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BUSINESS FORUM

Year End Tax Planning

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Tax planning in the weeks before year-end allows you to take advantage of strategies that might reduce your income tax obligation.

Tax Savings

Capitalize on Winners
Your investments are a good starting point for implementing tax-saving strategies. You can benefit from favorable tax rates on long-term capital gains by selling and taking profits on appreciated securities you’ve held longer than one year. Long-term gains are currently taxed at a maximum rate of 15% for most taxpayers and 20% for taxpayers with taxable income of over $434,550 ($488,850 for joint filers) in 2019.
Cut Your Tax Bite With Losers
Investments that have lost value and have consistently underperformed a benchmark over time may be perfect sell candidates, particularly if you’re not confident of a turnaround. By selling your losers, you can use your losses to offset gains on appreciated securities you’ve sold. Capital losses are fully deductible to offset capital gains and up to $3,000 of ordinary income each year ($1,500 if married filing separately). Any losses that you can’t deduct for 2019 can be carried over for deduction in future years, subject to the same limits.
Don’t make taxes your only reason for selling an investment. Many different factors should be considered when selling securities, including how the sale of a specific investment would affect your overall portfolio.
Curb Surtax Exposure
The 3.8% surtax on net investment income (NIIT) is a relatively new wrinkle for higher income taxpayers. The surtax comes into play when an individual filer’s modified adjusted gross income (AGI) is more than $200,000 ($250,000 on a joint return or $125,000 if married filing separately). The NIIT applies to the lesser of net investment income or the amount by which modified AGI exceeds the threshold. For purposes of the surtax, net investment income includes taxable interest, dividends, annuities, royalties, rents, net capital gain, and income from passive trade or business activities. The surtax doesn’t apply to municipal bond interest or distributions from tax-deferred retirement plans.
Several planning moves are available that may help reduce your exposure to the surtax. These include:
• Maximizing contributions to your employer’s qualified retirement plan. For 2019, you can contribute up to $19,000, plus an additional catch-up amount of $6,000 if you’re age 50 or older and your plan allows. Pretax contributions to a tax-qualified plan reduce your taxable income.
• Contributing to a traditional individual retirement account (IRA). Contributions are tax deductible if neither you nor your spouse actively participates in an employer-sponsored retirement plan. For 2019, the contribution limit is $6,000 ($7,000 with catch-up contribution- for individuals over age 50).
• Investing in tax-free municipal bonds. Be cautious, however, about investing in private activity municipal bonds, which can increase your exposure to the alternative minimum tax (AMT).
• Deferring capital gains through the use of installment sales. The installment method lets you defer taxes on the sale of certain property by recognizing profit over more than one tax year.

As everyone’s situation is different, please contact one of our tax professionals at Urbach & Avraham, CPAs, to discuss your personal circumstances

Deductions for Long-Term Care Insurance

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Many people are taking a closer look at buying long-term care insurance to protect themselves and their families — just in case. Within limits, premiums paid for qualified policies are deductible as an itemized medical expense. For 2019, premiums for qualified policies are tax deductible to the extent that they, along with other unreimbursed medical expenses, exceed 10% of your adjusted gross income.
The typical long-term care insurance policy will pay for nursing home, home care, or other long-term care arrangements after a waiting period has expired, reimbursing expenses up to a maximum limit specified in the policy. Eligibility for reimbursement usually hinges on the covered individual’s inability to perform several activities of daily living, such as bathing and dressing.
Premiums are eligible for a deduction only up to a specific dollar amount (adjusted for inflation) that varies depending upon the age of the covered individual. The IRS limits for 2019 are:

Long-Term Care Insurance Premium Deduction Limits, 2019
             Age                                                             Premium Limit
40 or under                                                                 $420
41-50                                                                            $790
51-60                                                                           $1,580
61-70                                                                           $4,220
Over 70                                                                      $5,270

These limits apply on a per-person basis. For example, a married couple over age 70 filing a joint tax return could potentially deduct up to $10,540 ($5,270 × 2). Keep in mind, however,  itemized medical expenses are deductible only to the extent that they, in total, exceed 10% of adjusted gross income (AGI).

