Local Sales Tax Increase

Effective April 1, 2016, the City of Shelton’s sales tax rate increased from 8.6% to 8.8%. This rate increase is due to the establishment of a Transportation Benefit District (TBD), and the taxes generated will be used for transportation services. As local consumers, we all just need to get used to paying a higher rate of sales tax, however for businesses the change requires some additional complexity.

If your business reports on a “cash basis” method with the Department of Revenue, invoices that were sent out at the old tax rate, but not received until after 4/1/16, will need to be reported during the period the actual sale occurred, in order to report and pay the correct sales taxes collected. This would mean for most businesses, that they would need to amend the excise return for the period in question, and include the sale that was received after the April 1st sales tax increase.

If your business reports on an “accrual basis” method with the Department of Revenue, the change should be seamless, aside from making sure that you setup any invoices after April 1st using the new rate of 8.8%.

If you need assistance with updating your accounting software, registers, etc., just contact us and we would be happy to assist you with implementing this change for your business.

The Affordable Care Act and Your Income Taxes

Which category of individual income tax filer do you fall into, and how do you avoid the “Individual Responsibility Payment”?  Are you covered under a “qualifying health insurance plan” (e.g. employer or medicare coverage), which offers “minimum essential coverage”, and are therefore exempt from the payment?  Are you in an exempt category, due to your income level, or other qualifications, which allows you to avoid the payment?  Or did you buy your health insurance on either the Federal or State of WA health care exchange and are therefore receiving an “Advance Premium Credit”, which means when your tax return is prepared you’ll either receive an additional premium tax credit, or else possibly you’ll pay the individual responsibility payment, depending on how your actual income turned out relative to your projected income?  This tax year, in addition to Form 1095-A, which you’ll receive if you are part of the health exchange process, you might receive a Form 1095-B or 1095-C, which are issued by or for employers or a governmental entities, if your health insurance premiums are paid on your behalf.  Whatever your circumstances please contact us if you have any questions or need our assistance.  We also want to take a minute to welcome Kristy Coots to our staff – please tell her hello when you call or come by our office!

It’s FAFSA Filing Season too!

If you have a college age child in your household you are more than likely needing to file a FAFSA (Free Application for Student Aid) form this time of year, even if you don’t expect your child to qualify for grant type funds, they may qualify for a scholarship or other financial support. While it’s best to complete and file the FAFSA early during the tax season, you can use estimates from tools like this income estimator, in order to meet the required FAFSA filing deadline, and then later update the FAFSA with actual amounts from the most recent tax year.   The good news is that once you’ve prepared the most recent year’s tax return, your financial information can be efficiently updated by using an IRS data retrieval tool, so you won’t need to spend the time to complete the FAFSA form all over again!  Please contact us if you have any questions, or if we can assist you in the process of preparing a FAFSA form.

Healthcare Excise Taxes Delayed

The Act delays the imposition following healthcare excise taxes:

  • Medical Device Tax. The Act provides a two-year moratorium on the 2.3% excise tax imposed on the sale of medical devices. The tax will not apply to sales during calendar-years 2016 and 2017.
  • Cadillac Medical Insurance Tax. A 40% excise tax imposed on high-cost employer sponsored health coverage (often referred to as the Cadillac tax) was scheduled to take effect for tax years beginning after 2017. The Act delays the tax for two years. It will now be imposed for tax years beginning after 2019. The Act also makes this tax a deductible business expense.

New Rules for Information Reporting

Accelerated Due Date for Reporting Employee and Nonemployee Compensation. Currently, a business that pays nonemployee compensation totaling $600 or more in any tax year to a single payee must file a Form 1099-MISC (Miscellaneous Income) with the IRS by the last day of February of the year following the calendar year to which such returns relate (or March 31 if filed electronically). Similarly, employers must file Form W-2, Wage and Tax Statement, to report wage paid to employees with the Social Security Administration (SSA) by that same date.

The Act accelerates the date that Forms 1099-MISC and W-2 must be filed with the IRS and SSA. Starting with 2016 calendar year Forms 1099-MISC and W-2, which are to be filed in 2017, the returns must be filed with the IRS (or SSA) by January 31 of the year following the calendar year to which such returns relate and they are no longer eligible for the extended March 31 filing date for electronically filed returns.

