Businesses around the country get helping hands from college interns during the summer months, often without pay. However, businesses that do not pay their interns can get into hot water if their intern classifications are challenged down the road. That was the case in 2013 when a U.S. District Court ruled against Fox Searchlight Pictures and its subsidiaries for failure to pay former summer interns. The court subsequently compelled the company to compensate the interns for unpaid back wages, overtime pay and unreimbursed expenses for use of their personal cell phones and computers.
According to the Department of Labor, for-profit businesses may classify interns as trainees and forgo paying them only when they satisfy the following criteria:
• The internship is similar to training that students would receive in an educational environment, even though the work is performed in the business’s offices.
• The internship experience is for the benefit of the intern
• The intern does not displace regular employees but works under the close supervision of existing staff
• The business that provides the internship derives no immediate advantage from the activities of the intern, and, on occasion, the employer’s operations may actually be impeded
• The intern is not necessarily entitled to a job at the completion of the internship
• The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.
Under these guidelines, for-profit business will find few situations for which they will not be required to pay interns. The advisors with Berkowitz Pollack Brant’s Tax Planning and Consulting practices work closely with businesses of all sizes to examine their employment needs and comply with federal and state labor laws.
About the Author: Joanie B. Stein, CPA, is a senior manager in Berkowitz Pollack Brant’s Tax Services practice. She can be reached in the firm’s Miami CPA office at 305-379-7000 or email firstname.lastname@example.org.
The IRS, Department of Labor and Department of Health and Human Services recently released final guidance clarifying the 90-day waiting period under the employer mandate of the Affordable Care Act, which prohibits health insurers from imposing a waiting period of more than 90 days before offering affordable health coverage to full-time employees.
Under the new guidance, employers may add no more than one month of “reasonable” employee orientation before counting down a 90-day waiting period. One month is calculated by adding one calendar month, less one calendar day from an employee’s start date. In other words, the 90-day waiting period must begin no later than the day following the last day of an employee’s orientation.
In addition to orientation periods, employers may add other conditions for health care eligibility, including requiring employees to meet certain sales goals or earn a specific level of commission, as long as those conditions do not exceed the 90-day waiting period.
This final regulation applies to health plans beginning on or after January 1, 2015.
The accountants and advisors with Berkowitz Pollack Brant’s Tax Services practice stay abreast of changes to the Affordable Care Act to help businesses of all sizes understand and comply with the provisions of the law.
About the Author: Adam Cohen, CPA, is an associate director in Berkowitz Pollack Brant’s Tax Services practice. For additional information, call (954) 712-7000 or e-mail email@example.com.
Posted on July 22, 2014 by
Most businesses understand their responsibilities to pay employment taxes on behalf of their employees. However, determining whether to classify workers as employees or independent contractors is not always so cut and dry. Incorrectly classifying an employee as a contractor can result in the imposition of back taxes and penalties on the business.
In the most general terms, businesses must withhold income taxes and pay Social Security, Medicare and unemployment tax on wages they pay to employees. The same is not true for independent contractors, who are responsible for paying taxes on their own.
Correctly classifying workers requires businesses to examine their relationship with the worker and their control over the behavioral and financial aspects of that relationship. While there is no magic bullet for proving a worker’s status, businesses that answer “no” to the following questions are more likely to be involved in an independent contractor arrangement.
1. Does the business dictate where, when and how the worker can work?
2. Does the business provide the worker with specific training required to accomplish the job?
3. Does the business hire and pay for assistants the worker may need to complete his or her work?
4. Does the business carry worker’s compensation insurance on the worker?
5. Does the business pay for and set budgetary limits on the worker’s business and travel expenses?
6. Do customers pay the worker directly?
7. Does the worker fail to realize a profit or suffer a loss as a result of his or her services?
8. Does the business provide paid holidays, sick days and vacation time for the worker?
9. Does the worker offer and provide similar services for other businesses?
10. Does the worker perform services under the business’s name?
11. Does the worker have a right to end his or her relationship with the business without incurring liability?
It is important to note that answers to these questions are merely guidelines. Businesses must have a reasonable basis for how they classify workers and be prepared to defend and substantiate those actions. In fact, should the IRS challenges worker classification, an employer may still avoid assessments of past employment taxes under the Section 530 safe harbor. To qualify for Section 530 relief, a business must meet the following provisions:
• File all 1099s for the independent contractor
• Treat all workers holding similar positions as contractors
• Have a reasonable basis for treating workers as contractors rather than employees, including reliance on prior court and IRS decisions, a prior employment tax audit or a long-standing industry practice.
