Tax Articles

Eligible small employers who provide health care coverage to their employees can receive a Small Business Health Care Tax Credit from the Federal government. Here’s what you need to know about who qualifies and how to take advantage of the credit.

What is the Small Business Health Care Tax Credit?

Small business owners make numerous decisions about employee benefits. For example, the type of benefits offered can entice the most desirable candidates to apply for their company’s positions. The right type of benefits can also boost employee retention. An excellent employee benefit to consider is health insurance. If that’s a perk being offered, the small business health care tax credit is a feature of the Affordable Care Act (ACA) that may be of interest. The tax credit is limited to employers with less than 25 employees, and it operates as a sliding-scale credit based on the size of the employer. The larger the employer, the smaller the tax credit. The maximum credit is 50 percent of premiums paid (35 percent for tax-exempt employers).

Qualifying small employers can take advantage of the small business health care tax credit for two consecutive tax years providing the business owes no taxes during those years. The credit can also be carried forward or back to other tax years. Any excess amount paid for health insurance premiums over the allowable credit can be claimed as a business expense.

Who qualifies for the Small Business Health Care Tax Credit?

As mentioned above, the small business health care tax credit is for small employers with fewer than 25 full-time equivalent employees (FTE). Note that the FTE concept is based on hours worked rather than the actual number of employees.

Other qualifications include that:

The employer pays less than $50,000 a year per FTE in average wages. Determining FTEs and average annual wages should be done by your qualified tax preparer, CPA, or via guidance from the Internal Revenue Service (IRS).

The employer offers a qualified health plan to employees through a Small Business Health Options Program Marketplace (SHOP).

The employer pays at least 50 percent of the employee’s premium cost. (Not family or dependent premium cost.)

What about Tax-exempt Organizations?

Tax-exempt organizations are also eligible for the small business health care tax credit. In this case, the credit is refundable to the extent that it does not exceed income tax withholdings or Medicare tax liability. Refunds to tax-exempt organizations are reduced by the current fiscal year sequestration rate. For an explanation of sequestration and how it impacts the small business health care tax credit, consult your tax advisor or accountant.

How do small businesses take advantage of the Small Business Health Care Tax Credit?

To claim the small business health care tax credit, the IRS requires Form 8941 (Credit for Small Employer Health Insurance Premiums) to be filled out and submitted. For small businesses, the amount should be included as part of the general business credit on the company’s federal tax return. The amount should be included on Form 990-T (Exempt Organization Business Income Tax Return) for tax-exempt organizations. Note: this form must be filed for a tax-exempt organization to claim the small business health care tax credit, even if the business does not typically file that form.

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Small business owners may find that offering perks like health insurance aren’t beyond their economic reach with incentives like this. As always, a trusted tax professional is the place to turn regarding this and other tax credits for small businesses.

Call us at 631-474-2500 now to discuss how we can formulate an effective tax strategy for you or your business. You can also request your free consultation online.

Created by the TCJA in 2017, opportunity zones are designed to help economically distressed areas by encouraging investments. This article contains an introduction to the complex details of how these zones work.

The IRS describes an opportunity zone as “an economically-distressed community where new investments, under certain conditions, may be eligible for preferential tax treatment.” How does a community become an opportunity zone? Localities qualify as opportunity zones when they’ve been nominated by their states. Then, the Secretary of the U.S. Treasury certifies the nomination. The Treasury Secretary delegates authority to the IRS.

The Tax Cuts and Jobs Act added opportunity zones to the tax code. The IRS says opportunity zones are new, although there have been other provisions in the past to help communities in need with tax incentives to spur business.

The new wrinkle is how opportunity zones are designed to stimulate economic development via tax benefits for investors.

• A Qualified Opportunity Fund is an investment vehicle set up as a partnership or corporation for investing in eligible property located in a qualified opportunity zone. A limited liability company that chooses to be treated either as a partnership or corporation for federal tax purposes can organize as a QOF.
• Investors can defer taxes on any prior gains invested in a QOF until whichever is earlier: the date the QOF investment is sold or exchanged or Dec. 31, 2026.
• If the QOF investment is held longer than five years, there is a 10 percent exclusion of the deferred gain.
• If the QOF investment is held for more than seven years, there is a 15 percent exclusion of the deferred gain.
• If the QOF investment is held for at least 10 years, the investor is eligible for an increase in basis on the investment equal to its fair market value on the date that the QOF investment is sold or exchanged.
• You don’t have to live, work or have a business in an opportunity zone to get the tax benefits. But you do need to invest a recognized gain in a QOF and elect to defer the tax on that gain.
• To become a QOF, an eligible corporation or partnership self-certifies by filing Form 8996, Qualified Opportunity Fund, with its federal income tax return.

