Calendar

Click on the link for the June 2017 Client Bulletin

The IRS has announced decreases in the standard mileage rates that taxpayers will use for calculating business, medical, and moving expenses in 2017. Use of the standard mileage rate is a popular alternative to using the actual expense method, which requires taxpayers to keep track of specific costs for maintenance, repairs, tires, gas, oil, insurance, etc.

Business Use

According to the IRS, the standard mileage rate for use in calculating 2017 business travel expenses is 53.5¢, down from 54¢ in 2016. The new rate also applies where the employer maintains an “accountable” plan for reimbursing employees who use their own automobiles for business-related travel. Additionally, if an employee is provided with a company-owned vehicle for personal use, the employer may use the standard mileage rate to value the benefit. 

Medical Travel

The IRS also announced a reduction in the mileage rate applicable to medical travel. The new rate is 17¢, down from 19¢. Costs of medical travel are potentially deductible on Schedule A of Form 1040 where the taxpayer has had to travel for medical treatment.

Moving

The 2¢ reduction also applies to mileage claimed as moving expenses, decreasing this rate to 17¢. Allowable moving expenses may be taken as an “above-the-line” adjustment where the taxpayer has to move for a job that is at least 50 miles farther from his or her prior residence than the prior employment. 

Charitable Work

No reduction will apply to the rate allowed for any travel related to charitable work, which remains at 14¢ per mile. This rate is set by statute and is not inflation-adjusted.

Generally, the IRS adjusts the standard mileage rate annually, though it sometimes makes a midyear adjustment when gasoline prices have changed significantly.

Summary

The new standard mileage rate is in effect for all business, medical, and moving expenses incurred in 2017. If you have any questions about how the standard mileage rates apply in particular (or deducting travel expenses in general), let us know.

The IRS has released new guidance to help taxpayers avoid taxes and penalties for late rollovers of distributions from employer-sponsored retirement plans and individual retirement accounts (IRAs). Ordinarily, such rollovers must be completed within 60 days to be considered valid. The new guidance establishes a process for taxpayers who miss the 60-day rollover window for any one of 11 different reasons to correct the error.

Background

Generally, a taxpayer who wants to roll funds tax free from a workplace retirement plan or IRA into another plan or IRA has two options: (1) Arrange for a direct trustee-to-trustee transfer of the funds (without taking receipt of the money) or (2) take the distribution and deposit it with the new plan or IRA trustee within 60 days.

In the second case, failure to meet the 60-day deadline generally renders the rollover invalid and the distribution taxable. Also, for those under age 59½, an additional 10% penalty will generally apply unless the taxpayer can meet one of a number of narrow exceptions.

Prior to the new guidance, taxpayers had only two avenues of relief for late rollovers. One was an “automatic waiver,” which applies only if the financial institution is at
fault. Alternatively, the taxpayer could apply for a private letter ruling from the IRS, but the application fee for a ruling is $10,000.  

New self-certification procedure

The new guidance offers a third avenue. It requires no application fee, but the taxpayer must complete the IRS’s model certification letter (or one substantially similar to it) and forward it to the receiving plan or IRA trustee.

In the letter, the taxpayer must certify that he or she missed the 60-day deadline for one of 11 specified reasons. These include — in addition to error by a financial institution — severe damage to the taxpayer’s principal residence, serious illness of the taxpayer or a family member, postal error, and a misplaced distribution check. In addition, the taxpayer must complete the rollover “as soon as practicable” — usually within 30 days — after the reason for the delay has ceased to apply.

Note that the IRS reserves the right to later challenge the rollover if it determines that the certification was not truthful or that the contribution was not made “as soon as practicable.”

Call us if we can help answer your rollover questions.

The Social Security Administration and the IRS have announced the cost-of-living adjustments that apply to the Social Security tax and retirement plan contribution limits for 2017. The most notable increase affects Social Security taxes.

Social Security Wage Base

Wages and self-employment compensation are subject to a 6.2% Social Security tax. The tax is payable by both the employee and the employer, combining for a total tax rate of 12.4%. The self-employed pay both portions of the tax.

The tax applies only to wages and self-employment compensation up to an annually adjusted wage base. For 2017, the new Social Security wage base is $127,200 — a substantial increase from the $118,500 level applicable in 2016.

As a result of this increase, an employee making an amount equal to or greater than the Social Security wage base in 2017 could see his or her share of Social Security taxes increase to $7,886.40 — or $539.40 higher than the maximum payable in 2016.

Contributions to Employer-sponsored Plans

Following are some of the key retirement plan limits.  

