THE IRS TARGETS MIDDLE-MARKET COMPANIES; WHAT THEY NEED TO KNOW

Because of the IRS’ new responsibility to enforce the employer mandated health care provisions of the ”Affordable Care Act” and other issues,  it appears the IRS is going to start targeting  Middle Market companies for audit.   

The audits will be performed by the Large Business International Division (LB&I Division) which is responsible for audits of the Fortune 1000 companies.  However the LB&I Division is also responsible for audits of companies with assets of $10 million to $100 million which is the typical size of companies considered to be midsized.  Because of limited resources and the historical focus on the Fortune 1000 there has been lighter coverage of middle-market in the past.  But no more, attention, resources and expertise are being shifted to the middle-market sector. This means more middle-market companies will be audited.

Normally middle-market companies do not have the same resources as the Fortune 1000 and are not as aware of IRS audit procedure or their rights as a taxpayer.   Many have an outside CPA that prepare the tax return and advise the owner or officers of tax and accounting issues.  However they will be faced with seasoned IRS auditors who are used to have immediate access to records and the tax professional during the audit.  This can cause significant issues during the audit for the owner and officer of the middle-market company.  Thus the middle-market company, as with all taxpayers, should assess their resources to see what is need to be prepared and which audit defense resources can be utilized.

The time to prepare for an audit is not when you get the audit notice, but when your tax return is prepared.   So if you have not thought of the possibility of being audited, this is a good time to have a conversation to see what needs to be done.  Normally, if a company is prepared for an audit before they receive the audit notice, an audit should never be a problem.

MANDATORY HEALTH INSURANCE WILL BEGIN IN 2014

Beginning in 2014 the Patient Protection & Affordable Care Act (the health care legislation sometimes known as Obama Care) will impose the new requirement that U.S. persons, with certain exceptions, have minimal, essential health care insurance.

A minimum essential health care policy is one in which the insurer pays 60% of the average medical expenses incurred by an average person over the course of one year.

How this will affect your family will depend upon a number of issues:

Already insured - If you will already be insured through an employer plan, Medicare, Medicaid, the Veterans Administration, or a private plan that provides minimal, essential care, then you will not be subject to any penalties under this new law.

Exempt from the mandatory insurance requirement - The following individuals will be exempt from the insurance mandate and will not be subject to a penalty for being uninsured:

·    Individuals who have a religious exemption

·    Those not lawfully present in the United States

·    Incarcerated individual

·    Those who cannot afford coverage based on formulas contained in the law

·    Those who have income below the federal income tax filing threshold

·    Those who are members of Indian tribes

·    Those who were uninsured for short coverage gaps of less than three months

·    Those who have received a hardship waiver from the Secretary of Health and Human Services, who are residing outside of the United States, or who are bona fide residents of any possession of the United States.

Cannot afford coverage - Individuals and families whose household income is between 100% and 400% of the federal poverty level will qualify for a varying amount of subsidy to help pay for the insurance in the form of a Premium Assistance Credit. To qualify for that credit, the insurance must be acquired from an American Health Benefit Exchange operated by the individual or family’s state, or by the Federal Government. These exchanges are scheduled to be up and running as of October 1, 2013, and the policies purchased through them will be effective as of January 1, 2014.

It is important to note that the subsidy is really just a tax credit based upon family income. It can be estimated in advance and used to reduce the monthly insurance premiums; it can be claimed as a refundable credit on the tax return for the year; or it can be some combination of both. However, it is based upon the current year’s income and must be reconciled on the tax return for the year. If too much was used as a premium subsidy, it must be repaid. If there is excess, it is refundable.

If household income is below 100% of the poverty level, the individual or family qualifies for Medicaid.

Penalty for noncompliance - The penalty for noncompliance will be the greater of either a flat dollar amount or a percentage of income:

·    For 2014, $95 per uninsured adult ($47.50 for a child) or 1 percent of household income over the income tax filing threshold

·    For 2015, $325 per uninsured adult ($162.50 for a child) or 2 percent of household income over the income tax filing threshold

·    For 2016 and beyond, $695 per uninsured adult ($347.50 for a child) or 2.5 percent of household income over the income tax filing threshold.

Flat dollar amounts - The flat dollar amount for a family will be capped at 300% of the adult amount. For example, the maximum in 2016 for a family will be $2,085 (300% of $695). The child rate will apply to family members under the age of 18.

Overall penalty cap - The overall penalty will be capped at the national average premium for a minimal, essential coverage plan purchased through an exchange. This amount won’t be known until a later date.

