Category Archives: Accounting

Tax Law Changes: New Meals & Entertainment Rules

Tax Law Changes: New Meals & Entertainment Rules

Did you know there are changes to the Meals & Entertainment Rules for business?

Under the new TCJA tax law, entertainment, amusement, or recreation expenses for clients and business associates  are no longer allowed as a business deduction?

Overview

The TCJA has changed the rules for deductions relating to entertainment expenses for clients. Starting January 1, 2018 entertainment, amusement, or recreation expenses for clients and business associates will no longer be a deductible expense. For example, monies spent to bring a client to a sporting event, concert, golf outing, etc. are no longer deductible, although the food and beverage costs that are separately stated from the entertainment are still entitled to the 50% deduction. The TCJA did not change the rule relating to expenses for recreational activities
primarily for the benefit of their employees (i.e. Holiday parties, annual picnic, etc.). These expenses are exempt from the entertainment disallowance rules, and are still 100% deductible. The rules regarding business meals are unchanged as well, and are still entitled to the 50% deduction. Because of this change in the law, there is now a great need to track meals separate from entertainment on your chart of accounts. The generic “Meals & Entertainment” account will now need to be broken out in order to receive the correct deduction.

If you have any tax questions, contact our office today.

Seminars on the New Federal Tax Law

New Federal Tax LawGot Tax Questions?

The new federal tax law changes have a lot of people and business owners asking, “How will this impact me?”  To answer those questions and more, Hedley & Co is hosting two in person seminars to cover the changes in the Federal Tax Law.  Please join us at one of the events listed.  You can register by filling out the form below.  If you are an existing client, there is no charge for the event, otherwise there is a $30 fee.

Session 1:

  • When: Tuesday, February 6th 4:00 PM
  • Where: Franklin Plaza, Four 4th Street, Troy, NY 12180

Session 2:

  • When: Wednesday, February 14th 8:00 AM (SOLD OUT)
  • Where: Community Room, Saratoga National Bank, 386 Clifton Park Center Road, Clifton Park, NY 12065

 

Will You Fall into the Alternative Minimum Tax (AMT) TRAP?

Originally introduced in the 1980s, the alternative minimum tax (AMT) system is designed to prevent higher income taxpayers from avoiding federal income taxes through the use of alternative minimum taxvarious exclusions, deductions, and credits. However, taxpayers who have a large number of personal exemptions, take large itemized deductions for state and local taxes, or have a spike in capital gains, among other things, may find themselves subject to the AMT.

Determining whether you will be subject to the AMT requires a thorough review of your tax situation, but here are the general rules.

HOW IT WORKS

Generally, the AMT calculation starts with your regular taxable income and requires you to make revisions for certain “tax preferences” and “adjustments” to arrive at alternative minimum taxable income (AMTI). Some of the more common adjustment and preference items relate to interest on certain tax-exempt bonds, personal and dependency exemptions, the exercise of incentive stock options, and itemized deductions for certain types of home equity loan interest, state and local income taxes, and medical expenses.

EXEMPTION AMOUNTS

Once AMTI has been calculated, an AMT exemption amount is subtracted from it to determine the final taxable figure. For 2016, the AMT exemption amounts are $83,800 (married filing jointly), $53,900 (single), and $41,900 (married filing separately). A 26% tax rate is applied to the first $186,300 of the resulting income, while a 28% tax rate is applied to any amounts above $186,300. For married persons who file separately, the rate changes at $93,150 in 2016.

Taxpayers with AMTI over a certain threshold do not qualify for the AMT exemption. For example, individuals in 2016 will have their exemption reduced by 25% of the amount by which their AMTI exceeds $119,700, which means that their exemption equals zero at AMTI of $335,300 or more.

PLANNING

Taxpayers who expect a potential AMT problem may be able to use certain strategies to reduce their taxes. For example, if a tax projection indicates that you may be subject to AMT this year but not next year, it may be helpful to delay prepaying certain expenses, such as state and local income taxes.

Midyear Tax Strategies

The midpoint of the year is a good time to look for ways to defer, manage, and reduce the income taxes you pay. Last year’s federal income-tax return can serve as a starting point for identifying areas where you may be able to lower your 2016 taxes. Read on for some strategies that may be helpful.

