News & Articles

Team Member Spotlight: Tom Sykes

Posted on Mon, Sep 28, 2020

Tom Sykes joined the Velosio Grand Rapids division of EHTC (Echelbarger, Himebaugh Tamm & Co., P.C.) in September 2018 as a Microsoft Dynamics 365 Business Central consultant in ERP and CRM. Tom is a graduate of Central Michigan University with a Bachelor of Science in Finance and Statistics and completed his graduate coursework in Computer Information Systems at Grand Valley State University. This education, combined with his diverse background which includes ERP systems, finance, technology, sales and marketing, enables him to focus on client service and consulting around solutions for end users.

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Tags: ERP, Microsoft Dynamics ERP, Microsoft Dynamics CRM, CRM, Velosio Grand Rapids

Tax Implications When Lenders Cancel Debts in the COVID-19 Era

Posted on Wed, Sep 23, 2020

In the COVID-19-ravaged economy, debts can pile up beyond a borrower's ability to repay. Lenders sometimes may be willing to forgive (or cancel) debts that are owed by certain borrowers. While debt forgiveness can help struggling borrowers survive financially, it can sometimes trigger negative tax consequences. Here's what borrowers need to know about the tax implications of so-called "cancellation of debt" (COD) income. 

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Tags: Forgiveness of Debt, COVID-19

Team Member Spotlight: Andrew Esther

Posted on Mon, Sep 14, 2020

Andrew D. Esther joined the Velosio Grand Rapids division of Echelbarger, Himebaugh, Tamm & Co., P.C. (EHTC) in January 2011 as a Software Developer. His work is focused primarily on web-based platforms and Microsoft products, including the entire Microsoft Dynamics 365 collection of applications. He is a graduate of Grand Valley State University with Bachelor degrees in both Computer Science and Computer Engineering. Prior to joining EHTC, Andrew worked as an application developer who developed a variety of business applications for clients and has extended his knowledge and expertise since joining the team.

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Tags: Microsoft Dynamics, ERP, CRM, Team Member

Plan Now to Reduce AMT Exposure

Posted on Thu, Sep 10, 2020

First the bad news: Despite passage of the Tax Cuts and Jobs Act (TCJA), the individual alternative minimum tax (AMT) is still in place. But there's some good news: The law has made AMT rules more taxpayer-friendly through 2025. In addition, other TCJA changes reduce the odds that you'll owe the AMT for those years. Even so, you may still benefit from taking steps now to avoid or minimize it.

Know the Basics

The AMT is connected to, but separate from, the regular federal income tax system. The difference is that the AMT taxes certain types of income that are tax-free under the regular income tax system. Also, the AMT disallows some regular tax breaks.

The maximum AMT rate is 28%, versus the 37% maximum regular tax rate. For the 2020 tax year, the maximum 28% AMT rate kicks in when AMT income exceeds $98,950 for individuals and $197,900 for married joint-filing couples (for 2019 these figures were $97,400 and $194,800 respectively).  If your AMT bill for the year exceeds your regular tax bill, you'll owe the higher AMT amount.

There's an inflation-adjusted AMT exemption that you can subtract when calculating your AMT income. But the exemption is phased out when your AMT income is greater than the applicable threshold. For 2018-2025, the TCJA raises the exemption amount and greatly increases the phase-out thresholds. For 2020, the exemption amounts are $72,900 for unmarried individuals, $113,400 for married joint-filing couples and $56,700 for married individuals who file separately (for 2019 these amounts were $71,700, $111,700, $55,850 respectively). The phase-out thresholds in 2020 are $518,400, $1,036,800 and $518,400 respectively (in 2019 $510,300, $1,020,600 and $510,300.).

Your exemption is reduced by 25% of the excess of AMT income over the applicable phase-out threshold. But thanks to the TCJA's much-higher thresholds through 2025, only those with very high incomes will be affected by the phase-out rule. Middle-income taxpayers will benefit from full exemptions.

