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Business Equipment – Lease or Buy?

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To lease . . . or not to lease. This is an issue business owners often face. If you are weighing the pros and cons of leasing versus buying, here are some things to keep in mind.

Cost Evaluating costs is more complicated than comparing the price of leasing a piece of equipment versus its purchase price. You will also want to consider these issues:

  • How soon will the equipment need to be upgraded or replaced? Highly technical or specialized equipment becomes obsolete quickly and may be a good candidate for leasing.
  • How will you arrange for service and repair? Leasing arrangements often include maintenance of the equipment. If you’re thinking of buying, research the equipment’s repair history as well as the cost and availability of reliable service.
  • How long will you need the equipment? If your use will be short term, then leasing may be the better option.

Cash If you’ve been leasing your equipment, then your costs have been predictable. Purchasing equipment can substantially alter your cash flow. Be sure you consider how purchasing your equipment might affect your business’ finances.

  • Can you save money by buying or leasing equipment? If — and when — cash savings will be realized is an important factor for you to weigh.
  • Do you have the cash available to purchase the equipment? If you use cash for a down payment, you may have less cash for operating and other business expenses.
  • How will financing your equipment purchases affect your ability to get credit for other things? If you anticipate having future credit needs, you may want to avoid adding equipment loans to your current debt load.

If you’re weighing leasing versus buying, give us a call. We can help you look at how the various options will play out.

Tax Planning for Divorce

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If you are getting a divorce, taxes are probably not highest on your list of concerns. Still, you should consider a number of tax-related issues.

Property Settlements

Dividing property in connection with a divorce generally has no immediate consequences for either spouse. However, if the spouse who receives property in the divorce settlement later sells it, there may be a gain to report for tax purposes. So, potential taxes should be a consideration in deciding which spouse will receive which property.

Note that a spouse who receives property in a divorce figures any gain on a subsequent sale of the property using the transferring spouse’s basis (e.g., cost), not the property’s value when it was received.

For example: Michelle receives 10 acres of unimproved land in her divorce settlement. Her ex-husband bought the land for $25,000. It’s now worth $100,000. If Michelle sells the land for $100,000, she will have to report a taxable gain of $75,000 (the difference between the $100,000 selling price and the $25,000 cost basis).

Personal Residence

If a divorcing couple sells their home while they are still married, they are entitled to exclude up to $500,000 of gain from their taxable income if otherwise eligible for the exclusion. If the ownership of the home is simply transferred to one spouse as part of the divorce settlement, there is no taxable gain or loss at the time of transfer. However, should that spouse later sell the house while he or she is unmarried, only a $250,000 exclusion would be available.

Retirement Benefits

A divorce settlement often determines how retirement plan benefits will be divided. However, an employer may distribute retirement plan benefits to a former spouse only after receiving a court-issued document that meets the requirements for a qualified domestic relations order (QDRO). The benefits are taxable to the former spouse who receives them pursuant to a QDRO.

Dependency Exemptions

The Tax Cuts and Jobs Act of 2017 suspended the deduction for dependency exemptions for 2018 through 2025. But after 2025, the deduction will apply (unless additional changes are made). While the spouse who has legal custody of a child is generally entitled to claim the dependency exemption, this tax advantage is negotiable and can change from year to year. The custodial spouse can waive his or her right to the exemption, allowing the noncustodial spouse to claim it.

Does it still matter which spouse qualifies for the dependency exemption? Although the deduction for the dependency exemption is suspended through 2025, there are still benefits to the spouse qualifying for the child’s dependency exemption. Certain tax credits are available such as the child tax credit, (see below) child care credit and tuition credit generally to the spouse entitled to the exemption. Also, many states have a deduction for dependents.

Other Tax Benefits

Having a child qualify as a dependent may impact other tax benefits. For example, there is a potential child tax credit of up to $2,000 annually for each qualifying dependent child under age 17.

Alimony vs. Child Support

For 2018, payments that qualify as alimony under the tax law are deductible by the paying spouse and are considered taxable income to the recipient spouse. Child support payments, on the other hand, are not deductible by the paying spouse and are not included in the recipient spouse’s income. The IRS characterizes payments that are linked to an event or date relating to a child — such as high school graduation or a 21st birthday — as child support rather than alimony.

Note that the tax treatment of alimony will be different for taxpayers who divorce after 2018. Under the Tax Cuts and Jobs Act of 2017, no deduction is available for alimony payments made under post-2018 divorce or separation agreements and recipients are not required to include the payments in income.

These are just some of the tax planning issues that could be important in a divorce situation. Be sure to consult us to discuss how these general rules pertain to your personal situation.

Connecticut Rules Against Double Dip in Determining Alimony

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The “Anti-Steneken” Decision

On May 21, 2019 The Appellate Court of Connecticut ruled against the “double dip” in the case of PENNY OUDHEUSDEN v. PETER OUDHEUSDEN. The decision takes the opposite position of the New Jersey Appellate Court in 2004 in Steneken v. Steneken, 367 N.J. Super. 427 (App. Div. 2004) which decided the “double dip” was permissible.

