Make Tax Friends with PALs

IRS updates FAQs on Certain ACA Provisions

The Trump Administration and the Republican majority in Congress plan to repeal and replace the Affordable Care Act (ACA) in the coming months. In the meantime, however, employers must continue to comply with the existing rules for 2016, including the information reporting requirements and shared responsibility provisions.

The IRS previously issued three sets of FAQs that provide guidance on employer responsibilities under the Affordable Care Act (ACA). This guidance was recently updated to include significant clarifications and help employers ensure that they’re in compliance with the rules. Here, we highlight the extensive updates that were issued in December 2016 and that you may find useful in fulfilling your information-reporting obligations for 2016, if you’re subject to the requirements.

Background

The employer shared responsibility provisions of the ACA require an applicable large employer (ALE) to pay a penalty if it doesn’t offer minimum essential health coverage (or doesn’t offer coverage that is affordable and provides minimum value) to its full-time employees and at least one full-time employee purchases coverage through a health insurance marketplace and receives a premium tax credit. Full-time employees are generally those who average at least 30 hours of service per week during a given month.

An ALE for a calendar year is an employer that employed an average of at least 50 full-time employees or the equivalent on business days during the preceding calendar year. To determine the number of full-time equivalent employees (FTEs), the overall hours worked by part-time employees during a month are added up, and the total is divided by 120 hours (equal to four weeks multiplied by 30 hours per week) and added to the number of full-time employees. However, the actual penalty is applicable solely to the health coverage status of full-time employees, not FTEs.

FAQs on Information Reporting

There are various reporting requirements associated with the employer shared responsibility provisions that apply to both coverage providers and employers. In general, every health insurance issuer, sponsor of a self-insured health plan, government agency that administers government-sponsored health insurance programs and other entity that provides “minimum essential coverage” must file annual returns reporting information for each individual for whom such coverage is provided. They also must furnish a written statement to each individual listed on the return showing the information that must be reported to IRS for that individual.

The information reported on Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, is used to determine whether an employer may be liable for a penalty under the employer shared responsibility provisions of the ACA, as well as the amount of any penalty. Form 1095-C is also used by the IRS and the employee in determining the eligibility of the employee (and his or her family members) for the premium tax credit.

The FAQs provide additional information about completing these forms for the 2016 calendar year (for filing in 2017). Here’s what’s been revised under the updated guidance:

Question 9. Do ALE members that are combined to form a single employer (an “aggregated ALE group”) file one authoritative transmittal reporting summary information for all ALE members in the aggregated ALE group?

The revisions clarify that an aggregated ALE group may not file one authoritative transmittal reporting summary information for all members in the group. Rather, the reporting requirements apply separately to each member.

Question 26. Should an ALE member report coverage under a Health Reimbursement Arrangement (HRA) for an individual who’s enrolled in both the HRA and the employer’s other self-insured major medical group health plan?

Under the updated guidance, enrollment in an HRA must generally be reported in the same manner as enrollment in other minimum essential coverage, unless an exception applies. One such exception is that if an individual is covered by two or more plans that provide minimum essential coverage and that are provided by the same reporting entity, reporting is required for only one of them for that month.

Question 27. Should an ALE member report coverage under an HRA for an individual who’s eligible for the HRA because the individual is enrolled in the employer’s insured group health plan?

The revised guidance states that if an individual is eligible for an HRA because the individual is enrolled in an employer’s insured group health plan for which reporting is required, reporting generally isn’t required for the HRA.

However, an ALE member must report HRA coverage for an employee who’s enrolled in the HRA but not enrolled in another group health plan of the employer.

FAQs on Offers of Health Insurance Coverage

Certain employers are required to report to the IRS information about whether they offered health coverage to their employees and, if so, information about the coverage offered. This information also must be provided to employees. With respect to reporting offers of health insurance coverage, the FAQs provide that:

Question 23. For purposes of reporting, including reporting facilitated by a third party, may an ALE member file more than one Form 1094-C?

The revisions explain that an ALE member may file more than one Form 1094-C, provided that one (and only one) of those transmittals is an “authoritative transmittal” reporting aggregate employer-level data for the ALE member.

Question 24. May an ALE member satisfy its reporting requirements for an employee by filing and furnishing more than one Form 1095-C that together provide the necessary information?

