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Business Tax Credit Basics: The Work Opportunity Tax Credit

How can your business get valuable tax credits while expanding your workforce and benefiting your local community? The Work Opportunity Tax Credit (WOTC) may be the answer.

The WOTC is a federal tax credit available to employers who hire and retain veterans and individuals from other target groups including:

    • Temporary Assistance for Needy Families (TANF)
    • Food stamp recipients
    • Residents of empowerment zones
    • Vocational rehabilitation referrals
    • Ex-felons
    • Supplemental security income recipients
    • Youth living in empowerment zones for summer jobs

Nationwide, businesses claim about $1 billion in tax credits annually under the WOTC program. The maximum tax credit can be up to $9,600 for each qualifying new employee during the first year of employment.

You don’t have limits on the number of individuals you hire from target groups. This is good news for potential employees, too, since individuals in these groups can experience significant employment barriers.

How WOTC Works

John, a veteran, is hired at your company for a part-time position. As the employer, your WOTC tax credit lasts for two years. In year one the credit equals 40 percent of John’s wages. If John stays on board, your tax credit in year two is 50 percent of his wages. Even though he’s part-time, because John works more than 400 hours each year – the minimum – you still qualify for the tax credit.

While 400 hours per year is the minimum to claim the full tax credit, partial credit (25 percent) is available starting at 120 hours.

These are just the basics; there is a lot of fine print. Before you calculate your company’s potential tax breaks, check out the full details on the official WOTC site.

How Do I Know if My Employee Fits the Profile?

How do you determine if Sharon, your new hire, fits one of the profiles mentioned above? The U.S. Equal Opportunity Commission (EEOC) protects employers from discriminatory claims or lawsuits when you ask congressionally mandated questions on WOTC screening and application forms.

You can ask Sharon for her date of birth, for example. The EEOC protects you since any eligible employee must be younger than 40 for age-specific categories like the summer youth program. What if Sharon isn’t hired for a summer job? In that case, use this online tool from the U.S. Department of Housing and Urban Development (located under the What’s New tab on their website). The tool will help you see if Sharon lives in an empowerment zone.

Yet another tricky question: How-to determine if Sharon or her family uses food stamps. States have considerable discretion in definitions used for food stamps and the TANF program. For WOTC purposes, the term family is the same as the benefit household. Social service agencies in your state can clarify definitions for your region.

 

A helpful hint: No WOTC tax credit can be claimed for wages paid to relatives or dependents living with and employed by a taxpayer-employer.

You would use IRS Form 8850 to apply for WOTCs. Once completed, send the form to your state’s workforce agency within 28 calendar days of the employee’s start date. The Department of Labor has an updated WOTC Form 9061 or 9062 to request certifications for new employees.

If you’re expanding your workforce, consider the benefits of hiring individuals from one of these target groups. Aside from the tax credits – which can be substantial – you can make a long-lasting, positive impact on your community.

We can help you implement the Work Opportunity Tax Credit at your company. Call or email us with questions.

Is a SEP IRA the Right Choice for Your Business?

 

According to the Department of Labor, more than one-third of U.S. workers do not have access to a workplace-sponsored retirement plan. As a business owner, the startup and operating costs of conventional retirement plans can make it difficult to offer quality savings options for your employees. Have you considered a Simplified Employee Pension (SEP) IRA?

A SEP IRA can work well in businesses that would otherwise not set up employer-sponsored plans; typically, sole proprietors, partnerships, corporations and sometimes even S corporations.

Benefits of a SEP
When using a SEP, you will experience:

  • A tax credit of up to $500 per year for three years
  • Low administrative costs
  • Non-taxable investment earnings to the employer
  • Limited or no government paperwork
  • IRA trustee(s) making investment decisions, not the employer
  • Trustee deposits contributions, sends annual statements and files all required documents with the IRS
  • Individual employees make specific investment decisions

How a SEP Works
SEPs are treated like traditional IRAs for tax purposes and allow the same investment options. The same transfer and rollover rules that apply to traditional IRAs apply to SEPs. SEP IRAs can receive employer contributions but with a higher annual contribution limit than standard IRAs. Think of a SEP IRA as a traditional IRA that lets your employer contributions be vested immediately.

When you contribute to SEP IRA accounts, you receive a tax deduction for the amount contributed. Additionally, your business is not locked into an annual contribution; each year you can decide whether and how much to contribute.

Contributions cannot exceed the lesser of 25 percent of an employee’s compensation for the year or $53,000. This is significantly higher than the $5,000 limit imposed on standard IRAs. These limits apply to your total contributions to the plan and any other defined contribution you have, like other SEP, 401(k), 403(b), profit-sharing or money purchase plans.

