For taxpayers that extended their returns, the fall extension deadlines are rapidly approaching. If you have an extension filed for your S-Corporation, Partnership, Estate, or Trust tax return the deadline is September 15. If you have an extension filed for your personal tax return, the deadline is October 15. 

It's important to get your tax preparer the necessary information to complete the return. Keep in mind, most firms have an internal deadline where they will need your information  a certain amount of days prior to the actual deadline to ensure a timely filing.

At our firm, we request that our clients have their information to us one month before the actual deadline. To understand why we need that much time, it's important to know there is a formal process (intake, scanning originals, tax preparation, review, completion). Once we have all of your documents, we try to stick to a two week turnaround time. This process could be more or less depending on where we are in the filing season.

Deadlines should not be ignored. There are penalties assessed if you do not file.

If you have questions regarding filing deadlines, feel free to let us know.

This week, our team volunteered with Wilmington Area Rebuilding Ministry (WARM). We wanted to share with you more on our experience.

First off, what is WARM? WARM, Inc. organizes volunteers and raises funds to complete safety-related urgent home repairs and accessibility upgrades for low-income homeowners in Brunswick, New Hanover and Pender Counties.

The activities may vary from project to project, but our team worked on a roof support replacement project – which was one small piece to the many things being done on this particular home. When it is all said and done, the flooring and the roof would be replaced on this particular project. There will be a handful of groups that come through to complete the task.

Just to give you an idea of the conditions, the homeowner was already on the list to have repairs done, but before the task could be completed, this homeowner's roof blew off in the last storm we had. Can you imagine what that would be like? Most of us cannot. If you have any compassion at all, seeing this will make you want to help even more. It certainly pulls on your heartstrings to say the least.

Why is this type of volunteering good for your team? It encourages team work. We had a few on ladders with drills, others were outside cutting out the boards that were being used, one was moving furniture to one room to another, etc. All of these tasks were important in getting the overall job done.

Can you or your team volunteer? Absolutely. WARM is always looking for volunteers to help out on projects.

What if you have no skills in this area? This is where team work comes in. We helped each other get the job done. Some of us are more handy and/or strong than others. There was also an employee from WARM to give us direction and show us exactly what we needed to do. If you can follow directions, you will be fine.

Volunteering in the community allows us to give back to this wonderful town that we live in. If working on a project like this is not your thing, there are plenty of other opportunities out there with other organizations. We have gone to schools and worked with the children, worked at The Food Bank, etc.

If your heart is calling you to help but you simply do not have time for that, you can always help in other ways. Any of these organizations are always accepting donations.

If you are thinking of volunteering and had questions about it, feel free to reach out to us.

Previously, we discussed North Carolina's tax ranking on The Tax Foundation site. We highlighted the worst states for taxes.

 

Just to recap, the WORST states according to The Tax Foundation were as follows (#1 being the worst):

10. Iowa (Income Tax  8.98%, Sales Tax 6%, Per Capita Property Tax $1,430)

9. Connecticut (Income Tax 6.7%, Sales Tax 6.35%, Per Capita Property Tax $2,580)

8. Wisconsin (Income Tax 7.65%, Sales Tax  5%, Per Capita Property Tax $1,724)

7. Ohio  (Income Tax 5.33%, Sales Tax  5.75%, Per Capita Property Tax $1,140)

6. Rhode Island (Income Tax 5.99%, Sales Tax  7%, Per Capita Property Tax $2,161)

5. Vermont (Income Tax 8.95%, Sales Tax  6%, Per Capita Property Tax $2,197)

4. Minnesota (Income Tax 9.85%, Sales Tax  6.88%, Per Capita Property Tax $1,535)

3. California (Income Tax 13.3%, Sales Tax  7.5%, Per Capita Property Tax $1,426)

2. New York (Income Tax 8.82%, Sales Tax  4%, Per Capita Property Tax $2,338)

1. New Jersey (Income Tax 8.97%, Sales Tax  7%, Per Capita Property Tax $2,896)

 

What are the BEST states for taxes? Here is a list (#1 being the best):

10. Texas (Income Tax  0%, Sales Tax 6.25%, Per Capita Property Tax $1,555)

9. Utah (Income Tax 5%, Sales Tax 5.95%, Per Capita Property Tax $912)

8. Indiana (Income Tax 3.4%, Sales Tax  7%, Per Capita Property Tax $971)

7. New Hampshire (Income Tax 5%, Sales Tax  0%, Per Capita Property Tax $2,518)

6. Montana (Income Tax 6.9%, Sales Tax  0%, Per Capita Property Tax $1,347)

5. Florida (Income Tax 0%, Sales Tax  6%, Per Capita Property Tax $1,369)

4. Alaska (Income Tax 0%, Sales Tax  0%, Per Capita Property Tax $2,077)

3. Nevada (Income Tax 0%, Sales Tax  6.85%, Per Capita Property Tax $1,109)

2. South Dakota (Income Tax 0%, Sales Tax  4%, Per Capita Property Tax $1,196)

1. Wyoming (Income Tax 0%, Sales Tax  4%, Per Capita Property Tax $2,173)

 

