Tag Archives: Retirement Planning

Top Tax Developments of 2014 with Impact on 2015

Michael Blitstein, CJBS

Michael Blitstein, CJBS

by Michael W. Blitstein, CPA

2014 was a notable year for tax developments on a number of fronts. Selecting the top tax developments for 2014 requires judgment calls based upon uniqueness, taxpayers affected, and forward looking impact on 2015 and beyond. With respect to David Letterman, the following list of 2014 tax developments reflects this prioritization in no particular order.

Passage of the Extenders Package
2014 was not a year for major tax legislation in Congress. In fact, Congress even failed to pass its usual two-year extenders package, instead settling on a one-year retroactive extension to January 1, 2014. As one senator put it, “This tax bill doesn’t have the shelf life of a carton of eggs,” referring to the fact that the 50-plus extenders provisions expired again on January 1, 2015. Instead, it has been left to the 114th Congress to debate the extension of these tax breaks in 2015 and beyond, and for taxpayers to guess what expenses in 2015 will again be entitled to a tax break.

Affordable Care Act
In many ways, 2014 was a transition year for the Affordable Care Act. One of the most far reaching requirements, known as the “individual mandate”, took effect on January 1, 2014. Unless exempt, individuals who fail to carry minimum essential health coverage will make a shared responsibility payment in 2015. Another key provision, the “employer mandate”, was further delayed to 2015. Employer reporting for 2014 is voluntary. The IRS also developed new forms for reporting many new requirements.

Repair Regulations
In 2014, the IRS finished issuing the necessary guidance on the treatment of costs for tangible property under the sweeping “repair” regulations. The most important development was the issuance of final regulations on the treatment of dispositions of tangible property, including the identification of assets, the treatment of dispositions, and the computation of gain and loss. The complexity of the repair regulations has not gone unnoticed by many tax professionals, who have asked the IRS to simplify some of the provisions.

IRS Operations
IRS predicted a complex and challenging 2015 filing season due to cuts in the Service’s funding. This dictates the Service having to do more with less because of budget cuts. The IRS is funded $1.5 billion below the amount requested. IRS could face another round of budget cuts under the new Republican controlled Congress for 2016.

Net Investment Income Tax
Many higher income individuals were surprised to learn the full impact of the net investment income tax (“NII”) on their overall tax liability during the 2014 filing season when their 2013 returns were filed. Starting in 2013, taxpayers with qualifying income have been liable for the 3.8 percent net investment income tax. Recent run ups in the financial markets, combined with the fact that the thresholds are not adjusted for inflation, have increased the need to implement strategies that can avoid or minimize the NII tax.

Retirement Planning
A number of changes were made during 2014 affecting IRAs and other qualified plans, which cumulatively rise to the level of a “top tax development” for 2014:

  • Distributions from a qualified retirement plan account are now able to have the taxable and non-taxable portions of the distribution directed to separate accounts.
  • 401(k) plans can now offer deferred annuities through target date funds.
  • A Tax Court ruling held that a taxpayer is limited to one 60-day rollover per year for all IRA accounts rather than one 60-day rollover per year for each IRA account. The IRS stated that the new interpretation of the rollover rules would be applied to rollover distributions received on or after January 1, 2015.
  • A 2014 Supreme Court decision found that inherited IRA accounts were not retirement assets and therefore not subject to creditor protection under the Bankruptcy Code.
  • The IRS announced the 2015 cost-of-living adjustments for qualified plans. Many retirement plan contribution and benefit limits increase slightly in 2015.

Identity Theft
Although clearly not confined to the area of Federal tax, identity theft has been a major issue for both the IRS and taxpayers. In 2014, the IRS put new filters in place and took other measures to curb tax related identity theft. The agency also worked with software developers, financial institutions and the prepaid debit card industry to combat identity theft.

Tax Reform
Although 2014 was clearly not the year for tax reform, the foundations for serious tax reform discussions were laid in 2013 and 2014. Looking ahead to 2015 and beyond, it is possible that Congress will complete some form of tax reform in 2015 or 2016.  The major difference of opinion, however, surrounds whether or not the reform would only address corporate tax provisions or also include individual provisions. Many leaders have called for tackling comprehensive tax reform on both the business and individual side. The Senate Finance Committee expects to hold tax reform hearings in 2015.

So what does this all mean? To continue the theme from the last few years, the tax world is ever evolving with increased complexity. Both current and long term planning is as essential as ever. Other 2014 developments may prove more significant to your particular situation.  Be sure to seek advice from a dental specific tax accountant to discuss your unique circumstances.

