Inside DMLO

Responding to many questions received in response to newly-enacted restrictions on home mortgages, the IRS has confirmed that taxpayers can continue to deduct home equity loan interest and interest on a home equity line of credit (HELOC) or second mortgage, regardless of how the loan is labeled.

The Tax Cuts and Jobs Act of 2017 suspends from 2018 until 2026 the deduction for interest paid on home equity loans and lines of credit, unless they are used to buy, build or substantially improve the taxpayer’s home that secures the loan.

Under the new law, for example, interest on a home equity loan used to build an addition to an existing home is typically deductible, while interest on the same loan used to pay personal living expenses, such as credit card debts, is not. As under prior law, the loan must be secured by the taxpayer’s main home or second home (known as a qualified residence), not exceed the cost of the home and meet other requirements.

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College accounting students: we’d like to invite you to join us for our expanded 2018 Student Leadership Program. Learn about #CPALife, our firm, how to have an awesome interview, and the skills you need to be recognized as a leader.

Join us for a social event on Wednesday afternoon, followed by a full program on Thursday. Jeans are perfectly appropriate – we wear them daily.

Check out photos from last year and read what participants had to say about the program.

Applications are due March 31st, so apply now by completing this form and emailing to santle@dmlo.com.

The IRS has announced that the start of the 2018 tax season will be Monday, January 29, meaning it will begin accepting both electronic and paper tax returns on that date. The IRS chose the date to ensure the security and readiness of key tax processing systems in advance of the opening, and to allow time to assess the potential impact of tax legislation on 2017 tax returns. 

The filing deadline to submit individual 2017 tax returns (that have not been properly extended) is Tuesday, April 17, 2018, rather than the traditional April 15 date. In 2018, April 15 falls on a Sunday, and this would usually move the filing deadline to the following Monday – April 16. However, Emancipation Day – a legal holiday in the District of Columbia – will be observed on that Monday, which pushes the nation’s filing deadline to Tuesday, April 17, 2018. Under the tax law, legal holidays in the District of Columbia affect the filing deadline across the nation.

A note about refund processing: by law, the IRS cannot issue refunds on tax returns claiming the Earned Income Tax Credit or the Additional Child Tax Credit before mid-February. This applies to the entire refund — even the portion not associated with the EITC and ACTC. If you claim one or both of these credits, expect the earliest refunds to be available in bank accounts or on debit cards starting on Feb. 27, if choosing direct deposit and there are no other issues with the tax return.

The IRS also reminded taxpayers in the announcement that a trusted tax professional can provide helpful information and advice, which we completely agree with of course. No need to wait until the IRS opens on January 29th – we kicked off our tax season today (see a few of our team pictured at the kickoff event), and are ready to meet with you!

The Tax Cuts & Jobs Act (TCJA), has both good and bad news for taxpayers. Here are highlights of some of the most significant changes affecting individual and business taxpayers. Except where noted, these changes are effective for tax years beginning after December 31, 2017.

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Congress is enacting the biggest tax reform law in thirty years, one that will make fundamental changes in the way you, your family and your business calculate your federal income tax bill, and the amount of federal tax you will pay. Since most of the changes will go into effect next year, there’s still a narrow window of time before year-end to soften or avoid the impact of crackdowns and to best position yourself for the tax breaks that may be heading your way. Here’s a quick rundown of last minute tax moves you should think about making.

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Friday evening the House and Senate Conference Committee agreed to the Tax Cuts and Jobs Act. Barring a delay, it is anticipated to pass both chambers tomorrow and be signed into law before December 25th. Click here to view Policy Highlights of the Act.

Not included in the highlights document are some of the deductions that may be lost or reduced under the Act, such as:

• College athletic event seating rights
• Miscellaneous itemized deductions (2% deductions) including tax preparation fees and investment management fees
• Personal casualty loss deduction

You may still be able to benefit from certain of these deductions, if payment is made before the end of 2017; for example, prepaying donations tied to college athletic event seating rights. Deducting prepayments of other items, such as 2018 state and local income taxes, is specifically prohibited in the language of Act.

Please call your DMLO advisor, or our main number (502) 426-9660, if you want to discuss the specifics of your situation and whether you should consider taking action before 12/31.

Year-end tax planning can provide a good way to lower a tax bill that will otherwise be waiting when you file your 2017 tax return in 2018. Since tax liability is primarily keyed to each calendar tax year, once December 31 passes, your 2017 tax liability – good or bad – will mostly be set in stone.

