The CPA Desk

A Thought Leader Production by PKFTexas

Mid-Year Tax Planning Strategies to Impact Your Business

Tax reform has been a major topic of discussion in Washington, but it’s still unclear exactly what such legislation will include and whether it will be signed into law this year. However, the last major tax legislation that was signed into law — back in December of 2015 — still has a significant impact on tax planning for businesses. Let’s look at three midyear tax strategies inspired by the Protecting Americans from Tax Hikes (PATH) Act:

  1. Buy equipment. The PATH Act preserved both the generous limits for the Section 179 expensing election and the availability of bonus depreciation. These breaks generally apply to qualified fixed assets, including equipment or machinery, placed in service during the year. For 2017, the maximum Sec. 179 deduction is $510,000, subject to a $2,030,000 phaseout threshold. Without the PATH Act, the 2017 limits would have been $25,000 and $200,000, respectively. Higher limits are now permanent and subject to inflation indexing.Additionally, for 2017, your business may be able to claim 50% bonus depreciation for qualified costs in excess of what you expense under Sec. 179. Bonus depreciation is scheduled to be reduced to 40% in 2018 and 30% in 2019 before it’s set to expire on December 31, 2019.
  1. Ramp up research. After years of uncertainty, the PATH Act made the research credit permanent. For qualified research expenses, the credit is generally equal to 20% of expenses over a base amount that’s essentially determined using a historical average of research expenses as a percentage of revenues. There’s also an alternative computation for companies that haven’t increased their research expenses substantially over their historical base amounts.In addition, a small business with $50 million or less in gross receipts may claim the credit against its alternative minimum tax (AMT) liability. And, a start-up company with less than $5 million in gross receipts may claim the credit against up to $250,000 in employer Federal Insurance Contributions Act (FICA) taxes.
  1. Hire workers from “target groups.” Your business may claim the Work Opportunity credit for hiring a worker from one of several “target groups,” such as food stamp recipients and certain veterans. The PATH Act extended the credit through 2019. It also added a new target group: long-term unemployment recipients.Generally, the maximum Work Opportunity credit is $2,400 per worker. But it’s higher for workers from certain target groups, such as disabled veterans.

One last thing to keep in mind is that, in terms of tax breaks, “permanent” only means that there’s no scheduled expiration date. Congress could still pass legislation that changes or eliminates “permanent” breaks. But it’s unlikely any of the breaks discussed here would be eliminated or reduced for 2017. To keep up to date on tax law changes and get a jump start on your 2017 tax planning, contact us.

Tips to Follow When Selling a Business

Jen:  This is the PKF Texas Entrepreneur’s Playbook.  I’m Jen Lemanski, this week’s guest host, and I’m back with Martin Euson, one of our tax directors on our Transaction Advisory Services team; Martin, welcome back to the Playbook.

Martin:  Thank you Jen, a pleasure to be here.

Jen:  So last time we had you here we were talking about buying a company.  A lot of our clients are looking to sell their company, what are some of the key considerations they need to be thinking about when they’re selling their company?
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When does your nonprofit owe UBIT on investment income?

In recent years, the IRS has increased its scrutiny of not-for-profits’ unrelated business income (UBI). Dividends, interest, rents, annuities and other investment income generally are excluded when calculating unrelated business income tax (UBIT). However, there are two exceptions where such income is taxable.

1. Debt-financed property

When your nonprofit incurs debt to acquire an income-producing asset, the portion of the income or gain that’s debt-financed is generally taxable UBI. Such assets are usually real estate, but could also be stocks, tangible personal property or other investments purchased with borrowed funds. Income-producing property is debt-financed if, at any time during the tax year, it had outstanding “acquisition indebtedness.”

But certain property isn’t considered debt-financed and therefore is exempt from this treatment. Examples include when:

  • 85% or more of the property’s use is substantially related to your nonprofit’s exempt purpose,
  • The property is used in a trade or business that’s excluded from the definition of “unrelated trade or business” either because it’s used in research activities or because the activity has a volunteer workforce, is conducted for the convenience of members, or consists of selling donated merchandise, or
  • It’s covered by the neighborhood land rule.

