KLR Tax Blog - Providence, Rhode Island, Newport, Boston, Massachusetts

menu
in this section

Sep 30

Tax Considerations with Investments

By Loree Dubois

Though you cannot make investment decisions based entirely on tax implications, you should be aware that tax treatment of investments differs based on a number of factors. There are many ways you can ensure that you are making the most practical investment decision.

Tax saving strategies

  • Capital Gains: To cut tax on any long term capital gain, hold on to the investment until you’ve owned it for more than a year.
  • Think about selling unrealized losses to offset your gains.
  • Mutual funds: Save tax dollars by choosing funds that provide primarily long-term gains (lower long-term rates).
  • Avoid the “wash sale rule”- The wash sale rule prevents you from taking a loss on a security if you buy a substantially identical security within 30 days before or after you sell the security that created a loss. Only when you sell the replacement security can you recognize the loss. There are ways to avoid this, such as waiting 31 days to repurchase the same security.
  • The 0% rate- For a long term gain that would be taxed at 10 or 15% (depends on the taxpayer’s ordinary-income), the 0% tax rate applies.
  • Bond swaps- A bond swap involves selling a bond, taking a loss, and then immediately buying another similar bond from a different issuer. You will get a tax loss with this because the wash sale rule doesn’t apply as the bonds aren’t considered identical.
  • Losses- Be aware that if net losses exceed net gains, you can only deduct $3,000 (for married couples filing separately, the deduction is $1,500) of the net losses per year against ordinary income. Loss carryovers can be a valuable tax saving tool, but carryovers disappear once the taxpayer dies, so sell investments at a gain now in order to absorb these losses!

Besides gains and losses, you will want to consider other tax consequences on investments like:

  • Interest on investments- Since interest income is generally taxed at an ordinary income rate, it may be a better tax decision to invest in stocks that pay qualified dividends.
  • Investments that produce dividends- Instead of a higher ordinary-income tax rate, qualified dividends are taxed at a long term capital gains rate.
  • Bonds- Bonds produce interest income, but they are treated a bit differently tax wise. Corporate bond interest, for example, is entirely taxable for both state and federal purposes.

Before making an investment decision, don’t ignore the tax implications of your potential decision! It is important to be conscious of the effects of buying, holding, and selling an investment. After considering both your desired return and risk tolerance, be sure to analyze all applicable tax consequences of your investment, including whether the income will be subject to the additional net investment income tax

Questions? Contact any member of our Tax Services Group or refer to the KLR Online Tax Guide.

 

Sep 30

Don’t Wait Until Year End to Take the AMT Into Account in Your Tax Planning

By Dave Desmarais

The alternative minimum tax (AMT) is a separate income tax system that reduces or prohibits certain deductions and treats some income items differently. The top AMT rate is lower than the top regular tax rate: 28% vs. 39.6%. But more of your income may be subject to the AMT rate, which can result in a larger tax bill because you must pay the higher of your AMT or regular tax liability.

Some permanent AMT relief was signed into law at the beginning of 2013, but it primarily benefits middle-income taxpayers. Many high-income taxpayers are still at significant AMT risk. To reduce this risk — or to minimize any negative impact if the AMT is unavoidable — you must start planning now.

Potential Triggers

Here are some of the deductions and income items that are treated differently for AMT purposes and can trigger the AMT:

  • State and local income and property taxes (especially if you live in an area where rates are high)
  • Interest on home equity debt of up to $100,000 not used to improve your principal residence
  • Miscellaneous itemized deductions subject to a floor (such as professional fees, investment expenses and unreimbursed employee business expenses)
  • Medical expenses for taxpayers age 65 and older (this group still enjoys a lower floor for deducting these expenses for regular tax purposes than for AMT purposes)
  • Accelerated depreciation adjustments and related gain or loss differences when assets are sold
  • Tax-exempt interest on certain private activity municipal bonds
  • Incentive stock option exercises

Large amounts of long-term capital gains and dividends can also trigger the AMT, even though they aren’t treated differently for AMT purposes.

Start Planning Now

You need to start planning for the AMT now because actions you take between now and Dec. 31 could cause you to unnecessarily trigger the AMT or to lose deductions that you could have preserved. We’ll cover some AMT planning strategies in a future blog, but if you’d like some ideas now, please contact us. We also can help you project your income and deductions for the year and assess your AMT risk.

