At the end of 2015, Congress made permanent a provision in the tax code that allows investors to transfer annually up to $100,000 tax-free from an Individual Retirement Account (IRA) directly to a qualified charity. By making a Qualified Charitable Distribution (QCD), investors over the age of 70 ½ may satisfy their annual required minimum distributions (RMDs) without adding the transferred amount to their taxable adjusted gross income for the year.
Consider a 72-year-old taxpayer who is required to take an RMD of $25,000 in 2016. Rather than depositing the required amount into the taxpayer’s bank account, he or she may instead transfer the funds directly to a tax-exempt organization and keep those funds out of his or her adjusted gross income. Philanthropic investors can contribute more than the RMD and similarly avoid a higher tax bracket and even reduce the amount of his or her Social Security benefits that are subject to taxes.
The tax benefits of QCDs are available only to investors who are 70 ½ or older who make QCDs from their own IRAs, not from ones they inherited. Any amount above the $100,000 threshold will be considered taxable income for which the taxpayer may be able to claim a charitable deduction on his or her tax returns.
The contribution must be made directly from the IRA to the intended charity; it may not flow to the account owner and then to the charity. The best way to accomplish this is to ask the IRA custodial to assist in completing the forms required for the transfer.
While donations below the $100,000 will not qualify for a tax deduction, donors should obtain from the charity a letter acknowledging receipt of the gift to substantiate their donations.
The professionals with Provenance Wealth Advisors have deep experience working with high-net-worth individuals to implement tax-efficient financial-planning strategies that are designed to meet desired wealth-preservation and charitable goals.
About the Author: Lee F. Hediger is a co-founding director and chief compliance officer with Provenance Wealth Advisors, an independent financial services firm affiliated with Berkowitz Pollack Brant Advisors and Accountants, and a registered representative with Raymond James Financial Services. For more information, call (954) 712-8888 or email info@provwealth.com.
Provenance Wealth Advisors, 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888.
Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC. Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors and Accountants.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of PWA and not necessarily those of Raymond James. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. You should discuss any tax and legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.
The IRS recently granted a one-month extension for estates to meet the 30-day consistent basis and reporting requirements that it introduced in 2015.
Effective March 31, 2016, executors and some estate beneficiaries will have 30-days after the date of an estate tax filing to report to the IRS, and to any persons inheriting interest from a decedent, the value of each asset contained in the estate.
The consistent basis reporting requirement aims to ensure that a beneficiary does not claim a higher value for inherited assets than that which the estate reports. Rather, the beneficiary’s income tax basis will remain the same as the estate tax value as reported on Form 706, Estate Tax Return, for all future years.
Executors will need to report asset basis to the IRS on Form 8971, Information Regarding Beneficiaries Acquiring Property, and on Schedule A within 30 days of the estate tax return filing. Reporting to beneficiaries will only require that estates provide beneficiaries with Schedule A within the 30-day period.
About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director with the Taxation and Financial Services practice of Berkowitz Pollack Brant Advisors and Accountants, where he provides tax and estate-planning counsel to high-net-worth families, closely held businesses and professional services firms. He can be reached in the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.
For the second time since July 2015, the IRS has extended the deadline for estates to meet a 30-day consistent basis and reporting requirement. Effective immediately, executors and some beneficiaries of estates will have until June 30, 2016, to report to the IRS, and to any persons inheriting interest from a decedent, the value of each asset contained in the estate. This extension applies to estate tax returns filed after July 31, 2015.
The consistent basis reporting requirement aims to ensure that a beneficiary does not claim a higher value for inherited assets than that which the estate reports. Rather, the beneficiary’s income tax basis will remain the same as the estate tax value as reported on Form 706, Estate Tax Return, for all future years.
Executors will need to report asset basis to the IRS on Form 8971, Information Regarding Beneficiaries Acquiring Property, and on Schedule A within 30 days of the estate tax return filing. Reporting to beneficiaries will only require that estates provide beneficiaries with Schedule A within the 30-day period.
About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director with the Taxation and Financial Services practice of Berkowitz Pollack Brant Advisors and Accountants, where he provides tax and estate-planning counsel to high-net-worth families, closely held businesses and professional services firms. He can be reached in the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.
Identity theft is a serious threat to consumers throughout the year. During tax season, however, the incidence of identity-related fraud increases as scammers find new ways to access consumers’ personal data or trick them into divulging this information in order to intercept tax refunds.
While the IRS advises taxpayers to file their returns early to avoid the risk of theft, this is not possible for high-net-worth individuals with complex finances who must wait for documentation from their advisors, brokerage accounts and others before they can file. Therefore, investors must take the following precautions to protect themselves during tax time and throughout the year.
Practice Safe Use of Technology
- Protect computers, mobile phones and tablets with passwords, PINS, firewalls, anti-spam and anti-virus software
- Update computer security patches regularly
- Ensure home and work Wi-Fi is password-protected
- Avoid public Wi-Fi networks when conducting business or accessing financial accounts on mobile devices
- Consider using file-encryption software to keep sensitive information hidden from potential thieves.
Stay Safe Online
- Look for an “s” at the beginning of a website’s https address (“shttps:\\”) to confirm that the site encrypts personal and sensitive data
- Login to secure websites using strong passwords that include a mixture of capital letters, lowercase letters, symbols and numbers
- Use a password-keeper program or store digital data in the cloud rather than writing down passwords on paper or maintaining them on unsecure desktops
- Be alert to phishing attempts, in which criminals pose as someone else, such as the IRS or a financial institution, and send official-looking and often demanding emails that attempt to trick potential victims into clicking on a link and revealing personally identifiable information, including one’s Social Security number, account information and login details; most reputable businesses will never ask a consumer to reveal this information via unsecured networks
- Avoid clicking on links or replying to any email that comes from an unknown source
- Access financial accounts by typing in a website URL rather than following a link received via email
- Review and update social media profiles and privacy settings regularly
Protect Your Information Offline
- Do not share Social Security numbers with any businesses, including doctor’s offices and retail stores, unless applying for a credit card or financing
- Do not leave mail with sensitive information in mailboxes outside of homes
- Shred documents containing personal information, including credit card offers, receipts, credit applications, bank statements, medical statements, etc.
- Store personal information securely in homes or in safe-deposit boxes at the bank
- Check your credit report annually to identify misuse of personal information and/or fraud
Education and a strong defense are among the best ways that consumers can deter criminals and protect themselves from becoming a victim of identity theft. This is especially true on South Florida, which was home to the nation’s highest per-person number of identity-theft complaints in 2014.
