• ACA Repeal & Replacement Bill Passes in House

    15 May 2017
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    On May 4th, the House of Representatives passed the proposed American Health Care Act (AHCA). This would repeal and replace several arrangements of the Affordable Care Act (ACA).

    Exact details are not available, but, we have found some details from the original draft legislation published on March 6 to give you an idea of the how this will function (please keep in mind that some provisions were modified with respect to existing conditions in order to obtain enough Republican votes to pass the bill).

     

    GOP’s March Version of the AHCA

    The American Health Care Act would repeal and replace the Affordable Care Act (ACA). In general, the GOP’s plan would continue the ACA’s premium tax credit through 2019 and then replace it in 2020 with a new credit for individuals without government insurance and for those who are not offered insurance by their employer. However, most of the ACA’s insurance mandates and penalties would be repealed retroactive to 2015. Other provisions will be overturned periodically through 2019.

    • Repeal of the Individual Mandate

    Background: Under the ACA, individuals are generally required to have ACA- compliant health insurance or face a “shared responsibility payment” (a penalty for not being insured). For 2016, the annual penalty was $695 per uninsured individual ($347.50 per child), with a maximum penalty of $2,085 per family.

    AHCA Legislation: Under the new legislation, this penalty would be repealed after 2015.

    • Repeal of the Employer Mandate

    Background: Under the ACA, large employers, generally those with 50 or more equivalent full-time employees, were subject to penalties that could reach thousands of dollars per employee for not offering their full-time employees affordable health insurance. These employers were also subject to some very complicated reporting requirements.

    AHCA Legislation: Under the new legislation, this penalty would be repealed after 2015.

    • Recapture and Repeal of the Premium Tax Credit

    Background: The premium tax credit (PTC) is a health insurance subsidy for lower-income individuals, and it is based on their household income for the year. Since the household income can only be estimated at the beginning of the year, the insurance subsidy, known as the advance premium tax credit (APTC), must also be estimated at the beginning of the year. Then, when the tax return for the year is prepared, the difference between the estimated amount of the subsidy (APTC) and the actual subsidy allowed (PTC) is determined based on the actual household income for the year. If the subsidy paid was less than what the individual was entitled to, the excess is credited to the individual’s tax return. If the subsidy paid was more than what the individual was entitled to, the difference is repaid on the tax return. However, for lower-income taxpayers there is a cap on the amount that needs to repaid, and this is also based on household income.

    AHCA Legislation: For tax years 2018 and 2019, the GOP legislation would require the repayment of the entire difference regardless of income. In addition, the PTC would be repealed after 2019.

    • Catastrophic Insurance

    Background: The current law does not allow the PTC to be used for the purchase of catastrophic health insurance.

    AHCA Legislation: The new legislation would allow premium tax credits to be used for the purchase of qualified “catastrophic-only” health plans and certain qualified plans not offered through an Exchange.

    • Refundable Tax Credit for Health Insurance

    Beginning in 2020, as a replacement for the current ACA insurance subsidies (PTC), the AHCA legislation would create a universal refundable tax credit for the purchase of state-approved major medical health insurance and unsubsidized COBRA coverage. Generally eligible individuals are those who do not have access to government health insurance programs or an offer of insurance from any employer.

    The credit is determined monthly and ranges from $2,000 a year for those under age 30 to $4,000 for those over 60. The credit is additive for a family and capped at $14,000. The credit phases out for individuals who make more than $75,000 and for couples who file jointly and make more than $150,000.

    • Health Savings Accounts

    Background: Individuals covered by high-deductible health plans can generally make tax-deductible contributions to a health savings account (HSA). Currently (2017), the maximum that can be contributed is $3,400 for self-only coverage and $6,750 for family coverage. Distributions from an HSA to pay qualified medical expenses are tax-free. However, nonqualified distributions are taxable and generally subject to a 20% penalty.

    AHCA Legislation: Beginning in 2018, the HSA contribution limit would be increased to at least $6,550 for those with self-only coverage and to $13,100 for those with family coverage. In addition, the new legislation would do the following:

    • Allow both spouses to make catch-up contributions (applies to those age55 through 64) beginning in 2018.
    • Allow medical expenses to be reimbursed if they were incurred 60 days prior to the establishment of the HSA (whereas currently, expenses qualify only if they are incurred after the HSA is established).
    • Lower the penalty for nonqualified distributions from the current 20% to 10% (the amount of the penalty prior to 2011).
    • Medical Deduction Income Limitation

    Background: As part of the ACA, the income threshold for itemizing and deducting medical expenses was increased from 7.5% to 10% of the taxpayer’s AGI.