Michael W. Blitstein, CPA is a partner with the firm of CJBS, LLC, in Northbrook, Illinois. For more than 30 years, Michael has worked closely with the dental community and is intimately familiar with the unique professional and regulatory challenges of creating, running and maintaining a successful dental practice. Michael advises his clients on tax, business and retirement planning, developing short and long-term strategic plans designed to achieve success for dental practice principals and their businesses.

He can be reached at michael@cjbs.com


Should a Not-For-Profit Form an Audit Committee?

by Andrew Lotts, member, CJBS

With the Sarbanes-Oxley Act (SOX) of 2002, there has been limited direct impact on nonprofits, remembering that SOX is law for publicly traded companies only.  However, many forward-thinking not-for-profits are asking themselves what parts of the SOX they should consider enacting as a part of best-practices. In fact, the Attorney Generals of several states have already implemented some Sarbanes-like reforms. Others are still in the study stage.

A recent trend among nonprofits is to adopt an audit committee structure. There are some pros and cons to this: If implemented correctly, an audit committee should provide the Board with a clear, independent voice to address financial matters. It also establishes that the auditors are neither engaged by nor report to management, but rather, the Board, through its audit committee. On the down-side, the committee members will need to devote the time and develop the expertise to effectively monitor increasingly complex financial practices.

Some of the duties of an audit committee are as follows:

  • Engage the auditing firm
  • Review the audit with the auditor
  • Present the audit to the Board
  • Provide an outlet for confidential reporting of any impropriety suspected by an employee with fear of management’s retribution (whistleblowers)
  • Review the appropriateness of major accounting and internal control policies
  • Protection of assets

Some major characteristics of an audit committee:

  • Should have at least one member of the Board (preferably more than one)
  • Should have a least one “expert” in the field on non-profit accounting/auditing (you may consider engaging such an individual if none are available from your volunteer base)
  • Should meet several times a year
  • Staff members normally do not serve on the committee
  • Boards with high turnover may consider longer terms to retain institutional memory

Many nonprofits will find it difficult to populate such a committee with qualified individuals. If you create an audit committee, it has to actually do what it is designed for. Also, members of an audit committee face strong fiduciary responsibilities, though its presence does not diminish those of the Board itself; it’s important to remember that the creation of an audit committee does not absolve the individual directors on the Board from their director responsibilities.

Another alternative to consider is to augment the mission of an already standing finance committee. Such a committee may already possess individuals with the knowledge necessary. If this is the direction you wish to take, the Board would need to pass a resolution empowering the committee to do such work and the committee name should have “audit” in it; for example, “finance and audit committee.” The drawback to this approach is that if the finance committee makes major financial recommendations, the same committee would not be able to independently review these decisions.  However, your existing finance committee is distinct from employee management so there is already a checks and balance system in place to a degree.

The bottom line is that people expect more from audit committees today, and the summary information below provides insight into audit committee leading practices that can help committees meet those expectations.

1. Financial Reporting and Disclosures

Financial reporting disclosure requirements have been steadily increasing for a number of years, in tandem with the complexity of accounting standards. Regulators and financial statement users continue to press companies for more information and to get that information sooner. This environment makes the audit committee’s responsibility to oversee the company’s financial reporting more difficult. The committee must be aware of the financial reporting risks to focus its attention appropriately. And it cannot lose sight of the need to maintain its skepticism.

2. Risk Management and the System of Internal Control

Given how many risks — known and unknown — a company faces, it’s a challenge for a board or audit committee to be assured that the organization is addressing risk appropriately. One of the difficulties facing the audit committee is clearly defining its risk responsibility relative to that of the entire board. While the company’s system of internal control is designed to help mitigate risk, the audit committee focuses particularly on controls relating to financial reporting, fraud, and compliance. Most existing finance committees have a history of handling these matters.

3. Oversight of Management and Internal Audit

The audit committee needs to oversee management while taking care not to step into management’s role. Establishing an effective relationship with management is essential — it allows the committee to effectively monitor the company’s financial reporting practices and evaluate management’s competence. Similarly, the committee relies heavily on internal audit or the external auditors to provide an objective view on how the company is handling a number of key risks, including those relating to financial reporting and compliance. (Traditionally, non publicly traded entities and not-for-profits do not specifically have controls tested as this is typically outside the scope of a financial audit.)

4. Relationship with External Auditors

The audit committee has to select the right external auditors to conduct a quality audit. As part of executing their audit plan, the external auditors provide the audit committee with assurance regarding the company’s financial reporting. Additionally, external auditors are in a unique position to provide unfiltered and unbiased feedback to the committee about management and the company’s processes.

