September 2012 Newsletter

Tax Planning for Small Business Owners

Tax planning is the process of looking at various tax options in order to determine when, whether, and how to conduct business and personal transactions to reduce or eliminate tax liability.

Many small business owners ignore tax planning. They don’t even think about their taxes until it’s time to meet with their accountants, but tax planning is an ongoing process and good tax advice is a valuable commodity. It is to your benefit to review your income and expenses monthly and meet with your CPA or tax advisor quarterly to analyze how you can take full advantage of the provisions, credits and deductions that are legally available to you.

Although tax avoidance planning is legal, tax evasion – the reduction of tax through deceit, subterfuge, or concealment – is not. Frequently what sets tax evasion apart from tax avoidance is the IRS’s finding that there was fraudulent intent on the part of the business owner. The following are four of the areas most commonly focused on by IRS examiners as pointing to possible fraud:

  1. Failure to report substantial amounts of income such as a shareholder’s failure to report dividends or a storeowner’s failure to report a portion of the daily business receipts.
  2. Claims for fictitious or improper deductions on a return such as a sales representative’s substantial overstatement of travel expenses or a taxpayer’s claim of a large deduction for charitable contributions when no verification exists.
  3. Accounting irregularities such as a business’s failure to keep adequate records or a discrepancy between amounts reported on a corporation’s return and amounts reported on its financial statements.
  4. Improper allocation of income to a related taxpayer who is in a lower tax bracket such as where a corporation makes distributions to the controlling shareholder’s children.

Tax Planning Strategies
Countless tax planning strategies are available to small business owners. Some are aimed at the owner’s individual tax situation, and some at the business itself, but regardless of how simple or how complex a tax strategy is, it will be based on structuring the strategy to accomplish one or more of these often overlapping goals:

  1. Reducing the amount of taxable income
  2. Lowering your tax rate
  3. Controlling the time when the tax must be paid
  4. Claiming any available tax credits
  5. Controlling the effects of the Alternative Minimum Tax
  6. Avoiding the most common tax planning mistakes

In order to plan effectively, you’ll need to estimate your personal and business income for the next few years. This is necessary because many tax planning strategies will save tax dollars at one income level, but will create a larger tax bill at other income levels. You will want to avoid having the “right” tax plan made “wrong” by erroneous income projections. Once you know what your approximate income will be, you can then take the next step: estimating your tax bracket.

The effort to come up with crystal-ball estimates may be difficult and by its very nature will be inexact. On the other hand, you should already be projecting your sales revenues, income, and cash flow for general business planning purposes. The better your estimates, the better the odds that your tax planning efforts will succeed.

Maximizing Business Entertainment Expenses
Entertainment expenses are legitimate deductions that can lower your tax bill and save you money–provided you follow certain guidelines.

In order to qualify as a deduction, business must be discussed before, during, or after the meal and the surroundings must be conducive to a business discussion. For instance, a small, quiet restaurant would be an ideal location for a business dinner. A nightclub would not. Be careful of locations that include ongoing floor shows or other distracting events that inhibit business discussions. Prime distractions are theater locations, ski trips, golf courses, sports events, and hunting trips.

The IRS allows up to a 50 percent deduction on entertainment expenses, but you must keep good records and the business meal must be arranged with the purpose of conducting specific business.

Important Business Automobile Deductions
If you use your car for business such as visiting clients or going to business meetings away from your regular workplace you may be able to take certain deductions for the cost of operating and maintaining your vehicle. You can deduct car expenses by taking either the standard mileage rate or using actual expenses.
The mileage reimbursement rates for 2012 is 55.5 cents a mile for business, 14 cents per charitable mile and 23 cents for moving and medical miles.
If you own two cars, another way to increase deductions is to include both cars in your deductions. This works because business miles driven is determined by business use. To figure business use, divide the business miles driven by the total miles driven. This strategy can result in significant deductions.

Whichever method you decide to use to take the deduction, always be sure to keep accurate records such as a mileage log and receipts.

Increase Your Bottom Line When You Work At Home
The home office deduction is quite possibly one of the most difficult deductions ever to come around the block. Yet, there are so many tax advantages it becomes worth the navigational trouble. Here are a few common tips for home office deductions that can make tax season significantly less traumatic for those of you with a home office.

Try prominently displaying your home phone number and address on business cards, have business guests sign a guest log book when they visit your office, deduct long-distance phone charges, keep a time and work activity log, retain receipts and paid invoices. Keeping these receipts makes it so much easier to determine percentages of deductions later on in the year.

Section 179 expensing allows you to immediately deduct, rather than depreciate over time, up to $139,000, with a cap of $560,000, in 2012 worth of qualified business property that you purchase during the year. The key word is “purchase”. Equipment can be new or used and includes certain software. All home office depreciable equipment meets the qualification. Also, if you purchase more than $139,000 in equipment, you can expense the first $139,000 then depreciate the rest. In addition, a “Bonus Depreciation” of 50 percent is allowed on qualified assets (new equipment only–no used equipment and no software) placed in service during 2012.

