KMC Year End Review

2016 Year end letter

To Our Business Clients

Thank you for your business during 2016.  The loyalty and support of you, our clients, is greatly appreciated by everyone at Keefe McCullough.

 

 

Internal Revenue Services audits and inquiries

Internal Revenue Service (I.R.S.) audits continue to remain detailed and technical.  Failure to maintain proper supporting records for all income and expenses may be costly in terms of additional taxes, interest, professional fees, and penalties.  The area's most commonly attacked are business vehicles, travel expenses, and entertainment expenses.

Corporate or business ownership of vehicles does not guarantee deductibility for Federal income tax purposes.  To take expense and depreciation deductions for vehicles, you must have "adequate records or sufficient evidence" supporting business use or meet one of the exemptions to the record keeping requirements.  I.R.S. defines adequate to include a log, account book, diary, trip sheet, or similar record.  Employers must have records of the date, mileage, purpose, and description of use for both local and long‑distance business trips.  Corporate shareholders, officers, and employees must reimburse the business for personal use of a business vehicle at the fair market value and/or have the fair market value of such use included on their annual W-2.  This personal auto use income is subject to both income and social security taxes.  Personal auto use includes daily commuting use of the business vehicle.

The standard mileage rate for vehicle use paid by employers to employees for 2016 has not yet been released by the IRS.  When the rate becomes available, we will inform you in a separate writing.  The rate was 54 cents per mile for 2016.  This, or a lower mileage rate, when used by an employer to reimburse employees' use of their personal vehicle for reported business mileage, is considered to meet the substantiation and adequate accounting rules.

Travel, meals, lodging, promotion, and entertainment expenses must have the following information recorded in order to properly support these items as business deductions:  a) amount;  b) date, time, and place;  c) business purpose; and) name and business relationship of entertained people.  (Note: During an audit, I.R.S. may ask for proof of business transactions resulting from the entertainment activity.)  We suggest recording this information on an expense report or in a diary or account book.  Canceled checks, credit card receipts, hotel bills, and other documents should be kept as corroborating data, but such documents by themselves, without the recorded information detailed above, will not be sufficient to support deductions.

Since tax law allows only 50% of any otherwise deductible expenses for business meals (including meals while traveling) or entertainment, it is necessary to account for these expenses separately so they can be properly reported on your tax return.  Exceptions to the 50% rule exist for meals or entertainment taxed as compensation to the recipients and for certain traditional recreational events for employees, such as a holiday party or summer outing.


FORM 8300 - REPORTING OF CASH PAYMENTS OVER $ 10,000

Each person engaged in a trade or business who, during that trade or business, receives more than $ 10,000 in cash (includes bank drafts, cashier checks, money orders, and travelers checks) in one transaction or two or more related transactions must file Form 8300 with the I.R.S. by the 15th day after the date of the transaction.  Any transactions conducted between a payer (or its agent) and the recipient in a 24-hour period are related and must be aggregated and reported as a single transaction if the total amount exceeds $ 10,000.  Transactions are considered related even if they occur over a period of more than 24 hours if the recipient knows, or has reason to know, that each transaction is one of a series of connected transactions.


FORMS 1096 AND 1099'S

The I.R.S. improved technology has increased their scrutiny of companies who fail to file these information returns. In addition, you are now required to answer specific questions when filing your business tax returns regarding the filing of these forms.  You are required to file with the I.R.S. Form 1096 and the appropriate Forms 1099 with the person's proper name, address, identifying number, and the amount of the income item if any of the following conditions exist:

  • Dividends (Form 1099-DIV) or interest (Form 1099-INT) amounting to $ 10 or more to any person
  • Rents and/or prizes and awards that are not for services rendered (Form 1099-MISC) amounting to $ 600 or more to any person
  • Other service (fees, commissions) payments (including parts and materials) to persons not treated as your employees (Form 1099-MISC) amounting to $ 600 or more to any person.
  • Rental owners who pay anyone $ 600 or more for services provided such as lawn maintenance and repairs.   


