More than 1 million taxpayers can expect to receive from the IRS a letter notifying them that their Individual Taxpayer Identification Numbers (ITINs) will expire at the end of 2017. Notice CP-48 will provide taxpayers with the steps they should take to immediately renew their ITINs and avoid delays in the processing of any future tax refunds or returns that are filed beginning in 2018.
The IRS issues ITINs to people who have U.S. tax filing or income reporting obligations but are not eligible for a Social Security number (SSN). Taxpayers who are eligible for, or who have, an SSN should not renew their ITINs; rather, these individuals should notify the IRS of both their SSN and previous ITIN, so that their accounts can be merged.
Taxpayers affected by Notice CP-48 include those whose ITINs have the middle digits 70, 71, 72 or 80 as well as those individuals who have not used their ITINs to file a U.S. federal tax return in at least one of the last three consecutive years. Should a taxpayer receive a renewal letter from the IRS, he or she may choose to also renew the ITINs for his or her spouse and all dependents claimed on the individual’s tax return, even if those family members’ ITINs are not expiring at the end of this year.
To renew an ITIN, taxpayers must complete IRS Form W-7 along with required documentation, including original and up-to-date documents that establish the taxpayer’s identity and connection to a foreign country, or copies of identification documents that are certified by the issuing agency. The IRS reminds taxpayers that it no longer accepts passports without a date of entry into the U.S. as a stand-alone form of identification document for dependents from a country other than Canada or Mexico, or dependents of U.S. military personnel overseas. Dependents claimed on a taxpayer’s federal return who do not have a date of entry stamp of their passports must also provide proof of U.S. residency via U.S. medical records when the dependent is younger than six years old, school records for dependents under the age of 18 or utility bills or bank statements for dependent children over 18.
Taxpayers have the option to mail Form W-7 and supporting documentation to the IRS, or they may make an appointment to meet face-to-face with a Certified Acceptance Agent (CAAs) at a designated IRS Taxpayer Assistance Center who will confirm their identity and submit all documentation to the IRS for processing.
About the Author: Angie Adames, CPA, is an associate director with Berkowitz Pollack Brant’s Tax Services practice, where she provides tax and consulting services to real estate companies, manufacturers and closely held business. She can be reached at the CPA firm’s Miami office at (305) 379-7000 or via email at firstname.lastname@example.org.
When U.S. taxpayers file their income taxes each year, they must choose a tax-filing status to ultimately determine the amount of taxes they must pay to the IRS. In some instances, selecting a filing status is easy; under certain circumstances, however, more than one filing status may apply. It is critical that taxpayers carefully consider their options and choose the appropriate filing status that applies to them and will allow them to lower their tax bills.
Select from Five Filing Statuses
The filing status individuals select will help to determine 1) the allowable deductions and exemptions they may use to reduce their tax liabilities as well as 2) their tax bracket, which refers to the rate of tax an individual will pay based upon his or her income. Under current law, there are seven tax brackets with rates of 10, 15, 25, 28, 33, 35 and 39.6 percent. Generally, the higher the income one earns, the higher the tax rate, and the more he or she will potentially owe in taxes.
- Single filing is reserved for those individuals who are not married, or who are currently divorced or legally separated under state law. The IRS requires taxpayers to select single status when they do not meet the criteria of the other four statuses.
- Head of Household filers are typically not married on the last day of the year, but they do pay for more than half of the cost of keeping up a home for themselves and another qualifying person, including a dependent child who has lived in the home for at least six months during the calendar year. This status typically applies to single parents with custody of minor children.
- Married Filing Jointly applies to couples who were married on the last day of the prior year and who choose to file one joint tax return between them.
- Married Filing Separately is an option for married couples who wish to keep their tax liabilities separate and for whom filing two separate tax returns will result in a lower tax burden than if they file jointly. The IRS recommends that taxpayers prepare their returns both ways before making a final selection.
- Qualifying Widow(er) with Dependent Child is reserved for those taxpayers whose spouses’ died in the prior year and who have a dependent child.
When a taxpayer qualifies for more than one tax filing status on the last day of the year, the IRS allows him or her to select the status that results in the “lowest tax obligation.” Making this conclusion will often require taxpayers to speak with their accountants to run the numbers for each filing status and determine which estimate is more financially advantageous for an individual’s specific circumstances.
The advisors and accountants with Berkowitz Pollack Brant work with individuals, family, estates and business owners to navigate complex laws and implement tax efficient strategies intended to build and preserve wealth.