Year-end 2017 presents unique challenges due to efforts by Congress and the Trump Administration to enact tax reform legislation – the scope of which has not been seen since 1986 (according to supporters). Whether this ambitious plan will be successful by the end of this year remains uncertain; but the reasons to prepare to maximize any benefits if it does happen are indisputable. Both talk of lower tax rates and fewer deductions requires careful monitoring at this time, with contingency plans ready should these changes occur.

Potential tax reform, although important, is not the only reason to engage in year-end tax planning this year. Other changes made by the IRS and the courts in 2017 have already become effective. Opportunities and pitfalls within these recent changes should not be overlooked, particularly as we approach the close of the year.

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Mindy Heck recently added a new credential to her resume – the Advanced Defined Contribution Plans Audit Certificate. This offers additional evidence of her expertise in the area of employee benefit plan audits, and her commitment to performing the highest quality work for this very specialized area of practice.

Developed by leading subject matter experts from the AICPA’s Employee Benefit Plans Audit Quality Center, the Advanced Defined Contribution Plans Audit Certificate Exam tests an auditor’s ability to plan, direct and report on these types of plan audits in accordance with the latest AICPA standards and Department of Labor and IRS requirements. The advanced level is designed for auditors with seven or more years of experience in performing and reviewing defined contribution plan audits. The exam covers:

• Planning and general procedures
• Internal control
• Net assets available for benefits
• Changes in net assets available for benefits
• Plan tax status
• Financial statement presentation, disclosure, and regulatory reporting
• Audit reports

This certificate requires the ability to evaluate and analyze the core concepts related to client acceptance, engagement planning, engagement analysis, concluding an engagement and guiding principles for defined contribution plan audits at an advanced level as outlined in the AICPA Competency Framework: Employee Benefit Plan Auditing.

Having this deep and highly specialized knowledge means that Mindy can provide the best possible insights – a real value to plan fiduciaries.

For more information about our employee benefit plan audit services, click here. 

View Mindy’s full bio and contact info here.

Congratulations to Jenny Lamkin on earning two credentials recognizing her expertise with the cloud-based Sage Intacct accounting solution:

Jenny is a member of our Business Services team, providing valuable accounting and payroll help to business owners so you can focus on what you do best.

If you would like to learn more about collaborating with us on your accounting needs using a secure, real-time, 24/7 access from anywhere application, with role-based dashboards, custom reports, document management, and more, click here or email Jenny.

In 2017, a man posing as an Atlanta-based tax consultant was sentenced to 27 months in prison for fraud and money laundering that impacted one of the largest health care organizations based in Louisville. The scheme involved tax credits falsely obtained through the Kentucky Department of Revenue.

Could this situation have been avoided? It’s hard to say without more detail. But after working with numerous businesses and organizations over the years, I find that many of the simple things that can help leaders manage the top fraud risks for not-for-profit organizations are overlooked or assumed for one simple reason. Trust.

If a large, for-profit organization like the one mentioned here can experience fraud, imagine the challenges for small not-for-profit organizations that have fewer staff and resources. Too often, leaders trust that vendors are carefully vetted and that financials and systems are accurate — managed with the proper controls. The organization may have part-time staff with limited hours and volunteer board members. Even with the best intentions and focus, they may have limited capacity to explore improved processes and systems.

Too much trust can impact more than the organization. You may risk the reputations and personal finances of leaders and volunteers who pledge to take fiduciary responsibility.

It is okay to trust people, but let’s add some facts and risk management by taking a look at the top fraud risks for not-for-profit organizations. The tips that follow can help staff and fiduciary leaders improve and monitor internal controls to support a healthier organization.

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As the 2018 filing season nears, the IRS is reminding taxpayers that the Affordable Care Act (ACA) remains on the books. The ACA’s reporting requirements for individuals have not been changed by Congress. At the same time, the Trump Administration has proposed administrative changes to the ACA, which could expand health reimbursement arrangements (HRAs), the use of short-term, limited duration health insurance, and association health plans.

Health coverage status

The ACA generally requires individuals to have minimum essential health coverage or make a shared responsibility payment, unless exempt. Most employer coverage as well as Medicare, Medicaid and coverage through the ACA Health Insurance Marketplace is minimum essential coverage. Individuals with minimum essential coverage merely check a box on their federal income tax return to report their health coverage status. Individuals who need to make a shared responsibility payment do so when they file their federal income tax returns.

Since passage of the ACA, the IRS has accepted returns that fail to report health coverage status. These are known as “silent returns.” Last year, the IRS announced that it would not accept these “silent returns.” However, the IRS later reversed course and accepted them for processing.

