Six Steps to Simplify the Tax Code

As the owner of a CPA practice, I’m always interested in the daily detail and take the time to communicate with my staff from the ground up on ways to improve our tax practice and service to our clients.

Recently, there has been a lot of presidential rhetoric about major tax reform in the scope of what occurred during the Reagan years. From an accounting standpoint, sometimes complexity can be resolved with simplicity. As I learned in law school, income taxation is a consortium of social policies — not a rigid set of rules for tax collections.

As April 18 has come and gone and we begin to prepare almost immediately for April 2018, I thought some suggestions to our congressmen of a few tweaks to the tax code in the name of simplicity might get us on down the road quicker and result in a more sociable equitable tax code for my constituents, the small business owners. Here are six steps to consider that follow good social policy, and that I would hope lawmakers would agree are worth implementing:

Step 1: Follow the social policy of helping working families, namely two-wage earning family members, and allow them to file their returns on the same return and start at zero income and tax, and then pay tax on graduated income and rates. This effectively gets rid of stacking one spouse’s income on top of another and allows each spouse to pay tax on his or her respective income if it’s more advantageous. This step is the simplest and reaches the largest segment of the tax base, our dual income, working families. They’re the backbone of society and currently, bear an undue amount of taxes and paperwork. A bonus for Arkansans, this is how we calculate our Arkansas individual income tax.

Step 2: Providing further education (after high school graduation) is another sound social policy. Allow a full tax deduction by the parent or student (with a high school diploma) for ALL out-of-pocket educational expenditures. This extended deduction should cover ALL additional education in the form of technical training, serving apprenticeships, or college and university schooling. As we all know, more educated or trained individuals create higher wage earners (and tax paying) individuals.

Step 3: Eliminate any and all limitations on itemized medical deductions. It is sound social policy to have a healthy society. Medical expense either for treatment or prevention of physical or mental diseases should be fully deductible and not subject to floor limitations. With the boomer generation aging out if income is spent on medical care, why not allow it to be fully deducted and not subjected to income tax? I have yet to meet anyone who has been able to save his or her way to good health. Changing the perception that medical treatment is an investment and not an expense can change the overall health and wealth of our society.

Step 4: Eliminate limitations on charitable giving. Charitable giving is a good social policy for individuals and for society. If an individual wants to donate more than 50 percent of his or her adjusted gross income in a year to a charitable cause, they should be allowed to do so and to fully deduct the donation against their income earned for the year. The more we are encouraged to help those around us, the less help will be needed in the future from government programs and the required tax revenues to fund those programs.

Step 5: Provide for one graduated tax structure for all taxpayers. This can be done in a series of smaller steps:

  1. Eliminate the Alternative Minimum Tax. If the tax rate structure is graduated, then leave it graduated and eliminate the flat rate tax from the tax structure. The most common AMT added back to income is state income tax. If an individual pays it, allow the deduction.
  2. Reinstate the 10 percent Investment Tax Credit for all purchases of IRC 1245 type property, namely business vehicles, equipment and furniture and fixtures. Allow the credit to reduce tax liability dollar for dollar, and allow for carry backs and carry forwards for unused amounts.
  3. Stop limiting capital losses on the sale or exchange of a capital asset. I have been practicing for 40 years and for the life of me I have never understood the practice of limiting capital losses on the sale or exchange of a capital asset. If you have a graduated tax system for income and tax rates, why do you cut the capital loss off at the pass, and say “No, you cannot deduct this loss against your other income even though you have incurred a tax loss"? It has been around since I have started practicing and I still don’t get it.

Step 6: Eliminate the limit on passive type losses and the limit of their deductibility against income earned, which is then subjected to higher graduated rates. The tax system is a graduated rate and income driven, but then kicks out certain types of losses and taxes the remaining income at higher rates. If the passive loss limitation were removed from the graduated tax system, then wouldn’t it serve as sound social policy to encourage investment in real estate property? If you change the depreciable lives of commercial real estate buildings and structures to 15 years, it would encourage real estate investment, the economy would grow and additional tax revenues would be collected.  

Over the next several months, and possibly years, I am certain that tax reform and discussion will continue with a positive outcome for those of us who pay all the taxes. Regardless of the level of change, it might be good social practice to start small, with the steps above. Any headway is progress. However, should our political leaders achieve a large scale overhaul, rest assured I will be more than excited to learn about the new changes and assist my clients in preparing their returns.

New Year - New Business!

It’s the start of a new year and you are finally going to take the big step of starting your own business.   Congratulations!  According to SBA, you will join over 240,000 Small Business Owners in Arkansas and have a part of employing over half of the state’s private workforce.  In order to start your new business off on the right foot, you’ll need a team of professionals to assist you. Most successful start-ups begin with a strong professional business team in place from the beginning.  The team is comprised of you, an attorney comfortable with setting up new businesses, a CPA who is competent and familiar with your field, a Banker willing to get to know you and your business and who is committed to helping you grow, and an experienced Insurance Agent.  All of these professionals play a very important role in guiding you through the ins and outs of starting in a new business endeavor.

Where do you find this team? Ask trusted friends, family and mentors for recommendations. Sometimes they can offer you sage advice on who NOT to work with! Look in trade publications for advertisements or editorials written by the experts in your field. Geographic proximity is not always the best indicator of a good team member. Look for those who specialize in your industry. Get a feel for how they like to communicate and work. If it doesn’t fit with your personality or business style, keep looking. Seek out people who are willing to explain things to you at the level you need to make sure you understand every detail you want to be involved with.  Often times the language used in explaining a complicated transaction turns off new business owners; be prepared to ask questions and say when you don’t understand. 

What will this team do? Attorneys are key players in the formation and registration of your new business entity with local, state and federal agencies. From formation of the entity and making sure you don’t fall into any licensing traps; legal counsel is much more effective (and less costly) on the front end in preventing problems than having to solve them on the back end.  CPA’s can advise you of the tax ramifications of the different business entities, and will help in determining what taxes your small business will be subject to and with what agencies the business will need to register with to pay or file those taxes.  CPA’s can give you time tables, estimates, and prepare the forms and statements that are required for you to know how your business is doing and to keep you out of hot water with the various taxing agencies.  Bankers assist the business in setting up the business banking needs like checking accounts, lines of credit and/or startup loans.  Insurance Agents recommend and price insurance to protect you and your business from the effect of unexpected and catastrophic events. They will talk with you to determine the level of coverage needed and make sure you have all of the necessary types of insurance for your particular industry.

With your team of professionals in place, you are now ready to implement your business plan and get started.  Some additional resources for getting started in a new business include information from theSBA on “10 Steps to Starting a Business”. If your business will be Arkansas based, the Department of Finance and Administration has an informative publication “Starting a New Business”.   The IRS also has a publication called “IRS Checklist for Starting a Business” Remember the key to forming, building and maintaining a successful business is to surround yourself with a team of successful and knowledgeable professionals.

Patience On Gains Could Lead To Better Returns

It's almost the end of the year and with the Dow Jones Industrial Average up almost 15 percent you may be thinking of taking some gains to put in your Christmas stocking.

But before you hit the sell button, you might want to consider how you might keep even more of those gains by waiting just a few more days. Looking ahead to what could be 2017 tax law changes, you may want to review any sale of an asset for capital gain purposes for tax planning at an individual tax level for 2016 to see whether it could be more advantageous to report the sale in 2017.

Two plans are in talks to possibly be implemented early in 2017, one proposed by President-elect Donald Trump, and one proposed by Speaker of the House Paul Ryan.

Under the Trump plan, the current capital gain taxation structure of a tiered 0-20 percent tax rate on qualified dividends and capital gains based on the taxpayer's bracket would be retained. However, the plan would simplify the tax bracket structure for married filing jointly taxpayers to $0-$75,000 with a tax rate of 12 percent and capital gains rate of 0 percent, $75,000-$225,000 with a 25-percent tax rate and 15-percent capital gains rate and more than $225,000 with a 33-percent tax rate and 20-percent capital gains rate.

Instead of starting with a capital gains rate of 0 percent, the Ryan plan would start at 6 percent and top out at 16.5 percent. For married filing jointly taxpayers the brackets, tax rates and capital gains rate would be: $0 to $75,300 with a 12-percent tax rate and 6-percent capital gains rate; $75,300 to $231,450 with a 25-percent tax rate and 12.5-percent capital gains rate and $231,450 and up with a 33-percent tax rate and 16.5-percent capital gains rate.  

