De Minimis Threshold: A Lesson in Latin & the IRS

Recently, the IRS updated the de minimis threshold for taxpayers without an applicable financial statement (AFS). Confused? Trust us, this is a good thing.

First, a Latin lesson. De minimis is a Latin expression meaning “about minimal things.” So what does this have to do with the IRS? Well a de minimis threshold is the lowest payment value required to count toward payments on a given project. In other words, if the value of a payment is under the de minimis threshold, it does not have to be reported.

So what’s with the IRS’ change of heart? Well several taxpayers made sure to let the IRS know that the previous threshold ($500 on a per-invoice or per-item basis) wasn’t really working for them. They even gave a few reasons: (1) the threshold was too low to truly reduce the administrative burdens of complying with the repair regulation requirements for small taxpayers (read, it caused a lot of time and paperwork without adding any real value), and (2) the amount paled in comparison to the $5,000 safe harbor provided for taxpayers who have an AFS.

And now a financial lesson. An applicable financial statement (AFS) is one prepared in accordance with U.S. Generally Accepted Accounting Principles. In other words, it’s something your accountant helps you do. And no, not all businesses need one. Here’s a refresher on why you might. 

The change, effective January 1, 2016, raises the de minimis threshold to $2,500 on a per-invoice or per-item basis for taxpayers without an AFS. It’s effective for expenditures incurred in taxable years beginning January 1, 2016. This change will simplify record-keeping requirements for small businesses. In other words, the IRS just made your life a little bit easier. Happy New Year.

De minimis

Want to know more? This change is great and all, but with it comes new elections and policies and procedures that need to be put in place effective January 1, 2016. So make sure to chat with a tax specialist about how to implement this in your organization. What, you thought it would be easy? Have we taught you nothing about taxes so far?

 

It’s the Season of Giving

season of giving

It’s beginning to look a lot like Christmas. The lights are up on the house, the stockings are hung and the presents are wrapped underneath the tree (unless you’re a procrastinator … in which case you have exactly 2 days to make it look like Christmas).

It’s the season of giving, to family, friends and even charities. As you give, here are a few tips to consider from a tax perspective.

Contribute to Qualified Charities. If you’re planning on itemizing your charitable deduction on your tax return, make sure your donation goes to a qualified charity by December 31. Not sure what a qualified charity is? Ask them about their tax-exempt status. Or, you can go to IRS.gov and use the Exempt Organizations Select Check tool to make sure.

If you are a taxpayer 70 ½ years of age or older, you can make a donation to a charity directly from your IRA (individual retirement account, a.k.a. what you’re going to live off of when you retire). If you do this, the amount is not included on taxable income. However, that also means you can’t itemize this deduction (on your handy form known as Schedule A).

Oh, and a reminder: gifts given to individuals, whether to friends, family or strangers, are not deductible. Hope your mom enjoys her new perfume.

Keep records of all donations. You’ll need to track any donations you’re planning on deducting, regardless of the amount. How do you do this? You can use a cancelled check, bank or credit card statement or payroll deduction record. For contributions of $250 or more, you must receive a written acknowledgement from the charity which states the following:

  • The charity’s name
  • The date of the contribution
  • The amount of the contribution
  • Whether or not any goods or services were received in exchange for the donation

This documentation isn’t just for fun. If you’re going to itemize your deductions, you have to have the written acknowledgement from the charity prior to filing your tax return.

Give in good condition. To be tax-deductible, clothing and household goods you donate to charity generally must be in good used condition or better. So don’t try and donate your old gym socks. This includes furniture, furnishings, electronics, appliances and linens.

Here’s a little tip from us to you. It’s a good idea to take pictures of donated items for substantiation (otherwise known as proof). Also, certain non-cash donations of $5,000 or more will require an appraisal.

Did we mention records? In order to deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or written communication from the charity. So what do we mean by monetary donations? Well, checks, cash, electronic funds transfer or credit card. But it can also apply to payroll deduction. To do this, the taxpayer needs to retain a pay stub, a Form W-2 or other documentation furnished by the employer.

Keep it to 2015. Contributions are deductible in the year they were made. So if you charged it to a credit card before the end of 2015, it counts for 2015. Even if you’re not paying your bill until 2016.