All nonemployee individuals are required to have a written contract stating their status as a nonemployee which includes a provision that the individual will not be treated as an employee for Federal tax purposes.  We suggest that the contract make further reference to the fact that the individual is responsible for paying their own income and self-employment taxes.  Please be aware that the mere existence of such a contract does not in itself solidify nonemployee status!!  You must secure each individual's full name, address, and social security number for completion of 1099's as described above.

CLARIFICATIONS:

  • Tax identification numbers
    The tax identification number to use for individual recipients, including sole proprietors, is the social security number (000-00-0000).  For other recipients, it is the employer identification number (00-0000000).
     
  • Payments to Corporations and Partnerships
    Reporting generally is not required for payments to corporations except in the case of (1) attorneys and law firms, (2) medical payments, (3) withheld Federal income tax or foreign tax, (4) barter exchange transactions, and (5) substitute payments in lieu of dividends and tax‑exempt interest.  For example, reporting is not required for service fees (except for attorney or law firm fees) paid to a corporation.

    However, reporting generally is required for payments to partnerships.  For example, payments of $ 600 or more made in the course of your trade or business to a service firm that is a partnership must be reported on Form 1099‑MISC.
     
  • Backup Withholding
    Interest, dividends, rents, royalties, commissions, nonemployee compensation, and certain other payments may be subject to backup withholding at a rate of 28%.  As a payor, you are required to make this 28% withholding and transmit it to the I.R.S. if the individual payee fails to furnish you their taxpayer identification number (TIN), if I.R.S. notifies you to impose backup withholding because the payee furnished an incorrect TIN or the payee is subject to backup withholding.  For interest, dividend, broker, or barter exchange accounts, additional certifications must be provided to avoid making backup withholding.

PENALTY INFORMATION:

If you fail to file a correct information return by the due date and you cannot show reasonable cause, you may be subject to a penalty of up to $ 100 per information return.  The penalty applies if you fail to file timely, you fail to include all information required to be shown on a return, you include incorrect information on a return, you report an incorrect TIN or fail to report a TIN, you file on paper when you were required to file on magnetic media, or you fail to file paper forms that are machine readable.  The maximum penalty is $ 1,500,000 per year ($ 500,000 for small businesses).

 There is an additional penalty of $ 50 per statement ($ 100,000 maximum per year) for failure to provide correct information returns to the payees by January 31st.

Higher penalties of at least $ 100 per payee statement, with no maximum penalty, may be imposed for intentional disregard of any of the aforementioned penalty infractions.

 

Payroll tax Information

The following items are of importance regarding employee tax data:

  • As a payer of income, you are required by law to request each payee's taxpayer identification number (usually social security number) and show it on Forms W‑2, RT‑6, and all other information documents you file.  Payees are required to provide you with these numbers upon request.  You must verify the employment eligibility of all hired employees by having them complete a Form I-9 (Employment Eligibility Verification).  The completed I-9 must be retained in your business files.  Furthermore, Federal and state law now require employers to provide information on newly hired or rehired employees within 20 days of their date of hire.  This information is normally provided to the Florida New Hire Reporting Office for employers in the State of Florida.
  • The social security tax rate for both employer and employee is 7.65% {Old-age and survivor and disability insurance (OASDI) - 6.2% / Medicare health insurance (HI) - 1.45%} for wages paid in 2017 up to $ 200,000.  Medicare withholding on wages paid in excess of $ 200,000 is 2.35%

    The 2016 self-employment tax rate is 15.3%, OASDI - 12.4% / HI - 2.9% for income up to $ 200,000 for single, $ 250,000 for married filing joint and $ 125,000 for married filing separate.  The HI rate is increased by 0.9% for income above those levels.  

    The maximum wage base that the OASDI rate will be applied to in 2017 increased to an amount of $ 127,200.  There continues to be no limit for the HI rate.