About the Author: Kenneth J. Strauss, CPA/PFS, CFP, is a director of Berkowitz Pollack Brant’s Tax Services practice. For more information, call (954) 712-7000 or email firstname.lastname@example.org.
The 2014 hurricane season has begun and South Florida businesses should take precautionary measures to put themselves in the best position possible in case a storm passes through our state. History has proven the crippling effect storms can inflict on businesses’ ongoing operations and the impact it can have also on the operations of business partners, including suppliers, distributors and customers.
While property insurance covers physical damage to a business following a disaster, business-interruption insurance is intended to cover the loss in income a business suffers arising from its inability to continue normal operations in the aftermath of a covered peril. Determining those economic losses is not a simple calculation. Policy considerations, such as limits, deductibles, exclusions and other endorsements; the adequacy of underlying records; market competitiveness; and the business owners’ attempts to mitigate its losses will affect the final loss quantification. However, business owners who properly maintain, manage and store their accounting and operational data will be better equipped to successfully substantiate and quantify business interruption losses when danger ensues.
Attempting to predict the damages a future natural or man-made disaster can cause is often a futile effort. Similarly, attempting to recoup losses in the aftermath of a disaster is ineffective without documentation of past performance and forecasts of future results. For this reason, businesses should take steps to ensure their records are up-to-date year-round, rather than waiting for the threat of a storm to make last-minute updates. Incomplete, imprecise or simply wrong information could hinder a business’ ability to recover damages or defend its claim.
Records of Past, Present and Future Performance
When a storm threatens, a business should gather documents that demonstrate its past performance, including three to five years of financial statements, tax returns, sales volumes, historical budgets / forecasts, general and subsidiary ledgers and other accounting journals for parent companies and their subsidiaries. These records can be key to substantiating a business’s track record and demonstrating to an insurance company the income it would have generated had the covered peril not occurred.
In addition, a business should preserve documents that detail its current operations, which may include its up-to-date books and records, financial statements, sales or order logs (including unfilled or pending sales / orders) and detailed records of inventory. Equally important is the business’s fixed-asset schedule, which itemizes the equipment the business owns, the dates of purchase, the dates the business put the equipment to use and the rate of depreciation on those assets. Fixed assets typically are insured for replacement-cost value, or the costs the business would incur to purchase an identical or similar piece of equipment without consideration for any depreciation that may exist. However, when the insured does not carry replacement-cost protection, the insurance company will pay the actual cash value of the assets and take into consideration the depreciation of those assets in the insurance recovery.
With regard to inventory, businesses that pay for selling price endorsements of finished inventory may value those products for insurance purposes at their selling prices, rather than their replacement costs. The resulting calculation of loss will include potential profits on the sales of those products in addition to their replacement value.
Lastly, it behooves businesses to substantiate loss claims with contemporaneous forecasts of future performance, which may include annual or monthly budgets, forecasts or projections as well as pending orders or cancelled orders that resulted from the covered peril.
With fewer documents demonstrating past, present and future performance on hand, businesses will have a harder time recouping losses following a disaster. To help reduce the likeliness of this occurrence, businesses should take steps to keep their records safe and secure. This may include the simple, low-tech task of storing papers and photographs of tangible assets in fire-proof, indestructible safes or sending them to a storage facility for safe keeping. Alternatively, businesses may avail themselves to one of the many cloud backup and storage service providers that ensure quick and easy retrieval of records.
Preparing for an unpredictable or unavoidable disaster takes forethought and planning to ensure a desirable recovery of insurable business losses, whether they be hard assets or economic variables.
The Forensic Accounting and Business Insurance Claims practices of Berkowitz Pollack Brant has more than three decades of experience helping Florida businesses prepare for and maximize financial recovery from insured perils.
About the Author: Daniel S. Hughes, CPA/CFF, is a director in Berkowitz Pollack Brant’s Forensics and Business Valuation Services practice. For more information, call (305) 379-7000 or e-mail email@example.com.
