December 10, 2013
Authored By: Connie Ward, Bookkeeper at CMP
As 2013 comes to an end, employers, employees and self-employed individuals should make sure they are complying with the new 0.9 percent additional Medicare tax requirement.
While this new requirement was effective January 1, 2013, the effects may not be fully felt until wages earned during 2013 reach in excess of $200,000, which may not occur until the last quarter of the year.
The tax applies only to employees and self-employed individuals and is in addition to the 1.45 percent regular Medicare tax that all individuals pay.
Required withholding of the additional Medicare tax may result in over or under withholding of the actual tax you owe based on your individual filing status. Employers should be checking their payroll systems to make sure they have properly begun to withhold from their high earners. The employers will be required to withhold the additional Medicare tax on wages over $200,000. Employees should project their income to see if they need to increase their withholding to account for their spouses income, and self-employed individuals should be talking with their tax return preparers to insure proper estimated tax payments are being made.
The thresholds for the new Medicare Tax is as follows:
Filing Status / Threshold Amount
Married filing jointly - 250,000
Married filing separately - 125,000
Single – 200,000
Head of household (with qualifying person) – 200,000
Qualifying widow(er) with dependent child) – 200,000
An additional tax of 3.8% Medicare tax will apply to “net investment income.” Net investment is defined as follows:
• Interest and dividend income
• Net Rental Income
• Gross income from passive activities
• Net gain from the disposition of property; stocks bonds mutual funds, capital gain distributions from mutual funds, investment property, sale of second residence
• Gain from rental property subject to tax
• Gain on the sale of a principal resides subject to tax (any gain over $500,000)
If you have any addition questions regarding the additional Medicare tax on wages as well as net investment income please contact any of our professionals at either our Salt Lake or Logan Offices.
December 2, 2013
Authored by David Cash, CPA, MAcc. Dave has worked in the Logan and Salt Lake City offices of CMP. He spent 2 years in the Logan office and has been in the Salt Lake City office for over 5 years. Dave specializes in oil and gas taxation, pension administration and reporting, and individual and business tax planning and compliance.
On October 31, 2013 the IRS released the cost-of living adjustments affecting dollar limitations for pension plans and other retirement related items for the 2014 tax year. Most of the limits will stay the same in 2014 as they were in 2013 as the Consumer Price Index did not meet the statutory thresholds for an adjustment.
Selected items retaining the same limits in 2014 as 2013 are as follows:
1) The elective deferral limit for employees in 401(k) plans remains at $17,500 for 2014
2) The annual contribution limit for IRAs remain at $5,500 for 2014
3) The catch-up contribution amount for those over 50 in 401(k) plans that allow it remains at $5,500 for 2014
4) The compensation definition of highly compensated employees remains unchanged at $115,000 for 2014
Selected items with changed limits in 2014 are as follows:
1) The compensation limit in 401(k) plans in increased from $255,000 in 2013 to $260,000 in 2014
2) The limitation for defined contribution plans (known as the 415(c) limit) is increased from $51,000 in 2013 to $52,000 in 2014
3) The compensation limit for the definition of a key employee in a top heavy plan is increased from $165,000 in 2013 to $170,000 in 2014
Should you have any questions about these limits and how they may relate to your individual circumstances we would encourage you to give one of the retirement plan specialists at Cook Martin Poulson, P.C. a call.
November 20, 2013
Authored By: Shane Roberts, Shane is currently a manager over tax and pension work in the Logan office. He has clients in a variety of industries including construction, agriculture, manufacturing and many others. He also handles all the pension design and administration work from the initial stages of designing a 401(k) plan to the yearly compliance work.
The IRS has issued the final “repair” regulations, which govern when a taxpayer can deduct their expenses for acquiring, maintaining, repairing and replacing tangible property. These regulations will affect virtually every business and they must be followed starting January 1, 2014. The final regulations have been simplified, which is a relative term when talking about the IRS and over 200 pages of regulation, compared to the 2011 temporary regulations.