  • We suggest that you obtain new W-4's at the beginning of each year from all employees. This W-4 allows up-dating of each employee's name, address, and withholding information at least annually.  Previous requirements to send certain Forms W-4 to the I.R.S. have been removed.  Forms W-4 now must be provided to the I.R.S. only when directed by the I.R.S.

  • You are required to keep for 4 years any employee (recipient) copies of Forms W-2 and 1099 that you tried to deliver but could not.

  • If you pay wages to nonresident aliens, you should consult the annual Circular E, Employer's Tax Guide, for the unique withholding requirements for these individuals.

  • Payroll tax deposit rules - An employer is either a monthly depositor or a semi-weekly depositor based on an annual determination.  There are various exceptions and safe harbors, including a next day deposit requirement for any payroll tax liability that accumulates to or is greater than $ 100,000.

    • Monthly Depositor
      An employer is a monthly depositor for the entire calendar year (2017) if the aggregate amount of employment taxes reported for the lookback period (July 1, 2014 through June 30, 2015) is $ 50,000 or less.

      An employer that is a monthly depositor must deposit employment taxes accumulated during a calendar month on or before the 15th day of the following month.  If the 15th day of the following month is not a banking day, taxes will be treated as deposited timely if deposited on the first banking day thereafter. 

    1. Semi-Weekly Depositor
      An employer is a semi-weekly depositor for the entire calendar year (2017) if the aggregate amount of employment taxes reported for the lookback period (July 1, 2015 through June 30, 2016) exceeds $ 50,000.

      An employer that is a semi-weekly depositor must deposit employment taxes as follows:

        1)  Payroll payment date Wednesday, Thursday and/or Friday
              Deposit on or before the following Wednesday

        2)  Payroll payment date Saturday, Sunday, Monday and/or Tuesday
              Deposit on or before the following Friday

      Note: Semi-weekly depositors shall have at least three business days following the close of the semi-weekly period to deposit employment taxes.  Thus, if any of the three weekdays following the close of the semi-weekly period is a holiday, the employer has an additional business day to make the required deposit.

  • All deposits must now use the Electronic Tax Payment system (EFTPS)  
     
  • All employers who filed over 250 W-2’s for 2015 are required to report the cost of health insurance premiums in Box 12 with a code of DD.  The amount to be reported should include both the portion paid by the employer and employee.

MAGNETIC MEDIA REPORTING REQUIREMENTS

Our government requires magnetic media (rather than traditional paper forms) reporting for entities if their W-2, 1099, et al volume reaches a certain level.

Magnetic media reporting is required if you file 250 or more of each 2015 information return.  The 250-or-more requirement applies separately to each type of return.  For example, if you must file 500 Forms 1099-MISC and 100 Forms W-2, you are not required to file Forms W-2 on magnetic media, but you must file Forms 1099-MISC on magnetic media.

To receive a waiver from the required filing of information returns on magnetic media, submit a Form 8508, Request for Waiver From Filing Information Returns on Magnetic Media, requesting an undue hardship waiver from magnetic media filing for a period of time not to exceed one tax year.  This application must be made at least 45 days before the due date of the return.

See Penalty Information above for a discussion of penalties that apply to information returns.


WAGE AND HOUR LAW

The present Federal minimum wage for 2017 is $ 7.25 per hour.  The minimum cash wage you must pay tipped employees is $ 2.13 per hour provided your employees earn enough tips to bring their total earnings to the minimum wage level.  The State of Florida has a different minimum wage than that of the Federal Government.  The minimum wage for Florida employers is $ 8.10 per hour for 2017.  The cash wages you must pay tipped employees in Florida will be $ 5.08 per hour in 2017.  On September 30th of each year the Florida minimum wage will be adjusted for inflation.  If you have questions, consult with your attorney, the Wage and Hour Bureau, or us as to your overall requirements.


STATE OF FLORIDA DEPARTMENT OF REVENUE

Florida taxpayers are experiencing expanded audit activity in Corporate Income Tax and Sales and Use Tax.  Therefore, your requirements under current Florida law should be reviewed at least annually.