About the Author: Jack Winter, CPA/PFS, CFP, is an associate director with Berkowitz Pollack Brant’s Tax Services practice, where he works with individual taxpayers and entrepreneurs on estate planning, tax structuring and business consulting. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email email@example.com.
As Congress shifts its attention from healthcare to tax reform, key Republicans and the White House on July 27, 2017, issued a joint statement agreeing to “set aside” a proposed and much-hyped border adjustment tax (BAT) on imported goods. Business groups that feared a destination-based tax would drive up costs cheered this news. However, it is important to note that the strongest supporters of the BAT, Speaker of the House Paul Ryan, and Ways and Means Committee Chairman Kevin Brady, tempered the announcement by stating that they would set aside the BAT temporarily, “at least in the short term.”
What is the Border Adjustment Tax?
Not long before the 2016 presidential election, House Republicans under Speaker Paul Ryan drafted an ambitious plan for tax reform that, among other things, recommended a destination-based border adjustment tax on products and services that U.S. businesses import into the country. When Trump took office, it appeared the BAT would become a reality, since it aligns with the president’s directive to get tough on trade and bring jobs and businesses back to the U.S.
The Republican proposal is a far departure from the U.S.’s current system that levies a 35 percent tax on profits corporations earn and bring back to the U.S. from sales of goods and services produced in the U.S.
Under a BAT regime, corporate cash flow would be subject to a flat 20 percent tax based upon the location where a product, service or intangible is actually sold and consumed. More specifically, the BAT would apply to goods produced in foreign countries and imported for consumption in the U.S., as well as goods produced and sold for consumption in the U.S. All exports would be exempt from taxation.
As an example, consider a U.S. manufacturer that ships fuselages to China, where they will be used to make airplanes. The profits the manufacturer makes on its exports will not be subject to U.S. taxes. However, if an American company that builds and sells airplanes for $10 million purchases a fuselage from China for $8 million, the company would be subject to U.S. tax on $2 million in profits plus the full $10 million of proceeds from the sale of the aircraft. Moreover, the manufacturer would not be able to deduct the costs it incurred to purchase the fuselage from overseas.
A BAT can be comparable to the Value Added Tax (VAT) that most foreign countries impose on goods and services consumed within their borders, regardless of where those goods are produced. It is also comparable to the U.S.’s current system of retail sales tax, for which goods produced in one state are exempt from state-level sales tax when they are sold and exported to another state.
While a BAT aims to reduce or eliminate the common tax-planning practice of artificially shifting profits overseas to low- or no-tax jurisdictions, it would provide a distinct advantage to businesses that purchase materials from U.S. suppliers. Items that businesses purchase domestically for manufacturing or resale would qualify as deductible business expenses, whereas the costs for importing those materials from abroad would be limited. Because the U.S. currently imports more than it exports, it is expected that a destination-based cash-flow (DBCF) BAT would generate more than $1 trillion in tax revenue for the U.S. over a 10-year period.
Winners and Losers
The imposition of a border adjustment tax could be a boon for exporters, who would escape taxation on sales outside the U.S., even when they bring the profits from those sales back to America. Theoretically, the exemption of exports would encourage businesses to manufacture in the U.S. and potentially increase foreign demand for lower-priced U.S. goods. Moreover, supporters of a BAT that treats income from foreign sales favorably believe that it would reduce corporate incentives to move profits overseas for tax-planning purposes, and instead incentivize businesses to invest and manufacture in the U.S.
Yet, without the imposition of a BAT, many U.S. businesses will still have an opportunity to reduce their tax rate on exports from approximately 40 percent to 20 percent, when they form a separate Interest Charge-Domestic International Sales Corporation (IC-DISC) that receives commissions on sales to non-U.S. customers.
Conversely, a BAT would impose significant costs and administrative burdens on importers, who would pay higher taxes on all goods, services and intangibles they bring in to their country, regardless of where the end-product is produced. This, combined with restrictions on business deductions for import activities, would ultimately narrow profit margins and lead to higher prices passed on to U.S. consumers. Under these circumstances, businesses would need to reassess their value chains and transfer-pricing policies.
Supporters argue, however, that a border adjustment tax would promote investment in the U.S. and preserve neutral tax treatment between domestic sales and exports. At the same time, a BAT would support the Administration’s goal of lowering the current corporate tax rate from 35 percent to a target of 20 percent. Without a BAT, the administration may not reach its tax reform goals, and it may need to identify additional methods for raising revenue.
What’s Next for U.S. Manufacturers?
