The IRS has a complicated set of guidelines for determining whether a worker should be treated as an employee or independent contractor for payroll tax purposes. It may be tempting for business owners to just classify people as independent contractors and save payroll taxes, but it’s not worth the risk, says Jim Forbes, CPA, a principal with Skoda Minotti.

“The IRS is conducting more payroll tax audits of small businesses, but the risk is always there with any audit. No matter what triggers the audit, the IRS will ask for all of your W-2s and 1099s and will be suspicious if a contractor is being paid like an employee,” Forbes said.

Smart Business spoke with Forbes about the process of determining whether a person is an employer or an independent contractor and why it poses such problems for businesses.

How do you determine if a worker is an employee or independent contractor?

The IRS uses 13 factors; some employers will look at a couple and think a person is clearly an employee or a contractor, but you have to look at all 13. Even then, there’s no set number you have to pass, it’s all a matter of facts and circumstances. That’s why it’s tricky for companies to figure out how to classify workers.

The 13 factors are:

• Type of instructions given. An employee is generally subject to follow instructions about when, where and how to work.

• Degree of instruction. The key consideration is whether the business retains rights to control details of a worker’s performance.

• Evaluation system. If the system measures details of how work is performed, that points to the person being an employee.

• Training. On the job training indicates a particular way of performing the job is desired and is strong evidence the worker is an employee.

• Significant investment. Independent contractors often have invested in the equipment used for work. However, that is not required for independent contractor status.

• Unreimbursed expenses. Independent contractors are more likely to have unreimbursed expenses.

• Opportunity for profit or loss. Having the potential of incurring a loss indicates a worker is an independent contractor.

• Services available to market. An independent contractor is generally free to seek out business opportunities.

• Method of payment. An employee is generally guaranteed a wage for hourly, weekly or other period of time. Independent contractors are usually paid a flat fee for jobs.

• Written contracts. The IRS is not required to follow a contract stating that a worker is an independent contractor; how the parties work together determines how the worker is classified.

• Employee benefits. Insurance, pension plans and other benefits are generally not given to independent contractors. However, absence of benefits does not necessarily means the worker is an independent contractor.

• Permanency of the relationship. If a worker is hired for an indefinite time, that is generally considered evidence of an employee/employer relationship.

• Services provided as a key activity of the business. Companies are more likely to have the right to control activities when the services are a key aspect of the business.

Why would companies attempt to classify employees as independent contractors?

With smaller companies, there is a greater impact from the additional payroll taxes. If the person is an employee, you have to pay 7.65 percent payroll taxes for Social Security and Medicare. There are other taxes, including unemployment, but that is the primary motivation.

There could be more incentive in 2014 with the employer mandate under health care reform. A business with 49 employees that needs to add two more people might want to bring them on as independent contractors to avoid the rules that kick in when you reach 50 full-time equivalents.

Still, most companies will try to do the right thing; it’s just difficult sometimes to figure out what that is. You can meet 10 of the 13 tests, but there’s no guarantee that means the person is an independent contractor. Ultimately, that answer rests with the IRS.

Jim Forbes, CPA, is a principal at Skoda Minotti. Reach him at (440) 449-6800 or

Follow up: If you’d like to schedule a confidential consultation regarding employee classification concerns, call Jim at (440) 449-6800.

Insights Accounting & Consulting is brought to you by Skoda Minotti


Published in Cleveland

To avoid elements of the Patient Protection and Affordable Care Act (PPACA) adversely affecting fully insured health plans, growing numbers of employers — especially smaller ones — are self-funding their plans.

“The problem is that everybody has been in a wait-and-see mode for two years, but now we’re starting to see the impact,” says Mark Haegele, director, sales and account management, at HealthLink. “I expect a lot of fully insured employers to make a change this year, mid-year. There are just so many compelling reasons to entertain it because self-funding policies still protect small employers and allow them to avoid many forthcoming taxes and rules.”

Smart Business spoke with Haegele about why the PPACA has prompted more employers to explore self-funding or partial self-funding.

How does medical loss ratio (MLR) reporting drive employers to self-funding?

Less service.

MLR reporting requires insurance companies to spend 80 or 85 percent — depending on their size — of premiums received on health care claims. Plan administration, such as overhead, payroll, sales efforts, network contracting, etc., comes from the remaining 15 to 20 percent.

MLR gives insurance companies an incentive to squeeze administrative services to make more profit. Some insurance companies have changed staffing and service models. One company had service people out to help with claim issues and problems for different segments — health insurance groups with two to 40 members, and 40 to 100 members. They recently bundled the segments into one, cutting staff and decreasing field service.

What will community rating rules do to health care costs?

Effective Jan. 1, 2014, insurers must comply with community rating factors based on geography, age, family composition and tobacco use. This means all fully insured small employers in an area or industry will pay the same for premiums. The idea is to get everybody to an affordable and stable price point, but many fully insured groups will be hit with big increases.

Here’s an example: in Missouri and Illinois, groups of fewer than 50 employees will be underwritten based on community rating rather than the specific group’s risk. A small, healthy employee group in Chicago can expect a 173 percent increase in 2014, according to the American Action Forum Survey of Insurance Companies. At the same time, a small Chicago group with older, less healthy members could have its premium decrease by 21 percent.

Under self-funding, healthy small groups are able to maintain rate stability based on the health of their own population.