    AHCA Legislation: Under the new legislation, the threshold would be returned to 7.5% beginning in 2018 (2017 for taxpayers age 65 or older).

    • Repeal of Net Investment Income Tax

    Background: The ACA imposed a 3.8% surtax on net investment income for higher-income taxpayers, generally single individuals with incomes above $200,000 ($250,000 for married taxpayers filing jointly).

    AHCA Legislation: The new legislation would repeal this tax after 2017.

    • Repeal on FSA Contribution Limits

    Background: Flexible spending accounts (FSAs) generally allow employees to designate pre-tax funds that can be deposited in the employer’s FSA, which the employee can then use to pay for medical and other qualified expenses. Effective beginning in 2013, annual contributions to health FSAs (also referred to as cafeteria plans) were limited to an inflation-adjusted $2,500. For 2017, the inflation limitation is $2,550.

    AHCA Legislation: The new legislation would remove the health FSA contribution limit, effective starting in 2017.

    • Repeal of Increased Medicare Tax

    Background: Beginning in 2013, the ACA imposed an additional Medicare Hospital Insurance (HI) surtax of 0.9% on individuals with wage or self-employed income in excess of $200,000 ($250,000 for married couples filing jointly).

    AHCA Legislation: The new legislation would repeal this surtax beginning in 2018.

    • Other Provisions
    • Preexisting Conditions – Prohibits health insurers from denying coverage or charging more for preexisting conditions. However, to discourage people from waiting to buy health insurance until they are sick, the legislation as introduced would require individuals to maintain “continuous” coverage. Those who go uninsured for longer than a set period will be subject to 30% higher premiums as a penalty.

    Children Under Age 26 – Allows children under age 26 to remain on their parents’ health plan until they are 26.

    • Small Business Health Insurance Tax Credit– Repealed after 2019
    • Medical Device Tax– Repealed after 2017
    • Tanning Tax– Repealed after 2018
    • Over-the-Counter Medication Tax– Repealed after 2017

     

    Questions? Contact Dagley & Co.

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  • Uber and Lyft Drivers’ Tax Treatment

    6 April 2017
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    Do you drive for Uber or Lyft, or are thinking of getting into this business? We’ve outlined what it’s like to work for these types of companies, including taxes, expenses, and write-offs:

    Uber and Lyft treat drivers as independent contractors as opposed to employees. However, more than 70 pending lawsuits in federal court, plus an unknown number in the state courts, are challenging this independent contractor status. As the courts have not yet reached a decision on that dispute, this analysis does not address the potential employee/independent contractor issue related to rideshare divers; it only deals with the tax treatment of drivers who are independent contractors, using Uber as the example.

    How Uber Works – Each fare (customer) establishes an account with Uber using a credit card (CC), Paypal, or another method. The fare uses the Uber smartphone app to request a ride, and an Uber driver picks that person up and takes him or her to the destination. Generally, no money changes hands, as Uber charges the fare’s CC, deducts both its fee and the CC processing fee, and then deposits the net amount into the driver’s bank account.

    Income Reporting – Uber issues each driver a Form 1099-K reflecting the total amount charged for the driver’s fares. Because the IRS will treat the 1099-K as gross business income, it must be included on line 1 (gross income) of the driver’s Schedule C before adjusting for the CC and Uber service fees. Uber then deposits the net amount into the driver’s bank account, reflecting the fares minus the CC and Uber fees. Thus, the sum of the year’s deposits from Uber can be subtracted from the 1099-K amount, and the difference can be taken as an expense or as a cost of goods sold. Currently, a third party operates Uber’s billing, coordinates the drivers’ fares and issues the drivers’ 1099-Ks.

    Automobile Operating Expenses – Uber also provides an online statement to its drivers that details the miles driven with fares and the dollar amounts for both the fares and the bank deposits.

    Although the Uber statement mentioned above includes the miles driven for each fare, this figure only represents the miles between a fare’s pickup point and delivery point. It does not reflect the additional miles driven between fares. Drivers should maintain a mileage log to track their total miles and substantiate their business mileage.

    A driver can choose to use the actual-expense method or the optional mileage rate when determining operating expenses. However, the actual-expense method requires far more detailed recordkeeping, including records of both business and total miles and costs of fuel, insurance, repairs, etc. Drivers may find the standard mileage rate far less complicated because they only need to keep a contemporaneous record of business miles, the purposes of each trip and the total miles driven for the year. For 2017, the standard mileage rate is 53.5 cents per mile, down from 54.0 cents per mile in 2016.

    Whether using the actual-expense method or the standard mileage rate, the costs of tolls and airport fees are also deductible.