What is the neighborhood land rule? If your nonprofit acquires real property intending to use it for exempt purposes within 10 years, the property won’t be treated as debt-financed property as long as it’s in the neighborhood of other property you use for exempt purposes.

2. Income from controlled organizations

Interest, rents, annuities and other investment income aren’t excluded from UBI if they are received from a for-profit subsidiary or controlled nonprofit. Such payments are included in the parent organization’s taxable UBI to the extent that they reduce the subsidiary organization’s net taxable income or UBI. The IRS generally considers a corporation to be “controlled” if the other organization owns more than 50% of the “beneficial interest” (either stock in a for-profit or voting board positions in a nonprofit).

Proceed with caution

Failing to pay UBIT on debt-financed property or income from controlled organizations could have serious consequences, ranging from taxes, penalties and interest to the loss of your tax-exempt status. Contact us for more information on UBIT rules.

Use Your Vacation Property to Benefit on Your Taxes

If you own a vacation property that you both rent out and use personally, it’s a good time to review the potential tax consequences:

If you rent it out for less than 15 days: You don’t have to report the income. But expenses associated with the rental (such as advertising and cleaning) won’t be deductible.

If you rent it out for 15 days or more: You must report the income. But what expenses you can deduct depends on how the home is classified for tax purposes, based on the amount of personal vs. rental use:

  • Rental property. If you (or your immediate family) use the home for 14 days or less, or under 10% of the days you rent out the property, whichever is greater, the IRS will classify the home as a rental property. You can deduct rental expenses, including losses, subject to the real estate activity rules. You can’t deduct any interest that’s attributable to your personal use of the home, but you can take the personal portion of property tax as an itemized deduction.
  • Nonrental property. If you (or your immediate family) use the home for more than 14 days or 10% of the days you rent out the property, whichever is greater, the IRS will classify the home as a personal residence, but you will still have to report the rental income. You can deduct rental expenses only to the extent of your rental income. Any excess can be carried forward to offset rental income in future years. You also can take an itemized deduction for the personal portion of both mortgage interest and property tax.

Look at the use of your vacation property year-to-date to project how it will be classified for tax purposes. Adjusting the number of days you rent it out and/or use it personally between now and year end might allow the home to be classified in a more beneficial way.

For assistance, please contact us. We’d be pleased to help.

Fundraising Advice for Nonprofits

Jen:  This is the PKF Texas Entrepreneur’s Playbook.  I’m Jen Lemanski, this week’s guest host, and back again with Nicole Riley, one of our Audit Senior Managers on our Not For Profit team.  Welcome back to the Playbook Nicole.

Nicole:  Thanks, glad to be here.

Jen:  Not for profits do fundraising in a whole variety of ways, what are some common issues you see when they do fund raising activities?

Nicole:  One of the most common things is there are some requirements; they call them quid, pro, quo donations or arrangements.  That’s where if you go to a dinner and the ticket is $100 you actually get a dinner in exchange for that ticket, so the organization is required, if the amount paid is more than $75, to tell the donor how much they received back in exchange for that ticket.

Jen:  I think Annjeanette a few episodes ago talked with us about that.

Nicole:  Yeah, there are definitely some requirements about that.  Another thing we see with nonprofits is when they do raffles, those are not donations.

Jen:  Really?

Nicole:  Really.  For the taxpayer themselves, it’s not a charitable donation.

Jen:  Oh my gosh, well we need to make sure that some of these boards that I’m on know that.  Is there anything else?

Nicole:  One other thing is in fundraising you see a lot of organizations get free things; either free advertising spots, free flowers.

Jen:  Like some in-kind donations?

Nicole:  Right.  They often forget to track those.  Those are required to be recorded as contributions in expenses in the financial statement.  So it’s important to keep track of what you got and how much it’s worth.

Jen:  So as an auditor when you’re looking at those financial statements are those the types of things that you guys are looking at?

Nicole:  It’s always something that we look at.  It’s an area that because it’s a donation and it’s an expense it’s important to have the financials stated properly, so of course we always look at those lists.

Jen:  Sounds good.  Well, we’ll get you back to talk some more about some of the nonprofit activity that we do.

Nicole:  Thanks.

Jen:  To learn more about how we can help your not for profit visit PKFTexas.com/notforprofit.  This has been another Thought Leader production brought to you by PKF Texas The Entrepreneur’s Playbook.