About the Author: Stefan Pastor is a financial planner with Provenance Wealth Advisors, an independent financial services firm affiliated with Berkowitz Pollack Brant Advisors and Accountants, and he is a registered representative with Raymond James Financial Services. He can be reached at 954-712-8888 or via email info@provwealth.com.
Provenance Wealth Advisors, 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888.
Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC.
Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors and Accountants.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Provenance Wealth Advisors and not necessarily those of Raymond James. You should discuss any legal matters with the appropriate professional. Prior to making an investment decision, please consult with your financial advisor about your individual situation. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.
Businesses currently operating in Florida have a responsibility to file an annual report with the Department of State by May 1 in order to maintain their active status. Failure to file by the May 1 deadline will result in a $400 late fee imposed on all for-profit corporations, limited liability companies, limited partnerships, and limited liability limited partnerships. Failure to file by the fourth Friday of September will result in administrative dissolution of the business entity.
Existing and active businesses in Florida should receive a notice instructing them to visit the Division of Corporations at www.sunbiz.org, where they may file an annual report online by entering the 6 to 12-digit document number provided to them from the Division of Corporations. Here, businesses may also pay electronically the required filing fee of $150 for for-profit corporations, $138.75 for limited liability companies, $500 for limited partnerships and limited liability partnerships or $61.25 for non-profit entities. Businesses may use the online annual report filing system as an opportunity to change their mailing addresses or the addresses or names of its officers, directors or partners. Changes to an entity’s name, however, cannot be executed online.
About the Author: Dustin Grizzle is a senior manager in Berkowitz Pollack Brant’s Tax Services practice, where he provides tax planning and compliance services to businesses and high-net-worth individuals. He can be reached at the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at info@bpbcpa.com.
March 31: Deadline for electronic filing of Form 1099 with the IRS and Form W-2 with the Social Security Administration
March 31: Deadline for large employers to furnish to their full-time employees IRS Forms 1095-B, Health Coverage, and 1095-C, Employer-Provided Health Insurance Offer and Coverage, detailing health care coverage provided to employees in 2015
April 1: Deadline for filing Florida Tangible Personal Property tax returns
April 1: Deadline to file Florida corporate returns for calendar-year corporations that do not request a six-month filing extension
April 1: Last day for retired taxpayers who turned 70 ½ in 2015 to avoid a penalty and take their first required minimum distributions (RMD) from traditional IRAs and employer-sponsored plans
April 18: Last day taxpayers may contribute to Individual Retirement Accounts (IRAs) for the 2015 tax year
April 18: 2015 tax filing deadline for individuals and calendar-year trusts and estates that do not request a six-month filing extension
April 18: 2015 deadline for individuals and calendar-year trusts to request a six-month filing extension and pay the estimated tax due
April 18: 2015 tax filing deadline for partnerships that do not request a five-month filing extension. Partnerships should also furnish copies of Schedules K-1 to each partner by this date.
April 18: Due date for individuals and calendar-year corporations to make their 2016 first-quarter estimated tax payments
April 30: Due date for businesses to file first-quarter 2016 payroll tax returns and federal unemployment tax
April 30: Deadline for businesses sponsoring pre-approved 401(k), profit-sharing or other defined contribution (DC) retirement plans, to sign and adopt restated, IRS-compliant plan documents
May 1: Deadline for Florida businesses to file annual reports with the state
May 16: Deadline for calendar-year non-profits and fiscal year June 30th non-profits to file 2015 tax returns.
June 15: Due date for individuals and calendar-year corporations to make 2016 second-quarter estimated tax payments
June 30: Deadline to file Form 114, Foreign Account Reporting
The IRS has temporarily suspended access to its Identity Protection Personal Identification Number (IP PIN) online tool following a data breach on the very service intended to protect taxpayers from identity theft.
The IRS established the IP PIN program to help reduce the incidence of tax-return fraud by issuing to eligible taxpayers a six-digit number to use to confirm their identities when filing federal tax returns. Eligible taxpayers include previous victims of identity theft; residents of Florida, Georgia or the District of Columbia who filed federal income tax returns last year; and any taxpayer who received an IRS notice via postal mail inviting them to opt in to receive a PIN.
Many taxpayers relied on the online tool to access or retrieve a forgotten IP PIN. While it suspends access to the tool and investigates security vulnerabilities, the IRS urges taxpayers to take one of the following steps:
- Call the IRS directly to confirm their identities and request that their lost or misplaced IP PINS be mailed to them
- Include previously retrieved IP PINS on their tax returns, if they were not previously victims of identity or if they live in Florida, Georgia or the District of Columbia
- File their returns as normal, without their IP PINS, if they cannot remember the digits and if they were not previously victims of identity or if they live in Florida, Georgia or the District of Columbia should include the number on their tax returns.
About the author: Joseph L. Saka, CPA/PFS, is co-CEO of Berkowitz Pollack Brant and co-director-in-charge of the firm’s Tax Services practices. He provides a full range of income and estate planning, tax consulting and compliance services, business advice, and financial planning services to entrepreneurs, high-net-worth families and family companies and business executives in the U.S. and abroad. He may be reached in the CPA firm’s Miami office at (305) 379-7000 or via e-mail at info@bpbcpa.com.
Municipal bonds can be an important part of an investment portfolio. While they can provide tax-free interest income, there also exists a dark side to owning them. More specifically, municipal bonds may yield unexpected federal or state taxation of income or proceeds.
Interest Income
State and local municipalities issue municipal bonds to raise funds for various reasons, including general obligations or the building of an electrical plant or water-treatment facility. While the semi-annual interest one earns is reportable on page 1 of Form 1040, it is not a component of federal taxable income for regular tax purposes. However, certain bonds are considered specified private activity bonds (PABs), which a municipality issues in connection with the financing of a qualified project with a private user that has public benefits. Examples include manufacturing plants, airports and parking garages.
Taxpayers that are or may be subject to Alternative Minimum Tax (AMT) need to understand that interest reported from a PAB is subject to AMT. Therefore, the earnings that one considers to be tax-free may, in fact, be taxable for federal income tax purposes.
State Taxation
States generally do not tax the interest income one earns from municipal bonds that municipalities issue within their own state. However, states with income taxes do tax municipal interest income earned from bonds issued by municipalities outside of their borders. For example, a New York resident will not pay tax on interest from a New York bond, but he or she will pay state tax on a bond issued by New Jersey, Florida or any other state.
