Tax Season Delay?

There is less than a week to go before the tax filing season opens on January 20th. We already have a lot of individuals and businesses reaching out to us about getting the preparation process started. The IRS Commissioner John Koskinen recently advised that “realistically we have no choice but to do less with less” due to the recent budget cuts. The IRS is understaffed and that can have a variety of impacts on this tax season.

  • Delayed RefundsThis

    will especially be true for taxpayers that elect to paper file their return. Our firm requires electronic filing unless there is a section of the return that prevents it. The Commissioner estimates it could take an additional week or longer for refunds to be processed.

  • Increased Wait Time on Telephone InquiriesWhile telephone calls were never answered quickly before, there will be an even longer wait time. During high volume call times taxpayers may be asked to call back later and that their phone call cannot be answered.
  • Delayed IRS CorrespondenceWe have seen this recently with current clients, but the IRS needs additional time to process requests on appeals and other items due to low staffing. This can result in unresolved tax issues dragging out for months at a time. However, it is important to keep current with the status of any IRS requests to make sure an extension of time either for the taxpayer or the IRS is in place.
  • IRS ShutdownsWhile this is unlikely to happen during the January to April tax season the IRS is planning for at minimum one shutdown this year.
  • Decreased Audit ResolutionsFor existing audits this means that less will be resolved this year. There is no official comment on new audits, but it is reasonable to assume that with less staff there will be fewer audits in 2015.

While the above issues are prevalent in most tax seasons, this year is predicted to be worse. We are recommending now more than ever getting in early to file.

2014 NC Qualified Business and Investment Tax Credit Shortfall

If you applied for a Qualified Business Investment Tax Credit you will receive a confirmation letter in the mail from the North Carolina Department of Revenue. These letters should be kept by investors as they provide important information on the limitation of that credit on 2014 North Carolina income taxes.

Qualified Business Tax Credit Program

Prior to January 1, 2014 the Department of the Secretary of State administered a Qualified Business Tax Credit Program. This allowed individuals to claim a tax credit for qualified business investments made in 2013 on their 2014 North Carolina tax returns. A “qualified business” was defined by statute and detailed information on which businesses qualified can be found here:

 

http://www.secretary.state.nc.us/bustax/overview.aspx

 

Qualified Business Investment Tax Credit

The Qualified Business Investment Tax Credit was allowed for pass-through entities up to 25% of the amount invested by an investor in 2013 or $750,000, whichever was less. The tax credit is reported on the investor’s Schedule K-1 and taken as a direct offset to 2014 North Carolina income taxes on the individual tax return. If the investor does not have a tax liability for 2014 or if the credit is more than their tax liability, they can carry the unused portion over for the next five years.

 

Tax Credit Reduction for 2014 Taxes

Since businesses and investors knew this program was not likely to renew for 2014, there was an abundance of investments and applications for credits by the October 15, 2014 deadline. As result, total credits claimed on applications filed for investments made in 2013 were $8,245,775. The maximum that the state budgeted to authorize was $7,500,000. These means that investors will only get 90.5557% of the credit they applied for. The exact amount allowed is stated on the confirmation letters from the North Carolina Department of Revenue. It is important to provide this letter to your tax preparer to ensure the proper amount is reported on the 2014 state income tax return.

 

The North Carolina Department of Revenue recognizes that there will be questions regarding this and suggest calling the Income Tax Division, Personal Taxes Section at 919-814-1066.

2014 Charitable IRA Rollovers ? Time is running out!

Congress did not leave much time for taxpayers to make a decision on a charitable individual retirement account (IRA) rollover. That provision along with around 50 over tax breaks were only extended through December 31, 2014. The President still has to sign off on the one-year tax extensions, but he is expected to sign it into law this week.

What is a Charitable IRA Rollover?