Under the updated guidance, an ALE member may not satisfy its reporting requirements for an employee by filing and furnishing more than one Form 1095-C that together provide the necessary information. There must be only one Form 1095-C for each full-time employee for that full-time employee’s employment with the ALE member.

FAQs on the Shared Responsibility Rules

If you still have questions about whether you’re considered an ALE for 2016 and whether you’ve complied with the shared-responsibility requirements, you may find the revised FAQs regarding the employer shared responsibility provisions helpful:

Question 8. If an employer hires additional employees, including some part-time employees, how does it determine if the entity has become large enough to be an ALE?

The revisions clarify that if an employer hires additional employees, including some part-time employees, during the current calendar year, the employer must take those employees into account when determining if it’s an ALE for the next calendar year.

Question 9. Do the employer shared responsibility provisions apply only to large employers that are for-profit businesses or to other large employers as well?

The revisions clarify that all employers that are ALEs are subject to the employer shared responsibility provisions. This includes for-profit, government and nonprofit employers, regardless of whether the entity is a tax-exempt organization.

Question 20. Is a full-time equivalent employee different than a full-time employee?

According to the revised answer to this question, the number of an employer’s FTEs is relevant only for purposes of determining whether the employer is an ALE.

Question 24. How does an employer count a particular employee’s hours of service if that employee works for two employers that are treated as one employer under the employer shared responsibility provisions (for example, different subsidiaries under a parent corporation that together form an aggregated ALE group)?

The rules for combining employers that have a certain level of common, or related, ownership, apply for purposes of determining whether an employer employs at least 50 FTEs.

Question 28. What counts as an “offer of coverage” under the employer shared responsibility provisions?

The updated guidance stipulates that an ALE makes an “offer of coverage” to an employee if it provides the employee an effective opportunity to enroll in the coverage (or to decline coverage) at least once for each plan year. Coverage refers to minimum essential health coverage under an eligible employer-sponsored plan.

Question 34. For purposes of the employer shared responsibility provisions, in determining what counts as an offer of coverage to at least 95% of an employer’s full-time employees (and their dependents), does an employer have to take into account full-time employees (and their dependents) that are eligible for coverage through another source?

Under the revisions, the determination of what counts as an offer of coverage to at least 95% of an ALE’s full-time employees applies regardless of whether any full-time employees have coverage from another source, such as Medicare, Medicaid or a spouse’s employer.

Question 43. Who’s an employee’s dependent for purposes of the employer shared responsibility provisions?

The revisions explain that a dependent is an employee’s child, including a child who has been legally adopted, or legally placed for adoption with the employee, who has not reached age 26. A dependent doesn’t include:

  • A spouse, or
  • A stepchild, foster child or child who doesn’t reside in the United States (or a country contiguous to the United States) and who isn’t a U.S. citizen or national.

Question 44. If an ALE is made up of multiple employers (called ALE members), is each separate ALE member liable for its own employer shared responsibility payment, if any?

According to the updated answer, if an ALE is made up of multiple ALE members, each separate ALE member is liable for its own employer shared responsibility payment.

Still Got Questions?

The rules for providing health care benefits can be overwhelming to employers. These FAQs offer some guidance, but tax and financial professionals can help explain the shared responsibility provisions and the related reporting requirements using plain English. Contact your WFY tax advisor at info@cpa-wfy.com for additional guidance.

Also be aware that the deadlines for filing ACA information forms are fast approaching. The due date for filing 2016 Forms 1094-B, Transmittal of Health Coverage Information Returns; 1095-B, Health Coverage, 1094-C and 1095-C with the IRS are February 28, 2017, if not filing electronically, or March 31, 2017, if filing electronically. However, the IRS extended the information reporting deadlines until March 2, 2017, for furnishing 2016 Forms 1095-B and 1095-C to individuals.

In the meantime, stay tuned for changes to health care coverage requirements. Health care reform has been made a top priority during President Trump’s first 100 days in office and Congress has already begun to pass related legislation.

© Copyright 2017. All rights reserved.

Brought to you by: Wright Ford Young & Co.

Thinking about Selling Your Business? Add Value Now

Business succession and exit planning should ideally be done over a long period of time (unless illness or another emergency makes it necessary to address them in the short term).