Zero-Coupon Bonds
Zero-coupon bonds, which one may purchase at a discount from their face value at the time of issuance, do not pay semi-annual interest but rather grow over their terms to reach par at maturity. The bond earns interest as the discount is amortized. Taxable bonds provide an annual 1099-OID (Original Issue Discount), which taxpayers report as ordinary interest income. Municipal bonds similarly accrue interest, but such interest is not taxable. Whether taxable or not, the accrued income is added to the taxable basis of the underlying bond. If a taxpayer buys the bond from the issuer and holds it to maturity (redeemed by the issuer), then the annual basis adjustment would eliminate the discount, causing no gain or loss on the receipt of the principal.
A more likely scenario occurs when a taxpayer purchases the bond and/or sells it in the secondary market. If the bond is bought at par, no further computations are needed upon its sale; the sales price over the adjusted tax basis is all capital gain. The holding period will determine if it is short-term or long-term.
If a taxpayer buys a bond at a market discount, when the price of the bond is below its adjusted tax basis, he or she will report the discount as ordinary income. The choice is to report the ordinary income component ratably over the remaining life of the bond or all of it upon the ultimate sale/maturity. Any capital gain or loss will be measured by the proceeds of the sale/maturity against the adjusted tax basis.
If a taxpayer buys a bond at a premium, for which the cost is greater than the adjusted tax basis, then the premium will be amortized during bond ownership. The amortization reduces the municipal income, which is generally irrelevant, and also reduces the tax basis of the bond, which is always relevant. The adjusted tax basis is used to compute the capital gain.
Social Security
Municipal income will not determine the amount one receives as social security benefits, but it will affect the computation of how much of those benefits are taxable. Low-income taxpayers will not include any social security benefits in their taxable income. However, the threshold to be considered a low-income taxpayer can be easily surpassed, resulting in as much as 85 percent of the benefits one receives to be treated as taxable income. The factor determining taxation is the total other sources of income reported on the tax return, specifically including municipal income. For example, an individual who has no source of taxable income and $50,000 of municipal, non-taxable income will have 85 percent of his or her social security benefits reported as taxable. Therefore, despite the lack of taxation on the municipal income itself, taxpayers may potentially incur taxes indirectly on other sources of income.
Taxpayers should consult with both a financial advisor and tax accountant to weigh the pros and cons of municipal bonds or any investment to ensure it meets with their short- and long-term needs.
About the Author: Jeffrey M. Mutnik, CPA/PFS, is a director with the Taxation and Financial Services practice of Berkowitz Pollack Brant Advisors and Accountants, where he provides tax and estate-planning counsel to high-net-worth families, closely held businesses and professional services firms. He can be reached in the CPA firm’s Ft. Lauderdale office at (954) 712-7000 or via email at info@bpbcpa.com.
Individuals and businesses that own or rent tangible property may be missing out on significant tax-savings opportunities when they or their advisors fail to understand and apply the often-confusing provisions contained in the Repair Regulations.
More formally known as the Tangible Property Regulations, these rules are intended to simplify how and when taxpayers should account for the substantial costs associated with the acquisition, production, improvement, repair and/or maintenance of assets used in a trade or business. More specifically, the regulations attempt to make it easier for taxpayers to identify when they may capitalize or deduct expenses to repair or maintain existing real or personal property based on the asset. However, as is the fact with much as the tax code, these regulations are complex and subject to different interpretation by practitioners and the IRS.
How do I Determine a Unit of Property
The Repair Regulations are unique in that they provide property owners with an opportunity to change what is considered a unit of property (UoP) subject to capitalization. For example, prior to the issuance of the final regulations in 2013, a shopping center owner could consider each bay within the center as separate units of property. The dollars the shopping center owner spent to make improvements to each bay as tenants moved in and out were historically subject to capitalization. The Repair Regulations changed that by allowing the property owner to now consider the shopping center a unit of property, in and of itself. Therefore, any costs the property owner incurs to improve the property may not necessarily be subject to capitalization; rather those dollars may be considered deductible expenses, depending on how those improvements influence each unit of property.
How do I Know if I Must Capitalize an Expense?
To determine if an expense should capitalized, taxpayers should remember the acronym RABI. More specifically, costs for activities should be capitalized when they result in any of the following improvements to a single unit of property:
- Restoration of the property,
- Adaptation of the property to a new or different use,
- Betterment of the property to its extend life
- Certain Improvements to the property
Property improvements can include those activities that improve a building or some of its structural components or any of the following eight specific building system, or UoPs:
- Heating, ventilation and air conditioning (HVAC) systems
- Plumbing systems
- Electrical systems
- Escalators
- Elevators
- Fire protection and alarm systems
- Security systems
- Gas distributions systems.
Again, the Unit of Property determination plays a critical role in a deciding whether the amount a property owner paid to acquire or produce a new unit of property must be expensed or capitalized and depreciated over time.
When May I Deduct Costs?
Deductible expenses are those tied to the repair or maintenance of an existing property. For example, the regulations provide a broad definition of routine maintenance, which provides property owners with new opportunities to deduct costs that previously should have been capitalized.
Under a routine maintenance safe harbor rule, taxpayers may deduct the costs for performing ongoing maintenance, such as cleaning, in order to keep a property in its ordinary operating condition. While the IRS extends this safe harbor to cover those expenses incurred for routine maintenance on buildings and their structural components, it limits application of the safe harbor to instances when taxpayers expect to perform these activities more than once during a 10-year period.
Another area that causes significant challenges in application and leads to missed opportunities relates to partial disposition of assets. Under IRS guidelines, a taxpayer may make a retroactive partial disposition election and deduct those portions of tangible assets removed in prior years to accommodate new asset components intended to improve, repair, or renovate existing buildings or machinery. For the 2015 tax year, taxpayers without applicable financial statements (AFSs) may deduct expenditures up to $500 per unit. The IRS increased this de minimis safe harbor amount for tax years beginning after January 1, 2016, to $2,500 per item, thereby allowing taxpayers to expense a broader range of items.
Those taxpayers with applicable financial statements may deduct up to $5,000 of costs on a unit-by-unit basis. It is important for taxpayers with AFSs to remember that they must ensure the costs they deduct for tax purposes are consistent with those costs they deduct on audited financial statements.
As the regulations continue to be refined, individuals and businesses that own or rent property should avoid missing out on all of the opportunities the law may provide. It is important to note that the information contained in this article provides general advice about tangible property regulations, which could represent significant tax-savings. Real property owners should rely on the expertise of experienced CPAs who understand the differences of opinion as to how to apply the rules to their unique circumstances in order to maximize their opportunities.
