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At this time of year, many business owners ask if there’s anything they can do to save tax for the year. Under current tax law, there are two valuable depreciation-related tax breaks that may help your business reduce its 2019 tax liability. To benefit from these deductions, you must buy eligible machinery, equipment, furniture or other assets and place them into service by the end of the tax year. In other words, you can claim a full deduction for 2019 even if you acquire assets and place them in service during the last days of the year.

The Section 179 deduction

Under Section 179, you can deduct (or expense) up to 100% of the cost of qualifying assets in Year 1 instead of depreciating the cost over a number of years. For tax years beginning in 2019, the expensing limit is $1,020,000. The deduction begins to phase out on a dollar-for-dollar basis for 2019 when total asset acquisitions for the year exceed $2,550,000.

Sec. 179 expensing is generally available for most depreciable property (other than buildings) and off-the-shelf computer software. It’s also available for:

Qualified improvement property (generally, any interior improvement to a building’s interior, but not for the internal structural framework, for enlarging a building, or for elevators or escalators),
Roofs, and
HVAC, fire protection, alarm, and security systems.
The Sec. 179 deduction amount and the ceiling limit are significantly higher than they were a few years ago. In 2017, for example, the deduction limit was $510,000, and it began to phase out when total asset acquisitions for the tax year exceeded $2.03 million.

The generous dollar ceiling that applies this year means that many small and medium sized businesses that make purchases will be able to currently deduct most, if not all, of their outlays for machinery, equipment and other assets. What’s more, the fact that the deduction isn’t prorated for the time that the asset is in service during the year makes it a valuable tool for year-end tax planning.

Bonus depreciation

Businesses can claim a 100% bonus first year depreciation deduction for machinery and equipment bought new or used (with some exceptions) if purchased and placed in service this year. The 100% deduction is also permitted without any proration based on the length of time that an asset is in service during the tax year.

Business vehicles

It’s important to note that Sec. 179 expensing and bonus depreciation may also be used for business vehicles. So buying one or more vehicles before December 31 may reduce your 2019 tax liability. But, depending on the type of vehicle, additional limits may apply.

Businesses should consider buying assets now that qualify for the liberalized depreciation deductions. Please contact us if you have questions about depreciation or other tax breaks.

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As we all know, medical services and prescription drugs are expensive. You may be able to deduct some of your expenses on your tax return but the rules make it difficult for many people to qualify. However, with proper planning, you may be able to time discretionary medical expenses to your advantage for tax purposes.

The basic rules

For 2019, the medical expense deduction can only be claimed to the extent your unreimbursed costs exceed 10% of your adjusted gross income (AGI). You also must itemize deductions on your return.

If your total itemized deductions for 2019 will exceed your standard deduction, moving or “bunching” nonurgent medical procedures and other controllable expenses into 2019 may allow you to exceed the 10% floor and benefit from the medical expense deduction. Controllable expenses include refilling prescription drugs, buying eyeglasses and contact lenses, going to the dentist and getting elective surgery.

In addition to hospital and doctor expenses, here are some items to take into account when determining your allowable costs:

1. Health insurance premiums. This item can total thousands of dollars a year. Even if your employer provides health coverage, you can deduct the portion of the premiums that you pay. Long-term care insurance premiums are also included as medical expenses, subject to limits based on age.

2. Transportation. The cost of getting to and from medical treatments counts as a medical expense. This includes taxi fares, public transportation, or using your own car. Car costs can be calculated at 20¢ a mile for miles driven in 2019, plus tolls and parking. Alternatively, you can deduct certain actual costs, such as for gas and oil.

3. Eyeglasses, hearing aids, dental work, prescription drugs and professional fees. Deductible expenses include the cost of glasses, hearing aids, dental work, psychiatric counseling and other ongoing expenses in connection with medical needs. Purely cosmetic expenses don’t qualify. Prescription drugs (including insulin) qualify, but over-the-counter aspirin and vitamins don’t. Neither do amounts paid for treatments that are illegal under federal law (such as marijuana), even if state law permits them. The services of therapists and nurses can qualify as long as they relate to a medical condition and aren’t for general health. Amounts paid for certain long-term care services required by a chronically ill individual also qualify.

