Category: Helpful Articles
Tax-free fringe benefits help small businesses and their employees
In today’s tightening job market, to attract and retain the best employees, small businesses need to offer not only competitive pay, but also appealing fringe benefits. Benefits that are tax-free are especially attractive to employees. Let’s take a quick look at some popular options.
Insurance
Businesses can provide their employees with various types of insurance on a tax-free basis. Here are some of the most common:
- Health insurance. If you maintain a health care plan for employees, coverage under the plan isn’t taxable to them. Employee contributions are excluded from income if pretax coverage is elected under a cafeteria plan. Otherwise, such amounts are included in their wages, but may be deductible on a limited basis as an itemized deduction.
- Disability insurance. Your premium payments aren’t included in employees’ income, nor are your contributions to a trust providing disability benefits. Employees’ premium payments (or other contributions to the plan) generally aren’t deductible by them or excludable from their income. However, they can make pretax contributions to a cafeteria plan for disability benefits, which are excludable from their income.
- Long-term care insurance. Your premium payments aren’t taxable to employees. However, long-term care insurance can’t be provided through a cafeteria plan.
- Life insurance. Your employees generally can exclude from gross income premiums you pay on up to $50,000 of qualified group term life insurance coverage. Premiums you pay for qualified coverage exceeding $50,000 are taxable to the extent they exceed the employee’s coverage contributions.
Other types of tax-advantaged benefits
Insurance isn’t the only type of tax-free benefit you can provide ― but the tax treatment of certain benefits has changed under the Tax Cuts and Jobs Act:
- Dependent care assistance. You can provide employees with tax-free dependent care assistance up to $5,000 for 2018 through a dependent care Flexible Spending Account (FSA), also known as a Dependent Care Assistance Program (DCAP).
- Adoption assistance. For employees who’re adopting children, you can offer an employee adoption assistance program. Employees can exclude from their taxable income up to $13,810 of adoption benefits in 2018.
- Educational assistance. You can help employees on a tax-free basis through educational assistance plans (up to $5,250 per year), job-related educational assistance and qualified scholarships.
- Moving expense reimbursement. Before the TCJA, if you reimbursed employees for qualifying job-related moving expenses, the reimbursement could be excluded from the employee’s income. The TCJA suspends this break for 2018 through 2025. However, such reimbursements may still be deductible by your business.
- Transportation benefits. Qualified employee transportation fringe benefits, such as parking allowances, mass transit passes and van pooling, are tax-free to recipient employees. However, the TCJA suspends through 2025 the business deduction for providing such benefits. It also suspends the tax-free benefit of up to $20 a month for bicycle commuting.
Varying tax treatment
As you can see, the tax treatment of fringe benefits varies. Contact us for more information.
© 2018
Is that still deductible? The Tax Cuts and Jobs Act generally eliminated the business deduction for entertainment expenses but not meal expenses. As long as certain conditions are met, taxpayers can still deduct 50% of the cost of business meals.
The IRS issued Notice 2018-76 spelling out the five conditions. The expense must be “ordinary and necessary;” the taxpayer (or an employee) must be present at the meal; the meal can’t be lavish; it must be provided to current or potential customers, and the meal cost must be separately stated from the entertainment cost.
For investors, fall is a good time to review year-to-date gains and losses. Not only can it help you assess your financial health, but it also can help you determine whether to buy or sell investments before year-end to save taxes. This year, you also need to keep in mind the impact of the Tax Cuts and Jobs Act (TCJA). While the TCJA didn’t change long-term capital gains rates, it did change the tax brackets for long-term capital gains and qualified dividends. For 2018 through 2025, these brackets are no longer linked to the ordinary-income tax brackets for individuals. So, for example, you could be subject to the top long-term capital gains rate even if you aren’t subject to the top ordinary-income tax rate.
Old rules
For the last several years, individual taxpayers faced three federal income tax rates on long-term capital gains and qualified dividends: 0%, 15% and 20%. The rate brackets were tied to the ordinary-income rate brackets. Specifically, if the long-term capital gains and/or dividends fell within the 10% or 15% ordinary-income brackets, no federal income tax was owed. If they fell within the 25%, 28%, 33% or 35% ordinary-income brackets, they were taxed at 15%. And, if they fell within the maximum 39.6% ordinary-income bracket, they were taxed at the maximum 20% rate.
