As a 501 (c) (3) tax-exempt organization, you are permitted, under Federal Law, to pay only for unemployment benefits claimed by former employees. Think of this permission as setting up a “pay as you go” plan for unemployment benefits. Your organization is self-funding the insurance. Your organization is acting as the unemployment insurance department. Cash disbursements are only made when unemployment benefits are required for former employees.

This plan is NOT for every 501 (c) (3) tax-exempt organization. You need to carefully review your recent history of unemployment benefit claims, the financial strength of your organization, your current work force and the continuality of your programs and various locations moving forward. What are your chances of losing programs or locations and having to lay-off some of your work-force?

If interested in discussing further, please call me. I can discuss the rules and the pluses and minuses of making this decision and can direct you to organizations that can help you further explore this option for potential implementation.

In today’s competitive environment, offering employees an equity interest in your business can be a powerful tool for attracting, retaining and motivating quality talent. If your business is organized as a partnership, however, there are some tax traps you should watch out for. Once an employee becomes a partner, you generally can no longer treat him or her as an employee for tax and benefits purposes, which has significant tax implications.

Employment taxes

Employees pay half of the Social Security and Medicare taxes on their wages, through withholdings from their paychecks. The employer pays the other half. Partners, on the other hand, are treated as being self-employed — they pay the full amount of “self-employment” taxes through quarterly estimates.

Often, when employees receive partnership interests, the partnership continues to treat them as employees for tax purposes, withholding employment taxes from their wages and paying the employer’s share. The problem with this practice is that, because a partner is responsible for the full amount of employment taxes, the partnership’s payment of a portion of those taxes will likely be treated as a guaranteed payment to the partner. 

That payment would then be included in income and trigger additional employment taxes. Any employment taxes not paid by the partnership on a partner’s behalf are the partner’s responsibility.

Treating a partner as an employee can also result in overpayment of employment taxes. Suppose your partnership pays half of a partner’s employment taxes and the partner also has other self-employment activities — for example, interests in other partnerships or sole proprietorships. If those activities generate losses, the losses will offset the partner’s earnings from your partnership, reducing or even eliminating self-employment taxes.

Employee benefits

Partners and employees are treated differently for purposes of many benefit plans. For example, employees are entitled to exclude the value of certain employer-provided health, welfare and fringe benefits from income, while partners must include the value in their income (although they may be entitled to a self-employed health insurance deduction). And partners are prohibited from participating in a cafeteria plan.

Continuing to treat a partner as an employee for benefits purposes may trigger unwanted tax consequences. And it could disqualify a cafeteria plan.

Partnership alternatives

There are techniques that allow you to continue treating newly minted partners as employees for tax and benefits purposes. For example, you might create a tiered partnership structure and offer employees of a lower-tier partnership interests in an upper-tier partnership. Because these employees aren’t partners in the partnership that employs them, many of the problems discussed above will be avoided. 

If your business is contemplating offering partnership interests to key employees, contact us for more information about the potential tax consequences and how to avoid any pitfalls.

Some business owners make major decisions by relying on gut instinct. But investments made on a “hunch” often fall short of management’s expectations.

In the broadest sense, you’re really trying to answer a simple question: If my company buys a given asset, will the asset’s benefits be greater than its cost? The good news is that there are ways — using financial metrics — to obtain an answer.

Accounting payback

Perhaps the most common and basic way to evaluate investment decisions is with a calculation called “accounting payback.” For example, a piece of equipment that costs $100,000 and generates an additional gross margin of $25,000 per year has an accounting payback period of four years ($100,000 divided by $25,000).

But this oversimplified metric ignores a key ingredient in the decision-making process: the time value of money. And accounting payback can be harder to calculate when cash flows vary over time. 

Better metrics

Discounted cash flow metrics solve these shortcomings. These are often applied by business appraisers. But they can help you evaluate investment decisions as well. Examples include:

Net present value (NPV). This measures how much value a capital investment adds to the business. To estimate NPV, a financial expert forecasts how much cash inflow and outflow an asset will generate over time. Then he or she discounts each period’s expected net cash flows to its current market value, using the company’s cost of capital or a rate commensurate with the asset’s risk. In general, assets that generate an NPV greater than zero are worth pursuing.

Internal rate of return (IRR). Here an expert estimates a single rate of return that summarizes the investment opportunity. Most companies have a predetermined “hurdle rate” that an investment must exceed to justify pursuing it. Often the hurdle rate equals the company’s overall cost of capital — but not always.

A mathematical approach

Like most companies, yours probably has limited funds and can’t pursue every investment opportunity that comes along. Using metrics improves the chances that you’ll not only make the right decisions, but that other stakeholders will buy into the move. Please contact our firm for help crunching the numbers and managing the decision-making process. 