4. Smoking-cessation and weight-loss programs. Amounts paid for participating in smoking-cessation programs and for prescribed drugs designed to alleviate nicotine withdrawal are deductible. However, nonprescription nicotine gum and patches aren’t. A weight-loss program is deductible if undertaken as treatment for a disease diagnosed by a physician. Deductible expenses include fees paid to join a program and attend periodic meetings. However, the cost of food isn’t deductible.

Dependent expenses

You can deduct the medical costs that you pay for dependents, such as your children. Additionally, you may be able to deduct medical costs you pay for other individuals, such as an elderly parent. If you have questions about medical expense deductions, contact us.

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Algorithms, the formulas that allow technology to process information and perform tasks are transforming daily life and for the most part people are very pleased, but should they be?
Companies like Facebook Inc. and Alphabet Inc.’s Google have spent billions developing the complex algorithms they use to sort through vast amounts of information and the secrets of their software are intently guarded. But as the public is kept in the dark about the process, “Every minute, machines are deciding your future. Software programs don’t just recommend books and movies you might like: they also determine the interest rate you’ll pay on a loan, whether you land a dream job and even the chance you might commit a crime,” according to Bloomberg.
As AI simplified processes in millions of ways the public came to believe that computer generated decisions are not only faster, but also more objective and therefore more intelligent. However, with growing regularity researchers are finding that algorithms replicate and even amplify the bias of their creators in ways most people are unaware of and understand little about.
Reuters reported on an embarrassing debacle that led Amazon to scrap a project to develop AI that could screen potential job applicants. The algorithm reinforced hiring biases for male-dominated roles like software engineering. Trained on millions of resumes the company received, the algorithm found the resumes of previous successful hires and trained on that pattern, teaching itself to downgrade resumes that included phrases like “Society for Women Scientists.”
More alarming is the tendency we are developing to give greater credence to information supplied by technology and ignore other sources of contradictory information. A life-threatening danger of human automation bias was found in recent analyses of health-related studies where clinicians overrode their own correct decisions in favor of erroneous advice from technology between 6% and 11% of the time.
The erroneous belief in technology as a ‘superior authority’ was recently examined by The Wall Street Journal. Research in the area of consumer finance confirms that American consumers’ preference for the recommendations of algorithms over human experts is especially strong in this area where objective data analysis is highly prized. Humans have emotions, but algorithms don’t, leading people to conclude that they are purely objective and rational—and these consumers remain convinced even after outcomes do not meet expectations.
“People often overlook the fact that algorithms are designed by humans who choose what data to use and how to use it—and those humans are just as fallible as human advisers,” says the author, Dr. Packin, a Zicklin Business professor, who noted concern about the importance of seeking second opinions. “By reducing the acceptability of seeking second opinions our algorithm dependent society is nudging us to tone down human traits such as creativity, innovation and critical thinking, and blindly rely on algorithms, which are biased black boxes.”

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The Tax Cuts and Jobs Act (TCJA) made only one change to the federal gift and estate tax regime, but it was a big one. It more than doubled the combined gift and estate tax exemption, as well as the generation-skipping transfer (GST) tax exemption. This change is only temporary, however. Unless Congress takes further action, the exemptions will return to their inflation-adjusted 2017 levels starting in 2026.

What does this mean for your estate plan? If your estate is well within the 2019 exemption amount of $11.40 million ($11.58 million for 2020), the higher exemption won’t have a big impact on your estate planning strategies. But if your estate is in the $6 million to $11 million range, it’s important to build some flexibility into your plan to address potential tax liability after 2025.