Sep 22

Multi-State Service Providers Beware – Changing Landscape of State Taxation

By Norman LeBlanc

Taxpayers doing business in more than one state generally use state mandated apportionment formulas to calculate the portion of their income that is subject to tax in each state. For service businesses, the apportionment formulas historically were pretty much the same in all states. But state taxation is dramatically changing in this area. The interplay of new and old rules in various states may have a dramatic impact on your overall state tax burden.

Cost of Performance vs. Market Based Sourcing

Traditionally, state apportionment formulas required taxpayers to source receipts from services based on where the costs were incurred to generate the receipt. Receipts were sourced either based on the percentage of costs incurred in a particular state or in full to the state which incurred the most costs.

Driven by the need to increase tax revenues, states have been moving towards an apportionment approach which instead looks to where the benefit of the service is received. Referred to as “Market Based Sourcing”, receipts are generally sourced based on the location of the taxpayer’s customer.  States which have changed their apportionment law, and the year of the change, include:

  • California - 2013
  • Massachusetts - 2014
  • Pennsylvania - 2014
  • Rhode Island - 2015 (Limited to Subchapter C Corporations)
  • New York - 2015

The Massachusetts Department of Revenue has issued a working draft of a Regulation to implement Market Based Sourcing. The DOR has been receiving comments from taxpayers and practitioners and is expected to publish a revised Proposed Regulation by the end of September, 2014.

Opportunity for Unexpected Tax Results

Assume a law firm has offices in Boston and New York and during 2014 a client located in Massachusetts is serviced by attorneys in New York.  For state apportionment purposes, Massachusetts will claim 100% of the receipts generated from this Massachusetts client. New York, however, will also require that a portion of this same revenue be sourced to New York, based on the percentage of the costs incurred in New York to service the client. The end result is that the same revenue is counted twice and the taxpayer may be “double taxed”. The result would be reversed for a client located in New York and serviced from Boston. These receipts would not be sourced to either state.

Any taxpayer engaged in a multi-state service business should be evaluating the potential impact of market based sourcing. Aside from the tax effect, there are also issues to address regarding the ability to collect the required data to source receipts using market based sourcing. The time to complete this analysis is now, while opportunities still may exist to plan for the changes taking place in 2014. For more information about these new apportionment provisions, or for help analyzing how your business may be affected, please contact us.

 

Sep 22

The Benefits of a Well-Designed Captive Insurance Strategy

By Paul Oliveira, CPA

Are you looking for insurance to supplement your commercial coverage? Is your company effectively self-insuring a variety of risks that may be considered insurable? For years, businesses have been receiving better rates on reinsurance through captive insurance companies (CICs), as well as procuring additional coverage on exposures that they currently self-insure. CICs are companies that provide risk management services for their parent companies and hold a number of tax and risk management advantages for those who use them.

Benefits of a Captive Insurance Company for Your Business

The potential benefits of setting up a CIC can include:

  1. Tax-Efficient Risk Management. Companies can actually build up an annual premium that is entirely deductible on a variety of risks that they are self-insuring. Without a CIC, these risks would only become deductible when there is an actual payout.  In addition, CICs generating annual premium income of $1.2 million or less (considered small CICs), are only federally taxable on their net investment income. Under section 831(b) of the IRC, net premium income is tax free. Many states around the country also offer favorable tax treatment for CICs as well.
  2. Estate & Succession Planning Advantages. Forming a CIC opens up planning opportunities for wealth shifting or compensating key employees in a more tax efficient manner because a CIC does not have to be owned by the same shareholders or in the same proportion as the related operating company. In fact, under IRS guidance, a shifting of risk (or “risk distribution”) is actually required in order for the CIC to be respected as a bona fide insurance company.
  3. Cost Savings. In addition to the tax benefits, there are potential cost savings involved in forming a CIC. A CIC exposes an individual directly to the reinsurance market. This provides the possibility of more favorable pricing on insurance premiums that a company would otherwise not have without a CIC.

Attractive Companies for CICs

Ideal candidates for a CIC strategy is a business that is showing consistent overall profitability and positive annual cash flow, and is spending at least $500,000 annually on all lines of insurance combined, including health.