    When the actual-expense method is chosen in the first year that a vehicle is used for business, that method must be used for the duration of the vehicle’s business use. On the other hand, if the standard mileage rate is used in the first year, the owner can switch between the standard mileage rate and the actual-expense method each year (using straight-line deprecation).

    Business Use Of The Home – Because drivers conduct all of their business from their vehicle, and because Uber provides an online accounting of income (including Uber fees and CC charges), it would be extremely difficult to justify an expense claim for a home office. Some argue that the portion of the garage where the vehicle is parked could be claimed as a business use of the home. The falsity with that argument is that, to qualify as a home office, the space must be used exclusively for business; because it is virtually impossible to justify that a vehicle was used 100% of the time for business, this exclusive requirement cannot be met.

    Without a business use of the home deduction, the distance driven to pick up the first fare each day and the distance driven when returning home at the end of a shift are considered nondeductible commuting miles.

    Vehicle Write-off – The luxury auto rules limit the annual depreciation deduction, but regulations exempt from these rules any vehicle that a taxpayer uses directly in the trade or business of transporting persons or property for compensation or hire. As a result, a driver can take advantage of several options for writing off the cost of the vehicle. These include immediate expensing, the depreciation of 50% of the vehicle’s cost, normal deprecation or a combination of all three, allowing owner-operators to pick almost any amount of write-off to best suit their particular circumstances, provided that they use the actual-expense method for their vehicles.

    The options for immediate expensing and depreciating 50% of the cost are available only in the year when the vehicle is purchased and only if it is also put into business use during that year. If the vehicle was purchased in a year prior to the year that it is first used in the rideshare business, either the fair market value at that time or the original cost, whichever is lower, is depreciated over 5 years.

    Cash Tips – Here, care must be taken, as Uber does not permit fares to include tips in their CC charges but Lyft does. Any cash tips that drivers receive must be included in their Schedule C gross income.

    Deductions Other Than the Vehicle – Possible other deductions include:

    • Cell phone service
    • Liability insurance
    • Water for the fares

    Self-Employment Tax – Because the drivers are treated as self-employed individuals, they are also subject to the self-employment tax, which is the equivalent to payroll taxes (Social Security and Medicare withholdings) for employees—except the rate is double because a self-employed individual must pay both the employer’s and the employee’s shares.

    If you are currently a driver for Uber or Lyft, or if you think that you may want to get into that business, and if you have questions about taxation in the rideshare industry and how it might affect your situation, please give Dagley & Co. a call.

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  • GOP Unveils Its Obamacare Repeal and Replacement Legislation

    15 March 2017
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    Last week, on March 6th, the House Republicans unveiled their draft legislation that would repeal and replace the Affordable Care Act (ACA). This plan would ultimately continue the ACA’s premium tax credit through 2019 and then replace it in 2020. Then, a new credit for individuals without government insurance and those who are not offered insurance by their employer will be available.

    Additional details are provided below. Dagley & Co. wants you to keep in mind that the legislation is only a draft legislation and is subject to changes.

    Repeal of the Individual Mandate

    Background: Under the ACA, individuals are generally required to have ACA-compliant health insurance or face a “shared responsibility payment” (penalty for not being insured). For 2016, the annual penalty was $695 per uninsured individual ($347.50 per child), with a maximum penalty of $2,085 per family.

    GOP Legislation: Under the new legislation, this penalty would be repealed after 2015.

    Repeal of the Employer Mandate

    Background: Under the ACA, large employers, generally those with 50 or more equivalent full-time employees, were subject to penalties that could reach thousands of dollars per employee for not offering their full-time employees affordable health insurance. These employers were also subject to some very complicated reporting requirements.

    GOP Legislation: Under the new legislation, this penalty would be repealed after 2015.

    Recapture and Repeal of the Premium Tax Credit

    Background: The premium tax credit (PTC) is a health insurance subsidy for lower-income individuals, and it is based on their household income for the year. Since the household income can only be estimated at the beginning of the year, the insurance subsidy, known as the advance premium tax credit (APTC), must also be estimated at the beginning of the year. Then, when the tax return for the year is prepared, the difference between the estimated amount of the subsidy (APTC) and the actual subsidy allowed (PTC) is determined based on the actual household income for the year. If the subsidy paid was less than what the individual was entitled to, the excess is credited to the individual’s tax return. If the subsidy paid was more than what the individual was entitled to, the difference is repaid on the tax return. However, for lower-income taxpayers there is a cap on the amount that needs to repaid, and this is also based on household income.

    GOP Legislation: For tax years 2018 and 2019, the GOP legislation would require the repayment of the entire difference regardless of income. In addition, the PTC would be repealed after 2019.