Materials and Supplies Defined
The final regulations have clarified and made some taxpayer friendly changes to some of the provisions of the temporary regulations issued previously. The first change is regards to materials and supplies. The final regulations define “materials and supplies” to mean tangible property used or consumed in the taxpayer’s business operations that is not inventory. The materials and supplies also must be:
• A unit of property with an acquisition or production cost less than $200. The temporary regulations required an acquisition cost of less than $100;
• A unit of property that has an economic useful life of 12 months or less, beginning when the property is used or consumed in the taxpayer’s operations;
• Fuel, lubricants, water, and similar items that are reasonably expected to be consumed in 12 months, or less;
• A component that is acquired to maintain, repair, or improve a unit of tangible property owned, leased or serviced by the taxpayer, but is not acquired as part of any single unit of tangible property
• Identified by the IRS in published guidance.
When the temporary regulations came out, many critics asked the IRS to raise the acquisition cost up to $500. The IRS rejected this amount and settled on $200.
The second provision the IRS clarified is routine maintenance. Under the temporary and final regulations the IRS included a routine maintenance safe harbor that allows a taxpayer to deduct amounts paid for routine maintenance if it is for recurring activities that a taxpayer expects to perform to keep a unit of property in its ordinary efficient operating condition. The IRS contends that activities are routine if, at the time the unit of property is placed in service, the taxpayer reasonably expects to perform the maintenance activities more than once during the class life of the unit of property.
The final regulations expanded the safe harbor to allow expensing for routine maintenance activities on a building and its structural components. The taxpayer must reasonably expect to perform such maintenance more than once over a 10-year period.
Election to Capitalize Repair and Maintenance Costs
The final regulations also added a new election to capitalize repair and maintenance costs. This election allows taxpayers to make an annual election to opt out of expensing repair and maintenance costs if the taxpayer treats the costs as capital expenditures on its books and records. A taxpayer must elect to capitalize these expenses on their tax return and depreciate the expenditures. The election only applies to amounts that the taxpayer incurs in carrying on a trade or business and treats as capital expenditures on its books and records used for computing regularly computing income. This election is made by attaching a statement to a timely filed return including extensions.
De Minimis Safe Harbor for Acquired or Produced Property
Generally taxpayers are required to capitalize amounts paid to acquire or produce a unit of real or personal property. The final regulations allow a taxpayer with an applicable financial statement to deduct up to $5,000 of the cost of an item of property per invoice. In order to take advantage of this rule, taxpayers must have written book policies in place at the start of the tax that specify a per-item dollar amount (up to $5,000). This means that calendar year taxpayers have until the end of 2013 to get this policy in place. Taxpayers that do not have applicable financial statements also received a safe harbor de minimus, however it is a per invoice limit of $500 instead of the $5,000 limit. Applicable financial statements are audited financial statements issued for SEC reporting issued by a CPA or audited financial statements issued by a CPA to report results of operations for shareholders or to acquire credit.
This de minimus safe harbor is an election and must be elected annually by attaching a statement to the taxpayer’s return for the year elected. The election will apply to all qualifying expenses, including materials and supplies that meet the requirements and a taxpayer cannot exclude particular qualifying expenses.
Containing over 200 pages, the final “repair” regulations are extremely complex and cumbersome. As CPA’s at Cook Martin Poulson, we pride ourselves on being proactive, not reactive to new laws and regulations. We have studied these new regulations and have developed strategies that will help our clients navigate the new laws including cost segregation studies and other techniques that will save our clients money and help with their cash flow. Call us today to set up a meeting where we can analyze your business and help you prepare for these new regulations.
November 18, 2013
Authored By: Nathan Shields, CPA, Senior Accountant. Nathan has been with the firm 5 years and works in both tax services and financial statement services.
Depending on all your other income your social security benefits may be taxable. If your only income is your social security benefits, you may not be required to file a tax return.
