Why Is the Valuation Date So Important?

Posted on Mon, Aug 01, 2016

It is common to think about which method the appraiser will use or whether discounts might apply when considering how the value of an asset will be determined. However, the appraisal date is a critical factor that may not immediately come to mind.

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Tags: Divorce, Estate, Valuation, Business Valuation

No One Factor Determines Contractor Status

Posted on Fri, Jul 29, 2016

Hiring someone on an independent contractor basis can have many advantages for employers. For example, independent contractors can:

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Tags: Independent Contractor, Employees

What Can Employers Do with Forfeited Employee FSA Balances?

Posted on Fri, Jun 24, 2016

When unused flexible spending account (FSA) balances are forfeited back to employers under the "use-it-or-lose-it" rule, employers have several options for what they can do with the money. Here is what employers need to know after first covering some necessary background information.

Flexible Spending Account Basics

Under an employer-sponsored flexible spending account (FSA) plan, employees can elect to contribute a designated amount of their annual salary to their personal health care FSA or dependent-care FSA or both.

For a health care FSA, the maximum amount that an employee can contribute for the 2016 tax year is $2,550 (unchanged from 2015).

For a dependent-care FSA, the maximum amount that can be contributed is $5,000 for 2016 (unchanged from 2015). For a married employee, the $5,000 cap represents the maximum amount that both spouses can together contribute.

Employee annual FSA contribution amounts are withheld in installments from their paychecks. Employees can then use their FSA money to cover qualifying out-of-pocket medical expenses (such as amounts paid to satisfy health insurance deductibles and co-pays and amounts paid for prescription drugs, dental care and vision care) and qualifying out-of-pocket dependent-care expenses. The amounts withheld from employee paychecks are treated as a salary reduction for federal income tax, Social Security tax and Medicare tax purposes (and usually for state income tax purposes too). Reimbursements from FSAs to cover qualified out-of-pocket expenses are tax-free to employees.

To put it another way, the FSA arrangement allows participating employees to pay for all or a portion of their out-of-pocket medical expenses and dependent care expenses with pretax dollars. That is the same as getting an income tax deduction combined with a reduction in Social Security and Medicare tax withholding. The employee's tax savings are permanent — not just a timing difference.

The Use-It-Or-Lose-It Rule

For employees, the main downside to an FSA is the use-it-or-lose-it rule. If the employee fails to incur enough qualified expenses to drain his or her FSA each year, any leftover balance generally reverts back to the employer. However, there are two exceptions to the use-it-or-lose-it rule.

  • An FSA plan can allow a grace period of up to 2 1/2 months. For a calendar-year FSA plan, that gives employees up to March 15 of the following year to incur enough expenses to soak up their unused FSA balances from the previous year. (Most FSA plans are operated on a calendar-year basis.)
  • A health care FSA plan can allow employees to carry over up to $500 of unused balances from one year to the next. However, if the $500 carryover privilege is allowed, the health care FSA cannot also offer the grace-period deal. In other words, a health care FSA plan can offer either the carryover privilege or the grace-period deal, but not both.
  • Dependent-care FSAs cannot allow the carryover privilege, but they can allow the grace period.

Employer Options for Forfeited FSA Balances

The IRS gives employers the following options for unused employee FSA balances that are forfeited under the use-it-or-lose-it rule. The source for this is Treasury Proposed Regulation 1.125-5(o).

1. The employer can simply keep the money.

2. If the employer doesn't keep the money, forfeited amounts must be used for the following purposes:

  • To defray expenses of administering the cafeteria benefit plan under which the FSA program or programs are offered.
  • To reduce employee FSA salary reduction amounts (or employee contributions) for the immediately following FSA plan year on a reasonable and uniform basis.
  • Return them to employees on a reasonable and uniform basis.
Example: Alpha Corporation maintains a cafeteria benefit plan for its 1,200 employees. The plan includes a health care FSA under which participating employees can make salary reduction contributions in $100 increments, from a minimum contribution of $500 to a maximum contribution of $2,550. For the 2015 plan year, 1,000 employees elected various contribution levels under the health care FSA plan. For the 2015 plan year, Alpha collected $5,000 of health care FSA balances that are forfeited under the use-it-or-lose-it rule.

Alpha can choose to simply keep the $5,000.

