Trends – Roth&Co

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Tax identity theft may seem like a problem only for individual taxpayers. But, according to the IRS, increasingly businesses are also becoming victims. And identity thieves have become more sophisticated, knowing filing practices, the tax code and the best ways to get valuable data.

How it works

In tax identity theft, a taxpayer’s identifying information (such as Social Security number) is used to fraudulently obtain a refund or commit other crimes. Business tax identity theft occurs when a criminal uses the identifying information of a business to obtain tax benefits or to enable individual tax identity theft schemes.

For example, a thief could use an Employer Identification Number (EIN) to file a fraudulent business tax return and claim a refund. Or a fraudster may report income and withholding for fake employees on false W-2 forms. Then, he or she can file fraudulent individual tax returns for these “employees” to claim refunds.

The consequences can include significant dollar amounts, lost time sorting out the mess and damage to your reputation.

Red flags

There are some red flags that indicate possible tax identity theft. For example, your business’s identity may have been compromised if:

Your business doesn’t receive expected or routine mailings from the IRS,
You receive an IRS notice that doesn’t relate to anything your business submitted, that’s about fictitious employees or that’s related to a defunct, closed or dormant business after all account balances have been paid,
The IRS rejects an e-filed return or an extension-to-file request, saying it already has a return with that identification number — or the IRS accepts it as an amended return,
You receive an IRS letter stating that more than one tax return has been filed in your business’s name, or
You receive a notice from the IRS that you have a balance due when you haven’t yet filed a return.

Keep in mind, though, that some of these could be the result of a simple error, such as an inadvertent transposition of numbers. Nevertheless, you should contact the IRS immediately if you receive any notices or letters from the agency that you believe might indicate that someone has fraudulently used your Employer Identification Number.

Prevention tips

Businesses should take steps such as the following to protect their own information as well as that of their employees:

Provide training to accounting, human resources and other employees to educate them on the latest tax fraud schemes and how to spot phishing emails.
Use secure methods to send W-2 forms to employees.
Implement risk management strategies designed to flag suspicious communications.

Of course identity theft can go beyond tax identity theft, so be sure to have a comprehensive plan in place to protect the data of your business, your employees and your customers. If you’re concerned your business has become a victim, or you have questions about prevention, please contact us.

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You’ve no doubt heard the old business cliché “cash is king.” And it’s true: A company in a strong cash position stands a much better chance of obtaining the financing it needs, attracting outside investors or simply executing its own strategic plans.

One way to ensure that there’s always a king in the castle, so to speak, is to maintain a cash reserve. Granted, setting aside a substantial amount of dollars isn’t the easiest thing to do — particularly for start-ups and smaller companies. But once your reserve is in place, life can get a lot easier.

Common metrics

Now you may wonder: What’s the optimal amount of cash to keep in reserve? The right answer is different for every business and may change over time, given fluctuations in the economy or degree of competitiveness in your industry.

If you’ve already obtained financing, your bank’s liquidity covenants can give you a good idea of how much of a cash reserve is reasonable and expected of your company. To take it a step further, you can calculate various liquidity metrics and compare them to industry benchmarks. These might include:

• Working capital = current assets – current liabilities,• Current ratio = current assets / current liabilities, and• Accounts payable turnover = cost of goods sold / accounts payable.
There may be other, more complex metrics that better apply to the nature and size of your business.

Financial forecasts

Believe it or not, many companies don’t suffer from a lack of cash reserves but rather a surplus. This often occurs because a business owner decides to start hoarding cash following a dip in the local or national economy.

What’s the problem? Substantial increases in liquidity — or metrics well above industry norms — can signal an inefficient deployment of capital.

To keep your cash reserve from getting too high, create financial forecasts for the next 12 to 18 months. For example, a monthly projected balance sheet might estimate seasonal ebbs and flows in the cash cycle. Or a projection of the worst-case scenario might be used to establish your optimal cash balance. Projections should consider future cash flows, capital expenditures, debt maturities and working capital requirements.

Formal financial forecasts provide a coherent method to building up cash reserves, which is infinitely better than relying on rough estimates or gut instinct. Be sure to compare actual performance to your projections regularly and adjust as necessary.

More isn’t always better

Just as individuals should set aside some money for a rainy day, so should businesses. But, when it comes to your company’s cash reserves, the notion that “more is better” isn’t necessarily correct. You’ve got to find the right balance. Contact us to discuss your reserve and identify your ideal liquidity metrics.

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In an unexpected turn of events last week, the Governor of South Dakota signed a bill into law which re-enacted the enforcement of sales tax collections triggered by the Wayfair decision.

Although the Supreme Court previously ruled that the states were entitled to collect tax for online sales, some states such as South Dakota and Tennessee had individual cases which barred the collection from taking place. After much legislative and legal dispute, South Dakota has finally ruled in favor of collecting online sales taxes, and now joins the majority of states in complying with the landmark decision.