How will the insurance tax affect health premiums for fully insured employers?

Starting in 2014, insurance carriers will be assessed a tax, projected to be $8 billion to $12 billion. The federal government will use this money to subsidize poor uninsured. However, insurance is a cost-plus business, so carriers will pass this on to employers. It’s still unclear how much the fully insured’s premium will increase as the tax is shared across the industry; it depends on your insurance company’s market share.

How will minimum essential benefits make self-funding more attractive?

Fully-insured plans sold in the small group market — fewer than 50 employees for Missouri and Illinois — will be required to limit annual deductibles to $2,000 for single coverage and $4,000 for family coverage, as of Jan. 1, 2014. This places upward pressure on premiums. If your current deductible is greater than $2,000, in order to decrease it premiums will go up because the insurance company faces more risk.

Also, for the past five years, many small employers’ deductibles have increased, which keeps premiums down, but employers haven’t passed it on. For example, because most members don’t use their deductibles, the employer could give employees a $1,000 deductible and use self-funding to cover the gap for the remaining $4,000 when the insurance company requires a $5,000 deductible to keep premium increases low.

Small employers could consider a self-funded platform in order to maintain their current deductible and keep rates stabilized.

Mark Haegele is a director, sales and account management, at HealthLink. Reach him at (314) 753-2100 or


VIDEO: Watch our videos, “Saving Money Through Self-Funding Parts 1 & 2.”

Insights Health Care is brought to you by HealthLink

Published in Chicago

There had been much talk surrounding the fiscal cliff, or the triggering of automatic federal spending cuts if Congress did not act by the end of 2012.

“It was everywhere — you couldn’t escape a newscast or report without hearing about it as 2012 came to a close,” says Todd Jolicoeur, tax senior at Cendrowski Corporate Advisors LLC.

However, the crisis was averted when the U.S. Congress approved the American Taxpayer Relief Act (ATRA), which paved the way for President Obama to sign the bill into law a day later. While not much has changed because of the bill, it did lay out a plan, freezing some tax rates and deductions that will offer taxpayers some answers as to how to plan for the coming years.

Smart Business spoke with Jolicoeur about the act and its tax implications.

What are some of the highlights of ATRA?

The most discussed is the return of the 39.6 percent tax rate for taxable income above $400,000 for single tax filings and $450,000 for those filing jointly. There is also a change to the tax rate on capital gains and dividends, as well as estate and gift tax. Additionally, there is the needed patch for the Alternative Minimum Tax (AMT). Many enhanced education credits were also extended.

How will taxpayers be affected by the 39.6 percent rate?

The new rate only affects individual taxpayers with bottom-line taxable income above $400,000 — $425,000 for head of household filers, $450,000 for married taxpayers. The other marginal income tax rates, 10, 15, 25, 28 and 33 percent, will remain the same going forward. The 35 percent rate has been carved to include those taxpayers between the top of the 33 percent rate and the income threshold established for the new 39.6 percent bracket.

What about the tax rate increase on capital gains and dividends?

The top rate for capital gains and dividends was increased from 15 to 20 percent. The increase on the top rate comes with the same income threshold that applies to the 39.6 percent ordinary income rate — $400,000 for single filers, $425,000 for head of household filers and $450,000 for joint filers. The previous zero percent tax rate remains as it was. The previous 15 percent rate still applies to those taxpayers between the two income thresholds established for the zero and 20 percent tax rate. Qualified dividends for all taxpayers will continue to be taxed at capital gains rates instead of ordinary income tax rates.

You mentioned a new maximum rate for estate and gift taxes. How has that changed?

The maximum rate for estates of decedents dying after Dec. 31, 2010, and before Jan. 1, 2013, is 35 percent, but has increased to 40 percent for estates of decedents dying after Dec. 31, 2012. In addition, the annually inflation-adjusted $5 million exclusion was extended.

Did the AMT patch become a part of ATRA?

Yes, ATRA contains a provision that ‘patches’ AMT for 2012 and beyond. It has done this by increasing the exemption amounts while also allowing nonrefundable personal credits to the extent of a taxpayer’s regular and AMT tax. The exemption rates for 2012 increased to $50,600 for individual filers, $78,750 for taxpayers filing joint returns or those of a surviving spouse, and $39,375 for returns of married taxpayers filing separately.

Does ATRA affect small businesses at all?

There are a few tax provisions that are applicable to businesses. There is the extension of the dollar limit and investment limit when calculating Section 179 depreciation and the extension of the 50 percent bonus depreciation through 2013. Another business credit that is extended is the research tax credit.

Is that the extent of the ATRA changes?

No. In addition to other provisions that relate to individuals and businesses, the new tax on investment income remains in effect. Also, the employee portion of FICA taxes on wages was restored to 7.65 percent. Ask your CPA to look into the tax rates, deductions, credit, and extenders as part of your 2012 tax preparation and planning for 2013.

Todd Jolicoeur is tax senior at Cendrowski Corporate Advisors LLC. Reach him at (248) 540-5760 or

Insights Accounting is brought to you by Cendrowski Corporate Advisors LLC

Published in Chicago

This past tax season, you could have filed your tax return, but then found out your return had been flagged and someone already collected a refund under your name.