About the Author: John G. Ebenger, CPA, is director of Real Estate Tax Services with Berkowitz Pollack Brant where he works closely with developers, landholders, investment funds and other real estate professionals as well as high-net-worth entrepreneurs with complex holdings. He can be reached can be reached in the CPA firm’s Boca Raton, Fla., office at (561) 361-2000 or via email at info@bpbcpa.com.
Businesses and non-profit organizations with 50 to 100 full-time equivalent employees who did not offer their workers minimal essential health care coverage in 2015 can qualify for a one-year exemption from the employer shared responsibility provision of the Affordable Care Act. However, these employers are still required to comply with the information requirements of the health care law for the 2015 tax year.
Applicable employers have until March 31, 2016, to provide workers with Forms 1095-B, Health Coverage, and 1095-C, Employer-Provided Health Insurance Offer and Coverage, summarizing the insurance they offered or did not offer to employees in 2015. Additionally, employers have a responsibility to file with the IRS Forms 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and 1095-C, Employer-Provided Health Insurance Offer and Coverage, by June 30, 2016, if filing electronically, or May 31, 2016, for paper filings.
Failure to meet these filing requirements will result in a penalty of $250 for each unfiled return, with a maximum penalty of $3 million per employer. Additional penalties will be applied to an employer that “intentionally disregards” the reporting requirements.
The advisors and accountants with Berkowitz Pollack Brant’s Tax Services practices work with individuals and businesses of all sizes to understand and comply with the provisions of Affordable Care Act.
About the Author: Adam Cohen, CPA, is an associate director in the Tax Services practice of Berkowitz Pollack Brant, where he works with closely held businesses and non-profit charities, hospitals and family foundations to maintain tax efficiency and comply with federal and state regulations. He can be reached at the CPA firm’s Ft. Lauderdale office at (954) 712-7000 or via e-mail info@bpbcpa.com.
Under the recently enacted Protecting Americans from Tax Hikes Act (PATH), entities established after December 18, 2015, that seek to operate as 501(c)(4) social welfare organizations will be required to notify the IRS and submit an application to be treated as such within 60 days after they are established. While the IRS has not yet provided detailed guidance relating to how organizations can notify the agency, it has specified that the required information must include the following:
- Name, address and tax identification number of the organization
- The date the organization was formed
- The state in which the organization was formed
- A statement regarding the organization’s purpose and need it fulfills
In addition, the IRS advises that under the new rules, prospective social welfare organizations should be prepared to pay a “reasonable” user fee when submitting their notifications. In turn, the IRS will send to the 501(c)(4) an acknowledgement that it received the notice no later than 60 later.
A social welfare organization’s failure to submit an initial notice to the IRS within the required 60 days after it is established will be subject to a penalty equal to $20 for each day after the expiration of this time period, up to a maximum of $5,000.
As the IRS and Treasury work to finalize these regulations, qualifying organizations will receive an additional 60 days until the issuance of such regulations to comply with the new procedures.
The advisors and accountants with Berkowitz Pollack Brant work extensively with not-for-profit organizations, providing operational and strategic plan consulting services, tax compliance services, financial statement audits and reviews, and employee benefit plan services.
About the Author: Adam Cohen, CPA, is an associate director in the Tax Services practice of Berkowitz Pollack Brant, where he works with closely held businesses and non-profit charities, hospitals and family foundations to maintain tax efficiency and comply with federal and state regulations. He can be reached at the CPA firm’s Ft. Lauderdale office at (954) 712-7000 or via e-mail info@bpbcpa.com.
A new year, and little has changed in the rapid pace with which criminals are employing elaborate schemes to cheat taxpayers and the IRS. During tax season, individuals should be on high alert to identify tax-related scams and take steps to protect themselves from becoming victims. Following are the IRS’s top-12 scams of the current tax year.
Telephone Scams involve criminals who pose as IRS agents and call taxpayers to demand the release of personal financial information or immediate payment of fake tax liabilities. The aggressive scam artists threaten taxpayers with arrest, deportation or license revocation for failing to supply the requested information. Taxpayers should be wary of anyone who requests personal information over the phone and remember that the IRS will never contact them via telephone.
Phishing occurs when criminals create official-looking emails and websites to trick recipients into divulging personal information or clicking on a website link. Often, these links will download a virus onto the recipients’ computers. Taxpayers should not respond to any emails claiming to be from the IRS; the only way that the agency will communicate with taxpayers is via postal mail.
Identity Theft occurs when criminals gain access to taxpayers’ personally identifiable information, including social security numbers, to file fraudulent tax returns. The best defense against identify theft is to rely on firewalls, strong passwords, encryption services and other protective measures when accessing financial accounts, shopping or sharing documents online, including sharing tax-related information via tax preparers’ client portals.
Return Preparer Fraud is a rising threat from which taxpayers can protect themselves by selecting tax preparers who have IRS-issued Preparer Tax Identification Numbers (PTINs) and professional credentials that demonstrate their skills, education and expertise. Avoid any preparers who base their fees on a percentage of a refund or who promise larger refunds than other preparers.
Offshore Tax Avoidance is a serious risk taxpayers take when attempting to hide and failing to report and pay tax liabilities on assets held overseas. Not only should taxpayers with assets offshore meet with accountants experienced in international tax matters, they should also come clean and avail themselves to the IRS’s Offshore Voluntary Disclosure Program.
Promises of Inflated Refunds should be a red flag that a tax return preparer may be a scam artist. Taxpayers should be wary of anyone who promises a big refund without seeing the taxpayer’s records, or who charges fees based on a percentage of the promised refund.
Fake Charities are an all-too-common occurrence in which criminals pose as fake charitable organizations and solicit donations from taxpayers. Before opening their wallets, taxpayers should take a few minutes to confirm that the organization requesting a contribution is a legitimate charity.
Hiding Taxable Income by Filing Fake Documents is an illegal act that can lead to significant penalties and possible criminal prosecution. Taxpayers should always read their tax returns before signing them.
Abusive Tax Shelters are complex, carefully planned structures, such as limited liability companies, limited liability partnerships, international business companies, foreign financial accounts and trusts, that are intentionally misused in an attempt to conceal taxpayers’ income and assets. Taxpayers should seek the counsel of experienced accountants and financial advisors before entering into these strategies.
Falsifying Income to Claim Credits can lead to significant penalties and possible criminal prosecution. Taxpayers are responsible for the information contained on their returns, even if prepared by someone else.
Excessive Claims for Fuel Tax Credits are often used in an effort to artificially inflate one’s tax refund. The fuel tax credit is limited to businesses that operate vehicles on local roads rather than highways and is therefore not available to most taxpayers.