5. What to Do When Things Go Wrong — Financial Statement Errors and Fraud Investigations

At times, breakdowns in financial reporting processes lead to potential errors in previously issued financial statements. Management and the audit committee have to assess whether an error is material and, if it is, take steps to resolve the situation. The situation can become more complex if the error results from fraud.

6. Committee Composition

Composition and leadership are critical in supporting the audit committee’s ability to carry out its responsibilities effectively. The committee needs the right combination of skills and experience. It also needs a chair with the knowledge and commitment to drive the committee’s work.

7. Meetings

To ensure committee meetings run well, the committee needs to have the right agenda and receive the right materials beforehand. The attendees, and how they interact with committee members, also influence the success of meetings. Given how many responsibilities the committee has, it needs to ensure it is meeting often enough and at the right points during the year.

8. Supporting Committee Effectiveness — Charter, Evaluations, Resources, and Training

The audit committee’s charter helps distinguish the committee’s responsibilities from those of the full board of directors. An audit committee that periodically evaluates its performance will be able to identify ways to improve its effectiveness. Orientation training for new members and ongoing development for all members are essential, particularly given the velocity of changes to financial reporting and governance standards.

We have found that maintaining a sub-committee for dealing specifically with auditor level matters and other potentially sensitive areas has been an effective tool for many of our not-for-profit clients.  The rigid audit committee structure, separate charter and additional layer of communication are often just too much to maintain effectively for many of our clients.  The key still gets back to effective communication and efficient dissemination of important information, responsive management and implementation of controls within the organization to ensure successful outcomes.

In general, we find that larger not-for-profits, typically greater than $25 million in gross receipts, with complex programs, multiple sites, and relatively large volumes of transactions have audit committees.  We believe that the relative complexities found at the larger organizations necessitate the use of an audit committee because it enhances communication and strengthens the organizations that have these characteristics.

Once again, having an audit committee is not a requirement for nonprofits, but in today’s marketplace, with its heightened scrutiny, everyone should explore all alternatives to best safeguard the resources they have been entrusted with. This is only a snapshot of some of the considerations involved. To discuss any of these issues or for more information, please feel free to contact me.

Best regards,

Andrew Lotts, CPA
Phone:  (847) 580-5422
E-mail:  mailto:arl@cjbs.com

State Nexus Issues

by Robin Mandell, CPA

Many states are becoming aggressive in taxing corporations based on the privilege of conducting business or deriving income within a state.   Florida has just ruled on a case subjecting a corporation to income tax even though it has no physical presence in Florida.

A corporate taxpayer had nexus with Florida and was subject to the state corporate income tax because some of its products were shipped or delivered inside the state. The taxpayer’s business activity in Florida consisted of the solicitation of sales of gifts and products the taxpayer’s customers use to reward their employees. Some of the products were shipped from the taxpayer’s warehouse outside the state while others were shipped directly to the customers from unrelated vendors’ warehouses, some of which are in Florida. To be protected from nexus, shipment or delivery must be from a point outside the state. Despite the fact that the taxpayer had no other business activity in Florida, because some of the shipments were made from within Florida, the taxpayer was not protected and was subject to Florida corporate income tax.

For sales tax purposes, states watch for is internet activity as many states have implemented “click through” nexus standards as well.  From a recent seminar I attended, the following states have enacted “click through” nexus standards for sales tax –

  • North Carolina  – 8/1/09
  • Rhode Island – 7/1/09 ($5,000 threshold)
  • Illinois – 7/1/11 ($10,000 threshold)
  • Arkansas  – 7/1/11 ($10,000 threshold)
  • Connecticut – 7/1/11($2,000 threshold)
  • Texas – letter ruling 3/24/11.

We expect many other states will be following suit.

The following states have enacted economic nexus standards in addition to Florida –

  • California – effective for taxable years beginning after 1/1/11
  • Iowa – case that went to Iowa Supreme Court, 4/28/11
  • New Jersey – issued 1/10/11, applies retroactively to tax years beginning in 2002

Minimizing Nexus

An important facet of tax planning is the minimization of corporate income tax nexus with unfavorable taxing jurisdictions. This can be accomplished by segregating activities from income producing operations. The first method of segregation is to separately incorporate certain portions of the business. Examples include creation of sales and distribution companies, contract manufacturers, service companies, or research and development companies. A second method of segregation is to create a pass-through entity, such as a limited liability company. A third method is the creation of an intangible holding company to license out the intellectual property of the corporation. Each of these methods of segregation has benefits and attendant risks, varying from state to state, but consideration of one or more of these tools can lead to successful tax planning through isolation of income producing activities from less favorable taxing jurisdictions.