MAXIMIZE RETIREMENT PLAN CONTRIBUTIONSmidyear-tax-strategy
Are you paying high taxes on your salary? If you participate in a 401(k) or similar retirement savings plan at work, increasing your pretax salary deferrals to the plan can help reduce your income-tax liability for the rest of this year. Although you’ll eventually be taxed when you take plan distributions, by then you may be retired and in a lower tax bracket.

If you are self-employed and don’t have a retirement plan, consider establishing one this year. There are several options available, and plan contributions are tax deductible (within limits).

LOOK INTO HIGHER EDUCATION TAX BREAKS
Are you earmarking some of your savings for a child’s future college education? A Section 529 college savings plan offers tax advantages that aren’t available with a regular savings account. Earnings on 529 plan investments accumulate tax free, and account withdrawals are not taxed when used for the account beneficiary’s qualified higher education expenses.

CONSIDER AFTER-TAX INVESTMENT RETURNS
For investments held outside of tax-favored accounts, there may be steps you can take to lower your tax burden on portfolio gains and earnings. For example, where it otherwise makes sense from an investment standpoint, holding appreciated securities for longer than a year before selling them allows you to take advantage of the lower tax rate on long-term capital gains. Or consider investing in municipal bonds, since interest is generally exempt from federal income taxes (and possibly state and local taxes). Owning dividend-paying stocks also may allow you to keep more of your earnings, since qualified dividends are currently taxed at the long-term capital gains rates.*

* Taxpayers with adjusted gross income exceeding a threshold amount may owe an additional 3.8% tax on capital gains, dividends, and certain other taxable investment income.

The general information provided in this publication is not intended to be nor should it be treated as tax, legal, investment, accounting, or other professional advice. Before making any decision or taking any action, you should consult a qualified professional advisor who has been provided with all pertinent facts relevant to your particular situation.

Article courtesy of Client Line Newsletter

Donating Excess Inventory to Charity

Businesses that donate inventory to charity need to be aware of the tax law’s rules for this type of charitable giving. Here’s an overview.

A donation of inventory to a qualified organization is potentially tax deductible as a charitable contribution. The amount that is deductible is the smaller of the donated inventory’s fair market value on the day it is contributed or its basis.

The basis of contributed inventory is any cost incurred for the inventory in an earlier year that the business would otherwise include in its opening inventory for the year of the contribution. The business must remove the amount of the charitable deduction from its opening inventory. It is not part of the cost of goods sold.

If the donated inventory’s cost is not included in opening inventory, the inventory’s basis is zero and the business may not claim a charitable contribution deduction. In this scenario, the business treats the inventory’s cost as it would ordinarily be treated under its method of accounting.

Under a special rule, a C corporation that donates inventory to a qualified charity that will use the donated items for the care of the ill, the needy, or infants may qualify for an enhanced (above-basis) deduction. Similarly, any trade or business that donates food inventory meeting certain standards may qualify for an enhanced deduction.

Source: Client Line newsletter

Protecting Your Net Worth

Protecting YOUR NET WORTH

GOT IT COVERED?
Consider carrying the maximum liability coverage available on your homeowners and automobile insurance policies. You may also want to have umbrella coverage for additional protection should the amount of a claim against you exceed the limit on the underlying home or auto policy. You’ll also need adequate professional liability insurance to protect against malpractice claims if you are an attorney, doctor, engineer, or other practicing professional.

IN BUSINESS
For business and real estate ventures, using an entity that offers some form of limited liability can reduce your personal exposure to the claims of business creditors.  Possibilities to consider include a corporation (regular or Subchapter S), a limited liability company (LLC), or a limited partnership.

A standard business owners policy (BOP) combines property, commercial liability, and business interruption insurance. (Separate policies are also available.) A BOP does not include workers’ compensation or auto coverage. If you own a business, review your coverage to make sure there are no gaps.

YOUR NEST EGG
Investing in a 401(k) or other qualified retirement plan is a helpful wealth-protection strategy. Plan assets are generally protected from creditors under ERISA (the federal pension law).