An uncertain future

Anything can happen between now and 2026. Lawmakers may allow the exemption amount to revert to its pre-TCJA level, reduce it even further (some have suggested $3.5 million) or make the current amount permanent. Or they may repeal the gift, estate and GST taxes altogether.

This uncertainty makes planning a challenge. Let’s say your estate is worth $8 million. If you die between now and 2025, you’ll avoid estate taxes. But suppose you live beyond 2025 and the exemption drops to an inflation-adjusted $5.75 million. Your estate will be hit with a $900,000 tax liability. A $3.5 million exemption would double the tax to $1.8 million.

One option is to take advantage of the higher exemption by giving away assets (either outright or in trust) during your lifetime. These gifts would be shielded from gift and GST taxes by the current exemption. And the assets (together with any future appreciation in value) would be removed from your estate, avoiding estate taxes even if the exemption decreases in the future.

The problem with this approach is that gifts of appreciated assets retain your tax basis, subjecting your beneficiaries to capital gains taxes if they’re sold. Assets transferred at death, on the other hand, enjoy a “stepped-up basis” and can be sold with lower or no capital gains. If you make substantial lifetime gifts and the exemption amount remains at its current level in the future (or the estate tax is repealed), you’ll have triggered capital gains taxes needlessly.

Staying flexible

One strategy to use to build flexibility into your plan is to use an irrevocable trust. This can enable you or your representatives to switch gears once the future of the estate tax becomes clearer. With this strategy, you transfer assets to an irrevocable trust, taking advantage of the current exemption amount. But you give the trustee the authority to take certain actions that would cause the assets to be included in your estate — such as granting you a power of appointment or naming you as successor trustee. The trustee would exercise this authority if it turns out that estate inclusion would produce a better tax outcome.

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Take a mental snapshot of your sales staff. Do only a few of its members consistently bring in high volumes of good margin sales? An old rule of thumb says that about 20% of salespeople will make 80% of sales; in other words, everyone’s not going to be a superstar.

However, you can create performance management standards that raise the productivity of your sales department and, in turn, the profitability of your company. To do so, focus on the three key traits of every successful salesperson:

1. Authentic aptitude. Some people are “born to sell” while others, with hard work, can become proficient at it. But if a person struggles to form relationships, has no tolerance for rejection or failure, and desires a routine workday, he or she probably doesn’t belong in sales.

You may want to use a sales aptitude test during the hiring process to weed out those most likely doomed to failure. But it’s always possible to hire someone with “potential” who just never grows into the position. If an employee lacks the aptitude for sales, no amount of training and coaching will likely turn him or her into a stellar performer. In such cases, you’ll need to choose between either moving the person into another area of the business or letting him or her go.

2. Effective tactics. Entire books could be written (and have been) about sales tactics. There’s the hard sell, the soft sell, upselling, storytelling, problem solving — the list goes on. At the end of the day, customers buy from people whom they like and trust — and who can deliver what they promise.

Doing the little things separates those at the top of the sales profession from everyone else and helps them build lasting and fruitful relationships with customers. Identify the most valuable tactics of your top sellers and pass them along to the rest of the staff through ongoing training and upskilling.

3. Strong numbers. There’s no way around it: A good salesperson puts up the numbers. Sales is a results-oriented profession. The question and challenge for business owners (and their sales managers) is how to accurately and fairly measure results and ultimately define success.

There are many sales metrics to consider. Which ones you should track and use to evaluate the performance of your salespeople depends on your strategic priorities. For example, if you’re looking to speed up the sales cycle, you could look at average days to close. Or, if you’re concerned that your sales department just isn’t bringing in enough revenue, you could calculate average deal size.

Hopefully, everyone on your sales staff demonstrates these three key traits to some degree. If not, regular performance reviews (to catch problems) and effective coaching (to solve them) are a must. We can help you identify the ideal metrics for your company, run the numbers, and set reasonable and profitable revenue goals.