If social security benefits are not your only source of income, some of your social security benefits may be taxable. To determine if your social security benefits are taxable you need calculate your income. This calculation includes all your income, including tax-exempt income, and one-half of your social security income. If your income is over the base amount a portion of your social security benefits may be taxable. The base is as follows:
Filing Status Base Additional
Single $25,000 $34,000
Head of Household $25,000 $34,000
Married Filing Jointly $32,000 $44,000
Married Filing Separately $0 $0
Qualifying Widow $25,000 $34,000
If your income is below those thresholds, then none of your social security benefits are taxable. For example if a single person’s income is over the base amount, but below $34,000, and a married filing jointly couple’s income is over the base amount but below $44,000, then a portion of the social security benefits are taxable. One half of your social security benefits over the base amount would be taxable. If your income is over the upper threshold, then $4,500 (or $6,500 if married filing jointly) plus 85% of your social security benefits over the additional amount are taxable. The taxable portion of your social security benefits cannot exceed 85% of your total benefits.
Once the thresholds are reached, you are adding an additional $1.85 of taxable income for every $1 over the threshold. You would be adding $1 of other income and $0.85 of taxable social security benefits. This could make your effective tax rate nearly 40%!
For the tax year ending December 31, 2013 one way to help lower taxable income is to make charitable contributions straight to the charity from an IRA. Taxpayers who are 70 ½ are required to take minimum distributions from their IRA. When this happens, the income received from the IRA is included in income, and included in the calculation of how much social security benefits will be taxable. Instead of receiving the money, and writing a check to a charity yourself, the IRA trustee can send a charitable contribution straight to qualified charitable organization. If the money is sent from the IRA, then the taxpayer does not need to include the IRA distribution in income and it reduces the amount of taxable income, and reduces the amount of social security benefits that are taxable.
October 15, 2013
Authored By: Sheri Lewis, Staff Accountant, has worked at Cook Martin Poulson since November 2011. She recently received her Master of Accounting Degree and is in the process of taking the CPA exams.
A recent study conducted by the Treasury Inspector General for Tax Administration (Employers Do Not Always Follow Internal Revenue Service Worker Determination Rulings; June 14, 2013. Reference Number: 2013-30-058) called for the IRS to provide better follow-up to ensure small employers are complying with worker classification ruling. Better follow-up translates to more payroll audits. The study indicated that only 17% of employers appeared to comply with the “employee” worker classification rulings that resulted from the filing of Form SS-8 (Determination of Worker Status for Federal Employment Taxes and Income Tax Withholding). Filing a Form SS-8 requesting a “worker status” determination means the business or the worker is asking the IRS to establish if the services provided to the firm are those of an employee or an independent contractor. Receiving the determination from the IRS can be a relatively long process. The crackdown, in part, may be intended to increase tax revenue by assessing back payroll taxes and penalties.
Unfortunately, there is no clear cut way to determine whether or not a worker is an employee or an independent contractor. There are three general guidelines that outline the factors the IRS considers in making a worker classification. The guidelines are summarized as follows:
1. Degree of Control: To what extent does the employer have the ability to direct how, what, when and where the worker performs his duties?
2. Financial Opportunities: How is the worker paid? Are expenses reimbursed? Is the pay a set or regular amount? Does the worker provide his own tools and/or supplies?
3. Relationship Type: Is the position permanent or temporary? Is there a written contract? Can the worker pursue other means of obtaining income? What benefits does the employer provide?
The classification of an employee or independent contractor can had significant tax consequences for all involved. Employers must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. Employers do not have to withhold or pay any taxes on payments to independent contractors. Independent contractors must pay the full share of Social Security and Medicare taxes themselves. The study showed that an employer, on average, can save around $3,700 annually per worker with a salary of $43,000 if the worker is classified as an independent contractor. This savings potential can unduly influence some small business owners to misclassify workers as independent contractors. Additionally, employers are trying to contend with the new health care law requirement to provide health insurance if they have 50 or more employees. The Wall Street Journal reports that studies have shown that local businesses misclassify workers anywhere from 10% to more than 60% of workers as independent contractors (WSJ, Payroll Audits Put Small Employers on Edge, March 13, 2013 by Angus Loten). Ironically, due to the lack of a clear definition as to what constitutes an employee or independent contractor, many employers are unsure if they are complying with the worker classification rules until they have a payroll audit.Older Entries »