Numerous tax limits affecting businesses have increased for 2020

An array of tax-related limits that affect businesses are annually indexed for inflation, and many have increased for 2020. Here are some that may be important to you and your business.

Social Security tax

The amount of employees’ earnings that are subject to Social Security tax is capped for 2020 at $137,700 (up from $132,900 for 2019).

Deductions

  • Section 179 expensing:
    • Limit: $1.04 million (up from $1.02 million for 2019)
    • Phaseout: $2.59 million (up from $2.55 million)
  • Income-based phase-out for certain limits on the Sec. 199A qualified business income deduction begins at:
    • Married filing jointly: $326,600 (up from $321,400)
    • Married filing separately: $163,300 (up from $160,725)
    • Other filers: $163,300 (up from $160,700)

Retirement plans

  • Employee contributions to 401(k) plans: $19,500 (up from $19,000)
  • Catch-up contributions to 401(k) plans: $6,500 (up from $6,000)
  • Employee contributions to SIMPLEs: $13,500 (up from $13,000)
  • Catch-up contributions to SIMPLEs: $3,000 (no change)
  • Combined employer/employee contributions to defined contribution plans (not including catch-ups): $57,000 (up from $56,000)
  • Maximum compensation used to determine contributions: $285,000 (up from $280,000)
  • Annual benefit for defined benefit plans: $230,000 (up from $225,000)
  • Compensation defining a highly compensated employee: $130,000 (up from $125,000)
  • Compensation defining a “key” employee: $185,000 (up from $180,000)

Other employee benefits

  • Qualified transportation fringe-benefits employee income exclusion: $270 per month (up from $265)
  • Health Savings Account contributions:
    • Individual coverage: $3,550 (up from $3,500)
    • Family coverage: $7,100 (up from $7,000)
    • Catch-up contribution: $1,000 (no change)
  • Flexible Spending Account contributions:
    • Health care: $2,750 (no change)
    • Dependent care: $5,000 (no change)

These are only some of the tax limits that may affect your business and additional rules may apply. If you have questions, please contact us.

© 2019

New law helps businesses make their employees’ retirement secure

A significant law was recently passed that adds tax breaks and makes changes to employer-provided retirement plans. If your small business has a current plan for employees or if you’re thinking about adding one, you should familiarize yourself with the new rules.

The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) was signed into law on December 20, 2019 as part of a larger spending bill. Here are three provisions of interest to small businesses.

  1. Employers that are unrelated will be able to join together to create one retirement plan. Beginning in 2021, new rules will make it easier to create and maintain a multiple employer plan (MEP). A MEP is a single plan operated by two or more unrelated employers. But there were barriers that made it difficult to setting up and running these plans. Soon, there will be increased opportunities for small employers to join together to receive better investment results, while allowing for less expensive and more efficient management services.
  2. There’s an increased tax credit for small employer retirement plan startup costs. If you want to set up a retirement plan, but haven’t gotten around to it yet, new rules increase the tax credit for retirement plan start-up costs to make it more affordable for small businesses to set them up. Starting in 2020, the credit is increased by changing the calculation of the flat dollar amount limit to: The greater of $500, or the lesser of: a) $250 multiplied by the number of non-highly compensated employees of the eligible employer who are eligible to participate in the plan, or b) $5,000.
  3. There’s a new small employer automatic plan enrollment tax credit. Not surprisingly, when employers automatically enroll employees in retirement plans, there is more participation and higher retirement savings. Beginning in 2020, there’s a new tax credit of up to $500 per year to employers to defray start-up costs for new 401(k) plans and SIMPLE IRA plans that include automatic enrollment. This credit is on top of an existing plan start-up credit described above and is available for three years. It is also available to employers who convert an existing plan to a plan with automatic enrollment.

These are only some of the retirement plan provisions in the SECURE Act. There have also been changes to the auto enrollment safe harbor cap, nondiscrimination rules, new rules that allow certain part-timers to participate in 401(k) plans, increased penalties for failing to file retirement plan returns and more. Contact us to learn more about your situation.