Most important, the Trump plan would also eliminate the 3.8-percent Net Investment Income Tax, which includes non-business capital gains, interest and dividend income, rental income and royalties. The elimination of the 3.8-percent tax could be the most important part of the equation since it would effectively reduce capital gains taxes next year even if the capital gains tax rate and income tax brackets and rates went unchanged.

In might be good to practice the same strategy of patience when selling as you did when buying. Waiting a few more weeks to book those gains may be the more prudent approach and could realize a greater return on your investments.

How to Engage in Smart Giving (Jennifer Bell Expert Advice)

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Christmas is quickly approaching, which means year-end tax planning is in full swing for those of us in public accounting. With the spirit of Christmas in my heart and numbers on my mind, I want to take a moment to share some smart giving tools. Charitable donations are a tax benefit often overlooked, but they can provide significant tax savings if done correctly. As an accountant, I love the idea of indulging my philanthropic heart while reducing my own taxable income.

Cash is the most commonly donated item to charitable organizations. Are all cash donations deductible for tax purposes, including what you drop in the red bucket as you walk in a store? According to the IRS, the donation must be made to a qualifying charitable organization — e.g., churches, 501(c)(3) organizations, private foundations, etc.

You cannot take a tax deduction for the money you give directly to an individual, no matter how charitable your heart may be. However, if you gave that same amount of money to a qualifying charitable organization, designated the fund or earmarked it for a particular purpose within that charity, you would receive a tax deduction, which could potentially save you 33 cents on the dollar, depending on your tax bracket.

Whether you donate cash, clothing or other household items to a charitable organization, the donor must receive a contemporaneous written acknowledgment if the donation is more than $250. There is a misunderstanding about this threshold and whether it is cumulative or based on an individual donation. For example, a person may give $200 each week to her church and assume that since it is less than $250 per donation, she does not need a receipt for the year in order to claim a tax deduction for the total amount given.

Because the acknowledgement rule requires you to look at the cumulative amount given for the year in order to receive the qualifying itemized deduction, the donor needs a written acknowledgement from the church showing the total amount given in order to deduct the gifts. Furthermore, the receipt must be dated prior to the date the donor files her tax return AND must include the “magic language” stating “no goods or services were received by the individual” in order for the receipt to qualify as a contemporaneous written acknowledgment.

But cash is not the only way you can help your favorite charity or cause. There are other items that can be donated to a charitable organization that are less traditional, yet can provide even greater tax benefits and indulge your philanthropic heart.

Appreciated property, marketable securities and publicly traded stocks are items that are ideal for smart giving. If an individual sold an investment and then donated the cash proceeds, she would have to pay capital gains tax on the net gain. Alternatively, if the individual took that same investment and donated it directly to a charity, she is allowed to take a deduction for the fair market value of the investment at the date of donation and avoid any capital gains tax.

Depending on the value of the noncash item being donated, there may be additional substantiation requirements that need to be satisfied in order for you to receive the full tax deduction benefit, so be sure to consult with your CPA if you’re considering these types of donations.

Another overlooked avenue for smart giving is a direct gift from an IRA to a qualified charity. IRA owners (over age 70) who are required to receive a minimum distribution can use this smart giving tool by having their required minimum distribution (RMD) sent directly to the organization. By removing the RMD from your taxable income, it can lower your overall income, which may make the difference in Social Security income being taxable, jumping to a higher tax bracket or impacting Medicare premiums. There are even some charitable organizations that will match a dollar amount or percentage of your RMD at certain times of the year, thus potentially doubling your giving and providing more dollars to your charity of choice.

Although we give from our hearts, it’s often a good idea to be thoughtful of your own finances as well. There’s no reason we can’t benefit from our own Christmas spirit and potentially increase our impact in our community through smart giving. After consulting with your CPA and learning how to give smartly, you may find that you want to give even more this holiday season!

AICPA honors Public Service Award Winners

The American Institute of Certified Public Accountants, a national organization with nearly 370,000 members in 128 countries, announced its annual public service award recipients on October 28, 2012, honoring Bell & Company with the 2011 Public Service Award for Firms and Johnny K. Hudson with the 2011 Public Service Award for Individuals.

Bell & Company of North Little Rock, Arkansas picked up the firm award, handed out during the fall meeting of the AICPA’s governing council in Amelia Island, Florida with over 400 professionals in attendance for the ceremony.

“The many strong candidates for these awards make it difficult to select individuals and firms,” stated Kathy G. Eddy, chair of the awards committee who presented the awards. “So many make significant contributions to their communities. It is our belief that all of the compassionate and tireless volunteers should be recognized. But this year’s winners, Johnny K. Hudson, Bell & Company and the Reznick Group clearly stand out.”

 

Bell & Company, North Little Rock Arkansas

Bell & Company’s service work included a fundraiser to buy school supplies for children in Haiti following the 2010 earthquake. 

The firm also financially supported a medical clinic in that village and sent two employees to distribute the 400 containers of school supplies and help set up the clinic.

In Arkansas, the firm supports the Arkansas State Mental Hospital through taking a catered meal to Unit A of the Arkansas State Hospital for Christmas and Thanksgiving. Bell & Company staff serves the meal and visits with the patients. They do a cookout during the summer for the staff and patients. They provide money for the staff to purchase and give Christmas presents to the patients.  The Central Arkansas Salvation Army through serving on the Board, various work with the Angel Tree Program, and feeding at the homeless shelter, the Susan G. Komen Race for the Cure by having a team participating each year along with sending the men to cheer on the ladies, we also have volunteers that go and help with the Race Space and Hearts and Hooves where the firm supports a horse named Ben, a therapeutic horse riding and teaching facility for those with disabilities.

 

Johnny K. Hudson, Little Rock

Individual award winner Hudson, CPA, co-founded Aspirnaut Imitative in Arkansas with his sister Ann Kincl and brother Billy in 2006. The organization is a set of educational enhancements for rural students that focus on science, technology, engineering and math achievement skills. It was the first organization in the U.S. to outfit a prototype school bus with five LCD/PC computer screens featuring programmed math and science lessons for students to gain an extra two hours of learning per day.

Hudson is Aspirnaut’s finance and accounting advisor and legislative liaison, as well as a senior partner at Hudon, Cisne & Co. of Little Rock. He serves on the board at Henderson State University, where he earned a B.S.B.A. in accounting, and is a member of the school’s Hall of Fame and Business Advisory Council.

 

Judges for this years submissions where:

Alice Gast, President of Lehigh University

Shelly Moore Capito, U.S. Congresswoman

David Long, President and CEO, Liberty Mutual Group 

 

AICPA began the awards in 1993 and only nine firms have received the Public Service Award for Firms since that time.  One other firm, The Reznick Group of Bethesda, Md also received an award for 2011 Public Service Award for Firms.

Bell & Company P.A. celebrated its 30th anniversary on November 1, 2012 at a celebration held in North Little Rock, Arkansas.  It announced the adoption of 60 angels from the Central Arkansas Salvation Army Angel Tree program representing it's 30 years of past service and 30 years of future service to the community.  Bell & Company P.A. is a regional accounting firm specializing in the trucking/transportation and small business industry for over 30 years.  The firm, located in North Little Rock, Arkansas is dedicated in assisting its clients in the management of their businesses though expert accounting and financial counsel to help generate and preserve wealth for future generations.  Founded in 1982, Bell & Company serves over 1,500 clients in 10 states.

Six Steps To Maximize Transportation Profits

Carriers know they should be more efficient and work smarter, not harder. But sometimes they confuse increasing revenues with maximizing profits. Want to maximize profits instead of just increase revenues? Any carrier of any size can by using these six steps.

Step one: Get smart.

Utilize technology to give your business an edge. The right equipment will provide cash and movement reports so you can stay on top of your business, as well as real-time updates on maintenance issues and driver performance. Technology is the one area where you do not want to save a buck. Months from now, you’ll hardly remember if you spent a little more than necessary, but you’ll kick yourself many times if you didn’t spend enough – especially if your competitors have capabilities you don’t.

Step two: Get tough.

Institute a fuel program, and then monitor it. Are you relying on your local or regional fuel salesperson to give you the best deal? How do you know what the best deals are? Cost plus? Retail minus? Better of? Bob Joiner of StrategEZ Fuel Network Solutions says carriers should contact fuel vendors regularly and negotiate the best prices possible. Deals shouldn’t stay in place year after year. Then carriers should track transactions to measure the results and make sure drivers are fueling at stops that are in the network. Many smaller carriers can’t afford a full-time fuel manager and assign this responsibility to another staff member, often the safety director. Safety directors have too important a job to ask them to take on this extra duty.

