Tax Implications Of A Divorce

Divorce can be stressful enough without discovering down the road the assets weren’t divided equitably even when spouses were in agreement about the division of their property. Failing to take taxes into account may be to blame when one spouse receives a smaller net share than expected.

Here are some issues to consider if divorce is on your horizon.

Taxable or Not Taxable?

Legal_Balance3Payments from one spouse to the other can have tax consequences for both spouses depending on how the payments are designated. Alimony generally is deductible by the spouse who pays it and is taxable to the recipient. Child support isn’t tax deductible by the person paying it nor is it taxable income to the recipient.

Who Claims the Exemptions?
The IRS has specific rules for determining which spouse is entitled to claim the dependency exemptions for the couple’s children. Who claims the exemption can also affect eligibility for certain tax credits, such as the child tax credit. Typically, the custodial parent claims the dependency exemption. However, parents can also choose to alternate claiming the exemption. And couples with more than one child may decide to split the exemptions.

The QDRO and Retirement Benefits

A qualified domestic relations order (QDRO) is a court order that specifies the property rights regarding qualified retirement plan assets of a spouse or dependent during a divorce. A QDRO allows the transfer of all or a portion of the assets in a qualified retirement plan from one spouse to the other without loss of the plan’s tax advantages. A QDRO should be carefully executed to avoid costly mistakes.

What’s Its Future Worth?

The value of assets that seem equal may no longer be equal once taxes come into play. Selling an asset in the future may create a tax liability. So spouses will need to consider more than current value when dividing investments and similar property.

Issues related to dividing assets during a divorce can be complex. Couples should seek professional advice.

Protect Your Business with a Buy-Sell Agreement

The unexpected can always happen. That’s why, if you’re the co-owner of a business, you need to prepare for the possibility that you — or the other owner — won’t be at the helm one day. The fact is, either of you could die tomorrow. What would happen then?

Business_Handshake7When you enter into a buy-sell agreement, you face this issue head on. A buy-sell agreement is a legal contract between you and the company’s other owners. In it, you each agree that your ownership interest will be sold (or offered for sale), at a certain price, to the company or to each other when you die. Often, the company or the owners buy life insurance policies so they’ll have the cash to make any agreed-upon purchase.

Tax Advantages
Buy-sell agreements offer more than simple protection for you and your family. You may also gain estate-tax benefits. Your estate can usually value your business interest according to the price or formula set in the agreement. This lets you plan in advance for what that value will be.

Buy-sell agreements can also help your estate avoid time-consuming and costly battles with the IRS. When an estate includes a closely held business interest, the IRS may see a red flag. The IRS wants to be sure that estates don’t come up with artificially low values for businesses in order to save taxes. If you have a buy-sell agreement in place, and follow all the tax law rules, the IRS is likely to accept your value.

What’s Your Interest Worth?
The key to making the value in your buy-sell agreement stick is to make sure that it is a “fair market” price. If you and the other owners aren’t relatives, this shouldn’t be a problem. You’ll probably bargain with one another to get the best deal possible. However, if you intend to pass your interest in the company on to a child or other family member, the IRS may argue that you and your close relative didn’t negotiate a fair price. That’s why it may be best to provide in the buy-sell agreement that a qualified professional will value the company annually or at the time of the sale.

Our team of business valuation experts can help you plan for the future through a buy-sell agreement. If you have questions or concerns about your business, contact Jack Hagmeyer at hagmeyer@wvco.com

 

Independent Contractor or Employee?

This seems like such a simple question. However, many companies and employees never take the time to consider their position. This is one of the most important decisions in the tax world. In fact, it goes well beyond taxes as it involves workers’ compensation, unemployment insurance, state and federal wage and labor laws, pension laws, nondiscrimination laws and more.