A CIC could be a great advantage for your company. Insuring and protecting is vitally important for the growth and prosperity of your business. The IRS has increased its scrutiny of CICs and it is important to work with a knowledgeable advisor to help you properly establish a CIC strategy that will meet the requirements of both federal tax law, as well as state insurance regulations. Any member of our team can assist you with assessing whether a captive insurance strategy makes sense for your business. For more information, please contact us.

Sep 18

New IRS Release on Foreign Partnerships and Trusts

By Paul Oliveira, CPA

As part of implementation of FATCA and an update to the initially published agreements, the IRS recently updated the Withholding Foreign Partnership (WP) and Withholding Foreign Trust (WT) agreements. The WP and WT agreements apply to foreign partnerships and trusts that are looking to enter into a withholding agreement with the IRS.

What’s included in the update?

The revised revenue procedure offers advice for entering into a WP or WT Agreement with the IRS. This allows the WP or WT to take on withholding and reporting responsibilities for payments of U.S. source income (like dividends, interest, and royalties) made to owners, partners or beneficiaries.

The changes include:

  • New application process for becoming a WP or WT.
  • Instructions for renewal of a WP or WT agreement.
  • Updated text of WP and WT agreements.

Important Dates

The updates apply for WP and WT agreements with effective dates on/after June 30, 2014. For calendar years after 2014, approved WP or WT applications received on or before March 31st of the calendar year will be effective January 1st of that year. Approved applications received on or after April 1st will be in force January 1st of the following year and WP agreement compliance must begin January 1st.

For more information on the updates, contact any member of our International Tax Services Group.

 

Sep 16

Don’t Forget the SALT!

By Paul McVay

When negotiating and structuring M&A transactions, don’t overlook state and local tax (SALT) issues. They can be complex, and tax laws vary dramatically from state to state. Even seasoned buyout veterans sometimes misjudge their importance.

SALT issues generally come into play in one or more of the following ways:

  1. The transaction itself may trigger state or local taxes. In a few states, for example, transfers of certain tangible personal property in connection with an M&A transaction are subject to sales and use taxes, causing a trap for the unwary. In many other states, these transfers avoid tax under an “occasional sale” or other exemption. Similarly, real property transferred in a transaction may be subject to real estate transfer taxes. Typically, these taxes apply in connection only with asset sales, not with stock sales. But some jurisdictions impose the tax on transfers of a controlling interest in a company that owns real estate. The point here is that the potential for these types of transactional taxes arising in your acquisition should be vetted as part of the due diligence and negotiation process.
  2. The buyer may incur successor liability for the seller’s unpaid taxes. Don’t assume that structuring a transaction as an asset purchase will avoid this liability. There are certain taxes that states will view as “trust fund” taxes. For example, many states impose successor liability for sales and use taxes as well as employer taxes on a buyer of substantially all of a seller’s assets. Special attention should be paid during the due diligence process for the existence of these liabilities, and, if necessary, sufficient amounts should be withheld from the ultimate purchase price to satisfy any amounts due to the states. The parties can also consider having the target company come forward and do a voluntary disclosure in states where it’s out of compliance. The advantage of negotiating a voluntary disclosure agreement with a state in anticipation of a transaction is that it brings certainty to the amount of tax and interest due, providing some closure for both buyer and seller on the extent of the liabilities and whether statutes of limitation have closed.
  3. The transaction may expand the buyer’s geographical footprint, exposing it to taxes in states where it was previously exempt. Generally, companies are subject to taxes in states with which they have a substantial economic connection, or “nexus.”

Buying a company that has nexus with other states may expose the buyer to those states’ sales and use, income, and franchise taxes. Again, a robust due diligence process will review nexus being created by current business operations and the impact that will have on the acquirer post-closing.

SALT issues may affect a transaction’s value or optimal structure, so it’s a good idea to address them as early as possible. For more information about how SALT issues could affect your upcoming deals — and how you can keep negative tax consequences to a minimum — please contact us.

Sep 8

Reduce Your Payroll Taxes by Offering More Fringe Benefits

By Loree Dubois

You know that benefits make up a substantial portion of an employee’s compensation package. You also know that payroll taxes further contribute to the cost of an employee. But did you know that providing certain benefits can reduce your payroll taxes?