Frivolous Tax Arguments and other unreasonable schemes used to avoid paying taxes are illegal and can result in the imposition of a $5,000 penalty and felony prosecution. Taxpayers do have a right to contest their tax liabilities, but they should be wary of anyone promoting frivolous arguments that
About the author: Joseph L. Saka, CPA/PFS, is co-CEO of Berkowitz Pollack Brant and co-director-in-charge of the firm’s Tax Services practices. He provides a full range of income and estate planning, tax consulting and compliance services, business advice, and financial planning services to entrepreneurs, high-net-worth families and family companies and business executives in the U.S. and abroad. He may be reached in the CPA firm’s Miami office at (305) 379-7000 or via e-mail at info@bpbcpa.com.
One of the best ways taxpayers can protect themselves against identity theft and improve their credit scores is to make it a habit to review their credit reports annually from the major reporting agencies.
What’s a FICO Score and Why Does it Matter?
A FICO score is one of the most widely used measures of an individual’s credit history and a key factor used by lenders in deciding whether or not to extend credit to or approve a loan for that individual. Moreover, in recent years, businesses have increasingly relied on FICO scores and the new VantageScore in their hiring practices to assess potential employees.
The score, which ranges from 300 to 850, is derived from data provided by three major credit bureaus, which include Experian, Equifax and TransUnion, concerning individuals’ credit histories, which include the length of credit history, promptness in paying debt obligations, unpaid accounts and those in collections. The higher the score, the better an individual’s creditworthy and eligibility to receive the best loan terms with the lowest interest rates. The lower the score, the more the individual is considered a credit risk.
Regular monitoring of one’s credit report helps to identify errors that could affect an individual’s credit score and his or her ability to secure employment and receive the best interest rates on loans. Moreover, it can help to detect whether an individual was a victim of identity theft and allow him or her to take corrective measures in a timely manner, before
Get a Free Credit Report
Individuals may visit the government-endorsed website www.annualcreditreport.com to receive a free credit report every 12 months from each of the three major reporting agencies. Consumers may request reports from all three agencies at one time or spread out their requests between the three agencies throughout the year to better monitor their credit histories and spot mistakes or possible cases of identity theft.
Look for and Correct Errors
It is not uncommon for an individual to find a mistake on his or her credit report, including information from a closed account or one that is tied to an ex-spouse. However, spotting and correcting such errors is the consumer’s responsibility.
Disputing errors is possible and fairly simple. Consumers have the option to contact creditors directly and/or the reporting agencies via the www.annualcreditreport.com website. Any addition documentation required to support a disputed item should be sent to the creditor or reporting agency via certified mail to ensure receipt.
About the Author: Cherry Laufenberg, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where she works with corporations, pass-through entities, trusts and foreign entities. She can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at info@bpbcpa.com.
As the winter temperatures begin to drop, thoughts often turn to warmer climates and the benefits of having a second home or even retiring for good in a location where one may escape the cold and all of the headaches that come with it.
According to the National Association of Realtors, 21 percent of all U.S. homes sales in 2014 represented vacation homes, a 57 percent increase over the prior year. Moreover, the age of the average second-home buyer in 2014 was 43, compared to 61 in 2003. Whether making a decision to purchase a second home for pleasure or for the potential investment returns, taxpayers should dip their toes in the water and do some research before plunging head first into what can end up being treacherous seas.
Plan Ahead
Buyers who plan to purchase a second home for personal enjoyment should consider how they expect to use the home in both the short term and down the road. Practical questions to ask include whether the house, townhouse or apartment has enough rooms for a growing family of future generations and how close and convenient are medical care, grocery stores and airports. These questions are especially important to answer when buyers are considering retiring in the home to ensure the home’s features and its proximity to life’s conveniences are suitable for aging buyers. To that end, it may behoove potential buyers to rent properties before committing to a purchase.
Answers to these questions are equally useful for buyers seeking to use the property for investment purposes. Whether buyers intend to flip a property for a profit or rent it out for a steady stream on income, they should recognize that the home’s location and of its features will affect resale value as will the local rental market and trends in local home sales.
Know what you can Afford
In addition to a home’s purchase price, buyers must consider carrying costs they will incur to purchase insurance, pay property taxes and maintain the home for years to come. Other items to consider include homeowner fees and potential future assessments imposed by the homeowner association as well as the age of the home and the likelihood that it will require frequent repairs immediately or in the future. In the case of a newer home, homeowners should recognize the costs they can expect to incur in the future for such big ticket items as a new roof, air-conditioning or water heater.
Consider Different Lending Practices for Second Homes
In most cases, lenders will require buyers to make a higher down payment on a second home than that which is required for a primary residence. Moreover, buyers purchasing a home as an investment property should be prepared to face more stringent lending practices, such as a lower debt-to-income ratio, as well as higher interest rates, which will subsequently increase monthly mortgage payments. To avoid these restrictions, owners may opt to make second home purchases with cash or existing lines of credit.
Know your Tax Liabilities
Purchasing a home in one state may provide a buyer with significant tax benefits over another. For example, Florida and Texas are among seven states in the nation that do not impose state income taxes. Therefore, buyers who purchase homes and establish and can support their residency in these states can avoid this added tax liability.
When using a second residence as a vacation home, taxpayers who itemize deductions may deduct property taxes as well as interest on mortgages and home equity loans of up to $1.1 million used to acquire, build or improve both the primary and second homes combined. However, a large percentage of second home owners will be affected by the itemized phase-out rules, which reduce the itemized deduction by 3 percent of the amount by which the taxpayer’s adjusted gross income (AGI) exceeds the threshold amount, with the reduction not to exceed 80 percent of the otherwise allowable itemized deduction.
When homebuyers intend to generate income by renting out a property they purchased, different tax rules will apply. For example, property owners will not need to report rental income if the home is rented out for 14 days or less during the calendar year. Once the rental period exceeds two weeks, the IRS requires homeowners to report the amount they receive as taxable rent income on their personal tax returns. Deductions may be claimed for expenses the owner pays for mortgage interest, property taxes, insurance and depreciation.
Owners who use their homes for personal enjoyment for a portion of the year and rent them to out during other times will need to take special care to accurately calculate the days the property was used for each purpose and divide expenses between the two. In these instances, a limited number rental expenses will be deductible. Similarly, rental expenses that exceed gross rental income less the mortgage interest and real estate taxes portion of the rental period will be excluded from their allowable expense deductions in that taxable year.