It's important to note how The Tax Foundation arrives at this data. As you can see in the information above, some factors include income tax, sales tax, and per capital property tax. Other factors that are not listed are corporate income tax rates. Rates vary among states and play a role in the determination of ranking. As shown above, Wyoming ranks as number 1 overall, yet has a fairly high per capital property tax rate. Because there are various inputs involved in the calculation, The Tax Foundation does the best they can to weight them and rank with the overall taxes in mind.

 

With all of that being said, North Carolina is not far behind the "best" states ranking at 16 (up from 44).

 

A few important factors that The Tax Foundation does not take into account are quality of life and personal preferences. You should consider all factors when deciding where you would like to be.

 

Topics to consider: Will you own a business? Are you in a young professional, in retirement age, somewhere in between, etc?  What are your interests? Are you purchasing a home in the state? What are your preferences on climate? The Tax Foundation's rankings gives you some insight to the best and worst states from a taxation standpoint, but as you can see, there is much more to it. This type of decision simply cannot be based on taxes alone. We hope you find this information useful.

Previously, we discussed North Carolina's tax ranking on The Tax Foundation site. We highlighted the worst states for taxes.

 

Just to recap, the WORST states according to The Tax Foundation were as follows (#1 being the worst):

10. Iowa (Income Tax  8.98%, Sales Tax 6%, Per Capita Property Tax $1,430)

9. Connecticut (Income Tax 6.7%, Sales Tax 6.35%, Per Capita Property Tax $2,580)

8. Wisconsin (Income Tax 7.65%, Sales Tax  5%, Per Capita Property Tax $1,724)

7. Ohio  (Income Tax 5.33%, Sales Tax  5.75%, Per Capita Property Tax $1,140)

6. Rhode Island (Income Tax 5.99%, Sales Tax  7%, Per Capita Property Tax $2,161)

5. Vermont (Income Tax 8.95%, Sales Tax  6%, Per Capita Property Tax $2,197)

4. Minnesota (Income Tax 9.85%, Sales Tax  6.88%, Per Capita Property Tax $1,535)

3. California (Income Tax 13.3%, Sales Tax  7.5%, Per Capita Property Tax $1,426)

2. New York (Income Tax 8.82%, Sales Tax  4%, Per Capita Property Tax $2,338)

1. New Jersey (Income Tax 8.97%, Sales Tax  7%, Per Capita Property Tax $2,896)

 

What are the BEST states for taxes? Here is a list (#1 being the best):

10. Texas (Income Tax  0%, Sales Tax 6.25%, Per Capita Property Tax $1,555)

9. Utah (Income Tax 5%, Sales Tax 5.95%, Per Capita Property Tax $912)

8. Indiana (Income Tax 3.4%, Sales Tax  7%, Per Capita Property Tax $971)

7. New Hampshire (Income Tax 5%, Sales Tax  0%, Per Capita Property Tax $2,518)

6. Montana (Income Tax 6.9%, Sales Tax  0%, Per Capita Property Tax $1,347)

5. Florida (Income Tax 0%, Sales Tax  6%, Per Capita Property Tax $1,369)

4. Alaska (Income Tax 0%, Sales Tax  0%, Per Capita Property Tax $2,077)

3. Nevada (Income Tax 0%, Sales Tax  6.85%, Per Capita Property Tax $1,109)

2. South Dakota (Income Tax 0%, Sales Tax  4%, Per Capita Property Tax $1,196)

1. Wyoming (Income Tax 0%, Sales Tax  4%, Per Capita Property Tax $2,173)

 

It's important to note how The Tax Foundation arrives at this data. As you can see in the information above, some factors include income tax, sales tax, and per capital property tax. Other factors that are not listed are corporate income tax rates. Rates vary among states and play a role in the determination of ranking. As shown above, Wyoming ranks as number 1 overall, yet has a fairly high per capital property tax rate. Because there are various inputs involved in the calculation, The Tax Foundation does the best they can to weight them and rank with the overall taxes in mind.

 

With all of that being said, North Carolina is not far behind the "best" states ranking at 16 (up from 44).

 

A few important factors that The Tax Foundation does not take into account are quality of life and personal preferences. You should consider all factors when deciding where you would like to be.

 

Topics to consider: Will you own a business? Are you in a young professional, in retirement age, somewhere in between, etc?  What are your interests? Are you purchasing a home in the state? What are your preferences on climate? The Tax Foundation's rankings gives you some insight to the best and worst states from a taxation standpoint, but as you can see, there is much more to it. This type of decision simply cannot be based on taxes alone. We hope you find this information useful.