Other SEP Rules
Rules can be complex. The following are other criteria that must be followed:

  • Eligible employees must be at least 21 and worked in at least three of the last five years
  • All eligible employees must participate in the plan
  • Includes part-time and seasonal workers
  • Does not include employees who received less than $600 in annual compensation
  • Contributions for all participants generally must be uniform; for example, the same percentage of compensation
  • Also, your workers who are covered in a union agreement that bargains for retirement benefits may be excluded from participating in a SEP IRA. The same goes for nonresident aliens if they don’t receive U.S. wages or other service compensation.

Why Choose a SEP?
A SEP IRA might be a good choice for your company. You can change contribution amounts from year to year, enjoy low administrative costs and minimal government paperwork, and avoid many of the investment decisions. When considering a SEP, make sure the financial institution you choose to be the trustee has several investment options for your employees to pick from.

A SEP IRA can be a win-win for you and your employees: they get access to an employer-sponsored retirement plan, and you get a happier, more loyal workforce – and don’t forget the tax benefits!

Contact us to learn more about a SEP IRA and if it’s right for your business.

 

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Estate Planning in Practice: Life Insurance Trusts

 

Estate planning is often a long and complicated process. Considering estate taxes could take up a significant portion of your assets after death, it’s good to know there are options to reduce or eliminate estate taxes.

One such option is a life insurance trust.

 

Need to Know

An irrevocable life insurance trust gives you more control over your insurance policies and the money that’s paid from them.

The basics of the trust are as follows:

  • The insurance trust owns the policies, not your estate
  • Estate taxes are reduced or even eliminated
  • The trust can buy extra insurance (also not include in your estate)
  • Proceeds not subject to probate or income taxes
  • Also free from estate taxes

Your family benefits by having the insurance proceeds available immediately after your death. This is an inexpensive way to pay estate taxes and other final expenses. And you can leave more money to your loved ones.

 

Major Components

There are three components to an insurance trust: the grantor, the trustee and beneficiaries.

Grantor: You set up the trust; therefore, you are the grantor. As the grantor, you select the trustee. You can be your own trustee, but know that you won’t receive the same tax advantages.

Trustee: The trustee manages the trust. He or she (or you) will purchase an insurance policy naming you as the insured and the trust as owner and beneficiary.

You want to choose someone who’s responsible and objective. Popular options for trustees are spouses, adult children and a bank or trust company. Whichever option you choose, make sure the trustee has the time and knowledge to properly administer the trust and ensure premiums are paid promptly,

When the insurance benefit is paid after your death, the trustee will collect the funds, make them available to pay estate taxes and other expenses — including debts, legal fees, probate costs, and income taxes due on IRAs and other retirement benefits. Then, the trustee distributes the remaining funds to the trust beneficiaries as you instructed.

 Beneficiary: Most people understand this term. The beneficiary is the person or parties to whom your assets pass after your death. You can typically change the beneficiary at any time before your death.

 

Drawbacks

The following scenarios present some drawbacks when it comes to the trust:

  • If someone else owns a policy on your life and dies first
    • What happens: the cash or termination value will be in his or her estate, an unhelpful situation
  • If someone else owns the policy
    • What happens: you lose control of naming beneficiaries, plus the policy could be cancelled, its cash value taken or the policy garnished to satisfy the trustee’s creditors

The bottom line is that an insurance trust is safer because it allows you to reduce estate taxes and maintain control of your estate plan.

 

You’re in Control

With an insurance trust, your trust owns the policy. The trustee you select must follow the instructions you put in your trust. And with your insurance trust as the beneficiary of the policies, you will have more control over the proceeds. Maybe you could use the trust to provide your spouse with lifetime income and keep the earnings out of both of your estates. Profits that stay in the trust can be protected from courts, creditors, spouses and even irresponsible spending.

 

Restrictions

There are three basic restrictions you should be aware of:

  • There may be limits on transferring existing policies to the trust
  • If you die within three years, the IRS considers the trust invalid and proceeds are included in your taxable estate
  • There may be a possible gift tax

These trusts can be complex to set up and are not for everyone. On the other hand, a life insurance trust can be an effective way to reduce taxes and maintain control over your assets. If you think this might be an option for you and your family, call or email us and we can help you decide the best course of action.

 

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Business Deductions You May Not Know About

Did you know you can deduct the cost of lunch on your business taxes? What about uniforms required for work? If you can document reasons for unusual business expenses used to benefit your business, you can generally deduct them from your business income. You may already know that you can deduct items like airfare and hotels. Read on to find out other deductions you may be missing.

Valid Write-offs

Even though any expense incurred in the production of income can be a valid write-off, you must keep good records. Go beyond collecting receipts: document duties and hours, write notes on receipts and keep a log of items like mileage and gas.

Reimbursements you pay your own employees are also deductible. These could include:

  • Gas
  • Meals
  • Hotels
  • Tips
  • Baggage fees

To claim such a deduction, your business should have an accountable plan that shows how reimbursed expenses were actually business-related.

