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Give your 401(k) plan a checkup at least once a year

March 6, 2020Advice, Articles, Uncategorized401k, administrator, business, compliance, Fees, Investment managers, investments[email protected]

In many industries, offering a 401(k) plan is a competitive necessity. If you don’t offer one and a competitor does, it could mean the difference in a job candidate’s decision to accept their offer over yours. It could even send employees heading for the door. Assuming you do offer a 401(k), the challenge then becomes plan maintenance and compliance. Just as you presumably visit your doctor annually for a checkup, you should review the administrative processes and fiduciary procedures associated with your plan at least once a year. Let’s look at some important areas of consideration as advised by top business consultant: Investments. Study your plan’s investment choices to determine whether the selections available to participants are appropriate. Does the lineup offer options along the risk-and-return spectrum for all ages of participants? Are any pre-mixed funds, which are based on age or expected retirement date, appropriate for your employee population? If the plan includes a default investment for participants who have failed to direct investment contributions, check the option to ensure that it continues to be appropriate. If your company plan doesn’t have a written investment policy in place or doesn’t use an independent outside consultant to assist in selecting and monitoring investments, consider incorporating these into your investment procedures. Fees. 401(k) plan fees often come under criticism in the media and can aggravate employees who follow their accounts closely. Calculate the amount of current participant fees associated with your plan’s investments and benchmark them against industry standards. Investment managers. Have you documented in writing the processes your plan has in place for the selection and monitoring of investment managers? If not, doing so in consultation with an attorney is highly advisable. If you have, reread the documents to ensure they’re still accurate and comprehensive. Administrator. Solicit and monitor participant feedback on the administrator so that you know about grumblings before they grow into heated complaints. Further, put criteria in place to assess the plan administrator’s performance on an ongoing basis and to benchmark performance against industry standards. Compliance. Are your plan’s administrative procedures in compliance with current regulations? If you intend your plan to be a participant-directed individual account plan, are all the provisions of ERISA Section 404(c) being followed? Have there been any major changes to 401(k) regulations over the last year? These are just a few critical questions to ask and answer. A 401(k) is usually among the most valued benefits a business can offer its employees, but you’ve got to keep a close and constant eye on its details. We’d be happy to help you assess the costs and other financial details of your company’s plan. © 2020

The tax aspects of selling mutual fund shares

February 25, 2020Advice, Articles, Uncategorizedinvestments, mutual fund, sale, tax basis, taxes[email protected]

Perhaps you’re an investor in mutual funds or you’re interested in putting some money into them, as a part of your tax strategy. You’re not alone. The Investment Company Institute estimates that 56.2 million households owned mutual funds in mid-2017. But despite their popularity, the tax rules involved in selling mutual fund shares can be complex. Tax basics If you sell appreciated mutual fund shares that you’ve owned for more than one year, the resulting profit will be a long-term capital gain. As such, the maximum federal income tax rate will be 20%, and you may also owe the 3.8% net investment income tax. When a mutual fund investor sells shares, gain or loss is measured by the difference between the amount realized from the sale and the investor’s basis in the shares. One difficulty is that certain mutual fund transactions are treated as sales even though they might not be thought of as such. Another problem may arise in determining your basis for shares sold. What’s considered a sale It’s obvious that a sale occurs when an investor redeems all shares in a mutual fund and receives the proceeds. Similarly, a sale occurs if an investor directs the fund to redeem the number of shares necessary for a specific dollar payout. It’s less obvious that a sale occurs if you’re swapping funds within a fund family. For example, you surrender shares of an Income Fund for an equal value of shares of the same company’s Growth Fund. No money changes hands but this is considered a sale of the Income Fund shares. Another example: Many mutual funds provide check-writing privileges to their investors. However, each time you write a check on your fund account, you’re making a sale of shares. Determining the basis of shares If an investor sells all shares in a mutual fund in a single transaction, determining basis is relatively easy. Simply add the basis of all the shares (the amount of actual cash investments) including commissions or sales charges. Then add distributions by the fund that were reinvested to acquire additional shares and subtract any distributions that represent a return of capital. The calculation is more complex if you dispose of only part of your interest in the fund and the shares were acquired at different times for different prices. You can use one of several methods to identify the shares sold and determine your basis. First-in first-out. The basis of the earliest acquired shares is used as the basis for the shares sold. If the share price has been increasing over your ownership period, the older shares are likely to have a lower basis and result in more gain. Specific identification. At the time of sale, you specify the shares to sell. For example, “sell 100 of the 200 shares I purchased on June 1, 2015.” You must receive written confirmation of your request from the fund. This method may be used to lower the resulting tax bill by directing the sale of the shares with the highest […]

