Don’t Forget to Consider the Ohio Business Income Deduction

Cathy Robinson, CPA

Principal

robinson@hwco.com

 

Beginning in 2015, Ohio has increased the benefit to taxpayers for the Ohio Business Deduction.  A business will receive up to 75% deduction on their first $250,000 of business income. This means up to $187,500 of business income will go untaxed by the state of Ohio no matter where it was earned.  The calculation removes the apportionment calculation that was part of the original deduction.  The remainder of the business greater than $250,000 will be taxed at the graduated rate of up to 3%.  The new deduction applies to both pass - through entities and proprietors alike.  The taxpayer should be careful though and take a closer look at what exactly constitutes business income.  Business income includes monies received in the ordinary course of a trade or business operation.

 

The deduction gets even better in 2016 when individuals can deduct 100% of their business income from their personal Ohio income tax.

 

Please remember to consider this tax deduction when preparing your return, and as always when in doubt, consult your advisor.

 

Lease Accounting Standard and Private Companies

Anthony LaNasa, CPA, CFE

Managing Principal - Columbus

lanasa@hwco.com

 

The U.S. Chamber of Commerce and other trade groups are trying to get the new lease standard expected to be published this month exempted from Private Companies.  In a January 29, 2016 letter to the Financial Accounting Standards Board (FASB), the trade groups state they do not feel the FASB adequately considered the differences between private and public companies.  This new standard will require all leases (those more than 12 months in duration) to be recorded as assets (right to use asset) and debt on all company’s balance sheets.  This is a significant change from prior guidance related to operating leases that were expensed as paid by companies.

 

The letter states:   “We are concerned that the decision to apply the soon-to-be finalized lease accounting standard to private businesses will exacerbate complexity, not meet the needs of private company investors and harm capital formation for those businesses. Such a decision would presume that users of private company financial statements would prefer capitalizing leases on balance sheets. However, since users of private companies are different than public company financial statement users in both composition and motivation this may not be the case”.  The link to the letter is http://www.fasb.org/cs/BlobServer?blobkey=id&blobnocache=true&blobwhere=1175832675827&blobheader=application%2Fpdf&blobheadername2=Content-Length&blobheadername1=Content-Disposition&blobheadervalue2=534659&blobheadervalue1=filename%3DLEASES-16.UNS.0021.U.S._CHAMBER_OF_COMMERCE_SEE_LISTED.pdf&blobcol=urldata&blobtable=MungoBlobs

 

The new standard will apply to all companies (private, public, and nonprofit) and is expected to be released this month.  However, stay tuned to potential last minute changes based on negative reaction such as this.

 

Check your Mailbox - Another IRS Data Breach

 

 

 

Cathy Robinson, CPA

Principal

robinson@hwco.com

 

Last month, the IRS stopped identity thieves from attempting to generate E-file PINS for stolen Social Security Numbers.  The PINS are used to efile a tax return.  There were 101,000 Social Security Numbers affected.  The IRS will be contacting the taxpayers to tell them of the breach, and tax return identity theft markers will be placed on their accounts.  There was no personal taxpayer data compromised or disclosed.  The breach was not related to the shutdown of efiling last week. 

 

Remember, the IRS will only contact you by mail.  They will not contact you by telephone or email.  If you need clarification of the correspondence, do not hesitate to consult your CPA.

 

 

Good news for charitable donors!

Cathy Robinson, CPA

Principal

robinson@hwco.com

 

The IRS has withdrawn proposed regulations regarding the reporting of donor information.  The proposed regulations would have allowed charities to file information returns about donors instead of providing written acknowledgements to the donors.   The problem with filing of information returns would have required obtaining the social security number of donors.  Some charities felt that asking for a social security number would discourage potential donors.  In addition, other charities were worried about identity theft.

 

Therefore, you must obtain written acknowledgement from the charity for a donation over $250 and save it for your tax preparer.