Preliminary Tax Preparation Can Save You Time Next April

You may be tempted to forget all about taxes during summertime. But if you start preliminary tax planning now, you may avoid an unpleasant tax surprise when you file next year. Summer is also a good time to set up a storage system for your tax records. Here are some tips:

Take action when life changes occur. Some life events (such as marriage, divorce, or the birth of a child) can change the amount of tax you owe. When they happen, you may need to change the amount of tax withheld from your pay. To do that, file a new Form W-4 with your employer. If you make estimated payments, those may need to be changed as well.

Keep records accessible but safe. Put your 2016 tax return and supporting records together in a place where you can easily find them if you need them, such as if you’re ever audited by the IRS. You also may need a copy of your tax return if you apply for a home loan or financial aid. Although accessibility is important, so is safety.

A good storage medium for hard copies of important personal documents like tax returns is a fire-, water- and impact-resistant security cabinet or safe. You may want to maintain a duplicate set of records in another location, such as a bank safety deposit box. You can also store copies of records electronically. Simply scan your documents and save them to an external storage device (which you can keep in your home safe or bank safety deposit box). If opting for a cloud-based backup system, choose your provider carefully to ensure its security measures are as stringent as possible.

Stay organized. Make tax time easier by putting records you’ll need when you file in the same place during the year. That way you won’t have to search for misplaced records next February or March. Some examples include substantiation of charitable donations, receipts from work-related travel not reimbursed by your employer, and documentation of medical expenses not reimbursable by insurance or paid through a tax-advantaged account.

For more information on summertime tax planning or organizing your tax-related information, contact us.

Nonprofits Should Avoid Excess Benefit Transactions…Here’s Why

Not-for-profits that ignore the IRS’s private benefit and private inurement provisions do so at their own peril. These rules prohibit an individual inside or outside a nonprofit from reaping an excess benefit from the organization’s transactions. Violation of such rules can have devastating consequences.

Defining terms

A private benefit is any payment or transfer of assets made (directly or indirectly) by your nonprofit that’s beyond reasonable compensation for the services provided or the goods sold to your organization, or that’s for services or products that don’t further your tax-exempt purpose. If any of your nonprofit’s net earnings inure to the benefit of an individual, the IRS won’t view your nonprofit as operating primarily to further its tax-exempt purpose.

The private inurement rules extend the private benefit prohibition to your organization’s “insiders.” The term “insider” or “disqualified person” generally refers to any officer, director, individual or organization (as well as their family members and organizations they control) that’s in a position to exert significant influence over your nonprofit’s activities and finances. A violation occurs when a transaction that ultimately benefits the insider is approved.

Never too careful

Of course, the rules don’t prohibit all payments, such as salaries and wages, to an insider. They simply require that a payment is reasonable relative to the services or goods provided and that it be made with your nonprofit’s tax-exempt purpose in mind.

To ensure you can later prove that any transaction was reasonable and made for a valid exempt purpose, formally document all payments made to insiders. Also, ensure that board members understand their duty of care. This refers to a board member’s responsibility to act in good faith, in your organization’s best interest, and with such care that proper inquiry, skill, and diligence has been exercised in the performance of duties.

Protect your exempt status

Any amount of private benefit or inurement is enough to cause the loss of your organization’s tax-exempt status. And individuals involved may be subject to significant excise tax penalties. Contact us if you have questions about how to maintain your exempt status.

Programs that Bring Technology Companies and Talent to Houston

Jen:  This is the PKF Texas Entrepreneur’s Playbook.  I’m Jen Lemanski, this week’s guest host, and I’m here with Ann Tanabe, the Chief Executive Officer for BioHouston.  Welcome back to the Playbook Ann.

Ann:  Thanks for having me, Jen.

Jen:  So last time we talked about there’s a lot going on in the life science world coming here to Houston, are there programs that are attracting companies to come here to Texas and Houston?

Ann:  Yes, we here in Texas have a really innovative program to look for talent, not just companies but actually talent, and this is through our CPRIT program – the Cancer Prevention Research Institute of Texas.  It’s a $3 billion fund which deploys $300 million a year towards cancer and cancer prevention.