With the government’s decision to set aside the BAT for the time being, retailers and consumers can breathe a temporary sigh of relief. Yet it is unclear what alternative strategies the administration will come up with to achieve its ambitious tax reform goals in the future. As a result, it is advisable that affected businesses plan to meet with experienced tax advisors and accountants to understand their options and be prepared to implement alternative strategies that may minimize their exposure to unnecessary operating costs and additional tax liabilities.
About the Author: James W. Spencer, CPA, is a director with Berkowitz Pollack Brant’s International Tax Services practice, where he focuses on a wide range of pre-immigration, IC-DISC, transfer pricing and international tax consulting issues for individuals and businesses. He can be reached at the firm’s Miami office at 305-379-7000 or via email at firstname.lastname@example.org.
There is no doubt that the rise of interconnectivity between networks, devices and apps have helped businesses in virtually all industries improve operational efficiency and personalize the customer experience. While more than half of U.S. states have made some progress in defining the sales taxability of digital goods and software, either by adopting the standards set out by the Streamlined Sales Tax Governing Board or through their own definitions, there remains a lack of definitive agreement on the parameters that define the sales and use taxability of intangible cloud-based products and services. Many providers of cloud computing, video streaming and online research offerings assume that the sale of their software and service delivery methods are intangible and therefore exempt from the collection and remittance of sales tax. In reality, cloud computing sales can often create economic nexus and trigger a sales tax liability based on the type of software sold and the delivery method employed.
When Does Cloud Computing Create Taxable Nexus?
There are many ways that businesses can create economic nexus, or a minimum legal presence, in a state that will require them to pay and/or collect sales and use taxes within that state. Obvious activities include owning property or employing workers in a particular state. However, with the rise of cloud services and online transactions, many states have been pushing the boundaries of “physical presence” as defined in the Supreme Court decision in Quill vs. North Dakota in order to collect taxes from out-of-state businesses that make online sales in their states. Common examples of laws for which businesses may qualify as operating in a state without even knowing it include online click-through nexus solicitation and referral laws, affiliate nexus for businesses that pay commissions to remote sellers located in other states, or nexus based on a business’s payroll or it sales activity that exceeds a statutory threshold within a state.
Complicating the determination of nexus and exposure to a state’s sales and use tax are laws involving the sales of software and cloud-computing services. Whether cloud computing is subject to sales tax depends on how each state characterizes the software (canned or customized, tangible or virtual, or product or service) and the method used to deliver it to an end user. More specifically, providers must ask how a state characterizes Software-as-a-Service (SaaS), Platform as a Service (PaaS), and Infrastructure as a Service (IaaS). Is the software considered tangible personal property (TPP), a service or an intangible? Who controls the end product, the software company or the out-of-state purchaser?
Some states have made progress addressing the taxability of the SaaS models, for which software is hosted in one state but licensed for remote use by customers in other states. Those states that impose sales tax on SaaS transaction do so because they consider the model to involve the following qualities:
- a sale of prewritten or canned software that it considers to be “tangible personal property,” or
- a sale of computer or data processing “services,” which many states, such as Arizona, expressly characterize as taxable services.
However, the challenge with sales and use tax compliance is a lack of consistency in the guidance from one state to the next. For example, SaaS transactions are not taxable in 29 states, but in Florida, this rule applies only when the software is considered a service and does not include the transfer of tangible personal property. In 2015, the New York Department of Taxation and Finance addressed the taxability of Infrastructure as a Service (IaaS) cloud computing by ruling that businesses providing its customers with access to computing power are, in fact, delivering a non-taxable service and therefore exempt from sales and use tax in the state.
As states update their nexus standards, businesses must remain alert to evolving laws and their potential sales and use tax liabilities based on the goods or services they provide.
Applying the Right Sales Tax to the Right State
When the sale of a cloud service is taxable, the provider must identify the state or states to which it should source the transaction. Typically, sourcing depends on how a state characterizes a transaction as either 1) the sale of tangible personal property sourced to its destination or use, or 2) the sale of a service sourced to the location where a benefit is derived.
For the latter, the benefit may be derived in multiple states for which a taxpayer should apportion the tax base and impose tax on only that portion of the service for which the benefit is being received in the taxing jurisdiction. This information must be included in contract terms, especially when a purchaser intends to use the service concurrently in multiple states, for which it must provide the seller with the percentage of use in each taxing jurisdiction. In turn, the seller may charge sales tax based on the percentage of use allocated to each of the applicable taxing jurisdictions in which it has sales nexus. When the seller does not have a nexus or responsibility to collect sales tax in a particular jurisdiction, the responsibility for remitting use tax on the service would fall to the purchaser.
However, cloud-computing sellers often have a hard time distinguishing where the benefits of their digital product or services will be derived. Is it the location where the purchaser runs the software on its server or where the end user is located? Is it the jurisdiction when the purchasing entity is located or where the purchasing business’s ultimate users are located?
