The decisions made by some publicly traded U.S. companies to reduce corporate taxes could impact your personal return.
For example, certain mergers between U.S. and foreign companies can result in capital gains when you own stock in the U.S. company. That’s because these transactions, which are sometimes called inversions, can be considered sales under current tax rules.
The inversion part — when the U.S. company becomes the subsidiary of the foreign company — means the U.S. company issues replacement shares. Typically, you receive new shares equal to your former holdings, but little or no cash. As a shareholder you’re required to recognize a gain on the exchange of stock even though your ownership remains the same.
The gain is the amount by which the value of the stock on the inversion date exceeds your basis.
The capital gain rate is based on your tax bracket. For 2014, capital gain rates range from zero to 20%. When your adjusted gross income is more than $200,000 ($250,000 when you’re married filing a joint return), the 3.8% net investment surtax may also apply.
Be aware that inversions can affect the amount of capital gain reported to you by mutual funds you own, if companies in the fund’s portfolio choose to invert during 2014.
Though not all mergers will create taxable income, keeping an eye on your portfolio can prevent tax bill shock when you file your 2014 federal income tax return.
Please give Carl Heinemann, your Chattanooga CPA, a call to discuss your options.
If you stash some of your savings in money market funds, you probably take for granted that the share price is always $1. Keeping the value stable even though the price of the fund’s underlying investments varies makes these accounts “feel” like a regular bank account.
However, with the exception of a period in 2008 and 2009, money market funds are not insured by the federal government the way regular bank accounts are. That guarantee was an exception, and happened only because certain funds had liquidity issues and “broke the buck,” meaning the redemption price sank below $1.
Over the summer, in an effort to avoid a repeat of 2008-2009, the Securities and Exchange Commission decided to let certain money market funds price their shares based on the underlying value of the fund’s assets. Most of the rules requiring these funds to report a “floating” net asset value will be implemented over the next two years.
Once the rules take effect, depositing and withdrawing money from what you might have considered a “checking” account could instead generate capital gains or losses — and potentially make your transactions subject to the wash sale rules.
As you probably know, the wash sale rules prohibit recognition of certain losses from investment sales. Specifically, you can’t claim a loss on your federal income tax return for the sale of a stock or security when you buy a substantially similar asset within 30 days before or after the sale date. Instead, the loss changes your basis.
The IRS has issued a revenue procedure in response to the SEC rules. The procedure provides an exemption from the wash sale rules for certain money market accounts and a simplified method for calculating gains and losses on those accounts.
We’ll keep you informed as the new rules take effect. If you have questions about the interplay between your investments and your taxes, please call Carl Heinemann, your Chattanooga CPA.
Now that 2015 open enrollment for health insurance is right around the corner, you may be thinking about what plan to select. While you’re making comparisons, don’t overlook tax perks available with older health care benefits.
Here are two.
- Health care flexible spending accounts. Also known as health FSAs, these accounts are established by your employer. You choose whether to participate on a yearly basis.
You can deposit as much as $2,500 (for 2014) into your FSA. Deposits you make are free from payroll and withholding tax. Withdrawals are also tax-free when you spend FSA funds on out-of-pocket medical expenses such as prescription drugs or medical equipment.
Be aware that the money in your account belongs to your employer and you generally have to use the entire amount by the end of the plan year or forfeit the balance. However, your employer may offer a 2½ month grace period during which you can use any remaining funds to pay current-year expenses. Alternatively, your employer can offer the option to carry over up to $500 to use for the next year.
- Health Savings Accounts. HSAs are a combination of a high-deductible health insurance policy and a savings account. You use the funds in the savings account to pay health-related expenses for costs such as deductibles and co-pays.
Contributions you make to your HSA are deductible on your federal income tax return. Contributions your employer makes, if any, are not subject to federal income or payroll taxes. Your withdrawals are tax-free when you use the money for unreimbursed medical expenses. Finally, the money in your HSA belongs to you, and you can carry the balance to future years.
Give Carl Heinemann, your Chattanooga CPA, a call as you evaluate your 2015 health insurance options. We’ll help you select the benefits that work best for you.
Will you be giving gifts to family members or others before year-end? Be sure to complete the paperwork you’ll need to file a gift tax return next April.
Here are two suggestions.
- Appraisals. Gifts are valued at fair market value at the time you give them. In some cases, such as when you gift real estate or interests in your closely held business, reporting the correct value means getting a current appraisal, which can take time.
Be aware that the appraiser you hire must meet certain requirements. In addition, the report you receive must contain specific details, including an explanation of the appraisal procedures followed.
The appraisal will be filed with your gift tax return.