    Catastrophic Insurance

    Background: The current law does not allow the PTC to be used for the purchase of catastrophic health insurance.

    GOP Legislation: The new legislation would allow premium tax credits to be used for the purchase of qualified “catastrophic-only” health plans and certain qualified plans not offered through an Exchange.

    Refundable Tax Credit for Health Insurance

    Beginning in 2020, as a replacement for the current ACA insurance subsidies (PTC), the GOP Legislation would create a universal refundable tax credit for the purchase of state-approved major medical health insurance and un-subsidized COBRA coverage. Generally eligible individuals are those who do not have access to government health insurance programs or an offer of insurance from any employer.

    The credit is determined monthly and ranges from $2,000 for those under age 30 to $4,000 for those over 60. The credit is additive for a family and capped at $14,000. The credit phases out for individuals who make more than $75,000 and for couples who file jointly and make more than $150,000.

    Health Savings Accounts

    Background: Individuals covered by high-deductible health plans can generally make tax-deductible contributions to a health savings account (HSA). Currently (2017), the maximum that can be contributed is $3,400 for self-only coverage and $6,750 for family coverage. Distributions from an HSA to pay qualified medical expenses are tax-free. However, non-qualified distributions are taxable and generally subject to a 20% penalty.

    GOP Legislation: Beginning in 2018, the HSA contribution limit would be increased to at least $6,550 for those with self-only coverage and to $13,100 for those with family coverage. In addition, the new legislation would do the following:

    • Allow both spouses to make catch-up contributions (applies to those age 55 through 64) beginning in 2018.
    • Allow medical expenses to be reimbursed if they were incurred 60 days prior to the establishment of the HSA (whereas currently only expenses incurred after the HSA is established qualify).
    • Lower the penalty for non-qualified distributions from the current 20% to 10% (the amount of the penalty prior to 2011).

    Medical Deduction Income Limitation

    Background: As part of the ACA, the income threshold for itemizing and deducting medical expenses was increased from 7.5% to 10% of the taxpayer’s AGI.

    GOP Legislation: Under the new legislation, the threshold would be returned to 7.5% beginning in 2018 (2017 for taxpayers age 65 or older).

    Repeal of Net Investment Income Tax

    Background: The ACA imposed a 3.8% surtax on net investment income for higher-income taxpayers, generally single individuals with incomes above $200,000 and $250,000 for married taxpayers filing jointly.

    GOP Legislation: The new legislation would repeal this tax after 2017.

    Repeal on FSA Contribution Limits

    Background: Flexible spending accounts (FSAs) generally allow employees to designate pre-tax funds that can be deposited in the employer’s FSA, which the employee can then use to pay for medical and other qualified expenses. Effective beginning in 2013, annual contributions to health FSAs (also referred to as cafeteria plans) were limited to an inflation-adjusted $2,500. For 2017, the inflation limitation is $2,550.

    GOP Legislation: The new legislation would remove the health FSA contribution limit, effective starting in 2017.

    Repeal of Increased Medicare Tax

    Background: Beginning in 2013, the ACA imposed an additional Medicare Hospital Insurance (HI) surtax of 0.9% on individuals with wage or self-employed income in excess of $200,000 or $250,000 for married couples filing jointly.

    GOP Legislation: The new legislation would repeal this surtax beginning in 2018.

    Other Provisions

    • Preexisting Conditions – Prohibits health insurers from denying coverage or charging more for preexisting conditions. However, to discourage people from waiting to buy health insurance until they are sick, individuals will need to maintain “continuous” coverage. Those who go uninsured for longer than a set period will be subject to 30% higher premiums as a penalty.
    • Children Under Age 26 – Allows children under age 26 to remain on their parents’ health plan until they are 26.
    • Small Business Health Insurance Tax Credit – Repealed after 2019
    • Medical Device Tax – Repealed after 2017
    • Tanning Tax – Repealed after 2018
    • Over-the-Counter Medication Tax – Repealed after 2017

    This is a proposed law change, and it may not ultimately turn out as described here. If you have any questions, please give Dagley & Co. a call.

     

     

     

     

     

     

     

     

     

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  • Don’t Overlook Standard Mileage Rate Add-Ons

    15 February 2017
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    Business owners and employees often use the standard mileage rate when taking a deduction for the business use of their vehicle. The standard mileage rate is determined annually by the IRS by using data based on the prior year’s costs. For 2017, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) is 53.5 cents per mile for business miles driven, down from 54 cents for 2016. Operating expenses include:

    • Gasoline
    • Oil
    • Lubrication
    • Repairs
    • Vehicle registration fees
    • Insurance
    • Straight line depreciation (or lease payments)

    What business owners using the standard mileage rate frequently overlook is that parking and tolls, as well as state and local property taxes paid for the vehicle and attributable to business use, may be deducted in addition to the standard mileage rate.