Some deductions can be taken whether or not you qualify for the home office deduction itself.
Article contributed by Forrestall, Galeano & Li, CPA, LLC, a leading metro Atlanta accounting firm offering a full range of accounting services including audit, tax, retirement, valuations, bookkeeping, and management consulting.

The Americans with Disabilities Act

The Americans with Disabilities Act (ADA) and the Americans with Disabilities Amendments Act, known as the ADAAA, are federal laws that require employers with 15 or more employees to ensure that applicants and individuals with disabilities receive reasonable accommodation when qualified for a job, so that they may perform the essential job functions of the position.

Qualified individuals with disabilities have the same rights in regard to application procedures, hiring, advancement, discharge, compensation, training or other terms, conditions and privileges of employment as any other applicant or individual.

When an individual with a disability requests an accommodation and can be reasonably accommodated without creating an undue hardship or an issue in terms of workplace safety, then he or she should be given the same consideration for employment as any other applicant.  Applicants who may be a direct threat to the health, safety and well being of themselves or others in the workplace, will not be hired, if a threat cannot be eliminated by reasonable accommodation.

There are a number of terms associated with the American’s with Disability Act and its amendments.  Understanding those definitions will allow us to better understand the principles behind the law.

  • Disability means a physical or mental impairment that limits one or more major life activities of the individual.
  • Reasonable accommodation includes any change to the work environment and may include making existing facilities readily accessible to and usable by individuals with disabilities.  Specific examples include:  job restructuring, part-time or modified work schedules, telecommuting, reassignment to a vacant position, acquisition or modification of equipment or devices, training materials or policies, the provision of qualified readers or interpreters, and other similar accommodations for individuals with disabilities.
  • Essential job functions refer to those job activities that are determined by the employer to be essential to performing the job.  These functions cannot be modified.
  • Undue hardship means an action requiring significant difficulty or expense by the employer. In determining whether an accommodation would impose an undue hardship on a covered entity, factors to be considered include, but are not limited to:
    • The nature and cost of the accommodation.
    • The overall financial resources of the facility or facilities involved in the provision of the reasonable accommodation; the number of persons employed at such facility; the effect on expenses and resources; or the impact of such accommodation upon the operation of the facility.
    • The overall financial resources of the employer; the size, number, type and location of facilities.

Four Point HR clients should contact the HR Director for more information on this subject if they receive a request for reasonable accommodation under ADA or ADAAA.

The 80/20 Rule

The new health reform law, the Affordable Care Act (ACA), holds health insurance carriers accountable to consumers and ensures that families in the U.S. are reimbursed if health insurance carriers do not meet a fair standard value.

Because of the ACA, insurance carriers now must reveal how much of premium dollars they actually spend on health care and how much they spend on administration, such as salaries and marketing.  In in the past this information was not disclosed to the consumer.  Now that it is, when the insurance carrier spends less than 80% of premiums on medical care quality, it must rebate the portion of premium dollars that surpasses this limit.  The 80/20 Rule is commonly known as the Medical Loss Ratio (MLR) rule.

This past June, insurance carriers nationwide submitted their annual MLR reports for coverage provided in 2011 to the Department of Health and Human Services (HHS).  Based on this data, insurance carriers that did not meet the 80/20 Rule will provide an estimated 12.8 million consumers with more than $1.1 billion in rebates this year.  Consumers receiving the rebate through their respective employers will benefit, on average, about $151 per household.
Under the ACA, rebates must be paid by August 1st of each year.  As a result, 12.8 American consumers will see the following:

  • A rebate check in the mail through their employer
  • A lump-sum reimbursement to the same account that was used to pay the premium if it was paid by credit or debit card
  • A direct reduction in their future premiums
  • Their employer providing a legal rebate method or applying the rebate in a manner that benefits its employer

Consumers in very state will also receive notifications from their insurance carrier about the 80/20 Rule.  Under the ACA, insurance carriers will send a letter to the consumer every year when they miss the 80/20 mark.  The letter will go on to explain the purpose of the 80/20 rule, how far the insurance carrier fell short of this goal, and the percentage of premium it owes in rebate.

In 2012, insurance carriers that meet or exceed the standard in 2011 coverage year will still send a notice to the consumers explaining the purpose of the 80/20 Rule and notifying the consumer that they did meet or exceeded the standard.  Insurance carriers will additionally provide the consumer with unprecedented amount of information about the value consumers get for every dollar spent on premiums (MLR Report).  Again, all this information will be publicly available to them.

Travel Expenses – Business Travel and Per Diem

Business travel can be a necessary expense for most employers. When handled properly, the costs can be fully deducted by the employer and not become a taxable item to the employee. Under IRS Regulations, advances or reimbursements are deductible by the employer and not subject to taxes if paid under an accountable plan. For employers to qualify for the accountable plan, they must ensure the employee receives expenses paid in advance of performing the services as an employee, the employee accurately accounts and reports the expenses, and the employee returns all excess payment in a reasonable amount of time.   For employers utilizing a non-accountable plan, expenses are taxable to the employee. While it is deductible for an employer, it is also considered compensation and subject to withholding taxes.