Step three: Get lean.

Make sure you aren’t wasting miles or keeping equipment you don’t need. Review your rates and your lanes in detail so you know where your trucks are going and so your customer service reps know what you need to turn a profit.  When your customer asks you to do more, ask yourself if that request would force you outside your standard routes. Maybe you should consider passing on the business.

Jimmy Starr, owner of Arkansas-based Woodfield Trucking, reduced his company’s fleets by 20 units about a year ago and now has 102 units. It was just too expensive to pay for trucks he wasn’t using and too hard to find qualified drivers to keep them moving. If the right business comes along, he’ll grow the fleet again, but he’s comfortable where he is.

Another place to look when trimming your company is excess staff. We’ve found that a carrier needs one non-driving employee, including owners, for every seven drivers.  If your company is way over the mark, review your processes and make sure you are not paying people just to shuffle paper around.  In reviewing the operations of a particular company, we found that very few loads were being booked during the morning hours, and then right before the end of the day, several loads miraculously would be entered into the system.  We concluded the company had too many dispatchers.  The company removed two and never missed a beat.  

Step four: Get green – and by green, I mean more fuel-efficient.

Gabe Stephens at CC Jones Trucking said his owner-operators spend up to $1,500 more a month on fuel using their older trucks than his company spends with newer trucks. One owner-operator got rid of his gas guzzler and is paying for his new rig with the difference in fuel costs alone.

To really save money, move the speedometer back to 62 miles per hour. A carrier driving 12 million miles a year that improves its fuel mileage from five to six miles per gallon would save, at $4 a gallon, $1.6 million a year. Stephens said, “I told somebody the other day, ‘When’s the last time you were on the interstate driving 65 to 70 miles an hour, and you had a truck pass you?’ he said. 'If you think about it, it just doesn’t hardly happen anymore.'"

Worried that you’ll lose drivers by doing that? Share some of those fuel savings with them. Bulkley Trucking out of Sulphur Springs, Texas, gives drivers incentives to improve their mileage. The company’s driver of the year averaged 9.1 miles per gallon and was awarded a Ford F-150 pickup truck in response. Thanks in part to its fuel efficiencies, the company’s profits and fleet size are increasing.

Step five: Get better maintenance processes.

Don’t skimp on maintenance – at all. Little things can cause big problems and review your utilization per shop personnel. This sometimes is a black hole where money goes in but nothing comes out. Accountability is the only way to stop the flow. Implement a repair order system, and if you already have one, make sure it is working as intended. Get shop reports weekly on equipment that needs to be repaired or is up for preventive maintenance, and have a person in management approve all repair and maintenance before it is performed. Check your production on your shifts, especially if you are running two of them. It could be that you need only one.  

Step six: Get a second opinion.

CPAs who really know the trucking industry can do more than balance your books and file your tax returns. They can help you save on all kinds of expenses. They also can provide projections whether you want to expand your business, cut back, or trade equipment. If leasing or purchasing is a question, let your CPA help you figure out the best approach based on your current tax and cash flow situation. Work with your CPA to make sure you are presenting your financial statements to your creditors in the best possible light.


Jeff Lovelady is a senior partner and an expert analyst on accounting strategies specific to the trucking industry at Bell & Company. Bell & Company, headquartered in North Little Rock, Arkansas, provides expert accounting and financial advice to over 40 southeastern trucking and logistics companies with a combined revenue of almost $650 million annually. Contact him at jeff.lovelady@bellandcompany.net.

What Your Business Is Worth Isn't Just for Selling

Merger and acquisitions are off to their fastest start since 2000.  Low interest rates and consolidation are driving business prices up as economic activity improves thanks to a continuing recovery in the economy.  Whether you are looking to buy a business or sell your existing business, determining the value is a key part of any successful transaction.  Most businessmen are faced with the need of determining what a business is worth at some point in their professional life.  So you may be asking yourself, what is your business worth?

If you’re like many business owners, you’re not sure about the answer to that question – even though you easily can answer questions about your revenues, your expenses and your profits.

The surest way to know what your business is worth is to conduct have a professional business valuation that takes into account your assets, your recent history and, importantly, your marketability to prospective buyers. Determining what a business is worth is more than simply what the numbers say it should be worth. More often it's worth what other like businesses are selling for and what the buyer is willing to pay for it.

But knowing the value of your business isn’t just important when you are looking to buy or sell.  Here are five important reasons why a business valuation should be performed on a regular basis.

1. It's a reality check. Most business owners are passionate about their business, but the market is not. What you think your business is worth isn't necessarily what a potential buyer or banker might agree with.  Emotions can set too high a value, while others undercut themselves. Valuing a business requires gathering accurate information, including about one’s competitors and the industry as a whole. Specialized software makes it easier, but many business owners don’t have access to it. A certified valuation brings credibility to the value without the emotional elements that can be challenging to owners. If day-to-day financials are the trees, then a business valuation is the forest. It can tell you where your business is succeeding and where it’s lagging. For example, you can learn where your expenses are out of line with industry standards. Armed with that information, you can build upon your strengths and address your weaknesses.

2.  It makes a partnership run more smoothly. All businesses with multiple owners should have a buy-sell agreement from the beginning that spells out what happens if one of the partners leaves, becomes disabled or dies. When the business is created, a value should be assigned to each partner's ownership percentage for the purpose of purchasing life insurance to cover each partner's obligation in the buy-sell section of the operating agreement. Annual valuations help all the partners know exactly what the business is worth and makes adjusting insurance policies easy and keeps the business transparent for all those involved. Moreover, there are many elements that affect the value for majority and minority partners. For example, a minority owner’s share is worth less than often expected because buyers are reluctant to invest in something they cannot control.

3. If your business gets involved in a lawsuit, the courts will want to know what it’s worth. The same applies in a divorce.  Already having this knowledge can be a key point if these issues ever come up.

4. It helps you satisfy gift and estate tax reporting requirements. You will want to give the IRS an accurate value of the gift/estate and not rely on your own estimate, which may not satisfy an audit. A qualified business valuation has much more credibility. A valuation also helps determine an heir’s gain or loss on an inheritance of the asset, since its value steps up to fair market value at the death of the original owner.  A solid business evaluation can be very helpful in estate planning long before the time of inheritance needs to take place.  Making the process much easier on a business owner's family and partners.

5. It sets a starting price for when you decide to sell. As any business broker knows, getting that initial price right is the key to maximizing profits. Start too low, and you’re giving away your money. Start too high, and you run the risk of unsuccessfully trying to sell it. If you are forced to eventually lower the price, buyers might conclude your business isn’t as valuable as it might actually be.

Knowing what your business is worth is the first step in making good financial decisions for you, your family and your employees.

Richard Bell is an expert analyst on accounting strategies specific to small business, medical professionals and the trucking industry.  He is founder and president of Bell & Company. Contact him at richard.bell@bellandcompany.net.

AR Business Article: Legal Succession

Family Business Succession – How do you gift “experience?”
- Valuing the Intrinsic Asset

As a second generation partner in our family accounting firm, I often find myself providing a particular service to clients that I never took a formal course on. In fact, there are no degrees to be sought or formal credentials to be had in this area of practice. Rather, it’s the actual everyday experience of trying to balance personal family relationships and a professional life, which has allowed me to become “certified” to advise clients as they too transition their own family businesses.

The questions usually arise from my family business clients as to when they should be shifting ownership interest, whether they will sale or gift such interest, and at what price. These basic business valuation questions all have answers that can be mathematically calculated with a bit of time and software. However, it’s the following questions, which cannot be so quickly answered:

  • At what age should the child be given more responsibility within the family business? Some corporate documents set a specific age, such as 35, before the second generation can have majority control.
  • To what extent does the first generation include the second generation in major decision making processes? Is the first generation solely responsible for all Human Resource Personnel decisions like hiring and firing employees; who has to sign the personal guarantees with the bank; etc.
  • How transparent should the family business’s financial position and net worth be? Does the second generation know about certain loans that may be cross collateralized; do they see only a specific portion of the financial statements at a certain time; do they know the difference in liquidity and net worth, etc?