The SECURE Act changes the rules for employers on retirement plans

February 20, 2020Advice, Articles, Uncategorized401k, business, employees, SECURE Act, taxes[email protected]

The Setting Every Community Up for Retirement Enhancement (SECURE) Act is the first significant retirement-related legislation in more than a dozen years. It brings many changes that affect employers of all sizes, including some that could be particularly beneficial for smaller employers that sponsor retirement plans. Some of the changes, however, may increase the burden on employers. Here are some of the most important developments for employers, many of which took effect for plan years beginning after December 31, 2019. Please read and see how it can help you design tax strategies for this year Greater access to multiple employer plans Multiple employer plans (MEPs) allow small and midsize unrelated businesses to team up to provide their employees a defined contribution plan, such as a 401(k) or SIMPLE IRA plan. By pooling plan participants and assets in one large plan, rather than several separate plans, it’s possible for small businesses to give their workers access to the same low-cost plans offered by large employers. Employers enjoy reduced fiduciary duties and administrative burdens by using outside administrators to manage the plan. Currently, MEPs generally are limited to participating employers that share some commonality — for example, being in the same industry or geographic location or using the same professional employer organization. The SECURE Act creates a new type of “open MEP” that covers employees of employers with no relationship other than their joint participation in the MEP. These pooled employer plans (PEPs) will be administered by a pooled plan provider (PPP), such as a financial services company. The PPP also will be the named fiduciary of the plan, but each employer is responsible for choosing and monitoring the PPP. PEPs will be permitted for plan years starting in 2021 or later. The U.S. Department of Labor and the IRS are expected to provide guidance before then, as PEPs generally are subject to the same Employee Retirement Income Security Act (ERISA) and Internal Revenue Code rules as single-employer plans. In addition, the SECURE Act eliminates the so-called “one bad apple” rule that deterred some employers from taking advantage of MEPs. Under the rule, a regulatory violation by one employer participant (such as failing to make contributions to the plan on schedule) could jeopardize the MEP’s tax-qualified status. The SECURE Act lays out certain requirements that a PEP can satisfy to protect its status in such a situation. The SECURE Act also provides an alternative to MEPs for small employers seeking the economies of scale they provide regarding administration. It allows a group of plans with a common plan administrator to file a consolidated Form 5500 annual report, with a single audit report, if certain conditions are met. Looser notice and amendment rules on safe harbor plans As of January 1, 2020, plan sponsors no longer are required to give notice to plan participants before the beginning of the plan year when the sponsor is making qualified nonelective contributions — that is, contributions an employer makes regardless of whether an employee contributes — […]

There still might be time to cut your tax bill with IRAs

February 18, 2020Advice, Articles, Uncategorizedcontributions, deductible, IRA, tax savings, traditional IRA[email protected]