Recognize Risk Factors

Several variables make it difficult to pinpoint exactly who will and who won't be hit by the AMT under the new tax law. However, the TCJA reduces or eliminates the risk associated with some factors through 2025, for example:

Substantial income. High income can cause your AMT exemption to be partially or completely phased out — which greatly increases the odds that you'll owe the AMT. Although this risk factor still exists, it has been substantially diminished by the TCJA's more-taxpayer-friendly AMT exemption rules.

Large itemized deductions for state and local taxes. Itemized deductions for state and local income and property taxes are disallowed under AMT rules. Through 2025, the TCJA limits regular-tax itemized deductions for state and local income and property taxes to a combined total of only $10,000, or $5,000 if you use married filing separate status. Because large itemized deductions for these taxes are no longer possible through 2025, this risk factor is greatly reduced for now.

Several dependents. Previously, there was some risk to taxpayers who claimed several personal and dependent exemption deductions. These deductions are disallowed under AMT rules. But the TCJA eliminates personal and dependent exemption deductions for through 2025, eliminating this risk factor for those years.

Miscellaneous itemized deductions. In the past, deducting such items as investment expenses, fees for tax advice and preparation, and unreimbursed employee business expenses could raise the risk of AMT exposure. But for 2018-2025, the TCJA eliminates most miscellaneous itemized deductions for regular tax purposes. So this risk factor is gone for now.

But even following the passage of the TCJA, some factors continue to make taxpayers vulnerable to the AMT, including:

Exercise of ISOs. In-the-money incentive stock options (ISOs) feature a bargain element — the difference between the market value of the shares on the exercise date and the exercise price under the ISO. This bargain element doesn't count as income under regular income tax rules but it does count as income according to the AMT. This risk factor still exists and will likely continue to be a common cause of AMT liabilities.

Interest from private activity bonds. Such interest is tax-free for regular tax purposes but taxable under AMT rules. The TCJA doesn't change this treatment, so private activity bond interest remains a risk factor.

Disallowed standard deductions. Through 2025, the TCJA almost doubles standard deduction amounts, but these write-offs are disallowed under the AMT rules. Therefore, the new law actually increases this risk factor.

Depreciation write-offs. Traditionally, assets such as machinery, equipment, computers, furniture and fixtures from a business or from investments in S corporations, limited liability companies or partnerships were required to be depreciated over longer periods for AMT purposes. This increased the likelihood that you'd owe AMT. For both regular income tax and AMT purposes, businesses can now deduct the entire cost of many depreciable assets placed in service between September 28, 2017 and December 31, 2022 in Year 1. The TCJA thus reduces this risk factor for newly-acquired assets. However, if you're depreciating older assets under the prior law's rules, the depreciation write-off threat still exists.

Avoid or Minimize the Tax

As we explained above, the TCJA reduces the odds that you'll owe the AMT. Even if you do owe it, you'll probably owe less — possibly a lot less. Nevertheless, you might benefit from making some changes that will help reduce your exposure to the AMT. For example:

Some taxpayers are in the habit of prepaying state and local income and property taxes that are due early in the following year. These taxes aren't deductible under AMT rules, and it may now make sense to deduct them next year when you have a chance of not being exposed to the AMT. Prepaying also may be a bad idea because the TCJA limits itemized deductions for state and local income and property taxes to a combined total of $10,000 ($5,000 for those married filing separately). Paying next year's taxes this year might push you over the threshold for non-deductibility.

You should also be careful when exercising in-the-money ISOs. Triggering these options when there's a big spread between current market value and exercise price is one of the most common causes for AMT liabilities. Consider spreading out ISO exercises over several years.

And although the interest on municipal bonds is tax-free under regular tax rules, interest on private activity bonds is taxable under AMT rules. In general, a private activity bond is a bond issued by or on behalf of local or state government to finance the project of a private user, such as a bond used to finance a stadium for a professional sports team.

Claim the AMT Credit

A portion of the AMT that you pay can potentially generate the minimum tax credit, which we will call the AMT credit. This credit can be used to reduce your regular tax liability in future years — but only to the extent that the regular tax liability equals the AMT liability for that particular year. The AMT credit can be carried forward for an unlimited number of years.