More often than not, I see the first generation unwilling to forgo control of the business or attempting to protect the second generation from the perils they experienced as a new startup business. Yet, it is exactly those experiences, learning from failures and failed attempts, which made the first generation successful. As not only a CPA, but also a second generation family business owner myself, I have quickly learned the value of experience. My father, Richard Bell, and I often joke about him having the “gray hair,” so to speak, while I have the additional credentials. There is no proper GAAP reporting standard for experience or dollar value to be assigned for experience in a Business Valuation. There is no exact manual on how to transition a family business between the generations or formula that can be applied uniformly. Rather, experience is the single asset that is the key to successful succession planning.

How Your Vote Will Affect Your Taxes

With the personal income tax filing date of today - most of us are settling up with Uncle Sam. But given the upcoming election and the inevitable new leadership in Washington, how you manage your taxes in the near future could be a bigger challenge than the past four years. Let’s look at just three areas - Tax Depreciation, Capital Gains Tax and Estate Tax. To be fair, we sourced each of the candidate’s tax stance using the Tax Policy Center which presents an excellent snapshot summary of Presidential Candidates positions on Tax Policy but have not disclosed the candidates name by position. You should research this for yourself.

First let’s review the Bonus Depreciation, which are accelerated methods of tax write off used by most family owned small S-Corporation or Partnership businesses to reduce pass-through income to owners. Currently, one best business practice would be to use the current depreciation expense rules and reduce federal taxable income to its lowest possible amount in the current year reducing the tax liability for the owner’s personal taxable income. Note, Arkansas does not allow Bonus Depreciation.

If you knew who would be the next President in 2018, and the marginal tax rates would increase to 43% for joint taxable income over $500,000 and 48% on joint income over $2,000,000, you might not use Bonus Depreciation in 2017. If another party’s candidate was elected and you knew that all tax rates would decrease to 10% in 2018, you would probably elect bonus and section 179 in the 2017, knowing that tax rates would drop in the future and deductions might not be as important as the current year.

Next, let’s look at Capital Gains Tax Rates. Assume you have a large long-term capital gain on a publicly traded stock that you have owned for the past 18 months. If you sell this year you pay the federal 23.8% capital gains tax and Obama tax on the net capital gain from the sale. Assume instead that you sold the stock next year and the law on capital gains holding period has changed to the ordinary tax rate of 43.4% if held less than two years as proposed by one candidate. You would probably have opted to sell the stock in 2016.

Furthermore, if you knew that in 2017, the tax law would change the holding period to six years to obtain the 23.8% capital gains rate, and included a stair step holding period rate structure with varying tax rates up to a six-year holding period, you would again probably wish you sold the stock in 2016 or be prepared to hold the asset for as long as possible to obtain the lowest capital gain rate. On the other hand, if all tax rates on all sources of income was reduced to 10%, or if a 0% tax rate applied to all capital gain type of income as proposed by one candidate, you might not sell the asset. Certainly, interesting times lay ahead in the future, with tax planning.

Finally, estate taxes are something that will eventually affect us all. If the estate tax law were going to be abolished in 2017, would you be concerned about making annual exclusion gifts of $14,000 in 2016? On the other hand, if you knew that the joint estate would be reduced to $7,000,000, and the limit on life time gifts would be $1,000,000 per taxpayer, would you move to make additional gifts this year of the $14,000 exclusion and some or all the current $5,000,000 life time gift amount? Confusing? Certainly! And it appears that it will be even more so in the coming months and years.

Although the outcome of the election is certainly not decided it is important that as voting citizens we understand our candidates stand on tax issues that will effect all of us. Take the time to research your candidate and learn what they have in store for you the taxpayer. An easy start is at Taxpolicycenter.org, which lists tax positions of each presidential candidate.

Tax Deadlines

Tax Deadlines Occurring in Calendar Year 2016 (for Tax Year 2015 Returns)

Individual tax returns (Form 1040, 1040NR, etc.)

  • First deadline is April 18, 2016 -- or April 19, 2016, for people in Maine and Massachusetts (Revenue Ruling 2015-13, IRS.gov, pdf)
  • Extended deadline is October 17, 2016

Partnership returns (Form 1065)

  • First deadline is April 18, 2016 -- or April 19, 2016, for partnerships in Maine and Massachusetts
  • Extended deadline is September 15, 2016

Trust and Estate income tax returns (Form 1041)

  • First deadline is April 18, 2016 -- or April 19, 2016, for trusts and estates in Maine and Massachusetts
  • Extended deadline is September 15, 2016

C-Corporation returns (Form 1120)

  • First deadline is March 15, 2016 (for corporations on a calendar year)
  • Extended deadline is September 15, 2016

S-Corporation returns (Form 1120S)

  • First deadline is March 15, 2016 (for corporations on a calendar year) 
  • Extended deadline is September 15, 2016

Not for Profit returns (Form 990-N, 990-EZ, 990, 990-PF)

  • First Deadline is May 16, 2016
  • Extended Deadline is August 15, 2016; second extension required for additional 3 months, November 15, 2015

Tax Deadlines Occurring in Calendar Year 2017 (for Tax Year 2016 Returns)

Individual tax returns (Form 1040, 1040NR, etc.)

  • First deadline is April 17, 2017
  • Extended deadline is October 16, 2017

Partnership returns (Form 1065)

  • First deadline is March 15, 2017 (note change of deadline).
  • Extended deadline is September 15, 2017

Trust and Estate income tax returns (Form 1041)

  • First deadline is April 17, 2017.
  • Extended deadline is October 2, 2017 (note change: extensions for fiduciary returns are now five and a half months instead of five months).

C-Corporation returns (Form 1120)

  • First deadline is April 17, 2017 for corporations on a calendar year (note change of deadline).
  • Extended deadline is October 16, 2017 (note change of deadline, corporations are now permitted a six-month automatic extension).
  • For corporations on a fiscal year other than a calendar year, the first deadline is the 15th day of the fourth month following the end of the corporation's fiscal year.
  • EXCEPTION: for corporations with a fiscal year from July 1 to June 30, the first deadline will remain September 15th (which is the 15th day of the third month following the end of the fiscal year) and the extended deadline will remain February 15 (five months after the first deadline) through fiscal year ending June 30, 2026.
  • Starting with the fiscal year ending June 30, 2027, the deadline moves to October 15th (the 15th day of the fourth month following the end of the tax year) and the extended deadline moves to March 15th (six months after the first deadline).

S-Corporation returns (Form 1120S)

  • First deadline is March 15, 2015 for corporations on a calendar year (note there is no change of deadline).
  • Extended deadline is September 15, 2017

Foreign Bank Account Reports (FinCen Form 114)

  • Deadline is April 15, 2017 (note change of deadline)
  • Extended deadline is October 15, 2017 (note: this is the first time ever that extensions are available for FBARs).
  • Note that unlike tax returns, FBARs do not have a next-business- day rule if the deadline falls on a Saturday, Sunday, or legal holiday
  • Not for Profit returns (Form 990-N, 990-EZ, 990, 990-PF)

Not for Profit returns (Form 990-N, 990-EZ, 990, 990-PF)

  • First Deadline is May 16, 2016
  • Extended Deadline is November 15, 2015 (no second extension required)

Driver Per Diem: To Pay or Not to Pay, That is The Question

There are a lot of questions on the best way to manage per diem pay for drivers these days. Per diem is a non-taxable reimbursement for meals and incidentals only which is unique to the trucking industry. Other types of per diem include a lodging rate as well, which is based on the locale of the travel.

By allocating a portion of a drivers pay, you eliminate the payroll taxes on that portion and also the federal and state income taxes on that portion for the driver as well. You also reduce the amount of worker’s compensation premium that you pay. But, be careful in this because most work comp policies have a limit on how much per diem you can exclude from pay for work comp premium calculation purposes. Although 20% of the per diem paid is not deductible for the company, the savings on payroll taxes and work comp premium will exceed the tax on the 20%.

 

By Day or Mile?

Paying per diem by the day is a more accurate method of payment. It eliminates the need for testing the per diem on a periodic basis which is required to be performed if you pay by the mile. If you are paying by the mile and you are not testing your per diem you need to start. If you are subjected to an audit that is one of the first things they will want to review. If you are paying by the mile there could be a chance, depending on the rate, that you could exceed the daily allowance which is currently $63 per day. On any departure or arrival day you can pay up to 75% of the daily allowance. So in an ideal situation, the driver leaves on Monday at 8 am and returns Friday at 8 pm you can pay the driver 2 days at 75% of the daily rate and 3 days at 100% of the daily rate.