Self- Employed? You may deduct the premiums for long-term care insurance above-the-line. Therefore, if your medical expenses don’t exceed the 10% AGI threshold or you can’t itemize deductions, you can still deduct the long-term care insurance premiums above-the-line. The deduction is limited to your net self-employment income.
NJ Filer? Premiums paid for long-term care insurance are deductible as medical expenses. In contrast to the IRS threshold of 10%, the threshold to deduct medical expenses for NJ is only 2%. Premiums are first subject to the same IRS tables as shown above. The premiums for self-employed individuals are not subject to the 2% NJ threshold.
NY Filer? You may claim a credit equal to 20% of the premiums paid for the purchase of coverage under a qualifying long-term care insurance policy.

As everyone’s situation is different, please contact one of our tax professionals, at Urbach & Avraham, CPAs, to discuss your personal circumstances.

No Internal Controls Turned a Nonprofit into a Worker’s Windfall

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The background: In 2012, a nonprofit hired an accountant from a temporary staffing agency. Diane (not her real name) did so well that the nonprofit took her on permanently even after learning that the staffing firm did not perform any background checks. They later discovered she stole tens of thousands of dollars from them.

The inside scoop: Diane managed the nonprofit’s payroll and credit cards, and reconciled journal entries. She also signed off on her own statements, with no one reviewing her work. This lack of internal controls let her charge personal expenses to the nonprofit’s credit cards — including a snowblower, payroll for her own company, and family vacations — without being detected.

She hid about $45,000 in credit card charges by debiting the credit card clearing account and crediting cash. Credit card charges were supposed to be entered into the nonprofit’s accounting program — so manual checks could be cut to pay for them — but Diane bypassed this by allocating them to different accounts within the system. She also entered the receipts under the wrong vendor name, so anyone trying to trace them would get lost in a maze of dead ends. Finally, she neglected to file payroll taxes for three years, putting the nonprofit about $20,000 in arrears for the tax liability alone.

How She Got Away With It: Besides giving one person control over the credit cards and the reconciliation, the nonprofit’s auditors didn’t review the credit card statements at year end. And they never tried to match the charges to the actual receipts.

How She Got Nabbed: The scheme unraveled when Diane went out on medical leave and others took over her job functions. They saw what was going on; Diane was soon fired, law enforcement was called in, and charges were filed against her.

What Can My Company Do? The biggest mistake was a lack of internal controls. The person responsible for receipts or disbursements shouldn’t be the one reconciling the accounts. Also, internal and external auditors should closely examine significant transactions and random test for others. Staffing firms should be running background checks on all potential candidates.  Finally, every employee should be required to take time off so someone else can review his work. Consult with one of our CPAs at Urbach & Avraham to review your internal procedures.

Wage Violations Put Construction Company in the Hole with NJ DOL

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First-ever Stop-Work Order Deconstructs Operations: Citing wage violations, the NJ Department of Labor shut down a construction site managed by a building restoration and rehabilitation company. The action was the first-ever taken by the department under its recently expanded authority, according to an NJDOL announcement.
Digging Deeper: Three Sons Restoration LLC was cited for allegedly failing to pay the prevailing wage, for unpaid and late wages, and for failure to keep accurate, certified payrolls. The company has appealed, and the matter has been referred to the Office of Administrative Law for a formal hearing
Here’s What Happened: On August 22, in a coordinated sweep that involved local law enforcement, NJ DOL investigators issued notices at Maurice Hawk Elementary School in West Windsor, Bayonne Fire House at Engine 6 in Bayonne, and at the company’s Union headquarters.
At a September 4 hearing, a determination was made to lift the Stop Work Order at the Bayonne location; but the order at Maurice Hawk Elementary School was affirmed and remained in effect pending the formal hearing.
The state DOL is stepping up its wage-violation efforts, according to Division of Wage and Hour Compliance Assistant Commissioner Joseph Petrecca. “With these new authorities given to us by Governor Murphy and the Legislature, this administration will continue to fight for our workers using all means necessary, especially when it comes to making sure our workers are being paid properly, and the playing field is level for our employers,” he said. Under a new law, a company may be assessed civil penalties of $5,000 per day for each day it conducts business in violation of a Stop Work Order.
Don’t get steamrolled by the state: Prevailing-wage, record-keeping and other issues can be complex. We will review your company’s unique circumstances to make sure you are in compliance with the latest developments in state and US wage-and-hour regulations.  We handle many NJ and US DOL audits. We frequently work with qualified employment attorneys, if necessary in each case. Consult with your legal and accounting advisers to stay on the tight side of the fence.

