The CPA Desk

A Thought Leader Production by PKFTexas

Grandchild in college this fall? Paying tuition could save gift and estate taxes

Now’s the time of year when many young adults are about to head back to college — or to enter their first year of higher education. If you have a grandchild who’ll be in college this fall and you’re concerned about gift and estate taxes, you may want to consider paying some of his or her tuition.

Cash gifts to an individual generally are subject to gift tax unless you apply your $14,000 per beneficiary annual exclusion or use part of your $5.34 million lifetime gift tax exemption (which will reduce the estate tax exemption available at your death dollar-for-dollar). Gifts to grandchildren are generally also subject to the generation-skipping transfer (GST) tax unless, again, you apply your $14,000 annual exclusion or use part of your $5.34 million GST tax exemption.

But tuition payments you make directly to the educational institution are tax-free without using any of your exclusions or exemptions, preserving them for other asset transfers.

This is only one of many strategies for funding college costs while saving gift and estate taxes. Please contact us for more ideas.

Export Financing – Options for Businesses

Russ: This is the PKF Texas Entrepreneurs Playbook. I’m Russ Capper. This week’s guest host. Today’s topic is export financing. And I’m here with Cynthia Flake, senior vice president in Comerica Bank’s Houston middle market group. Welcome to the Playbook, Cynthia.

Cynthia: Nice to be here, Russ.

Russ: You bet. So we recently featured a series on the Houston Port and highlighted the large amount of exports taking place in Texas these days. What are some of the unique challenges export businesses have?

Cynthia: Well, Russ, if global sales are a large enough part of a company’s business, they’re going to need working capital solutions to finance foreign receivables and inventory bound for export. And also, let’s say the company is a manufacturer with production timeline of more than a couple of months. They’re typically going to be receiving incremental payments, progress payments if you will, and may be required to issue performance letters of credit during the production time. And sometimes warranty letters of credit at the final sale.

Russ: This sounds like a complex and specialized area of financial services.

Cynthia: Well, it is. Companies with export sales can really benefit from having number one, the right bank team and also their CFO or another team member on staff dedicated to supporting the relatively large amount of trade documentation that can take place.

Russ: Okay. This sounds pretty sophisticated, and I think we need to stay on this topic. Can we have you back?

Cynthia: You bet. Glad to come back.

Russ: All right. This has been another thought leader production brought to by PKF Texas Entrepreneurs Playbook. Tune in next week for another chapter.

Growth of Microbreweries in Houston – A Chat with Rassul Zarinfar, Buffalo Bayou Brewing Company

Jen: PKF Texas: Entrepreneur’s Playbook. I’m Jen Lemanski, this week’s guest host, and I’m here with Rassul Zarinfar, the founder and CEO of Buffalo Bayou Brewing Company. Rassul, welcome to the Playbook.

Rassul: Thanks for having me, Jen.

Jen: Now, you guys have been open for a couple of years now. Can you give me a little background about Buff Brewery and what you guys are doing?

Rassul: Sure, yeah. So we’re Houston’s most innovative microbrewery. We released 27 different beers in our first 27 months. We’ve brewed with three different types of flowers. We’ve got a beer with cucumber coming out right now, and just some really new twists on old crafts in terms of recipes.

Jen: So what inspired you to start the brewery?

Rassul: Well, I looked around Texas and no one was brewing the beer that I wanted to drink. I think a lot of breweries play it safe. And when you think about Houston, Houston’s a really foodie city. It’s a really fashion-forward city in terms of culinary trends, and we haven’t been seeing that out of the breweries in Houston. So that was kinda disappointing, and that prompted us to say, “Be the change you want to see in your glass.”

Jen: Awesome. Now, where are you guys actually located?

Rassul: We’re right at I10 and Shepherd.

Jen: Oh good. So real close. Like near the Heights.

Rassul: Yeah.

Jen: Now, can they take tours of the brewery?

Rassul: Yep, yep. We’re there every Saturday from noon to 3:00. And so you can come by, grab a glass, and drink some beers.

Jen: Do you do tastings or how does that work?

Rassul: Yeah. It’s pretty unstructured. It’s more like an open house, and so all of our volunteers are really smart and know a lot about the beers. So the whole idea is – we don’t have a sign, so it’s one of those things where it’s self-select. So a really cool vibe in terms of people who know what they’re looking for and they come by. And you just hang out, and usually one of us is there to kinda talk through what you’re tasting in the glass.

Jen: Now, do you have kinda some staples that you always have and then specialty brews?