You can’t be itemized and standard. For individuals, only taxpayers who itemize their deduction (on a little form known as Form 1040 Schedule A) can claim charitable contributions. Meaning, if you normally take standard deduction, you’re out of luck for charitable deductions. Need more clarification on this? Ask your tax professional.

 

 

 

Finding the Right Accountant

It’s the holiday season and your kids are pouring through catalogs, searching online and making extensive Christmas lists (okay, admit it, we’re describing you). We take care to make lists, check them twice and ensure people know exactly what we might be “surprised” to find underneath the Christmas tree.

All this work for one time a year. What if you put the same effort into finding someone to help your business grow and succeed? Someone who not only understood your books but could help you project, forecast and make sure all the boxes were checked. That person is your accountant (come on, would you expect anything less from us?).

Too often, small businesses adopt the DIY model until the finances become too complicated, or too much of a mess, before they call someone in. Finding the right accountant for your organization early (whether it be someone on your staff or hiring an outside firm)  is a gift that will give continually to your organization.

But how do you know what to look for? Similar to the search for the perfect gift, research is key. Here are things you should be sure to put on your accountant wish list:

They know their stuff. We’re talking degree(s) obtained, GPA, certifications (CPA, CMA), continuing education, accounting software experience/background and more. Further, make sure to take a long look at their resume, as it’s truly your first impression. Do they have proven accounting experience? How long have they stayed in previous positions? What were their job responsibilities at each position?  Basically, you’re looking to ensure they have the background and framework to help you and your organization.

Tip: Ask them to explain in their own words their skill set and experiences from past positions. Raise the red flag if they just start reciting their resume.

You understand what the heck they’re talking about. You’ve taken the first step and reviewed their experience and education. They know their stuff. But the question is, can they help you understand it as well, beyond all the jargon? According to Forbes, “the mark of a really-great-to-work-with CPA is an ability to translate esoteric ideas and terms into something that you can truly understand and work with. You want someone who will go beyond doing a job for you – you want to be able to use them as a resource to expand your knowledge of how to run your business.”

Tip: Have more than one person interview them. Have a separate interview within different departments to see how well they communicate across departments or individuals. Here’s a few questions to ask:

  • Explain a time when your month-end close process didn’t go well, what did you do to fix the problem?
  • What processes have you put in place to strengthen the accounting department and why?
  • How do you handle the tight deadlines within an accounting department?

 

It’s not all about THEM. Yes, you’re looking for an accountant for your organization, so you want to make sure they’re qualified. But remember, it’s not all about them. It’s about YOU too. A good accountant should be able to discuss your business and be willing to learn more about what you do. Sure, they need to know the numbers, but they also should be a genuine partner who can give feedback and advice across various areas of your business.

Tip: Ask some general questions about starting or running a small business. A good accountant should be able to talk about industry trends and answer basic small business accounting questions.

They’re not the best thing since sliced bread.

A truly good CPA will be skilled, but will also know where their shortcomings are. According to Forbes, “Look for someone who openly discusses what they’re good at and what their flaws are – and hopefully how the rest of their team compliments and compensates for them.”

Make sure your accountant not only knows their stuff, but is backed by a team that also knows their stuff. Learn more not only about your accountant, but about the team that will be working alongside them. It’s highly likely you’ll be working more with their staff on day-to-day operations and preparation then with the CPA. So you should probably make sure you all get along.

Don’t take their word for it.

Remember, an interview is a person’s opportunity to show their best self. But they should also be able to back it up. Background checks are incredibly important, as they allow you to verify what a person has told you. Background checks can verify education degrees and graduation dates, credentials and if they’re still active, and employment. Further, calling professional references will give you a clearer picture of the person or firm you’re looking to hire.

Yes, this will take time. However, it will take more time if you hire the wrong accountant/firm and then have to replace them and onboard someone else. Spend the time upfront to ensure you get the right accountant early on.

Seem like a whole lot of work? You can always hire a placement service firm (like us) to do the hard work for you.