Payroll taxes can be costly. They include the employer portions of Social Security tax (6.2%) and Medicare tax (1.45%), as well as federal and state unemployment taxes. Employers must pay these taxes on their employees’ wages and on certain benefits (such as retirement plan contributions). But they don’t have to pay them on statutorily excluded fringe benefits.

Here are some examples of benefits that can qualify for this special treatment:

  • Term life insurance
  • Parking
  • Mass transit or van pooling
  • Certain meals on the employer’s premises
  • Moving expense reimbursements
  • Dependent care assistance
  • Education assistance
  • Retirement planning services
  • Cell phones

Keep in mind that dollar limits and additional rules apply to many of these benefits. Health insurance premiums also are exempt from payroll tax, but there are many additional issues to consider before you change your health care offerings, such as Affordable Care Act requirements.

You can still deduct the cost of statutorily excluded fringe benefits just as you would wages, bonuses and non-excluded benefits. Employees also reap tax savings that can make these benefits more attractive to them: They won’t owe the employee portion of payroll taxes on the benefits, and the benefits won’t be included in their taxable income. Another advantage to employees is that they might otherwise have to buy these items and services with their after-tax wages.

So if you’re looking to attract and retain employees, consider offering more fringe benefits rather than more cash (such as bigger starting salaries or larger raises or bonuses). The key to success is to offer benefits that your employees value.

To learn more about the tax treatment of fringe benefits, please contact us.

Sep 5

Tax Credits and Incentives for Manufacturers in Massachusetts

By Norman LeBlanc

Massachusetts has long provided tax benefits to corporations that are engaged in manufacturing activities within the state. The benefits include:

  • An Investment Tax Credit of 3%
  • A sales and use tax exemption for equipment and supplies used in manufacturing and R&D
  • An exemption from local personal property tax

In addition, any corporation engaged in manufacturing will use single sales factor apportionment to determine its Massachusetts taxable income. This can provide a significant tax savings to taxpayers with substantial amounts of payroll and property in Massachusetts.

A corporation can qualify for manufacturing status if at least 25% of its gross receipts are from the sale of products manufactured in Massachusetts. A trend has developed in recent years to broaden the types of businesses that can qualify for manufacturing status.

Courts in Massachusetts have held that a business is not required to perform itself each step in the manufacturing process to be classified as a manufacturer. For example, a business which outsources the actual production of its product, but performs product development and product testing activities, can be classified as a manufacturer.

Another broadening of manufacturing status derives from the definition of “products”. When the Massachusetts sales tax law was changed to tax electronic delivery of prewritten (canned) software, the Department of Revenue said in a public pronouncement that development of prewritten software would be treated as a manufacturing activity. Therefore, many software development companies can be classified as a manufacturer.

Except for the property tax exemption, all of the benefits noted above can be claimed for a current or amended tax return by any corporation engaged in substantial manufacturing in Massachusetts. The property tax exemption is only available to corporations that file Form 355Q and are approved by the Department of Revenue. January 31, 2015 is the deadline for filing Form 355Q to be exempt from personal property tax for the state’s fiscal year beginning July 1, 2015.

To discuss how this might apply to your business or to take full advantage of the tax benefits available for manufacturers in Massachusetts please contact us.

 

Sep 2

New Healthcare Reporting Requirements

By Loree Dubois

With ACA deadlines approaching, look out for new requirements under ACA sections 6055 and 6056. HR Executives should expect questions and concerns from employees about how the ACA will affect their benefits.

When are the reports due?

Reporting requirements under section 6055 and 6056 do not begin until January 2016 for employees and March 2016 to the IRS but the data required to be reported is based on 2015. Employers should act accordingly; It is best to have the necessary information ready by January 2015. Though the IRS has not released the forms required for this reporting (forms are still in draft format), employers should prepare all their information, and make sure they are practicing appropriate record keeping.

What are the requirements?

For self-insured employers, Section 6055 requires reports filed with the IRS that include information on each individual who received minimum health coverage. Those individuals must complete a statement each year for tax filing purposes that discloses this information by month covered.

Employers must report health coverage provided to full time employees to the IRS under Section 6056. Statements must be sent to employees for this as well. 