The law governing the taxing of business travel is determined by the travel and if it is considered business travel or business transportation. Business transportation is defined as travel completed within the same day. If no lodging is required, only the air fare and transportation are deductible. All meals and lodging would become optional and would not be deductible. Business travel requiring overnight stay would be considered deductible and would include meals, lodging and incidentals as well all transportation costs. Qualifying an overnight stay requires that sleep or rest is necessary to enable the employee to continue working and does not mean an entire night is spent away from home. For example, local lodging may be required if the employee is required to remain at an overnight function or activity, lodging is necessary for the employee to fully participate, lodging does not exceeded five calendar days per quarter and the lodging is not extravagant or lavish.

It is important to note, an employee must have a home for tax purposes and be away from that home to be eligible for the overnight business travel benefit. There are some taxpayers who do not have a permanent tax home such as traveling salesmen. In this case, there would ne no deductions allowed for meals or lodging and all expenses are considered taxable.

Employers using the Per Diem method are based on a “per Day” allowance for travel expenses. Per diem translates from the Latin to “per day” and this Per Diem rate is set by the US General Service Administration. Per Diem is used for travel expenses which include lodging, meals and incidentals. It is important for employers to follow the specific guidelines with regards to the daily amounts as any payment in excess of the allowable daily rate becomes taxable income to the employee. The employers are also required to have an accountable plan in order to be in compliance with the IRS regulations regarding Per Diem expenses. The current Per Diem rates are $160.00 per day with $108.00 for lodging and $52.00 for meals and incidentals. Although both plans provide reimbursement to the employees, it is important to utilize the appropriate plan for your companies travel needs.

NCCI Methodology with Change Experience MOD Calculations

The National Council on Compensation’ Insurance (NCCI) develops your experience MOD annually and insurance carriers use it as a tool to compare your claims experience to that of your industry. To qualify for a MOD rating, an insured must have had coverage of a minimum premium of $10,000 for one policy period or $5,000 for two consecutive policy periods.

The NCCI annually produces a MOD Worksheet that outlines the calculation and the data that was used to develop your MOD factor. Typically, the MOD worksheet contains three years of claims and payroll data. The most recent policy year is not included in the three years. For example, for a 1/1/2012 MOD, the worksheet would contain the 2010, 2009, and 2008 policy year’s data (not 2011).

In layman’s terms your MOD is simply the amount of your actual work comp losses divided by your expected losses based on your industry. For the past 20 years, the first $5,000 of a claim has been considered the “primary” portion and any amount above $5,000 has been considered the “excess” portion of the claim. This magic $5,000 line is known as the “split point” of claim. In the formula the NCCI uses to calculate your MOD factor, there is a big difference between the “primary” and “excess” parts of a claim. The formula counts the entire $5,000 “primary” portion of a claim against your MOD but only counts a small portion (typically 5% – 15%) of the “excess” portion of the claim against your MOD. As an example, using a $10,000 lost time claim for a company whose MOD formula only uses 10% of the “excess” portion of the claim, just $5,500 of the $10,000 claim would count against your MOD calculation i.e. the first $5,000 “primary” portion is fully counted but only 10% of the rest of the claim ($5,000 x 10% = $500) is used in the MOD calculation.

The major change that the NCC1 is proposing is they will be raising the “split point” of claims from $5,000 to $15,000 over the course of three years. Starting 1/1/2013 the “split point” will be increased from $5,000 to $10,000, and then will be increased to $13,500 in the second year and finally to $15,000 (plus two years of inflation adjustment) in the third year. Looking back at the above example, starting in 2013, that $10,000 lost time claim will have the full $10,000 “primary” portion of the claim fully count against your MOD factor calculation.

How will the “split point” change impact your MOD factor? The NCCI is projecting that the “split point” change will cause the experience MODs of 17.8% of employers to increase by .02 points or more, 13.5% of employers to increase by .05 points or more, and 7% of employers to increase by .10 points or more. Your MOD will be largely impacted by the number of claims you have that are over $5,000. If none of your claims exceed $5,000, you will generally see a decrease in your MOD because no additional losses will flow into the MOD formula even with the higher “split point”. Following that same logic, it is safe to predict that for companies that have an above average amount of claims over $5,000 in losses, they can expect to see an increase in their MOD factor.
Keep in mind that even though these proposed changes won’t become effective until 2013; the claims data that the NCCI will be using for your 2013 MOD is from your 2009, 2010, and 2011 policy years.

Our internal software will allow us to proactively evaluate and communicate any positive or negative changes that occur to your MOD in anticipation of your Workers Compensation renewal. Please call us with any questions or concerns regarding your specific MOD circumstances.

Payroll Corner

Four Point HR will be closed Monday, September 3rd in observance of the Labor Day holiday.  Client payroll processing affected by the closing will be notified.

Four Point HR requests that employees check all the personal information on their checks or check stubs for accuracy. All changes, including addresses, are to be submitted on an Employee Information Change form. Please contact your Payroll Operations Manager for assistance or forms.

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