The credit is generated only by AMT liabilities that are attributable to deferral preferences (items that are recognized at different times for regular tax and AMT purposes). By contrast, AMT liabilities attributable to exclusion preferences (items that are permanently treated differently under the regular tax and AMT rules) don't generate AMT credits.

Exclusion preferences include:

  • Itemized deductions allowed for regular tax purposes but disallowed under AMT rules (such as state and local income and property taxes and miscellaneous itemized deductions that were allowed before the TCJA),
  • Deductions for home equity loan interest that was allowed for regular tax purposes before the TCJA if the loan proceeds weren't spent on your first or second residence,
  • Your standard deduction if you claimed it instead of itemizing,
  • Personal and dependent exemptions allowed before the TCJA, and
  • Tax-exempt interest from private-activity bonds.

Most other AMT adjustments and preferences are deferral preferences that potentially will generate AMT credits. For example, the bargain element from exercising an ISO is a deferral preference as are AMT depreciation adjustments. Because the TCJA reduces or eliminates such exclusion preferences as itemized deductions for state and local taxes, home equity loan interest deductions, and personal and dependent exemption deductions, anyone who owes the AMT under the current rules is more likely to generate AMT credits than under prior law.

When to Take the Contrarian Approach

If you know you have AMT exposure this year, remember that the maximum AMT rate is 28% — compared with the maximum regular tax rate of 37%. So you might actually benefit from accelerating some income into the next year when it may be taxed at the 28% AMT rate instead of at a higher, regular tax rate next year. Over the two-year period, you'll likely save taxes.

Conclusion

Although avoiding or minimizing the AMT is a worthy tax-planning goal, don't shoot yourself in the foot. For example, postponing the exercise of an ISO could turn out to be a bad idea if the stock price plummets. Your tax advisor can help you identify the most beneficial moves and avoid costly mistakes.

About EHTC

EHTC is a dedicated, full-service CPA firm in West Michigan that focuses on helping clients to achieve their full potential through comprehensive accounting, finance and tax services. We are a local firm with large firm resources, using a team approach to proactive client service that helps our clients gain a competitive advantage through our ability to develop strategies and present realistic solutions that build value.

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Tags: AMT, Tax Cuts and Jobs Act (TCJA)

Team Member Spotlight: Dan Holzgen

Posted on Mon, Aug 31, 2020
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Tags: EHTC, Team Member, Velosio Grand Rapids, Office 365

Paying Employees While They Put on Safety Gear?

Posted on Thu, Aug 20, 2020

The current focus on keeping employees safe at work amid the COVID-19 pandemic may prompt broader questions of workplace safety, including what's compensable time for hourly employees. Although it's improbable that such issues would arise in connection with simply putting on masks and gloves, it's still important to be mindful of the latest legal interpretations concerning more significant gear.

Periodically, courts are brought in to rule on whether employees must be compensated for time spent putting on or taking off protective equipment for work. (In legalese, this is referred to as "donning" and "doffing.")

Portal to Portal Act

The legal foundation of rules governing when employees must be paid for the time it takes them to don and doff specialized safety gear was laid by the Portal to Portal Act of 1947. It clarified provisions of the Fair Labor Standards Act of 1938.

In a nutshell, the Portal to Portal Act requires that employees be compensated for "all time during which an employee is necessarily required to be on the employer's premises, on duty, or at a prescribed workplace," according to the statute. This rules out, for example, the time it takes an employee to commute to work in a typical commuting scenario.

The question of whether the time employees spend donning and doffing protective equipment should be compensated was later clarified by the courts. The answer hinges on issues that include whether the:

  • Gear is "integral and indispensable" to the employer's "principal activity,"

  • Equipment is required by the principal work performed by the employee, and

  • Employer benefits from the employee's act of donning and doffing the protective gear.