Purchasing a second home is a decision that should be made with advance planning and with the counsel of accountants and financial advisors. Doing will so will help homebuyers maximize available opportunities and avoid a tidal wave of potential problems down the road.
About the Author: Rick D. Bazzani, CPA, is a senior manager with Berkowitz Pollack Brant’s Tax Services practice, where he provides individuals with a broad range of tax-efficient estate-, trust- and gift-planning services. He can be reached in the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or at info@bpbcpa.com.
With days before the close of 2015, Congressional lawmakers passed a package of provisions that bring significant tax benefits to individuals and businesses. Following are just some of the tax breaks included in the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), which will remain in effect permanently, or until further congressional action.
Provisions Made Permanent for Businesses
Increased Section 179 Limits. Eligible businesses may take an immediate deduction of $500,000 for the costs expended to purchase qualifying equipment and property, including computer software and qualified leasehold, retail and restaurant improvements, with a phase-out beginning after $2 million. There was a threat that the deduction would decrease to $25,000 up to a phase-out beginning at $200,000.
Research and Development Tax Credit. Businesses with less than $50 million is gross receipts may apply the dollar-for-dollar R&D credit against their alternative minimum tax liabilities. In addition, some early-stage businesses lacking income tax liabilities may apply the credit to offset payroll taxes. Expenses that qualify for the R&D credit include those related to the investment of time and resources to design, develop or improve products, processes, techniques or technology.
Abbreviated Straight-Line Cost Recovery for Qualified Leasehold Improvements. Under certain circumstances, real estate owners may depreciate qualified retail and restaurant leasehold improvements over a reduced 15-year period, rather than the extended 39-year recovery life of those assets.
Reduced Recognition of S Corporations’ Built-In Gains. S Corporations are subject to corporate-level tax on the disposition of appreciated assets over a five year period, rather than the extended 10 years required under previous law.
Provisions Made Permanent for Individuals and Families
Increased Child Tax Credit. Taxpayers’ whose income falls below $75,000 for single head of household or $110,000 for married couples filing jointly may claim a credit of $1,000 per qualifying child as well as a refundable credit of 15 percent of earned income above a now permanent $3,000 threshold.
Increased American Opportunity Tax Credit. Congress made permanent the maximum annual credit of $2,500 per student for taxpayers with modified adjusted gross income of $80,000 or less, or $160,000 or less for married couples filing a jointly, who are paying qualified college expenses.
Increased Earned Income Credit. Congress made permanent an increased credit for low-income families with three or more children.
Itemized Deduction for State and Local Sales Taxes. Taxpayers may reap substantial savings by electing to take an itemized deduction for state and local sales tax instead of the itemized deduction for state and local income tax.
Deductions for Teachers. Kindergarten through 12th grade teachers who purchase classroom supplies are entitled to a $250 annual deduction, which will be indexed for inflation after 2016.
Tax-Free Charitable Distributions from IRAs. Taxpayers over age 70 ½ may make charitable donations directly from their individual retirement accounts without incurring taxes when the amount donated is $100,000 or less.
About the Author: Karen A. Lake, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant, where she helps businesses and individual navigate complex federal, state and local taxes, credits and incentives. She can be reached at the Miami CPA firm’s office at (305) 379-7000 or via email klake@bpbcpa.com info@bpbcpa.com.
The IRS recently cautioned payroll and human resources professionals to be on alert for a new email phishing scheme that has already claimed several victims.
In the latest tax-season scam, victims receive emails that appear to come from executives within their companies and that request the release of personally identifiable employee data, such as W-2 earnings and Social Security Numbers. Because the emails includes the actual name of the company’s chief executive, payroll administrators and HR professionals may be more likely to be tricked into sharing the requested information. According the IRS, some of the “spoofing” emails it identified contain the following messages:
- Kindly send me the individual 2015 W-2 (PDF) and earnings summary of all W-2 of our company staff for a quick review
- Can you send me the updated list of employees with full details (Name, Social Security Number, Date of Birth, Home Address, Salary) as at 2/2/2016.
- I want you to send me the list of W-2 copy of employees wage and tax statement for 2015, I need them in PDF file type, you can send it as an attachment. Kindly prepare the lists and email them to me asap.
To protect businesses, the IRS advises that employees who receive an email from a company executive should check it out and either call the executive or send him or her a separate email to confirm the request before responding. Employees should never respond to an email that looks suspicious.
“If your CEO appears to be emailing you for a list of company employees, check it out before you respond,” advised IRS Commissioner John Koskinen. “Everyone has a responsibility to remain diligent about confirming the identity of people requesting personal information about employees.”
About the author: Joseph L. Saka, CPA/PFS, is co-CEO of Berkowitz Pollack Brant and co-director-in-charge of the firm’s Tax Services practices. He provides a full range of income and estate planning, tax consulting and compliance services, business advice, and financial planning services to entrepreneurs, high-net-worth families and family companies and business executives in the U.S. and abroad. He may be reached in the CPA firm’s Miami office at (305) 379-7000 or via e-mail at info@bpbcpa.com.
The way in which real estate developers and construction contractors account for and report income on long-term contracts has been an ongoing source of contention with the IRS. Under Internal Revenue Code 460, construction contractors are generally required to account for long-term contracts during the course of construction using the percentage of completion method. However, under special circumstances, the law allows certain contractors to instead apply the completed contract method of accounting, which allows them to defer all profits, deductible costs and related tax liabilities until the entire project is complete and accepted by buyers.
Exceptions under the Law
Internal Revenue Code 460 provides two exceptions to the percentage of completion method requirement. When long-term contracts meet the following exceptions, contractors are permitted to employ the completed contract method of accounting and defer recognition of revenue:
- The construction contract had annual gross receipts averaging $10 million or less for the preceding three tax years, and it is expected to be complete within two years.
- The contract qualifies as a “home construction project” for which 80 percent or more of the estimated total contract costs (as of the close of the taxable year in which the contract was entered into) are reasonably expected to be attributable to building, construction, reconstruction, rehabilitation, or integral component installation of dwelling units contained in buildings containing 4 or fewer dwelling units, and improvements to real property directly related to such dwelling units and located on the site of such dwelling units.
Two recent court cases and the tax court’s findings on appeal highlight the intricacies of interpretation in the tax code and 80 percent test to qualify as a home construction project.