Alternatively, Alpha could take one of the following steps or a combination of them. Here are some additional details under the alternative option.

1. The $5,000 could be used to defray the expenses of administering the cafeteria benefit plan.

2. The $5,000 could be used to lower 2016 plan year salary reduction FSA contribution amounts for all 2015 plan year participants. For instance, a $500 health care FSA contribution for 2015 could be "priced" at $480 and a $1,000 contribution could be "priced" at $960.

3. The $5,000 could be used to reimburse health care FSA claims in excess of elected salary reduction amounts for the 2016 plan year, as long as such reimbursements are made on a reasonable and uniform basis.

4. The $5,000 could be returned to participating employees on a per-capita basis, weighted to reflect the participants' elected health care FSA salary reduction contributions. For instance, an employee who elected a $1,000 health care FSA contribution for the 2015 plan year would receive twice as much as an employee who elected a $500 contribution. Amounts returned to employees under this last option should apparently be treated as additional taxable wages for the year the amounts are returned.

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Tags: Employers, FSA, Flexible Spending Account

Estate Planning for Singles: Current Rules May Dictate Changes

Posted on Wed, May 04, 2016

Legislation enacted a few years ago made permanent changes to the federal estate and gift tax rules.

Specifically, here are the significant estate changes in the American Taxpayer Relief Act:

What is Included In Your Taxable Estate?

First, calculate the value of assets including:

    • Cash, stocks and bonds;
    • Intangible investments such as patents, trademarks and copyrights;
    • Real estate;
    • Automobiles, boats and airplanes;
    • Life insurance, including proceeds from policies on your own life;
    • IRAs, 401(k)s and pensions;
    • Inheritances; and
    • Jewelry, art and collectibles.

Then, subtract your total liabilities from your assets to get your net worth. Include liabilities such as:

    • Credit card and other revolving debt;
    • Secured and unsecured notes payable, such as home equity loans and automobile loans;
    • Mortgages;
    • Margin trading accounts; and
    • Life insurance loans.
    • The 2016 federal estate tax exemption is $5.45 million for estates of individuals who die in 2016 (up from $5.43 million in 2015). A 40 percent tax rate applies to the value of an estate in excess of the $5.45 million exemption.
    • The federal gift tax exemption is also set at $5.45 million for 2016 (up from $5.43 million in 2015). Gifts in excess of the $5.45 million exemption will be taxed at 40 percent.

This is all good news, but your estate plan may need an update to take advantage. Here is what unmarried individuals need to know for 2016.

Singles With an Estate of Less than $5.45 Million

If your estate is worth less than $5.45 million and you die in 2016, everything you own can be left to relatives and loved ones without any federal estate tax bill.

However, you still may need to be aware of implications to your estate. Let's say you had estate planning documents drawn up years ago that directed the executor of your estate to make enough charitable donations to get the value of an estate below the exemption amounts that applied in previous years. These amounts were smaller than $5.45 million (for example, $2 million for 2008 and $3.5 million for 2009). If this is your situation, the bigger $5.45 million exemption gives you the opportunity to leave more to relatives and loved ones (and less to charity) without any federal estate tax.

Singles With an Estate of More than $5.45 Million

You might want to change your estate planning documents to direct the executor to give away more to IRS-approved charities in order to get your taxable estate below the $5.45 million threshold.

Put another way, up to $5.45 million can be left to relatives and loved ones without any federal estate tax hit if you die in 2016. If you leave more, there will be a federal estate tax bill to pay. But the taxable value of your estate is reduced by donations that the executor of your estate is directed to make to IRS-approved charities. Of course, increasing such donations means less for relatives and loved ones.

Consult with your estate planning attorney for other steps you can take to reduce your taxable estate. Here are three options:

1. Make annual gifts of up to $14,000 to relatives and loved ones. Thanks to the annual federal gift tax exclusion, such gifts will reduce the taxable value of your estate but they will not reduce your $5.45 million federal estate tax exemption or your $5.45 million lifetime federal gift tax exemption. For example, say you have two adult children and two grandchildren. You could give them each $14,000 this year for a total of $56,000 (4 times $14,000). Then, you could do the same thing again next year. Your taxable estate would be reduced by $112,000 (2 times $56,000) with no adverse federal estate or gift tax effects.