So, what is the “double dip”? According to NJ attorneys Charles F. Vuotto and Lisa Steinman:

The “double-dip” refers to the double counting of a marital asset, once in the property division and again in the alimony award. More specifically, where a court uses a business owner’s “excess earnings” to value the interest in the business and also fixes support on that spouse’s total income (inclusive of the “excess earnings” used to value the business), a “double-dip” occurs. The tacit acceptance (by some) of a rule against the “double-dip” served to ameliorate the harsh result of distributing undiscounted business values while also fixing alimony on the same income stream used to value a business. However, the recent decision of Steneken, has submerged the availability of a rule against the “double-dip”.

Could this impact NJ divorce law? As of this writing we don’t know if the decision will be appealed to the Connecticut Supreme Court.  As forensic accountants and non-attorneys, we don’t know if New Jersey attorneys, using an out of state case, can try and overturn Steneken – something that would require a New Jersey Supreme Court Decision presumably on a new matter. That effort would take years and thousands of dollars in legal and expert fees. For the right case with enough dollars at stake it may make sense.

If you would like a copy of the PENNY OUDHEUSDEN v. PETER OUDHEUSDEN decision email Jeffrey D. Urbach, partner at jdu1@ua-cpas.com.  Jeff has been providing Court related litigation support services for over thirty years. He is a NJ Roster Rule 1:40 Mediator and is trained in Collaborative Law. Jeff is a CPA, ABV (Accredited in Business Valuations by the AICPA) and a CVA (Certified Valuation Analyst by the NACVA) among other advanced designations.

 

Stiffing on Employee Overtime can Cost Companies Big Time!

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The State and US Dept. of Labor (DOL)are increasingly paying attention to wage-and-hour calculations and thus launching more wage and hour exams. 

The Plot Unintentionally or otherwise, a NJ landscaper cut some corners, and recently got raked over by the DOL. Fullerton Grounds Maintenance, a Kenvil-based landscaping service, failed to pay more than $500,000 in OT to its employees, per the NJ Dept. of Labor & Workforce Development’s  Division of Wage & Hour Compliance.

The DOL Harvest A 6-month investigation revealed that workers had not been paid $529,898, collectively, in OT for time worked over 40 hours a week. The employer cooperated with the investigation, according to the State, “and agreed to perform a self-audit to calculate the amounts owed to the 362 employees who were paid improperly.”

The NJ DOL investigation also determined that the landscaping company took illegal deductions for uniforms and other items not permitted by the NJ Wage Payment Law. 

Another DOL Shopping Spree An employee-generated 2019 NJ DOL audit recovered $133,490 for nine underpaid supermarket workers. A US DOL exam of R&J Supermarket Corp. in Jersey City, revealed OT, minimum wage and recordkeeping violations. For deficient employee records, the employer paid $49,349 in penalties.

A Growing Concern The pace of wage-hour investigations — many of which are triggered by employee complaints, is on the rise. In 2018, the US DOL’s Wage and Hour Division (WHD) recovered $304 million in back wages. As these NJ audits reflect, once an agency begins to investigate your firm, there’s no telling what it’ll turn up.

 More Concern US and State agencies aren’t the only ones chasing after companies.

Employers will confront more wage-hour class action suits as more plaintiff-lawyers take up the charge. There’s been “an on-going migration of skilled plaintiffs’ class action lawyers into the wage and hour litigation space for close to a decade,” according to the Annual Workplace Class Action Report  by the Chicago law firm Seyfarth Shaw LLP,

An Ounce of Prevention… firms should keep up with the latest developments in State and US wage and hour regulations. They should consult with their legal and accounting advisor regarding any employee classification, overtime or other questions. At Urbach & Avraham, CPAs, we work with many experienced employment attorneys.

Urbach Teaching Divorce Taxation Webinar

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Back by popular demand, Jeff Urbach, partner, a long time NACVA (National Association of Certified Valuators and Analysts) Instructor and Course Developer, will be teaching Divorce Taxation Including the Impact of the 2017 TCJA (Tax Cut and Jobs Act) for the third time in 2019. The course is Day 5 of a Five-Day Matrimonial Litigation Series of Webinars given by NACVA.

What will the course cover?

  • Impact of TCJA
  • Taxation of Alimony and Equitable Distribution 
  • Marital Residence
  • QDROs
  • Marital Tax Fraud
  • Tax Filing Status
  • Other Related Topics

Jeff authored this popular course and first taught it in Ft. Lauderdale in December 2018. Since then, he led a Webinar in March 2019 and presented the class live at the NACVA/CTI 2019 Annual Consultants Conference in Salt Lake City in June 2019.

When?

The webinar is on Friday, August 9, 2019 at 1:00 PM EST is open to anyone through registration on the NACVA (www.nacva.com ) website. It will also be presented live again in Ft. Lauderdale in December 2019.

Who can benefit?