“A lot of CPAs at the end of the filing season found out that a number of their clients fell victim to tax identity fraud, which significantly lengthens the time it takes for them to get legitimate refunds or fix the error,” says Michelle Mahle, CPA, director of tax at SS&G.

Smart Business spoke with Mahle about this growing fraud problem and how taxpayers can try to protect themselves.

What is happening with this type of identity fraud?

Thieves steal someone’s name and Social Security number and use it to e-file a false tax return with a refund, taking money from the IRS. The thieves use e-file because of the quick refund turnaround and often have the refund deposited to a debit card. Then, when the taxpayer e-files a legitimate tax return, there’s immediate notification that a tax return has already been filed for this Social Security number.

An employer has to issue W-2s to employees by Jan. 30, but those forms are not due to the IRS until the end of February. Most fraudulent tax returns requesting refunds are filed in January or February as soon as the e-filing season opens. At that time, the government doesn’t have the information on file to verify what the taxpayer reports. Yet the IRS continues to fall under extreme scrutiny to turn around refunds as quickly as possible.

How does tax identity fraud affect individual taxpayers?

It causes unnecessary delays to refunds, but you won’t know until you file your return and it’s rejected. If there’s a problem with your electronically filed tax return, you’ll get an immediate notification. Then the CPA or tax adviser you are working with would likely step in and deal with the IRS on your behalf. A paper return works the same way; it just takes longer for it to be processed and for the notification letter to get back to you.

It can take four to six months — probably closer to the six-month range — to resolve the issue and get a refund issued to the legitimate taxpayer. The burden of proof falls on the legitimate taxpayers to go through the trouble of proving who they are and why they are entitled to the refund. For example, one taxpayer filed in June and the IRS flagged the return as suspicious. The return consisted primarily of a large salary with a lot of withholdings, resulting in a significant tax refund. The taxpayer didn’t get the refund until around Sept. 15. Normally, with e-file, the refund cycle can be as short as 11 days.

How is tax identity fraud growing?

It’s becoming more prevalent, and the statistics every year are astounding. The IRS has issued billions of dollars in fraudulent refunds. Like credit fraud, the money is usually already spent by the time the government finds and convicts someone of the crime. Many taxpayers are caught off guard and immediately want to know their risk or exposure. CPAs and tax advisers should be warning their clients that this could happen to them.

What can taxpayers do to protect their identity from being used for tax fraud?

Even the most cautious, careful person can fall victim to this type of fraud, based on the way records are kept and maintained. Taxpayers may be doing well with protecting their credit card information, but they also have to be aware of tax identity theft and protect their Social Security number. It really is a matter of matching a name and a Social Security number, and that’s it — the address seems to be irrelevant for purposes of claiming that refund. In one instance, multiple fraudulent returns were filed with the same mailing address.

The government does require that Social Security numbers not appear on documents being sent through the mail, but that may or may not be happening. In many cases, thieves actually steal mail from mailboxes. It’s been so severe that postal workers have been mugged for information around retirement villages or communities, which is particularly prevalent in Tampa Bay and Miami, Fla. If you’re living in a retirement community, it may make sense to use a post office box. Also be conscientious of paper documentation at stores requesting credit applications or completing forms at medical facilities and how they file, share or dispose of your Social Security number. If someone needs your Social Security number for a specific purpose, perhaps write it down in a manner that can be immediately discarded.

If you can legitimately speed up the timing of your filing, you also should do so, as the fraudulent returns are generally filed early on. However, that’s not an option for a lot of taxpayers.

How is the IRS reacting?

There’s been nothing specific announced yet for this upcoming tax season, although the IRS is definitely aware of the increasing fraud and working to control it. If they come out with any provisions or changes, it will be on its website,

One way it could possibly crack down is to only allow one refund per account. The IRS also will be looking more closely at mailing addresses in the upcoming filing season and appears to have implemented an internal grading system that makes a return ‘suspicious.’ The IRS can implement things that would restrict a lot of the occurrences, but in the end, it also restricts the flexibility we have as taxpayers. So, do we want to be inconvenienced and have our affairs secure, or have the convenience of a quick, timely refund at the cost of having our affairs exposed to tax identity fraud?

Michelle Mahle, CPA, is a director of tax at SS&G’s Cleveland office. Reach her at (440) 248-8787 or

Insights Accounting & Consulting is brought to you by SS&G

Published in Akron/Canton

Business owners have long understood the importance of income tax compliance. Companies that understand the tax law and apply it correctly can save money and reduce the risk of surprises in the event of an audit. But recent focus on employment taxes by the IRS has caught even savvy business owners off guard, and in some cases, out of compliance.

Smart Business spoke with Claudia Necke-Lazzarato, a tax manager at Sensiba San Filippo LLP, about changes in employment tax rules, increased IRS scrutiny, and what businesses should be doing to ensure compliance and limit their risk.

Why is employment tax compliance becoming more important?

Compliance has always been important. However, recently the IRS has shown an increased focus on employment taxes. With the economic slowdown, income tax revenue growth has slowed as well, and the IRS has increased its focus on employment taxes. These types of tax audits are definitely on the rise. This increase in IRS audits means an increase in risk for taxpayers. It is essential that business owners understand the importance of employment tax compliance. If it’s important to the IRS, it should be important to every business owner.

What are some common employment tax reporting mistakes?

