Category Archives: Blog

Do you have a Capitalization Policy?

In an attempt to alleviate past confusion, the IRS issued new regulations clarifying which costs are classified as repairs and maintenance and deductible in the current year. This is versus those fixed asset expenditures that have to be capitalized and depreciated over a number of years.

General Rule: Taxpayer must capitalize and depreciate all costs that facilitate the acquisition or production of property. Improvements to property that better a unit of property, restore it, or adopt it to a new and different use must also be capitalized.

The regulations provide circumstances for when certain items can be expensed, rather than capitalized.

  1. De Minimis Safe Harbor: Supplies and Materials that are $200 or less per item, per invoice OR have a useful life of 12 months or less can be expensed in the current year.
  2. Routine Maintenance Safe Harbor: Repairs and maintenance that keep business property in ordinarily efficient operating condition, such as inspection, cleaning, testing, and replacement of worn or damaged part can be expensed.
  3. Per Building Safe Harbor for Small Businesses: Taxpayers with average annual gross receipts of $10 million or less in the three preceding tax years can deduct improvements made to a building with an unadjusted basis of $1 million or less. The deduction is limited to $10,000 or 2% of the building’s unadjusted basis. This election is made annually on a timely filed return and is on a building-by-building basis.

Exceptions to the General Rule:

  1. A Capitalization Policy establishes the threshold (minimum cost) for capitalization and depreciation of fixed assets. Taxpayers that have a written policy for accounting procedures in place by the beginning of the tax year can deduct up to $500 per item, per invoice (instead of $200). The $500 de minimis safe harbor election can be made by attaching a statement to a timely filed federal income tax return. This election is not considered a Change in Accounting Method and therefore Form 3115, Application for Change in Accounting Method, is not required. For businesses that had a written Capitalization Policy in place at 1/1/2014, the $500 threshold can be applied on the 2014 Federal return. For businesses that did NOT have a policy in place can still make the election for 2015 by establishing accounting procedures for the 2015 tax year before January 1st.
  2. The IRS has hinted at flexibility in the dollar ceilings where the taxpayer has the burden of showing that such treatment clearly reflects income. If you think your business model can support a higher de minimis threshold, consider filing Form 3115, Application for Change in Accounting Method, with the tax return for the year the change is to be effective.

These regulations are lengthy and complex, so contact your local Padgett office for assistance, as these new provisions will affect every business, even yours!

For more information, contact Padgett Business Services in Bothell, Washington at (425) 408-1695. We handle your bookkeeping, accounting, tax (personal & business) and payroll needs – so you can focus on what makes you money. Serving Bothell, Lynnwood, Kenmore, Mill Creek and surrounding areas.

The Gift of Inventory – Maximize Your Tax Deduction

Donating excess or obsolete inventory can help small businesses avoid hefty storage fees and make room in their warehouse for the products which do sell. Small business owners could also receive a valuable tax deduction if the donation meets certain requirements.

  • What can be donated? Obsolete inventory exists when the items are no longer in season/style, have expired, or are outdated for the purposes of your business. To qualify for a tax deduction, it must still retain some value and must be able to be used by the charitable organization. A computer is an example for which you can receive a tax deduction. However, the donation of a typewriter to a charitable organization will unlikely qualify for the tax deduction.
  • How much can you donate? The IRS encourages businesses to donate excess inventory to charity in quantities that can be used in the charitable organization’s normal course of business and help them to meet the stated mission of their organization. For example, a manufacturing business can’t receive a deduction for donating 200 widgets to the Salvation Army since they provide no benefit to the charity. However, a clothing store donating 200 coats to Salvation Army would receive a charitable deduction. What if there were 1,000 coats? To receive a deduction for all 1,000 coats, the Salvation Army would have to be able to sell these in the normal course of business, otherwise a deduction would be allowed for only a reasonable number of donated coats.
  • Who can you donate to? Only charitable organizations that are listed as 501(c)(3) organizations will qualify for the tax deduction. Schools, hospitals and churches are some examples of these types of organizations. If you’re in doubt, you can ask the charity about its status.
  • How much can you deduct? The amount you can deduct is the smaller of its fair market value on the day you contributed it or its basis. The basis of contributed inventory is any cost incurred for the inventory. You must remove the amount of your charitable contribution deduction from your opening inventory, as it is not part of the cost of goods sold. If the cost of donated inventory is not included in your opening inventory, the inventory’s basis is zero and you cannot claim a charitable contribution deduction.