If you’re gearing up for your Tax return preparation to file your 2019 tax return, and your tax bill is higher than you’d like, there may still be an opportunity to lower it. If you qualify, you can make a deductible contribution to a traditional IRA right up until the Wednesday, April 15, 2020, filing date and benefit from the resulting tax savings on your 2019 return. Do you qualify? You can make a deductible contribution to a traditional IRA if: You (and your spouse) aren’t an active participant in an employer-sponsored retirement plan, or You (or your spouse) are an active participant in an employer plan, and your modified adjusted gross income (AGI) doesn’t exceed certain levels that vary from year-to-year by filing status. For 2019, if you’re a joint tax return filer covered by an employer plan, your deductible IRA contribution phases out over $103,000 to $123,000 of modified AGI. If you’re single or a head of household, the phaseout range is $64,000 to $74,000 for 2019. For married filing separately, the phaseout range is $0 to $10,000. For 2019, if you’re not an active participant in an employer-sponsored retirement plan, but your spouse is, your deductible IRA contribution phases out with modified AGI of between $193,000 and $203,000. Deductible IRA contributions reduce your current tax bill, and earnings within the IRA are tax deferred. However, every dollar you take out is taxed in full (and subject to a 10% penalty before age 59 1/2, unless one of several exceptions apply). IRAs often are referred to as “traditional IRAs” to distinguish them from Roth IRAs. You also have until April 15 to make a Roth IRA contribution. But while contributions to a traditional IRA are deductible, contributions to a Roth IRA aren’t. However, withdrawals from a Roth IRA are tax-free as long as the account has been open at least five years and you’re age 59 1/2 or older. Here are a couple other IRA strategies that might help you save tax. 1. Turn a nondeductible Roth IRA contribution into a deductible IRA contribution. Did you make a Roth IRA contribution in 2019? That may help you years down the road when you take tax-free payouts from the account. However, the contribution isn’t deductible. If you realize you need the deduction that a traditional IRA contribution provides, you can change your mind and turn that Roth IRA contribution into a traditional IRA contribution via the “recharacterization” mechanism. The traditional IRA deduction is then yours if you meet the requirements described above. 2. Make a deductible IRA contribution, even if you don’t work. In general, you can’t make a deductible traditional IRA contribution unless you have wages or other earned income. However, an exception applies if your spouse is the breadwinner and you manage the home front. In this case, you may be able to take advantage of a spousal IRA. How much can you contribute? For 2019 if you’re qualified, you can make a deductible traditional IRA contribution of up […]

Answers to your questions about 2020 individual tax limits

February 12, 2020Advice, Articles, Uncategorized2019 taxes, 2020 taxes, 401k, IRA, social security, tax bill[email protected]

Right now, you may be more concerned about your 2019 tax bill than you are about your 2020 tax situation. That’s understandable because your 2019 individual tax return is due to be filed in less than three months. However, as Business Consultant we suggest that it’s a good idea to familiarize yourself with tax-related amounts that may have changed for 2020. For example, the amount of money you can put into a 401(k) plan has increased and you may want to start making contributions as early in the year as possible because retirement plan contributions will lower your taxable income. Note: Not all tax figures are adjusted for inflation and even if they are, they may be unchanged or change only slightly each year due to low inflation. In addition, some tax amounts can only change with new tax legislation. So below are some Q&As about tax-related figures for this year. How much can I contribute to an IRA for 2020? If you’re eligible, you can contribute $6,000 a year into a traditional or Roth IRA, up to 100% of your earned income. If you’re age 50 or older, you can make another $1,000 “catch up” contribution. (These amounts are the same as they were for 2019.) I have a 401(k) plan through my job. How much can I contribute to it? For 2020, you can contribute up to $19,500 (up from $19,000) to a 401(k) or 403(b) plan. You can make an additional $6,500 catch-up contribution if you’re age 50 or older. I sometimes hire a babysitter and a cleaning person. Do I have to withhold and pay FICA tax on the amounts I pay them? In 2020, the threshold when a domestic employer must withhold and pay FICA for babysitters, house cleaners, etc. is $2,200 (up from $2,100 in 2019). How much do I have to earn in 2020 before I can stop paying Social Security on my salary? The Social Security tax wage base is $137,700 for this year (up from $132,900 last year). That means that you don’t owe Social Security tax on amounts earned above that. (You must pay Medicare tax on all amounts that you earn.) I didn’t qualify to itemize deductions on my last tax return. Will I qualify for 2020? The Tax Cuts and Jobs Act eliminated the tax benefit of itemizing deductions for many people by increasing the standard deduction and reducing or eliminating various deductions. For 2020, the standard deduction amount is $24,800 for married couples filing jointly (up from $24,400). For single filers, the amount is $12,400 (up from $12,200) and for heads of households, it’s $18,650 (up from $18,350). So if the amount of your itemized deductions (such as charitable gifts and mortgage interest) are less than the applicable standard deduction amount, you won’t itemize for 2020. How much can I give to one person without triggering a gift tax return in 2020? The annual gift exclusion for 2020 is $15,000 and is unchanged from last year. This […]