Underreporting W-2 wages is the easiest way for businesses to fall out of compliance. Whether it’s wages that are improperly characterized as reimbursable expenses, or employees who are incorrectly designated as subcontractors, it is very common for a misunderstanding of tax law to lead to the underpayment of taxes.

Just this year, the IRS released a clarification on what qualifies as a reimbursable expense. This clarification created a requirement that employers have ‘accountable plans’ for reimbursement. The IRS also defined these ‘accountable plans’ for employee reimbursements, and according to the new ruling, they must meet the following three requirements:

• The reimbursed expense must be allowable as a deduction and must be paid or incurred in connection with performing services as an employee of the employer.

• Each reimbursed expense must be adequately accounted for to the employer with receipts or other proof of expense.

• Any amounts paid to employees in excess of expense must be returned within a reasonable period of time.

If all of these requirements are not met, reimbursements will not be treated as reimbursable expenses. Instead, these payments would be considered wages, and would be subject to withholding and employment taxes.

This means that flat value ‘expense allowances,’ which allow a set amount of funds to offset the costs of tools, automobiles and other business-related expenses, may now be reportable as W-2 income. To simplify internal reporting, many companies have historically provided fixed-value allowances for common expenses. Typically, these allowances would not meet the new requirements for ‘accountable plans.’

How do you determine if someone should be designated as an employee or a subcontractor?

Another very common mistake is mischaracterizing employees as subcontractors. If an employer incorrectly designates a worker as a subcontractor, it will fail to withhold tax for the employee and fail to pay the employer’s share of employment taxes. This can put both the employee and employer at significant financial risk.

To feel confident that they have correctly determined employment status, employers should know what questions to ask and who to speak with for clarification. Evaluate each contractor’s relationship with a few simple questions, then ask a CPA who is well versed in employment tax law if there is any ambiguity remaining. Look closely at who has behavioral and financial control in the relationship and answer the following questions:

• Is the work performed as part of a defined project?

• Who is supervising the work?

• Who provides the tools and supplies needed to complete the work?

• Who sets the schedule for the work?

If you still aren’t sure of the answer, find a CPA and ask for help. The IRS defaults to assuming an employee/employer relationship, so be certain you’re getting it right.

What are the consequences of underreporting employment tax?

Employment tax compliance isn’t just about having the right answer. There are real consequences for underpayment of taxes. The IRS has sharpened its focus on the reimbursement arrangement taxpayers have in place. In several instances, companies have a reimbursement arrangement that does not pass the requirements of accountability, from the IRS’s point of view. The IRS penalties can be very costly and time consuming to resolve, with companies having to pay all underpayments with interest, and in addition, pay an automatically assessed 20 percent penalty. Working with a CPA firm with IRS audit experience can help clients receive a negotiated reduced penalty and put a qualifying accountable plan in place.

How can business owners ensure compliance?

Understanding the importance of getting employment taxes correct is the first step. Rules and enforcement change frequently, so partnering with an experienced tax professional is a good idea.

A best practice to help remain compliant is to talk about the issue as much as possible and in a proactive manner, rather than taking the rearview mirror approach after an audit notice is received. When ongoing success is your primary objective, you need a tax professional who actively helps you to find opportunities and avoid potential problems.

Claudia Necke-Lazzarato is a tax manager at Sensiba San Filippo LLP, a regional CPA firm based in the San Francisco Bay area. Reach her at (925) 271-8700 or

Insights Accounting is brought to you by Sensiba San FilippoLLP

Published in National

As your company experiences increasing global commercialization of products, services and technologies, you may face new tax challenges and uncertainties.

“Even the smallest of companies are experiencing some interaction with global suppliers or customers,” says George Koutouras, partner, international and transaction tax, at Moss Adams. “So that means they have the need to consider certain tax aspects associated with global transactions, on one end of the supply chain or the other.”

With a U.S. tax system based on global income, it may make sense for a company — transforming from predominantly domestic to global — to keep earnings offshore to reinvest in new growth for foreign jurisdiction subsidiaries, as opposed to taking U.S.-sourced capital and committing it to offshore operations, he says. However, you must have an economic or legal justification to organize your business that way, as solely tax-motivated transactions are not available in today’s environment.

Smart Business spoke with Koutouras about businesses experiencing increasing growth globally and the potential tax problems.

When migrating capital offshore, why are bank debt covenants important?

When a company decides to go offshore, setting up operations or buying facilities, the first question is not what does that do from a tax perspective, but what are the restrictions on your bank covenants? Lenders may place restrictions on a company’s ability to use lent funds offshore, recognizing the difficulty associated with returning that capital to the U.S.

Review your bank’s financing restrictions. If they limit your ability to migrate cash or capital, determine if you can re-negotiate some of the bank notes, which is not always easy. A company may need to replace certain financing with other debt financing — it’s not a matter to be taken lightly.

Ultimately, whenever sending capital offshore, businesses and their advisers need to understand the intended end result. Do they need to repatriate it at some point to service debt, or do they intend to keep that cash offshore indefinitely to finance offshore growth? The answers will influence the structure that is created from the outset.

How seriously should a company consider local financing options?

If a company migrates some activities offshore, you might need to obtain local financing to expand operations. However, certain jurisdictions, particularly in Europe, are experiencing a credit crisis and, as a result, bank financing is not readily available. Without local financing, question whether there is any ability to service U.S. bank debt, or will you need a mechanism for intercompany financing? Often cash-rich companies use intercompany loans to more freely transfer extra cash between jurisdictions.