© 2019

New law provides a variety of tax breaks to businesses and employers

While you were celebrating the holidays, you may not have noticed that Congress passed a law with a grab bag of provisions that provide tax relief to businesses and employers. The “Further Consolidated Appropriations Act, 2020” was signed into law on December 20, 2019. It makes many changes to the tax code, including an extension (generally through 2020) of more than 30 provisions that were set to expire or already expired.

Two other laws were passed as part of the law (The Taxpayer Certainty and Disaster Tax Relief Act of 2019 and the Setting Every Community Up for Retirement Enhancement Act).

Here are five highlights.

Long-term part-timers can participate in 401(k)s.

Under current law, employers generally can exclude part-time employees (those who work less than 1,000 hours per year) when providing a 401(k) plan to their employees. A qualified retirement plan can generally delay participation in the plan based on an employee attaining a certain age or completing a certain number of years of service but not beyond the later of completion of one year of service (that is, a 12-month period with at least 1,000 hours of service) or reaching age 21.

Qualified retirement plans are subject to various other requirements involving who can participate.

For plan years beginning after December 31, 2020, the new law requires a 401(k) plan to allow an employee to make elective deferrals if the employee has worked with the employer for at least 500 hours per year for at least three consecutive years and has met the age-21 requirement by the end of the three-consecutive-year period. There are a number of other rules involved that will determine whether a part-time employee qualifies to participate in a 401(k) plan.

The employer tax credit for paid family and medical leave is extended.

Tax law provides an employer credit for paid family and medical leave. It permits eligible employers to claim an elective general business credit based on eligible wages paid to qualifying employees with respect to family and medical leave. The credit is equal to 12.5% of eligible wages if the rate of payment is 50% of such wages and is increased by 0.25 percentage points (but not above 25%) for each percentage point that the rate of payment exceeds 50%. The maximum leave amount that can be taken into account for a qualifying employee is 12 weeks per year.

The credit was set to expire on December 31, 2019. The new law extends it through 2020.

The Work Opportunity Tax Credit (WOTC) is extended.

Under the WOTC, an elective general business credit is provided to employers hiring individuals who are members of one or more of 10 targeted groups. The new law extends this credit through 2020.

The medical device excise tax is repealed.

The Affordable Care Act (ACA) contained a provision that required that the sale of a taxable medical device by the manufacturer, producer or importer is subject to a tax equal to 2.3% of the price for which it is sold. This medical device excise tax originally applied to sales of taxable medical devices after December 31, 2012.

The new law repeals the excise tax for sales occurring after December 31, 2019.

The high-cost, employer-sponsored health coverage tax is repealed.

The ACA also added a nondeductible excise tax on insurers when the aggregate value of employer-sponsored health insurance coverage for an employee, former employee, surviving spouse or other primary insured individual exceeded a threshold amount. This tax is commonly referred to as the tax on “Cadillac” plans.

The new law repeals the Cadillac tax for tax years beginning after December 31, 2019.

Stay tuned

These are only some of the provisions of the new law. We will be covering them in the coming weeks. If you have questions about your situation, don’t hesitate to contact us.

© 2019

Wayfair revisited — It’s time to review your sales tax obligations

In its 2018 decision in South Dakota v. Wayfair, the U.S. Supreme Court upheld South Dakota’s “economic nexus” statute, expanding the power of states to collect sales tax from remote sellers. Today, nearly every state with a sales tax has enacted a similar law, so if your company does business across state lines, it’s a good idea to reexamine your sales tax obligations.

What’s nexus?

A state is constitutionally prohibited from taxing business activities unless those activities have a substantial “nexus,” or connection, with the state. Before Wayfair, simply selling to customers in a state wasn’t enough to establish nexus. The business also had to have a physical presence in the state, such as offices, retail stores, manufacturing or distribution facilities, or sales reps.

In Wayfair, the Supreme Court ruled that a business could establish nexus through economic or virtual contacts with a state, even if it didn’t have a physical presence. The Court didn’t create a bright-line test for determining whether contacts are “substantial,” but found that the thresholds established by South Dakota’s law are sufficient: Out-of-state businesses must collect and remit South Dakota sales taxes if, in the current or previous calendar year, they have 1) more than $100,000 in gross sales of products or services delivered into the state, or 2) 200 or more separate transactions for the delivery of goods or services into the state.