Splitting Hairs

Inevitably, new questions have arisen concerning how the basic principle of the law would apply in various work scenarios. Courts typically consider three factors in deciding whether donning and doffing time is compensable. The first two are fairly straightforward:

  1. Is the equipment required by the employer?

  2. How many minutes are involved?

If less than ten minutes in total are needed, courts have tended to rule that the time involved is insignificant and not compensable.

The third factor gets a little more complicated: The nature of the gear itself. For example, if it's relatively generic and easy to put on and take off — such as a hard hat, safety glasses or ear plugs —the time will generally be considered noncompensable. But more specialized and cumbersome equipment — for instance, safety harnesses and shin guards — might tilt the scales in the other direction.

Supreme Court Decision

One dispute that was decided by the U.S. Supreme Court in 2005 (IBP Inc. v. Alvarez) involved time spent by employees at their employer's location waiting to don their protective equipment, putting on and taking off the gear, and walking to and from their workstations from the place where they donned and doffed the gear.

In that case, which involved a meat packing plant, the protective gear was extensive. It included hardhats, hairnets, earplugs, gloves, sleeves, aprons, leggings and boots. Because the safety gear was integral to the job, the court unanimously ruled that the employees were entitled to compensation for all time involved — except for the time they had to wait before they were handed clean safety gear to don. That time segment was excluded because, according to the Court, it was a "preliminary activity" that, as described in the Portal to Portal Act, isn't compensable.

However, the Court could have also ruled that the waiting time was compensable if employees had been required to arrive at work at a specific time and the waiting period to receive their safety gear began at that specific time. If, instead, employees were required only to begin their shift at a particular time, it wouldn't have been compensable.

Protecting Your Organization

Despite the various rulings that have fleshed out the details of questions left unanswered by the Portal to Portal Act, the law in this area seems to remain in flux. As a practical matter, you don't want your compensation practices to be the subject of the next court interpretation. If any of your employees need to use specialized safety equipment that takes more than a brief period to put on and take off, there might be ways you can streamline that process to minimize the elapsed time.

For example, if the location where employees do their donning and doffing is relatively distant from their workstations, consider moving it closer to minimize time spent getting from one place to the other. Also, make it as convenient as possible for employees to put the safety gear where it needs to go when their shift is over.

Finally, sometimes it's better to err on the side of caution when it comes to interpreting the meaning of "work." Using a liberal definition of the term, and paying workers accordingly, may enable you to avoid a dispute whose cost would greatly exceed whatever you might have saved by using a narrower definition. When in doubt, consult a labor attorney to learn the latest legal standards on this issue — including laws in your state that might favor employees more than federal standards.
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Tags: COVID-19

Team Member Spotlight: Stephanie Kraus, CPA/CFE

Posted on Mon, Aug 17, 2020
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Tags: Audit, EHTC, Team Member, Financial Statements, Agreed Upon Procedures

EHTC Named 2020 Accounting Today's Best Accounting Firm to Work For

Posted on Wed, Aug 05, 2020

EHTC was recently named as one of the 2020 Accounting Today’s Best Accounting Firms to Work for. Accounting Today has partnered with Best Companies Group to identify companies that have excelled in creating quality workplaces for employees.

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Tags: Accounting, Award, Best Accounting Firm to Work For

Team Member Spotlight: Mary Echelbarger

Posted on Mon, Aug 03, 2020
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Tags: Accounting, EHTC, Team Member

Midyear Tax Planning Ideas for Individuals

Posted on Wed, Jul 29, 2020

The extended July 15 deadline for filing your 2019 federal income tax return is behind us. Now it's time to think about your current federal tax situation. Tax planning is especially complicated for 2020. There are a lot of moving pieces: The COVID-19 pandemic has caused some people to lose their jobs or take pay cuts. Many investors have suffered financial losses during the crisis — while other people have prospered by taking advantage of COVID-related business and investment opportunities. So, depending on your situation, you may have less (or possibly more) taxable income in 2020 than you did in 2019.

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Tags: Tax Planning, Charitable Giving, RMD, COVID-19, Midyear