The Research credit has been permanently extended.

Cathy Robinson, CPA

Principal

robinson@hwco.com

 

 

Research and development credits were originally implemented to create jobs and bolster the U.S. position as a leader in technological development. It is also important to note that the name can be misleading as the credit not only covers research and product development, but it also includes new processes, formulas, and software, etc. This effectively extends the industries commonly thought to benefit from the credit to also include industries such as software development and construction (i.e., designing electrical systems, mechanical systems, and testing new building materials, etc.). 

 

The PATH act retroactively and permanently extended this credit, which otherwise would have expired prior to 2015. The qualified research expenses encompass both in-house and contract expenses.  The credit is for 20% of current year qualified spending that exceeds a base amount related to gross receipts in earlier years and cannot exceed 10% of the total spending in the current year on qualified research.

The big impact of the research credit is its ability to be used by eligible small businesses for years beginning after December 31, 2015.  In addition, an eligible small business ($50 million or less in gross receipts) can claim the credit against its alternative minimum tax liability.

 

A second benefit added by the PATH Act allows a qualified small business ($5 million or less in gross receipts) the option to claim a portion of its research credit as a payroll tax credit against its employer FICA tax liability versus  its income tax liability.  If elected, the payroll credit can be claimed beginning with the first calendar quarter after the date on which the small business files its income tax or informational returns for the tax year.

With the start of the new year, it is a good time to have a conversation with your tax adviser to determine if you can qualify for this credit, as well as which option may be most beneficial.

New Employee or Independent Contractor?

 

Cathy Robinson

Principal

robinson@hwco.com

 

As the new year begins, you may be contemplating an addition to your company.  The thought crosses your mind about not putting them on payroll, but paying them as an independent contractor.  

 

Be aware this is an area on the IRS radar.   A large amount of money is lost each year by the U.S. Treasury due to worker misclassification.

 

Therefore, you need to look at the factors the IRS considers when reclassifying workers as employees.  There are 20 common law factors in Revenue Ruling 87-41 reviewed by the IRS.  Instructions provided to workers, training, hours, and location are some of the factors to consider.  The main point to consider is who has control over employee behavior and the relationship between the parties. 

 

There are safe harbor rules to consider when making the decision.  Section 530 of the Revenue Act of 1978, P.L. 95-600 lists some rules.  An individual will not be considered an employee if the payer:

consistently treated other workers performing the similar task as nonemployees; had a reasonable basis for not treating as an employee; filed the Form 1099-MISC for all individuals.

 

Still not sure?  You can request a determination from the IRS.  Prepare and file Form SS-8 with the IRS.  It should be noted that most of the requests are filed by workers who think they are employees and entitled to benefits.

 

As with any business decision, it is always wise to check with your trusted advisor.

Additional information on last week’s post on documentation needed for charitable deductions

 

 

Cathy Robinson

Principal

robinson@hwco.com

 

Last week, I covered documentation you will need to report charitable deductions you have taken during the year. This week, consider additional, accompanying documentation which if you receive it, you will need to hold on to it for completion of your income tax return.

 

If you are working, you will receive your Form W-2 from your employer by January 31^st.  If you have a bank account, you may have received interest income during the year. If this is the case, you will receive a Form 1099-INT.   Furthermore, if you have a brokerage account or a mutual fund, you may have interest income, dividend income, or stock sales to report.  In this case, you should receive a consolidated Form 1099 and year end summary.  Another form you may receive is a 1099-G.  This form reports the amount of any tax refund you may have received in the prior year. 

 

If you were an independent contractor, you should receive a 1099 – MISC by January 31^st.  Additionally, did you take a withdrawal from a retirement account in 2015; did you roll over money to another retirement account?  If either of these scenarios happened, you will receive a Form 1099-R.  Lastly, were you a winner at the casino or the lottery?  If so, you will receive a W-2G.

 

Be alert and on the lookout for these forms in your mailbox soon!