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Most businesses report financial performance using U.S. Generally Accepted Accounting Principles (GAAP). But the income-tax-basis format can save time and money for some private companies. Here’s information to help you choose the financial reporting framework that will work for your situation.

The basics

GAAP is the most common financial reporting standard in the United States. The Securities and Exchange Commission (SEC) requires public companies to follow it — they don’t have a choice. Many lenders expect large private borrowers to follow suit, because GAAP is familiar and consistent.

However, compliance with GAAP can be time-consuming and costly, depending on the level of assurance provided in the financial statements. So, some private companies opt to report financial statements using an “other comprehensive basis of accounting” (OCBOA) method. The most common OCBOA method is the tax-basis format.

Key differences

Departing from GAAP can result in significant differences in financial results. Why? GAAP is based on the principle of conservatism, which prevents companies from overstating profits and asset values. This runs contrary to what the IRS expects from for-profit businesses. Tax laws generally tend to favor accelerated gross income recognition and won’t allow taxpayers to deduct expenses until the amounts are known and other deductibility requirements have been met. So, reported profits tend to be higher under tax-basis methods than under GAAP.

There are also differences in terminology. Under GAAP, companies report revenues, expenses and net income. Conversely, tax-basis entities report gross income, deductions and taxable income. Their nontaxable items typically appear as separate line items or are disclosed in a footnote.

Capitalization and depreciation of fixed assets is another noteworthy difference. Under GAAP, the cost of a fixed asset (less its salvage value) is capitalized and systematically depreciated over its useful life. For tax purposes, fixed assets are depreciated under the Modified Accelerated Cost Recovery System (MACRS), which generally results in shorter lives than under GAAP. Salvage value isn’t subtracted for tax purposes, but Section 179 and bonus depreciation are subtracted before computing MACRS deductions.

Other reporting differences exist for inventory, pensions, leases, start-up costs and accounting for changes and errors. In addition, companies record allowances for bad debts, sales returns, inventory obsolescence and asset impairment under GAAP. But these allowances generally aren’t permitted under tax law.

Departing from GAAP

GAAP has become increasingly complex in recent years. So some companies would prefer tax-basis reporting, if it’s appropriate for financial statement users.

For example, tax-basis financials might work for a business that’s owned, operated and financed by individuals closely involved in day-to-day operations who understand its financial position. But GAAP statements typically work better if the company has unsecured debt or numerous shareholders who own minority interests. Likewise, prospective buyers may prefer to perform due diligence on GAAP financial statements — or they may be public companies that are required to follow GAAP.

Tax-basis reporting makes sense for certain types of businesses. But for other businesses, tax-basis financial statements may result in missing or even misleading information. We can help you evaluate the pros and cons and choose the appropriate reporting framework for your situation.

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Your not-for-profit may have paid little attention to the European Union’s (EU’s) General Data Protection Regulation (GDPR), which took effect May 25, 2018. The GDPR revises standards for privacy rights, information security and compliance in the EU. Yet it might also apply to U.S.-based organizations, such as your not-for-profit.

Big steps beyond

GDPR requirements are comprehensive and go far beyond existing U.S. privacy standards. They address:

Data security and data governance,
Consent to processing,
Mandatory breach notification,
Access to personal data and data erasure (the right to be “forgotten”),
Data portability, and
Cross-border data transfers.

Organizations must notify the appropriate EU authority within 72 hours after becoming aware of a data breach. By contrast, U.S. states’ breach notification laws require notification “without unreasonable delay,” with the shortest timing at 30 days, while the Health Information Portability and Accountability Act (HIPAA) allows 60 days.

The regulations define “personal data” broadly to include such identifiers as name, address, Social Security or tax identification number, and email address. Location data and online identifiers such as cookies or IP addresses are also considered personal data.

Notably, GDPR rules apply to entities outside the EU that process or hold the personal data of “data subjects” who are physically in the EU. It doesn’t matter where the processing takes place or whether the subjects are EU residents.