The payment of the per diem pertains to the amount of time the driver is away from his/her “tax home”. Also, by paying by the mile, you could lose out on the maximum savings you can receive by paying the per diem. For example, if you pay per diem at .08 per mile, your driver may go 600 miles in a 24 hour period(Obviously an almost perfect scenario), that is only $48, technically he should get $63 so you have missed out on the maximum savings of paying the per diem. By paying by the day, you calculate it at the end of the trip and that means no need to test it periodically.

 

Make It Clear

Also, make sure you have a written policy on file that explains your per diem payment process. If you pay by the mile, include a plan on how you are testing the daily rate as well as a plan of action should your test come back that you have exceeded the daily rate.

Jeff Lovelady
Partner at Bell & Company
Transportation Industry Accounting Specialist

Tax Filing Fraud: The Newest Form of Identity Theft

Today, a taxpayer’s worst nightmare is hearing from their CPA: “We can’t “e-file” your return. There’s an e-file error which indicates a return is already on file with the IRS using your Social Security Number.” The Internal Revenue Service (IRS) paid out nearly $5.2 billion dollars in bogus refunds to identity thieves for the tax year 2013 and it is estimated by the end of 2016 the number will hit $21 billion. According to the Government Accountability Office, (GAO), the real figure is probably significantly higher because it is difficult for the IRS to detect all income tax frauds. Thieves are able to file returns using counterfeit or fraudulent W2s because W2s are not required to be filed with the Social Security Administration until February 29th and in turn, the Social Security Administration does not send the W2s to the IRS until July. This lag in reporting allows a “Perfect Storm” for identity thieves to file fraudulent returns undetected. In response to this growing problem, there are new regulations requiring W2s to be filed with The Social Security Administration on January 31, 2017; however, there is still a delay in SSA forwarding the W2s to the IRS for use in matching data with returns as they are filed. According to IRS publication 5027, if you become a victim of tax return identity theft you should:

  • File a complaint with prosecuting attorney or your local law enforcement
  • Contact one of the three major credit bureaus to place a “fraud alert” on your credit records
  • Contact your financial institution and close any financial or credit accounts opened without your permission or tampered with by identity thieves
  • Complete and file IRS Form: 14039, Identity Theft Affidavit

Remember, the IRS does not initiate contact with taxpayers by telephone or electronic means to request personal or financial information. This includes any type of electronic communication such as emails, text messages, and social media channels. The IRS is reporting a 400% increase in these types of scams from 2015. Report suspicious online or emailed phishing scams to phishings@irs.gov or call 800-366-4484.

A common scam is for criminals to call and impersonate a US Treasury official and threaten jail time, liens, or a visit from the sheriff if you do not immediately provide them with payment for overdue tax liabilities. This scare tactic has proven effective in separating people from their money, and there is no way to recover the stolen funds. The fraudsters are so sophisticated they can make your caller ID display the IRS as No initial verification of information will ever be done over the phone with an IRS employee. Always use caution in providing personal information over the phone to strangers, no matter how legitimate they sound.

The IRS has resources to help if you are a victim of identity theft. Publication 4524 Taxes. Security. Together. lays out steps you can take to help protect yourself from identity theft and phishing scams.

One Thing Is For Sure: Death and Taxes

As the year comes to a close, I encourage clients not only to reflect on the past but also to take a moment to plan for the future. As the old saying goes, the only two things that are certain are death and taxes. However uncomfortable these are, it is worth noting that with careful thought and the help of your CPA some of the discomfort can be removed.

This article is not a technically written article, as neither space nor time will allow. The objective is to encourage you to begin the conversation (both CPA and client) for these two events. When was the last time you updated or reviewed your will and trust? This is probably not high on your to-do list; however, if it has been more than five years, you should give this priority as the ESTATE EXCLUSION and GIFT TAX laws have changed and are most generous.

Since 2013, no tax is due on one’s estate or gifts up to $5.34 million per individual – if you are married, you can double that amount, which brings the tax-free estate exclusion up to almost $11 million per inflation adjusted numbers.

You should also be aware of the earlier 2011 laws that developed the concept of PORTABILITY.  I refer to it as the unlimited marital deduction on steroids. If you do not have an estate greater than $5.34 million, your unused part automatically passes to your surviving spouse, so long as you timely file an estate tax return.

Now, throw in the income tax concept of STEP-UP, which is a “mark-to-market value” of an asset at the time of death. The importance of step-up is that it reduces the income taxes paid by the surviving spouse, children, or other beneficiary on the future sale of the asset by adjusting the original tax cost to fair market value at the asset title holder’s time of death. As with all tax concepts, there are exceptions and exclusions (e.g. retirement accounts or annuities).

By combining the use of the increased estate exclusion, gift tax, portability and step-up, your CPA can minimize the tax dollars paid by you and your family. Although each case is unique, here are some general planning questions to consider and discuss with your CPA:

a. If the combined joint estate is under $11 million, should we leave the estate to each other for step-up purposes (i.e., I love you wills)?

b. If my estate is under the equivalent taxable amount, should I forego making annual gifts?

c. Should I amend my wills and trusts to move away from the traditional A-B trust or are there other reasons besides estate, gift, and income taxes that I need to consider (i.e., second marriage, health issues, creditor issues, etc.)?

d. If a spouse is a bit peaked, should we shift step-up type assets into their ownership bucket? If so, are there holding period rules that would prevent death bed gifts between spouses?

e. Is it possible to have a double step-up on the values of assets (i.e., step-up to market value at my death, leave the assets to my surviving spouse, and then a step-up on the same assets at his/her death)?

f. What impact will income tax rates play at death (i.e., in 2015, the top income tax rate for a married couple kicks in for taxable income over $464,850, while the threshold for a trust is only at $12,300 – don’t forget about the additional 3.8% NIIT)?

g. What if I have set up grantor type trusts or have an existing bypass trust in operation – can I somehow distribute the assets to my surviving spouse and then step-up again at death?

As the New Year approaches, I would encourage my fellow CPAs and Attorneys to dedicate themselves to picking up the phone and discussing the issue of estate vs. income taxes and would suggest that my fellow CPAs schedule a face-to-face meeting with their client and their respective Estate Attorney – this topic is often one ignored until it is too late to plan.

Happy Holidays!

Richard Bell is a licensed CPA & Attorney as serves as a expert analyst on accounting strategies specific to individuals, small business, medical professionals and the trucking industry.  He is founder and president of Bell & Company. Contact him at richard.bell@bellandcompany.net.

5 Financial Things To Do Before December 31st

You're probably starting to plan your Christmas gift list. But there's one other important list you need to get started before December 31. Whether you’re an individual or business owner, there are five things you need to consider before the year ends.

1. If you haven't maximized your 401k and IRA contributions, do it before year-end. Building wealth is a slow process, so take every opportunity you can to invest in your tax deferred accounts. Also, with the S&P up over 20% this year, it may be time to rebalance your investments and 401k.

2. Complete all those bookkeeping items you've been putting off. Make sure you have the details of any major transactions, like property and stock sales or major purchase details. The more complete your information the faster preparing your tax return will go meaning the faster you'll get that refund.

3. If you’re a business owner, assess your capital expenditure needs. If you need new equipment, now is the time to replace it. However, if you don't need the equipment now, it is always better to just pay the tax. Technically, you are only deferring the taxes to potentially higher rates in the future.

4. Review your insurance. Healthcare, home, auto - if it's insured, check to make sure it's accurate or if there's a better rate available. Also, review your estate planning and your life insurance needs as well. No one likes to think about this but it's a good time to make sure your family is taken care of in the coming new year.

5. If you use a financial manager, CPA or tax planning professional, set an appointment to start communicating. Once the New Year starts, it's usually too late to realize all the potential that might be available to you. Like the old saying goes, "failing to plan is planning to fail."


Richard Bell is an expert analyst on accounting strategies specific to small business, medical professionals and the trucking industry.  He is founder and president of Bell & Company. Contact him at richard.bell@bellandcompany.net.

Fiscal Year 2016 Travel Per Diem Rate Now Available

Documenting business travel expenses causes administrative headaches for employers and employees alike. Typically, employees are required to collect receipts as they travel, noting the time, place and business purpose of each expenditure. They then must submit monthly expense reports that are subject to approval of their supervisors. Sometimes, administrative delays occur if documentation is incomplete or a supervisor questions the business purpose (or reasonableness) of an item. Employers must hold on to all of this documentation for several years in case the IRS questions business travel deductions. Isn't there any easier way to reimburse workers for their travel costs?