But an inevitable hurdle with related-party transactions is the need for a secondary analysis to ensure those transactions are at arms length. Otherwise, the jurisdictions involved, such as the U.S. and Ireland, may attempt to re-characterize or re-price payments to be more consistent with market turns, creating some unanticipated tax consequences.

What intellectual property (IP) will you need within a foreign region?

IP is a relatively broad category of assets that not only consists of patents and trademarks but can also include know-how and processes, and companies should match the commercialization of IP with the development of the IP.

Often businesses take U.S.-developed IP and parse it up among various global commercial centers. However, if IP is being sold in Europe, there may be a need to manipulate or develop that IP in a European-centric way. Companies should identify centers of activity for offshore endeavors, including the development of IP. Areas, such as Ireland for Europe and Singapore for Asia, have a skilled work force, good technology infrastructure for research and development, and a relatively low tax rate when compared to the U.S.

IP is an area where the U.S. is vigilant about establishing policies to restrict companies’ ability to migrate assets offshore, so outright sales of IP offshore aren’t without their accompanying tax costs. Often, property, including IP, in its earliest stages of development and/or recently purchased is the easiest to convey offshore without the inclusion of taxes. To the extent IP and other U.S.-owned assets are needed offshore, consider both sides of related-party pricing to avoid unsupportable accumulations of income or loss in the relevant jurisdictions.

How should you quantify the support needed from domestic management, sales force, technical help or home office systems?

The cost for headquarter-support services needs to be chargebacked by the offshore entity. Companies that aren’t charging for management services and/or systems that go offshore are vulnerable. For example, the U.S. might assert that the foreign entity should be paying more back to the U.S. for the use of the U.S.-based management, thereby creating more potential U.S. tax income. This is something that needs to be reviewed periodically; the management chargebacks existing today might not be the chargebacks needed in a year’s time.

What tax considerations are important for how you sell goods within a region?

Pay attention to how your company conducts sales within the jurisdiction. Sending your domestic sales force into a foreign country will extend the taxable presence to that other jurisdiction. To avoid that, a company can compartmentalize sales by setting up a separate company or using a third-party, such as distributors, already within the country’s marketplace. Another mitigation is to avoid signing sales contracts within market and thereby creating a taxable presence. Ideally, in such cases, all sales are negotiated and executed remotely, and the salesperson is merely demonstrating the product with no authority to sell on behalf of company.

Also, when selling inventory, the placement of property within a jurisdiction could create a taxable presence. The U.S. will tax the income, and the foreign jurisdiction may assert tax liability for sales within its borders, creating the possibility that the same dollar could be taxed twice.

George Koutouras is a partner, international and transaction tax, at Moss Adams. Reach him at (415) 677-8212 or

Insights Accounting is brought to you by Moss Adams

Published in Northern California

In recent years, federal estate and gift taxes have been in a continual state of change. As a result, estate planning documents may no longer contain the best options to get individuals, especially those with high net worth, to their goals. And this changing landscape may not be stabilized any time soon; if Congress fails to act before the end of the year, individuals will face significantly lower estate and gift tax exemption amounts and higher tax rates in 2013, says Carly Fagan Neals, J.D., senior trust officer and vice president at First Commonwealth Advisors.

“Similarly, while the extension of the 15 percent long-term capital gains rate provided ongoing windows of opportunity for those wishing to harvest gains at the lowest long-term capital gains rate in our country’s history, there seems to be no doubt that this historically low rate will be higher in 2013,” says Neals.

Smart Business spoke with Neals about how to react to potential changes in federal estate and gift tax law and capital gains rates.

What does the current landscape mean for wealthy individuals?

For estate planning, as a result of drastic changes in tax rates and exemption amounts, high-net-worth clients should talk to their legal advisers to determine what flexibility is built into the plan for these quickly changing laws. Will their current estate planning documents effectuate their wishes, and will their plans be carried out with similar results regardless of the federal estate and gift tax exemption amounts at the time of death?

The same holds true for the likely changing long-term capital gains rates. Examining assets and current and future personal tax obligations can allow individuals to be strategic and potentially take advantage of the current 15 percent long-term capital gains rate.

Individual should discuss questions and concerns with their investment advisers, accountants and possibly, legal counsel. This ensures that all possible consequences are examined before initiating a sale that would result in a long-term capital gain and avoid surprises that would negatively affect other aspects of the client’s financial picture and/or plan.

What are the federal estate and gift tax exemption amounts and rates, and how could they change?

The federal estate and gift tax exemption amount is $5.12 million per individual, with a tax rate of 35 percent for estates or gifts in excess of that amount. In the absence of new legislation, on Jan. 1, 2013, the rates will return to pre-Bush-era tax cut rates — a $1 million federal and gift tax exemption, with the excess taxed at 55 percent. This could mean the difference between an individual with a $5 million estate paying no federal estate taxes versus paying millions at the time of passing.

Another unknown is what will happen to portability, which makes a deceased spouse’s unused portion of the federal tax exemption available to the surviving spouse. In addition to the higher estate tax exemption, the increased gift tax exemptions amounts have also created a window of opportunity that could allow wealthy individuals to transfer assets to the next generation or second generation heirs without incurring transfer tax, thereby decreasing their own taxable estate.