While few states provide specific answers to these questions, it is advisable that cloud computing sellers, at a minimum, apply a consistent approach to all of their sales/use tax allocations. Additionally, it behooves sellers to identify in their sales contracts the location where a purchasers’ users are located as well as indemnification language to protect the cloud service provider from any future sales and use tax liabilities.
Businesses must consistently assess their exposure to sales and use tax liabilities, especially as a growing number of states are overextending their reach and enacting their own economic nexus laws in order to fill their eroding coffers and generate tax revenue from outside their borders, including the cloud. For example, Alabama passed a law that requires out-of-state retailers to collect and pay sales and use tax when their gross receipts or total sales of tangible personal property to Alabama customers exceeds $250,000 per year. Similar economic nexus laws based on annual sales thresholds have been adopted by other states, including Colorado, Indiana, Massachusetts, North Dakota, South Dakota, Tennessee and Vermont.
One potential glimmer of hope that may help online businesses avoid an overabundance of regulations and corporate income tax liabilities has come from Representative Jim Sensenbrenner of Wisconsin who recently introduced the No Regulation Without Representation Act of 2017. Under the proposed HR 2887, states would be prohibited from taxing or regulating a business’s interstate online commerce unless such business or individual has a physical presence in that state’s jurisdiction. Should Congress approve the bill, online businesses and cloud service providers have the ability to sell across any state line free of sales and use tax, as long as they do not have a physical presence in a jurisdiction. In the meantime, businesses operating in the digital age must take the time to navigate carefully through treacherous waters of conflicting sales and use tax laws.
About the Author: Karen A. Lake, CPA, is an associate director in the Tax Services practice of Berkowitz Pollack Brant and a SALT specialist who helps individuals, businesses and non-profit entities navigate complex federal, state and local taxes, credits and incentives. She can be reached at the firm’s Miami office at (305) 379-7000 or via email at email@example.com.
Gone are the days when multinational companies could reduce or eliminate their tax liabilities by taking advantage of broad language contained in various income tax treaties that the U.S. had effectuated with other foreign jurisdictions. In 2015, the Organization for Economic Cooperation and Development (OECD) introduced a new framework that aims to prevent businesses from exploiting gaps in different countries’ tax systems and artificially shifting their profits to low- or no-tax jurisdictions. Under this Base Erosion and Profit Shifting (BEPS) Action Plan, barriers have been put into place to block businesses from implementing strategies that had previously allowed them to take advantage of exceptions to U.S. income tax treaties and avoid creating a tax nexus that would have otherwise required them to pay taxes in that country.
By amending tax treaties to ensure that corporate profits are taxed in the jurisdiction where real economic activities generate those profits and create value, the BEPS Action Plan aims to eliminate these legal practices of tax avoidance. In turn, businesses around the globe will not only be required to adjust their financial and tax reporting, but also to plan and prepare revised guidelines for those activities they, their employees, or their agents may take while working abroad.
What is the BEPS Action Plan?
At its core, the BEPS Plan features 15 recommended best practices for increasing tax transparency and information sharing between international tax authorities; improving voluntary compliance with cross-border tax-treaty consistency; and making the taxation of corporate profits more certain and predictable among all participating countries.
How Does Business Nexus Affect Taxability?
One area of particular interest is Action Item 7, which aims to prevent multinational enterprises from artificially avoiding permanent establishment (PE) status, or a “substantial economic presence,” in a jurisdiction that would otherwise trigger a related tax liability in that country. Historically, a PE has been defined to include:
- a physical “fixed place of business” in a country (a “fixed place PE”), or
- a dependent agent (be it an individual or a corporation) in that country that “habitually exercises the authority to conclude contracts on the enterprise’s behalf,” (a “dependent agency PE”).
These loose definitions, along with several exceptions to the rules, had permitted many enterprises to avoid creating PEs, or business nexus, in foreign countries. Common tactics the businesses employed included the use of commissionaire or toll arrangements, specific activity exemptions (e.g. preparatory and auxiliary services and warehousing facilities), and splitting up contracts.
In an effort to curb artificial avoidance of permanent establishment status and accompanying tax liabilities, BEPS Action Item 7 expands the definition of dependent agency PE to involve all situations in which a closely related agent or person acts on the behalf of an enterprise. This includes not only the conclusion of contracts, but also any contracting for the “transfer of ownership or granting of rights to use” any property owned by the enterprise, or that the enterprise has a right to use or any contract for which the enterprise promises to provide services.