In addition, higher-income individuals with long-term capital gains and dividends were also hit with the 3.8% net investment income tax (NIIT). It kicked in when modified adjusted gross income exceeded $200,000 for singles and heads of households and $250,000 for married couples filing jointly. So, many people actually paid 18.8% (15% + 3.8%) or 23.8% (20% + 3.8%) on their long-term capital gains and qualified dividends. New rules The TCJA retains the 0%, 15% and 20% rates on long-term capital gains and qualified dividends for individual taxpayers. However, for 2018 through 2025, these rates have their own brackets.
Here are the 2018 brackets:
Singles: 0%: $0 – $38,600 15%: $38,601 – $425,800 20%: $425,801 and up
Heads of households: 0%: $0 – $51,700 15%: $51,701 – $452,400 20%: $452,401 and up
Married couples filing jointly: 0%: $0 – $77,200 15%: $77,201 – $479,000 20%: $479,001 and up
For 2018, the top ordinary-income rate of 37%, which also applies to short-term capital gains and nonqualified dividends, doesn’t go into effect until income exceeds $500,000 for singles and heads of households or $600,000 for joint filers. (Both the long-term capital gains brackets and the ordinary-income brackets will be indexed for inflation for 2019 through 2025.) The new tax law also retains the 3.8% NIIT and its $200,000 and $250,000 thresholds. More thresholds, more complexity With more tax rate thresholds to keep in mind, year-end tax planning for investments is especially complicated in 2018. If you have questions, please contact us. © 2018
When you think about recent tax law changes and your business, you’re probably thinking about the new 20% pass-through deduction for qualified business income or the enhancements to depreciation-related breaks. Or you may be contemplating the reduction or elimination of certain business expense deductions. But there are also a couple of recent tax law changes that you need to be aware of if your business sponsors a 401(k) plan.
1. Plan loan repayment extension
The Tax Cuts and Jobs Act (TCJA) gives a break to 401(k) plan participants with outstanding loan balances when they leave their employers. While plan sponsors aren’t required to allow loans, many do. Before 2018, if an employee with an outstanding plan loan left the company sponsoring the plan, he or she would have to repay the loan (or contribute the outstanding balance to an IRA or his or her new employer’s plan) within 60 days to avoid having the loan balance deemed a taxable distribution (and be subject to a 10% early distribution penalty if the employee was under age 59-1/2). Under the TCJA, beginning in 2018, former employees in this situation have until their tax return filing due date — including extensions — to repay the loan (or contribute the outstanding balance to an IRA or qualified retirement plan) and avoid taxes and penalties.
2. Hardship withdrawal limit increase
Beginning in 2019, the Bipartisan Budget Act (BBA) eases restrictions on employee 401(k) hardship withdrawals. Most 401(k) plans permit hardship withdrawals, though plan sponsors aren’t required to allow them. Hardship withdrawals are subject to income tax and the 10% early distribution tax penalty. Currently, hardship withdrawals are limited to the funds employees contributed to the accounts. (Such withdrawals are allowed only if the employee has first taken a loan from the same account.) Under the BBA, the withdrawal limit will also include accumulated employer matching contributions plus earnings on contributions. If an employee has been participating in your 401(k) for several years, this modification could add substantially to the amount of funds available for withdrawal.
Nest egg harm
These changes might sound beneficial to employees, but in the long run they could actually hurt those who take advantage of them. Most Americans aren’t saving enough for retirement, and taking longer to pay back a plan loan (and thus missing out on potential tax-deferred growth during that time) or taking larger hardship withdrawals can result in a smaller, perhaps much smaller, nest egg at retirement. So consider educating your employees on the importance of letting their 401(k) accounts grow undisturbed and the potential negative tax consequences of loans and early withdrawals. Please contact us if you have questions. © 2018
Employers generally pay federal unemployment tax (FUTA) of 6% on the first $7,000 of covered wages of each employee each year. That’s offset by the state unemployment insurance (UI) tax paid. States that can’t meet their obligations to pay UI benefits may borrow funds from the federal government. If the loans aren’t repaid, employers in the state may be subject to “credit reductions,” resulting in higher FUTA until loans are paid off. According to the U.S. Labor Dept., only the Virgin Islands is currently subject to a credit reduction, with FUTA increased by 2.4%.