Some of the areas where the State of Florida has assessed additional tax are the enforcement of the Florida documentary stamp tax on all stock certificates, bonds, debentures, certificates of indebtedness, promissory notes, etc.; the escheating of funds for unclaimed outstanding checks, customer deposits and gift certificates not redeemed for 5 years after issuance; sales (use) tax on purchases of goods from out of state suppliers; sales tax on building and equipment rental between business owners and their businesses (including sales tax on building insurance and property taxes paid by the business); and sales tax on internally created tangible personal property such as constructed furnishings and/or internally prepared and printed business forms, catalogs, advertisement flyers, and company brochures.

One of the present tax planning techniques being used and tested involving State of Florida taxation is: transfer of individually owned real estate rented to your wholly owned corporation to that corporation to escape the sales tax on the rental of the real estate (corporate income tax considerations may impact this idea).  Obviously, any change in business form requires careful planning and discussion with your legal counsel.  We will be happy to discuss this idea with you and your legal counsel.

Electronic Funds Transfer Program - Florida law requires that dealers who remit sales and use tax by Electronic Funds Transfer (EFT) file their sales and use tax returns by Electronic Data Interchange (EDI). For 2017, any taxpayer who paid more than $ 20,000 in sales and use tax for the period July 1, 2015 through June 30, 2016 musta) make sales and use tax payments (including estimated tax, if required) electronically andb) file sales and use tax returns electronically.  The State of Florida should have notified you of your requirement of payment and/or filing in this manner.

Electronic filing of quarterly Florida unemployment tax returns - Florida law requires any employer who had 10 or more employees in any quarter during the period July 1, 2015 to June 30, 2016, to file and pay their unemployment tax electronically.  Information and registration for electronic filing can be found on the Florida Department of Revenue web site -http://dor.myflorida.com/dor/eservices/enroll.

If you do business outside the State of Florida, your requirements to file tax returns in these other jurisdictions should be reviewed.  All states and municipalities are stepping up their activities to increase revenues from existing sources.

 

FICTITIOUS NAME LAW

Florida law now requires any person or entity doing business under a fictitious name to register with the Division of Corporations, Florida Department of State.  Fictitious names are no longer filed with the county clerk's office.  If the business name on your occupational license is other than the legal name of the business, the business name must be registered or re-registered as a fictitious name with the Division of Corporations.  Please consult your attorney for advice concerning the meaning of "legal name" of your business.

 

CORPORATE MINUTE BOOKS

All corporations' minute books need to be up-dated with any important corporate activities annually.  Compensation, loans, and all other transactions between the corporation and related parties must be documented in the minutes by amount, interest rate, date, etc.  Notes, leases, etc. should also be drawn and executed in proper legal form and copies put in the minute books and given to the affected parties.  Review all notes at least annually for possible pay‑off provisions.

Buy-sell agreements that are funded by life insurance need to be reviewed carefully with your attorney.  Although it is commonly thought that life insurance proceeds are not taxable income, the alternative minimum tax computation includes corporate proceeds from life insurance benefits as taxable for alternative minimum tax purposes.  This fact may result in the need to restructure your buy-sell agreement and the ownership and payment of buy-sell life insurance policies.

We recommend that, at each annual meeting, a resolution as to the amount of dividends to be declared and paid should be passed.  If no dividends are declared, the resolution should reflect that decision.

Furthermore, corporate minutes should state that the corporation will consider as loans to the affected individual any expenses paid by the business which upon I.R.S. audit are considered nondeductible business expenses.  The minutes should express emphatically that these expenses are not to be considered dividends but are to be treated as a loan to the affected individual.  The minutes must further state that the loan be repaid within a reasonable period of time from notification of existence.


UNUSED BUSINESS BENEFITS    

We feel it is necessary to list the possible benefits a business can provide to owners and their employees.  Some of these benefits may only be available through the corporate form of business, although many of these benefits are also available to non-corporate entities.

