Archive for the ‘Business’ Category

Grouping Passive Activities

January 6, 2014

By Darren Morrow

If you own rental properties or have other similar passive activities that generate a loss each year and you want to be able to utilize that loss, then grouping activities may be a good option for you.

Grouping activities is the process of treating one or more passive trade or business activities, or rental activities, as a single activity, including rental real estate. This can only be done if those activities form an appropriate economic unit for measuring gain or loss under the passive activity rules. The simple definition of an economic unit is activities that are similar in nature, industry, and control. See IRS publication 925 for specific criteria regarding what constitutes and economic unit.

Grouping is important for a number of reasons. If two activities are grouped into one larger activity, you need only show that you materially participate in the activity as a whole. But if the two activities are separate, you must show that you materially participate in each one of the activities individually. This is especially beneficial if you own multiple rental properties and are trying to qualify for the material participation test or active participation test. Qualifying for these tests may allow you to potentially recognize all of the losses in the year incurred (materially participating real estate professional) or up to $25k of losses in the year incurred (active participation test). Grouping can also be important in determining whether you qualify for the 10% ownership requirement for actively participating in a rental real estate activity .

One of the downsides to look out for when grouping your activities is if you plan on disposing of one of your activities that accumulated suspended passive losses before it was grouped with other activities.  If you group two activities into one larger activity and you dispose of only one of the two activities, then you are considered to have disposed of only part of your entire interest in the activity. In this case, you are not allowed le to recognize the previously suspended passive losses of the disposed of activity since it is now considered part of the one larger activity. But if the two activities are separate and you dispose of one of them, then you are considered to have disposed of your entire interest in that activity and are able to recognize the suspended passive losses associated with the disposed of activity.

To group an activity all you need to do is file a written statement with your original income tax return for the first tax year in which two or more activities are originally grouped into a single activity. The statement must provide the names, addresses, and employer identification numbers (EIN), if applicable, for the activities being grouped as a single activity. In addition, the statement must contain a declaration that the grouped activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules.

Certain activities are restricted from being be grouped. They are listed below:
– Motion picture films
– Farming
– Leasing 1245 property
– Oil and Gas resources
– Geothermal deposits.

For more information about grouping passive activities and material participation please contact us at http://www.ntcpas.com or contact our offices at (714) 836-8300.

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Standard Mileage Rates go Down in 2014

December 9, 2013

Via Journal of Accountancy

Optional standard mileage rates for use of a vehicle will go down by one-half cent per mile for 2014, the IRS announced on Friday (Notice 2013-80). Taxpayers can use the optional standard mileage rates to calculate the deductible costs of operating an automobile.

For business use of a car, van, pickup truck, or panel truck, the 2014 rate will be 56 cents per mile. Driving for medical or moving purposes may be deducted at 23.5 cents per mile. Both rates are one-half cent lower than for 2013.

The rate for service to a charitable organization is unchanged, set by statute (Sec. 170(i)) at 14 cents a mile.

The portion of the business standard mileage rate that is treated as depreciation will be 22 cents per mile for 2014, down one cent from the 23 cent rate in effect in 2012 and 2013.

For purposes of computing the allowance under a fixed and variable rate (FAVR) plan, the maximum standard automobile cost for 2014 is $28,200 for automobiles (not including trucks and vans) or $30,400 for trucks and vans, increases of $100 and $500, respectively, from 2013. Under a FAVR plan, a standard amount is deemed substantiated for an employer’s reimbursement to employees for expenses they incur in driving their vehicle in performing services as an employee for the employer.

Installment Sale Basics

August 20, 2013

By Darren Morrow, CPA

Ever heard of an installment sale?  This article will help you understand the basics of installment sales, including what you need to know to help you make the best decisions when selling property.

An installment sale is the sale of a property where both parties have agreed to terms where the payments will be made over a number of years instead of receiving the entire purchase price at the time of sale. For instance, a person may choose to sell their home to someone and receive payments over a ten year period. The technical definition of an installment sale for tax purposes requires that payments must be made in at least two separate tax years.

Calculating the taxable income to be recognized under an installment sale is quite simple. The first step is to calculate the gain on sale as you normally would (sales price less tax basis). Then a percentage is calculated taking the principal portion of payments received in the current year divided that by the total sales price.  Taxable income for the current year must include this percentage of the overall gain on the sale of the property.

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There are some benefits to taxation under the installment sale rules.  One of the most obvious benefits is the deferral of capital gains taxes. Since you are only recognizing a portion of the gain in the current year you are only taxed on that amount.  The additional tax due from the sale is deferred to future years. Another benefit that is not quite as obvious is that you could possibly be in a lower tax bracket each year since you are not recognizing a large amount of income in one year. Additionally, an often overlooked benefit of the transaction is the additional interest income that can be structured into the sale. Generally sellers will receive a higher rate of interest on the deferred funds than can be realized elsewhere, and the note receivable is secured by the real property. 