Alternative Substantiation Methods
Fortunately, the IRS offers simpler alternatives that may be worthwhile for some companies. Instead of reimbursing employees for their actual expenses for lodging, meals and incidentals while traveling, employers may pay them a per diem amount, based on IRS-approved rates that vary from locality to locality.
If your company uses per diem rates, employees don't have to meet the usual recordkeeping rules required by law. Receipts of expenses generally aren't required under the per diem method. Instead, the employer simply pays the specified allowance to employees, although they still must substantiate the time, place and business purpose of the travel. Per diem reimbursements generally aren't subject to income or payroll tax withholding or reported on the employee's Form W-2.

Important note: Per diem rates can't be paid to individuals who own 10% or more of the business.
Under the "high-low method," the IRS establishes an annual flat rate for certain areas with higher costs of living. All the locations within the continental United States that aren't listed as "high-cost" automatically fall into the low-cost category. The high-low method may be used in lieu of the specific per diem rates for business destinations. Examples of high-cost areas include San Francisco, Boston and Washington, D.C. (See the chart below for a complete list by state.)
Under some circumstances — for example, if an employer provides lodging or pays the hotel directly — employees may receive a per diem reimbursement only for their meals and incidental expenses. The IRS also provides a $5 incidental-expenses-only rate for employees who don't pay or incur meal expenses for a calendar day (or partial day) of travel.

Recent Updates for 2016
The IRS recently updated the per diem rates for business travel for fiscal year 2016, which starts on October 1, 2015. Under the high-low method, the per diem rate for all high-cost areas within the continental United States is $275 for post-September 30, 2015, travel (consisting of $207 for lodging and $68 for meals and incidental expenses). For all other areas within the continental United States, the per diem rate is $185 for post-September 30, 2015, travel (consisting of $128 for lodging and $57 for meals and incidental expenses). Compared to the prior simplified per diems, the high-cost area per diem has increased $16, and the low-cost area per diem has increased $13.
The following costs aren't included in incidental expenses:
  • Transportation costs between places of lodging or business and places where meals are taken, and
  • Mailing costs of filing travel vouchers and paying employer-sponsored charge card billings.
Accordingly, taxpayers using per diem rates may separately deduct, or be reimbursed for, transportation and mailing expenses.
The IRS also modified the list of high-cost areas for post-September 30 travel. The following localities have been added to the high-cost list:
  • Mammoth Lakes, Calif.,
  • Grand Lake, Colo.,
  • Silverthorne/Breckenridge, Colo.,
  • Traverse City/Leland, Mich.,
  • Hershey, Pa., and
  • Wallops Island, Va.
On the other hand, these areas have been removed from the previous list of high-cost localities:
  • Sedona, Ariz.,
  • Santa Cruz, Calif.,
  • New Orleans, La.,
  • Baltimore City, Md.,
  • Cambridge/St. Michaels, Md.,
  • Glendive/Sidney, Mont.,
  • Conway, N.H.,
  • Glens Falls, N.Y.,
  • Tarrytown/White Plains/New Rochelle, N.Y.,
  • Kill Devil, N.C., and
  • Williston, N.C.
Note: Certain tourist-attraction areas count as high-cost areas on only a seasonal basis. Starting on October 1, the following tourist-attraction areas have changed the portion of the year in which they are high-cost localities:
  • Napa, Calif.,
  • Telluride, Colo.,
  • Miami, Fla.,
  • Martha's Vineyard, Mass.,
  • Nantucket, Mass.,
  • Jamestown/Middletown/Newport, R.I.,
  • Charleston, S.C., and
  • Jackson/Pinedale, Wyo.
Rules and Restrictions
Companies that use the high-low method for an employee must continue to use it for all reimbursement of business travel expenses within the continental United States during the calendar year. The company may use any permissible method to reimburse that employee for any travel outside the continental United States, however.
For travel in the last three months of a calendar year, employers must continue to use the same method (per diem method or high-low method) for an employee as they used during the first nine months of the calendar year. Also, employers may use either:
1. The rates and high-cost localities in effect for the first nine months of the calendar year or
2. The updated rates and high-cost localities in effect for the last three months of the calendar year, as long as they use the same rates and localities consistently for all employees reimbursed under the high-low method.

Company Deductions
In terms of deducting amounts reimbursed to employees on the company's tax return, employers must treat meals and incidental expenses as a food and beverage expense that's subject to the 50% deduction limit on meal expenses. For certain types of employees — such as air transport workers, interstate truckers and bus drivers — the percentage is 80% for food and beverage expenses related to a period of duty subject to the hours-of-service limits of the U.S. Department of Transportation.
Example: A company reimburses its marketing manager for attending a July trade show in Chicago based on the $275 high-cost per diem. It may deduct $241 ($207 for lodging plus $34 for half of the meals and incidental expense allowance).
Contact a Tax Pro
IRS auditors often target business travel expenses. So, detailed recordkeeping is imperative. Per diem substantiation methods may simplify your recordkeeping requirements and minimize IRS scrutiny. Contact your tax adviser to determine if it makes sense for your company to use per diem rates to reimburse employees' business travel expenses.
The High-Cost Area List for 2016
State
Key City
CaliforniaMammoth Lakes (December 1-February 29)
Monterey (July 1-August 31)
Napa (October 1-October 31; May 1-September 30)
San Francisco
San Mateo/Foster City/Belmont
Santa Barbara
Santa Monica
Sunnyvale/Palo Alto/San Jose
ColoradoAspen (December 1-March 31; June 1-August 31)
Denver/Aurora
Grand Lake (December 1-March 31)
Silverthorne/Breckenridge (December 1-March 31)
Steamboat Springs (December 1-March 31)
Telluride (December 1-March 31; June 1-August 31)
Vail (December 1-March 31; July 1-August 31)
District of ColumbiaWashington, D.C.
FloridaBoca Raton/Delray Beach/Jupiter (January 1-April 30)
Fort Lauderdale (January 1-March 31)
Fort Walton Beach/DeFuniak Springs (June 1-July 31)
Key West
Miami (December 1-March 31)
Naples (January 1-April 30)
Illinois Chicago (October 1-November 30; March 1-September 30)
Maine Bar Harbor (July 1-August 31)
MarylandOcean City (June 1-August 31)
MassachusettsBoston/Cambridge
Falmouth (July 1-August 31)
Martha's Vineyard (June 1-September 30)
Nantucket (October 1-December 31; June 1-September 30)
Michigan Traverse City/Leland (July 1-August 31)
New YorkLake Placid (July 1-August 31)
New York City
Saratoga Springs/Schenectady (July 1-August 31)
PennsylvaniaHershey (June 1-August 31)
Philadelphia (October 1-November 30; March 1-June 30; September 1-September 30)
Rhode IslandJamestown/Middletown/Newport (June 1-August 31)
South Carolina Charleston (October1-November 30; March 1-September 30)
Texas Midland
Utah Park City (December 1-March 31)
Virginia Virginia Beach (June 1-August 31)
Wallops Island (July 1-August 31)
WashingtonSeattle
WyomingJackson/Pinedale (June 1-September 30)
 — Source: IRS

5 Things To Do Now To Reduce Your Tax Bill Next Spring

With the holidays in full swing, most of us aren't thinking about taxes next Spring. But before you know it, the Christmas gifts will turn to credit card bills and taking steps to reduce your tax liability now could make a jolly new year come tax time.  So while you’re making your holiday list, consider adding these five things to make next April a little more enjoyable too.

Hit The Accelerator On Deductions

If you can, prepay your 2015 property and state income taxes before December 31 (unless your normally owe AMT, then hold off and pay these timely). Then make your full contributions to your 401(k) plan and individual retirement accounts.  You can also prepay your January mortgage payments to capture any mortgage interest deductions this year.  Plus that January mortgage payment will be out of the way when the Christmas credit card bills arrive.

'Tis The Season To Give To Your Favorite Charity

Doing good things can make you feel better about your taxes too. Donating stock or property can give you twice the benefit from your charitable contribution if you donate these instead of cash. Not only will you avoid the capital gains tax, but you'll also get to claim a write-off that may be equal to the asset's fair market value.

10 Tax Tips For A Happy New Year

December is the time of year when we all start thinking about our new year’s resolutions – many of which, let’s admit, we’ll fail to keep. But one resolution every trucking executive should make and keep is to do a good job of tax planning.