2. Pay college tuition expenses (not room and board) or medical bills for relatives and loved ones. You can give away unlimited amounts for these purposes without reducing your $5.45 million federal estate tax exemption or your $5.45 million lifetime federal gift tax exemption -- as long as you make the payments directly to the college or medical service provider.

3. Give away appreciating assets to relatives and loved ones while you are still alive. Thanks to the generous federal gift tax exemption, you can give away up to $5.45 million worth of appreciating assets right now without triggering any federal gift tax hit. This can be on top of cash gifts to relatives and loved ones that take advantage of the $14,000 annual exclusion and on top of cash gifts to directly pay college tuition or medical expenses for relatives and loved ones. Important: if you make gifts that chip away or use up your $5.45 million federal gift tax exemption, your $5.45 million federal estate tax exemption will be reduced dollar-for-dollar. But that is okay if you are giving away appreciating assets -- because the future appreciation will be kept out of your taxable estate.

Finally: Your estate planning attorney can help optimize your estate plan under the current rules. Be sure to consider any state estate tax rules that are applicable when making changes to reflect the federal estate tax rules. Your estate planning attorney can advise you on that too.

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Tags: Tax Exempt, Estate Planning, American Taxpayer Relief Act, Estate, Taxes

29th Annual Chipping for Charity Needs Not-for-Profit Recipient

Posted on Wed, Feb 17, 2016

EHTC chooses a different local charity each year as the recipient of our annual Chipping for Charity golf outing held at Scott Lake Country Club on September 21, 2016. Deciding which charity will benefit from the golf outing is always difficult because there are so many worthy causes. However, this is also a rewarding task for us at EHTC because it is one area where we truly pride ourselves in giving to the community!

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Tags: Chipping for Charity, Golf Outing, Golf, Nonprofit, Not-for-Profit

What to Do with Impossible Employees? Clean House

Posted on Thu, Feb 11, 2016

When psychiatrist Mark Goulston asked several successful CEOs to name the single most important key to their success, he expected them to refer to their "vision" or their "mission."

But, independent of one another, the CEOs advised: Recognize destructive no-win people inside and outside your workplace early. Then cut your losses and move on.

According to the CEOs, "lean and clean" is more productive than "lean and mean." Toward this end, Goulston started urging employers to perform a "corporate housecleaning" every six months.

How Can Your Firm Achieve This?

1. Clean house.

2. Make time to personally praise good and outstanding employees.

3. "Hire more shrewdly next time," said Goulston.

Foremost on Goulston's list is cleaning house — "cutting out the bad wood," he said. Workplace leaders can prepare for housecleaning with an inventory of employees, placing each worker in one of four categories: Impossible, Difficult, Easy and Extraordinary.

Goulston defined the four categories as follows:

    • Impossible employees are the ones who "keep you up at night," according to Goulston. They are not just rebels without a cause. They are rebels without a clue. They are the "know-it-alls" who don't know what they're talking about. When you cross them, they can become verbally combative or abusive. You dread having to see or deal with them. You appease or avoid them because they infuriate you. They contaminate your organization as more worthy and conscientious employees see superiors "greasing these squeaky wheels."
    • Difficult employees don't keep you up at night. Instead, they keep other people in your workplace awake. They are arrogant and talk down to other employees. As contrary as they are, you keep them because you need their talents or abilities. You have to weigh the value they bring to your organization against the problems they create.
    • Easy employees are your foot soldiers. They are cooperative, "salt of the earth," and great team players. They do their jobs without creating problems for you. Regardless of the chaos going on in your organization, they do a good job because they're responsible and grown up.
    • Extraordinary employees are your stars and the future of your organization because of their talent and commitment. They'll stay late at night trying to figure out a better way to do something for your organization. They're the ones who enable you and other executives to get a good night's sleep because you feel (and see) how dedicated they are to your organization.

To evaluate your impossible and difficult employees, Goulston recommended you use his "Self-Other Inventory" chart. (See chart below.)

A summary sentence you write on the chart about the attitude of an employee might state: "I can rely on this person to do the bare necessities of the job if he is not annoyed about something." Or: "I can't rely on him to do a task without making mistakes, then blaming others or making excuses." Other summaries might state: "He can rely on me to give him a warning and a chance to improve his work" or "he can't rely on me to endlessly tolerate his sloppy work and negative attitude."