What could happen to estate and gift taxes?

Determining where these exemptions and rates will head is speculative. While there seems to be consensus on the likelihood of higher long-term capital gains rates, the future of where estate and gift tax exemptions land is still very much unknown. The Obama administration has alluded to supporting a return to 2009 rates, with a $3.5 million federal estate tax exemption and a 45 percent tax rate on the excess, while Republican candidate Mitt Romney’s plan has suggested doing away with the death tax, while keeping the gift tax in place with a $1 million exemption and a 35 percent top gift tax rate. What takes place in the November elections will guide the direction of these tax laws and their upcoming expiration.

What planning techniques can provide flexibility for the current tax landscape and the one that lies ahead?

All individuals should consider a comprehensive review of their estate planning documents. In recent years, it was a common and appropriate planning technique for practitioners to draft estate planning documents that used formula provisions to dispose of assets at the time of a client’s death. With the roller-coaster exemption amounts, this type of formula planning could lead to unintended consequences. For example, in the case of ‘formula documents,’ high exemption amounts could allow all of an individual’s estate to be placed into a trust for their children, leaving the surviving spouse with no assets. Creating documents without formulas allows flexibility as tax laws change.

Have your advisers work together as a team. Your estate planning lawyer, accountant and investment adviser should be working toward your common goals, not giving you advice in a vacuum. This protects you from unknowns and allows you to ask questions and feel comfortable letting the advisers guide you.

How can business owners take advantage of the current rates?

For those with certain closely held assets that are likely to appreciate quickly, including ownership in a private business, certain techniques can allow the transfer of wealth with tax benefits through the use of estate planning tools. However, time constraints may limit options, as valuations and planning can take a considerable amount of time.

For investors who have over concentrated positions or are holding assets with a low cost basis,  selling this year may allow them to take advantage of the 15 percent capital gains rate. In the absence of legislative action, the long-term capital gains tax rate will increase to 20 percent at the beginning of 2013.

If you believe you may benefit from historically low rates and high exemption amounts, contact your advisers to discuss taking advantage of them before the end of the year.

Carly Fagan Neals, J.D., is a senior trust officer and vice president at First Commonwealth Advisors. Reach her at (412) 690-2131 or

Insights Wealth Management is brought to you by First Commonwealth Bank

Published in Pittsburgh

With year-end tax season in full swing, a cloud of uncertainty hovers over businesses. Forecasting what 2013 will bring in terms of tax rates and legislation is difficult because of the impending presidential election and the unknowns about whether the Bush-era tax cuts will be extended.

What will happen to tax rates in 2013? How could estate planning be affected? Is now the time for your business to buy equipment?

“This year, the traditional planning techniques of deferring income and accelerating deductions may not be appropriate, depending on what happens with tax rates,” says Michael R. Viens, director, Tax Strategies, at Kreischer Miller, Horsham, Pa.

Viens recommends businesses plan early but hold off on executing any specific plan until the post-election dust settles and Congress gives some indication of its direction concerning late 2012 or early 2013 tax legislation.

Smart Business spoke with Viens about how businesses can best prepare and position their organizations to be flexible in light of the uncertain political and economic climate.

How is this year different in terms of tax planning? 

A key concern is tax rates and whether they will increase in 2013. If nothing happens legislatively by year-end, tax rates are scheduled to increase, impacting a number of events. Traditional business tax strategy focuses on deferring income and accelerating deductions, keeping as much cash in the business as possible. But such a strategy, if employed this year, may create higher taxable income in 2013, with the potential for a higher tax bite that could more than offset 2012 tax savings. Once the election is over, we should have clearer indications as to the likely tax regime in 2013 and beyond and will be in a better position to make decisions regarding implementation of specific tax planning initiatives.

Start planning now. Work through the what-ifs with your advisers, but wait before pulling the trigger until after the election.

Is now a good time to purchase equipment?

The purchase of appropriate qualifying equipment is a common year-end activity for businesses that wish to take advantage of the value of  bonus-depreciation opportunities that allow an immediate 50 percent write-off, and a Section 179 expense deduction that allows deduction of the full amount of the purchase price of the equipment, up to $139,000, in the year in which it was purchased and placed in service. Bonus-depreciation provisions expire Dec. 31, 2012, and the Section 179 deduction is scheduled to revert to $25,000 for tax years beginning in 2013, unless extended.

With equipment purchases, economics should drive the decision, with tax impact being secondary. If the equipment is important and acquiring it today means the business will be in a better position than it would be buying it in January, purchasing now likely should win the day. But all things being equal, a purchase in December versus January may be worth considering once it is understood what tax deductions and rates will apply in 2013.

How might an equipment purchase in 2012 be more beneficial than in 2013 if the current tax structure is not continued? 

Say a business purchases qualifying equipment for $1 million and places it in service in December 2012. It immediately gets a $500,000 tax deduction in 2012 per the 50 percent bonus depreciation rule and may also receive normal first-year depreciation for another $100,000. That equals a $600,000 deduction in 2012. And with a 35 percent tax rate, the tax savings is $210,000, resulting in a net short-term cash outlay for the equipment at $790,000.

If this purchase is deferred until January 2013 with no bonus depreciation and a new 40 percent tax rate, the business may save in the short term only $80,000 in cash rather than $210,000. However, due to subsequent depreciation, the business would realize a total of $240,000 in tax savings on the same $600,000  deduction that would be otherwise accelerated into 2012.