Your business should be readied for sale on a continuing basis. But as you get closer to the time you want to sell, you should make changes to enhance the value. It’s similar to putting a house on the market. Before you put up the “for sale” sign, you fix deficiencies and highlight coveted features. Do the same before selling your business.

Cash Flow and Revenue Drive Value

Most privately owned businesses derive value from their cash flow, so the focus of adding value should begin with finding ways to increase it. Of course, revenue is the ultimate driver — without revenue, there’s no cash flow.

What’s the difference? Revenue is the money your business receives from selling its products or services. Cash flow is the money you have on hand to operate the business. It includes revenue and other sources such as investments and tax savings.

To help assess and boost revenue, here are some questions to ask:

  • What has the historical trend of our revenues been?
  • What is the outlook for our industry?
  • What can we do to increase our revenue stream going forward?
  • Do we need to eliminate some products or services?
  • Do we need to add products or start new lines of business?
  • Do we need to expand the territory in which our business sells products or services?
  • Do we need to add locations?
  • Do we need to look at our sales process and revamp or reorganize it to produce higher sales?

Many business owners don’t bother examining the revenue-generating process when they look to add value to their companies. They focus on cutting expenses. However, the best way to add value is generally to increase revenue. You can try and squeeze expenses to generate additional cash flow, and that’s a process you should definitely undertake, but there’s a limit to what can be gained by cutting costs.

Remember that a business buyer is purchasing future cash flow and future revenues. While the past has historical value, it’s only valid if it’s representative of the future.

Enhance Value Further with Expense Control

Although bumping up profits is key, cutting costs is also part of the equation for increasing your business’s value. To manage the expenses of your business in an effort to enhance cash flow, thoroughly review each expense area. Start with the major costs. In many businesses, that involves the cost of labor. Examine each department and position. It’s not necessarily the amount being paid to each individual employee, but rather the number of employees relative to the true needs of each department.

Adjusting departmental and labor costs can be a painful exercise, but it’s necessary to ensure that the business is operating at maximum efficiency. No person or position should be exempt from this process. It might be difficult to terminate some positions prior to the sale. However, when you present estimated future cash flow information to potential buyers, you can identify these positions as not necessary and adjust for eliminating them.

The process doesn’t end with the cost of labor. More areas to consider include:

  • Technology. In today’s world, this might be the most important function. Buyers generally won’t want to purchase a company that uses outdated technology for operations, manufacturing, financial systems, HR information and so on.
  • Property and equipment. If these aren’t modern or in good condition, steps should be taken to remedy the situation. A buyer wants to see operable and state-of-the-art equipment.
  • Operations. Does the business have up-to-date operations? What about operations manuals? Make sure processes are efficient and revise or institute manuals, if necessary.
  • Financial systems. The company should have financial data that is current and serves the needs of managers operating the business.
  • Internal controls. These are vital to the operations and security of the business. They should be evaluated and, if necessary, steps should be taken to bring them up to standards.
  • Other systems and assets. Examine intellectual property, real estate, insurance, employee relations, environmental matters, material agreements with outside parties and other components. Are they complete and up-to-date?
  • Regulatory matters. Ensure that your business is in compliance with all federal, state and local laws and regulations.

Maximize the Value

Matters that affect cash flow directly and indirectly are critical to enhance the value and the attractiveness of your business. The objective when selling your business is to maximize the value. Thoughtful planning can accomplish that goal.  Contact your WFY tax advisor at info@cpa-wfy.com for additional guidance.

© Copyright 2017. All rights reserved.

Brought to you by: Wright Ford Young & Co.

Nurture Understanding Between Generations for a Peaceful Workplace

Is there frustration building in your organization due to clashing generational attitudes about work? If so, you are not alone. The good news is it doesn’t need to trigger an explosion.

In many workplaces, Baby Boomer and Gen X supervisors are exasperated with younger workers — typically those in the Millennial generation, who were born between 1981 and 2000. Some older supervisors have trouble managing the younger workers.

By the same token, Millennial generation employees often are demoralized by an environment they do not find conducive to doing their best work.

Be Proactive

If you are facing these issues, don’t wait for things to get out of hand. It’s better to be proactive and sensitize employees and supervisors to generational differences in typical attitudes and expectations about work.

When a problem is evident, don’t just hope it will go away or tell a younger employee chafing under the supervision and communication style of a Baby Boomer boss, “this is the way it is around here.”