IRS Issues Guidance on Carryover Basis Rules for 2010 Decedents’ Estates

by Matthew Bergman, CPA 

On August 7, 2011, the IRS issued guidance on the time and manner for making the election not to have estate tax apply to estates of decedents who died in 2010. The election must be made by November 15, 2011. The notice also discusses how donors can elect out of automatic allocation of the generation-skipping transfer (GST) tax exemption for direct skips in 2010 and clarifies when 2010 GST tax returns are due.

IRS also provided details on how executors who elect not to have estate tax apply can allocate increase in basis to decedents’ assets.

The Tax Relief, Unemployment Reauthorization, and Job Creation Act of 2010 reinstated the estate tax for 2010 after it had been repealed under the provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001. However, the Tax Relief Act allows executors of the estates of decedents who died in 2010 to elect to apply the Code as if the estate tax had not been reinstated. Under this election, no estate tax would be due, but assets in the estate do not receive a step-up in basis to fair market value (FMV) at the date of death (or alternate valuation date). Instead, heirs’ basis in assets they inherit is determined under the modified carryover basis rules, with their basis being the decedent’s adjusted basis at date of death; however, the executor can elect to allocate up to $1.3 million to increase certain assets’ basis to their FMV at death (basis increase).

Executors can elect to have the provisions of Section 1022 apply by filing Form 8939, Allocation of Increase in Basis for Property Acquired from a Decedent, on or before November 15, 2011. The IRS will not grant extensions of time to file Form 8939 and will not accept late-filed forms, except in certain narrowly defined circumstances. However, the IRS had not yet released a final version of Form 8939.

The notice explains that executors must allocate the basis increase on Form 8939. The executor must report on Form 8939 all property acquired from the decedent (except cash and rights to receive income in respect of a decedent). The executor must also provide a statement to each recipient of property reported on Form 8939, within 30 days of filing Form 8939, setting forth information required under Section 6018(e).

Revenue Procedure 2011-41 explains in detail how the allocation of the basis increase works and what assets it applies to. It also discusses how to determine fair market value, gives special rules for community property states, and explains the interaction of section 1022 with other tax provisions.

If the executor of the estate of a decedent who died in 2010 makes the Section 1022 election, the executor will allocate the decedent’s available GST exemption by filing Schedule R with Form 8939. The notice provides two ways for the executor to elect out of the automatic allocation of the GST exemption.

The due date for filing a return reporting a direct skip, taxable distribution, or taxable termination that occurred during 2010 (before December 17, 2010) is September 19, 2011, except in the case of Form 8939, Schedule R, which is due November 15, 2011.

FUTA surtax is no longer in effect

by Matthew Bergman, CPA

Beginning July 1, 2011, the 0.2% Federal unemployment tax (FUTA) surtax is no longer in effect. Thus, the FUTA tax rate, before consideration of state unemployment tax credits, is now 6.0%.


Under Code Sec. 3301(1), the 0.2% FUTA surtax expired on June 30, 2011. The surtax was part of the 6.2% gross unemployment tax rate (before state credit) that employers paid on the first $7,000 of wages paid annually to each employee (6% permanent tax rate, 0.2% temporary surtax). The surtax has been in effect in every year since 1976, when it was enacted by Congress on a temporary basis. Since legislation hasn’t been enacted to extend the surtax, the FUTA tax rate, before consideration of state unemployment tax credits, now drops to 6.0%, effective July 1, 2011.

So what does this mean for employers?

As IRS noted on its June 2, 2011 payroll industry conference call, employers need to separately track FUTA taxable wages paid before July 1, 2011 and FUTA taxable wages paid after June 30, 2011 since the FUTA tax rates are different during those two periods. Employers whose FUTA tax is more than $500 for the calendar year need to make quarterly FUTA deposits. The next quarterly payment is due on August 1, 2011, but that payment is based on taxable wages earned through June 30, 2011, so it will be computed using the 6.2% FUTA tax rate. However, the payment after that is due on October 31, 2011, and it will be computed using the 6.0% FUTA tax rate if legislation is not enacted to retroactively reinstate the FUTA surtax beginning July 1, 2011.

IRS has indicated it would have some mechanism in place under which an employer would not be assessed deposit penalties if it computed its unemployment tax deposits at a 6.0% rate, and legislation was enacted to retroactively reinstate the surtax.  IRS is working on revising Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, to take into account the elimination of the surtax. That return must be filed in January 2012.