Under this expanded definition, a multinational enterprise will have a dependent agency PE in a contracting state where it has an agent whose activities “lead to the conclusion of contracts” in the name of the enterprise, or for the transfer of goods or services by the enterprise. The only exception will apply to those enterprises that hire truly independent intermediaries, whose businesses are separate and unrelated from the enterprise, and who do not work exclusively for the enterprise.
Action Item 7 also limits taxable nexus to “fixed places of business” where an entity conducts activities that are not considered “preparatory or auxiliary” to its core business. Only those short-term activities that “support, without being part of, the essential and significant part of the activity of the enterprise as a whole” will escape PE treatment. This may include maintaining stock of goods for storage, display, delivery or processing, as well as purchasing or collecting information for both brick-and-mortar and online businesses. Note, however, that these very same activities may, under certain circumstances, comprise an essential (or significant) part of the operating entity’s business activity.
For example, a large, online distributor that makes its money by warehousing the products of others and delivering such products in a timely fashion may now have more trouble arguing that its warehouse facilities are preparatory rather than the essence of its business. As such, they may no longer rely on this exception to avoid a local tax nexus in the jurisdiction in which they maintain such warehouses.
These revised definitions may give way to a flood of PE-creating activities for which businesses will be exposed to greater tax liabilities and administrative costs in additional countries, even when they have in place well-established policies concerning the “do’s” and “don’ts” of cross-border activities. In fact, under the BEPS package, businesses will need to reexamine their compliance with the principles of cross-border business activities to ensure that they do not run afoul of these new, broader definitions of when a tax nexus may be created abroad.
How May My Business Minimize Exposure to Permanent Establishment Status?
Businesses and their executives must closely assess their cross-border activities to identify and correct instances in which they may be inadvertently creating taxable PE.
For example, consider a U.S. company that hires one of its foreign subsidiaries to act as a sales agent for its product in a local market. Historically, the sales agent or its employees would not sign contracts with a local customer, but instead, perform all of the negotiations and other related activities that led to the eventual contract signing between the third-party customer and the ultimate U.S. parent company. Under the old definition of dependent agency PE, the U.S. company could first argue that the related subsidiary was independent. However, even if it treated the agent as dependent, the U.S. company could still argue that the agent did not have the authority to sign contracts, and did not habitually do so, thereby allowing the company to avoid a local tax nexus.
However, under the new, expanded definition, a related party, such as the one described above, would almost surely be treated as dependent; the company would be unable to make the first argument that the foreign subsidiary could be considered independent under the old definition. Furthermore, under the new definition of dependent agency PE, it is not required that the agent habitually sign contracts. Rather, it is only required that such agent’s activities lead to the conclusion of contracts in the name of the U.S. parent company. In such a case, the same activities that did not give rise to a local tax nexus under the old definition, would, indeed, give rise to a tax nexus under the new rules.
To avoid triggering taxable PE status under Action Item 7, businesses may need to restructure existing sales arrangements, and/or implement new policies and procedure for selling their goods and services across borders in the future. International tax advisors can help businesses analyze the substance of their cross-border activities and make recommendations for restructuring business activities, including transfer pricing adjustments 1) to minimize risk of creating a tax nexus in the first place; and 2) to reduce the amount of the income tax exposure associated with a taxable nexus, if one could not be avoided.
About the Author: Andre Benayoun, JD, is an associate director of International Tax Services with Berkowitz Pollack Brant where he works with inbound and outbound multinational businesses and nonresident aliens on a variety of matters, including structuring for mergers, acquisitions and liquidations; planning for profit repatriation; treaty analysis; tax efficient debt financing; and pre-immigration tax planning. He can be reached at the firm’s Miami office at 305-379-7000 or via email at firstname.lastname@example.org.
The Department of Treasury in July 2017 announced its intent to reform or repeal eight tax regulations enacted during the Obama administration that it deems to be financially burdensome or excessively complex for U.S. taxpayers. It is expected that Treasury will make its final recommendations on these rules by September 18, 2017.
The regulations at risk of potential modification or revocation include the following:
- Final and temporary Section 385 regulations (T.D. 9790) that intended to make it harder for businesses to engage in “earnings stripping” and avoid U.S. taxes on their worldwide income by loading their U.S. operations with debt and moving profits to foreign subsidiaries. A possible repeal would allow businesses to remove the barriers preventing them from qualifying for preferential tax treatment when their foreign operations lend money to those in the U.S.
- Final regulations (T.D. 9803) under Internal Revenue Code Section 367, which aimed to prevent businesses from transferring foreign goodwill and going concern value to a foreign corporation without immediate or future U.S. income tax.