Charitable IRA rollovers were allowed starting in 2006. IRA holders age 70 ½ or older can exclude up to $100,000 of taxable income if IRA distributions are paid directly to qualified public charities. The legislation was enacted to encourage older taxpayers to charitably give out of their IRAs.

What are the Tax Benefits?

Age 70 ½ is also the time the IRS requires withdrawals (required minimum distributions) from IRAs even if the owner does not need the funds. Charitable IRA rollovers allow taxpayers who have to take a required minimum distribution to donate those funds directly to charity. The donation is removed from income so they do not have to pay taxes on the distribution. This is also a good strategy for taxpayers who normally cannot itemize their deductions and take advantage of the charitable deduction.

The one-year tax extender bill is applied retroactively to any charitable IRA rollovers made earlier in the year and to those made through the end of the year. If this is something you may be interested in pursuing we recommend reaching out to the manager of your IRA as soon as possible.

2015 and Future

A bill was originally introduced to make these rollovers permanent legislation, but it was discovered that the President would have vetoed it. There is still debate on which tax extenders to make permanent without increasing the national deficit. For now, the extended provisions are only through December 31, 2014. One provision of a bill over the summer that did not get passed, but may appear in the future, is the “charitable giving extension”. This would allow taxpayer’s to make charitable gifts up until April 15th that would be deductible on the previous year’s tax return. That would be a very interesting tax planning strategy that we will monitor in 2015.

What is Reasonable S Corporation Compensation?

S Corporation shareholders who provide substantial services to the business must have “reasonable compensation” or reasonable salary. Determining reasonable compensation can be difficult for a lot of shareholders. While some shareholders rely on the 50/50 rule for salary and distributions this is not an Internal Revenue Service (IRS) accepted method for determining reasonable compensation. The IRS is aware of S Corporation shareholder’s motivation to maximize dividends or distributions and minimize payroll to avoid self-employment taxes. As a result, S Corporation tax return audits are on the rise. Of the returns audited in 2007-2011, each resulted in an average of over $100,000 in adjustment recommendations so there is a significant under payment issue on payroll for S Corporation shareholders.

What is reasonable compensation?

·         Replacement Cost – What you would pay someone else to do your job

·         Fair Market Value – What someone would pay you for your job (hourly rate x 2,080 hours of work)

In August 2008, the IRS released a fact sheet (FS 2008-25) to help provide some guidance on determining reasonable compensation. They stated that when assessing reasonable compensation they use 9 main factors:

1.       Training and Experience (Degrees held by officer and length of time in industry)

2.       Duties and Responsibilities

3.       Time and Effort Devoted to the Business (Capped at 2,080 hours per year)

4.       Dividend (Distribution) History

5.       Payments to Non-Shareholder Employees (Other employees receiving more compensation than main shareholder)

6.       Compensation Agreements (Whether these are added to Corporate minutes)

7.       Timing and Manner of Paying Bonuses to Key People

8.       What Comparable Businesses Pay for Similar Services

9.       Whether a Formula was Used to Determine Compensation

The key takeaway is that reasonable compensation is not a simple calculation. S Corporations need to document how they are determining reasonable compensation for S Corporation shareholders who provide substantial services to the business.

North Carolina Employment Security Commission (NC ESC) 2015 Notices

The North Carolina Division of Employment Security has sent out unemployment tax rate assignments that will be effective January 1, 2015. There are important facts to remember:

This Is Not a Bill

These letters are not bills requesting payment or notices of a refund. They are purely informational showing how the North Carolina unemployment tax rate for 2015 for your business is calculated. At the beginning of the notice in the upper left you will see “Tax Rate for Year Shown Above”. This percentage may be unchanged, increased, or decreased from 2014 depending on unemployment activity for each individual business. The rate is based on taxable wages and account balances as of July 31, 2014. Activity after this date will affect your 2016 unemployment rate. An explanation of how the rate is calculated is below the July 31, 2014 account balance.