The federal tax credit for energy property was established by The Energy Policy Act of 2005.  In 2008, there was the Energy Improvement and Extension Ac t of 2008.  This extended eight years of the credit to December 31, 2016.

Taxpayers can claim a credit of 30% of qualified expenditures for a system that serves a dwelling unit located in the US and is owned as used as a residence.  On new homes, there is a "placed in service" date is the date of occupancy by the homeowner.  The home that is served by the system does not have to  be the taxpayer's principal residence.  If your credit exceeds the tax owed, you can carry the unused portion forward to next year's tax return.  Form 5695 Residential Energy Credits needs to be filled out and attached to your 2015 Federal tax return.

Solar Electric Property

Systems must be placed in service on or after January 1, 2006, an on or before December 31, 2016. There is no maximum credit for systems placed in service after 2008.

 

Solar Water-Heating Property

Systems must be placed in service on or after January 1, 2006, an on or before December 31, 2016. The equipment must be certified by performance by the Solar Rating Certification Corporation (SRCC) or a comparable entity endorsed by the government of the state in which the property is installed.  The tax credit does not apply to solar water-heating for hot tub or swimming pools.

 

Fuel Cell Property

Maximum credit is $500 per half kilowatt (kW).  The fuel cell must have a nameplate capacity of at least 0.5 kW of electricity using the electrochemical process and an electricity-only generation efficiency greater than 30%. 

 

Small Wind-Energy Property

There is no maximum credit for systems placed in service after 2008. Systems must be placed in service on or after January 1, 2006, an on or before December 31, 2016.

 

Geothermal Heat Pumps

Must meet federal Energy Star criteria.

 

A good resource to research and verify information is via the NC Clean Energy Technology Center.

                Identity theft is still a serious concern for many individuals. We hear about it in the news regarding credit cards when it is Target or another large organization that has a security breach. Social Security numbers can be just as dangerous when that information is stolen from taxpayers. This time of year our clients are trying to get us their information quickly to expedite the completion of their tax returns. While many are careful with their personal information we find that clients will send tax documents with their Social Security numbers on them to us via email. As much as we strive to be a paperless office we recognize the dangers in electronically transferring personal information over an unsecured connection. In our office we utilize Sharefile which allows us and our clients to share information with each other via a secure portal. Each client has an individual login with their email and chosen password. Our custom Sharefile site can be found here:

www.adamshaycpa.sharefile.com

                Tax-related identity theft and fraud is a big concern in our industry. Having helped clients with this issue, we know that it can be a frustrating and time-consuming ordeal to go through. With a stolen name and Social Security number it is all too easy for someone to file your taxes and claim a large refund. Typically the fraud is only discovered when clients go to file their tax return and someone has already filed under their Social Security number. Any refunds due can take a year or more to receive since someone has already claimed it and there is a formal process for proving your identity. With the IRS being understaffed we anticipate those identity theft cases taking even longer now.

The IRS is also trying to avoid future identity theft by instituting a program for Identity Protection Personal Identification Numbers (IP PIN). Currently, only certain individuals are eligible for an IP PIN (see link below). Once registered for an IP PIN that number is required to file the tax return. This helps prevent fraudulent filings since this six-digit IP PIN is not related to the taxpayer’s social security number. Keep in mind that once an IP PIN is applied for it must be used on all tax filings going forward. Each year a new number is received from the IRS. The steps to apply are below for eligible individuals:

http://www.irs.gov/Individuals/Get-An-Identity-Protection-PIN

We encourage our clients to avoid using email to send personal information when possible. The extra time to log on to our Sharefile site or drop by the office can save you countless hours and stress if your identity were to be stolen.

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.

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.

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.

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

Most people have moved at least once in their life. Once you are settled into a new home, it can be the best feeling in the world, but I think we would all agree that the actual moving process itself can be a stressful experience. 

A common question that we get is, do you need to notify the Internal Revenue Service (IRS) and your state of an address change? The answer is, yes.

Why do they need your address? Any correspondence from the IRS is mailed. If they do not have the correct address, there is a chance that you would not get the notices. This could cause a very small problem to turn into a huge problem. Ignoring the IRS will not make them go away (whether it is intentional or not).

How do you notify the IRS of an address change? While you have the option to draft a letter or call, the most straight forward and easiest way to complete this process is to use the form that they provide. Simply fill out Form 8822 and mail it to the IRS (which can be found on the IRS website).  By using this form that they created, you are assured you have given them what they will need.   North Carolina requests that you mail them a letter.

Anytime you mail items to the IRS or state, we recommend scanning or copying the item for your own records. You can certify mail it, or at the very least, keep track of when you mailed the form in.

If you have any questions about changing your address with the IRS or state, please contact us.