401(k), 403(b), and most 457 plans. The limits for elective deferrals and “catch-up” contributions (for those age 50 and older) remain at $18,000 and $6,000, respectively.   

“Annual additions” limit for defined contribution plans. This limit generally provides a cap on the combined contributions of the employer and employee in a defined contribution plan (such as a 401(k) plan or a basic profit sharing plan). The limit has increased from $53,000 to $54,000.

SIMPLE IRAs. The general limits on employee contributions and catch-up contributions remain at $12,500 and $3,000, respectively.

Contributions to IRAs

Though contribution limits have not changed, phaseout levels have increased by small amounts.

Individual retirement accounts (IRAs). The limits for contributions and catch-up contributions to both traditional and Roth IRAs remain unchanged at $5,500 and $1,000, respectively.

Individuals who contribute to traditional IRAs and have access to a workplace retirement plan (whether their own or through their spouse’s plan) will see minor changes in the income-level phaseouts that apply for purposes of making deductible contributions.

• For single taxpayers and heads of household who are covered by a retirement plan at work, the deduction is phased out once modified adjusted gross income (MAGI) is between $62,000 and $72,000 (increased from $61,000 and $71,000 in 2016).     

• For married couples filing jointly when the spouse contributing to the IRA is also covered by a workplace retirement plan, the deduction is phased out once joint MAGI is between $99,000 and $119,000 (increased from $98,000 and $118,000 in 2016).

• For married couples filing jointly when the spouse contributing to the IRA is not the spouse with the workplace retirement plan, the deduction is phased out once joint MAGI is between $186,000 to $196,000 (increased from $184,000 and $194,000 in 2016).

Similarly, the income phaseout levels for Roth IRA contributions have increased slightly.

• For single taxpayers and heads of household, the income phaseout range is $118,000 to $133,000 (increased from $117,000 and $132,000 in 2016). For married couples filing jointly, the income phaseout range is $186,000 to $196,000 (increased from $184,000 and $194,000 in 2016).

Businesses that use independent contractors must be careful to observe federal tax laws regarding who does and who does not qualify for that designation — or they risk incurring significant financial penalties. Though sometimes the line between the two categories of workers can blur, the problem of misclassified independent contractors remains a high priority issue for the IRS.

Distinct tax obligations

For an employee, the business generally must withhold income and FICA (Social Security and Medicare) taxes from the employee’s pay and deposit the taxes with the government in a timely manner.

The business must also pay its own share of FICA taxes for the employee. These taxes can be significant. For 2017, the employer’s FICA share is equal to 7.65% of earnings up to $127,200 and 1.45% of earnings exceeding that amount.

In contrast, if the worker is an independent contractor, the business need not withhold federal income or FICA taxes — nor need it pay any FICA or federal unemployment taxes on the worker’s earnings.

Penalties

Because businesses have financial incentives for characterizing employees as independent contractors, the IRS has authority to impose heavy penalties for misclassifications. Businesses may be held liable for employment taxes for misclassified workers, and additional penalties may apply.

Proper designation

To determine whether a worker is an independent contractor or an employee, the IRS examines the degree of control and independence in three broad categories — behavioral, financial, and type of relationship. No single piece of evidence —such as, for example, a written agreement expressly stating that the worker is an independent contractor — will control the determination.

An employer who is unsure about the proper classification can ask the IRS for a determination. Though these decisions may take six months or longer, a business that continually hires the same types of workers may want to consider filing IRS Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

Correcting mistakes

Employers with misclassified workers may be able to correct their mistakes through the IRS’s Voluntary Classification Settlement Program. The program gives eligible employers the opportunity to reclassify their workers as employees for future tax periods and obtain partial relief for unpaid federal employment taxes. 

New filing deadlines

Generally, if a business has made payments of $600 or more to an independent
contractor, it must file an information return (Form 1099-MISC) with the IRS and send a corresponding statement to the independent contractor.

For the 2016 calendar year, businesses must file Form 1099-MISC for nonemployee compensation payments earlier than in prior years, and there will be no extensions for electronic filings. Paper and electronic versions must be filed with the IRS by January 31, 2017.

Please call us with any questions you may have about your tax obligations for employees and independent contractors.

The tax law allows businesses to deduct ordinary and necessary expenses, including the costs of repairs and maintenance. However, amounts paid to acquire and improve buildings, equipment, and other tangible property must be capitalized and generally are deducted over time through depreciation.

Reconciling the two rules has been difficult for many businesses. To help clarify how the rules apply, the IRS issued final regulations in 2013 for application beginning in the 2014 tax year.