While South Dakota may not be a major source of sales for every online retailer, it is just another sign of the impact of the Wayfair ruling, and reinforces the fact that these new laws must be understood and followed. Frankly put, these laws aren’t going away. As noted previously, South Dakota, along with the other states, will now be requiring online retailers from across the country who sell products to customers in the state to remit sales taxes due to South Dakota, a responsibility which was previously unheard of. This can seem (rightfully so) like an overwhelming job for an online retailers, especially when the law is so new. Thankfully, the Advisory Services team at Roth & Company has been following Wayfair at every step, and has developed a thorough process for helping your online business continue to operate and grow, hassle free. For more information on how this may affect you, please contact your trusted advisor at Roth & Company.

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Every business with more than one owner needs a buy-sell agreement to handle both expected and unexpected ownership changes. When creating or updating yours, be sure you’re prepared for the valuation issues that will come into play.

Issues, what issues?

Emotions tend to run high when owners face a “triggering event” that activates the buy-sell. Such events include the death of an owner, the divorce of married owners or an owner dispute.

The departing owner (or his or her estate) suddenly is in the position of a seller who wants to maximize buyout proceeds. The buyer’s role is played by either the other owners or the business itself — and it’s in the buyer’s financial interest to pay as little as possible. A comprehensive buy-sell agreement takes away the guesswork and helps ensure that all parties are treated equitably.

Some owners decide to have the business valued annually to minimize surprises when a buyout occurs. This is often preferable to using a static valuation formula in the buy-sell agreement, because the value of the interest is likely to change as the business grows and market conditions evolve.

What are our protocols?

At minimum, the buy-sell agreement needs to prescribe various valuation protocols to follow when the agreement is triggered, including:

• How “value” will be defined, • Who will value the business, • Whether valuation discounts will apply, • Who will pay appraisal fees, and • What the timeline will be for the valuation process.
It’s also important to discuss the appropriate “as of” date for valuing the business interest. The loss of a key person could affect the value of a business interest, so timing may be critical.

Are we ready?

Business owners tend to put planning issues on the back burner — especially when they’re young and healthy and owner relations are strong. But the more details that you put in place today, including a well-crafted buy-sell agreement with the right valuation components, the easier it will be to resolve buyout issues when they arise. Our firm would be happy to help.

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oth&Co Tax Attorney Ahron Golding, discusses the importance of using an effective method of accounting, and the problem with using the “Ostrich Method,” which involves burying your head in the sand and hoping the IRS will go away.

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Do you own a vacation home? If you both rent it out and use it personally, you might save tax by taking steps to ensure it qualifies as a rental property this year. Vacation home expenses that qualify as rental property expenses aren’t subject to the Tax Cuts and Jobs Act’s (TCJA’s) new limit on the itemized deduction for state and local taxes (SALT) or the lower debt limit for the itemized mortgage interest deduction.

Rental or personal property?

If you rent out your vacation home for 15 days or more, what expenses you can deduct depends on how the home is classified for tax purposes, based on the amount of personal vs. rental use:

Rental property. If you (or your immediate family) use the home for 14 days or less, or under 10% of the days you rent out the property, whichever is greater, the IRS will classify the home as a rental property. You can deduct rental expenses, including losses, subject to the real estate activity rules.

Your deduction for property tax attributable to the rental use of the home isn’t subject to the TCJA’s new SALT deduction limit. And your deduction for mortgage interest on the home isn’t subject to the debt limit that applies to the itemized deduction for mortgage interest. You can’t deduct any interest that’s attributable to your personal use of the home, but you can take the personal portion of property tax as an itemized deduction (subject to the new SALT limit).

Nonrental property. If you (or your immediate family) use the home for more than 14 days or 10% of the days you rent out the property, whichever is greater, the IRS will classify the home as a personal residence. You can deduct rental expenses only to the extent of your rental income. Any excess can be carried forward to offset rental income in future years.

If you itemize deductions, you also can deduct the personal portion of both property tax and mortgage interest, subject to the TCJA’s new limits on those deductions. The SALT deduction limit is $10,000 for the combined total of state and local property taxes and either income taxes or sales taxes ($5,000 for married taxpayers filing separately). For mortgage interest debt incurred after December 15, 2017, the debt limit (with some limited exceptions) has been reduced to $750,000.

Be aware that many taxpayers who have itemized in the past will no longer benefit from itemizing because of the TCJA’s near doubling of the standard deduction. Itemizing saves tax only if total itemized deductions exceed the standard deduction for the taxpayer’s filing status.

Year-to-date review

Keep in mind that, if you rent out your vacation home for less than 15 days, you don’t have to report the income. But expenses associated with the rental (such as advertising and cleaning) won’t be deductible.