If your small business has excess inventory, contact your local Padgett office to see how you may benefit from making a donation.

For more information, contact Padgett Business Services in Bothell, Washington at (425) 408-1695. We handle your bookkeeping, accounting, tax (personal & business) and payroll needs – so you can focus on what makes you money. Serving Bothell, Lynnwood, Kenmore, Mill Creek and surrounding areas.

News from the IRS – Scams and Email Phishing

Scam Phone Calls: The Internal Revenue Service issued a consumer alert providing taxpayers with tips to protect themselves from telephone scam artists calling and posing as the IRS. These callers may demand money or may say you have a refund due in hopes of tricking you into sharing private information.

Don’t be fooled, as these con artists can sound convincing and may know a lot about you. They usually alter the caller ID to make it look like the IRS is calling and use fake names and bogus IRS identification badge numbers. The IRS reminds people that identifying a fake IRS caller is relatively easy; below are five things the scammers often do but the IRS will never do:

  1. Call you about taxes you owe without first mailing you an official notice.
  2. Demand that you pay taxes without giving you the opportunity to question or appeal the amount.
  3. Require you to use a specific payment method for your taxes, such as a prepaid debit card.
  4. Ask for credit or debit card numbers over the phone.
  5. Threaten to bring in local police or other law-enforcement groups to have you arrested for not paying.

If you get a phone call from someone claiming to be from the IRS and asking for money, the IRS advises you to do the following:

  • If you know you owe taxes or think you might owe, call the IRS at 1.800.829.1040.
  • If you know you don’t owe taxes or have no reason to believe that you do, report the incident to the Treasury Inspector General for Tax Administration (TIGTA) at 1.800.366.4484 or at www.tigta.gov.
  • If you’ve been targeted by this scam, also contact the Federal Trade Commission and use their “FTC Complaint Assistant” at FTC.gov. Please add “IRS Telephone Scam” to the comments of your complaint.

Email Phishing Scam: The IRS has been alerted to a new email phishing scam in which the email will appear to be from the IRS and include a link to a bogus website intended to mirror the official IRS website. These emails contain the direction “you are to update your IRS e-file immediately”. Although these emails may seem legitimate and mention USA.gov and IRS.gov, don’t get scammed! These emails are not coming from the IRS, as the IRS never initiates contact with taxpayers by email, texting, or any social media.

Taxpayers who get these messages should not respond to the email or click on the links. Instead, they should forward the scam emails to the IRS at phishing@irs.gov . For more information, visit the IRS’s Report Phishing web page.

IRS2Go Mobile App: The 2014 Version of the IRS2Go is now available! This new version has a brand new look and feel with new added features. The app is available in both English and Spanish and allows you to check the status of your federal income refund or request your tax return or account transcript through your smartphone. You can even use it to help you locate an IRS Volunteer Income Tax Assistance (VITA) site near your home. If you have an Apple iPhone, iPad, or iPod Touch, you can download the free IRS2Go app by visiting the iTunes app store. If you have an Android device, you can visit Google Play to download the free IRS2Go app.

For more information, contact Padgett Business Services in Bothell, Washington at (425) 408-1695. We handle your bookkeeping, accounting, tax (personal & business) and payroll needs – so you can focus on what makes you money. Serving Bothell, Lynnwood, Kenmore, Mill Creek and surrounding areas.

IRS Direct Pay is Now Available

On May 24th, the IRS announced the successful start of its new web-based system, known as IRS Direct Pay, on IRS.gov.

The system allows taxpayers to pay their tax bills or make tax payments directly from checking or savings accounts without any fees or pre-registration and offers a 30-day advance payment scheduling, rescheduling or cancellations, as well as a payment status search.