Installment sales are not always an option for every transaction. Installment sales cannot be used (for tax calculation purposes) if your sale results in a loss (sales price exceeds your basis), or if it is a sale of inventory, stocks, or securities traded on an established securities market. Additionally, if you choose to do an installment sale and defer your capital gains into future years and the tax rate on capital gains goes up, you could potentially pay a higher amount of tax in the future.

Knowing how installment sales work and how to use them to your advantage is a great tool when negotiating a sale. It will let you have more control over your income and may even earn you a little extra interest income along the way. For more information about installment sales please contact us at http://www.ntcpas.com or contact our office at (714) 836-8300.

A Construction Surety Bond Program – Are you ready and can you prove it?

May 30, 2013

By Jon Fosburg – Reed Surety

Contractors face widespread bonding requirements today. Contractors performing work for federal, state, county or municipal entities will be required to post a bond. With tighter budgets governing projects everywhere, owners want stronger protection against contractor default.

Some construction companies face the challenge of establishing a surety line from scratch, while others seek to maintain or increase their limits. Regardless, every contractor should be aware of the critical factors that affect whether or not you get bond credit.

CPA prepared financial statements – To secure or increase your bond capacity rests primarily on the results posted in your company’s financial statements and these statements must be prepared on an accrual, percentage of completion basis. Surety companies take a hard look at a contractor’s net worth and working capital. They generally discount assets that are not easily converted to cash such as aged receivables older than 90 days and inventory. Sureties also look at how assets are allocated. A contractor may show a strong bottom line, but if its working capital consists almost entirely of equipment and fixed assets, can it really fund a job? If such a company’s cash and credit line were to dry up, it couldn’t simply sell equipment to pay wages and other job costs, because then it couldn’t do the job at all. That’s why a surety company likes to see contractors with strong working capital (defined as current assets minus current liabilities). Current assets include cash, receivables under 90 days and some inventory, assets that can likely be turned into cash within a year as opposed to property, plant, equipment and other long-term resources. Working capital gauges a firm’s ability to finance its operations and indicates the level of protection creditors and surety companies can expect when they underwrite the firm’s operations.

Company information – What’s the largest job your company has completed, has there ever been a claim, what accounting system do you use, resumes of your team, who’s your CPA? These are just several questions that are covered on a contractor’s questionnaire. The more complete your information is to the surety underwriter, the fewer roadblocks you’ll encounter in securing bond credit.

Banking  – Sureties will look for good banking relationships and balances. A bank line of credit is always helpful and it is becoming more of a requirement for larger programs. Have a bank reference letter ready to submit in the underwriting package.

Work in Progress (WIP) – The importance of a WIP report cannot be overemphasized. Typically a WIP is included in the year-end financial statement, however consistent reporting of a WIP to the surety will produce benefits. The WIP report is perhaps the most important report a contractor has to manage the profitability of the jobs it has in the backlog. In securing and maintaining your bond program, sureties will closely examine your WIP report.

For more information or assistance with your surety bonding needs, please contact Jon Fosburg of Reed Surety.

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Small Business Health Care Tax Credit for Small Employers

May 7, 2013

Beginning 2010, eligible small employers may claim a tax credit if the employer makes non-elective contributions that pay for at least one-half of the cost of health insurance premiums for the coverage of participating employees.  For tax years 2010 through 2013, the maximum credit is 35% for small business employers and 25% for small tax-exempt employers. An enhanced version of the credit will be effective beginning January 1, 2014.  In general, on January 1, 2014, the rate will increase to 50% and 35% respectively, allowing the cost of providing insurance to be even lower for employers.

Can you claim the credit?

To be eligible, you must cover at least 50% of the cost of single (not family) health care coverage for each of your employees.  You must also have fewer than 25 full-time equivalent employees.  Those employees must have average wages of less than $50,000 a year.  Also, the amount of the credit you receive works on a sliding scale.  The smaller the business or charity, the greater the credit allowed.

Full-time equivalent employees are defined as follows: for example, if you have 50 employees that work 20 hours per a week each, this is the equivalent of 25 full-time employees.

Credit in tax years after 2013

In 2014, major provisions of the Affordable Care Act (ACA) take effect, including the establishment of Health Insurance Exchanges and, in many states, the expansion of Medicaid.  Many of these new provisions will affect small business’ approach to offering healthcare coverage to employees.