One basic preemptive problem-solving strategy is to explain each group to the other. Understanding why each generation behaves as it does allows supervisors and workers to overcome the belief that one party is merely going out of its way to annoy or undermine the other. Next, improve on the golden rule. Instead of treating people the way you want them to treat you, treat them the way they want to be treated — within reason.

An “aha moment” for Boomer and Gen X supervisors in understanding how Millennials want to be treated often comes when they are asked about how they raised their children. The younger generation was constantly told they were special. They won trophies merely for participating on sports teams (winning optional) and were heavily programmed with organized activities during their childhoods. Their school essays may have been proofread by their parents. All of these experiences lead to certain expectations in the work environment.

In particular, these employees often expect lots of feedback (especially praise) and direction. They may also have less respect for hierarchies if they viewed their parents more as friends than as authority figures.

Life is too Short?

Many Millennials developed certain attitudes about work by witnessing the fate of some Boomer parents who devoted themselves fully to their jobs and companies, worked long hours without complaint, only to be laid off during times of economic difficulty. This can lead to an attitude that life is too short to sacrifice yourself for a job that might disappear without warning.

Other common differences:

  • Millennials are more interested in collaboration and teamwork, while Generation Xers and Baby Boomers are more independent.
  • Millennials communicate through technology, while Boomers prefer face-to-face interaction.
  • Some Millennials resent having to perform menial tasks and resist the idea that you have to work your way up in an organization while Boomers and Gen Xers believe in the concept of “paying your dues.”

A Two-Way Street

Mitigating inter-generational conflict is a two-way street. Millennials may need to be coached about the meaning of concepts such as initiative and “ownership” of projects. You may want to advise them to narrow down their requests from supervisors.

When Millennials are sensitized to such issues, along with generational attitude differences, they may walk away realizing: “My boss isn’t an evil person, just a product of his time.” They may become content to make a few adjustments to “meet the boss in the middle,” or perhaps embrace a more Boomer or Gen X-like attitude.

When older supervisors are encouraged to make some accommodations to the emotional needs of younger workers, a common response is: “Hey, nobody did that for me.” However, their grumbling may soften when they learn that the accommodations they need to make often aren’t very time-consuming — and they can bring positive results. Examples include sending an occasional thank-you note for a job well done, or cc’ing a boss on an e-mail praising a younger employee.

Some members of each generation are probably going to conclude that those of other generations are wrong and “just need to get over it.” But the differences are not going away. Compromise is key, and if all sides are willing to give a little, the workplace can be a much more productive and pleasant place to be.

© Copyright 2017. All rights reserved.

Brought to you by: Wright Ford Young & Co.

Transferring Real Estate to Heirs: Issues that Can Arise Without a Will

When someone dies owning real estate, problems may occur — especially if the individual doesn’t have a will. This article addresses some of the issues that could arise so that you can plan ahead to make the process go smoothly for your heirs.

A person can leave real property specifically to someone in a will or trust. For example, a father can leave a residence or vacation home to one of his three adult children by simply listing it in his will.

Real estate can also be left to heirs as part of an individual’s net estate or residuary estate. This is the portion of an individual’s assets that remain after all specific gifts and bequests have been made and all claims, taxes and other debts of the estate are satisfied.

For example, the father has a will and leaves specific items (artwork, jewelry) to each of his three children. His will then specifies that the rest of his assets are to be divided equally among the three children. Any real estate he owns is part of the net or residuary estate.

Without a Will

If someone dies without a will, the real property passes by “operation of law,” to the next of kin pursuant to the intestate law of the state. This is the law governing how property is distributed when someone dies without a will. State laws can vary significantly. Operation of law means that nothing has to be put in writing to cause the heirs to inherit the property.

When filing a petition for probate or estate administration, the court will want to know the value of the property and whether or not it is an income producing property (for example, a rental property). Depending on the property value, who is handling the estate and who will inherit the property, the court will determine whether to restrict the sale of the property without court approval. The court will also want the executor or personal representative to account for the rental income of the property if it is a rental property.

Bills to Pay and Records to Keep

Difficulty usually arises immediately after death if there are bills to pay or rent to collect. For example, there may be mortgage, utility or property tax payments. It may take a few weeks before someone is appointed as the executor or personal representative. Or, in some cases, no one decides to petition the court. Some heirs may take it upon themselves to pay bills or collect rent. These heirs must keep a strict accounting of the finances because later they may be accused of malfeasance, which includes acting in their own self-interests and fraud.