If you have any questions as to how this new insurance requireme

GET CREDIT FOR GENERATING YOUR OWN HOME POWER

Through 2016, taxpayers can get a 30% tax credit on their federal tax returns for installing certain power-generating systems in their homes. The credit is non-refundable, which means it can only be used to offset a taxpayer’s current tax liability, but any excess can be carried forward to offset tax through 2016.

Systems that qualify for the credit include:

·    Solar water-heating system - Qualifies if used in a dwelling unit used by the taxpayer as a main or second residence where at least half of the energy used by the property for such purposes is derived from the sun. Heating water for swimming pools or hot tubs does not qualify for the credit. The property must be certified for performance by the Solar Rating Certification Corporation or a comparable entity endorsed by the state government where the property is installed.

·    Solar electric system - Qualified system that uses solar energy to generate electricity for use in a dwelling unit located in the U.S. and used as a main or second residence by the taxpayer.

·    Fuel cell plant - This is a fuel cell power plant installed in the taxpayer’s principal residence that converts a fuel into electricity using electrochemical means. It must have an electricity-only generation efficiency of greater than 30% and generate at least 0.5 kilowatt of electricity. The credit is 30% of qualified fuel cell expenditures but limited to $500 for each 0.5 kilowatt of the fuel cell property’s capacity to produce electricity.

·    Qualified small wind energy - A wind turbine used to generate electricity for use in connection with a dwelling unit used as a main or second residence by the taxpayer

·    Qualified geothermal heat pump - Must use the ground or ground water as a thermal energy source to heat the dwelling unit or as a thermal energy sink to cool the dwelling unit, and must meet the Energy Star program requirements in effect when the expenditure is made. The dwelling unit must be used as a main or second residence by the taxpayer.

 

Other aspects of the credit:

·    Limited carryover - The credit is a non-refundable personal credit, which limits the credit to the taxpayer’s tax liability for the year. However, the portion of the credit that is not allowed because of this limitation may be carried to the next tax year and added to the credit allowable for that year. Thus, the credit carryover is available through 2016 (the final year for the credit).

·    Installation costs - Expenditures for labor costs allocable to onsite preparation, assembly, or original installation of property eligible for the credit, as well as for piping or wiring connecting the property to the residence, are expenditures that qualify for the credit.

·    Swimming pool - Expenditures that are for heating a swimming pool or hot tub are not taken into account for purposes of the credit.

·    Newly constructed homes - The credit can be taken for newly constructed homes if the costs of the residential energy-efficient property can be separated from the home construction and the required certification documents are available.

Certification - A taxpayer may rely on a manufacturer's certification that a product is a Qualified Energy Property. A taxpayer is not required to attach the certification statement to the return on which the credit is claimed. However, taxpayers are required to retain the certification statement as part of their records. The certification statement provided by the manufacturer may be a written copy of the statement that is posted on the manufacturer’s website with the product packaging details in printable form or in any other manner that will permit the taxpayer to retain the certification statement for tax recordkeeping purposes.

Installation costs - Costs for labor allocable to onsite preparation, assembly, or original installation of the residential energy-efficient property are includible.

If you have questions about how you can benefit from this credit, please give this office a call.

Documenting Charitable Contributions

In recent years Congress has passed stringent recordkeeping rules for charitable contributions and harsh penalties fir understating taxable income.  The following recordkeeping rules, though not all-inclusive, should be a good guideline.  .

Cash Contributions - Cash contributions include those paid by cash, check, electronic funds transfer, or credit card (see special requirements for payroll cash contributions). You cannot deduct a cash contribution, regardless of the amount, unless you can document the contribution in one of the following ways.

1. A bank record that shows the name of the qualified organization, the date of the contribution, and the amount of the contribution. Bank records may include:

(a)  A canceled check

(b)  A bank or credit union statement, or

(c’)  A credit card statement.

2. A receipt (or a letter or other written communication) from the qualified organization showing the name of the organization, the date of the contribution, and the amount of the contribution.

As a result, if you drop cash into a church collection plate each week at a worship service, you cannot legally deduct that donation on your tax return. The same goes for dropping a cash donation into the Christmas kettle. Instead, you should write a check to the charitable organization of your choice and put the check into the collection plate, or make other arrangements with the organization for giving your tax-deductible contribution to ensure that a bank record, receipt, or letter is provided.

Payroll Contributions - For contributions made by payroll deduction, you must keep:

1. A pay stub, W-2 form, or other document provided by your employer that shows the date and amount of the contribution, and
2. A pledge card or other document prepared by or for the organization to which you are donating that shows the name of this organization. If the employer withheld $250 or more from a single paycheck, the pledge card or other document must state that the organization does not provide goods or services in return for any contribution made to it by payroll deduction. A single pledge card may be kept for all contributions made by payroll deduction, regardless of the amount, as long as it contains all of the required information.