    Regardless of whether the standard mileage rate or actual expense method is used, a self-employed taxpayer may also deduct the business use portion of interest paid on an auto loan on their Schedule C. However, employees may not deduct interest paid on a consumer car loan.

    If you have questions related to taking a tax deduction for the business use of your vehicle, please give Dagley & Co. a call.

     

     

     

     

     

     

     

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  • W-2 and 1099-MISC Filing Dates Moved Up

    19 December 2016
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    Dagley & Co. is here to give you up-to-date tax and tax requirement details and due dates. Please read the following regarding a delay in a tax return due date:

    The IRS, in an effort to combat rampant tax filing fraud, has introduced what they hope will be two new fraud-prevention measures for the upcoming filing season. The first will purposely delay until February 15 the issuance of refunds for tax returns where there is an earned income tax credit (EITC) and/or a refundable child tax credit (CTC), giving the IRS more time to match the income reported on these returns to the income reported by employers. These two tax credits have been the favorite target of scammers who have been filing fraudulent returns with stolen IDs and fabricated income before the IRS is able to verify the income and withholding claimed on the returns.

    The second preventive measure is to require earlier filing of W-2 and 1099-MISC forms, which will enable the IRS to ferret out returns that report phony income and withholding. This measure will have a significant impact on employers by moving up the filing due date of the government’s copy of 2016 W-2s and 1099-MISCs to January 31, 2017 (the previous due date was February 28, or March 31 if filed electronically). January 31 has been and continues to be the date the forms are required to be provided to the employees (W-2s) or independent contractors (1099-MISCs).

    The 30-day automatic extension to file W-2s is no longer automatic. The IRS anticipates that it will grant the non-automatic extension of time to file only in limited cases where the filer or transmitter’s explanation demonstrates that an extension of time to file is needed as a result of extraordinary circumstances.

    With regard to the government’s copy of 1099-MISC forms, the earlier filing due date only applies to those 1099-MISC forms reporting non-employee compensation.

    If you have questions related to W-2 or 1099-MISC requirements, please give Dagley & Co. a call at (202) 417-6640.

     

     

     

     

     

     

     

     

     

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  • Employing a Family Member

    25 August 2016
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    Employing family members in your business is one way to reduce the overall family tax bite. Doing so will allow you to shift income and possibly provide them with employment benefits.

    Strategy – Employing a Child - By employing a child, the income tax advantages include obtaining a business deduction for a reasonable salary paid to that child and reducing the self-employment income and tax of the parents (business owners) by shifting income to the child. Since the salary paid to a child is considered earned income, it is not subject to the “Kiddie Tax” rules that apply to children through age 18 and full-time students ages 19 through 23. The Kiddie Tax won’t apply at all to the 19- through 23-year-old student if his or her earned income exceeds one-half of total support, another incentive to employ a child in some situations.

    The maximum standard deduction available to the child in 2015 is $6,300. Therefore, the standard deduction eliminates all tax on that amount of income if the child is paid $6,300* in compensation. If the business is unincorporated, wages paid to the child under age 18 are not subject to social security taxes. Not only are there significant income tax advantages to employing the child, but the parent-employer may provide him or her with fringe benefits, such as group-term life insurance and qualified pension plan contributions.

    The child may also make deductible contributions to an IRA for 2015 of the lesser of earned income or $5,500. By combining the standard deduction and the maximum deductible IRA contribution, a child could earn $11,800 of wages and pay no income tax. If the child balks at contributing his or her hard-earned money to an IRA, the parent might consider giving the child part or all of the IRA contribution as a gift.

    *Actually only $5,950 needs to be paid to the child for the child to be able to claim the full $6,300 standard deduction for 2015 because a dependent may claim the sum of their earned income + $350, but no more than $6,300, as the standard deduction.

    Strategy – Employing a Spouse - Reasonable wages paid to a spouse entitles the employer-spouse to a business deduction. The wages are subject to FICA taxes, and the spouse may qualify for Social Security benefits to which he or she might not otherwise be entitled. In addition, the spouse may also be eligible to receive coverage under the business’ qualified retirement plan, and the employer-spouse may obtain a business deduction for health insurance premium payments made on behalf of the employed spouse. While maintaining the same family coverage, the business deductions could be increased by providing the spouse with family health insurance coverage as an employee. These wages are subject to income tax. Always remember, when a family member is employed in a family business, wages should equal the work performed, and that the services performed are completely necessary for the business.

    If you need more information, contact Dagley & Co., CPA at (202) 417-6640.