Nexus steps

The vast majority of states now have economic nexus laws, although the specifics vary:Many states adopted the same sales and transaction thresholds accepted in Wayfair, but a number of states apply different thresholds. And some chose not to impose transaction thresholds, which many view as unfair to smaller sellers (an example of a threshold might be 200 sales of $5 each would create nexus).

If your business makes online, telephone or mail-order sales in states where it lacks a physical presence, it’s critical to find out whether those states have economic nexus laws and determine whether your activities are sufficient to trigger them. If you have nexus with a state, you’ll need to register with the state and collect state and applicable local taxes on your taxable sales there. Even if some or all of your sales are tax-exempt, you’ll need to secure exemption certifications for each jurisdiction where you do business. Alternatively, you might decide to reduce or eliminate your activities in a state if the benefits don’t justify the compliance costs.

Need help?

Note: If you make sales through a “marketplace facilitator,” such as Amazon or Ebay, be aware that an increasing number of states have passed laws that require such providers to collect taxes on sales they facilitate for vendors using their platforms.

If you need assistance in setting up processes to collect sales tax or you have questions about your responsibilities, contact us.

© 2019

Risk Assessment: A Critical Part of the Audit Process

Audit season is right around the corner for calendar-year entities. Here’s what your auditor is doing behind the scenes to prepare — and how you can help facilitate the audit planning process.

The big picture

Every audit starts with assessing “audit risk.” This refers to the likelihood that the auditor will issue an adverse opinion when the financial statements are actually in accordance with U.S. Generally Accepted Accounting Principles or (more likely) an unqualified opinion when the opinion should be either modified or adverse.

Auditors can’t test every single transaction, recalculate every estimate or examine every external document. Instead, they tailor their audit procedures and assign audit personnel to keep audit risk as low as possible.

Inherent risk vs. control risk

Auditors evaluate two types of risk:

1. Inherent risk. This is the risk that material departures could occur in the financial statements. Examples of inherent-risk factors include complexity, volume of transactions, competence of the accounting personnel, company size and use of estimates.

2. Control risk. This is the risk that the entity’s internal controls won’t prevent or correct material misstatements in the financial statements.

Separate risk assessments are done at the financial statement level and then for each major account — such as cash, receivables, inventory, fixed assets, other assets, payables, accrued expenses, long-term debt, equity, and revenue and expenses. A high-risk account (say, inventory) might warrant more extensive audit procedures and be assigned to more experienced audit team members than one with lower risk (say, equity).

How auditors assess risk

New risk assessments must be done each year, even if the company has had the same auditor for many years. That’s because internal and external factors may change over time. For example, new government or accounting regulations may be implemented, and company personnel or accounting software may change, causing the company’s risk assessment to change. As a result, audit procedures may vary from year to year or from one audit firm to the next.

The risk assessment process starts with an auditing checklist and, for existing audit clients, last year’s workpapers. But auditors must dig deeper to determine current risk levels. In addition to researching public sources of information, including your company’s website, your auditor may call you with a list of open-ended questions (inquiries) and request a walk-through to evaluate whether your internal controls are operating as designed. Timely responses can help auditors plan their procedures to minimize audit risk.

Your role

Audit fieldwork is only as effective as the risk assessment. Evidence obtained from further audit procedures may be ineffective if it’s not properly linked to the assessed risks. So, it’s important for you to help the audit team understand the risks your business is currently facing and the challenges you’ve experienced reporting financial performance, especially as companies implement updated accounting rules in the coming years.

© 2019

The Art and Science of Goodwill Impairment Testing

Goodwill shows up on a company’s balance sheet when the company has been acquired in a business combination. It represents what’s left over after the purchase price in a merger or acquisition is allocated to the company’s tangible assets, identifiable intangible assets and liabilities. Periodically, companies must test goodwill for “impairment” — that is, whether the carrying value on the balance sheet has fallen below its fair value. This assessment can be complicated.

Reporting recap

Under current U.S. Generally Accepted Accounting Principles (GAAP), public companies that report goodwill on their balance sheet must test goodwill at least annually for impairment. In lieu of annual impairment testing, private companies may elect to amortize acquired goodwill over a useful life of up to 10 years.