In addition, in order to be reimbursed by the estate, heirs must keep strict records. Unfortunately, some heirs don’t petition the court for a long time — even years — to officially begin the probate or estate administration process. This can result in claims of wrongdoing.

Further, it is generally in the best interests of the estate to distribute or sell the property in a timely manner. The longer the property stays in the estate, the more likely there might be a legal challenge about the handling of the sale, the distribution to heirs, the collection of rent and/or the payment of expenses.

Feelings of Entitlement among Heirs

Unfortunately, a common occurrence is when one sibling in a family believes — for one reason or another — that he or she is entitled to more than what is permitted by law. For example, let’s say that a mother with four children lives in a home, which she owns free and clear, with one of her daughters. The other three siblings live out of state and rarely visit. After the mother dies without a will, the daughter who lived with her believes that she should receive the home and be able to continue living there. However, the law is likely to treat the property as an asset that must be divided equally among the siblings.

Let’s further assume that the daughter who lives in the home petitions the court to become the executor or personal representative. The court appoints her. If she refuses to sell the property and distribute the money to the rest of the siblings, the heirs would have to petition the court for an accounting and removal of their sister as executor or personal representative for breach of fiduciary duty. The sister would be required to have a justifiable reason why the property was not distributed.

If upon distribution, there is disagreement on what to do with the property, one of the heirs can petition for a partition and sale of the property. In other words, force the sale of the property to a third party or have an heir “buy out” the other heir(s).

Overall, keeping real property in the estate for an extend period of time is not looked upon favorably by courts.

If you don’t have a will, consult a WFY tax advisor at info@cpa-wfy.com for a recommended estate attorney to draft one so that your wishes are carried out. If you believe you are the heir of an estate with real estate — and the decedent did not have a will — speak with your attorney about how to handle these issues so they do not get out of hand.

Out-of-State Property

What if an estate includes real estate in another state from the one the decedent lived in? If there is no will, the property will be handled under the intestate laws in the state where the property is located.

For example, let’s say you live in the northeast United States but you own a vacation home in the south where you spend winters. If you die without a will, the vacation property will be passed to your heirs under the laws of the southern state. The laws in that state may be vastly different from the laws in the state where you have your principal residence.

 

© Copyright 2017. All rights reserved.

Brought to you by: Wright Ford Young & Co.

Land Is Not Always a Low-Taxed Capital Asset

In one U.S. Tax Court decision involving several consolidated cases, the court concluded that gains from a partnership’s land sales were high-taxed ordinary income rather lower-taxed long-term capital gains. We’ll explain the decision, but first let’s cover some background information.

Capital Gains Tax Basics

Long-term gains recognized by individual taxpayers from the sale of capital gain assets are taxed at lower federal rates than ordinary income. Currently, 20% is the maximum federal income tax rate on net long-term capital gains from most capital assets held for more than one year. That ignores the possibility that the 3.8% Medicare surtax on net investment income might also apply.

For real estate, long-term gains attributable to depreciation are subject to a maximum federal rate of 25%, plus the Medicare surtax when applicable.

In contrast, the maximum federal rate on ordinary income is 39.6%, ignoring the possibility that the 0.9% additional Medicare tax on salary and self-employment income might also apply.

Key Point: Net short-term capital gains are taxed at the same high rates as ordinary income and are also potentially subject to the Medicare surtax.

Inventory Is Not a Capital Asset

These preferential tax rates only apply to long-term gains from dispositions of capital assets. These do not include property held by the taxpayer primarily for sale to customers in the ordinary course of business. Such assets are commonly called inventory. Whether property is inventory is a question of fact, but the Tax Court and the U.S. Circuit Court of Appeals for the 9th Circuit have identified the following five factors as relevant in making that determination:

  1. The nature of the acquisition of the property.
  2. The frequency and continuity of property sales by the taxpayer.
  3. The nature and the extent of the taxpayer’s business.
  4. Sales activities of the taxpayer with respect to the property.
  5. The extent and substantiality of the transaction in question.

The meaning behind these factors is certainly not self-evident. However, in one case, the Tax Court put them to use in deciding a real-life tax controversy.

