your employees.
 
All employees must be included if they meet minimum requirements — This can be expensive as the practice grows and you start adding employees. 
 
 
Dental professionals often neglect retirement savings while building their practice. Yet, building a nest egg for yourself and your employees doesn’t have to be complicated or expensive. 
 
We can help recommend, based on your retirement goals and other factors, what type of plan would be best suited for your practice.

Stay on top of filing and reporting deadlines with our tax calendar! Our tax calendar includes dates categorized by employers, individuals, partnerships, corporations and more to keep you on track. 

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