Now is a good time to review your vacation home use year-to-date to project how it will be classified for tax purposes. By increasing the number of days you rent it out and/or reducing the number of days you use it personally between now and year end, you might be able to ensure it’s classified as a rental property and save some tax. But there also could be circumstances where personal property treatment would be beneficial. Please contact us to discuss your particular situation.

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To avoid interest and penalties, you must make sufficient federal income tax payments long before your April filing deadline through withholding, estimated tax payments, or a combination of the two. The third 2018 estimated tax payment deadline for individuals is September 17.

If you don’t have an employer withholding tax from your pay, you likely need to make estimated tax payments. But even if you do have withholding, you might need to pay estimated tax. It can be necessary if you have more than a nominal amount of income from sources such as self-employment, interest, dividends, alimony, rent, prizes, awards or the sales of assets.

A two-prong test

Generally, you must pay estimated tax for 2018 if both of these statements apply:

1. You expect to owe at least $1,000 in tax after subtracting tax withholding and credits, and

2. You expect withholding and credits to be less than the smaller of 90% of your tax for 2018 or 100% of the tax on your 2017 return — 110% if your 2017 adjusted gross income was more than $150,000 ($75,000 for married couples filing separately).

If you’re a sole proprietor, partner or S corporation shareholder, you generally have to make estimated tax payments if you expect to owe $1,000 or more in tax when you file your return.

Quarterly payments

Estimated tax payments are spaced through the year into four periods or due dates. Generally, the due dates are April 15, June 15 and September 15 of the tax year and January 15 of the next year, unless the date falls on a weekend or holiday (hence the September 17 deadline this year).

Estimated tax is calculated by factoring in expected gross income, taxable income, deductions and credits for the year. The easiest way to pay estimated tax is electronically through the Electronic Federal Tax Payment System. You can also pay estimated tax by check or money order using the Estimated Tax Payment Voucher or by credit or debit card.

Confirming withholding

If you determine you don’t need to make estimated tax payments for 2018, it’s a good idea to confirm that the appropriate amount is being withheld from your paycheck. To reflect changes under the Tax Cuts and Jobs Act (TCJA), the IRS updated the tables that indicate how much employers should withhold from their employees’ pay, generally reducing the amount withheld.

The new tables might cause some taxpayers to not have enough withheld to pay their ultimate tax liabilities under the TCJA. The IRS has updated its withholding calculator (available at irs.gov) to assist taxpayers in reviewing their situations.

Avoiding penalties
Keep in mind that, if you underpaid estimated taxes in earlier quarters, you generally can’t avoid penalties by making larger estimated payments in later quarters. But if you also have withholding, you may be able to avoid penalties by having the estimated tax shortfall withheld.

To learn more about estimated tax and withholding — and for help determining how much tax you should be paying during the year — contact us.

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“I’d like to start a small business. How do I go about it?” a man asked.
“Simple,” said his friend, “buy a big one and wait.”

The recent bankruptcy and subsequent demise of Toys R’ Us was a debacle. By the time the one-time industry disruptor gave up the fight there was only a hint of nostalgia left amongst the millions of would be consumers who grew up as Toys R’ Us kids.

When industry giants die, the ripples reverberate and the question hangs loosely in the air; What killed Toys R’ Us?

The company failed on a few fronts. Consumer needs and industry standards were rapidly changing in an era of growing online sales. Yet, instead of developing a branded online business, they contracted as the sole distributor for Amazon at a cost of 50 million dollars a year. By the time Toys R’ Us sued them successfully to get out of the contract, a distraction that bled time, focus and energy, a rapidly evolved Amazon had learned all they needed to know about selling toys and had acquired Toys R’ Us’ online customer base. You can’t win that back in court.

At the same time, Toys R’ Us’ sprawling brick and mortar stores were neither quick and easy nor cheap. Their shelves overflowing with stock couldn’t compete with the selection, prices and ease offered to consumers online or by big box stores like Wal-Mart and Target, where prices are low and millennial parents can buy a toy while shopping for groceries.

Technology growth created a deadly trifecta – it changed the way people shop, it reduced the market demand and it changed the next generation of consumer, and Toys R’ Us lost on all fronts.
In the end it was poor risk management, and lack of innovation in re-creating the brand, that drowned the giant in a sea of debt.

R.I.P Toys R’ Us.

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When the word “tax shelter” comes to mind, many of us think of a locale such as the Cayman Islands, Switzerland, or Apple’s own Ireland. While many of those countries do offer enticing tax benefits, a recent piece of legislation has clandestinely spurred one of the most significant tax incentives in modern history, with no international accountant required. Called the Investing in Opportunity Act, this bipartisan law was launched over a process of more than 10 years, started by tech mogul Sean Parker, all with the aim of helping America’s most under-performing and neglected cities. Quickly catching the attention of Democratic Senator Corey Booker, along with many of his colleagues from both Houses of Congress, the Bill was officially signed into law in December 2017, which most tax professionals equate with the Tax Cuts & Jobs Act.