If the pay stub, W-2 form, pledge card, or other document does not show the date of the contribution, you must also have another document that does show the date of the contribution. If the pay stub, W-2 form, pledge card, or other document does show the date of the contribution, you need not keep any other records except those described in (A) and (B).

Non-Cash Contributions - Non-cash contributions include the donation of property, such as used clothing or furniture, to a qualified charitable organization.

Deductions of Less than $250 - If you claim a non-cash contribution of less than $250, you must get and keep a receipt from the charitable organization showing:

1. The name of the charitable organization,
2. The date and location of the charitable contribution, and
3. A reasonably detailed description of the property that was donated.

 

You are not required to have a receipt if it is impractical to get one (for example, if the property was left at a charity’s unattended drop site). However, you still must document the contribution as described above.

Deductions of at Least $250 but Not More than $500 - If you claim a deduction of at least $250 but not more than $500 for a non-cash charitable contribution, you must have and keep an acknowledgment of the contribution from the qualified organization. If the contributions were made in more than one donation of $250 or more, you must have either a separate acknowledgment for each or one acknowledgment that shows the total contribution. The acknowledgment(s) must be written and should include the following:

1. The name of the charitable organization,
2. The date and location of the charitable contribution,
3. A reasonably detailed description (but not necessarily the value) of any property contributed,
4. Whether or not the qualified organization gave you any goods or services as a result of the contribution (other than certain token items and membership benefits), and
5. If goods and/or services were provided to you, the acknowledgement must include a description and good faith estimate of the value of those goods or services. If the only benefit received was an intangible religious benefit (such as admission to a religious ceremony) that generally is not sold in a commercial transaction outside the donative context, the acknowledgment must say so and does not need to describe or estimate the value of the benefit.

Deductions of over $500 but Not over $5,000 - If you claim a deduction of over $500 but not over $5,000 for a non-cash charitable contribution, you must get and keep the same acknowledgement and written records as for contributions of at least $250 but not more than $500 (as described above).

In addition, the records must also include:

1. How the property was obtained (for example, by purchase, gift, bequest, inheritance, or exchange).
2. The approximate date the property was obtained or, if you created, produced, or manufactured the item, the approximate date the property was substantially completed.
3. The cost or other basis, and any adjustments to the 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. This requirement, however, does not apply to publicly-traded securities. If you are not able to provide information on either the date the property was obtained or the cost basis of the property, and there is reasonable cause for not being able to provide this information, a statement of explanation must be attached to the return.

Deductions over $5,000 - Because of special rules related to contributions over $5,000, please call this office for documentation requirements of the particular contribution before making the contribution.

Out-of-Pocket Expenses - If you render services to a qualified organization and have unreimbursed out-of-pocket expenses related to those services, the following three rules apply.

1. You must have adequate records to prove the amount of the expenses.
2. You must get an acknowledgment from the qualified organization that contains:
a. A description of the services provided,
b. A statement of whether or not the organization provided you with any goods or services to reimburse you for the expenses incurred,
c. A description and good faith estimate of the value of any goods or services (other than intangible religious benefits) provided as reimbursement, and
d. A statement that the only benefit received was an intangible religious benefit, if that was the case. The acknowledgment does not need to describe or estimate the value of an intangible religious benefit.

3. The acknowledgement must be obtained before the earlier of the following:
a. The date of filing the return for the year in which the contribution was made, or
b. The due date, including extensions, for the return.

Car Expenses - When you claim expenses directly related to the use of your car to provide services to a qualified organization, you must keep reliable written records. Whether the records are considered reliable depends on the facts and circumstances. Generally, your records will likely be considered reliable if made regularly and/or near the time the expense was incurred. The records must show the name of the organization being served and the date each time the car was used for a charitable purpose. If the standard mileage rate of 14 cents per mile is used, the records must show the miles driven for the charitable purpose.

If you deduct actual expenses, the records must show the costs of operating the car that are directly related to a charitable purpose. General repairs and maintenance expenses, depreciation, registration fees, or the costs of tires or insurance cannot be deducted.

Vehicle Donations - When the deduction claimed for a donated vehicle exceeds $500, IRS Form 1098-C (or another statement containing the same information as Form 1098-C) furnished by the charitable organization must be attached to your filed tax return. Without the 1098-C or other statement, no deduction is allowed. When the charity sells the vehicle, Form 1098-C (or other statement) must be obtained within 30 days of the sale of the vehicle.

CAUTION: With the exception of vehicle contributions, charitable gift acknowledgements must be obtained before the earlier of the following:

1. The date on which your return was filed for the year in which you made the contribution, or
2. The due date, including extensions, for filing the return.

If you have questions regarding charitable recordkeeping or what is deductible as a charitable contribution, please give our office a call.