4 new law changes that may affect your retirement plan

January 22, 2020Advice, Articles, UncategorizedIRA, new law, retirement plan, Stretch IRA, traditional IRA[email protected]

If you save for retirement with an IRA or other plan, you’ll be interested to know that Congress recently passed a law that makes significant modifications to these accounts. The SECURE Act, which was signed into law on December 20, 2019, made these four changes, lets read about these changes and see how they can benefit in Tax return preparation. Change #1: The maximum age for making traditional IRA contributions is repealed. Before 2020, traditional IRA contributions weren’t allowed once you reached age 70½. Starting in 2020, an individual of any age can make contributions to a traditional IRA, as long he or she has compensation, which generally means earned income from wages or self-employment. Change #2: The required minimum distribution (RMD) age was raised from 70½ to 72. Before 2020, retirement plan participants and IRA owners were generally required to begin taking RMDs from their plans by April 1 of the year following the year they reached age 70½. The age 70½ requirement was first applied in the early 1960s and, until recently, hadn’t been adjusted to account for increased life expectancies. For distributions required to be made after December 31, 2019, for individuals who attain age 70½ after that date, the age at which individuals must begin taking distributions from their retirement plans or IRAs is increased from 70½ to 72. Change #3: “Stretch IRAs” were partially eliminated. If a plan participant or IRA owner died before 2020, their beneficiaries (spouses and non-spouses) were generally allowed to stretch out the tax-deferral advantages of the plan or IRA by taking distributions over the beneficiary’s life or life expectancy. This is sometimes called a “stretch IRA.” However, for deaths of plan participants or IRA owners beginning in 2020 (later for some participants in collectively bargained plans and governmental plans), distributions to most non-spouse beneficiaries are generally required to be distributed within 10 years following a plan participant’s or IRA owner’s death. That means the “stretch” strategy is no longer allowed for those beneficiaries. There are some exceptions to the 10-year rule. For example, it’s still allowed for: the surviving spouse of a plan participant or IRA owner; a child of a plan participant or IRA owner who hasn’t reached the age of majority; a chronically ill individual; and any other individual who isn’t more than 10 years younger than a plan participant or IRA owner. Those beneficiaries who qualify under this exception may generally still take their distributions over their life expectancies. Change #4: Penalty-free withdrawals are now allowed for birth or adoption expenses. A distribution from a retirement plan must generally be included in income. And, unless an exception applies, a distribution before the age of 59½ is subject to a 10% early withdrawal penalty on the amount includible in income. Starting in 2020, plan distributions (up to $5,000) that are used to pay for expenses related to the birth or adoption of a child are penalty-free. The $5,000 amount applies on an individual basis. Therefore, each spouse in a married couple may […]

Congress gives a holiday gift in the form of favorable tax provisions

January 7, 2020Advice, Articles, Uncategorizedcontributions, IRA, taxes, TCJA[email protected]

A good news for all of those who are planning their Tax Return preparation, as part of a year-end budget bill, Congress just passed a package of tax provisions that will provide savings for some taxpayers. The White House has announced that President Trump will sign the Further Consolidated Appropriations Act of 2020 into law. It also includes a retirement-related law titled the Setting Every Community Up for Retirement Enhancement (SECURE) Act. Here’s a rundown of some provisions in the two laws. The age limit for making IRA contributions and taking withdrawals is going up. Currently, an individual can’t make regular contributions to a traditional IRA in the year he or she reaches age 70½ and older. (However, contributions to a Roth IRA and rollover contributions to a Roth or traditional IRA can be made regardless of age.) Under the new rules, the age limit for IRA contributions is raised from age 70½ to 72. The IRA contribution limit for 2020 is $6,000, or $7,000 if you’re age 50 or older (the same as 2019 limit). In addition to the contribution age going up, the age to take required minimum distributions (RMDs) is going up from 70½ to 72. It will be easier for some taxpayers to get a medical expense deduction. For 2019, under the Tax Cuts and Jobs Act (TCJA), you could deduct only the part of your medical and dental expenses that is more than 10% of your adjusted gross income (AGI). This floor makes it difficult to claim a write-off unless you have very high medical bills or a low income (or both). In tax years 2017 and 2018, this “floor” for claiming a deduction was 7.5%. Under the new law, the lower 7.5% floor returns through 2020. If you’re paying college tuition, you may (once again) get a valuable tax break. Before the TCJA, the qualified tuition and related expenses deduction allowed taxpayers to claim a deduction for qualified education expenses without having to itemize their deductions. The TCJA eliminated the deduction for 2019 but now it returns through 2020. The deduction is capped at $4,000 for an individual whose AGI doesn’t exceed $65,000 or $2,000 for a taxpayer whose AGI doesn’t exceed $80,000. (There are other education tax breaks, which weren’t touched by the new law, that may be more valuable for you, depending on your situation.) Some people will be able to save more for retirement. The retirement bill includes an expansion of the automatic contribution to savings plans to 15% of employee pay and allows some part-time employees to participate in 401(k) plans. Also included in the retirement package are provisions aimed at Gold Star families, eliminating an unintended tax on children and spouses of deceased military family members. Stay tuned These are only some of the provisions in the new laws. We’ll be writing more about them in the near future. In the meantime, contact us with any questions. © 2019