Shea Homes vs. Commissioner
In 2014, the U.S. Tax Court permitted residential home developer Shea Homes and its subsidiaries to apply the completed contract method of accounting to a planned community rather than to each individual home sale. Shea claimed that it marketed each individual home as a part of a larger residential lifestyle community. Homebuyers were not purchasing individual lots but rather a fully developed community that required Shea to improve common areas and construct lifestyle amenities, including pools and clubhouses. As a result, the developer argued that it should be permitted to delay recognition of profits on individual home sales until it incurred 95 percent of the total costs to develop the community. The court agreed, noting that, in certain circumstances, a contract to construct a home may extend beyond the houses and the lots on which they sit to include common improvements to the larger community.
The Howard Hughes Co. vs. Commissioner
The application of the completed contract method of accounting to a master-planned development did not fare as well for the Howard Hughes Company, which owned 22,500-acres of land in Nevada that it planned to develop into a residential community divided into villages and smaller neighborhoods with individual lots. After readying the land, the developer sold property within the community to commercial builders, home builders and individual home buyers who could develop their own houses on the smaller lots.
Claiming that it met the “home construction contracts” exception under Internal Revenue Code 460, Hughes used the completed contract method of accounting to delay reporting its income on sales contracts until it incurred 95 percent of the total costs to develop the larger community. The IRS disagreed, arguing that Hughes did not meet the “home construction contract” requirements and should instead recognize gains and losses in the year they were incurred by applying the percentage of completion method of accounting, which would ultimately increase Hughes’s annual taxable income.
On appeals, the tax court agreed with the IRS, arguing that Hughes failed to meet the completed contract exception based on the following facts:
- Hughes, unlike Shea, did not build homes nor did it have house contracts; rather Hughes sold land
- Hughes failed to satisfy to 80 percent test as it applies to the costs of construction, reconstruction, rehabilitation, or installation of an integral component of a home or apartment “dwelling unit”; rather Hughes incurred costs solely for the development of a larger community infrastructure
While clarifying the exceptions to the percentage of completion method, the tax court limited the allowable use of the completed contract method to those contractors that actual construct homes or sell lots in which qualifying dwelling units will be sold. According to the court, “If the taxpayer does not construct or intend to construct qualified dwelling units, there is no allocable share of common improvement costs. . . . Petitioners were not homebuilders, and their contracts were not home construction contracts.”
Lessons Learned
One key takeaway when comparing the court’s opinions in Shea and Howard Hughes is that a contract cannot be considered a construction contract if it “includes the provision of land by the taxpayer and the estimated total allocable contract costs, as defined in paragraph (b)(3) of this section, attributable to the taxpayer’s construction activities are less than 10 percent of the contract’s total contract price.” This is especially important for developers of condominiums, who may incur common improvement costs in the construction of individual units within a building. In most cases, however, these developers will need to account for gains and losses in the years they are incurred.
Contractors seeking to apply the completed contract method and reap the benefits of deferring significant income for multiple years until an entire development is complete, must engage in advanced tax planning. The additional effort may yield significant costs savings down the road.
About the Author: Laurie Jennings Arcia, CPA, is an associate director in the Tax Services practice of Berkowitz Pollack Brant, where she provides real estate tax compliance and consulting services to developers, entrepreneurs, high-net-worth individuals and family limited partnerships. She can be reached in the CPA firm’s Miami office at (305) 379-7000 or via email at info@bpbcpa.com.
Posted on March 02, 2016 by
Tax season officially started on January 19, the date the IRS began accepted individuals’ electronically filed tax returns for 2015. For many taxpayers, however, preparing for the April filing deadline, which is extended three days in 2016, will require more time to gather together all of the required year-end forms and apply retroactively many of the provisions Congress extended at the end of 2015.
How can taxpayers get ready for the April 18 filing deadline? Plan ahead, get organized and prepare to receive the following documentation, most of which must be sent to taxpayers by February 1. In most cases, the IRS will require taxpayers to include these forms with their annual filings.
W-2: All employees, including self-employed individuals, should receive from their employers a W-2, Wage and Tax Statement, which shows the amount of money the employees earned, the amount withheld for taxes and the amount the employees may have contributed to employer-sponsored retirement plans or health savings accounts. Taxpayers will need to file copies of their W-2s with their individual tax returns by the April 18 deadline, unless they request a filing extension.
1042-S: By March 31, nonresident aliens in the U.S. should expect to receive Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, which reports the amount U.S.-based businesses or institutions paid to foreign persons that is subject to income tax withholding. Examples of U.S.-source income subject to withholding include rent, royalties, pension distributions, corporate distributions, interest and gambling winnings.
1095-A: Taxpayers who purchased health care insurance through a state or federal exchange will receive Form 1095-A, Health Insurance Marketplace Statement, which will help to determine whether they qualify to receive the premium tax credit under the health care law. Taxpayers should not attach their Forms 1095-A to their individual tax returns. Rather, they should be kept in a safe place with other tax documents.
1095-B and
1095-C: Taxpayers who receive health care insurance through their places of employment can expect to receive from their employers informational Forms 1095-B, Health Coverage, and 1095-C, Employer Provided Health Insurance Offer and Coverage, by March 31. These forms, which are new for the 2015 tax year, do not need to be included with one’s individual tax filings. However, taxpayers should keep the forms with their other tax documents and be prepared to simply check the box on their tax returns to indicate that they and their family members had qualifying health insurance during every month in 2015.
1098: Lenders send out Form 1098 to report the amount of mortgage interest a homeowner paid during the year. Mortgage interest is a deductible expense that taxpayers will report on Form 1090 to reduce their taxable income.
1098-E: Taxpayers with student loans should expect to receive from their lenders Form 1098-E, Student Loan Interest Statement, which reports the amount of interest taxpayers paid on those debts. Depending on a taxpayer’s income, he or she may be able to deduct from their federal income tax a portion of paid student loan interest.
1098-T: Colleges and universities provide students enrolled in their institutions with Form 1098-T, Tuition Statement, which details the amount of qualified education expenses taxpayers paid during the year. This is important information for taxpayers who may qualify for education-related tax benefits.
1099-B: In mid-February, taxpayers should expect to receive from their brokers Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, which summarizes annual gains and losses from sales of stock. Taxpayers must report this information of their individual tax returns.
1099-C: Taxpayers whose creditors forgave an outstanding debt will receive Form 1099-C, Acquisition or Abandonment of Secured Property and Cancellation of Debt. The IRS consider cancelled debt as taxable income that individuals must report on their federal returns.
1099-DIV: Investment firms provide their account holders with Form 1099-DIV, Dividends and Distributions, summarizing all of the capital gains and dividends paid to taxpayers during the year. Often, these forms are available to account holders via secure portals on investment firms’ websites.