Challenges

Perhaps the greatest difficulty involved in this process is that the IRS has not yet released forms for this reporting, so it is difficult for employers to prepare adequately. There are other challenges as well, including:

  • Different systems: Collecting all the required data could be difficult as the information could be on different systems administered by different vendors. Employers have to make sure records match up for hours worked, and coverage availability, for example.
  • Personal information: Employers could be required to acquire personal information from employees under the new requirements, which employees could find invasive. Questions about Medicaid eligibility and social security numbers for dependents are sensitive pieces of information that employees may be reluctant to release.

Get ahead of the game

It is a good idea for employers to start gathering the relevant information to prepare for the report. To ensure that you are preparing to the best of your ability, make sure to:

  • Form a strong working relationship with your broker.  Brokers are able to work with companies to ensure that they are developing the appropriate materials to connect with employees and are administering the required compliance.
  • Assign leadership to HR. HR execs must ensure that communication and compliance work with vendors is managed properly. Employees will wonder why they are receiving letters, so there should be coordination between HR and vendors and consultants.

As long as employers show that they are complying with the new requirements to the best of their ability, the federal government is expected to be flexible and understanding. The information in this new form will have relevant and necessary information that employees will need to properly file their tax returns. Early preparation for this will ensure that HR executives will have an easy time working with the new reporting process. For more information, contact Loree Dubois, CPA or any member of our Healthcare Services Group.

 

Aug 29

IRS Phone Fraud Calls Increasing

By Paul Oliveira, CPA

The Internal Revenue Service and the Treasury Inspector General for Tax Administration continue to hear from taxpayers who have received unsolicited calls from individuals demanding payment while fraudulently claiming to be from the IRS. I was even recently surprised when my wife received one of these calls and was told that the police were on their way with an arrest warrant!

There have been over 90,000 complaints to date and more than 1,100 victims who have lost an estimated $5 million from these scams.  There are some clear warning signs about these scams that you should be aware of. Educating yourself and learning what to listen for can save you time and money if confronted by a scammer.

  • Calls from the IRS, especially your first contact with the agency are never out of the blue. This is done via official correspondence through the mail. If you receive a random call from someone saying they are with the IRS and you have not received a notice in the mail, which is a huge red flag!

Additionally, it is important to note that the IRS will:

  • Never ask for credit card, debit card or prepaid card information over the telephone.
  • Never insist that taxpayers use a specific payment method to pay tax obligations.
  • Never request immediate payment over the telephone and will not take enforcement action immediately following a phone conversation. Taxpayers usually receive prior notification of IRS enforcement action involving IRS tax liens or levies.

Many callers in the IRS scam have told victims that they owe money that must be paid immediately to the IRS or that they are entitled to big refunds. When unsuccessful the first time, sometimes phone scammers call back trying a new strategy.

Be on the lookout for some of these scam tactics:

  • Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.
  • Scammers may be able to recite the last four digits of a victim’s Social Security number.
  • Scammers spoof the IRS toll-free number on caller ID to make it appear that it’s the IRS calling.
  • Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.
  • Victims hear background noise of other calls being conducted to mimic a call site.
  • After threatening victims with jail time or driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.

If you get a phone call from someone claiming to be from the IRS, here’s what you should do:

  • If you know you owe taxes or you think you might owe taxes, call the IRS at 1.800.829.1040. The IRS employees at that line can help you with a payment issue, if there really is such an issue.
  • If you know you don’t owe taxes or have no reason to think that you owe any taxes (for example, you’ve never received a bill or the caller made some bogus threats as described above), then call and report the incident to TIGTA at 1.800.366.4484.
  • If you’ve been targeted by this scam, you should also contact the Federal Trade Commission and use their “FTC Complaint Assistant” at FTC.gov. Please add “IRS Telephone Scam” to the comments of your complaint.

Taxpayers should be aware that there are other unrelated scams (such as a lottery sweepstakes) and solicitations (such as debt relief) that fraudulently claim to be from the IRS.
Be vigilant against any phone calls you may receive from the IRS.

The IRS will never contact taxpayers via email for personal or financial information. If you receive an email that contains this information, do not click on any of the attachments and forward it immediately to phishing@irs.gov. For more information or guidance on IRS communications contact any member of our Tax Services Group.

 

See all Tax Blog articles in the archives.