From an employer’s perspective, it’s often preferable to hire freelancers and contractors instead of employees. An employer is not required to pay for all the benefits offered to regular employees, such as health insurance, bonuses, 401(k) plan contributions, and so on. As a result, employers experience considerable incentives when utilizing independent contractors. More often than not, such employment follows the regulations set forth by the law. Nevertheless, some employers have been accused of misclassifying workers who should be considered employees as contractors instead.

The IRS has issued guidelines on the matter, stating “if you have the right to control or direct not only what is to be done, but also how it is to be done, then your workers are most likely employees.” Meanwhile, “If you can direct or control only the result of the work done — and not the means and methods of accomplishing the result, then your workers are probably independent contractors.” The distinction is important because there are penalties for misclassification.

For businesses of all sizes, the fines are everywhere and they’re not cheap. Take a look:

  • The Department of Labor ordered three construction companies to pay $491,100 in back wages and damages to 99 employees who were misclassified as independent contractors, in addition to another $108,900 in civil fines.
  • A prominent shipping company settled a series of class action lawsuits alleging worker misclassification for a total of $27 million. Previously, the IRS had already ordered the company to pay $319 million in back taxes and penalties.
  • The San Diego Union Tribune, owned by The Copley Press Inc., was ordered by a state court judge in California to pay $6.1 million in legal fees to the attorneys for a class of over 1,200 paper carriers to whom the court had earlier awarded $3.2 million in damages and another $1.75 million in interest. The final cost of the verdict against the newspaper for misclassification of the paper carriers as independent contractors totaled $11 million.

The IRS has given guidelines to its agents to determine worker status. In the past, a list of 20 factors compiled by the IRS had been used in court decisions to determine worker status. The list, sometimes called the “20-Factor Test” is still used as an analytical tool, although some of the factors are no longer as relevant as they once were.

Basically, the IRS’ 20-Point Checklist focuses on three main factors:

  • How much control the employer has over the worker’s behavior and work results. (Who controls training, where and what time the person works, what equipment they use?)
  • How much control the employer has over finances? (Does the employer have primary control over the person’s profit or loss?)
  • What is the relationship between the parties? (Does the worker receive benefits? Is it a long-term relationship?)
    Estimates are that 20% of businesses misclassify workers, so make sure your business understands the difference.

By: Mark Dietrich, Accountant

Changes Coming To The CPA Exam

For every CPA, the CPA Exam is a rite of passage, one of the first milestones on the path to a career in accounting. Long hours of study and prep work and the stress of the test itself are rewarded with the joy and/or relief of passing scores on all parts of the exam.

If you or anyone you know is planning to enter the field of public accounting, be aware changes are coming to the Uniform CPA Examination in April 2017, the first major update to the exam since 2011. Periodically, the AICPA conducts a practice analysis, seeking input from state boards of accountancy, state CPA societies, public accounting firms, and other stakeholders to assess whether the test is able to measure the skills and knowledge needed by newly licensed CPAs. This analysis determined that due to the automation and outsourcing of routine accounting tasks, greater critical-thinking skills were needed of new hires.

The four basic content areas of the exam – Auditing and Attestation, Business Environment and Concepts, Financial Accounting and Reporting, and Regulation – are not changing. How those areas are tested, however, will be. There will be fewer multiple-choice questions, and a greater emphasis on task-based simulations that better assess higher-order critical-thinking skills. Because of this, total test time will be increased from 14 to 16 hours.

To aid new candidates with preparation for the exam, an array of preparation and support materials reflecting the new exam format are being rolled out. The current Content Specification Outline and Skill Specification Outline are being replaced by new “blueprints” that will contain about 600 tasks across the four exam areas that will align with the skills expected of new accountants. AICPA.org will offer a sample of the new exam at aicpa.org/nextcpaexam, as well as a LinkedIn group for exam candidates.

Based on historical trends in advance of previous changes to the exam, the AICPA expects a surge of exam candidates in 2016. Forty total testing days will be added – ten each quarter beginning in April 2016.