"This tool will help you to [clarify] to employees and yourself what needs to improve in order for the difficult and impossible to keep their jobs," said Goulston, author of Get Out of Your Own Way: Overcoming Self-Defeating Behavior.

Goulston encourages workplace leaders to turn the table on themselves, by allowing the employee to fill out the same evaluation chart.

Once a plan of corrective action is devised, deadlines for follow-up discussions and compliance must be set, and then enforced. Failure to comply with the agreed-upon remedies justifies dismissal of impossible employees, Goulston advised.

This charting tool also works for difficult, easy and extraordinary employees. Goulston offered the following summaries regarding these higher-potential categories:

Difficult people may be arrogant, but they're not stupid. They want to get results, but they have big egos. Their intimidating, condescending attitude frequently makes people afraid to tell them when things go wrong. If they don't find out about problems, they can't correct them. If you can't find a way to keep employees from upsetting people around them, then give them their own space and skilled, thick-skinned assistants to insulate them from the rest of the workplace.

Employers, managers and supervisors often take easy and extraordinary employees for granted while their concerns are tied up with other combative and contrary people. You can usually get away with ignoring easy and extraordinary staff members, but it's wrong to do so, Goulston said.

One of the most common pitfalls of less-than-great leaders is letting the people who don't care about the firm or organization distract them from expressing gratitude toward people who do care.

Goulston also polled his CEO clients on their opinions about the second most important key to success. The CEOs replied that next to cutting the impossible people out of their lives early, the most important key is to recognize and value the good people so they could keep them in their lives longer.

Self-Other Inventory for ________________

  What Can I Rely on this Person For? What Can't I Rely on this Person For? What Can this Person Rely on Me For? What Can't This Person Rely on Me For?
Competence        
Accountability        
Self-Reliance        
Team Playing        
Integrity        
Creativity        
Attitude        
Loyalty        
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Tags: Human Resources, Hiring Tips, Employees

EHTC's 28th Annual Chipping for Charity!

Posted on Fri, Jul 25, 2014
EHTC's 28th Annual Chipping for Charity!
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Tags: EHTC Article, Chipping for Charity, Community Outreach, Scott Lake Country Club, Registration, Golf Outing, Ele's Place, Golf, Sponsorship, Newsletter, Articles

Inundated with Tax Clutter? Here's What You Can Toss

Posted on Sun, Apr 27, 2014

E-filing is on the upswing. According to the Data Book recently released by the IRS, the agency processed 240 million returns during its last fiscal year, of which 59 percent, or 151 million, were filed electronically. Of the 146 million individual income tax returns filed, almost 83 percent were e-filed.

Business Record Guidelines

Employee earnings

Maintain for at least four years, to meet various state and federal requirements. (However, don't throw away records that might involve unclaimed property, such as a final paycheck not claimed by a former employee.)

Employee time cards

Keep for at least three years if your business is subject to the Fair Labor Standards Act (engaged in interstate commerce). It is a best practice for all businesses to keep the files for several years in case questions arise.

Personnel records

Retain three years after an employee has been terminated.

Employment tax records

Keep four years from the date the tax was due, or the date it was paid -- whichever is longer.

Employee business expenses

For travel and transportation expenses supported by mileage logs and other receipts, keep supporting documents for the three-year statute of limitations.

Sales tax returns

State regulations vary. For example, New York generally requires sales tax records to be retained for three years, while California requires four years, and Arkansas, six. Check with your tax adviser.

Business property

Records used to substantiate the cost and deductions (such as depreciation, amortization and depletion) associated with business property must be maintained to determine the basis and gain (or loss) on the sale. Keep these for as long as you own the asset, plus seven years, according to IRS guidelines.

You might think those numbers suggest we are close to becoming a paperless society, at least when it comes to the IRS. That would be a wrong assumption. Even if you recently filed your 2013 tax return electronically, you probably printed out a hard copy for your files. Add that paper to the financial reports, bank statements and other documents you've been holding on to for years and it is likely your filing cabinets are overflowing with paper.

Now that you have filed your tax return, take time to do some spring cleaning.

But you cannot just dump old tax records without giving the process some thought. Some of the documents may still be valuable in case the IRS ever comes calling.