Rassul: Yeah. Yep. Yeah. So we have 1836 and More Cowbell. 1836 is a copper ale, and it’s very easygoing. More Cowbell is a double IPA, super aggressive. And those beers are available all the time, and then the other beers just rotate really rapidly. So we’ve got our Gingerbread Stout. We’ve got our Summer Wit, which is ginger, corridor, two types of orange peel, hibiscus flowers, and pink peppercorns. It’s really fresh, really bright, very crisp. Perfect for the summer. And then we’ve got our Smoke on the Bayou, which is – we hand smoke the malts at different barbeque joints across town. And we blend ‘em together to make a beer that you can’t have anywhere else on the planet. It’s literally -

Jen: So you’re getting Houston local.

Rassul: Yeah. It’s only – you can’t replicate it even year after year.

Jen: That’s perfect. Well, thanks so much for sharing your story. We really appreciate it.

Rassul: Thanks so much for coming – or having me. Yeah.

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

Health Reporting Forms for Employers

The IRS has issued draft versions of the reporting forms most employers will use in 2015 to show their group health insurance plans comply with the health care reform law.

The forms are the primary means through which the government will enforce the health care reform law’s minimum essential coverage and shared responsibility requirements for employers.

The IRS said the revenue procedures and notice will appear in Internal Revenue Bulletin 2014-33, dated Aug. 11, 2014.

The IRS said it expects to publish draft instructions for completing the reporting forms by late August and that both the forms and the instructions would be finalized later this year.

See IRS website.

Design Experience and the Role of a Chief Experience Officer

Jen: This is the PKF Texas: Entrepreneur’s Playbook. I’m Jen Lemanski, this week’s guest host, and I’m here with Kelsey Ruger, the Chief Experience Officer at CogMine. He’s also the President of the Houston Interactive Marketing Association. Kelsey, welcome to the Playbook.

Kelsey: Thanks, Jen. Thanks for having me.

Jen: Now, Chief Experience Officer. That just sounds like a really cool title. I really don’t know what that means. Can you tell me about -

Kelsey: Sure. And it sounds cool. It’s actually a really cool job to have. I think typically when people think of customer experience or design, they tend to think of things like websites or software interfaces. But really when you think about from the customer’s perspective, that experience includes every touch point they have with you. It could be your logo, your branding. It could be the marketing, your copy, your content. It’s all of those things that when you weave them together create this holistic experience that people have with you.

Jen: That’s cool. So it’s not just for technology companies, right?

Kelsey: Definitely not. I think you’re gonna see technology companies use it a lot more. I mean we have a great example in Apple and how they’ve been able to do this with their products and their services. But I think even if you are a service company, this can play a really important part in taking your services to market because the people are touch points too, right? So if you have a consultant who’s out in the field, what they say and how they say it could have a huge impact on how people experience your brand.

Jen: Well, it sounds like you guys are really kind of on the forefront of this trend at CogMine.

Kelsey: Thanks. And I’m definitely looking forward to see how well it works out here in Houston.

Jen: Perfect. Well, thanks for being here. We really appreciate it.

Kelsey: No problem.

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

Presidential Budget Proposal 2015 – Tax Change on Professional Services

Social Security and Medicare benefits are financed through taxes on wages (FICA) while individuals’ self-employment earnings are subject to SECA taxes.

General partners and sole proprietors typically pay SECA taxes on the full amount of their net trade or business income.

Limited partners pay SECA taxes only on payments from the partnership for services provided, without consideration of the income of the partnership.

For most limited liability companies (LLCs), SECA taxation is unclear because LLCs are neither general partners nor limited partners under state law.

S corporation shareholders are subject to FICA , not SECA taxes.

Non-wage distributions to employee-shareholders of S corporations are not subject to either FICA or SECA taxes.

Regulations treat businesses according to the legal form of their ownership and of the payment received. As a result, some owners pay employment taxes on nearly all earnings (general partners and sole proprietors), other similarly situated owners pay employment taxes on only a portion of earnings (S corporation owner-employees), and others pay little tax at all (limited partners and many LLC members).

Conforming SECA taxes for professional service businesses will close this unintended gap between FICA and SECA taxes. The 2015 presidential budget proposes individual owners of professional service businesses as an S corporations, limited partnerships, general partnerships, and LLCs taxed as partnerships would be treated with similar SECA rules.

Distributions of compensation to owners of professional service S corporations would no longer have wages subject to FICA but to SECA taxes.

Owners who materially participate would be subject to SECA taxes on their distributive shares of partnership (or LLC or S corporation) income.  Owners who do not materially participate would also be subject to SECA taxes, but only on income equal to reasonable compensation.

“Professional service businesses” would be partnerships, S corporations, or other entities taxed as partnerships. This includes fields of health, law, accounting, investment advice or management, and brokerage services. This proposal would be effective for taxable years beginning after December 31, 2014.

For further information on the Presidential Budget 2015, please see these links.

Ryan Istre, Audit Director Discusses PKF Texas Culture

Jen: This is the PKF Texas Entrepreneurs Playbook. I’m Jen Lemanski, this week’s guest host, and today, we’re telling the stories of what PKF Texas means to our people. Ryan Istre is a director in our Audit Department. Welcome to the Playbook, Ryan.