IRS Direct Pay simplifies the payment process by allowing taxpayers to establish an account with no waiting period and receive instant confirmation of their payment on a system that is available 24 hours a day, seven days a week.

Currently, IRS Direct Pay accepts only 1040 series return payments, including estimated tax payments, proposed tax assessments, extension payments, and amended return payments spanning from tax years 1993-2014.

To use this program, the IRS must first verify the taxpayer’s name, address, filing status, social security number and date of birth from a prior year tax return. Contact your local Padgett office to see how this new system can simplify your life!

For more information, contact Padgett Business Services in Bothell, Washington at (425) 408-1695. We handle your bookkeeping, accounting, tax (personal & business) and payroll needs – so you can focus on what makes you money. Serving Bothell, Lynnwood, Kenmore, Mill Creek and surrounding areas.

Know Your Rights as a Taxpayer

On June 10th, the Internal Revenue Service adopted a “Taxpayer Bill of Rights” to help the public understand their rights when dealing with the IRS. These rights have been grouped into ten categories as follows:

  1. The Right to Be Informed: Taxpayers have the right to know what they need to do to comply with the tax laws and are entitled to clear explanations of IRS procedures in all tax forms, instructions, publications, notices, and correspondence. They have the right to be informed of IRS decisions about their tax accounts.
  2. The Right to Quality Service: Taxpayers have the right to receive prompt, courteous, and professional assistance in their dealings with the IRS, to be spoken to in a way they can easily understand, to receive clear and easily understandable communications from the IRS, and to speak to a supervisor about inadequate service.
  3. The Right to Pay No More than the Correct Amount of Tax: Taxpayers have the right to pay only the amount of tax legally due, including interest and penalties, and to have the IRS apply all tax payments properly.
  4. The Right to Challenge the IRS’s Position and Be Heard: Taxpayers have the right to raise objections and provide additional documentation in response to formal IRS actions or proposed actions, to expect that the IRS will consider their timely objections and documentation promptly and fairly, and to receive a response if the IRS does not agree with their position.
  5. The Right to Appeal an IRS Decision in an Independent Forum: Taxpayers are entitled to a fair and impartial administrative appeal of most IRS decisions, including many penalties, and have the right to receive a written response regarding the Office of Appeals’ decision. Taxpayers generally have the right to take their cases to court.
  6. The Right to Finality: Taxpayers have the right to know the maximum amount of time they have to challenge the IRS’s position as well as the maximum amount of time the IRS has to audit a particular tax year or collect a tax debt. Taxpayers have the right to know when the IRS has finished an audit.
  7. The Right to Privacy: Taxpayers have the right to expect that any IRS inquiry, examination, or enforcement action will comply with the law and be no more intrusive than necessary, and will respect all due process rights, including search and seizure protections and will provide, where applicable, a collection due process hearing.
  8. The Right to Confidentiality: Taxpayers have the right to expect that any information they provide to the IRS will not be disclosed unless authorized by the taxpayer or by law. Taxpayers have the right to expect appropriate action will be taken against employees, return preparers, and others who wrongfully use or disclose taxpayer return information.
  9. The Right to Retain Representation: Taxpayers have the right to retain an authorized representative of their choice to represent them in their dealings with the IRS. Taxpayers have the right to seek assistance from a Low Income Taxpayer Clinic if they cannot afford representation.

10. The Right to a Fair and Just Tax System: Taxpayers have the right to expect the tax system to consider facts and circumstances that might affect their underlying liabilities, ability to pay, or ability to provide information timely. Taxpayers have the right to receive assistance from the Taxpayer Advocate Service if they are experiencing financial difficulty or if the IRS has not resolved their tax issues properly and timely through its normal channels.

For more information, contact Padgett Business Services in Bothell, Washington at (425) 408-1695. We handle your bookkeeping, accounting, tax (personal & business) and payroll needs – so you can focus on what makes you money. Serving Bothell, Lynnwood, Kenmore, Mill Creek and surrounding areas.