Jen:  Wow, so do they work with institutions in the Med Center and how do you guys get involved with that?

Ann:  Academic institutions in the Med Center do apply for grants and individual research grants.  We at BioHouston get involved because there’s a portion of the program that deploys funds for companies.  So companies that are actually in the clinic or close to being in the clinic to develop their products and that’s where we get involved.  We help companies learn, both here in Texas and outside of Texas, learn about the opportunity and go through the process of applying for the CPRIT grants.

Jen:  That’s really cool.  Well, we’ll get you back to talk about some more ways that we’re innovating here in the life science sector, does that sound good?

Ann:  Sure, happy to do so.

Jen:  Perfect.  This has been another Thought Leader production brought to you by PKF Texas the Entrepreneur’s Playbook.  Tune in next week for another chapter.

Insurance Options for Nonprofit Fundraising Events

Not-for-profit special events can be lucrative from a fundraising standpoint, but they also carry significant risks. Proper insurance coverage can help protect your organization.

Special event, special planning

Risks associated with special events run the gamut from accidents and personal injury to fraud and theft to cancellation due to inclement weather or nonappearance by a featured performer. However, it’s possible to buy designated “special events insurance.”

These policies provide coverage for lawsuits and claims brought by a third party who suffered a loss connected to the event. Coverage may include liquor liability coverage that protects your nonprofit against postevent calamities, such as an auto accident caused by an event guest driving under the influence.

Cost-effective options

There is a drawback: Special events insurance for a single event generally comes with a high price tag. Depending on the type of event and your current coverage, it might be more cost-effective to obtain coverage by extending one of the following types of insurance policies:

Comprehensive/commercial general liability. CGL insurance provides coverage for claims that allege bodily injury or property damage. When necessary, the coverage can be extended to members, volunteers, temporary or leased workers, co-sponsoring organizations, outside sponsors and board members.

Directors and officers liability. D&O insurance covers claims arising from the management or governance of an organization and can include coverage for board members and executives.

Nonowned/hired automobile liability. You may need this coverage if volunteers or staff will use their own vehicles during the event, or if rented or hired cars, such as limousines, will be used.

Fidelity. Fidelity bonds guard against the loss of money or property due to dishonest acts of staff or volunteers.

Weather. Weather insurance provides coverage for losses resulting from weather-related event cancellations and is particularly important for outdoor events.

Nonappearance/cancellation. This insurance protects against losses that result when a featured guest fails to appear.

Check with your insurer

You may already have some of this coverage under your current policies. Check with your insurer to learn if your special event will be covered or if you can pay a one-time additional premium for protection. Contact us for more information on managing risk.

Move-Related Tax Deductions – Does Your Relocation Apply?

Summer is a popular time to move, whether it’s so the kids don’t have to change schools mid-school-year, to avoid having to move in bad weather or simply because it can be an easier time to sell a home. Unfortunately, moving can be expensive. The good news is that you might be eligible for a federal move-related tax deduction.

Pass the tests

The first requirement is that the move is work-related. You don’t have to be an employee; the self-employed can also be eligible for the moving expense deduction.

The second is a distance test. The new main job location must be at least 50 miles farther from your former home than your former main job location was from that home. So a work-related move from city to suburb or from town to neighboring town probably won’t qualify, even if not moving would increase your commute significantly.

Finally, there’s a time test. You must work full time at the new job location for at least 39 weeks during the first year. If you’re self-employed, you must meet that test plus work full time for at least 78 weeks during the first 24 months at the new job location. (Certain limited exceptions apply.)

What’s deductible

So which expenses can be written off? Generally, you can deduct transportation and lodging expenses for yourself and household members while moving.

In addition, you can likely deduct the cost of packing and transporting your household goods and other personal property. And you may be able to deduct the expense of storing and insuring these items while in transit. Costs related to connecting or disconnecting utilities are usually deductible, too.

But don’t expect to write off everything. Meal costs during move-related travel aren’t deductible. Nor is any part of the purchase price of a new home or expenses incurred selling your old one. And, if your employer later reimburses you for any of the moving costs you’ve deducted, you may have to include the reimbursement as income on your tax return.

Questions about whether your moving expenses are deductible? Or what you can deduct? Contact us.