The first set of opportunity zones covers parts of 18 states and was designated on April 9, 2018. Since then, there have been opportunity zones added to parts of all 50 states, the District of Columbia and five U.S. territories. More details are available on the U.S. Treasury website. Or see the IRS website for more information

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Slow paying customers, seasonal revenue variations, an unexpected downturn in sales, higher expenses — any number of business conditions can contribute to a cash flow crunch. If you own a small business, you may find the suggestions that follow helpful in minimizing cash flow problems.

Billing and collections. Your employees need to work with clear guidelines. If you don’t have a standardized process for billing and collections, make it a priority to develop one. Consider sending invoices electronically instead of by mail. And encourage customers to pay via electronic funds transfer rather than by check. If you don’t offer a discount for timely payment, consider adding one to your payment terms.

Expense management. Know when bills are due. As often as possible, pay suppliers within the period that allows you to take advantage of any prompt-payment incentives. Remember that foregoing a discount in order to pay later is essentially financing your purchase.

Take another look at your costs for ongoing goods and services, including telecommunications, shipping and delivery, utilities, etc. If you or your employees travel frequently for in-person meetings, consider holding more web conferences to reduce costs.

Inventory. Focus on inventory management, if applicable, to avoid tying up cash unnecessarily. Determine the minimum quantities you need to keep on hand to promptly serve customers. Systematically track inventory levels to avoid overbuying.

Debt management. Consider how you use credit. Before you commit to financing, compare terms from more than one lender and keep the amount to a manageable level. For flexibility, consider establishing a line of credit if you do not already have one. You will be charged interest only on the amount drawn from the credit line.

Control taxes. Make sure you are taking advantage of available tax breaks, such as the Section 179 deduction for equipment purchases, to limit taxes.

Develop a cash flow budget. Projecting monthly or weekly cash inflows and outflows gives you a critical snapshot of your business’s cash position and shows whether you’ll have enough cash on hand to meet your company’s needs.

Don’t get left behind. Contact us today to discover how we can help you keep your business on the right track. Don’t wait, give us a call today.

Having a qualified default investment alternative relieves you and plan fiduciaries of certain liabilities. Click through to enhance 401(k) plans by providing investments with potential for long-term growth regardless of how engaged employees are.

You want your retirement plan to attract and retain key personnel, lower overall costs, and contain appropriate and competitive investments. When coming up with the lineup, you may choose a QDIA as a safe-harbor option. A QDIA is an investment fund or option designated as a default fund for investment contributions when employees fail to make an election.

Developed by the Pension Protection Act of 2006, QDIAs seek to increase participation through automatic enrollment but can be applied to any participant enrolled in your plan who hasn’t confirmed any investment choices.

A QDIA, if properly selected and implemented, provides you and your plan sponsors with protective relief regardless of the investment outcome of the fund. Some firms see it as a silver bullet to increase plan participation while keeping owners and sponsors better protected.

QDIAs must meet the Employee Retirement Income Security Act’s criteria for protective relief, which includes, but may not be limited to, the following:

• Providing employees opportunities to move assets out of a QDIA just as they do with other plan options.
• Giving plan participants all relevant materials.
• Making sure special communication is provided 30 days in advance of a potential investment in a QDIA.
• Giving participants annual notices describing the circumstances under which their assets may be invested in a QDIA as well as how elective investments are made on their behalf.
• Giving participants the opportunity to direct their own investments regardless of whether they do so.
• Providing participants with a full description of the QDIA, including fees, expenses, investment objectives and risk/return profile.

Know the details

When an employee contributes money to a 401(k) account but hasn’t made an investment election, the funds are automatically invested into a QDIA. The plan fiduciary — you or the 401(k) manager — is responsible for selecting the QDIA.

All 401(k) plans should have a QDIA so that you and employees aren’t saving without investment elections. Plans with automatic enrollment always need a QDIA, but other situations occur that also result in the need for QDIAs, such as:

• Employer contributions on behalf of an employee who isn’t contributing.
• Incomplete enrollment forms.
• Beneficiary or alternative payee balances.
• A qualified domestic relations order is in force.
• Removal of investment options.
• 401(k) rollovers.
• Missing persons.