Ryan: Thanks for having me, Jen.

Jen: So Ryan, how has PKF Texas shaped your career in actually becoming a director?

Ryan: I think the general theme around our clients at PKF Texas is that we have a great cross section of clients here that sort of mirrors the economy in Houston. I think the generality of that group has helped me to become very diverse in my skill-set.

Jen: And did you always know you wanted to be a director here?

Ryan: I think I knew from very early on that I wanted to be a director at this place.

Jen: Because you’ve been here since college, right?

Ryan: I did. I stepped in here about three months after graduating from college, so I’ve seen a transformation in the firm in a positive way, and shortly after I started, I knew I wanted to continue my trajectory into being a director in the Audit Group.

Jen: That’s awesome. Now why do you think talented people with all the choices in the world from other accounting firms to industry, why should they come to PKF Texas and work with us?

Ryan: The standard answer that most folks will give you that it’s the people. The people here are the great assets that we have as our firm, and while that is true, I think the people couples with the diversity of our client base and just the broad opportunity for advancement and broad variety of skill sets is what attracts talented, young individuals.

Jen: That sounds great. Thanks so much for being here, Ryan. We really appreciate it.

Ryan: Thank you for having me.

Economic Climate in Texas Drives Growth

In the past few weeks, there have been two excellent articles in the Wall Street Journal about how Texas and Houston’s growth friendly attitudes and regulatory environments have played a role in attracting talent and companies from other states.

Success and the City” focuses on Houston and what sets it apart from other major metropolitan areas. The article states, “Houston’s growth is more than oil-industry luck; it reflects a unique policy environment. The city and its unincorporated areas have no formal zoning, so land use is flexible and can readily meet demand.”

A Texas Guide to the Economy” compares the economic policies in Texas to those in other states, notably California. The author says, “If states are truly laboratories of democracy, Texas’ pro-growth policies serve as an example of the way forward in a slow recovery for…California and the country as a whole.”

We’ve seen these pro-growth trends in action with our clients at PKF Texas. Many are in growth mode and are the benefiting from our strong economy.

Factors Impacting Your Decision to Export

Russ: This is PKF Texas Entrepreneur’s Playbook. I’m Russ Capper. This week’s guest host and our topic once again is continuing on port advisory services, and I’m here with Keith Miceli, the international business advisor at PKF Texas. Welcome back to the Playbook, Keith.

Keith: Russ, nice to be back.

Russ: You bet. Okay, we sort of set the stage talking about the volume of business that’s taking place at the port now, which is incredible. And then we talked about the basic steps that somebody needs to go to in considering and deciding to get into the exporting business. What are the next steps?

Keith: Well, exporting as you know can be both very rewarding, but also extremely challenging. So we here at PKF Texas have launched a port-related advisory service which can provide value added for companies that are just starting up in the export business.

Russ: That sounds good.

Keith: We believe in the old adage that information is power, so we can provide information on logistics providers, free trade zones, freight forwarders, and warehouse operators, also information on investment-grade properties in and around the ship channel that can be leased or purchased for warehousing, distribution, and/or manufacturing. In fact, since 2006 nearly 13 million square feet has been developed and currently there’s 2.5 million square feet available.

Russ: My goodness. I agree, information is power. It seems like it’s almost essential in this business for sure.

Keith: It is. In the final stages of committing to launching an export business PKF Texas can assist in setting up mechanisms to take advantage of tax incentives to lower the effective tax rate on export earnings and discuss establishment rules for exporters using agents to distribute their products overseas.

Russ: Sounds comprehensive to me.

Keith: Yes.

Russ: All right. Thanks a lot, Keith. I really appreciate it.

Keith: My pleasure.

Russ: You bet. And this has been another Thought Leader production brought to you by PKF Texas Entrepreneur’s Playbook. Tune in next week for another chapter.

Tax Consequences of Selling Your House

If you’ve put your home on the market, you need to know the tax consequences of a sale

Summer is a common time to put a home on the market. If you’re among those who are following this trend, it’s important to be aware of the tax consequences.

If you’re selling your principal residence, you can exclude up to $250,000 ($500,000 for joint filers) of gain — as long as you meet certain tests. Gain that qualifies for exclusion also is excluded from the Affordable Care Act’s 3.8% net investment income tax.

A loss on the sale of your principal residence generally isn’t deductible. But if part of your home is rented out or used exclusively for your business, the loss attributable to that portion may be deductible.

If you’re selling a second home, be aware that it won’t be eligible for the gain exclusion. But if it qualifies as a rental property, it can be considered a business asset, and you may be able to defer tax on any gains through an installment sale or a Section 1031 exchange. Or you may be able to deduct a loss.

If you have a home on the market, please contact us to learn more about the potential tax consequences of a sale.