In addition to providing children with an opportunity to earn some extra cash, summer jobs and internships also offer a valuable lesson in savings. Often, these summer positions, whether they be as a cashier at fast-food restaurant or as a members of a formal internship program, represent the first time teenagers and young adults earn their own money and get their first introduction to Uncle Sam. Here are three common questions asked by students and their parents.
What is a W-4 and How do I Complete It?
Paid employees are required to complete a W-4 form that helps employers calculate the appropriate Social Security and Medicare taxes to withhold from employees’ paychecks.
Filing out section 1, 2, 3, 4 and 7 of the W-4 form is easy. It requires young workers to know their names, addresses, Social Security numbers and marital status. The form can get tricky on section 5, which asks for the total number of allowances one is claiming. The more dependents one claims, the less taxes the employer will withhold from his or her paycheck. Young workers may claim themselves as one dependent, unless they are already claimed as dependents on their parent’s tax returns. In these cases, young employees should claim zero (0) on their W-4s. While this may mean that more money may be taken out of one’s paycheck, the student may get a tax larger refund or owe less tax, depending on the amount of income earned for the year.
I Worked for the Money, Why Can’t I Spend It?
With a job comes a range of responsibilities, including establishing new behaviors for accomplishing goals, meeting deadlines and balancing work and personal schedules. Equally important is the responsibility of budgeting earnings today and saving for the future.
By establishing a budget, young workers can visualize where they spend and where they will eventually need to spend their earnings to cover adult expenses for items such as rent, gas and textbooks. It also provides an opportunity for young adults to see how they can grow their earning through a forced-savings program.
While retirement is a long-way off for young adults, the practice of setting aside savings now is the perfect entrée into employer-sponsored benefits plans and a lesson in how they may take advantage of compounding money over time. In fact, young workers may consider contributing a portion of their summer job earnings to Roth Individual Retirement Accounts (IRAs) and allowing their investment to grow tax-deferred until they reach retirement age, at which point they may withdraw funds free of tax. Furthermore, because of their young age, students can take full advantage of the power of compounding money over time. Consider the wealth students could accumulate by the age of retirement if they begin making the maximum annual contributions of $5,500 to a Roth IRA during their teen years.
Alternatively, young workers may opt to set aside a portion of their earnings into a bank savings account, which, unlike a qualified retirement plan, they may access at any time without penalty. In these cases, their contributions need not be limited to earned income.
Do I Need to File a Tax Return?
By January 31 of the year following their employment, young workers should expect to receive
a W-2 form that summarizes the amount of money they earned and the taxes already paid on those earnings. Students who earn more than $6,100 in 2014 must file an income tax return by April 15 of the following year. However, those earning less that $6,100 may also wish to file a return if they claimed zero dependents on their W-4s and had the maximum amount withheld from their paychecks. In these cases, the worker may be due a refund from the government.
Summer jobs present an excellent opportunity for young adults to get into the habit of working within a budget, while they have the safety net of their parents, and establishing a routine of saving for their unknown future.
About the Author: Joanie B. Stein, CPA, is a senior manager in Berkowitz Pollack Brant’s Tax Services practice. For more information, call 305-379-7000 or email firstname.lastname@example.org.
The IRS recently introduced an updated Taxpayer Bill of Rights to communicate more clearly and concisely the rights and responsibilities of taxpayers when dealing with the agency. These 10 protections and privileges include:
The Right to Be Informed. Taxpayers have a right to receive information and explanations about IRS procedures and decisions regarding their tax accounts and what they need to do to comply with tax laws.
The Right to Quality Service. Taxpayers have a right to receive prompt, courteous and professional services from the IRS as well as the ability to speak with a supervisor when they receive services in a manner that is not up to the taxpayer’s standards.
The Right to Pay No More than the Correct Amount of Tax.
The Right to Challenge the IRS’s Position and Be Heard. Taxpayers have a right to object to IRS actions, provide additional documentation to support their disputes and to receive a timely response from the IRS.
The Right to Appeal an IRS Decision in an Independent Forum. Taxpayers have a right to appeal most IRS decisions, including taking their cases to court.
The Right to Finality. Taxpayers have a right to know the amount of time they have to challenge the IRS’s position and when the IRS finishes an audit.
The Right to Privacy. Taxpayers have a right to expect that the IRS will comply with privacy laws and uphold taxpayers’ due process rights.
The Right to Confidentiality. Taxpayers have a right to expect that the IRS will not disclose their personal information, unless authorized be the taxpayer.