Beginning 2014 and beyond, the 50% credit for employers is the lessor of:

  1. The total amount of non-elective contributions that the employer makes on behalf of its employees during the tax year under a contribution arrangement for premiums for qualified health plans
  2. The total amount of non-elective contributions that would have been made during the tax year if each employee had taken into account (1) or had enrolled in a qualified health plan that had a premium equal to the average premium tax for the small group market in the rating area in which the employee enrolls for coverage.

Research and Development Credit – The Basics

February 20, 2013

As an incentive for businesses to engage in research and development, the Internal Revenue Code provides for the Incremental Research Expenses Credit, also known as the Research and Development Credit (R&D Credit).  This credit may be claimed by a business as one of the general business credits. This credit is intended to benefit those who spend resources on bettering their technology with the intention to develop or improve a business component – especially in the manufacturing and distribution field. The expenditures must have a functional purpose.  They must relate to new or improved function or increase performance, reliability or quality.

The Research and Development Credit may be calculated using one of two methods. Under the general method, 20% of the increases in qualified research expenses over a base year are allowed as a credit against tax. The base period amount is a result of fixed-base percentage and average annual gross receipts for four years preceding the credit. The fixed-base percentage of qualified research expenses may not exceed 16% of gross receipts for the preceding four years. The base amount may not be less than 50% of the qualified research expenses for the credit year.

The Alternative Simplified Credit Method may also be used to calculate the increased research activities credit. Under the Alternative Simplified Credit Method, the credit is generally calculated as 14% of the amount of current year qualifying expenses in excess of 50% of the average of qualifying expenses over the three years preceding.

Expenses qualifying for the Research and Development Credit are generally all in-house expenses dedicated directly for research – wages, supplies, rent of a qualified facility and computer charges, as well as 65% of amounts paid or incurred for research done by someone other than an employee, or 75% if using a qualified research consortium.

The credit is subject to general business credit tax liability limitation and carryover rules. Additionally, the amount of credit will also reduce the deduction for research expenses unless otherwise elected.

Generally, it is preferential to take the credit and lower the corresponding deduction because there is a dollar for dollar tax benefit for expenditures resulting in a credit, as compared to a partial tax benefit for expenses treated as a tax deduction.

This information is intended to provide a basic understanding of the R&D Credit.  Please contact our office to better understand the details, and to explore taking advantage of this great credit.

Author: Sid Siddiqui

Economic Forecast – 2013

January 29, 2013

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This morning, several members of Nienow & Tierney, LLP had the opportunity to attend the 14th Annual Economic Forecast Breakfast sponsored by the OC Chapter of California Society of CPA’s.  The speaker for the morning was Dr. Esmael Adibi from the Anderson Center for Economic Research at Chapman University.

Dr. Adibi presented a forecast of cautious and slow growth for 2013.  He expects the GDP for the United States to increase by 2.1% in 2013.  This was following a 2.4% increase in 2012.

Dr Adibi also indicated that he expects consumer spending to increase by 1.8% in the United States for 2013.

In California, Dr. Adibi projects about 225,000 new jobs being produced and with 25,000 of those occurring in Orange County.   He also estimated that housing prices will increase by 6.8% in California.

It was a pleasure to hear Dr. Adibi’s forecast and we hope for an above average increase to our clients in 2013.

Newly Proposed IRS Regulations Intend to Clarify Definition of Limited Partner for Purposes of Material Participation

January 9, 2013

A question that often comes up in the course of our work is whether a taxpayer is materially participating in a trade or business.  Material participation is an important concept because the tax treatment of income or losses from a trade or business will be classified as passive or non-passive accordingly.  If a taxpayer does not materially participate in a trade or business, the activity is treated as passive.  Additionally, by statutory definition, all rental activities, even those in which the taxpayer materially participates, are generally treated as passive activities.  Material participation is defined as involvement in the operations of the activity that is regular, continuous and substantial, per IRC §416(h)(1).  There are seven tests that determine whether someone should be treated as materially participating.  In order to be considered materially participating, a taxpayer would need to meet one of these seven tests.

Limited partners are generally treated as not materially participating in partnership activities and therefore flow-through income and losses are treated as passive. Currently, a partnership interest is considered to be a limited partnership interest if the partnership agreement indicates it is limited or if the liability of the partner is limited for obligations of the partnership according to the  state laws in the state in which the partnership is formed.