Penalty Relief for De Minimis Errors on Information Returns. Substantial penalties can apply for failing to file correct information returns and to furnish correct information to payees. The penalties are the same regardless of the size of the error in the amount reported. For returns required to be filed after 2016, the Act establishes a new safe harbor from penalties if the return is otherwise correctly filed but includes only a de minimis error of $100 or less ($25 or less in the case of errors involving tax withholding). In this case, the issuer is not required to file a corrected return and no penalty is imposed, unless the recipient of such the incorrect return requests a corrected return.

Other Business Tax Breaks

Tax Breaks Made Permanent. Business provisions made permanent by the Act include the following:

  • Research and Development (R&D) Credit. The Act retroactively and permanently extends the R&D credit. Additionally, beginning in 2016, eligible small businesses ($50 million or less in gross receipts) may claim the credit against Alternative Minimum Tax (AMT), and the credit can be utilized by certain small businesses against the employer’s payroll tax (i.e., FICA) liability.
  • Break for S Corporation Built-in Gains. When a C corporation converts to S corporation status, the corporate-level Section 1374 built-in gains tax generally applies when built-in gain assets (including receivables and inventories) are turned into cash or sold within the recognition period. The tax is only assessed on built-in gains (excess of FMV over basis) that exist on the conversion date. The recognition period is normally the 10-year period that begins on the conversion date. However, for S corporation tax years beginning in 2012 through 2014, the recognition period was five years. The Act makes the five-year recognition period permanent retroactive to tax years beginning in 2015. In other words, for gains recognized in 2015 and beyond, the built-in gains tax won’t apply if the fifth year of the recognition period has gone by before the start of the year.
  • Differential Pay Credit for Small Employers. The Act retroactively and permanently extends the credit for eligible small employers that provide differential pay to employees while they serve in the military. The credit equals 20% of differential pay of up to $20,000 paid to each qualifying employee during the tax year. Additionally, beginning in 2016, the Act modifies the credit to apply to employers of any size, rather than employers with 50 or fewer employees, as under current law.

Work Opportunity Credit (WOTC) Hiring Deadline Extended through 2019. The Act retroactively extends the general deadline for employing eligible individuals for purposes of claiming the WOTC to cover qualifying hires who begin to work before 2020. With respect to individuals who begin work for an employer after 2015, the PATH Act also modifies the WOTC to apply to employers who hire qualified long-term unemployed individuals (i.e., those who have been unemployed for 27 weeks or more) with the credit with respect to such long-term unemployed individuals equal to 40% of the first $6,000 of wages.

Tax Breaks Extended through 2016. The following business tax breaks were retroactively extended for two years through 2016:

  • Credit for Building Energy-efficient Homes. The Act retroactively extends the $2,000 or $1,000 (depending on the projected level of fuel consumption) per-home contractor tax credit for building new energy-efficient homes in the U.S. to qualifying homes sold by December 31, 2016, for use as a residence.
  • Energy-efficient Commercial Building Property Deduction. The Act retroactively extends the deduction for the cost of an “energy efficient commercial building property” placed in service during the tax year for two years, for property placed in service before 2017. The maximum deduction for any building for any tax year is the excess (if any) of the product of $1.80, and the square footage of the building, over the total amount of the Section 179 deductions claimed for the building for all earlier tax years.

Cost Recovery Provisions

Enhanced Section 179 Deduction Made Permanent. The Act retroactively restores and makes permanent the (1) enhanced maximum Section 179 deduction of $500,000 (same as in effect from 2010 through 2014), (2) enhanced Section 179 deduction phase-out threshold of $2 million (same as in effect from 2010 through 2014), and (3) rule allowing Section 179 deductions for qualified real property. Without this change, the maximum Section 179 deduction was scheduled to be only $25,000, the phase-out threshold was scheduled to fall to $200,000, and there was to be no Section 179 deduction privilege for real estate.

Additionally, for tax years beginning after 2015, (1) the $500,000 and $2 million limits will be indexed for inflation, (2) the special $250,000 deduction cap that previously applied to qualified real property will be eliminated, and (3) air conditioning and heating units will be eligible for expensing.

15-year Depreciation for Certain Real Property Improvements Made Permanent. The Act retroactively extends and makes permanent the 15-year straight-line depreciation privilege for qualified leasehold improvements, qualified restaurant property, and qualified retail space improvements.