GAAP Memo

December 31, 2019Advice, Articlesaccounting, Accounting Standards, GAAP, taxes[email protected]

REVENUE RECOGNITION For 2019, there is a new accounting rule for revenue recognition that applies to non-public companies. In addition, there are other accounting rules for coming years. It is important to know these changes as they will change your accounting and financials and will help in Tax preparation services. Most banks, lenders, and investors want to see Generally Accepted Accounting Principles (GAAP) financial statements. Having GAAP financial statements allows a reader to use standard GAAP reporting to understand your financial statements, apply financial ratios and compare to industry ratios. Be prepared and contact us if we can assist. Background In May 2014, the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) issued substantially converged final standards on revenue recognition. These final standards were the culmination of a joint project between the Boards that spanned many years. The FASB’s Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606), provides a robust framework for addressing revenue recognition issues, and upon its effective date, replaces almost all pre-existing revenue recognition guidance in current U.S. generally accepted accounting principles (GAAP). Implementation of the robust framework provided by ASU 2014-09 should result in improved comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. The effective dates for the new guidance are staggered. Public entities have already implemented the new guidance, and nonpublic entities are required to implement the new guidance in their first annual reporting period beginning after December 15, 2018. Scope All customer contracts fall within the scope of ASC 606 except those for which other guidance is provided in the ASC (e.g., leases, insurance contracts, financial instruments, guarantees, non-monetary exchanges). Core principle and key steps Revenue is now recognized in a five-step process: Identify the contract with the customer Identify the performance obligations in the contract Determine the transaction price Allocate the transaction price to the performance obligations Recognize revenue when (or as) each performance obligation us satisfied. LEASES Starting in 2021, there is a new accounting rule for leases that applies to non-public companies. Early adoption is allowed and recommended. Although this new standard doesn’t need to be implemented for private companies until 2021, we are recommending applying it for 2020, so the company will have comparable financial statements for 2021. We feel this law is mean to get the lease liability on the balance sheet. For income taxes, a different method will probably apply. Background In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842). The new standard requires that all leases should result in an asset and corresponding liability be recognized on the balance sheet. This asset reflects the right to use an asset that is owned by someone else. A corresponding liability reflecting future lease payments is also recognized on the balance sheet. Scope All leases with a lease term of over 12 months Core principle and key steps Capital leases are now called finance leases and the reporting of these types of leases […]

3 last-minute tips that may help trim your tax bill

December 13, 2019Advice, Articles, Uncategorized2019, 2020, 401k, deductions, investment, retirement contributions, tax, tax bill, tax return[email protected]