The seven material participation tests are:

  1. Individual participates in the activity for more than 500 hours during the year
  2. Individual’s participation in the activity for the year constitutes substantially all of the participation of all individuals involved in the activity for the year
  3. Individual participates in the activity for more than 100 hours during the year, and such participation is not less than anyone else’s participation, including non-owners
  4. Activity is a significant participation activity (more than 100 hours), and the individual’s aggregate participation in all significant activities exceeds 500 hours
  5. Individual materially participates in the activity for any 5 out of the previous 10 taxable years preceding the taxable year
  6. Activity is a personal service activity (health, law, engineering, accounting, etc.) and individual materially participated in the activity for any 3 taxable years preceding the taxable year
  7. Based on all of the facts and circumstances, the individual participates in the activity on a regular, continuous and substantial basis during the year

The IRS has issued proposed regulations to modify the definition of a “limited partner” as it relates to a taxpayer being treated as materially participating.  If the holder of the interest in a partnership does not have management rights during the entire tax year, the proposed regulations detail that an interest in the entity would be treated as a limited partnership interest.  One exception to the rule is if an individual has both a limited and a general partner interest.  In this case, they would be treated as a general partner. Under the proposed regulations, it will become easier for individuals to meet the material participation tests. Fewer partnership interests will be treated as limited interests for passive loss purposes and as a result, taxpayers will be able to report the income or losses as non-passive.

Anaheim Enterprise Zone Credits

December 11, 2012

 

On February 1, 2012, the State of California designated the City of Anaheim as eligible to receive Enterprise Zone Credits.

These credits provide tax incentives to businesses that are located in the specified Enterprise Zones.  There are currently 42  zones located in the State of California.  This program was established in 1984 to stimulate the economy in several depressed areas.

Anaheim will receive the designation for 15 years (through January 31, 2027).

There are several ways to receive the tax incentives.

1. Hiring Tax Credits – Businesses located within the Enterprise Zone that hire qualified individuals can earn up to $37,440 in state credits for each qualified employee hired.  These credits can be used to directly offset state income tax and can be carried over until used up.

2.  Sales Tax Credit – Companies can earn sales tax credits on the purchase of machinery and equipment.  The business will receive a state tax credit equal to the sales or use tax paid on up to $20 million per year of equipment purchased.

3. Interest Deduction – Lenders that loan money to businesses located in the Enterprise Zone are not taxed on the net interest income earned on the loan.  This can save of thousands of dollars in tax each year.

To find out if your business is located in the Anaheim Enterprise Zone, please click the following link.

www.anaheimchamber.org/anaheimez/boundaries.asp

If you would like more information about Enterprise Zone credits or to find out if your business is located in one of the 42 zones, please contact our office at (714) 836-8300.

Choosing the Right Charities

November 14, 2012

In this slow economy, we all want our dollar to go further and mean more. This is certainly true when it comes to our charitable giving.  How can we be sure that we are selecting charities that are effectively administered, accountable and fiscally responsible?  Here are a few items to consider when choosing charities to contribute to:

  • Verify the organization’s tax-exempt status and ensure the organization is in good standing.  The IRS and the California Attorney General’s office allow you to review this information on their websites.
  • Review the most recent financial statements and tax returns for the nonprofit.  The annual reports and forms contain important financial information and also address the various programs and activities the exempt organization engaged in for the year. Also available on the annual returns is the overhead expense ratio measure to confirm how much of each donation is spent on programs as opposed to administrative and fundraising costs.  Keep in mind, however, that low overhead does not automatically mean an organization is effectively accomplishing its mission, nor does it necessarily confirm great organizational efficiency.
  • Consider the diversity of the funding sources.  Does the nonprofit receive donations from a variety of sources?  Examples of various funding sources are private donors, program-related loans, program-related investments, and government funding.
  • Review the organization’s investment and conflict-of-interest policies. The exempt organization’s annual reports and financial statements often specify who manages the organization’s funds and investments. You can check the investment-manager’s track record through several sources such as http://www.morningstar.com and http://www.institutionalinvestor.com.  If the investment manager(s) sits on the board of directors or is an officer then a conflict-of-interest policy will be important and should be in place.
  • Review the nonprofit’s mission statement. Do the programs and services match up with the organization’s mission and your philanthropic agenda?
  • Visit the organization and meet the leadership and staff. How experienced are leadership and staff relative to the programs and services they provide? What work do they outsource? Do they have strategic plans for the future? How are they being implemented?  These indicate an organization that is going forward and conscientious of how best to utilize the donations they receive.

In summary, you should contribute to organizations that align with your philanthropic agenda and that are responsible both to the communities they benefit and the individuals who donate.  The suggestions noted above can assist you in selecting which nonprofits you choose to contribute to.

Content for this article was sourced from Journal of Accountancy, February 2012, “Help Clients Choose the Right Charities”.  Please visit http://www.journalofaccountancy.com or contact our office for more information.