Hiring the Right Accounting Firm

What You Want to Know: Gift Cards

We want to give you a better experience, where you feel connected to your financial journey and confident that you’re making the best decisions for your business. As part of this, we’ll feature blog posts on frequently asked questions. No question is a dumb question so if you want to learn more about something, just ASK.

It’s the holiday season and businesses and individuals alike are honoring individuals they care about. One of the common ways they do this is with gift cards. So if your organization gives gift cards, there are steps you have to follow to make sure you’re compliant. Yes, shocking to no one, there are IRS rules about even this …

You gave your employees each a gift card for Christmas. Did you report it as income? You should have. Yes, even gift cards count as taxable income and must be reported on your handy W-2 (remember that one?). According to the IRS, because cash and cash equivalent fringe benefits, like gift certificates, have a readily ascertainable value, they do not constitute de minimis fringe benefits.

De mini … what?

A de minimis fringe benefit is “one for which, considering its value and the frequency with which it is provided, is so small as to make accounting for it unreasonable or impractical.” In other words, this benefit is so small the IRS basically says, don’t even bother with trying to report it.

Let me guess, gift cards don’t qualify.

You guessed it. Cash or cash equivalent items provided by an employer are never excludable from income (with a few minor exceptions … did you expect any different?). Gift certificates have an easily ascertainable value and can be redeemed for general merchandise or have a cash equivalent value. In other words, you have to report them as part of an employee’s wages.

So I have to report them.

Yes, you have to include it as part of wages on Form W-2. Further, if the employee is covered for social security and Medicare, the value of benefits are also subject to withholding for these taxes.

Any way around this?

Awards and gifts of minimal value (read, not a gift card … think more like a holiday turkey), generally fall under the de minimis rule and are not taxable. So what’s considered minimal? Well, the IRS has never put a dollar amount on the de minimis fringe benefit. However, they have given us some examples:

  • Occasional personal use of an employer’s copying machine (as long as you have restrictions in place so 85% of the use is for business purposes)
  • Occasional group meals, picnics or cocktail parties for employees and their guest.
  • Occasional theater or sporting event tickets.
  • Flowers, fruit, books, or similar property for employees under special circumstances (otherwise known as occasionally. For instance on account of illness, outstanding performance, etc.)

Sense a pattern in the above examples? Frequency is a huge deal when it comes to de minimis fringe benefits and what does and does not need to be reported. If you have a questions, or a sneaking suspicion, check with your tax professionals.

The moral of the story.

If you give your employees a gift card, regardless of size (yes, even a $5 one counts), you need to report it as part of their wages.

Gift cards

 

“Help” is on the Way

The IRS recently launched a “new initiative designed to more quickly identify employers who are falling behind on their payroll or employment taxes and then help them get caught up on their payment and reporting responsibilities.” This effort is cleverly called the Early Interaction Initiative (Ell). In other words, the IRS doesn’t think tardiness is cool.

Need a refresher on payroll tax? As an employer, you pay your employees. It’s not just their wage earnings you have to take into account, however. Payroll taxes must also be withheld from an employee’s paycheck. These generally include the following:

  • Federal income tax
  • Social security tax
  • Medicare tax
  • State income tax
  • Various tax withholding (think city, county, school district)

According to the IRS, nearly 2/3 of federal taxes are collected through the payroll tax system. So the IRS would really appreciate you not being late for class. Before this new initiative, the IRS had a hard time monitoring late payments (we’re talking weeks or even months). However, under Ell, they’ll be able to catch your tardiness right away and hopefully keep you from repeating the pattern.

Why is this such a big deal? Sometimes employers have cash flow problems. An employee’s tax withholding dollars may seem like a great short-term loan to solve the issue. By issuing Ell, the IRS is sending a very clear message that this is not the way to earn your spot at the cool kids table.

In fact, they’re making it super easy for you to get caught. Under Ell, the IRS will now do one or more of the following:

  • Monitor employer withholding deposit patterns to identify those employers whose payments decline or are late.
  • Send a letter to any identified employer reminding them of their responsibility to make timely and complete payroll filings and deposits.
  • Make automated phone calls providing information related to payroll withholding and payment requirements and offering assistance.
  • When deemed appropriate, dispatch an IRS revenue officer to the employer’s place of business.

