Monthly Archives: September 2015

New estate tax reporting requirement

As the executor of an estate, you already have plenty of responsibilities, including inventorying and valuing estate assets. Now you need to add one more task to your list.

The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 became law on July 31 and included provisions that require consistent reporting of property values between an estate and the beneficiaries. The new requirement means you’ll have to file a statement with the beneficiaries and the IRS notifying both of the value of the property as reported on the estate return. Unless an exception applies, the beneficiaries, in turn, can claim no more than that value when the property is later sold or disposed of.

The new rule took effect as of July 31, 2015, and applies to estates that must file returns after that date. Under the rule, the statement is due within 30 days after the estate return is filed or 30 days after the due date of the estate return, whichever is earlier.

However, if you’re required to file this new statement before February 29, 2016, you’ll need to wait until the IRS issues guidance before you can comply with the rule. In this situation, IRS Notice 2015-57 delays the due date for filing and furnishing the statement until February 29, 2016.

Note this change has no effect on the general rule that property in an estate typically passes to beneficiaries at the fair market value on the date of death. That continues to be the case.

The IRS expects to issue regulations and forms related to the new provisions before the delayed due date. We’ll keep you advised as information becomes available.

New law revises tax due dates

By their very definition, due dates and deadlines seem to be permanent limits. Yet these constraints are merely tools that can be changed when they fail to achieve their purpose.

In July, Congress did just that by changing the initial and extended due dates for various business returns, as well as the “Report of Foreign Bank and Financial Accounts.” The dates were changed to coordinate information flow between personal and business returns, potentially reducing the number of extensions and amended returns filed each year. The due date for personal federal income tax returns remains the same, as does the due date for S corporations.

The revised due dates take effect for tax years starting after December 31, 2015. That means you’ll file all of this year’s returns on the usual due dates in 2016. However, you’ll want to keep the new dates in mind as you begin your planning and recordkeeping for next year.

Three notable changes affect the 2016 tax returns of partnerships, C corporations, and the “Report of Foreign Bank and Financial Accounts” (known as FBAR).

  • Partnerships will be required to file a return within 2½ months after the end of the fiscal year. For calendar-year partnerships, the due date for 2016 returns is March 15. Partnerships can still request a six-month extension of time to file, and calendar-year extended returns will be due September 15. The change brings the due dates for partnerships into line with other pass-through entities such as S corporations.
  • C corporation returns will be due 3½ months after the close of the tax year — on April 15 for calendar-year corporations. C corporation extensions will be for five months, making extended 2016 calendar-year corporate returns due on September 15. There is a special rule for corporations with a June 30 year-end.
  • Form 114, the “Report of Foreign Bank and Financial Accounts,” for 2016 will be due April 15. Beginning in 2016, you’ll be able to request an extension until October 15 to file the FBAR.

The new provisions also change the extended due dates for nonprofit returns (Form 990) and benefit plan returns (Form 5500).

Please call Carl Heinemann, your Chattanooga CPA, if you need a complete list of changes.

Tax breaks for people with disabilities

Have you heard about the new “Achieve a Better Life Experience” (ABLE) accounts? They’re tax-favored savings accounts you can establish to set aside money to pay expenses for a disabled family member. Assets in ABLE accounts grow tax-free and withdrawals are nontaxable if used to pay qualified disability expenses.

ABLE accounts were authorized under a federal tax law, and individual states are responsible for setting up the programs. That means you may have to wait a while longer to open an account. However, the tax code currently offers other benefits for people with disabilities that may help reduce your federal income tax bill.

For example, when you’re legally blind, you can claim an enhanced standard deduction in addition to the basic amount. If you itemize, you can deduct medical expenses related to your disability, including the care and maintenance of a guide dog as well as certain home improvements such as access ramps. Other itemized deductions to keep track of: out-of-pocket expenses you incur so you can work.

If you’re the parent or spouse of a disabled family member and you pay for care of your loved one so you can work, you may be able to claim the child and dependent care credit. The credit directly reduces the federal income tax you owe.

Contact Carl Heinemann, your Chattanooga CPA, for more detailed information about these tax breaks.

How to report business charitable deductions

The rules for making charitable donations from your business are similar to those governing personal donations. For example, you can donate cash or property, your total deduction may be limited, you may need to get an appraisal to establish value, and you have to keep good records.

How you report the deduction depends on how your business is structured.

  • Sole proprietorship. If you’re a sole proprietor, charitable contributions are not reported on your “Schedule C, Profit or Loss from Business.” Instead, you’ll report the contribution on “Schedule A, Itemized Deductions.”