At this time of year, a summer vacation is on many people’s minds. If you travel for business, combining a business trip with a vacation to offset some of the cost with a tax deduction can sound appealing. But tread carefully, or you might not be eligible for the deduction you’re expecting.
General rules
Business travel expenses are potentially deductible if the travel is within the United States and the expenses are “ordinary and necessary” and directly related to the business. (Foreign travel expenses may also be deductible, but stricter rules apply than are discussed here.)
Currently, business owners and the self-employed are potentially eligible to deduct business travel expenses. Under the Tax Cuts and Jobs Act, employees can no longer deduct such expenses. The potential deductions discussed below assume that you’re a business owner or self-employed.
Business vs. pleasure
Transportation costs to and from the location of your business activity may be 100% deductible if the primary reason for the trip is business rather than pleasure. But if vacation is the primary reason for your travel, generally none of those costs are deductible.
The number of days spent on business vs. pleasure is the key factor in determining whether the primary reason for domestic travel is business:
- Your travel days count as business days, as do weekends and holidays — if they fall between days devoted to business and it would be impractical to return home.
- Standby days (days when your physical presence is required) also count as business days, even if you aren’t called upon to work those days.
- Any other day principally devoted to business activities during normal business hours also counts as a business day.
You should be able to claim business was the primary reason for a domestic trip if business days exceed personal days.
Deductible expenses
What transportation costs can you deduct? Travel to and from your departure airport, airfare, baggage fees, tips, cabs, etc. Costs for rail travel or driving your personal car are also eligible.
Once at the destination, your out-of-pocket expenses for business days are fully deductible. Examples of these expenses include lodging, meals (subject to the 50% disallowance rule), seminar and convention fees, and cab fare. Expenses for personal days aren’t deductible.
Keep in mind that only expenses for yourself are deductible. You can’t deduct expenses for family members traveling with you — unless they’re employees of your business and traveling for a bona fide business purpose.
Substantiation is critical
Be sure to accumulate proof of the business nature of your trip and keep it with your tax records. For example, if your trip is made to attend client meetings, log everything on your daily planner and copy the pages for your tax file. If you attend a convention or seminar, keep the program and take notes to show you attended the sessions. You also must properly substantiate all of the expenses you’re deducting.
Additional rules and limits apply to the travel expense deduction. Please contact us if you have questions.
© 2018
When you think about recent tax law changes and your business, you’re probably thinking about the new 20% pass-through deduction for qualified business income or the enhancements to depreciation-related breaks. Or you may be contemplating the reduction or elimination of certain business expense deductions. But there are also a couple of recent tax law changes that you need to be aware of if your business sponsors a 401(k) plan.
-
Plan loan repayment extension The Tax Cuts and Jobs Act (TCJA) gives a break to 401(k) plan participants with outstanding loan balances when they leave their employers. While plan sponsors aren’t required to allow loans, many do. Before 2018, if an employee with an outstanding plan loan left the company sponsoring the plan, he or she would have to repay the loan (or contribute the outstanding balance to an IRA or his or her new employer’s plan) within 60 days to avoid having the loan balance deemed a taxable distribution (and be subject to a 10% early distribution penalty if the employee was under age 59-1/2). Under the TCJA, beginning in 2018, former employees in this situation have until their tax return filing due date — including extensions — to repay the loan (or contribute the outstanding balance to an IRA or qualified retirement plan) and avoid taxes and penalties.
-
Hardship withdrawal limit increase Beginning in 2019, the Bipartisan Budget Act (BBA) eases restrictions on employee 401(k) hardship withdrawals. Most 401(k) plans permit hardship withdrawals, though plan sponsors aren’t required to allow them. Hardship withdrawals are subject to income tax and the 10% early distribution tax penalty. Currently, hardship withdrawals are limited to the funds employees contributed to the accounts. (Such withdrawals are allowed only if the employee has first taken a loan from the same account.) Under the BBA, the withdrawal limit will also include accumulated employer matching contributions plus earnings on contributions. If an employee has been participating in your 401(k) for several years, this modification could add substantially to the number of funds available for withdrawal.