The moral of the story: payroll taxes are an important (and necessary) part of doing business, not something to skim over.

Year-End Planning: Form 1099

Now that you’ve become an expert in filling out your W-2s correctly (still not quite sure? Here you go!), it’s time to talk about another type of FORM. Get excited.

Form 1099

Businesses make certain payments to nonemployees during a calendar year. When they do this (you guessed it), they must furnish annual information returns both to the IRS and to the nonemployee recipient of the payment.

As a reminder, an information return is a document used for reporting purposes based on certain transactions incurred throughout the year. Information on these forms is used to assist both the taxpayer (you and the nonemployee party) in preparing to file taxes, as well as the IRS to match records to the taxpayer’s tax return.

In order to facilitate the reporting of these payments, IRS has developed the Form 1099 Series, which is a group of forms used to report ordinary kinds of payments made by a business, such as dividends, interest, retirement distributions, and miscellaneous income payments.

Wait … what?

While W-2 reports wages, salaries and tips, Form 1099-MISC, “Miscellaneous Income” is filed by a business for certain payments made to nonemployees (remember the difference?) in the course of trade or business.

What exactly does trade or business mean?

Trade or business generally refers to an entity that operates for gain or profit. However, it’s not that simple. Nonprofit organizations are also subject to these reporting requirements. Other organizations/items subject to the reporting requirement also include:

  • Trusts of qualified pension or profit-sharing plans of employers
  • Certain organizations exempt from tax under section 501(c) or (d)
  • Farmers’ cooperatives exempt from tax under section 521
  • Widely held investment trusts
  • Payments made by federal, state or local governments

When is Form 1099-Misc required exactly?

Form 1099 is required in a number of circumstances, including:

  • $10 or more in royalties or broker payments in lieu of dividends or tax–exempt interest;
  • $600 or more in:
    • Rent
    • Services, including parts and materials
    • Prizes and awards
    • Other income payments
    • Medical and health care payments
    • Crop insurance proceeds
    • Cash payments for fish you purchase from anyone engaged in the trade or business of catching fish (we’re not kidding)
    • The cash paid from notional principal contract to an individual, partnership, or estate
  • Any fish boat proceeds (again, not making this up)
  • Gross proceeds to an attorney
  • Reporting of direct sales of at least $5000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment
  • Any backup withholding regardless of the amount of payment.

This form is seriously required? 

Yep! The form is required for each person to whom payments have been made during the year.

So everyone has to fill this thing out?

Not quite. There are certain payments where Forms 1099 are not required:

  • Generally payments to a corporation
  • Payments for merchandise telegrams (yes, it’s a thing), telephone, freight, storage and similar items
  • Payments of rent to real estate agents
  • Wages paid to employees (report on Form W-2. Learn more about that one here)
    • Other items not included on Forms 1099, but are included on W-2:
      • Military differential wage payments made to employees while they are on active duty in the Armed forces or other uniformed services
      • Business travel allowances paid to employee (may be reportable on W-2)
      • Cost of current life insurance protection (report on Form W-2 or Form 1099-R, Distributions from Pensions, Annuities, Retirement, or Profit-Sharing plans, IRAs, Insurance Contracts, etc.)
  • Payments to a tax-exempt organization including tax-exempt trusts (IRAs, HSAs, Archer MSAs, and Coverdell ESAs), the United States, a state, the District of Columbia, a U.S. possession, or a foreign government
  • Payments made to or for homeowners from the HFA Hardest Hit Fund or the Emergency Homeowners’ Loan Program or similar state program.
  • Payments made with a credit card or payment card and certain other types of payments, including third party network transactions
    • These ones go on a different form, known as the Form 1099K
  • A payment to an informer as an award, fee, or reward for information about criminal activity
    • Yep, you don’t have to fill this form out if you were being a good Samaritan, as long as the payment is made by a federal, state, or local government agency, or by a nonprofit organization exempt from tax under section 501(c)(3) that makes the payment to further the charitable purpose of lessening the burdens of government.
  • Scholarship or fellowship grants. Why, you might ask. Well scholarship or fellowship grants are taxable to the recipient because they are paid for teaching, research, or other services as a condition for receiving the grant.
    • So where might this one go? If you guessed W-2, you’re exactly right. They are considered wages and must be reported on Form W-2. Other taxable scholarships or fellowship payments (to a degree or non-degree candidate) are not required to be reported to the IRS on any form.
  • Difficulty-of-care payments that are excludable from the recipient’s gross income are not required to be reported. Difficulty-of-care payments to foster care providers are not reportable if paid for not more than 11 children under age 19 and not more than six individuals age 19 or older.
  • A canceled debt is not reportable on Form 1099-MISC. That one goes on a different form (yes, there really are a lot of forms), known as Form 1099-C.