Challenges Facing Aging Taxpayers

Retirement planning has grown increasingly difficult due to demographic, social, and financial factors. From rising health care costs to longer life expectancy rates, and an estimated 10,000 Baby Boomers turning 65 each day, future retirees are faced with many challenges.

So, what is the best strategy for aging taxpayers to ensure that they will have enough money to sustain their lifestyle after retirement and cover possible long-term health care costs as they age? Unfortunately, there is not a simple answer. Financial planners do suggest considering the following factors.

  • If you believe that Social Security will be a viable benefit when you retire, you will want to determine the best strategy to maximize these benefits. AARP and T.Rowe Price have free online calculators to help taxpayers determine how and when to claim benefits. You may also, for a nominal fee, use certain websites such as www.maximizeMySocialSecurity.com  and www.SocialSecurityChoices.com.
  • As long-term care costs continue to rapidly increase, do your current assets allow for self-insuring or should you consider purchasing Long Term Care Insurance?
  • If you are more concerned with “running out of money” or “dying with too much money leftover,” you may want to begin monitoring your expenditures closely and re-evaluating your financial positions quarterly.

What are your options for the money that is in your employer’s retirement plan? The amount of the monthly payout will depend on the amount in the account and your age. Remember to consider your tax bracket when you begin taking distributions as these are taxed at your ordinary income tax rate.

For more information, contact Padgett Business Services in Bothell, Washington at (425) 408-1695. We handle your bookkeeping, accounting, tax (personal & business) and payroll needs – so you can focus on what makes you money. Serving Bothell, Lynnwood, Kenmore, Mill Creek and surrounding areas.

Understanding Affordable Care Act: Healthcare Trilogy, Part 3

2014 Healthcare Action Plan

All employers (large or small) should be aware of how the Affordable Care Act (ACA) affects their business. All employers are required to provide new employees with a Notice of Availability of Insurance at the time of hire. For additional information on this notice, please revisit Part 2 of the SmallBiz Builder Health Care Trilogy.

In addition, all employers should track hours of service by workers (unless obviously a Small Employer with less than 50 workers) to determine whether the employer mandate applies to their business and if so, does it take effect in 2015 or 2016. For more information, please revisit Part 2 of the SmallBiz Builder Healthcare Trilogy.

Below are some specific action steps that can be taken now to ensure compliance with the ACA.

Large Employers (100 or more employees for 2015 or 50 or more employees for 2016)  

  • Identify full-time and full-time equivalent employees and their dependents.
  • Consider the potential “No offer” penalty of $2,000 per full-time employee over 30 full-time employees, if one or more employees obtain insurance from the state exchange and qualify for a premium assistance credit. (See related article on page 3 of this issue).
  • Consider the “Inadequate offer” penalty (due to lack of Affordability and/or Minimum value) of $3,000 per employee that obtains insurance from the exchange with a premium assistance credit. The total penalty cannot be larger than the “No offer” penalty. (See related article on page 3 of this issue).
  • Consult with your insurance agent to consider “quick fixes” to your current health plan that may be more cost effective than paying the penalty.
  • Consider converting full-time workers to part-time employment. (See related article on dumping employees on page 3 of this issue).
  • Evaluate other current health benefit plans (Cafeteria, HRA, etc.) offered to the employees and verify they comply with the requirements of ACA.
  • Communicate to employees any changes you are making to your employee benefit plans as a result of the ACA and be ready for questions.
  • Prepare for reporting the required information to the IRS.
  • Consider whether replacing your current health insurance plan with a group plan (including SHOP) is beneficial to the business and its employees.
  • Consider whether dropping health insurance as an employee benefit and increasing employee salaries is more beneficial to the business and employees. This allows them to obtain health insurance coverage (including any premium assistance credit) through the exchange.
  • Evaluate any other health benefit plans (Cafeteria, HRA, etc.) offered to employees and verify their status under the ACA.
  • Consider whether the Small Business Health Care Credit is available for the business (fewer than 25 employees with an average salary under $50,000).