FAMILY TRUSTS
Trusts are often used to help protect assets earmarked for children and grandchildren. Consult an estate planning attorney if you are interested in creating a trust.

Seasonal Employees and Your Taxes

With summer fast approaching, some businesses are looking ahead to their busiest time of the year. Below are some reminders for businesses that intend to hire employees for the season.

  • Seasonal employees are subject to the same tax-withholding rules as nonseasonal employees.
  • Certain seasonal businesses may qualify for an exemption from the federal minimum wage and overtime pay rules. However, qualifying businesses should find out if applicable state law recognizes or permits the exemption.
  • An employer with a simplified employee pension (SEP) plan must allow all eligible employees to participate, including eligible seasonal employees. (An eligible employee is one who is at least age 21 and has worked for the employer in at least three of the last five years.)
  • Businesses that may be affected by the Affordable Care Act’s employer mandate will want to get details on how seasonal employees are treated.

Helpful Hints for Personal and Business Life

You may try to keep your personal life and your business life separate, but they’re bound to overlap, sometimes in surprising ways. Case in point: Two basic principles for managing your personal finances also apply to managing your business.

PAY YOURSELF FIRST
Before you start divvying up your paycheck to pay bills and spend on other things, tuck some money away for financial emergencies and for your future. Paying yourself first may be difficult in the beginning, but you’ll soon adjust. Make it as easy and as invisible as possible by arranging to have money transferred automatically from your paycheck or checking account to a separate savings account, an investment account, or a retirement account. If you have access to a 401(k) or similar tax-deferred plan, it’s a good way to put your retirement savings on autopilot.

TAKE PROFITS FIRST
The business version of pay yourself first is to put money into a “profit account” before you spend it elsewhere. As money from sales comes in, deposit a predetermined percentage in a separate account and leave it there. Out of sight, out of mind. Since small business owners generally make spending decisions based on how much is in the bank, having a profit account helps protect you from spending everything.

SPREAD THE RISK
Diversification is the strategy of holding different investments and different asset types in your portfolio instead of putting all your eggs in one basket. It can help you manage your overall exposure to investment risk because asset classes often react differently in different economic climates.

DIVERSIFY YOUR CUSTOMERS
The business version of diversification is also about reducing your exposure to risk, but here the strategy is to have a good mix of customers. If your company’s sales are dominated by one or two large customers, your business might be in trouble if you lose one of them. Guard against becoming overly reliant on one major customer by adding new customers and increasing sales to existing ones.

Key Business Tax Changes for 2014

On December 19th, 2014, the president signed the Tax Increase Prevention Act of 2014 into law.  It is a one year (retroactive for all of 2014) law which extends the items listed below.

Bonus depreciation (ability to deduct up to half the cost of new equipment in the year of purchase) no longer available.  Note: As of 12/3/14 the House of Representatives passed a bill that would reinstate bonus depreciation for 2014 if signed into law

Section 179 deduction ( expensing the entire purchase price of new equipment in the year of purchase) limits reduced from $500,000 to $25,000.  Note:   As of 12/3/14 the House of Representatives passed a bill that would reinstate the $500.000 limit for 2014 if signed into law.

Depreciable life of qualified leasehold improvements and qualified restaurant and retail improvements has increased from 15 to 39 years.

Work Opportunity Credit, which allowed employers a tax credit for hiring workers in specific categories ( veterans, food stamp recipients, and workers in certain targeted areas) has expired

Key Tax Changes for 2014

Obamacare tax subsidy – individuals who purchase health insurance through the Exchange and are eligible based on income may receive a subsidy. This subsidy is calculated based on projected household income. Once the monthly amount is determined, it will either be paid directly to the insurance company or the taxpayer can pay the full premium and claim the subsidy as a tax credit on his tax return. Either way, a reconciliation will be done on the tax return once the actual household income is determined.

Tax penalty for not purchasing health insurance – Insurance companies or employers have to provide documentation of health insurance coverage. If the individual does not have proof of coverage, the penalty imposed for the 2014 tax year is the greater of $95 or 1% of income. This penalty amount increases annually.