- Final regulations (T.D. 9794) under Section 987 that provided complex rules for 1) how businesses translate income from branches operating in different functional currency than that of the parent company, 2) how they calculate foreign currency gains or losses with respect to qualified business units (QBUs), and 3) how they recognize these foreign currency gains or losses when a branch makes a transfer of any property to its owner.
- Temporary regulations (T.D. 9770) under IRC Section 337(d), which were intended to prevent certain spin-off transactions involving transfers of property by C Corporations to REITs and RICs. More specifically, these rules were aimed at preventing these property transfers from qualifying for non-recognition tax treatment.
- Temporary regulations (T.D. 9788) under Section 752 that opponents say are restrictive rules for purposes of determining whether “bottom-dollar” payment obligations provide the necessary “economic risk of loss” to be taken into account as recourse liabilities.
- Proposed regulations under Section 2704 that would potentially eliminate or restrict the availability of valuation discounts to apply to intra-family wealth transfers for estate, gift and generation-skipping transfer tax purpose.
In addition to the questionable future of these regulations, taxpayers should be on alert to the tax reform proposals that the current administration is expected to unveil later this year. In the interim, taxpayers should consider meeting with their accountants and advisors now to consider potential strategies to implement in the future in order to protect wealth while maintaining tax compliance and efficiency.
About the Author: Edward N. Cooper, CPA, is director-in-charge of Tax Services with Berkowitz Pollack Brant, where he provides business- and tax-consulting services to real estate entities, multi-national companies, investment funds and high-net-worth individuals. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or via email at email@example.com.
As we deal with peak hurricane season, we are reminded once again of the importance of preparing for and responding to natural disasters in order to minimize losses and ensure long-term viability. The actions a business takes during the first few days following a loss can often determine the success of its recovery and settlement of insurance claims for property damages and lost profits.
Following are seven tasks that well-prepared businesses incorporate in their continuity plans. If such a plan does not already exist, a business should still consider adopting these best practices to make the recovery process smoother and improve their chances of a complete and satisfactory recovery.
Step 1: Assess Damages. As soon as the danger has passed, business owners should conduct the following activities:
· Identify the cause and origin of the loss
· Assess structural components of the remaining facilities
· Determine the scope of physical damage
· Reach a consensus with an insurance representative on the scope of the damages
· Conduct a count of damaged and/or destroyed inventory
It is recommend that business owners record the damages they incurred via videotape as soon as possible after incurring a loss. A narrated video provides an inexpensive ounce of prevention if there are future disputes with insurers about specific damage.
Step 2: Protect and Secure the Site. Boarding up broken windows, making temporary roof repairs, covering machinery to protect against the elements and disconnecting utility services are examples of activities businesses should engage in to protect their property from further damage. In addition, consideration should be given to securing the damaged area with temporary fencing or security personnel to ensure it remains intact for subsequent investigation and calculation of losses. Retail establishments should take extra care to avoid looting. Securing the site and protecting property is typically an insurance policy requirement. Plus, it will help to expedite the business’s return to its normal operations.
Step 3: Form a Recovery Task Force. Business owners looking to get their operations up and running quickly must act fast to reestablish revenue streams from customers. The best way to accomplish this is to have a solid recovery plan carried out by a company task force made up the following key constituents:
- Employees representing the business’s damaged operations, such as an operations manager, head of manufacturing, etc.
- Personnel responsible for rebuilding, such as a facilities manager, project manager, etc.
- A representative with the construction contractor
- A risk manager or other staff member in charge of corporate insurance policies
- Key staff members who interact regularly with customers, such as sales directors or customer relations representatives
- A corporate finance or accounting liaison, who will serve as the gatekeeper to gather, track, and record the repair costs as well as distribute the necessary information to other appropriate parties
- Other consultants retained to assist in the recovery, including engineers, reconstruction experts and outside accountants and consultants
Step 4: Be Involved in Estimations of Losses. When an insured business has a covered loss, the insurance carrier will typically send out one of its adjuster to establish a “reserve”, which is an initial estimate of the loss. Rather than leaving this initial loss estimation solely in the hands of insurance adjusters or other outside consultants, business owners should involve themselves in the process. No one knows a business better than its owner(s), who have unique knowledge about the business’s operations and facilities as well as the cost of replacement equipment, building materials or temporary locations. Moreover, a business interruption estimate prepared in cooperation with a business owner is less likely to overlook important factors that might affect the ultimate amount of covered losses, such as recently awarded contracts, new customers, new products, recently implemented or soon to be implemented cost savings or efficiencies, which may affect the ultimate amount of the loss.