Bonus Depreciation Extended through 2019. The Act retroactively extends bonus depreciation for qualifying new (not used) assets that are placed in service during 2015 through 2019 (2020 for certain assets with longer production periods). The bonus depreciation percentage is 50% for property placed in service during 2015 through 2017 (2018 for certain assets with longer production periods), and phases down to 40% for property placed in service in 2018 (2019 for certain assets with longer production periods), and 30% for property placed in service in 2019 (2020 for certain assets with longer production periods).

For new passenger autos and light trucks subject to the luxury auto depreciation limitations, the bonus depreciation increases the maximum first-year depreciation deduction by $8,000 for vehicles placed in service through 2017, $6,400 for vehicles placed in service in 2018, and $4,800 for vehicles placed in service in 2019.

Family and Individual Tax Breaks

Tax Breaks Made Permanent. The Act makes a whole slew of favored individual provisions permanent, including the following:

  • Deduction of State and Local General Sales Taxes. For the last few years, individuals who paid little or no state income taxes had the option of claiming an alternative itemized deduction for state and local sales taxes. The sales tax deduction option expired at the end of 2014, but the Act makes this option permanent starting in 2015, so that itemizers can elect to deduct state and local sales taxes, instead of state and local income taxes, for tax years beginning in 2015 and beyond.
  • IRA Qualified Charitable Contributions. For 2006–2014, IRA owners who had reached age 70½ were allowed to make tax-free charitable contributions of up to $100,000 directly out of their IRAs. Such contributions were called Qualified Charitable Distributions (QCDs), and they counted as IRA Required Minimum Distributions (RMDs). Charitably inclined seniors with more IRA money than they needed could reduce their income tax bills by arranging for tax-free QCDs to take the place of taxable RMDs. This break expired at the end of 2014. The Act makes this tax break permanent, so that it’s available for QCDs made in tax years 2015 and beyond.
  • $250 Deduction for K-12 Educators. For the last few years, teachers and other eligible personnel at K-12 schools could deduct up to $250 of school-related expenses paid out of their own pockets—whether they itemized or not. This break expired at the end of 2014. The Act makes this deduction permanent, so that it is allowed for 2015 and beyond. Also, beginning in 2016, the $250 cap will be indexed for inflation, and professional development expenses will be deductible under this provision.
  • Qualified Conservation Contribution Breaks. Qualified conservation contributions are charitable donations of real property interests, including remainder interests and easements that restrict the use of real property. Liberalized deduction rules applied through 2014 that increased the maximum write-off for these contributions. The Act makes these liberalized rules permanent.
  • 100% Gain Exclusion for Qualified Small Business Corporation (QSBC) Stock. The Act retroactively restores and makes permanent the 100% gain exclusion (within limits), and the exception from alternative minimum tax preference treatment for sales of QSBC stock that expired at the end of 2014. Note that you must hold QSBC shares for more than five years to be eligible for the 100% gain exclusion.
  • American Opportunity Tax Credit (AOTC). The AOTC is a credit of $2,500 for various tuition and related expenses for the first four years of post-secondary education. This credit is phased out for AGI starting at $80,000 (if single) and $160,000 (if married filing jointly). This break was set to expire after 2017. The Act makes the AOTC permanent.
  • Parity for Employer-provided Transit and Parking Benefits. The Act retroactively restores and makes permanent the parity provision that requires the tax exclusion for transit benefits to be the same as the exclusion for parking benefits. Thus, for 2015, employees can receive tax-free transit benefits of up to $250 a month—the same as for tax-free parking benefits.
  • Favorable Rule for S Corporation Donations of Appreciated Assets. The Act retroactively restores and makes permanent the favorable shareholder basis rule for stock in S corporations that make charitable donations of appreciated assets. For such donations, each shareholder’s tax basis in the S corporation’s stock is only reduced by the shareholder’s prorata percentage of the company’s tax basis in the donated assets. Without this tax break, a shareholder’s basis reduction would equal the passed-through write-off for the donation (a larger amount). The provision is taxpayer-friendly because it leaves shareholders with higher tax basis in their S corporation shares.

Credits for Qualified Solar Electric and Water Heating Property Extended through 2021. The 30% credit for qualified solar water heating property and solar electric property expenditures was scheduled to expire for property placed in service after 2016. The Act extends this credit through 2021. For property placed in service in calendar-years 2017—2019, the credit remains at 30%. The credit is reduced to 26% or property placed in service in calendar-year 2020, and 22% for property placed in service in calendar-year 2021.