The way in which the bill works to a client’s benefit is in many ways reminiscent of a 20th Century tax shelter, especially in that the venture is most successful when implemented as a Limited Partnership. Essentially, the bill is engineered to corporations, wealthy individuals, and investment institutions who have recently realized capital gains, and are looking to defer (or in some instances eliminate) those tax liabilities. First, investors who have sold an asset at a gain have 180 days (roughly six months) to reinvest the capital into an Opportunity Zone. What is an “Opportunity Zone”? An Opportunity Zone, termed O-Zone, is any city which is designated by the government with 20% or greater poverty rates or a median household income less than 80% of the neighboring areas. Once the investor places the capital into an O-Zone fund, which must have a minimum of 90 percent of its assets in O-Zone projects, the original capital gain isn’t due until 2026. When the investor pays the original capital gains tax in 2026, he is given a 15% tax cut on whatever the liability is.

Further, after the O-Zone investment is sold (provided it is sold after 10 years), any gains realized are tax-free. Yes, tax-free. Other than several articles by Forbes Magazine, this law has gotten minimal attention from experts and newspapers alike, but, especially in states such as New York and California, this law can prove to be a tremendous tax planning device as the industry races to find ways to offset the increased tax burdens for many clients.

Where are these O-Zones located?

While many are in the rural communities that make up the majority of the local economic crises, it is surprising to see just how many of them are within striking distance of our desktops. In fact, in the national Opportunity Zone database, there are currently 83 located in Brooklyn alone, with dozens more in the Bronx, Queens, and Nassau Counties. Of course, no strategy is universally successful, but wouldn’t this law be useful to many clients, eager to invest in real estate, but afraid of the tax consequences? Since this law is truly a new concept, the IRS has not released the final regulations pertaining to it, which means that now is the time to keep up with the rulings and updates, gaining the knowledge to help clients in truly expert standards.

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If you’ve done any research into employee benefits for your business recently, you may have come across a bit of alphabet soup in the form of “HSA + HDHP.” Although perhaps initially confusing, this formula represents an increasingly popular model for health care benefits — that is, offering a Health Savings Account (HSA) coupled with, as required by law, a high-deductible health plan (HDHP).

Requirements

An HSA operates somewhat like a Flexible Spending Account (FSA), which employers can also offer to eligible employees. An FSA permits eligible employees to defer a pretax portion of their pay to later use to reimburse out-of-pocket medical expenses. But, unlike an FSA, an HSA is permitted to carry over unused account balances to the next year and beyond.

The most significant requirement for offering your employees an HSA is that, as mentioned, you must also cover them under an HDHP. For 2019, this means that each participant’s health insurance coverage must come with at least a $1,350 deductible for single coverage or $2,700 for family coverage. It’s okay if the HDHP doesn’t impose any deductible for preventive care (such as annual checkups), but participants can’t be eligible for Medicare benefits or claimed as a dependent on another person’s tax return.

The benefit of the high deductible requirement is that premiums for HDHPs are typically less expensive than for health plans with lower deductibles. You and your employees can use some or all of the money saved on premiums to fund their HSAs.

Pretax contributions

You and the employee combined can make pretax HSA contributions in 2019 of up to $3,500 for single coverage or $7,000 for family coverage. An account beneficiary who is age 55 or older by the end of the tax year for which the HSA contribution is made may contribute an additional $1,000.

The good news for you, the business owner: First, employer contributions are optional. Second, pretax contributions to an employee’s HSA, whether by you or the employee, are exempt from Social Security, Medicare and unemployment taxes.

Growing popularity

Just how popular is the HSA + HDHP model? A 2018 report by the trade association America’s Health Insurance Plans found that enrollment in these plans increased by nearly 400% over the last 10 years — from about 4.5 million in 2007 to about 21.8 million in 2017. Of course, this doesn’t mean your business should blindly jump on the bandwagon. Contact us to discuss the concept.

Businesses aren’t immune to tax identity theft

Keeping a king in the castle with a well-maintained cash reserve

Wayfair Update: South Dakota is now fully compliant

Prepare for valuation issues in your buy-sell agreement

Ahron Golding, Esq, MTx- Ostrich Method of Accounting

You might save tax if your vacation home qualifies as a rental property

Do you need to make an estimated tax payment by September 17?

Toys r NOT us

Protecting the O-Zone: Insight into the Greatest Tax Break You’ve Never Heard Of

HSA + HDHP can be a winning health benefits formula