Are you a new business owner and feel especially lost? Consider that many of your startup expenses can be deducted once the business starts. These include continuing education courses, lunch with future clients or a previously purchased computer. You can deduct up to $5,000 of business start-up costs and $5,000 of organizational costs, with the rest amortized. None of this is valid, however, without adequate records.

Other Deductions

Beyond the more obvious deductions, consider if any of the following seven deductions might apply.

Looking for Work: If you’re looking for a job in your field and you itemize deductions, document those that exceed two percent of your gross income. Any over that threshold can be deducted. Remember that costs add up quickly. Consider the mileage you put on your car when driving to interviews and the cost of printing resumes. (But remember: keep a record!)

Self-employed Social Security: You have to pay 15.3 percent of your income for Social Security and Medicare taxes — the portions ordinarily paid by both employee and employer. One small consolation is that you can take a deduction on your income taxes.

Health Insurance Premiums: Medical expenses can blow any budget and, to be deducted, they have to be a certain percentage of your adjusted gross income. If you’re self-employed and responsible for your own health insurance coverage, you can deduct 100 percent of your premium cost. That gets taken off your adjusted gross income rather than becoming an itemized deduction.

Tax Savings for Teachers: K-12 educators are allowed to deduct $250 for materials. This gets subtracted from income and can be taken advantage of even without itemization.

Other deductions include:

  • Education and training for employees
  • Exhibits for publicity
  • Investment advice and fees

Other Tips

Apps can be great resources to keep track of receipts. Hubdoc, for example, turns financial documents into digital files that are easy to store. You should also keep business expenses separate from personal expenses. A red flag for the IRS is when expenses are combined.

Of course, these are just the basics. There may be exceptions and special provisions, and the laws and regulations can change each year. Your best bet is to think long term and work with a tax professional on strategies for current and future planning.

Let us help you save as much on your taxes as you are legally able to do. Contact us today.

 

 

 

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Update on the Affordable Care Act’s Cadillac Tax

If you haven’t already considered how the Affordable Care Act’s (ACA) provision for Cadillac plans could affect your business, read on. Set to take effect in 2020, the Cadillac tax discourages overpriced health plans. Your business may yet be affected, even if you haven’t had to make changes.

Background

The 40 percent excise tax applies to employer-sponsored health plans in excess of $10,200 in premiums annually for individuals, and $27,500 for families. The Cadillac tax was supposed to take effect in 2018, and employers now have two more years to phase in changes or face the consequences. Insurers are responsible for paying the tax on fully insured plans, while the administrator of the plan — you or the coverage provider — is responsible for taxes on self-funded plans.

Broad-Based Support

Many economists co-signed a letter to Congress asking them to keep the Cadillac tax in place. Economists support the tax because when companies limit their coverage, copayments go up. This discourages people from getting care for frivolous concerns. Considering the health care tax exclusion reduces federal revenue by more than $250 billion each year, you can see why the economists pegged high-cost health care plans for cost reduction.

The IRS provided some guidance on how the tax will work as recently as July 2015. More guidance will follow as the effective date nears. It’s a complicated process, as these benefits represent a major shift in tax policy. Employers have traditionally written off the cost of providing health care coverage to employees; this is already changing.

The Cadillac tax, Obama administration officials wrote in The New York Times in 2013, will help combat the “hugely regressive” federal subsidy for employer-backed health insurance. They explained that the rich receive nearly triple the financial benefits from the tax exclusion than those with lower incomes because they’re taxed at a higher rate and tend to have more expensive health insurance.

On the Other Hand

According to the nonpartisan Kaiser Family Foundation, the tax will hit more than just traditional health insurance. It also applies to:

  • Health savings accounts
  • Flexible spending accounts (Includes money workers save tax-free for medical expenses)
  • Supplemental insurance plans
  • On-site clinics set up for workers may also be included

Looking to the Future

While many employers have already been making changes to their health care plans, it may be only a temporary reprieve. Congress linked the tax threshold to the consumer price index plus 1 percent, even though medical costs typically grow much faster. Medical costs are expected to grow an average of 5.6 percent over the next decade, while inflation will increase by about two percent per year.

This means that over time, more companies will be subject to the Cadillac tax. This has raised concern, likening the Cadillac tax to the alternative minimum tax. Originally aimed at the very wealthy, the excise tax could trickle down the income ladder opponents say.

Many look at overly generous insurance as shielding beneficiaries from costs, which encourages them to use more services and drives up prices for everyone else. It’s also a matter of fairness, some say, because forgoing taxes on health care benefits amounts to a major break for those with jobs offering coverage.

No matter how you look at this, it bears further consideration: Your employees are watching as well. Whatever changes you make to your employer-sponsored coverage, it’s wise to phase in changes gradually.  Know where you stand now and in the future so you’re prepared, and your employees won’t be caught off guard by a substantial jump in premiums one year.

Be sure to stay in touch with your CPA and financial adviser, who can keep you updated on changes. In the meantime, contact us with your questions.

 

 

 

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