Trucking Co. Hits NJ DOL Pothole Over Employee Status

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Collision with the DOL   A national trucking company operating in NJ had to deliver more than $1 million to the NJ Dept.of Labor after allegedly misclassifying employee drivers as independent contractors for more than a decade.

The Package Deal Eagle Intermodal Inc. agreed to pay $1.25 million in back unemployment and disability contributions, and pledged to come into compliance with the law, the NJ DOL announced on September 12, 2019.

The Dispute began in 2006 when an audit flagged the alleged misclassification, which meant the company had not paid employer payroll contributions, including NJ Unemployment and Temporary Disability Insurance. A special exemption does exist for services performed by certain operators of large trucks. The DOL concluded that Eagle’s operations didn’t qualify for it; and that the company also failed to establish that the drivers were independent contractors, rather than employees, per                 NJ’s ABC Test:

  1. The worker’s performance is not under the control or direction of the firm, and
  2. The services performed are outside of the usual course of the business, and
  3. The worker is customarily engaged in an independently established trade,    occupation, profession or business.

Gov. Phil Murphy has declared a crackdown on employee misclassification, with the NJDOL required to audit 1% of active NJ businesses. Murphy’s Task Force on Employee Misclassification says these audits have uncovered “tens of millions of dollars in employee-related taxes not paid to the state.” The task force report identified trucking, transportation, delivery services, construction, janitorial services, home care, and other labor-intensive, low-wage sectors as “industries where misclassification is widespread.”

The Safer Road Firms who want to avoid fines and penalties should consult with their legal and accounting advisors. Companies should consider issues like employee classification and overtime, and work with their advisors to keep up with the latest developments in state and federal wage and hour regulations. At Urbach & Avraham we work with many qualified employment attorneys who handle these issues. We also represent many companies at US and NJ DOL audits.

Choice of Business Entity

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When you start a business, there are endless decisions to make. Among the most important is how to structure your business. Why is it so significant? Because the structure you choose will affect how your business is taxed and the degree to which you (and other owners) can be held personally liable. Here’s an overview of the various structures.

Sole Proprietorship

This is a popular structure for single-owner businesses. No separate business entity is formed, although the business may have a name (often referred to as a DBA, short for “doing business as”). A sole proprietorship does not limit liability, but insurance may be purchased. You report your business income and expenses on Schedule C, an attachment to your personal income tax return (Form 1040). Net earnings the business generates are subject to both self-employment taxes and income taxes. Sole proprietors may have employees but don’t take paychecks themselves.

Limited Liability Company

If you want protection for your personal assets in the event your business is sued, you might prefer a limited liability company (LLC). An LLC is a separate legal entity that can have one or more owners (called “members”). A one-member LLC is considered to be a “disregarded entity” by the IRS. Usually, income is taxed to the owners individually on Form Schedule C- Business Income (part of Form 1040), and earnings are subject to self-employment taxes. Note: It’s not unusual for lenders to require a small LLC’s owners to personally guarantee any business loans.

An LLC can make an election to be taxed as a corporation or a partnership by filing IRS Form 8832- Entity Classification Election.

Corporation

A corporation is a separate legal entity that can transact business in its own name and files corporate income tax returns. Like an LLC, a corporation can have one or more owners (shareholders). Shareholders generally are protected from personal liability but can be held responsible for repaying any business debts they’ve personally guaranteed. If you make a “Subchapter S” election, shareholders will be taxed individually on their share of corporate income. This structure generally avoids federal income taxes at the corporate level.

Partnership

In certain respects, a partnership is similar to an LLC or an S corporation. However, partnerships must have at least one general partner who is personally liable for the partnership’s debts and obligations. Profits and losses are divided among the partners and taxed to them individually.

Summary

There is no right or wrong entity. The question is which one is correct for your company, needs and circumstances. Call us for a consultation to help you select the appropriate entity form for your business and family.