The Right to Retain Representation. Taxpayers have the right to retain a certified tax and accounting representative to assist and represent them in IRS-related matters.
The Right to a Fair and Just Tax System. Taxpayers have a right to expect the IRS to consider all of a taxpayer’s challenges in complying with applicable laws, paying tax liabilities and providing timely documentation. Should taxpayers believe that the IRS has not resolved their tax issues properly, they have the right to receive assistance from the Taxpayer Advocacy Service.
The professionals with Berkowitz Pollack Brant’s Tax, Audit and Consulting Services practices help individuals and business to comply with relevant domestic and international tax laws and have extensive experience representing then before taxing authorities.
About the author: Joseph L. Saka, CPA/PFS, is director in charge of the Tax Services practice at Berkowitz Pollack Brant. For more information, call (305) 379-7000 or e-mail email@example.com.
All businesses that enter into contracts with customers to sell goods and services will need to start preparing now for new revenue recognition standards that will take effect beginning in 2016 for public companies, and 2017 for privately held entities. This includes companies in the real estate, construction, software, telecommunication, manufacturing and distribution industries
The long-awaited new standards, ASU 2014-09 issued by the Financial Accounting Standards Board, and IFRS 15 issued by the International Accounting Standards Board, address the existing disparities and inconsistencies in how and when businesses recognize and report revenue. Under the new standards all businesses would recognize revenue using the same principles-based five-step model. Ultimately, users of a business’s financial statements, including vendors, customers, banks and investors, will have a better, universal yardstick with which to measure the business’s financial performance in the future.
Despite the advance notice on implementing the new standards, businesses should take the time now to assess their current contract procedures and take the necessary steps to implement systems and policies that will enable them to transition smoothly to the new revenue recognition model in the not so distant future.
The Tax, Audit and Consulting practices of Berkowitz Pollack Brant have experience working with business clients in a range of industries to develop strategies that meet complex reporting and disclosure requirements. For more information, call 305-379-7000 or e-mail firstname.lastname@example.org.
South Florida’s condo market is booming, thanks in large part to cash-rich buyers who are willing and able to pay pricey deposits prior to and during construction. These deposits on long-term construction contracts present property developers with significant tax-planning challenges and opportunities.
Long-Term Construction Contracts (LTCCs) for the building, manufacturing, installation or construction of property that will not be completed in the same taxable year in which the contract is executed require unique methods of accounting for revenue recognition. Failure to consider all of the components associated with accurately reporting income on LTCCs and the planning opportunities for postponing tax liabilities could result in severe penalties for non-compliance as well as lost opportunity costs when developers use available capital to pay taxes.
Typically, real estate developers recognize revenue using one of two methods. Under the Completed Contracted Method, the developer generally recognizes revenue when the contract is complete and accepted by the customer. However, when developers pre-sell projects utilizing LTCCs, they may be required to use the Percentage-of-Completion Method (PCM). Unless the LTCC covers one of several exempt projects, such as single-family homes, townhouses and buildings containing four or fewer residential dwellings, the developer may recognize revenue annually, throughout the development period using PCM. This may occur despite the fact that deposits the developer received from customers, which, by law, cannot be used to pay non-construction-related expenses.
Under PCM, revenue is determined by dividing the actual contract costs incurred through the end of a specific year by the total costs that the developer expects to incur over the life of the contract. The resulting fraction is then multiplied by the unit sales price to determine cumulative revenue to be recognized. Revenue recognized in all prior taxable years is then subtracted from the current tax year’s cumulative revenue to determine the revenue to be recognized for that particular tax year.
An exception to these revenue-recognition rules occur when LTCCs involve residential buildings in which 90 percent of the expected costs of the building are allocable to dwelling units. In these instances, the developer may determine income from a residential construction contract using the Percentage-of-Completion/Capitalized-Cost Method (PCCM). The IRS allows developers of residential condos that meet this 90 percent test to calculate 70 percent of the contract revenue using the percentage of completion method while typically using the preferable completed contract method to compute the remaining 30 percent of contract income. For alternative minimum tax (AMT) purposes, the developer must calculate the entire contract under PCM. As a result, the 30 percent of contract income that the developer can defer for regular tax purposes becomes taxable for AMT purposes, which generally results in a significant adjustment to alternative minimum taxable income.