 

Tax Breaks Extended through 2016. Individual tax breaks that weren’t made permanent or extended through 2021 by the Act, were extended for two years through 2016, including the following:

  • Tax-free Treatment for Forgiven Principal Residence Mortgage Debt. For federal income tax purposes, a forgiven debt generally counts as taxable Cancellation of Debt (COD) income. However, a temporary exception applied to COD income from cancelled mortgage debt that was used to acquire a principal residence. Under the temporary rule, up to $2 million of COD income from principal residence acquisition debt that was cancelled in 2007–2014 was treated as a tax-free item. The Act retroactively extends this break to cover eligible debt cancellations that occur before 2017.
  • Mortgage Insurance Premium Deduction. Premiums for qualified mortgage insurance on debt to acquire, construct, or improve a first or second residence can potentially be treated as deductible qualified residence interest. The deduction is phased out for higher-income taxpayers. Before the Act, this break wasn’t available for premiums paid after 2014. The Act retroactively extends the break for premiums paid before 2017.
  • Qualified Tuition Deduction. This write-off, which can be as much as $4,000 or $2,000 for higher-income folks, expired at the end of 2014. The Act retroactively extends it through 2016.
  • $500 Energy-efficient Home Improvement Credit. In past years, taxpayers could claim a tax credit of up to $500 for certain energy-saving improvements to a principal residence. The credit equals 10% of eligible costs for energy-efficient insulation, windows, doors, and roof, plus 100% of eligible costs for energy-efficient heating and cooling equipment, subject to a $500 lifetime cap. This break expired at the end of 2014, but the Act retroactively extends it for two years, to apply to property placed in service before 2017.

New Tax Breaks. The Act also includes a number of new individual tax breaks, including:

  • Allowing tax-preferred distributions from section 529 accounts to be spent on qualifying computer equipment and technology purchases.
  • Allowing ABLE accounts (tax-preferred savings accounts for disabled individuals), which currently may be located only in the state of residence of the beneficiary, to be established in any state. This will allow individuals setting up ABLE accounts to choose the state program that best fits their needs, such as with regard to investment options, fees, and account limits.
  • Allowing a taxpayer to roll over distributions from an employer-sponsored retirement plan [e.g., a 401(k) plan] and traditional IRA (that is not a SIMPLE IRA) into a SIMPLE IRA, provided the SIMPLE IRA has existed for at least two years.

2016 Payroll Considerations

We are writing to remind you to update certain pertinent information on behalf of your employees, as is either required by law, or is relevant to your company’s record keeping needs. Please refer to our website, for relevant government forms including; Form W-4, INS Form I-9, and the DSHS New Hire Reporting information, which are discussed below.

Also, please note that the State of Washington’s minimum wage will remain $9.47 per hour, effective January 1, 2016.

Please have each of your current employees complete a 2016 Form W-4. The annual completion of this form allows your employees to assess their withholding status, as well as confirm their social security number, marital status and mailing address.

Each new employee must complete a 2016 Form W-4 (lines #1-7) along with their signature, date of hire and date of birth. As the employer, you need to complete lines #8-10 of the Form W-4. Remember that you must also complete and retain a form I-9, making sure that all sections are filled out completely. The I.C.E. (Immigration & Customs Enforcement) can fine your company up to $50 per incomplete, and/or incorrectly completed section, which can add up to $200 per form.

Please let us know if we can answer any questions about these requirements, or assist you with the DSHS New Hire Reporting requirements.

We’d also like to remind you that Washington State law requires (under RCW 50.12.070 and WAC 192-12-050) that the following information be maintained by all employers:

  • Name (in full) of the employee
  • Date of birth 
  • Social Security number
  • Days and weeks when work was completed
  • Dates and hours worked (specific time in and time out)
  • Wages paid for each separate pay period
  • Location where work was performed
  • Date when hired or re-hired to work
  • Date when the individuals name was removed from the payroll
  • Cause of separation from work due to discharge, quit, etc.

According to the State of Washington these employee records are to be kept for at least four years, but our office recommends seven years. We also recommend that you maintain an employee policy and procedure manual, and that you review the overall content of your employees’ files annually for completeness.

In addition to maintaining the above employee information, we also recommend that you maintain two binders separate from your employee’s files. One that holds copies of your employee’s W-4’s; present employees first, with past employees in the back. The second one should hold copies of your employee’s I-9’s, in the same order as your W-4 binder. Using this approach you would be able to provide the required employee information to an auditor, if requested, without pulling each employee’s personnel file.