Small Employers (Less than 100 employees for 2015 or less than 50 employees for 2016)  

Before the passage of the ACA in March 2010, individuals were not required to have health insurance. As of January 1, 2014, individuals and self-employed taxpayers now have a healthcare requirement. The provision applies to individuals of all ages, including children. The adult or married couple who can claim a child or another as a dependent for federal tax purposes is responsible for making the payment if the dependent does not have coverage and does qualify for an exemption.

Individuals  

  • Obtain minimum essential coverage beginning in 2014 for themselves and their dependents, qualify for one or more exemptions from coverage, or be subject to penalty when you file your 2014 individual tax return.
  • Purchase health insurance from the federal or state exchange which may result in a premium assistance credit.
  • Consider applying for a penalty exemption with HHS before the end of the year.

In April 2014, the White House released the following Fact Sheet claiming the ACA is working by giving millions of Americans healthcare security and slowing the growth of health care costs. The press release included the following facts:

  • 3 million young adults gained coverage thanks to the ACA by being able to stay on their parents plan.
  • 3 million more people were enrolled in Medicaid and CHIP as of February, compared to before the Marketplaces opened.
  • Health care costs are growing at the slowest level on record: Lower-than-expected premiums under the ACA will help save $104 billion over the next ten years. Medicare /Medicaid costs in 2020 are now projected to be $180 billion lower than 2010 estimates. In 2016, the average premium for the second-lowest cost silver Marketplace plan will be 15% lower than expected.
  • Up to 129 million Americans with pre-existing conditions – including up to 17 million children – no longer have to worry about being denied health coverage or charged higher premiums because of their health status.
  • In 2013, 37 million people with Medicare received at least one preventative service at no out of pocket cost.
  • Since the health care law was enacted, almost 8 million seniors have saved nearly $10 billion on prescription drugs as the health care law closes Medicare’s “donut hole.”

105 million Americans no longer have to worry about having their health benefits cut off after they reach lifetime limit.

Large Employer Taxes for Health Insurance Plans  

“No Offer” Penalty 

For 2015, large employers with 100 or more employees are subject to a shared responsibility penalty for failure to offer health insurance to at least 70% of their full-time employees, and any employee obtains coverage on a state exchange and receives a premium tax credit or cost-sharing reduction. Beginning in 2016, the requirement extends to large employers with 50 or more employees that fail to offer coverage to 95% of their full-time employees. This penalty is calculated monthly at $167 (1/12 of $2,000) for each month of failure, multiplied by the number of full-time employees greater than 30.

“Inadequate Offer” Penalty 

Large employers (as defined under “No Offer” Penalty above) that fail to offer affordable and/or minimum value coverage are also subject to a penalty calculated monthly at $250 (1/12 of $3,000) for each month of failure for each employee that obtains health insurance on a state exchanges and receives a premium tax credit or cost-sharing reduction. This penalty cannot be greater than the “No Offer” Penalty.

“Dumping” Penalty 

Many employers had thought they could shift health costs to the government by “dumping” their employees to the exchange with a tax free contribution of cash to their employees to help cover the costs of insurance. The Obama Administration does not allow for such arrangements and stated the following:

Large employers with 50 or more employees, who terminate their health insurance plans, are subject to a (penalty) tax of $100 per day for each employee to whom such failure relates. The tax ranges from a minimum of $2,500 up to $500,000, but not to exceed 10% of the amount paid by the employer during the preceding year for group health insurance plans.

  • The tax will continue until the noncompliance is corrected.
  • No tax will be due if the failure is corrected within 30 days of the first person otherwise liable for the tax knew, or exercising reasonable diligence would have known, that the failure existed.
  • The penalty does not apply to church plans.
  • The “No Offer” and “Inadequate Offer” penalties also apply.

For more information, contact Padgett Business Services in Bothell, Washington at (425) 408-1695. We handle your bookkeeping, accounting, tax (personal & business) and payroll needs – so you can focus on what makes you money. Serving Bothell, Lynnwood, Kenmore, Mill Creek and surrounding areas.