Step 5: Establish a Loss Accounting System. There are many ways for businesses to account for a loss, but the best method is to use a simple system that follows their normal day-to-day activities. Examples can include creating a set of charge codes related to the loss, establishing separate costs centers for each repair expense category or creating a project work order, as if the repair was a normal project. The goals should be to separate repair costs from normal operating expenses and keep them organized and easy to access.
Step 6: Run Expenses and Invoices through a Corporate Gatekeeper. Invoices for loss-related expenses should be routed to an individual in the business’s accounting department (e.g.; controller, chief accountant, etc.), who can review them for accuracy, appropriate detail and relevance to a claimed loss. The job of the Gatekeeper is to ensure that all invoices meet an insurance company’s reimbursement requirements before a business pays an invoice. If further detail is required from the vendor, it is often much easier to get the information before the invoice is paid rather than after.
Step 7: Get Help. The recovery from a loss is a traumatic and potentially significant event. For some companies, major losses threaten their very existence and a full recovery determines survival or extinction. Getting help from a professional accountant, lawyer and/or engineer who specialize in financial recovery from losses and keeps your best interests in mind can make the process less complicated. They will work with your company, insurance broker and the insurer’s representatives in the time consuming task of preparing complete and fully documented claims, allowing your personnel to concentrate on the task of serving customers, repairing facilities and returning to normal operations. In addition, their fees may be covered by an insurance policy with a “professional fee” or “claim preparation cost” endorsement.
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, CGMA, CVA, is a director in the Forensics and Business Valuation Services practice at Berkowitz Pollack Brant, where he works with businesses of all sizes on matters involving valuations, economic damages, lost profits and the quantification of business interruption insurance claims. He can be reached in the CPA firm’s Miami office at (305) 379-7000 or via e-mail at firstname.lastname@example.org.
Working parents may be able to offset some of the costs of sending their children to summer day camp when they qualify for the Child and Dependent Care Tax Credit. The credit, which is based on a taxpayer’s gross income, filing status, amount of allowable expenses and number of children, can be worth up to $2,100 for a family with two or more children and $6,000 or more in childcare expenses.
Following are a few tips to keep in mind:
- Qualifying taxpayers include those parents who either worked full time or were looking for work while their child attended summer camp. This rule applies to both spouses when the parents are married couples; if one spouse is a stay-at-home parent, a full-time student or if he or she is disabled and unable to work, the family will not qualify for the Child and Dependent Care Tax Credit.
- Qualifying children must be younger than 13 or they must be dependents who lived with a qualifying taxpayer for more than half the year and who are physically or mentally incapable of self-care.
- Qualifying costs include those a family incurs for sending their child to day camp or for those paid to an individual who provided care for a dependent child in the family’s home. Similarly, some families may qualify to apply the credit toward costs charged by the day camp to transport children to and from the campus. However, it is important to note that the credit will not apply to costs incurred for sending a child to overnight, sleepaway camp, and or to those costs a family spends on their own means of transportation. In addition, families must be careful when hiring individuals to care for children in their homes, as these individuals may be considered household employees for whom the families must withhold Social Security and Medicare tax and pay unemployment tax.
- Documentation required for families to claim the Child and Dependent Care Tax Credit include the name, address and taxpayer identification number of the camp or caregiver, which should be included with an annual tax return on Form 2441, Child and Dependent Care Expenses.
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 email@example.com.
With half of the year behind us, taxpayers should take a few moments to check their withholding allowances, and estimated taxes if self-employed, to ensure that the proper amount of federal income tax is taken from their paychecks. When not enough tax is withheld or paid in, you may end up with a significant tax bill next year. Too much tax liabilities taken out of your paycheck may result in a tax refund in 2018, but it also means that you are receiving unnecessarily smaller paychecks and less money in your pocket in 2017.
Self-employed taxpayers who either do not pay tax through withholding or do not pay enough tax that way may be required to pay their estimated fair share of tax throughout their year. These quarterly estimated tax payments include not only the amount one owes in federal income taxes, but also his or her liabilities for self-employment tax and the alternative minimum tax (AMT). Should individuals miss an estimated tax payment, or determine that they underpaid their estimated tax liabilities during the year, they have an opportunity to make up for the discrepancy by increasing their salary withholding between now and the end of the year. This planning trick can also help taxpayers reduce or eliminate and interest-charges or penalties they will incur for failing to pay their estimated liabilities throughout the year.