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The IRS is strict about collecting unpaid payroll taxes and tough on “responsible persons” who don’t pay them. Withheld federal income, Social Security, and Medicare taxes are known as “trust fund” taxes because they are held in trust until they’re paid. If they aren’t paid, the IRS can assess liability for 100% of the unpaid amount on responsible individuals. Once that move is taken, the tax agency can start collection action against an individual’s personal assets. It can file a federal tax lien or take levy or seizure action.

A recent court case shows that a person may not be able to escape the penalty even if someone else is primarily responsible for handling payroll taxes.

The case involved a 50% owner and CEO of a tool and die company. He signed the paychecks. The other 50% owner served as the COO and prepared the payroll tax deposit checks. Both men had authority to handle money for the company, to open and close bank accounts in its name and to sign checks.

Payroll Service Bails

The company used a third-party payroll service provider to process its paychecks. But in December 2003, the service ended the contract after the tool and die company wasn’t able to remit the full amount of its gross payroll, including taxes.

At the COO’s urging, the company began using an in-house software system to handle payroll. Both the CEO and the COO expected to be able to fix the tax shortfall early in 2004.

The CEO maintained that the COO was the sole person entrusted to ensure that the payroll taxes were paid. He says that he didn’t learn that the COO was routinely failing to do so until July 2004. At that time, the CEO arranged a meeting with IRS to discuss the shortfalls.

At some point, the CEO was going through the COO’s desk and discovered that although the man was regularly cutting payroll tax checks, he wasn’t paying the taxes. Up until that point, the CEO claimed that the regular cutting of the checks led him to believe the taxes were being paid.

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As year end approaches, you may be thinking about making some charitable contributions. Here’s a rundown of the potential tax breaks for your generosity.

Itemized Deductions

You can claim write-offs for contributions of cash and other items donated to charitable organizations, such as United Way and Goodwill. What you might not realize is that not all contributions to charities qualify for tax breaks.

First, you receive tax savings from charitable donations only if you itemize deductions on your personal tax return. For 2017, the standard deduction amounts are:

• $6,350 for singles,
• $9,350 for heads of households, and
• $12,700 for married joint-filers.

Unless your total itemized deductions, including any charitable donations, exceed the applicable standard deduction, you won’t get any tax savings for your generosity. In general, most people who don’t own homes don’t itemize.

Also, be aware that some not-for-profit organizations aren’t qualified charities for federal income tax purposes. You can search for IRS-approved charities on the IRS website or ask your tax advisor for help. And of course, you can’t deduct money or property you give to an individual.

In addition, there are limits on the amount of itemized charitable donations that you can deduct in any one year. For most types of donations, the limit is 50% of adjusted gross income (AGI). However, lower limits apply to certain types of donations.

Any amount of charitable contribution that’s disallowed under the applicable percent-of-AGI limitation is carried forward to the following five tax years. If you can’t use up the carryover amount during the five-year period, the remainder can’t be deducted.

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As the end of 2017 approaches, the prospect of dramatic tax reform makes year-end tax planning especially challenging for businesses. In late September, the Trump administration and Republican congressional leaders unveiled their Unified Framework for Fixing Our Broken Tax Code. The framework proposes reduced tax rates for businesses and changes to a variety of business tax benefits. But there’s a great deal of uncertainty over when — and if — tax reform will be implemented and which proposals could make their way into possible new tax legislation.

So, what can you do now? Start by projecting your business’s income and expenses for 2017, 2018 and beyond and see what your tax picture would look like under various tax reform scenarios. You may want to delay implementing year-end strategies until further details emerge about proposed tax reform. But unless Congress makes significant progress in the coming weeks, you may have to make some educated guesses and plan accordingly.

What are the key business-related proposals?

The proposed framework calls for:

• Reducing the top corporate income tax rate from 35% to 20%. (It also suggests that tax-writing committees consider methods to reduce double taxation of corporate earnings.)
• Eliminating the corporate alternative minimum tax.
• Providing for 100% bonus depreciation, for at least five years, for new investments in depreciable assets (other than structures) made after September 27, 2017. Current law allows 50% bonus depreciation for such assets, dropping to 40% next year and 30% in 2019, after which it will be eliminated.
• Partially limiting the deduction for net interest expense by C corporations.
• Preserving the research and low-income housing credits. Most other business credits would be eliminated, although some may be retained if budgetary limitations allow it.
• Eliminating the Section 199 deduction for domestic production activities, as well as most industry-specific deductions and exclusions.
• Taxing “business income of small and family-owned businesses conducted as sole proprietorships, partnerships and S corporations” at a top rate of 25%. Currently, sole proprietors and owners of pass-through entities are taxed at individual rates as high as 39.6%. Antiabuse provisions would “prevent the recharacterization of personal income into business income.”