There are four types of QDIAs:

1. A product with a mix of investments that takes into account the individual’s age or retirement date — like target date funds.
2. An investment service that provides an asset mix based on an employee’s current contributions and existing plan options and that takes into account the individual’s age or retirement date — like a managed account.
3. A product with a mix of investments that accounts for the demographic characteristics of all employees, rather than each individual — like a balanced fund.
4. A short-term, low-risk, low-return product for capital preservation for only the first 120 days of participation — like a money market fund.

A QDIA protects your employees from missing out on potential long-term growth when they don’t make an investment selection. It simplifies investment decision-making by selecting the 401(k) investments for them — money will automatically be invested in long-term retirement savings.

Call us at 631-474-2500 now to discuss how we can formulate an effective tax strategy for you or your business. You can also request your free consultation online.

Any business with employees must withhold money from its employees’ paychecks for income and employment taxes, including Social Security and Medicare taxes (known as Federal Insurance Contributions Act taxes, or FICA), and forward that money to the government. A business that knowingly or unknowingly fails to remit these withheld taxes in a timely manner will find itself in trouble with the IRS.

The IRS may levy a penalty, known as the trust fund recovery penalty, on individuals classified as “responsible persons.” The penalty is equal to 100% of the unpaid federal income and FICA taxes withheld from employees’ pay.

Who’s a Responsible Person?

Any person who is responsible for collecting, accounting for, and paying over withheld taxes and who willfully fails to remit those taxes to the IRS is a responsible person who can be liable for the trust fund recovery penalty. A company’s officers and employees in charge of accounting functions could fall into this category. However, the IRS will take the facts and circumstances of each individual case into consideration.

The IRS states that a responsible person may be:

• An officer or an employee of a corporation
• A member or employee of a partnership
• A corporate director or shareholder
• Another person with authority and control over funds to direct their disbursement
• Another corporation or third-party payer
• Payroll service providers
• The IRS will target any person who has significant influence over whether certain bills or creditors should be paid or is responsible for day-to-day financial management.

Working With the IRS

If your responsibilities make you a “responsible person,” then you must make certain that all payroll taxes are being correctly withheld and remitted in a timely manner. Talk to a tax advisor if you need to know more about the requirements.

Are you an individual or business owner who’s interested in lowering your tax burden? Call us at 631-474-2500 and ask to speak to a tax accountant now or request a consultation online and we’ll contact you.

Business owners who travel out of town on business sometimes like to extend their trips and take a little time to relax and see the sights. When a trip is partly for business and partly for pleasure, various expenses may still be deductible.

Domestic Travel

A self-employed individual whose trip is primarily for business may deduct the full cost of the travel itself (such as airfare or train fare) even though some of the trip is devoted to personal activities.¹ Additionally, various other expenses allocable to business, such as lodging and 50% of meal costs incurred on the business days, are deductible.

If a trip is primarily for personal reasons, the entire cost of the travel is a nondeductible personal expense. However, expenses incurred while at the destination that are directly related to the taxpayer’s business may be deducted.

Foreign Travel

The deductibility rules for combined business/pleasure trips outside of the U.S. are a little more complicated in some respects. Even if the primary purpose of the trip is business, the cost of the travel itself generally has to be allocated, and only the business portion is deductible. However, no allocation has to be made — and the full travel cost is deductible — if:

• The trip lasts for no more than seven consecutive days (excluding the day of departure but including the day of return); or
• Personal days total less than 25% of the total days spent on the trip (including both the day of departure and the day of return); or
• The taxpayer can establish that the opportunity to take a personal vacation was not a major consideration for the trip.
• For these purposes, business days include days when business is conducted for only part of the day, days spent traveling to and from a business destination, and weekend days or holidays that fall between two business days.

As this brief overview suggests, with smart planning, self-employed business owners can maximize their write-offs for combined business/pleasure travel.

Are you an individual or business owner who’s interested in lowering your tax burden? Call Newton Sankey & Co. at 631-474-2500 and ask to speak to a tax accountant now or request a consultation online and we’ll contact you.

Source/Disclaimer:

¹Under The Tax Cuts and Jobs Act of 2017, employees may no longer deduct unreimbursed employee business expenses as a miscellaneous deduction, effective with the 2018 tax year.