De minimis Safe Harbor

The regulations include a safe harbor rule that allows eligible businesses to treat as “de minimis” (and therefore currently deductible) certain expenditures for low-cost items. Using the safe harbor rule can simplify tax recordkeeping and allow relatively inexpensive asset purchases to be written off more quickly.

Initially, businesses electing the safe harbor could deduct up to $5,000 or $500 per invoice (or per item as substantiated by the invoice), with the higher limit available to taxpayers with an applicable financial statement (AFS) — generally, a financial statement audited by a CPA. However, after numerous commentators argued that the lower $500 limit did little to ease the administrative burdens of small businesses that lack an AFS, the IRS recently announced it would increase that limit to $2,500.

Eligible taxpayers will still have to meet the other requirements of the safe harbor, including the need to have appropriate accounting procedures in place at the beginning of the tax year.

Example. ABC’s accounting procedures provide that ABC will treat purchases of assets costing $2,500 or less as an expense on its books and records. ABC buys four printers for $800 each and receives a final invoice for $3,200. The expenses satisfy the new safe harbor rule because the cost of each item is not more than $2,500 and within ABC’s accounting guidelines.

The new $2,500 limit will generally apply for tax years that begin on or after January 1, 2016.

Safe Harbor for Retail/Restaurant Remodeling Costs

The IRS also announced a new safe harbor formula for restaurant and retail businesses. To simplify the determination of whether the cost of “remodel-refresh” projects are for repairs/maintenance or for improvements, the new rule allows eligible businesses to simply treat 75% of the year’s qualified costs as the deduction portion and the other 25% of the costs as the capital expenditure portion.

To be eligible for the new method, a taxpayer must have an AFS and be in the trade or business of (1) selling merchandise to customers at retail or (2) preparing and selling meals, snacks, or beverages to customer order for immediate on-premises and/or off-premises consumption. (Certain types of businesses won’t qualify.) A taxpayer that leases or sublets a building to a retailer or restaurant that incurs remodel-refresh costs may also qualify.

This new rule is effective for tax years beginning on or after January 1, 2014.

Contact us if we can help you review your expensing procedures.

Conserving energy is a priority for many taxpayers. There are generous federal income-tax credits available to individuals and businesses that can help defray some of the cost of buying and installing certain energy efficient systems.

Individuals

The residential energy efficient property (REEP) credit is a tax credit of up to 30% of the expenses paid for solar electric, solar hot water, geothermal heat pump, small wind energy, and fuel cell property. In the case of fuel cell property, there is an additional cap on the credit of $500 for each half kilowatt of capacity.

To qualify for the credit, the property must be installed in the taxpayer’s new or existing U.S. residence prior to 2017. For fuel cell equipment, individuals may claim the credit only for property installed in their principal residence.

The credit covers both equipment and installation expenses, including the cost of piping or wiring the equipment into the home. Note, however, that the credit is unavailable for equipment used to heat a swimming pool or hot tub and is not available for leased equipment.

Individuals can claim the REEP credit for more than one qualifying item. Though the credit is nonrefundable (that is, limited by the amount of an individual’s tax liability for the year), any unused portion may be carried forward to future years.

Businesses

The business energy credit is equal to 30% of the cost of qualifying fuel cell, solar energy, and small wind energy property. A 10% credit is available to businesses for qualifying geothermal and microturbine property.

Businesses generally must place the property in service prior to 2017. (A 10% credit for certain geothermal and solar energy property will be available after 2016.) Moreover, the credit may not be available when the property is purchased using certain types of non-recourse financing.

Contact us if we can help you determine if you or your business is eligible for either of these energy credits.

The IRS has announced that, for 2014, it will allow qualifying small businesses to account for tangible property on a go-forward basis for that year and without filing Form 3115. Essentially, the new rule makes it easier for small businesses to adopt the new tangible property regulations made effective for 2014.

Background

In 2013, the IRS issued long-awaited and wide-ranging final regulations concerning the proper method of accounting for the acquisition, maintenance, and improvement of tangible property. In 2014, the IRS issued additional final regulations regarding dispositions of tangible property.

The new regulations will require many taxpayers to change their accounting treatment for particular items of tangible property. However, to do so, taxpayers must first obtain IRS consent, which in turn ordinarily requires that they file Form 3115 and account for the items’ treatment in prior years. The requirement is designed to ensure that all income is accounted for and no deductions are duplicated.

After it had originally released the tangible property regulations, the IRS received numerous comments about the additional administrative burdens that they would place on small business owners.