The business should weigh the longer-term $30,000 tax savings from deferring the equipment purchase into 2013 against an earlier short-term tax savings. The choice involves tradeoffs — short-term cash flow versus the present value of longer-term higher tax savings. Without knowing what 2013 will bring, planning for both scenarios is key.

How should businesses proceed with succession planning given tax law uncertainty? 

Estate taxes are of importance to business owners in transferring ownership to the next generation, and there is uncertainty regarding those provisions. There are currently opportunities to transfer significant family wealth without incurring gift tax due to historically high lifetime gift exemption levels. But this could go away if the estate/gift tax structure is not extended. Businesses transferring ownership should discuss opportunities now with an attorney and their tax adviser.

What traditional year-end tax planning techniques still apply, regardless of what the tax law brings? 

Address safe harbors to avoid underpayment penalties. Because many businesses are seeing 2012 earnings that are more robust than in 2011, a prior year-based 100 or 110 percent (applicable for higher income taxpayers) safe harbor comprised of withholding and/or estimated tax payments may be an easy answer. A business with a tax liability of $100,000 in 2011 could use a $110,000 safe harbor and make up a shortfall when tax returns are due next April.

What planning strategy can business owners adopt to prepare for unknown 2013 outcomes?

Develop a Plan A and Plan B, working out how your business will react if tax law continues as is, and what decisions will be implemented if the current tax opportunities and tax rates change. Depending on the position of the business and owner circumstances, this year may require a more robust planning process than in the past, which is a good reason to enlist an experienced accountant and begin the tax-planning dialogue early.

Michael R. Viens is director, Tax Strategies, at Kreischer Miller, Horsham, Pa. Reach him at (215) 441-4600 or

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Published in Philadelphia

Missouri is focused on attracting and retaining businesses by creating a positive economic environment.  One way the state has worked to enhance its economic position is by implementing tax laws that benefit the business community. For instance, during 2012, three bills were passed by the state legislature that expand current exemptions and deduction opportunities for businesses that meet certain criteria.

“Missouri is attempting to assist businesses during this time of economic recovery,” says Susan Nunez, the state and local tax principal in the Tax Services Group at Brown Smith Wallace LLC, St. Louis, Mo. “The state is looking for ways to enhance business and the passing of these tax laws demonstrates those efforts.”

As a result of the recently passed bills, purchasers now have a more direct avenue for obtaining refunds of overpaid taxes, more businesses may take advantage of expanded transportation asset exemptions, and partnerships and S corporations now can claim a job creation deduction that was previously only available to corporations.

Smart Business spoke with Nunez about the bills that were passed and what opportunities these tax laws may introduce for businesses.

How is Missouri streamlining the process for obtaining refunds for overpaid taxes?

House Bill 1504 (HB1504) creates an avenue for a purchaser to obtain overpaid sales and use tax directly from the Department of Revenue and sets forth steps on how to obtain refund claims. Prior to the passing of HB1504, if a purchaser realized that it overpaid taxes to a vendor, the purchaser was required to contact the vendor and request the vendor to file a refund claim with the Department of Revenue on behalf of the purchaser.  If a vendor was not willing to cooperate, the purchaser lacked authority to pursue a refund of the overpaid tax with the Department of Revenue directly and thus lost the opportunity to obtain the refund of taxes it erroneously paid.

Meanwhile, if the Department of Revenue sent a notice to the vendor in response to a purchaser’s request for a refund, that purchaser may have missed its opportunity to respond or appeal due to the lack of due diligence on the part of the vendor.  Overall, it was a struggle for purchasers to obtain refunds for taxes they paid to their suppliers. Additionally, vendors who did cooperate with their customers request to submit refunds potentially had an additional risk of being audited by the state.

With the passage of HB1504, the purchaser receives its refund from the state, not the vendor, so the process is more efficient and effective. A purchaser who has overpaid taxes must contact the vendor in writing requesting the vendor to assign its right to the refund. If the vendor agrees and signs the letter, the purchaser can file a refund claim directly with the state and include a copy of the letter. Once the claim is filed, reviewed, and approved by the Department of Revenue, the state will notify the vendor and, upon approval, will refund the overpaid tax directly to the purchaser.

Because the refund is paid directly from the Department of Revenue to the purchaser, the process is streamlined and can easily be audited. In addition, it relieves some of the vendor’s burden because it does not need to utilize its own resources to obtain such refunds.

How has Missouri expanded the exemption for transportation assets?

Historically, there have been transportation asset exemptions that applied to assets used for the transportation of persons or property for hire by common carriers.  Since the original exemptions were adopted, the U.S. Department of Transportation has changed the rules regarding common carriers, and many businesses have obtained and now operate their own fleets of qualifying assets. To allow more businesses to take advantage of the exemption, the new law enhanced the existing exemptions by the addition of a transportation asset exemption.

The new exemption applies to purchases or leases by all motor carriers that operate motor vehicles that have a licensed weight of 54,000 pounds or more. Additionally, this new exemption is a bright line exemption. If a business operates as a motor carrier, with a truck licensed for the requisite weight, the exemption requirements may be met.

How can partnerships and S corporations now take advantage of a job creation deduction?