Attorneys and financial experts involved with the complex area of divorce taxation will find this program helpful either as a refresher class for experienced practitioners or an introduction for those new to the field.

Tax Planning for College Expenses

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It’s no secret that a college education is expensive. Average annual charges for tuition, fees, and room and board at four-year public colleges and universities stood at $20,770 for in-state

Jr in First Grade

students and $36,420 for out-of-state students for the 2017-2018 school year. Average charges were $46,950 at four-year private colleges and universities.1 These costs are likely to increase in the future.

Parents should take the time to look into the various tax benefits that can help reduce the costs of sending a child to college. Getting an early start on tax planning for college expenses can help reduce some of the anxiety surrounding the whole issue of trying to figure out how to pay for college. Here are some areas worth further investigation.

Savings Programs

Parents have several education savings opportunities that come with built-in tax benefits. Section 529 plans have grown in popularity over the years, but Coverdell education savings accounts also offer valuable tax benefits.

Section 529 Savings Plans

Section 529 college savings plans* are specifically designed for educational saving. You can invest a little at a time or contribute a larger lump sum, whatever approach works best for you. You choose how you want your contributions invested; your plan investments are then professionally managed. These plans offer several features that parents may find appealing:

  • Investment earnings accumulate tax deferred and won’t be subject to federal income taxes when withdrawn for your child’s qualifying educational expenses. (Excess withdrawals are subject to tax and a potential 10% penalty.)
  • Some states offer their residents tax incentives for investing in an in-state plan. New York taxpayers (both resident and non-resident) may deduct up to $5,000 from the NY income taxes for contributions to 529 plans ($10,000 for married filing joint taxpayers)
  • As a parent, you retain control of the money in the account even after the child turns 18.
  • If your child does not attend college or deplete the fund, you can change the account beneficiary to another qualifying family member without losing tax benefits.

Coverdell Education Savings Accounts

Annual contributions to these accounts are limited to $2,000 per child. This maximum phases out (is gradually reduced to zero) for taxpayers with modified adjusted gross income (AGI) between $95,000 and $110,000 (between $190,000 and $220,000 for joint filers).

Your contributions accumulate tax deferred at the federal level and earnings are tax free when used for qualified educational expenses such as tuition, room and board, and books. If you make withdrawals from the account for non-educational expenses, the earnings portion of the withdrawal may be subject to federal income tax and an additional 10% penalty.

What are the advantages of a Coverdell ESA? The Coverdell ESA allows you to self-direct your investments. Also, in addition to college expenses, Coverdells can be withdrawn tax-free to pay for a broad range of K-12 expenses, while 529 plans are limited to K-12 tuition.

Scholarships

Young adults who demonstrate high academic promise or who possess certain desirable skills may receive scholarships that can defray a percentage of the cost of attending college. Scholarships are generally exempt from income tax if the scholarship is not compensation for services and is used for tuition, fees, books, supplies, and similar items (and not for room and board).

Tuition Tax Credits

A tax credit gives you a dollar-for-dollar reduction against the taxes you owe the IRS. The following two education tax credits can help eligible parents alleviate the costs of educating a child.

American Opportunity Tax Credit (AOTC) 

This credit is worth up to $2,500 per year for each eligible student in your family. It’s for the payment of tuition, required enrollment fees, and course materials for the first four years of post-secondary education. The credit is allowed for 100% of the first $2,000 of qualifying expenses, plus 25% of the next $2,000. Were the credit to exceed the amount of tax you owe, you may be eligible for a refund of up to 40% of the credit. The available credit is phased out for single taxpayers with modified AGI between $80,000 and $90,000, and for married couples with modified AGI between $160,000 and $180,000.

Lifetime Learning Credit (LLC)

This credit can be as much as $2,000 a year (per tax return) for the payment of tuition and required enrollment fees at an eligible educational institution. It is calculated as 20% of the first $10,000 of expenses. You cannot claim the credit for a student if you are claiming the AOTC for the student that year. Unlike the AOTC, qualified expenses for the LLC do not include academic supplies and no portion of the credit is refundable. The LLC is phased out (in 2018) for single taxpayers with modified AGI between $57,000 and $67,000, and for married couples with modified AGI between $114,000 and $134,000.

Student Loan Interest Deduction

A tax deduction lowers your tax liability by reducing the amount of income on which you pay tax. You can deduct interest on qualified loans you take out to pay for your child’s post-secondary education. The maximum deduction is $2,500 per year, but it phases out for taxpayers who are married filing jointly with AGI between $135,000 and $165,000 (between $65,000 and $80,000 for single filers). The deduction is available even if you don’t itemize deductions on your return.

*Certain 529 plan benefits may not be available unless specific requirements (e.g., residency) are met. There also may be restrictions on the timing of distributions and how they may be used. Before investing, consider the investment objectives, risks, and charges and expenses associated with municipal fund securities. The issuer’s official statement contains more information about municipal fund securities, and you should read it carefully before investing.

Questions about college savings opportunities? Please call us to discuss. It is never too early to start saving for junior’s college.