Action is Required

Depending on a business’ payroll processing system the taxable wage base will need to be updated starting January 1, 2015. The taxable wage base per employee is now $21,700 up from $21,400 in 2014. The unemployment tax rate will also need to be updated (if changed) in the payroll system. Be sure to provide these notices to your payroll professional. More importantly, businesses should review these notices to ensure they are not being charged for unemployment claims in error.  If no former employees have claimed unemployment the businesses’ reserve account balance should be increasing for the year. Taking the time to give these letters a quick reasonableness test could save the business money in future years if unemployment claims are made.

Again, these rates are effective January 1, 2015 and not the date the statements are mailed or received. These rates will become final if not contested by May 1, 2015. There are instructions on contesting an unemployment rate on the notice. If your business does not receive a tax rate assignment by yearend we would recommend reaching out to the North Carolina Division of Employment Security for an updated rate online or by phone. Contact information is below:

Online – https://www.ncesc1.com/business/login.asp?txtURL=business/employerservices/employermain.asp&txtQuery=RTF%3DTAS

Phone – 919-707-1150

2014 Tax Extender Update

At the end of 2013 over 50 individual and business tax provisions expired. Congress has still made little progress on determining which of these will be retroactively reinstated for 2014 even as we approach the end of the tax year. It looks like no decision will be made in November since Congress adjourns for Thanksgiving and will reconvene starting December 1st. For our clients we are providing them with the worst case scenario, assuming that the provisions that expired will not be retroactively be reinstated. If provisions are not reinstated, individuals and businesses could be facing some tax surprises in 2014. Here are several of the main expired provisions and who they affect:

Individual Tax Provisions

  • Sales Tax Deduction
  • Mortgage Forgiveness Exclusion
  • Charitable Donation of IRAs
  • Tuition and Fees Deduction

Business Tax Provision

  • Research and Development Tax Credit
  • Section 179 Expensing (has reverted back to the $25,000 per year limit)
  •  Energy Tax Credits

No deals have been finalized, but much of the debate is over making some of these provisions permanent like the Earned Income Tax Credit. The White House has come out to say they will veto a bill that makes expiring corporate tax breaks permanent. It will be interesting to see if the provisions that do pass are only reinstated for one year and defer the issue to 2015 when Republicans control Congress. Either way, it is an important time to pay attention to those extenders that may affect your business or family to prepare for 2014 taxes.

Small Business Saturday in Wilmington NC

Small Business Saturday started in 2010 as a marketing campaign by American Express to encourage consumers to “Shop Small”. The goal was to promote attention to small businesses that the deep discounts and early morning rush of Black Friday can take away from. American Express encourages local business to publish their business on the Shop Small map and band together the neighborhoods of local shops to promote Small Business Saturday. This campaign can be found here: https://www.americanexpress.com/us/small-business/shop-small/

 

While we have a passion for helping small businesses, there are facts to back the reasoning for supporting small businesses. According to a study performed by Civic Economics, at least 68% of dollars spent at a local business will stay in the local economy. A large business that receives the same amount of money will only reinvest 48% of those dollars back into the local economy. Also, as an incentive to Shop Small, American Express is offering up to a $30 credit to your bill if you shop at 3 small businesses on the Shop Small map on Small Business Saturday and spend at least $10 at each of them. To take advantage of this promotion you must register in advance at the American Express link we provided above.

Locally here in Wilmington many shops are offering special discounts and entertainment on Small Business Saturday. We encourage you to avoid the Black Friday craze and enjoy Small Business Saturday and support our local community!

 

Small Business Saturday Wilmington NC

Area Voters Say Yes to Tax Increases

It is a rarity that citizens vote in favor of tax increases, but that is exactly what happened yesterday in New Hanover County. There was an overwhelming majority in favor of the Wilmington Transportation bond and New Hanover County school bond.

What does this mean for the county?