- Crummey letters. These written notices inform trust beneficiaries of their right to withdraw some or all of the gifts you contribute to a trust.
As you probably know, an “annual exclusion” applies to most gifts. The exclusion is the amount you can give to a single donee each year with no gift tax liability. (For 2014, the annual federal gift tax exclusion is $14,000.)
However, the annual exclusion applies to gifts of “present interests.” That term means the gift can be possessed, used, or enjoyed now, instead of sometime in the future. Contributions to trusts generally are not present interests. But granting beneficiaries a specified time period, such as 30 days, to make withdrawals allows your contributions to meet the present interest definition and qualify for the annual gift tax exclusion.
Other documents you may need include copies of trust agreements, corporate balance sheets, and life insurance statements.
Please give Heinemann CPAs, your Chattanooga CPA, a call. We’ll help you get the paperwork in order.
One day, while wheeling down the avenue, you spot a brightly-colored banner at the local rent-to-own store: “We can help you own it! No credit needed! You are pre-approved for up to $2,500!” Sound like a good deal? Ready to sign on the dotted line? Let’s take a hard look at the numbers.
First, a little background. About 10,000 rent-to-own stores currently operate in Canada, Mexico, and the United States. They serve over four million customers annually and generate over $7 billion in yearly sales. In addition to brick-and-mortar outlets, many stores peddle their goods online. They offer a wide range of rent-to-own stuff — furniture, electronics, appliances, musical instruments, jewelry, fine art, bicycles, even riding lawn mowers — and generally give customers three purchase options: buy-it-now, same-as-cash, and rent-to-own. Because most people return their products within the first four months of a contract, stores often rent the same item many times, generating additional cash on each rent-to-own agreement.
It’s a lucrative business.
Using the buy-it-now option, you pay a listed cash price to haul away that shiny new washing machine or dining room table today. With the same-as-cash option, you’re given a specified time period (90 days, for example) to pay off the purchase without incurring additional fees. Under the third option — rent-to-own — you sign a contract under which you’re obligated to make weekly or monthly payments for a specified term at a specified (often outrageously high) interest rate. At the end of the rental term, you own the merchandise.
So is rent-to-own a good option for you, the consumer? Hardly. Let’s take one example. You spy a hot new desktop computer at the rent-to-own store. That particular model is being offered at a buy-it-now price of $1,260. But you don’t have the cash, so you’re considering a rent-to-own contract obligating you to pay $139.99 a month for 12 months. Total cost? $1,679.88.
Fortunately, before signing that contract you conduct a little research. You discover the very same desktop model being offered at your local discount store for $766, less than half the price you were planning to pay at the rent-to-own store. So instead of buying the desktop today, you sock away $139.99 for six months and pay cash at the discount store, saving over $900 on the purchase. A little sacrifice, a big savings.
For many small businesses, office rent and inventory storage costs are perceived as fixed — unalterable, locked up tight, grudgingly tolerated. But are such expenses truly inflexible? Or can they be altered with a little effort and ingenuity? Because rent and storage costs often constitute a significant portion of a firm’s total expense budget, creative owners who find ways to minimize those costs may reap substantial rewards. Consider the following questions:
- Rent — is it negotiable? Your landlord undoubtedly prefers a monthly lease payment to dormant office space and no income. So look around. If your business is located in an area with unoccupied office buildings, you may enjoy a strong bargaining position. Open up negotiations, especially if you’re nearing the end of a lease term. If your company is struggling, consider letting your landlord read your firm’s financial statements, making it clear that a reduction in rent would enable your business to survive and prosper. A renegotiated lease agreement might also provide for a temporary rent reduction in exchange for increased payments when sales start climbing.
- Moving — is it an option? Just because you settled in this location years ago doesn’t necessarily mean you should stay put. You might get better lease rates across town, closer to your customer base or suppliers. Or you might pick up stakes and take your business back home. Working out of your garage or spare bedroom until sales revenues pick up might be a wise business move.
- Subletting space — should you become a landlord? If your current landlord agrees and your lease terms allow, additional cash may be generated by setting aside space for a rent-paying partner or another company. But be sure to consider possible ramifications. Confirm that you won’t need the space in the near term, and don’t forget to specify conditions under which the location can be reoccupied or the lease terminated.
- Inventory control — can you minimize storage costs? If goods have been sitting on your shelves for too long, it may be time to sell, donate, or otherwise dispose of them. Insurance, spoilage, interest, and taxes — all the costs associated with storing unused or obsolete inventory — can eat up your budget in a hurry. If storage capacity is limited, disposing of obsolete stock may also free up space for saleable items and fresh materials.