New Guidance

The new rule provides that a qualifying “small business” may make changes to its method of accounting for amounts paid or incurred, and dispositions of tangible property in tax years beginning on or after January 1, 2014 on a “cutoff” basis — that is, without accounting for their treatment in prior years. In addition, for its first taxable year that begins on or after January 1, 2014, a qualifying small business may make the necessary accounting changes without filing Form 3115.

For purposes of the new rules, a “small business” has either (a) total assets of less than $10 million or (b) average annual gross receipts of $10 million or less for the prior three tax years.

Treatment of the tangible items on a “cutoff” basis will not provide audit protection for prior years. Small businesses may, however, choose to file Form 3115 to retain a clear record of a change in method of accounting.

Call us if we can answer questions about how the tangible property regulations apply to your situation.

Any employer reimbursing its employees for business-related expenses should consider whether the reimbursement arrangement meets the IRS’s requirements for an “accountable plan.” Meeting these requirements avoids the need to include the expense payments in employees’ gross income and avoids the employer’s share of any payroll taxes that otherwise would be due on the payments.

General Requirements

An accountable plan must meet several requirements. One is that the expense must have a “business connection,” meaning it must be allowable as a deduction and paid or incurred by the employee while performing services as an employee.

Also, the employee must adequately account for expenses and return any excess reimbursement or allowance within a “reasonable period of time.” The meaning of reasonable period of time depends on the facts and circumstances, but the IRS has provided several safe harbors.

Safe Harbors

Substantiation of an expense within 60 days after it is paid or incurred will be deemed reasonable, as will the return of an advance within 120 days. Alternatively, an employer may provide its employees with periodic
statements (at least quarterly) that require them to either account for or return any advances within 120 days of the statement.

Reporting Reimbursements

If the reimbursement is made under an accountable plan, the employer reports no additional income to the employee. But if an accountable plan is in place and the employee fails to substantiate the expense or fails to return any amount in excess of substantiated expenses within a reasonable period of time, then the reimbursement is subject to withholding and employment taxes. These amounts must be reported no later than the first payroll period following the end of the applicable reasonable period of time.

If the employer has a non-accountable plan — a plan that fails to meet one of the required accountable plan elements — then all amounts advanced to employees are wages and subject to both income withholding and employment taxes at the time they are paid.

Additional rules apply to per diem and mileage reimbursements.

If you would like us to review your reimbursement plan, please contact us.

The IRS has announced the 2015 contribution limits for both employer-sponsored plans and individual retirement accounts (IRAs). Increased limits may provide individuals and businesses with opportunities for additional tax savings in the coming year.

Employer-sponsored Plans

401(k), 403(b), and most 457 plans. In 2015, employees may defer up to $18,000 in earnings (up from $17,500 in 2014). For those 50 and older, the limit on supplemental “catch-up” contributions has increased from $5,500 to $6,000.

Defined contribution plans. The dollar limit on “annual additions” (generally, combined contributions of the employee and employer) to a participant’s account in a defined contribution plan, such as a 401(k) plan or a basic profit sharing plan, has increased from $52,000 to $53,000.

SIMPLE IRAs. The general limit on employee contributions to a SIMPLE IRA has increased from $12,000 to $12,500. The allowable catch-up contribution for employees 50 and older has increased from $2,500 to $3,000.

Individual Retirement Accounts

The limit for contributions to both traditional and Roth IRAs remains unchanged at $5,500, as does the $1,000 limit on catch-up contributions.

However, individuals who contribute to traditional IRAs and have workplace retirement plans will be allowed to have slightly more income in 2015 before they can no longer deduct their IRA contributions.

• For single taxpayers and heads of household who are covered by a retirement plan at work, the deduction is phased out once modified adjusted gross income (MAGI) is between $61,000 and $71,000 (up from $60,000 and $70,000 for 2014).

• For married couples filing jointly when the spouse contributing to the IRA is also covered by a workplace retirement plan, the deduction is phased out once joint MAGI is between $98,000 and $118,000 (up from $96,000 and $116,000 for 2014).

• For married couples filing jointly when the spouse contributing to the IRA is not the spouse with the workplace retirement plan, the deduction is phased out once joint MAGI is between $183,000 and $193,000 (up from $181,000 and $191,000 for 2014).

Similarly, the income phaseout levels for Roth IRA contributions have also increased.

• For single taxpayers and heads of household, the income phaseout range is $116,000 to $131,000 (up from $114,000 to $129,000 for 2014).

• For married couples filing jointly, the income phaseout range is $183,000 to $193,000 (up from $181,000 to $191,000 for 2014).