Key Point: Taxpayers have the burden of proving that they fall on the right side of these factors. If they fail to do so, the IRS wins the point.

Facts Underlying the Tax Court Decision

Concinnity LLC (CL) was treated as a partnership for tax purposes. It was organized by three taxpayers, who also organized and incorporated Elk Grove Development Company (EGDC). CL acquired 300 undeveloped acres in Montana for $1.4 million. At the time of the purchase, the land was already divided into four sections (phases 1-4). The land later came to comprise the Elk Grove Planned Unit Development (Elk Grove PUD).

CL entered into an agreement that gave EGDC the exclusive right to purchase from CL phases 1-3, which consisted of 300 lots in the Elk Grove PUD. On its 2005 federal partnership return, CL reported $500,761 of long-term capital gains from two installment sales of the lots in phases 2 and 3. In turn, the three taxpayers (the owners of CL) reported their passed-through shares of CL’s gains as long-term capital gains on their respective 2005 individual federal income tax returns.

After an audit, the IRS claimed that CL’s land sales produced ordinary income rather than long-term capital gains and asserted tax deficiencies against the three owners.

The taxpayers took their cases to the Tax Court, where they claimed that the land sales produced long-term capital gains because the land was held for investment.

What the Tax Court Concluded

The Tax Court applied the factors listed above and found none weighed in favor of the taxpayers. Therefore, the court agreed with the IRS that CL’s land sale gains should have been reported as high-taxed ordinary income.

Factor No. 1:  (Nature of Acquisition): The IRS claimed that CL acquired the land which came to be included in the Elk Grove PUD to divide and sell lots to customers. Supporting this position was the fact that CL’s 2000 partnership return identified its principal business activity as “development” and its principal product or service as “real estate.”

In addition, the Tax Court found that the record suggested that CL’s purpose in acquiring the land was to develop and sell it. Therefore, the court concluded that evaluation of this factor failed to show that the taxpayers held the property for investment rather than as inventory for sale to customers.

Factor No. 2:  (Frequency and Continuity of Sales): The Tax Court observed that frequent and substantial sales of real property indicate sales of inventory in the ordinary course of business, whereas infrequent sales for significant profits are more indicative of property held for investment. In this case, the record was not clear as to the frequency and substantiality of CL’s land sales.

The court noted that CL’s tax returns reflected two land sales in phases 2 and 3 to EGDC and an affidavit stated that CL had directly entered into agreements for the sale of 81 lots in phase 1, without the involvement of EGDC. However, the record was insufficient to establish the overall extent of CL’s sales activities. Therefore, the Tax Court concluded that evaluation of this factor failed to show that the taxpayers’ sales were not frequent and substantial.

Factor No. 3:  (Nature and Extent of Business): With regard to this factor, the IRS claimed that the only documents in the record indicated that CL brokered the land sale deals, found additional investors for the development project, secured water and wastewater systems, and guaranteed that necessary improvements were made.

The Tax Court agreed that the record showed that CL paid for certain water and wastewater improvements to the Elk Grove PUD and that this level of activity was more akin to a developer’s degree of involvement than to an investor’s action to increase the value of the property. The court concluded that evaluation of this factor failed to show that CL held Elk Grove PUD land primarily for investment rather than as inventory for sale in the ordinary course of business.

Factor No. 4:  (Sales Activities with Respect to the Property): The record was unclear as to whether CL sought out the 81 individual phase 1 lot buyers or whether the buyers sought out CL. Therefore, the Tax Court concluded that evaluation of this factor failed to show that CL did not spend large portions of its time actively participating in selling lots in the Elk Grove PUD.

Factor No. 5:  (Extent and Substantiality of Transaction): EGDC agreed to buy the land in question from CL at an apparently inflated price. According to the Tax Court, this indicated that CL did not make bona fide arm’s-length sales to EGDC, which was also owned by the taxpayers.

This tended to indicate that EGDC was formed for tax avoidance reasons: to buy the lots from CL and then sell them to customers in order to avoid the appearance that CL was itself in the business of selling lots to customers. Therefore, the court concluded the taxpayers were on the wrong side of this factor.