Audits and Amended Returns

You should generally keep records supporting items claimed on your individual tax return until the statute of limitations runs out. Typically, that is three years from the due date of the return or the date you filed, whichever is later. So this year you can generally toss out your tax records for the 2010 tax year and most paperwork you have left from earlier years, but keep your files for the past three tax years.

This is because the IRS can audit your returns for a minimum of three years. You can also file an amended return on Form 1040X during this time period if you missed a deduction, overlooked a credit or misreported income.

But you are not necessarily safe from an audit after three years have passed. There are a couple of key exceptions to this general rule:

1. The statute of limitations increases to six years if the IRS has reason to believe you understated your income by 25 percent or more, and

2. There is no time limit if the IRS suspects fraud or you do not file a tax return.

Various Retention Requirements

Keeping records for three years is the general rule. There are exceptions for certain records. Perhaps not surprisingly, there is no easy answer to the question of how long you should keep specific papers. The IRS does not require you to keep records in any particular way. But here are some basic guidelines for individuals to follow. (See right-hand box for business guidelines.)

Completed tax returns. Some tax advisers recommend that you hold onto copies of completed, filed returns for your lifetime. The reason is so you can prove to the IRS that you actually filed if there's ever a question about it. Even if you don't keep the returns indefinitely, you should hang onto them for at least six years after they are due or filed, whichever is later.

Backup records. Any written evidence that supports figures on your tax return, such as receipts, expense logs, bank notices and sales records, should generally be kept for at least three years.

Exceptions. There are times when you may be entitled to more than the usual three years to file an amended return. For instance, you have up to seven years to take deductions for bad debts or worthless securities, so don't toss out records that could result in refund claims for those items.

Real estate records. Keep real estate records for as long as you own the property, plus three years after you sell (or otherwise dispose of) it and report the transaction on your tax return. Throughout ownership of the property, keep records of the purchase, as well as receipts for home improvements, insurance claims, and documents relating to refinancing. These may help prove your adjusted basis in the home, which is needed to calculate the taxable gain at the time of sale, or to support calculations for rental property or home office deductions.

Securities. To accurately report taxable events involving stocks and bonds, you must maintain detailed records of purchases and sales. These records should include dates, quantities, prices, dividend reinvestment, and investment expenses, such as broker fees. Keep these records for as long as you own the investments, plus the statute of limitations on the relevant tax returns.

Individual Retirement Accounts (IRAs). The IRS requires you to keep copies of Forms 8606, 5498 and 1099-R until all the money is withdrawn from your IRA accounts. Now that Roth IRAs have been added into the mix for some retirement savers, it's more important than ever to hold onto all IRA records pertaining to contributions and withdrawals in case you're ever questioned. If an account is closed, treat IRA records with the same rules as securities. Don't dispose of any ownership documentation until the statute of limitations expires.

Issues affecting more than one year. Records that support figures affecting multiple years, such as carryovers of charitable deductions, net operating loss carrybacks or carryforwards or casualty losses, should be saved until the deductions no longer have an effect, plus seven years, according to IRS instructions.

These general recordkeeping guidelines are for individual tax purposes. Businesses, insurance companies and creditors may have other requirements. Contact your advisers for more information.

Last word: One critical step to take when cleaning out financial documents is to shred them thoroughly before you toss them out.

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Tags: Tax, EHTC Article, Tax Laws, Articles

Potential Tax Credits and Savings for Not-for-Profit Entities

Posted on Thu, Feb 27, 2014

Could your not-for-profit be in line for tax credits with the enactment of the Affordable Care Act? Are you paying unnecessary taxes? Be sure to take note of the following money saving ideas for not-for-profit entities.

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Tags: Tax Credits For Nonprofits, EHTC Blog, Elevate with EHTC, Affordable Care Act (ACA), business consulting

Don't Lose Your Tax Exempt Status

Posted on Wed, Feb 12, 2014

While often less discussed, not-for-profit organizations have their own filing responsibilities with the Internal Revenue Service. These filing requirements vary from one organization to another and can depend on location and operation. To avoid losing the tax-exempt status, it’s imperative that organizations take note of these tips.

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Tags: Elevate with EHTC, EHTC Article, Not-for-Profit Series, Form 990, Tax Exempt, CPA Firm, EHTC