     

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  • Have Fewer Than 50 Employees? Here is How the Health Care Act Affects You

    27 July 2016
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    The Affordable Care Act (ACA) was set up by the Congress with two basic categories of businesses, those with 50 full-time employees and/or full-time equivalent employees (FTEEs) and those with fewer than 50 employees. Under the ACA, businesses in the first category have a requirement to offer affordable insurance to their full-time employees and their dependents. If you are an employer with fewer than 50 full-time employees or FTEEs, you are not subject to the insurance requirement, but there are still some ACA issues you need to be aware of.

    First of all, you need to make sure you are in the under-50 category, because the penalties can be backbreaking if you aren’t and you didn’t offer affordable health coverage. Determining if your business meets or exceeds the 50-employee threshold requires maneuvering through lots of special rules, and not all of these intricacies can be covered in this article.

    Generally, the 50-employee threshold is determined by adding together the number of full-time employees and the total number of full-time equivalent employees for each calendar month of the prior calendar year and dividing that total number by 12.

    Full-time employees are generally those working 30 hours or more per week, and the number of FTEEs is determined by dividing all the hours worked by part-time employees for the month by 120. In addition, certain employees, such as seasonal employees, are excluded from the count. If you have any doubt whether you are under the 50-employee threshold, please call this office for assistance.

    If you are under the 50-employee threshold, you are not subject to any ACA information reporting that is required of larger employers—with one exception. If you provide insurance and you are self-insured, then you are required to annually file a Form 1094-C along with a 1095-C for each employee.

    If you wish to provide insurance to your employees, even though you are not required to since you are under the 50-employee threshold, you are allowed to purchase health insurance coverage through the Small Business Health Options Program, better known as the SHOP Marketplace. Even though purchased through the Marketplace, this type of group coverage does not qualify your employees for the premium tax credit subsidy they might otherwise be entitled to if they acquired coverage directly from the individual policy Marketplace.

    As an enticement for employers that have fewer than 25 FTEEs with average annual wages of less than $50,000 to provide health insurance to their employees, the ACA added a small business health care tax credit. To qualify, the business needs to purchase the health insurance through the SHOP Marketplace and cover at least 50 percent of their full-time employees’ premium costs. However, this credit applies for only 2 years, after which time the employer will receive no further financial assistance from Uncle Sam. A recent General Accounting Office report noted that far fewer small businesses were taking advantage of the credit than expected by Congress.

    If you have questions, need assistance in determining whether you meet the 50-employee threshold, or would like to determine the benefit of the small business health care tax credit, please give Dagley & Co. a call.

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  • Tax Court Ruled Employer’s Independent Contractor Interpretation Reasonable

    27 June 2016
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    Should a worker be classified as an employee or an independent contractor? This is one of the most challenging issues facing employers. A case recently concluded in federal district court illustrates this point. An employer, Nelly Home Care, Inc., had classified a group of 35 workers as independent contractors and was charged by the IRS with owing substantial employment taxes. The agency pursues those who try to avoid having to pay FICA, FUTA and income tax withholding by mislabeling employees in this way. Upon review of the specifics of the case, the court determined that the employer did not owe these taxes and was entitled to relief under Section 530 of the Revenue Act of 1978. The case was Nelly Home Care, Inc., DC-Pa., May 10, 2016.

    The Case Against Nelly Home Care – Though the court’s decision may mean that the IRS now pursues each independent contractor for self-employment taxes owed, for our purposes it is of interest to understand the terms of Section 530, the safe harbor rule on which the ruling was based. Section 530 spells out circumstances that allow a taxpayer to escape liability for paying employment taxes for a prior period — even if the case pursued by the IRS is correct and the workers should not have been classified as independent contractors. In order for Section 530 to apply, an employer needs to show that it has never treated the workers as employees, it has consistently filed all federal returns (including 1099s) and it has a reasonable basis for not treating the worker as an employee.

    Reasonable basis is present if any of the following can be shown: Having a previous judicial ruling or precedent, or technical advice, letter rulings, or a determination letter from the IRS pertaining to that business. Having already undergone an IRS audit that made no adjustment to the way that the workers were classified. Being able to show that a large percentage of businesses in the same industry follow the same practice and have done so for a significant amount of time.

    Even when an employer fails to meet one of these tests, the employer can still get Section 530 relief by showing reasonable basis in some other reasonable manner. Section 530 indicates that this reasonable basis is to be construed liberally in favor of the taxpayer.