Bottom Line

Because the taxpayers in this case were not found to be on the right side of any of the five factors, the Tax Court agreed with the IRS that CL held the Elk Grove PUD lots as inventory for sale to customers in the ordinary course of business. Therefore, CL’s land sales generated high-taxed ordinary income rather than lower-tax long-term capital gains. (Cordell Pool, et al, T.C. Memo 2014-3)

With more careful attention to detail, CL’s land sale profits could have been properly characterized as lower-taxed long-term capital gains. However to achieve this favorable result, CL’s activities should have been limited to acquiring the property and subsequently making just a few sales to the development entity EGDC. Unfortunately, the taxpayers failed to prove that:

  1. CL did not do any significant development work itself; and
  2. CL was not itself involved in selling lots to customers.

So the IRS won. If you have questions or want more information on tax planning for land sales, consult a WFY tax adviser at info@cpa-wfy.com.

© Copyright 2017. All rights reserved.

Brought to you by: Wright Ford Young & Co.

Important Tax Figures for 2017

Every year, the dollar amounts allowed for various federal tax benefits are subject to change based on inflation adjustments and legislation. Here are some important tax figures for 2017, compared with 2016, including the estate tax exemption, Social Security wage base, qualified retirement plan and IRA contribution limits, driving deductions, allowable business write-off amounts and more.

 

 

The following table provides some important federal tax information for 2017, as compared with 2016. Many of the dollar amounts are unchanged or have changed only slightly due to low inflation. Other amounts are changing due to legislation.

 

Social Security/ Medicare2017 2016
Social Security Tax Wage Base$127,200$118,500
Medicare Tax Wage BaseNo limitNo limit
Employee portion of Social Security6.2%6.2%
Individual Retirement Accounts20172016
Roth IRA Individual, up to 100% of earned income$5,500$5,500
Traditional IRA Individual, up to 100% of earned Income$5,500$ 5,500
Roth and traditional IRA additional annual “catch-up” contributions for account owners age 50 and older$1,000$ 1,000
Qualified Plan Limits20172016
Defined Contribution Plan limit on additions on Sections 415(c)(1)(A)$54,000$ 53,000
Defined Benefit Plan limit on benefits (Section 415(b)(1)(A)) $215,000$210,000
Maximum compensation used to determine contributions$270,000$265,000
401(k), SARSEP, 403(b) Deferrals (Section 402(g)), & 457 deferrals (Section 457(b)(2))$ 18,000$ 18,000
401(k), 403(b), 457 & SARSEP additional “catch-up” contributions for employees age 50 and older$ 6,000$ 6,000
SIMPLE deferrals (Section 408(p)(2)(A))$ 12,500$ 12,500
SIMPLE additional “catch-up” contributions for employees age 50 and older$ 3,000$ 3,000
Compensation defining highly compensated employee (Section 414(q)(1)(B))$120,000$120,000
Compensation defining key employee (officer)$175,000$170,000
Compensation triggering Simplified Employee Pension contribution requirement (Section 408(k)(2)(c))$600$600
Driving Deductions20172016
Business mileage, per mile53.5 cents54 cents
Charitable mileage, per mile14 cents14 cents
Medical and moving, per mile17 cents19 cents
Business Equipment20172016
Maximum Section 179 deduction$510,000$500,000
Phase out for Section 179$2.03 million$2.01 million
Transportation Fringe Benefit Exclusion20172016
Monthly commuter highway vehicle and transit pass$255$255
Monthly qualified parking$255$255
Standard Deduction20172016
Married filing jointly$12,700$12,600
Single (and married filing separately)$6,350$6,300
Heads of Household$9,350$9,300
Personal Exemption20172016
Amount$4,050$4,050
Personal Exemption Phaseout20172016
Married filing jointly and surviving spousesBegins at $313,800Begins at $311,300
Heads of HouseholdBegins at $287,650Begins at $285,350
Unmarried individualsBegins at $261,500Begins at $259,400
Married filing separatelyBegins at $156,900Begins at $155,650
Domestic Employees20172016
Threshold when a domestic employer must withhold and pay FICA for babysitters, house cleaners, etc.$ 2,000$ 2,000
Kiddie Tax20172016
Net unearned income not subject to the “Kiddie Tax”$ 2,100$ 2,100
Estate Tax20172016
Federal estate tax exemption$5.49 million$5.45 million
Maximum estate tax rate40%40%
Annual Gift Exclusion20172016
Amount you can give each recipient$14,000$14,000

 

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