The ultimate goal of a mid-year checkup is to provide taxpayers with enough time to make adjustments to their withholding and come as close as possible to a zero tax balance at the end of the year. This requires taxpayers to consider whether or not any of their life circumstances have changed, such as marital status or birth of a child, since they last provided their employers with Form W-4, Employee’s Withholding Allowance Certificate. These life changes and how they are reflected on a worker’s W-4 ultimately affect the credits, exemptions and other adjustments to income and tax liabilities that he or she may claim on his or her annual tax return. For example, the W-4 will inform employers whether to withhold a worker’s taxes at the single rate or at the lower married rate and how much to withhold based upon the number of allowances a worker claims.
To make a withholding adjustment, taxpayers simply need to complete a new Form W-4 and submit it to their employers, who will calculate the withholding amount based on the information contained on the W-4. While workers may select to have an additional taxes withheld from their paychecks with the hopes of receiving a refund next year, it is important to remember that the dollars you receive as a tax refund are actually a government repayment of an interest-free loan that you made to Uncle Sam with your own money. Rather than having the excess taxes taken from your pay, you could have put those dollars to work for you by investing in the public equity markets or an employer’s 401(k) retirement plan or health savings account, or even keeping the money in a low-interest-bearing bank savings accounts.
To ensure that the calculation of estimated tax payments and/or withholding tax is as close as possible to the true amount a taxpayer owes at the end of the year, individuals should seek the counsel of experienced tax accountants.
About the Author: Andreea Cioara Schinas, CPA, is a director with Berkowitz Pollack Brant’s Tax Services practice, where she provides corporate tax planning for clients through all phases of business operations, including formation, debt restructuring, succession planning and business sales and acquisitions. She can be reached in the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000, or via email at firstname.lastname@example.org.
Tax-related scams are casting a dark cloud over the typically blue skies and sunshine-filled days of the summer months. During this time of easy living, people must remain vigilant against new and often aggressive schemes that can comprise their personal information and financial security and leave them as yet another victim of identity theft.
In this new twist on an old scheme, scammers posing as IRS officials call taxpayers to say that because two certified letters about an outstanding tax bill were undeliverable, the taxpayer must make an immediate tax payment via a specific prepaid debit card or face arrest. Victims are told that the debit card is linked to the Electronic Federal Tax Payment System (EFTPS), which is a free service offered by the U.S. Department of Treasury that allows taxpayers to pay federal taxes online or by phone. The problem is that the debit card the scammers demand taxpayers purchase is, in reality, it is controlled entirely by the scammer.
To avoid falling victim to this scam, taxpayers should remember that the IRS will never call them to demand payment without giving them the opportunity to question or appeal the amount owed. In addition, the IRS will never threaten a taxpayer with arrest nor will it ask for a credit or debit card payment over the phone. Rather, all tax payments must be payable only to the U.S. Treasury.
“Robo-call” Message Scams
Taxpayers who receive a prerecorded message claiming to be from the IRS should know that the agency will never leave a voice-mail message demanding an immediate call back. Individuals fall victim to this scam when they call back and are threatened with arrest unless they make immediate payment by a specific prepaid debit card or by wire transfer.
Private Debt Collection Scams
Taxpayers should be on the lookout for scammers posing as private collection firms demanding payment of an outstanding tax liability. While it is true that the IRS has engaged private-sector collection agencies to recover a limited number of taxpayers’ overdue federal tax liabilities, taxpayers will first receive a notice from the IRS advising them of the debt and the name of the collection agency.
Scams Targeting People with Limited English Proficiency
Taxpayers who are not proficient in English may receive phone calls or emails in their native language from someone claiming to be from the IRS. The caller will tell victims that they owe the IRS money and threaten deportation or police arrest unless they make an immediate tax payment on a preloaded debit card, gift card or wire transfer. Again, taxpayers must remember that the IRS will never call or email them about an outstanding tax liability, nor will the agency ever demand payment via debit card, credit card or wire transfer. The only acceptable method for paying taxes is doing so directly to the U.S. Department of the Treasury.
If a taxpayer believes that he or she owes taxes, it is important to remember the following points:
1. The IRS’s primary method for contacting taxpayers is through regular U.S. Postal Mail.
2. Never give out person information over the phone or via a link to a website.
3. Taxpayers may call the IRS directly at 800-829-1040 to verify or debunk any purported tax liabilities and requests for payment
4. Individuals may access their tax accounts, potential liabilities and options for payment online at IRS.gov, or they may request that their accountants obtain these transcripts on their behalf
About the author: Joseph L. Saka, CPA/PFS, is CEO of Berkowitz Pollack Brant, where 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 can be reached at the firm’s Miami office at (305) 379-7000 or via e-mail at email@example.com.