Nest Egg Harm
These changes might sound beneficial to employees, but in the long run they could actually hurt those who take advantage of them. Most Americans aren’t saving enough for retirement, and taking longer to pay back a plan loan (and thus missing out on potential tax-deferred growth during that time) or taking larger hardship withdrawals can result in a smaller, perhaps much smaller, nest egg at retirement. So, consider educating your employees on the importance of letting their 401(k) accounts grow undisturbed and the potential negative tax consequences of loans and early withdrawals. Please contact us if you have questions. © 2018
An old business adage says, “Sales is a numbers game.” In other words, the more potential buyers you face, the better your chances of making sales. This isn’t completely true, of course; success also depends on execution. Nonetheless, when a company builds a pipeline to funnel prospects to its sales team, it will increase the opportunities for these staff members to strike and close deals. Here are some ways to undertake construction.
Do your research
First, establish a profile of the organizations that are the best candidates for your products or services. Criteria should include:
- Location
- Number of employees
- Sales volume
- Industry
- Specific needs
Next, think lead generation
The two best sources for generating leads are companywide marketing activities and individual salesperson initiatives, both of which create name recognition and educate prospects on the benefits of your products or services. Although you may find one method works better for you than the other, try not to be too dependent on either.
Three ways to reach out
Once you identify prospects, your sales team has got to reach out.
Here are three ways to consider:
- Cold calls. Every salesperson has done traditional cold calling — assembling a list of prospects that fit into your established customer profile and then calling or visiting them. Cold calling requires many attempts, and the percentage of interested parties tends to be small. Encourage your sales staff to personalize their message to each prospect so the calls don’t have a “canned” feel.
- Researched cold calling. Select a subset of the most desirable candidates from your prospect list and do deeper research into these organizations to discover some need that your product or service would satisfy. Work with your sales team to write customized letters to the appropriate decision-makers, highlighting your company’s skills in meeting their needs. If possible, quote an existing customer and quantify the benefits. The letter should come from the sales rep and state that he or she will be following up with a phone call. Often, after sending such a letter, getting in the door is a little easier.
- Referrals. Research potential referral sources just as you study up on sales prospects themselves. Your goal is to develop and maintain a referral network of satisfied customers and other professionals who interact with your prospects. When you get referrals, be sure to send thank-you notes to the sources and keep them informed of your progress.
Go with the flow
Does your business regularly find itself hitting dry spells in which sales prospects seem to evaporate into thin air? If so, it may be because you lack a solid pipeline to keep the identities of those potential buyers flowing in.
Looking for the perfect bookkeeper is something like looking for an ideal mate. You’ll want to think hard about your organization’s needs before you start searching for, and commit to, the person who’ll handle your day-to-day accounting functions. Define the role Before advertising the position, define the role. Crafting a detailed job description that outlines responsibilities will help you attract qualified candidates and give you a consistent yardstick with which to measure them. Common bookkeeper responsibilities include: • Preparing and recording accounts payable, accounts receivable and cash receipts,• Tracking expenses, • Reconciling bank statements, • Posting accounts to the general ledger, and • Preparing for year-end financial audits. If you’ll be relying on your bookkeeper to send donor acknowledgments, order supplies or handle any other clerical duties, spell out those duties in the job description. Ensure a good fit Not-for-profits have special bookkeeping challenges that for-profit businesses don’t. At the very least, you want a bookkeeper who understands there are differences, such as accounting for pledges, donated goods and services, and restricted donations. Candidates also must be: • Knowledgeable about accounting basics, • Willing to learn your organization’s accounting specifics, • Attentive to details, • Deadline-oriented, and • Computer-literate. Finally, because your bookkeeper will handle cash, financial records and proprietary information, potential hires must be trustworthy and above reproach. Conduct thorough background and credit checks on anyone you’re seriously considering, including following up on any references. Get what you need Many organizations hire a bookkeeper because other staff members don’t have the necessary accounting skills. If you’re in that situation, you may wonder how you can judge the accounting acumen of bookkeeper candidates. We can help you define the role and provide advice on hiring the bookkeeper that meets your needs. © 2018