Tax planning is even more important than it has been in the past because of the government’s current fiscal situation. If you’ve been following the news lately, you know that the federal government is broke and looking for money wherever it can find it. If that money has to come from a hard-working, job-creating trucking company, well, so be it. Bell & Company has been in business 30 years. We’re seeing more audits now than we can remember seeing in a long time, and those audits are hitting carriers of all sizes.

How can you ensure that six months from now, you’re not sitting across a table from an IRS agent who wants to use your company’s profits to reduce the federal budget deficit? These seven tips will help. Pay special attention to the first two, because if you get them right, the rest will take care of themselves.

First, discuss your tax situation with a qualified accounting firm at least quarterly. You should plan and strategize, not react and hope. Waiting until April to dump your records on your accountant makes it more likely you’ll face something unexpected, and when it comes to tax planning, surprises are bad. In fact, even a “good” surprise – a refund – is bad because that means a carrier has been paying too many taxes throughout the year instead of using that money to build its business. By providing information to your accountant throughout the year, he or she more likely will catch variances, spot developing problems, and keep you from paying too much or too little. Plus, you’ll have more peace of mind. As Jimmy Starr, owner of the Camden-based carrier Woodfield, Inc., put it, “If we see something turn either direction, then we can adjust to it throughout the year instead of having any kind of surprises that would be devastating for our cash flow.”

Also, don’t wait until December to start asking your accountant about last-minute purchases. A good tax benefit won’t outweigh a bad business decision. You don’t want to haphazardly buy assets in December like a last-minute Christmas shopper filling her cart with whatever is left on the shelf. Besides, the trucking industry doesn’t lend itself to that kind of purchase. The most important assets, trucks and trailers, need to be spec’d and ordered months in advance of the end of the year in order to take advantage of the full tax benefits.

Second, make sure your financial statements are complete and accurate. Even the best accountants may not catch something if you don’t provide them the right information, and that could lead to problems. Plus, sloppy record-keeping adds to the expense of preparing the return. The more times an accountant has to stop working, call to ask a question, work on someone else’s return while he waits for the carrier to call back, decide if the answer made sense – the more he’ll have to charge for the time. Meanwhile, he’ll have already produced a cheaper, mistake-free return for the client’s more organized competitor. Which carrier do you want to be?

As part of your records, make sure your fixed asset additions are detailed for your CPA to add to your depreciation schedule. It may not be obvious that you’ve added trucks or trailers, done major repairs, or completed a big renovation to your office. Year over year, the expense may look the same, but there may be some capitalizable items within that profit and loss statement that need to be added to the balance sheet and to the depreciation schedule. Remember, accountants don’t like surprises.

Third, ask your CPA if leasing or purchasing is right for you. Leasing means the payment will be lower, and you can deduct expenses over time. Purchasing enables you to deduct 50 percent of the expense during the first year.

Fourth, periodically revisit your accounting method – cash or accrual. In the accrual method, you pay taxes on receivables even if you haven’t collected payment. Using the cash method, you pay taxes only on your actual revenues. Obviously, the cash method makes more sense for most trucking companies because not every shipper pays in a timely manner and some don’t pay at all. However, certain types of IRS Schedule C corporation companies are required to use the accrual method.

Which brings us to the fifth tip: If you still are a C corporation, you should ask your accountant about converting to an S corporation. S corporations are pass-through entities that are not subject to income taxes, though shareholders’ incomes are. However, there are some additional reporting requirements. The S corporation is best for most carriers, but it may not be right for you.

Sixth, ask your accountant about the government’s changing tax laws. Even if you like to defer paying taxes, you may want to distribute your earnings as a dividend this year rather than wait until the beginning of next year because capital gains taxes may increase in 2013. If that happens, you might be better off paying fewer taxes now rather than more taxes later. Also, ask your accountant if you should take the 50 percent bonus depreciation on new purchases next year or if you should elect out and take the depreciation over time. If taxes increase – as they eventually will – you may want to spread the depreciation out to reduce your tax burden over several years’ time.

Last but not least, make sure your company is paying taxes in all the states where taxes are owed. Many companies are unaware they have multi-state tax issues. They may think that paying their International Fuel Tax Agreement taxes takes care of those state-by-state demands, but IFTA is not an income tax. Also, different states have different rules. For example, if you haul from Arkansas into Texas, that state doesn’t expect you to pay anything. If you simply drive through Arkansas, you owe that state money according to the number of miles traveled through its borders. One particular carrier had no idea it owed money until a tax auditor happened to see one of its trucks arriving at a shipper’s location, wrote the carrier’s name down from the side of the truck, and researched the company’s tax history. That turned out to be a costly delivery – seven years of taxes owed in multiple states.

When it comes to tax planning, there is not always a right or wrong answer because each carrier has different needs and philosophies. Some carriers like to defer taxes as much as possible so they can use the money to build their business. Some prefer to pay their taxes as they go so they don’t have a big future expense coming due at a bad time.

But no one likes an unexpected tax bill, and no one likes an audit. Following these seven tips will help keep either of those from happening so that 2013 is a happy new year for you and your business.

7 Tax Tips For A Happy New Year

December is the time of year when we all start thinking about our new year’s resolutions – many of which, let’s admit, we’ll fail to keep. But one resolution every trucking executive should make and keep is to do a good job of tax planning.

Tax planning is even more important than it has been in the past because of the government’s current fiscal situation. If you’ve been following the news lately, you know that the federal government is broke and looking for money wherever it can find it. If that money has to come from a hard-working, job-creating trucking company, well, so be it. Bell & Company has been in business 30 years. We’re seeing more audits now than we can remember seeing in a long time, and those audits are hitting carriers of all sizes.

How can you ensure that, six months from now, you’re not sitting across a table from an IRS agent who wants to use your company’s profits to reduce the federal budget deficit? These seven tips will help. Pay special attention to the first two, because if you get them right, the rest will take care of themselves.

First, discuss your tax situation with a qualified accounting firm at least quarterly. You should plan and strategize, not react and hope. Waiting until April to dump your records on your accountant makes it more likely you’ll face something unexpected, and when it comes to tax planning, surprises are bad. In fact, even a “good” surprise – a refund– is bad because that means a carrier has been paying too many taxes throughout the year instead of using that money to build its business. By providing information to your accountant throughout the year, he or she more likely will catch variances, spot developing problems, and keep you from paying too much or too little. Plus, you’ll have more peace of mind. As Jimmy Starr, owner of the Camden-based carrier Woodfield, Inc., put it, “If we see something turn either direction, then we can adjust to it throughout the year instead of having any kind of surprises that would be devastating for our cash flow.”

Also, don’t wait until December to start asking your accountant about last-minute purchases. A good tax benefit won’t outweigh a bad business decision. You don’t want to haphazardly buy assets in December like a last-minute Christmas shopper filling her cart with whatever is left on the shelf. Besides, the trucking industry doesn’t lend itself to that kind of purchase. The most important assets, trucks and trailers, need to be spec’d and ordered months in advance of the end of the year in order to take advantage of the full tax benefits.

Second, make sure your financial statements are complete and accurate. Even the best accountants may not catch something if you don’t provide them the right information, and that could lead to problems.

As part of your records, make sure your fixed asset additions are detailed for your CPA to add to your depreciation schedule. It may not be obvious that you’ve added trucks or trailers, done major repairs, or completed a big renovation to your office. Year over year, the expense may look the same, but there may be some capitalizable items within that profit and loss statement that need to be added to the balance sheet and to the depreciation schedule. Remember, accountants don’t like surprises.

Third, ask your CPA if leasing or purchasing is right for you. Leasing means the payment will be lower, and you can deduct expenses over time. For 2012 purchasing enables you to deduct 50 percent of the expense during the first year.

Fourth, periodically revisit your accounting method – cash or accrual. In the accrual method, you pay taxes on receivables even if you haven’t collected payment. Using the cash method, you pay taxes only on your actual collected revenues. Obviously, the cash method makes more sense for most trucking companies because of the timing issues (i.e. you pay your payables every day and get paid by your shippers every thirty days).  However, C corporations are sometimes required to use the accrual method.

Which brings us to the fifth tip: If you still are a C corporation, you should ask your accountant about converting to an S corporation. S corporations are pass-through entities that are not subject to income taxes, though shareholders’ incomes are. However, there are some additional reporting requirements. The S corporation is best for most carriers, but it may not be right for you.