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Going once, going twice

Charity auctions can be lucrative fundraising and stakeholder engagement events, and the option of cost-effectively conducting online auctions has only made these activities more popular. But you need to consider the tax compliance responsibilities, largely related to substantiating donations, that come with this type of event.

Acknowledging donations of auction items

If you use an auction to sell merchandise or services donated to your charity, you should provide written acknowledgments to the donors of the auctioned items valued at $250 or more. You won’t incur a penalty for failing to acknowledge the donation, but the donor can’t claim a deduction without such substantiation.

You can assist your auction item donors by providing a timely, written statement containing the name of your organization and a description — but not the value — of the donated item. The statement also should include:

• A description and good faith estimate of the value of any goods or services that your organization provided in return for the contribution,

• A statement that any goods or services that your organization provided in return for the contribution consisted entirely of intangible religious benefits, or

• A statement that no goods or services were provided by your organization in return for the contribution.

Remember, it’s the donor’s responsibility to substantiate the value of a donated auction item.

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Congratulations to these staff members whose contributions to the firm have resulted in a promotion:

Manager to Senior Manager: Nick Porter

Senior Accountant to Supervisor: Peter Pence, Dustin Gilchrist, Levi Kamer, Melody Raidy

Staff Accountant to Senior Accountant: Jenna Benningfield, Evelyn White, Emily Whatley, Kevin Graham, Sarah Kerrick  

We are proud to have you on our team!

Today the Trump Administration, the House Committee on Ways and Means, and the Senate Committee on Finance together released the Unified Framework For Fixing Our Broken Tax Code, intended to serve as a template for the tax-writing committees that will develop legislation. The document discusses four principals for tax reform that it claims will broaden the tax base, close loopholes, and grow the economy:

1. Make the tax code simple, fair and easy to understand (a form the size of a postcard was referenced by Speaker Paul Ryan).
2. Give American workers a pay raise by allowing them to keep more of their hard-earned paychecks.
3. Make America the jobs magnet of the world by leveling the playing field for American businesses and workers.
4. Bring back trillions of dollars that are currently kept offshore to reinvest in the American economy.

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A recent Tax Court decision and pending tax reform proposals have intersected in highlighting how stock sales can be timed for maximum tax advantage. The taxpayer in the recent case (Turan, TC Memo. 2017-141) failed to convince the Tax Court that he timely made an election with his broker to use the last-in-first-out (LIFO) method to set his cost-per-share cost basis for determining capital gains and losses on his stock trades on shares of the same company. As a result, he was required to calculate the capital gain or loss on his stock trades using the firm’s first-in-first-out (FIFO) “default” method, which, in his case, yielded a significant increase in tax liability for the year.

Timing stock trades to maximize the tax advantage of long- and short-term capital gains and losses has always made sense, particularly as a year-end planning technique. This year, tax reform may make such strategies considerably more lucrative. If tax rates are suddenly set lower, either retroactively for this year or, more probably, starting January 1, 2018, managing stock basis becomes more significant. As a result, investors should consider carefully whether they may be better off tax-wise to give their brokers specific instructions in certain cases not to use the default FIFO method when selling certain holdings of the same company purchased at different times.

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We were recently recognized once again by Business First as one of the most generous medium-sized companies in our area, at the Louisville Partners in Philanthropy Awards luncheon at the Seelbach Medallion Ballroom. See photos from the awards luncheon here. 

Excerpts from the interview with President Chris Ward:

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The U.S. Department of Labor (DOL) has begun taking steps to loosen the reins on employers, turning away from some Obama administration initiatives. While recent actions indicate that the crackdown on joint employers and employers using independent contractors is over, it’s important to remember that employment-related tax laws are enforced not by the DOL but by the IRS — so these changes have no effect on liability for payroll taxes. In particular, a worker who would be considered an independent contractor by the DOL could nonetheless be deemed an employee for tax purposes.

Withdrawal of Obama-era guidance

Earlier this year, the DOL announced that it was withdrawing its 2015 and 2016 guidance on joint employment and independent contractors. The guidance, known as “administrator interpretations,” didn’t represent enforceable law but was important because courts often defer to an agency’s interpretation of the laws it enforces. These interpretations reflected the Obama administration’s move to expand employer liability under the federal wage and hour law, the Fair Labor Standards Act (FLSA).

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