Employee benefit plans with 100 or more participants must generally provide an audit report when filing IRS Form 5500 each year. Plan administrators have fiduciary responsibilities to hire independent qualified public accountants to perform quality audits.

Select a qualified auditor

ERISA guidelines require employee benefit plan auditors to be licensed or certified public accountants. They also require auditors to be independent. In other words, they can’t have a financial interest in the plan or the plan sponsor that would bias their opinion about a plan’s financial condition. 

But specialization also matters. The more training and experience that an auditor has with plan audits, the more familiar he or she will be with benefit plan practices and operations, as well as the special auditing standards and rules that apply to such plans. Examples of audit areas that are unique to employee benefit plans include contributions, benefit payments, participant data, and party-in-interest and prohibited transactions.

Ask questions

Employee benefit plan audits are a matter of more than just compliance. The auditor’s report highlights any problems unearthed during the audit, which can serve as a springboard for improving plan operations. The conclusion of audit work is a good time to ask such questions as the following:

* Have plan assets covered by the audit been fairly valued?
* Are plan obligations properly stated and described?
* Were contributions to the plan received in a timely manner?
* Were benefit payments made in accordance with plan terms?
* Did the auditor identify any issues that may impact the plan’s tax status?
* Did the auditor identify any transactions that are prohibited under ERISA?

Experienced auditors can also suggest ways to improve your plan’s operations based on their audit findings.

Protect yourself

Employee benefit plan audits offer critical protection to plan administrators and employees. Your company can’t afford to skimp when it comes to hiring an auditor who is unbiased, experienced and reliable. Contact us for more information on hiring a plan auditor.

The IRS, state tax agencies and the tax industry have renewed their warning about a recurring email scam targeting payroll and human resources departments. In this scam, the email appears to come from an actual corporate officer and requests individual employee Forms W-2 or an earnings summary that contains similar information from the company’s payroll or human resources departments. The IRS has urged payroll and human resources officials to double check any executive level or unusual requests for Forms W-2 or lists of employee Social Security numbers (SSNs).

The W-2 scam first appeared last year. Cybercriminals tricked payroll and human resource officials into disclosing employee names, SSNs and income information. The thieves then attempted to file fraudulent tax returns in order to obtain tax refunds.

Jim Selsor will be presenting during the Delaware Division of Revenue and the Internal Revenue Service's 40^th Annual Federal and State Tax Institutes. The goal of these institutes is to update, clarify, and explain federal and state tax law requirements and any new tax law developments.

There will be 3 locations this year (see the list below). The registration fee for the tax institutes is $50.00, which includes materials, continental breakfast and a certificate of completion. Registration begins at 7:30 a.m. with the institute beginning promptly at 8:00 a.m. and ending at 4:30 p.m.

Note: Tax Institute materials will not be provided in book format this year. Instead, attendees will receive a thumb drive containing the speakers’ presentations and notes. Laptops are not provided but please feel free to bring your own if you wish to view the information on the thumb drive during the Tax Institute. Division of Revenue is not responsible for lost or damaged laptops or for supplying batteries, charging stations or extension cords.

Registration form and payment must be received by November 23, 2016.

• Monday, December 5, 2016 - Dover Downs Conference Center
• Tuesday, December 6, 2016 - Atlantic Sands Hotel & Conference Center
• Friday, December 9, 2016 - University of Delaware, Clayton Hall

 For more information and to print out a registration form, visit: http://www.revenue.delaware.gov/calendar.shtml 
 

Owners of residential rental property and other types of buildings purchased or constructed after 1986 have the opportunity to reap the benefits of an IRS approved tax break. This tax break, referred to as cost segregation can provide significant and immediate tax savings. 

Cost segregation guidelines provided by the IRS allow a portion of a building’s cost to be depreciated in a shorter period of time than the usual 27.5 to 39 years used for the building itself. Separate components that are not related to the building’s general operation and maintenance could be depreciated over five to seven years instead. Additionally, the depreciation deduction for these components allows costs to be recovered twice as fast as the traditional straight-line method. 

Although not all-inclusive, a few examples of building components that qualify for accelerated depreciation include many functional and ornamental features like carpeting, counters, cabinets, millwork, and kitchen equipment. Similarly, some land improvements located outside of the building such as landscaping, sidewalks, parking lots, signs, and lighting can be depreciated over a 15 year period, helping to recover costs faster. In total, up to 60 percent of a building’s cost could potentially be deducted over a shorter period, depending on the building type.

If you think cost segregation analysis could benefit you or your business, we would love to hear from you. Please contact our office and let our experts determine how these beneficial tax breaks could work for you.

Thank you to all our employees for voting in the News Journal's Top Work Place survey this summer. We are honored to be listed 5th in the small business category with a special award in the Ethics category and the highest ranking CPA firm - for the 9th year in a row.  

To see the full article, please visit Delaware Online.