    How the Court Ruled – In this particular case, the employer was in the homecare services industry, and the 35 workers in question worked with the elderly. The employer provided them with workers’ compensation insurance but did not train them or control many aspects of their work. Upon review of the circumstances, the IRS determined that they were not independent contractors, but employees. However, the district court determined otherwise. Though the court indicated that the threshold had not been met for use of the statutory safe harbor, it noted that the employer had given consideration to a number of other factors that qualified Nelly Home Care for the reasonable basis safe harbor. Those factors included the fact that others in the field categorized their workers in the same way and that the personal income tax returns of the corporation’s shareholders had previously undergone an IRS audit that did not raise the issue, despite the IRS having reviewed business documents involving the workers during the audit. The court ruled that these two factors were enough for the employer to have made a reasonable assumption that the practice was correct.

    Though this case ended well for the employer, not all stories end so happily. Making the wrong decision can end up costing a business a significant amount of money in fines and back taxes. If you are not certain as to how to categorize your own workers, give Dagley & Co. a call. In some cases it may also be appropriate to seek legal advice.

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  • Deducting More Than $250 For Teachers’ Classroom Supplies

    4 May 2016
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    Several years ago, Congress created a special deduction for teachers that would allow them to annually deduct up to $250 on their tax returns for classroom supplies—even if they don’t itemize their deductions. This was done to recognize those devoted teachers that spend a significant amount of their own money on supplies for their classroom. This type of deduction is termed an “above-the-line” deduction, and it is available even for taxpayers who claim the standard deduction.

    Those who teach kindergarten through grade 12 are eligible for the special $250 deduction. In addition to teachers, those eligible include counselors, principals, and aides who work at least 900 hours during a school year. Because of the 900-hour requirement, many substitute teachers do not qualify for this above-the-line deduction.

    However, most conscientious teachers spend far more than $250 for classroom supplies every year. What are the options for teachers who spend more than the $250 on classroom supplies or for teachers and other qualified individuals who do not meet the 900-hour test or other requirements to deduct the $250 above the line?

    When eligible, teachers should always claim the above-the-line deduction first; then, they should consider the following possibilities for the excess amount. This advice may also help colleagues who are ineligible for the above-the-line deduction.

    Employee Business Expense – One option is to claim expenses for classroom supplies beyond the $250 deduction as employee business expenses, which can be used as a miscellaneous itemized deduction. To claim employee business expenses, the teacher must itemize his or her deductions, which eliminates any benefit for those who use the standard deduction instead of itemizing (usually because the standard allowance is more than the total itemized deductions).

    Even for those who itemize, miscellaneous itemized deductions are only deductible to the extent that they exceed 2% of the teacher’s adjusted gross income (AGI), so the deductible amount might be wiped out or substantially limited by the AGI reduction. In addition, if the teacher is subject to the alternative minimum tax, some or all of the employee business expense deduction will not be allowed.

    Charitable Contribution – According to the tax code, the term “charitable contribution” refers to a contribution or gift for the use of a state, the United States itself, or the District of Columbia—or any political subdivision of any of the foregoing—but only if the contribution or gift is made for exclusively public purposes.

    Since public schools are part of a political subdivision of a state, any contribution to a school, in either cash or goods, would be a charitable contribution.

    Therefore, a teacher’s classroom supplies, if the teacher properly documents them and if the school provides a written acknowledgment, would qualify as a noncash charitable contribution. Caution: Supplies or equipment that the teacher retains are not considered a completed gift, and their cost does not qualify as a charitable contribution. For example, if a science teacher purchases a microscope that students use in the classroom, but the teacher then keeps it for personal use when the school year ends, the cost of the microscope would not be deductible as a charitable contribution.

    To meet the requirements for noncash contributions, the teacher claiming the contribution must obtain and keep an acknowledgment from the school; the contents of this acknowledgement are based upon the value of the contribution claimed, as detailed below. The acknowledgment must be in the taxpayer’s possession before he or she files a return for the year in which the contribution was made, or before the due date (including extensions) for filing that return, whichever is earlier.

    Deductions of Less Than $250These acknowledgments must include: the name of the charitable organization, the date and location of the charitable contribution, and a reasonably detailed description of the property.

    Deductions of at Least $250 but Not More Than $500 These acknowledgments must include: the name of the charitable organization, the date and location of the charitable contribution, a reasonably detailed description (but not necessarily the value) of any property contributed, and whether the qualified organization gave the taxpayer any goods or services as a result of the contribution (other than certain token items and membership benefits).

    If the taxpayer received goods and/or services in return, the acknowledgement must also include a description and good-faith estimate of their value. (The portion of the donation attributable to the goods and services that the taxpayer received is not deductible.)