The Wilmington Transportation bond was approved for $44 million and the city will allocate other funds for a total of $55 million for the proposed projects. The areas planned for improvement are marked by large blue signs around the city. The funds allocated for the projects are broken down as follows:

–          $33 million in road improvements

–          $20 million in sidewalks, crosswalks, and trails to improve pedestrian access

–          $2 million in public transportation

The New Hanover County school bond was approved for $160 million. This bond’s 14 projects will address the county’s top concerns of safety, increase enrollment, and infrastructure. The projects will include a new elementary school, several replacement schools, and renovations to eight existing schools. There will also be safety and infrastructure improvements throughout the county.

What does this mean for taxes?

The Wilmington Transportation bond will increase the city’s property tax rate by 2 cents starting July 1, 2015 and lasting for twenty years. This means for every $100 worth of home value you will pay an additional 2 cents per year. Note that this is a city tax so citizens in New Hanover County not in the city limits will not be subject to this tax.

The New Hanover County school bond will increase the city’s property tax rate by 3 cents and lasting for twenty years. This means for every $100 worth of home value you will pay an additional 3 cents per year. This is a county wide tax.

Property taxes are deductible on your individual income tax return if deductions are itemized. This means that not only will those taxes pay to improve the county, but can provide income tax benefit as well!

NC and the State Tax Rankings

On October 28, 2014 the Tax Foundation released its 2015 State Business Tax Climate Index and North Carolina was #16 among the ranked 50 states. The Tax Foundation is a nonpartisan tax research group that collects and publishes tax research for both Federal and state. While #16 may not seem like something to cheer about, North Carolina was ranked top 10 worst business tax climates in 2014 at #44. Also, there are states that do not have individual, corporate, or sales tax like we do. These states that do not have corporate or individual income tax (Wyoming, Nevada, and South Dakota) automatically vault to the top of the list.

The North Carolina tax reform left many with mixed emotions since it cut the $50,000 business income deduction per business owner that our small to medium sized business clients benefited from. However, it is hard to ignore that a jump in the rankings makes our state a lot more attractive when compared to surrounding coastal states. This ranking will also climb when the next income tax rate reductions are put into effect in 2015. As a reminder here are the tax rates changes that have resulted in North Carolina’s jump in the business tax climate rankings:

Individual Income Tax Rates:

2013 – Ranged from 6% to 7.75%

2014 – 5.8%

2015 – 5.75%

Corporate Income Tax Rates:

2013 – 6.9%

2014 – 6%

2015 – 5%

 

IRS Phone Scam

Opening the mailbox and seeing a letter with the IRS logo on it usually results in panic even if the notice is purely information. What if instead of a letter you were to receive a phone call from the IRS threatening to put you in jail or revoke your driver’s license? This has happened to an increasing number of our clients over the past several months. The IRS telephone scam is becoming so prevalent that the IRS issued a notice warning taxpayers of the phone calls.

Here are items to remember:

·         The IRS will always send any notification of tax due via the United States mail in written letter form. So if the telephone call is the first you are hearing from them, it is almost certainly a scam.

·         The IRS never asks for credit card, debit card, or other payment information over the phone.

·         Just because the caller knows the last 4 digits of your social security number does not mean they are with the IRS as this is surprisingly easy information to obtain.

·         Caller ID may not help you detect scammers as they can replicate the IRS phone number to display.

·         The callers may mimic background noises to make them appear like they are in an IRS call center.

In a few rare cases after the IRS scammers call, another phone call comes in pretending to be the police or DMV to help support their claims that they could take you to jail or revoke your driver’s license. Fear clearly is what they are using to victimize taxpayers and steal account information. Although the telephone scam is the one we have heard the most about from clients remember that the IRS also does not email, send text messages, or contact through social media outlets.

If you receive a phone call and want to confirm the request is legitimate hang up with the current caller and call 1-800-829-1040. A representative can pull up your account and let you know for certain if any taxes are owed. If no taxes are owed, you can report the incident at 1-800-366-4484 to help others from becoming victims of this scam.