If you’re starting to fret about your 2019 tax bill, there’s good news — you may still have time to reduce your liability if you do your tax return preparation carefully. Three strategies are available that may help you cut your taxes before year-end, including: 1. Accelerate deductions/defer income. Certain tax deductions are claimed for the year of payment, such as the mortgage interest deduction. So, if you make your January 2020 payment this month, you can deduct the interest portion on your 2019 tax return (assuming you itemize). Pushing income into the new year also will reduce your taxable income. If you’re expecting a bonus at work, for example, and you don’t want the income this year, ask if your employer can hold off on paying it until January. If you’re self-employed, you can delay your invoices until late in December to divert the revenue to 2020. You shouldn’t pursue this approach if you expect to land in a higher tax bracket next year. Also, if you’re eligible for the qualified business income deduction for pass-through entities, you might reduce the amount of that deduction if you reduce your income. 2. Maximize your retirement contributions. What could be better than paying yourself instead of Uncle Sam? Federal tax law encourages individual taxpayers to make the maximum allowable contributions for the year to their retirement accounts, including traditional IRAs and SEP plans, 401(k)s and deferred annuities. For 2019, you generally can contribute as much as $19,000 to 401(k)s and $6,000 for traditional IRAs. Self-employed individuals can contribute up to 25% of your net income (but no more than $56,000) to a SEP IRA. 3. Harvest your investment losses. Losing money on your investments has a bit of an upside — it gives you the opportunity to offset taxable gains. If you sell under-performing investments before the end of the year, you can offset gains realized this year on a dollar-for-dollar basis. If you have more losses than gains, you generally can apply up to $3,000 of the excess to reduce your ordinary income. Any remaining losses are carried forward to future tax years. We can help The strategies described above are only a sampling of strategies that may be available. Contact us if you have questions about these or other methods for minimizing your tax liability for 2019. © 2019

Business year-end tax planning in a TCJA world

November 20, 2019Advice, Articles, Uncategorizedbusiness year end tax planning, QBI, TCJA, year-end-tax planning[email protected]

The first tax-filing season under the Tax Cuts and Jobs Act (TCJA) was a time of uncertainty for many businesses as they struggled with the implications of the law’s sweeping changes for their bottom lines. With the next filing season on the horizon, you can incorporate the lessons learned into your Tax return preparation. Several areas in particular are ripe with opportunities to reduce your 2019 federal tax liability. Entity choice The creation of the qualified business income (QBI) deduction for pass-through entities, paired with the reduction of the corporate tax rate to a flat 21% rate from a top rate of 35%, make it worthwhile to re-evaluate whether your current entity type is the most tax-favorable. Pass-through entities, including sole proprietorships, partnerships and S corporations, traditionally have been seen as a way to avoid the double taxation C corporations are subject to at the entity and dividend levels. Pass-through entities are taxed only once, at an individual tax rate, but that rate can be as high as 37%. If they qualify for the full 20% QBI deduction — not always a sure thing (see below) — their effective tax rate is about 30%. The deduction for state and local taxes also plays a role in the entity choice. The TCJA limits the amount of the deduction for individual pass-through entity owners, but not for corporations. Bear in mind, too, that the reduced corporate tax rate is permanent (or as permanent as any tax cut can be), while the QBI deduction is slated to end after 2025. Ultimately, your business’s individual circumstances will determine the optimal structure. The QBI deduction Pass-through entities can take several steps before December 31 to maximize their QBI deduction. The deduction is subject to phased-in limitations based on W-2 wages paid (including many employee benefits), the unadjusted basis of qualified property and taxable income. You could boost your deduction, therefore, by increasing wages (for example, by hiring new employees, giving raises or making independent contractors employees). To increase your adjusted basis, you can invest in qualified property by year end. If the W-2 wages limitation doesn’t limit the QBI deduction, S corporation owners can increase their QBI deductions by reducing the amount of wages the business pays them. (This tactic won’t work for sole proprietorships or partnerships, because they don’t pay their owners salaries.) On the other hand, if the W-2 wages limitation limits the deduction, they might be able to take a greater deduction by increasing their wages. Tax credits Some of the most popular tax credits for businesses survived the tax overhaul, including the Work Opportunity Tax Credit (WOTC), the Small Business Health Care tax credit, the New Markets Tax Credit (NMTC) and the research credit (also referred to as the “research and development,” “R&D” or “research and experimentation” credit). Smaller businesses may qualify for a credit for starting new retirement plans. The WOTC, generally worth a maximum of $2,400 per employee (although for certain employees that can increase to $9,600), is currently scheduled […]