    Deductions Over $500 but Not Over $5,000A taxpayer claiming a deduction over $500 but not over $5,000 for a noncash charitable contribution must have the same acknowledgement and written records as for the contributions described in the previous section (for donations of at least $250 but not more than $500). In addition, the records must include: how the property was obtained (for example, by purchase, gift, bequest, inheritance, or exchange); the approximate date when the property was obtained or (if created, produced, or manufactured by the taxpayer) substantially completed; and the cost or other basis (and any adjustments to that basis) of property held for less than 12 months and (if available) the cost or other basis of property held for 12 months or more.

    Deductions Over $5,000There are additional requirements for noncash contributions of this size, including certified appraisals. However, the details are not included here.

    If you have additional questions related to deducting classroom supplies, please give Dagley & Co. a call.

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  • Can You Deduct Employee Expenses?

    21 March 2016
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    Do you know which expenses relating to your employment are deductible from your tax return? If you are an employee, this may cross your mind. This is a complicated area of tax law, and many expenses are deductible only if the expense is a “condition of employment” or is for the “convenience of the employer,” two phrases that are effectively the same.

    In addition, other factors affect an employee’s ability to deduct expenses incurred as part of employment. One, if an employer would have paid for or reimbursed the employee for an expense, but the employee chooses not to apply for or take advantage of that reimbursement, the employee cannot take a tax deduction for the expense. Two, only those employees who itemize their deductions can benefit from business expense deductions. Thus, if you are using the standard deduction, you cannot receive any tax benefit for your job-related expenses. In addition, even when itemizing, miscellaneous itemized deductions must be reduced by 2% of your adjusted gross income (AGI). Employee business expenses fall into the miscellaneous itemized deduction category. As an example: if your AGI is $80,000, the first $1,600 (2% x AGI) of your miscellaneous deductions provide no benefit. Last, miscellaneous deductions are not included in the itemized deductions allowed for computing the alternative minimum tax (AMT). Thus, if you are unlucky enough to be subject to the AMT, you will not benefit from your miscellaneous deductions for the extent of the AMT.

    The following includes a discussion of the various expenses that an employee might feel they are entitled to deduct and the IRS’s requirements for those deductions.

    Home Office – An employee can deduct a home office only if his or her use of the home office is for the convenience of the employer. According to the U.S. Tax Court, an employee’s use of a home office is for the convenience of his employer only if the employee must maintain the home office as a condition of employment. In an audit, the auditor will require a letter from the employer to verify that fact. Most employers are reluctant to make a home office a condition of employment due to labor laws and liability. In addition, an employee would also have to comply with the IRS’s strict usage requirements for home offices.

    Computer – An individual’s property, such as computers, TVs, recorders, and so on, that is used in connection with his or her employment is eligible for expense or depreciation deductions only if that property is required for the convenience of the employer and as a condition of employment. Even if the condition of employment requirement is satisfied, a computer’s usage must be prorated for personal and business use.

    Uniforms and Special Work Clothes – The cost and maintenance of clothing is allowed if: The employee’s occupation is one that specifically requires special apparel or equipment as a condition of employment and The special apparel or equipment isn’t adaptable to general or continued usage (so as to take the place of ordinary clothing).

    Generally, items such as safety shoes, helmets, fishermen’s boots, work gloves, oil clothes, and so on are deductible if required for a job. However, other work clothing and standard work shoes aren’t deductible—even if the worker’s union requires them.

    Education - To qualify as job-related, courses must maintain or improve the skills required by the employee’s trade or business (such as by helping the employee to meet professional continuing education requirements) or be required as a condition of employment. However, these courses must not be necessary to meet the minimum requirements of the job and must not qualify the employee for a new trade or promotion. If a course meets this definition, its cost is considered deductible as an ordinary and necessary business expense, and as such, it may be excluded from an employee’s income if the employer reimburses the employee for its cost. Note: Some education expenses may qualify for more beneficial education credits or an above-the-line-deduction.

    Impairment-Related Work Expenses – Taxpayers who have a physical or mental disability that limits their activities can deduct impairment-related work expenses. For example, an allowable expense would be the cost of attendant care at the place of the taxpayer’s work.

    Job-Search Expenses – Expenses related to looking for a new job in the taxpayer’s current occupation are deductible even if a new job is not obtained. To be deductible, the expenses cannot be related to seeking a first job or a job in a new occupation. If there is a substantial time gap between the taxpayer’s last job and the time when he or she looks for a new job, the expenses are not deductible.

    Of course, all sorts of employee situations exist, including those in which the employee works at his or her local employer’s office and those in which the employee lives and works in a remote location. The deductions available to each employee vary significantly based upon that individual’s unique situation.

    For more information related to employee expenses and what might be deductible in your situation, please give Dagley & Co. a call.

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