Jake Freppel, Senior Accountant

Seasonal Business Considerations

If you have a seasonal business, you may face challenges typically not encounters by a year-round businesses. After all, attempting to squeeze a year’s worth of business into a far shorter period can prove to be hectic. Here are some tips to help you deal with demands of owning a seasonal venture.

Cash Control
All small business owners have to be careful cash managers. Strict management is particularly important when cash flows in over a relatively short period of time. One very important lesson to learn: Control the temptation to overspend when cash is plentiful.

Arming yourself with a realistic budget and sound financial projections, including next season’s start-up costs, will help you maintain control. In addition, you may want to establish a line of credit just to be safe.

In the Off-season
It may be difficult to maintain visibility when you are not in business year round. However, continued marketing efforts and periodic updates via e-mail or snail mail can dramatically impact your client base. Such marketing efforts can also help you develop new leads and new business. When you re-open for the season, you will certainly want to announce the date well ahead of time. Maximize your efforts by utilizing social media to expand your reach.

SeasonsTime for R and R
Take some time for rest and relaxation, you deserve it. Nevertheless, you will also want to use this time to make any necessary repairs and take care of any additions or modifications. You can also use the off-season to shop around for deals on items you keep in stock and/or equipment you need to buy or replace.

Expansion Plans
If you’re thinking of making the transition from “closed for the season” to “open all year,” start investigating new product lines or services. If you diversify in ways which are complementary to and compatible with your core business, your current customer base may provide support right away. A well-thought-out expansion can be the key to a successful transition into a year-round business.

Being the owner of any type of business has its rewards — and its challenges. We significant experience working with small business and would be happy to assist in any possible.

You Are Being Audited: Now What?

Here is the situation:  you have received a letter from the IRS; they are reviewing a previous tax year and you must provide support for your tax position(s). Hence, you are being audited.

Tax_AuditDon’t panic! Numerous taxpayers are audited on a yearly basis. You won’t be the first or the last. Since the IRS is such a large government institution, the process will be slow. The best thing you can do is remain calm and begin to make a plan.

Read the Audit Letter. Once you have taken the time to thoroughly examine the letter and its contents, determine what they looking for? Audits vary in length and scope. Pay attention to the time frame the IRS has provided for you to compile the requested documents.

Gather all information requested. Begin gathering the info requested. If you maintain good records, the process may be easier. If you are having difficulty locating certain documents, you may call and request an extension . If necessary, you may send the information piecemeal as some auditors appreciate some information rather than none. It is important to send only those items requested. Obviously, the IRS has the power to open additional audits of anything/anyone they feel is questionable or suspicious. So while you may think offering additional supporting information would be helpful, it may in the end cause additional issues. Rule of thumb is to stick to their list, The IRS will notify you if additional information is necessary.

Work with the auditor. Auditors are people too! More often than not, auditors are willing to work with you. Being upfront and honest can go a long way. If you are unable to locate a receipt, tell them. They may allow a credit card invoice or some other proof of payment as alternative substantiation.

Talk through the results and ask questions. Once the auditor has reviewed your paperwork, they will inform you of any issues. In some cases, you may be asked to provide more substantive evidence for expenses. In other cases, the auditor may try to assess penalties. In all of these instances, make sure you ask questions to understand why such circumstances are occurring. Many times, penalties are negotiable and occasionally even completely abatable. Make sure you take the time to understand what’s happening and go from there.

Pay the tax. Once you’ve gone through the process and settle on what you believe to be the final tax owed, make sure you pay it! This sounds straight-forward, taxpayers often think they can deal with the balance at a later time. The IRS will assess additional penalties and interest on any outstanding amounts due. If needed, payment plans are available.

If you are the subject of an audit and are unsure of the actions being taken, or have questions about the process, feel free to contact a William Vaughan Company audit representative.