Each so called "fringe benefit" has to be considered in the framework of your business as to its net benefit.  However, we feel we should provide you with the following list of benefits so that you can follow-up with your legal counsel and us as to the relative applicability to your particular business entity:  a) retirement plans, including "SIMPLE" and 401(k) plans;  b) cafeteria plans; c) various stock plans;  d) deferred‑compensation plans;  e) group life and disability insurance programs;  f) medical reimbursement plans;  g) educational assistance programs;  h) group legal‑service plans;  i) group child or dependent care plans; andj) employer gift and award plans.

There are numerous other generally accepted "fringe benefit" ideas used which have generally been regarded as partially or fully nontaxable to the employee.  The I.R.S. and Congress continue reviewing these areas and the use of these techniques must be evaluated carefully before their implementation.  Despite the uncertainty of taxability of these items and constant modifications in the deductibility of some of these items, they should be considered when deciding an over‑all "fringe benefit" package.  Some of these items are:  a) use of company automobiles;  b) legal, financial, and tax counseling;  c) professional dues;  d) travel and entertainment allowances versus direct expense reimbursement; and e) executive-directed donations.


INTEREST-FREE AND LOW-INTEREST LOANS

Generally speaking, such loans are treated like other loans made on the open market by having an interest rate imputed (assigned) in the transactions.  This imputed interest rate, called the "Applicable Federal Rate", is tied to the average yield on certain Federal securities and is calculated and published monthly by the I.R.S.

Those who lend money at less than the "Federal rate" will be treated as receiving interest income up to the "Federal rate" while borrowers will get an interest deduction for a like amount.  In family loans, the lender will also be considered to be making a gift equal to the difference in interest actually charged and the "Federal rate."  Computations to determine both the gift and income tax consequences vary depending on whether the loan is "demand" or "term" and on whether the loan is personal or business related.  Professional advice should be sought before proceeding with this type of loan.

We recommend that all such loans be immediately paid-off and/or set-up on a monthly amortization schedule, including principal and interest at an appropriate rate, to retire the loan over as short a period as practical.

These rules do not apply to loans for less than $ 10,000 which is determined to be for a valid business reason and for a nontax avoidance purpose.


YEAR END TAX PLANNING NOTES

  • Section 179 which allowed you to expense, rather than depreciate, the first $ 500,000 of qualified business equipment placed in service.  This amount is reduced if your total equipment purchases for the year exceed $ 2,000,000.  Currently trucks, vans and sport utility vehicles (SUV's) used more than 50% in a business, with a gross vehicle weight in excess of 6,000 pounds can take advantage of Section 179 expense.
     
  • For new assets that were placed in service for years 2016-2017 you are allowed to expense 50% of the cost under the bonus depreciation rules.  The amount is reduced to 40% in 2018 and 30% in 2019.
     
  • Bonus depreciation will not be available for tax years 2020 and beyond unless legislation is extended.
     
  • If your inventory has declined in value, you may be able to claim a deduction at year end.  To do so, you must make a bona fide offer to sell the inventory at a lower price.  If your inventory is worthless, you can deduct its full cost if you physically dispose of it by year end.
     
  • Consider accelerating or deferring income and expenses based on current year situation and projected 2016 income.  Careful planning in this area not only includes consideration of the regular tax rates, but also must incorporate the possibility of alternative minimum tax.  In addition, the time value of money should be considered.
     

Let us know if we can be of further help or if we need to expand on any of the above items.

We have enclosed a copy of our "2016 Annual Tax Planning Letter".  Please review the tax planning letter and contact us regarding any item that you would like to discuss further.

Our normal office hours, from April 16th through December 31st, are 9 a.m. to 5 p.m. However, for your convenience, office hours are extended to 8 a.m. to 6 p.m. from January 1st through April 15th, during the busy tax season.  Saturday appointments are also available by appointment.



 

I.R.S. examination and inquiry response services handled by our firm are billed to our clients as our efforts are incurred.  I.R.S. examinations usually take substantially more time than the annual preparation of your tax return.