    Tip: Be sure to classify expenses properly to get the maximum deduction. As an illustration, say you take out an ad for your business product in a church bulletin. The cost is an advertising expense, not a charitable donation and you can deduct it directly from your business income.

  • Pass-through entity. Charitable contributions you make from your partnership or S corporation flow to you as the partner or shareholder in the same way as other income and expense items. Your deduction, which you claim on your personal return, may be limited by your basis in the business. In addition, since you have to itemize to benefit, other limitations may reduce the total amount you can deduct.
  • Corporation. C corporations can deduct charitable contributions on the corporate federal income tax return. Generally, the deduction is limited to 10% of taxable income. Special rules apply to donations of certain inventory, such as food.

Please call if you’re considering making a charitable donation from your business. We can help you run the numbers to determine the tax benefit.

“File and suspend” social security strategy

When considering ways to maximize your social security benefits, one strategy often suggested by financial planners and touted in the financial media is called “file and suspend.” Part of the Senior Citizens Freedom to Work Act, the “file and suspend” provision was added to the social security rules in 2000. For many folks, this strategy may provide a substantial windfall and increased lifetime income. Though the rules are complicated, the basic steps may be illustrated by the following example.

Joe, who was born in 1953, is married to Sally. Throughout their married life, Sally worked part-time and Joe worked full-time, so Joe has a much higher lifetime income than Sally. He reaches full retirement age (for people born between 1943 and 1954, full retirement age is 66) and files for social security benefits. Joe’s filing allows Sally to file for benefits based on Joe’s work history. Under current rules, her benefits can total up to one-half of Joe’s benefit. So if Joe is entitled to a benefit of $2,000 per month, Sally can start collecting benefits of $1,000 per month.

Joe then “suspends” his benefit payments, postponing the collection of benefits until he reaches age 70. This strategy allows Joe to accrue retirement credits, which boost his future benefits by an average of 8% for every year that benefits are delayed. At age 70, Joe notifies the Social Security Administration that he wants to start receiving payments. Because of accrued retirement credits, Joe’s monthly benefit has grown from $2,000 to $2,640 and Sally continues to receive her benefits of $1,000 per month. (This scenario ignores cost of living increases.)

Sounds like a great deal. But like all financial strategies, this one carries risk and is based on certain assumptions. For example, it assumes that Joe is in relatively good health and will live a long life, long enough to reap the rewards of postponing his social security payments. It also assumes that current federal rules will remain in effect and that Joe and Sally have adequate resources to cover four years of expenses (age 66 to age 70) without relying on Joe’s social security income.

“File and suspend” is a strategy worth considering, but it may not be the best option for your family. If you’d like help analyzing retirement planning scenarios, give Carl Heinemann, your Chattanooga CPA, a call.

Tips for dissolving a partnership

You and your business partner have decided to part ways. The reasons are numerous. Perhaps your partner isn’t delivering the results originally anticipated, or perhaps you work 60 hours a week; your partner works 20. Maybe your vision has changed or your skills are not compatible, or maybe you’re just plain tired of working with one another.

Whatever the reason, it’s always preferable to dissolve a partnership with as little acrimony, hurt feelings, and contentious litigation as possible. Mutual benefit is only possible when both parties are willing to negotiate honestly. Fortunately, following a few simple guidelines can make the process less antagonistic and more productive.

  • Pull out the contract. Your partnership agreement should enumerate the terms and conditions needed to dissolve the partnership. In general, the contract should detail the process for dividing business assets and liabilities. A written partnership contract is always the first place to start because it outlines salient obligations, promises, and understandings — the terms you stipulated before becoming enmeshed in the rough-and-tumble of daily business.
  • Communicate clearly. Call a face-to-face meeting and lay out your concerns and reasons for seeking an amicable dissolution of the partnership. Especially when family members are involved, such meetings may engender hurt feelings and mistrust. But business is business, and a diplomatic and straightforward discussion of the issues is preferable to hidden agendas, innuendo, and rumor. Perhaps the misunderstanding is yours and the partnership can be salvaged. You won’t know unless you talk — honestly and openly.
  • Be generous. If you decide the partnership must be terminated, be willing to give a little. Split the last check. Don’t be stingy. Litigation is expensive in terms of time, money, and energy. Don’t let ego and heated emotions rule the day and cloud your judgment. After all, what’s the point of diverting thousands of dollars to lawyers and lawsuits when, for a fraction of the cost, you might settle your differences amicably?

One final word: Even if you aren’t filing lawsuits against one another, enlisting the aid of a competent attorney can help ensure that you’re moving in the right direction and outcomes remain equitable. If you’d like additional guidance, give Carl Heinemann, your Chattanooga CPA, a call.