This makes NO SENSE. Head hurts.

Tax reporting is complex and multi-faceted. This stuff isn’t easy and, frankly, stumps quite a few of us (and we’re accountants). So don’t be afraid to ask.

 

 

 

Year-End Planning: Form W-2

One of the gifts your business keeps on giving is the gift of FORMS. Owning and running your own business comes with a great deal of paperwork, including several forms related to your employees. In the spirit of the season (tax planning season that is), we’re going to break down a few of these forms and things to watch for, especially since several of them will have an impact on you, and your employees’, tax liability.

Before we begin, we’d like to preface with the following: many of these mistakes are simple and easily avoidable if you take the time to truly walk through the form. We know there are a lot of things to fill out when you run a business, but taking a few extra minutes now will save you a lot of headache later on.

Now on with the form tutorial …

Form W-2

What is it?

It’s a type of information form, meaning it’s a document used for reporting purposes based on certain transactions incurred throughout the year. Information on these forms is used to assist both the taxpayer (that’s your employees) in preparing to file taxes, as well as the IRS to match records to the taxpayer’s tax return.

Who gets it?

The W-2 tax form shows the amount of taxes withheld from a paycheck for the year and is used for both federal and state taxes. An employer legally must send out W-2 forms to each of its employees (if you need a refresher on who is an employee, go here) to whom they pay a salary, wage or other form of compensation.

Employers must file a W-2 for wages paid to each employee for whom:

  • Income, social security or Medicare taxes were withheld
  • Income tax would have been withheld if the employee had claimed no more than one withholding allowance or had not claimed exemption from withholidng on Form W-4.

When do I need to do this?

As the employer, you must send the employee a W-2 form on or before January 31st each year. This ensures the employee has ample time to file everyone’s favorite thing (taxes) before the April 15th deadline.

Well that seems pretty straightforward …

There are several common W-2 reporting errors that can wreak real havoc. Here are some thing to watch for:

  • Incorrect or missing employer identification number
  • Incorrect employee names and SSNs
  • Omission of decimal point and cents from entries
  • Using ink that is too light – use only black ink
  • Entries made that are too small or too large (Use 12-point Courier font, if possible)
  • Dollar signs added to the money amount boxes
  • Inappropriately checking the “Retirement plan” checkbox in box 13
  • Misformatting the employee’s name in box e. Enter the employee’s first name and middle initial in the first box, his or her surname in the second box, and his or her suffix (such as “Jr.”) in the third box.

Errors on the W-2 form can also cause issues with reports. So make sure to watch for these errors:

  • Use of maximum social security or Medicare wage amounts for a prior year – instead of for the tax year being reported.
  • Use of social security maximum yearly wage amount for Medicare wages.
  • Decimal mistakes in money fields; i.e. “4800” which is treated by SSA as $48.00 – instead of
  • $4800.00.
  • Tips included in the social security wage field as well as in the social security tip field.
  • Omitted wage or tax fields on wage reports.

And one more for good measure. If you’re filling out paper Form W-2, make sure that you watch out for these common mistakes:

  • Prior tax year form used.
  • Unscannable reports
  • Failure to file Copy A of Form W-2 with SSA
  • “Void” indicator on Form W-2 checked in error

Again, these are often simple and easily avoidable mistakes. Ensure the accuracy and clarity of the information and take your time now, to avoid wasting your time in the long run with costly cleanup. When in doubt, ASK. Even the simplest tax form can be complex. Avoiding errors on these forms might just be one of the best gifts you give yourself (and your employees) this tax season.