Sixth, ask your accountant about the government’s changing tax laws. Even if you like to defer paying taxes, you may want to distribute your C Corporation earnings as a dividend this year rather than wait until the beginning of this year because capital gains taxes may increase in 2013. If that happens, you might be better off paying fewer taxes now rather than more taxes later. Also, ask your accountant if you should take the 50 percent bonus depreciation on new purchases this year or if you should elect out and take the depreciation over time. If taxes increase – as they eventually will – you may want to spread the depreciation out to reduce your tax burden over several years’ time.

Last but not least, make sure your company is paying taxes in all the states where taxes are owed. Many companies are unaware they have multi-state tax issues. They may think that paying their International Fuel Tax Agreement taxes takes care of those state-by-state demands, but IFTA is not an income tax. Also, different states have different rules. For example, if you haul from Texas to Arkansas, Texas doesn’t expect you to pay anything. In driving through Arkansas, you owe Arkansas money according to the number of miles traveled through its borders. One particular carrier had no idea it owed money until a tax auditor happened to see one of its trucks arriving at a shipper’s location, wrote the carrier’s name down from the side of the truck, and researched the company’s tax history. This is happening more often now that the states are searching for revenue sources.   

When it comes to tax planning, there is not always a right or wrong answer because each carrier has different needs and philosophies. Some carriers like to defer taxes as much as possible so they can use the money to build their business. Some prefer to pay their taxes as they go so they don’t have a big future expense coming due at a bad time.

But no one likes an unexpected tax bill, and no one likes an audit. Following these seven tips will help keep either of those from happening so that 2013 is a happy new year for you and your business.

A Closer Look at Home Office Deductions Working from Home

Home office deductions can save taxpayers a bundle if they meet the tax law qualifications. However, claiming expenses for a home office has long been a red flag for an IRS audit since many people don't qualify. But don't be afraid to take a home office deduction if you're entitled to it. You just need to pay close attention to the rules to ensure that you're eligible -- and that your recordkeeping is complete.

Beware: IRS Hot Button

The IRS often scrutinizes home office deductions claimed on tax returns. In one recent U.S. Tax Court case, many of the taxpayer's claimed expenses were disallowed once she became an employee. The case illustrates a number of issues that you should consider before deducting home office expenses.

Facts of the Case

Jean Marie Fontayne and her husband worked for Vitesse Semiconductor Sales Corporation. The husband was an employee, but Jean was a part-time independent contractor who worked from her home from January to July 2008.

After Jean's supervisor retired, his replacement hired Jean as a full-time employee in July 2008. As an employee, she was required to work from Vitesse's office at least two days a week and could work from home up to three days a week.

The taxpayers moved into their home in January 2008. Jean designated a room with a closet and a bathroom as her office space. Later that year, the taxpayers enlarged the home office. A contractor removed an office wall and replaced it 14 inches further into the living room.

In the home office area, the taxpayers replaced the carpet, re-tiled the bath, and added under-the-floor heating, a central vacuum, and a fireproof safe in the closet.

The Fontaynes reported a tentative profit from the business of $24,728 and expenses of $24,728 ($22,883 plus $1,845 for a casualty loss and depreciation) for business use of their home. That amount included direct expenses of $16,501 for repairs and maintenance, as well as an allocable portion of indirect expenses, such as utilities and homeowners insurance.

The taxpayers claimed that the office occupied 17.87 percent of their home (554 square feet in the home office divided by 3,100 feet in the total house). Their home office measurement included the hallway, entryway, room, bathroom and closet. In addition, the taxpayers calculated square footage from the outside of the house.

The IRS allowed deductions of just $1,113 for business use of home expenses. This included $391 of real estate taxes removed from Schedule A and re-characterized as home office expenses.

Tax Court Findings:

The court agreed that the taxpayers qualified for home office deductions for part of the year. The rest of the time, the court noted the taxpayer was an employee who wasn't required to work from home, although it might have made her more productive.

The taxpayers presented a letter from Vitesse stating Jean's part-time home office was beneficial for the company but wasn't required. Instead, she had to work at the company's location at least two days a week. The court ruled Jean didn't meet the "convenience of employer" requirement and disallowed home office deductions for the second half of the year.

The court also ruled the bathroom wasn't used exclusively and regularly for business. Neither was the closet, because Jean wasn't required to store inventory or other items for work. In addition, most of the claimed repairs were capital improvements which couldn't be deducted.

Ultimately, the Court allowed a home office deduction for the first half of the year when Jean was a contractor. The judge also scaled back on many of the taxpayers' computed direct and indirect expenses. (Fontayne, T.C. Summ. Op. 2013-54)

For Self-Employed Individuals

For self-employed individuals, a home office qualifies for deductions if it is used:

  • Exclusively and regularly as your principal place of business;
  • Exclusively and regularly as a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business; or
  • In the case of a separate structure, in connection with your trade or business.

There are also special rules for portions of a home used as a child care facility or for storage of inventory or product samples. If you are self employed, have no other business location and perform the work at home, you should qualify. You can also qualify if you perform administrative or management activities in a home office and have no other fixed location where you can conduct such activities.

For example, suppose you're self-employed and take orders while visiting clients. Your only location for processing orders and following up on inquiries is your home office, so it likely qualifies for a tax deduction. Regularly meeting customers or clients at a home office also qualifies it. The key word is regularly. 

Seeing customers twice a month is unlikely to meet the threshold. The exclusive use requirement is also strictly interpreted. A spare bedroom converted into a home office will probably qualify, unless your relatives use the room when they come to visit.

For Employees

The rules for employees are stricter. An employee's home office qualifies if it is:

  • For the employer's convenience and
  • Required as a condition of employment.

To be a condition of your employment means it is necessary for you to properly perform your work. For example, suppose you're an engineer who inspects construction sites during the day and performs administrative tasks at night. If your employer's office is locked after hours, your home office would probably qualify for home office deductions if you use it to write up daily reports. In these types of cases, get a letter from your employer to substantiate the facts.

Crunching the Numbers

When computing your deduction, there are two types of expenses that are deductible -- indirect and direct. Indirect expenses are those that pertain to the whole house, such as utilities and homeowners insurance. Those are apportioned based on the percentage of the space used for business.

Some expenses -- such as housekeeping and gardening expenses or repairs to another room in the house -- don't qualify as an indirect expense and would not be deductible at all.

Direct expenses don't have to be apportioned. For example, if you have a separate electric line and meter for your home office, the full amount of the electric bill for that meter would be deductible.

New Simplified Option

Starting in 2013, you can deduct a simplified safe harbor amount of $5 per square foot up to a maximum of $1,500 (300 square feet). That's not overly generous, but it means you can itemize your full mortgage interest and real estate taxes on Schedule A of your personal tax return.

In some parts of the country, the effective savings of the new simplified option may be as much as if you claimed actual home office expenses. But if you live near a major metropolitan area, the simplified option might amount to a fraction of the actual expenses.

Keep in mind, the simplified option only makes the recordkeeping burden easier. It does not change the criteria for who can claim home office deductions. There's no simplified method for qualifying in the first place.

Pick One Method for the Year

Below is a chart from the IRS comparing the two options for claiming home office expenses. Once you choose a method for the tax year, you cannot change to the other method for the same year. If you use the simplified method for one year and use the regular method for any subsequent year, you must calculate the depreciation deduction for the subsequent year using the appropriate optional depreciation table. This is true regardless of whether you used an optional depreciation table for the first year the property was used in business.

If you have questions about whether you qualify to claim home office deductions on your tax return, consult with your tax adviser.

New Simplified Option

Regular Method

Deduction for home office use of a portion of a residence allowed only if that portion is exclusively used on a regular basis for business purposes

The same rules apply

  • Allowable square footage of business home use (not to exceed 300 square feet)
  • Percentage of home used for business
  • Standard $5 per square foot used to determine home business deduction
  • Actual expenses determined and records maintained
  • Home-related itemized deductions claimed in full on Schedule A
  • Home-related itemized deductions apportioned between Schedule A and business Schedule C or F
  • No depreciation deduction
  • Depreciation deduction for portion of home used for business
  • No recapture of depreciation upon sale of home
  • Recapture of depreciation on gain upon sale of home
  • Deduction cannot exceed gross income from business use of the home, less business expenses

The same rules apply

  • Amount in excess of gross income limitation may not be carried over
  • Amount in excess of gross income limitation may be carried over
  • Loss carryover from use of regular method in prior year may not be claimed
  • Loss carryover from use of regular method in prior year may be claimed if gross income test is met in current year