Please don’t hesitate to let us know if we can assist you in completing the required employment forms, or to help you understand the rules, as they specifically apply to your company.

2015 Year End Considerations for Business Clients

We are writing to remind you of some of the year end procedures that your company should consider, now that we are in the final month of the calendar year. While not all of these issues are directly relevant for your company, they should be reviewed in order to determine their usefulness to your company’s needs.

1. 1099 Requirements – The first issue to consider is whether or not your company is required to prepare 1099 Forms for vendors and service providers that you have paid in 2015. Please refer to the general requirements for Form 1099/1096 reporting, to determine the circumstances under which your company would need to file these reports. We also want to provide you with access to the IRS website, where you can access the 2016 Form 1099, and instructions, as well as the related W-9 form.

2. Annual Company Meeting – If your company is incorporated (either C or S corporation) the officers and shareholders are required to hold at least one annual meeting in order to determine matters that are essential to the management and operations of the company. Please refer to your company’s articles of incorporation and bylaws, or consult with your company’s attorney to determine the annual meeting requirements for your company. Limited Liability Companies (LLC’s) are not required to hold annual meetings, however this practice is recommended to clarify company policies, and make changes in operational matters. In order to provide you with some guidance with respect to relevant issue, please look at some example topics to be considered for your company’s annual meeting.

3. Record Retention – The minimum required period for retaining financial records is 3 years, which is the standard statute of limitations look back period, which the IRS and other tax authorities enforce. However, our office recommends a 7 year archiving of relevant tax and accounting supporting information, in order to make certain that any prior year issue can be resolved, with the proper factual financial and employment data.  Please refer to our website for more specific record retention guidelines.

4. Re-seller’s Permit – If you are eligible for a re-sellers permit, as issued by the State of WA’s Department of Revenue (DOR), the re-seller permit can be applied for with the Department of Revenue, in order to allow your business to make wholesale purchases, including qualified contractors. The permits allow businesses to purchase items or services for resale, without paying retail sales taxes. However if your purchases are subject to sales taxes, typically for items used by your company, but were not paid at source, remember that you are required to pay use taxes, in lieu of sales taxes, at the time you file your combined excise tax report.

5. Retirement Benefits – If you haven’t already, remember to consider establishing an employee benefit type of plan, in which the employees, as well as the owners/officers of the company can all receive benefits. You may want to consider establishing a retirement type of plan, such as a SIMPLE IRA plan, which allows employees to defer a portion of their wages, along with a relatively modest company match, as a means to deferring taxable income of the employee as well as allowing a deductible, non-payroll taxable form of compensating your employees. Please refer to our Summary of Retirement Plan Options.

 6. Health Savings Plan – Another consideration is to set up a health saving account (HSA) plan, which when combined with a lower premium cost “high deductible” type of medical insurance plan, allows the employees of the company, as well as the company, at the discretion of the ownership, to contribute toward a medical savings account, which can be either used by the employee during the year of contribution, or else carried over indefinitely for future medical costs, and/or eventually as a retirement type of fund, similar to an Individual Retirement Account (IRA).  

7. Medical Insurance Premiums – If your business is an S corporation, remember that the medical insurance premiums paid out on behalf of the shareholders must be reported along with wages on Form W-2. The premiums can still be paid out by the S corporation on behalf of the shareholders, however the total premiums must be included as part of the shareholder’s wages, tips, other compensation, and also on lines 3 and 5, subject to Social Security and Medicare taxes. The amount of premiums paid should also be reported on Line 14, as a separately reported line item, so that the nature and amount of the payments is clearly stated. Please note that this reporting requirement, as per IRS Notice 2008-1, does not change the fact that these medical insurance premiums are deductible by the shareholder when paid.  

8. Written Consent for Copies of Tax Returns – Federal law requires that in order to directly provide 3rd party users (e.g. bankers, lenders, insurance agents, etc.) with a copy of your tax return, or with information from your tax return, we must obtain a written consent form from you prior to the release of this information.

9. Affordable Care Act – Given the implementation of the ACA (Affordable Care Act), we understand that as a company owner, you, as well as your employees, may have specific concerns or questions regarding various compliance aspects of the law, so please don’t hesitate to contact us if you’d like to discuss how the changes may impact you and your company.  

10. We are here to help! – As the year winds down and you complete your company’s accounting procedures, such as the counting of your company’s year end inventory, and the reconciling of your company’s annual accounting, please let us know if you have any specific questions and/or concerns that we can assist you with – we are here to help!