When developers are required to account for their projects using the PCM or PCCM methods, it is likely that they and their investors will recognize so-called “phantom income,” which is taxable income recognized when there is no cash available from the project to distribute to investors to pay the taxes. Understanding this and other nuances in revenue recognition requirements allows condominium developers and their investors to properly plan for and address cash flow and tax liabilities associated with allocated income or losses from a particular project. This necessitates that developers employ the most advantageous accounting and tax planning strategies while mitigating risks associated with under-reporting income.
Costs Capitalization vs. Deduction Allocation
Condominium developers may not deduct the costs of developing a project in the year they incur those costs. Instead, they must accumulate and capitalize those costs by applying them against the revenues from future unit sales.
Capitalized costs on long-term contracts include both direct costs, such as land, direct materials and direct labor; and indirect costs, which involve expenses for project oversight, executive compensation, pension and employee benefits, rent, taxes, insurance, utilities, repairs, maintenance, engineering and design. These capitalized costs are applied against the revenue recognized under the PCM or PCCM methods. Prior year cumulative costs recognized are subtracted from the cumulative costs incurred at the end of the current taxable year and the difference is applied against the revenue recognized for the year to arrive at gross profit.
Certain indirect costs, such as those incurred for sales and marketing, including commissions on unit sales, are not required to be capitalized and may therefore be deducted in the year they are incurred. Developers may deduct these costs from gross profits realized from the PCM or PCCM method to arrive at taxable income for the year.
Interest expense may be deducted or capitalized, depending on the production cycle of a particular project. Developers must capitalize these costs for the production period of each unit of real property, which begins on the first date that physical production activity related to that unit commences and ends when either (1) the building is completed, or (2) the production ceases for a period of 120 days. Production activity includes not only construction activities for a building or structure, but also the clearing and grading of raw land, the demolition of a building and the construction of infrastructure, such as roads, sewers, sidewalks and landscaping. As a result, interest is generally deductible in the early stages of a particular project when a site is acquired. As a general rule, capitalization of interest expenditures begins when a shovel is taken to the proposed site.
Taxpayers must pay or are entitled to receive interest on the amount of tax liability that they defer or accelerate as a result of their overestimation or underestimation of total contract price or contract costs. Under this look-back method, taxpayers must pay interest for any deferral of tax liability resulting from the underestimation of the total contract price or the overestimation of total contract costs. Conversely, if the total contract price is overestimated or the total contract costs are underestimated, taxpayers are entitled to receive interest for any resulting acceleration of tax liability.
The purpose of the look-back method is to compensate either the IRS or developers for any deferral or acceleration of contract income that results from the use of estimated, rather than actual, total contract costs in applying the percentage of completion method. The look-back method is intended to offset the time-value effects of using estimates during the life of a contract that differ from the actual amounts determined upon the completion of the contract.
Understanding the revenue recognition rules and managing taxable income is not a simple task for developers of multi-family properties. It requires effective tax planning from the early stages of a project’s conception and continues through to project completion. For instance, developers who wish to meet the 90 percent test to utilize the PCCM method rather than the PCM method must address the issue during a building’s concept design phase. Additionally, developers may consider revenue deferral strategies, such as converting reservation deposits into executed contracts in January of a subsequent year, rather than in December of the current year.
Similarly, there may be tax-planning opportunities to accelerate deductions. For example, developers may consider optimizing sales-commission structures in order to accelerate deductions. Finally, the capital structure of many projects provides a particular partner (sponsor) a carried interest, which generally grants the sponsor a larger allocation of the cash distributions than his or her proportional share of the capital contributed, if any. Because income from the development and sale of condominiums is typically ordinary income, it may be more beneficial to structure the carried interest formula instead to be a development fee to be paid to the sponsor at the end of the project. As a result, the sponsor’s fee would become a cost of the project, which could potentially reduce the percent complete ratio. In turn, this could decelerate the revenue recognition for the investors. The sponsor may also be able postpone the recognition taxable income from his share of the deal profit to more closely correspond with his receipt of cash from the project.
The Real Estate Tax professionals with Berkowitz Pollack Brant have extensive experience guiding developers through the labyrinth of revenue recognition challenges and developing sound strategies to optimize tax-planning opportunities.
About the Author: Edward N. Cooper, CPA, is a director with Berkowitz Pollack Brant’s Tax Services practice. For more information, call (305) 379-7000 or e-mail email@example.com.