1099-INT: Taxpayers can expect to receive Form 1099-INT, Interest Income, if their bank accounts or certificates of deposit paid more than $10 in interest to them in 2015 or if they redeemed savings bonds in the prior year.
1099-MISC: Taxpayers in a trade or business who received any payments exceeding $600 or who earned miscellaneous income from sources that include rent, provision of services, and prizes and awards will receive Form 1099-MISC.
1099-R: Taxpayers who took distributions from retirement accounts, pensions, annuities, profit-sharing plans or insurance policies in 2015 will receive Form 1099-R, which helps to identify the portion of those distributions that are taxable to taxpayers. The deadline for receiving these forms is February 1.
1099-S: Individuals who were involved in a sale or exchange or real estate in 2015 should receive Form 1099-S by February 15. Taxpayers must report on their tax returns the proceeds they received related to the sale or exchange of real property.
A final key to easy tax preparation and planning is the selection of a certified public accountant (CPA), who can provide deep knowledge and experience navigating the complexities of the tax code and ensuring taxpayers maintain efficiency and minimize tax liabilities now and into the future.
About the Author: Kenneth J. Strauss, CPA/PFS, CFP, is a director with the Taxation and Personal Financial Planning practice of Berkowitz Pollack Brant, where he works with entrepreneurs and multi-generational family businesses to develop tax-efficient estate, succession and financial plans. He can be reached in the CPA firm’s Fort Lauderdale, Fla., office at (954) 712-7000 or via email info@bpbcpa.com.
February 28: Deadline for filing paper Form 1099 with the IRS and Form W-2 with the Social Security Administration
February 29: Deadline for Florida residents to enroll in the state’s Prepaid College Program to save for a child’s future college education
March 15: Deadline for partnerships and S corporations to file annual tax returns or request a six-month filing extension
March 31: Deadline for electronic filing of Form 1099 with the IRS and Form W-2 with the Social Security Administration
March 31: Deadline for large employers to furnish to their full-time employees IRS Forms 1095-B, Health Coverage, and 1095-C, Employer-Provided Health Insurance Offer and Coverage, detailing health care coverage provided to employees in 2015
April 1: Last day for retired taxpayers who turned 70 ½ in 2015 to avoid a penalty and take their first required minimum distributions (RMD) from IRAs and employer-sponsored plans
April 15: 2015 Tax Filing Deadline and last day taxpayers may contribute to their Individual Retirement Accounts (IRAs)
April 15: Due date for 2016 first quarter estimated tax payment
April 30: Deadline for businesses sponsoring pre-approved 401(k), profit-sharing or other defined contribution (DC) retirement plans, to sign and adopt restated, IRS-compliant plan documents
The New Year ushers in new and updated obligations for employers to comply with the Affordable Care Act (ACA), including a welcome extension of information reporting deadlines and a burdensome expansion of the law’s shared responsibility provision to those businesses with 50 or more full-time employees.
More Employers Subject to Shared Responsibility Provisions
Beginning in 2016, the shared responsibility provisions of the health care law, which were a requirement for most businesses with 100 or more full-time equivalent employees (FTEs) in 2015, will be extended to a larger swath of applicable large employers (ALEs). More specifically, effective January 1, for-profit and not-for-profit businesses as well as government entities with 50 or more full-time equivalent workers are required to provide “minimum essential” health insurance coverage to 95 percent of their full-time workforce and dependent children under the age of 26. Failure to do so will result in a penalty equal to $2,080 for 2015 for every non-covered employee after the first 30 as well as a $3,120 penalty for each full-time employee that purchases insurance through the federal marketplace because the employer’s coverage did not meet the “minimal essential” requirements.
How is “minimal essential” coverage defined? Employer-sponsored health care plans must meet two standards: affordability and minimum essential value.
To be considered affordable, the lowest-cost self-only insurance plan offered by an employer must not require an individual employee to contribute more than 9.66 percent of his or her household income in order to participate in the plan, up from 9.56 percent of household income in 2015.
Meeting the minimum value standard requires that the health care insurance plan offered by an employer covers at least 60 percent of the total cost of an average employee medical services, including physician visits and inpatient hospital stays. To confirm that they meet this standard, employers may refer to a minimum value calculator available on the Health and Human Services website.
Increased Penalties for Non-Compliant Employers
The penalties for failing to meet the minimal essential heath care coverage provisions of Obamacare increase with each year. For 2016, businesses will be required to make a shared responsibility payment of $2,160 for each non-covered full-time employee as well as a $3,240 payment for each FTE that purchases insurance through the federal marketplace due to a lack of affordable coverage offered through the employer.
Delayed Health Care Information Reporting Requirements for 2015 Tax Year
On a more positive front, the December 28 passage of the PATH ACT granted employers more time to comply with the information reporting requirements of the health care law.
More specifically, the due date for employers to provide employees with Forms 1095-B, Health Coverage, and 1095-C, Employer Provided Health Insurance Offer and Coverage, both for the 2015 tax year, has been extended from January 31, 2016, to March 31, 2016.
In addition, the deadline for filing with the IRS Form 1094-B, Transmittal of Health Coverage Information Returns; Form 1095-B, Health Coverage; Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns; and Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, has been delayed from February 29, 2016, to May 31, 2016. Employers filing these forms electronically will have an extra month to meet a June 30, 2016, deadline.
Due to these extensions, employees may not receive Forms 1095-B and 1095-C for the filing of their individual tax returns. The IRS urges employers to inform their workers that while the forms contain helpful information for preparing individual tax returns, they are not required for an actual filing with the IRS. Therefore, employees do not need to delay the filings of their own individual tax returns until they receive health care information reporting forms from their employers.
Delayed Cadillac Tax
Businesses also welcome a two-year delay in the health care law’s excise-tax on high-cost insurance plans, also known as the Cadillac Tax. The effective date of this now deductible 40 percent tax on employer-sponsored health insurance with annual premiums exceeding $10,200 for individuals (or $27,500 for families) is now January 1, 2020.
The advisors and accountants with Berkowitz Pollack Brant’s Tax Services practices work with individuals and businesses of all sizes to understand and comply with the provisions of the Affordable Care Act.
About the Author: Adam Cohen, CPA, is an associate director in the Tax Services practice of Berkowitz Pollack Brant, where he works with closely held businesses and non-profit charities, hospitals and family foundations to maintain tax efficiency and comply with federal and state regulations. He can be reached at the CPA firm’s Ft. Lauderdale office at (954) 712-7000 or via e-mail info@bpbcpa.com.