FUTA Tax Rate Change Effective July 1, 2011

by Matthew Bergman, CPA

The effective tax rate for the Federal Employment Taxes (“FUTA”) was reduced from .8% (.008) to .6% (.006) on July 1, 2011. Congress has announced that the FUTA .2% surcharge, first enacted in 1977, will not be extended after June 30, 2011. Employers have been required to pay a flat rate of .8% on the first $7,000.00 of each employee’s annual wages for FUTA.

The IRS is currently revising Form 940 (Employer’s Annual Federal Unemployment (FUTA) Tax Return) to accommodate the two different FUTA rates for calendar year 2011.

Newly-released information return for “one-participant” plans reflects changes

by Matthew Bergman, CPA

The IRS has released the 2010 version of Form 5500-EZ, Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan, which some plans must file by July 31, 2011. The new form reflects a new type of pension plan that first became available in 2010. It also reflects some changed administrative practices. While they generally were first implemented last year, they are worth noting for plans first having to file Form 5500-EZ for 2010.

Purpose of Form.

Form 5500-EZ is used by one-participant plans that are not subject to the requirements of section 104(a) of the Employee Retirement Income Security Act of 1974 (ERISA) and that are not eligible or choose not to file Form 5500-SF electronically to satisfy certain annual reporting and filing obligations imposed by the Code.

The instructions stress that a one-participant plan (see below) cannot file an annual return on Form 5500, Annual Return/Report of Employee Benefit Plan, regardless of whether the plan was previously required to file an annual return on Form 5500. Therefore, every one-participant plan required to file an annual return must file paper Form 5500-EZ with IRS or choose, if eligible, to electronically file Form 5500-SF (Short Form Annual Return/Report of Small Employee Benefit Plan) using the EFAST2 Filing System (an all-electronic system designed by the Department of Labor, IRS, and Pension Benefit Guaranty Corporation to simplify and expedite the submission, receipt, and processing of Forms 5500 and 5500-SF).

Who Must File Form 5500-EZ.

Form 5500-EZ must be filed for a retirement plan if:

… it is a one-participant plan that is required to file an annual return and the taxpayer is not eligible or chooses not to file the annual return electronically on Form 5500-SF; or

… it is a foreign plan that is required to file an annual return.

A one-participant plan is a retirement plan other than an Employee Stock Ownership Plan (ESOP), which:

… covers only the taxpayer (or the taxpayer and his spouse) and the taxpayer (or the taxpayer and his spouse) owns the entire business (which may be incorporated or unincorporated); or

… covers only one or more partners (or partners and their spouses) in a business partnership; and

… does not provide benefits for anyone except the taxpayer (or the taxpayer and his spouse) or one or more partners (or partners and their spouses).

Who May Not Have to File Form 5500-EZ.

Form 5500-EZ does not have to be filed for the 2010 plan year for a one-participant plan if the total of the plan’s assets and the assets of all other one-participant plans maintained by the employer at the end of the 2010 plan year does not exceed $250,000, unless 2010 is the final plan year of the plan. If a plan meets all the requirements for filing Form 5500-EZ and its total assets exceed $250,000 at the end of the 2010 plan year, Form 5500-EZ must be filed for each of the employer’s one-participant plans including those with less than $250,000 in assets for the 2010 plan year.

EFAST2 Filing System.

One-participant plans may satisfy their filing obligation by filing Form 5500-SF electronically under EFAST2 in place of Form 5500-EZ (on paper), provided that the plan covered fewer than 100 participants at the beginning of the plan year. One-participant plans that covered 100 or more participants at the beginning of the plan year are not eligible to file Form 5500-SF, and must file Form 5500-EZ.

Final Plan Year.

All one-participant plans should file the Form 5500-EZ for their final plan year indicating that all assets have been distributed. The final plan year is the year in which distribution of all plan assets is completed.

Filing Due Date.

Form 5500-EZ must be filed by the last day of the seventh month following the end of the plan year (e.g., normally July 31 for calendar year plans but Aug. 1, 2011 for 2010 calendar years plans because July 31, 2011 falls on a Sunday) unless an extension is granted. A one-time extension to file Form 5500-EZ of up to 2 1/2 months may be obtained by filing Form 5558.

One-participant plans automatically receive an extension of time to file Form 5500-EZ (without filing a Form 5558) if the following conditions are met:

… the plan year and the employer’s tax year are the same;

… the employer has been granted an extension to file its federal income tax return to a date later than the normal due date for filing the Form 5500-EZ; and

… a copy of the application for extension of time to file the federal income tax return is retained with the plan’s records..

This exception gives an extension to the extended due date for filing the employer’s income tax return.