Rights of individuals

To comply with the GDPR, your nonprofit must obtain consent from individuals to collect their personal data. This means the person takes affirmative action, such as clicking on an “I agree” statement, and the personal data you already possess isn’t “grandfathered in.” You must obtain consent on that data or purge it completely from your systems (including employees’ spreadsheets and Outlook contact lists).

You also must disclose to individuals the data you collect on them upon request, so you’ll need to keep close track of such information. And if individuals ask to be forgotten, you must delete all of their data or anonymize it.

Proceed with caution

A serious violation of the GDPR can bring a penalty as high as 20 million euros (about $23 million) or 4% of the violator’s annual revenue. Questions remain about enforcement in the United States, but that’s no excuse not to abide by the rules and develop a compliance plan now. Contact us if you have questions.

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One of the most laborious tasks for small businesses is managing payroll. But it’s critical that you not only withhold the right amount of taxes from employees’ paychecks but also that you pay them over to the federal government on time.

If you willfully fail to do so, you could personally be hit with the Trust Fund Recovery Penalty, also known as the 100% penalty. The penalty applies to the Social Security and income taxes required to be withheld by a business from its employees’ wages. Since the taxes are considered property of the government, the employer holds them in “trust” on the government’s behalf until they’re paid over.

The reason the penalty is sometimes called the “100% penalty” is because the person liable for the taxes (called the “responsible person”) can be personally penalized 100% of the taxes due. Accordingly, the amounts the IRS seeks when the penalty is applied are usually substantial, and the IRS is aggressive in enforcing it.

Responsible persons

The penalty can be imposed on any person “responsible” for the collection and payment of the taxes. This has been broadly defined to include a corporation’s officers, directors, and shareholders under a duty to collect and pay the tax, as well as a partnership’s partners or any employee of the business under such a duty. Even voluntary board members of tax-exempt organizations, who are generally exempt from responsibility, can be subject to this penalty under certain circumstances. Responsibility has even been extended in some cases to professional advisors.

According to the IRS, being a responsible person is a matter of status, duty and authority. Anyone with the power to see that the taxes are paid may be responsible. There is often more than one responsible person in a business, but each is at risk for the entire penalty. Although taxpayers held liable may sue other responsible persons for their contributions, this is an action they must take entirely on their own after they pay the penalty. It isn’t part of the IRS collection process.

The net can be broadly cast. You may not be directly involved with the withholding process in your business. But let’s say you learn of a failure to pay over withheld taxes and you have the power to have them paid. Instead, you make payments to creditors and others. You have now become a responsible person.

How the IRS defines “willfulness”

For actions to be willful, they don’t have to include an overt intent to evade taxes. Simply bowing to business pressures and paying bills or obtaining supplies instead of paying over withheld taxes due to the government is willful behavior for these purposes. And just because you delegate responsibilities to someone else doesn’t necessarily mean you’re off the hook.

In addition, the corporate veil won’t shield corporate owners from the 100% penalty. The liability protections that owners of corporations — and limited liability companies — typically have don’t apply to payroll tax debts.

If the IRS assesses the penalty, it can file a lien or take levy or seizure action against the personal assets of a responsible person.

Avoiding the penalty

You should never allow any failure to withhold taxes from employees, and no “borrowing” from withheld amounts should ever be allowed in your business — regardless of the circumstances. All funds withheld must be paid over on time.

If you aren’t already using a payroll service, consider hiring one. This can relieve you of the burden of withholding and paying the proper amounts, as well as handling the recordkeeping. Contact us for more information.

2 valuable year-end tax-saving tools for your business

Medical expenses: What it takes to qualify for a tax deduction

Biased Belief is Risky Business

Flex plan: In an unpredictable estate planning environment, flexibility is key

3 key traits of every successful salesperson

GAAP vs. tax-basis: Which is right for your business?

How the EU’s data protection regulations might affect U.S. nonprofits

Small businesses: Stay clear of a severe payroll tax penalty