When original legislation was passed providing a deduction from income tax for new jobs created in Missouri for certain qualifying small businesses, the language in that bill limited the tax opportunity to corporations. It did not apply to partnerships or S corporations because those are pass-through entities that do not pay income tax, as they are taxed at the owner level. Missouri recently passed a remedy to correct this oversight in the original law, which allows owners of partnerships and S corporations to pass the deduction through to their owners. This change is reflected in House Bill 1661, and it is great news for small businesses of all types that are creating jobs in the state.

What steps should a business take to determine eligibility for these tax advantages so it can reap the benefits?

First, business owners should present their fact patterns to their attorneys or accountants when discussing whether these opportunities will apply to them. Do they operate a fleet of trucks that transports goods? Are they currently claiming a transportation exemption? Are they creating jobs in the state?

A knowledgeable professional can provide guidance by reviewing a business’s operations, its tax posture, understanding the scope of the particular law and how these laws may affect the taxpayer’s everyday business.

Susan Nunez is a state and local tax principal in the Tax Services Group at Brown Smith Wallace LLC, St. Louis, Mo. Reach her at (314) 983-1215 or

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Published in St. Louis

What you paid for your assets and how the Internal Revenue Service values them are not the same considerations, but taxpayers often don’t know the difference.

“This is not the kind of thing you run into every day,” says Thomas H. Ahlbeck, CPA, managing director at SS&G’s Des Plaines, Ill., office. “Some people might only run into this complexity a couple of times in their lifetime.”

However, the wrong basis can add thousands of dollars to your taxes, so it’s important to understand how this can happen, especially as your net worth grows and affairs become more complicated.

Smart Business spoke with Ahlbeck about how to get a handle on this important, but nebulous, accounting concept.

What is basis?

Basis is what the IRS uses as your asset value for determining your gain/loss or taxability of a transaction. For example, if you bought a common stock but don’t know or cannot prove your purchase price, you might have to enter the basis as zero even though you paid significantly more. You’ll pay more taxes on the proceeds you receive — or not be able to write off a loss if the security is worthless.

What is the biggest problem area for figuring basis and how can it be detrimental for your taxes?

Taxpayers are losing a small fortune with nondeductible individual retirement accounts. IRAs can be problematic because you pay thousands of dollars into an IRA and the basis is not easy to track. When people put in after-tax contributions to their IRAs, they might not be keeping track or telling their accountant as it doesn’t have anything to do with their current taxes. Later, unless you can prove those were after-tax contributions, you’ll have to pay taxes on the money again when you take it out.

Once you’re making withdrawals from the IRA, the nondeductible contributions are taken as a percentage of every withdrawal. So, if you put in $100,000 of after-tax dollars originally and the account grows to $150,000, then only two-thirds of that is not taxable and a third of each withdrawal will be taxed.

How is real estate another area where basis is often wrong?

Real estate is another neglected area for basis — particularly primary and secondary residences where accountants aren’t completing a depreciation schedule. Today, many homeowners look at the current market and assume their home will never appreciate. Therefore, they don’t keep records of improvements, which should be added to the basis to narrow any gains when it comes time to sell in 10 or 20 years. This is even more critical for a vacation home because you don’t get the $500,000 exclusion of taxable gain that you might get on your primary home.

Real estate transactions, by their very nature, are held for a sizeable length of time, making it difficult to keep all the records. Your basis can be further complicated because the land and building are held as separate values and the land’s original value is often forgotten when configuring basis for a sale years later. If a property goes through a bankruptcy or debt forgiveness, those also will change the value of the basis.

Another problem is when inheriting or gifting occurs because, again, records can be lost. If someone inherits real estate, the basis value is stepped up to the current market value, which is why an appraisal needs to be done at the time of death. The idea of the increased value, which can happen for no other reason than inflation, is to counteract estate taxes.

However, if a property is gifted, the value of the basis is what the original owner paid for it. Therefore, if a couple jointly own property and one spouse dies, half of the basis will stay at the original purchase price, while the other half will be stepped up to the date-of-death value.

What can you do to prevent some of these difficulties?

The simple rule of thumb is to know the basis of all your assets at all times, meaning what you can use as value against the selling price in the eyes of the IRS. Know what will change the character of an asset, such as when a personal residence becomes rental property. There’s a lot of logic to basis, but with fair market value of property, the contract cost, debt involved, after-tax dollars, inheritance and gifting, the original basis can be confusing and even change without you realizing it.

You also might not recognize the tax consequences of your actions. For example, if you bought a stock for $10,000, you also need to keep track of the reinvestment because it becomes part of the cost to give you a higher basis.

Don’t assume your financial adviser or accountant is tracking basis. If they are, keep an eye on it to ensure they are doing so correctly. Many financial advisers now are tracking basis for stocks and mutual funds, especially with new rules from the IRS, but there can also be basis issues and related loss limitations with a closely held corporation or a partnership.

Know what records you need to have and how long to keep them. When someone gifts you a vacation home, you might not think that you’ll need the paperwork stating what the home originally cost. A lot of people think they only need to save three years of tax records before they throw them out. But as long as the transaction hasn’t been completed, it needs to be tracked.


Thomas H. Ahlbeck, CPA, is a managing director of SS&G’s Des Plaines, Ill., office. Reach him at (800) 869-1834 or

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Published in Akron/Canton
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