Courtney Elgin, CPA

Laying the Groundwork for a Business Sale

Are you considering selling your small business? To ensure a successful and profitable outcome, now may be the right time to prepare for such transaction in advance.

After you’ve built your business from the ground up, being objective about its value can be difficult. Knowing what similar businesses have sold for recently can provide significant guidance. If you require a clear idea, you may consider having a certified accountant complete a business valuation.

Next, it is important to give some thought to an appropriate type of buyer – your ideal candidate. Is it a key person who currently works for your company? A competitor? Someone who just wants to buy a good business and run it but isn’t a current employee or competitor? An investor who wants to make a profit but isn’t interested in the day-to-day operations of the company? The sales price you desire will be dependent on the type of buyer being targeted.

At this point, you will also want to think about your future participation in the business after it is sold. Consider the role you’d be willing and able to play, if any, during the transition to new ownership.

Make It Attractive
Before putting your company on the market, you’ll want to focus on its profitability. Taking steps to enhance the bottom line — even if it means paying more income taxes — may allow you to command a higher price for the business.

On the asset side, now is the time to identify any equipment, furniture, fixtures, or machinery that is no longer useful and consider selling or otherwise disposing of these items. That way, you’ll be able to present a leaner business to potential buyers.

It’s What You Keep
Selling your company for a fair price is important, but so is securing all available tax advantages. Will you be structuring the sale as an asset sale or will you be selling your company stock? Each has different tax implications. With smart planning, you’ll be in a better position not only to command top dollar for your company, but also to minimize taxes on the sale.

Donating Excess Inventory to Charity

Getting rid of excess or obsolete inventory can provide much needed warehouse space.  Some businesses may choose to donate excess inventory to charity. However, it is important to be aware of the tax regulations involved in this type of charitable giving.

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

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

Manufacturing_Inventory3

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

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

IRS Changes Call First Policy for Audits

Most taxpayers are familiar with the IRS’ promise of not calling first. The IRS offers this assurance in an effort to combat scammers making unsolicited calls claiming to be IRS officials. However, this pledge has not been entirely accurate and lends to an explanation.

Tirs-logohe IRS made such declaration with regard to phone calls made for the collection of taxes or requests for personal information. However, until recently the Internal Revenue Manual suggested the preferable way to schedule in-person field examinations was to make initial contact through phone calls. The IRS felt it was clear their previous assurance of not calling first related only to collection calls while calls to schedule audits were a completely different function. Unfortunately, the distinction is not as obvious to a taxpayer receiving a cold call from someone claiming to be from the IRS. Distinguishing between the two scenarios may be difficult. In an effort to avoid confusion, the IRS is changing their policy and will now send a notification of audit through the U.S. mail and will follow-up with a subsequent call to schedule an appointment.

This change in policy is the result of various complaints from attendees of a public forum held by the Taxpayer Advocate Service on May 5, 2016. The complaints argued taxpayers has received phone calls from the IRS to schedule audits, which contradicted the IRS’ assurance of never calling first. In response to these complaints, the IRS issued a statement that “in an abundance of caution and in light of pervasive phone scams seeking to extort money from taxpayers, the IRS has decided to adjust this policy for in-person field exams.”

This change in policy means the IRS will no longer make initial contact through phone calls, but will instead only contact taxpayers via for follow-up communication. An IRS Consumer Alert reminds taxpayers that the IRS will never do any of the following over the phone:

  • Demand immediate payment
  • Request you to verify your identity or ask for personal and financial information
  • Ask for credit or debit card numbers
  • Require the use of a specific payment method for your taxes, such as prepaid debit card
  • Threaten to immediately bring in local police or other law-enforcement groups to have you arrested for not paying

If you receive a phone call from someone claiming to be from the IRS that involves any of the above red flags, do not provide any information and hang up immediately. You can then call any of the professionals at William Vaughan Company and we will assist you in determining if you have any obligation to the IRS.

By: Mark Sawyer, CPA