All companies — regardless of whether they’re publicly traded or privately held — must test goodwill for impairment when a triggering event happens. Examples of triggering events that could lower the fair value of goodwill include:

  • The loss of a key customer or key person,
  • Adverse regulatory actions,
  • Unanticipated competition, and
  • Negative cash flows from operations.

Impairment may also occur if, after an acquisition has been completed, there’s an economic downturn that causes the parent company or the acquired business to lose value. Impairment write-downs reduce the carrying value of goodwill on the balance sheet. They also lower profits reported on the income statement, which may raise a red flag to lenders and investors.

Quantifying impairment

Calculating goodwill impairment was originally a two-step process: First, businesses must figure out whether an impairment exists, and then they must put a dollar figure on it. The second step includes determining the implied fair value of goodwill and comparing it with the carrying amount of goodwill on the balance sheet.

The rules for testing goodwill impairment were simplified in Accounting Standards Update (ASU) No. 2017-04, Intangibles — Goodwill and Other, Simplifying the Test for Goodwill Impairment. The changes go live for fiscal periods starting after:

  • December 15, 2019, for public companies that file with the Securities and Exchange Commission,
  • December 15, 2020, for other public companies,
  • December 15, 2021, for privately held businesses.

Early adoption is permitted for testing dates after January 1, 2017. The updated guidance nixes the second step of the impairment test. Instead, a business will perform the impairment test by comparing the fair value of a reporting unit that includes goodwill with its carrying amount.

Who can help?

Few companies employ internal accounting staff with the requisite training and time to handle impairment testing. And most auditors won’t perform valuation services for their audit clients for fear of violating their independence standards. Instead, valuation specialists are often called in to handle these complex assignments. Contact us for more information.

© 2019

Small Businesses: It may not be too late to cut your 2019 taxes

Don’t let the holiday rush keep you from taking some important steps to reduce your 2019 tax liability. You still have time to execute a few strategies, including:

1. Buying assets.Thinking about purchasing new or used heavy vehicles, heavy equipment, machinery or office equipment in the new year? Buy it and place it in service by December 31, and you can deduct 100% of the cost as bonus depreciation.

Although “qualified improvement property” (QIP) — generally, interior improvements to nonresidential real property — doesn’t qualify for bonus depreciation, it’s eligible for Sec. 179 immediate expensing. And QIP now includes roofs, HVAC, fire protection systems, alarm systems and security systems placed in service after the building was placed in service.

You can deduct as much as $1.02 million for QIP and other qualified assets placed in service before January 1, not to exceed your amount of taxable income from business activity. Once you place in service more than $2.55 million in qualifying property, the Sec. 179 deduction begins phasing out on a dollar-for-dollar basis. Additional limitations may apply.

2. Making the most of retirement plans. If you don’t already have a retirement plan, you still have time to establish a new plan, such as a SEP IRA, 401(k) or profit-sharing plans (the deadline for setting up a SIMPLE IRA to make contributions for 2019 tax purposes was October 1, unless your business started after that date). If your circumstances, such as your number of employees, have changed significantly, you also should consider starting a new plan before January 1.

Although retirement plans generally must be started before year-end, you usually can deduct any contributions you make for yourself and your employees until the due date of your tax return. You also might qualify for a tax credit to offset the costs of starting a plan.

3. Timing deductions and income. If your business operates on a cash basis, you can significantly affect your amount of taxable income by accelerating your deductions into 2019 and deferring income into 2020 (assuming you expect to be taxed at the same or a lower rate next year).

For example, you could put recurring expenses normally paid early in the year on your credit card before January 1 — that way, you can claim the deduction for 2019 even though you don’t pay the credit card bill until 2020. In certain circumstances, you also can prepay some expenses, such as rent or insurance and claim them in 2019.

As for income, wait until close to year-end to send out invoices to customers with reliable payment histories. Accrual-basis businesses can take a similar approach, holding off on the delivery of goods and services until next year.

Proceed with caution

Bear in mind that some of these tactics could adversely impact other factors affecting your tax liability, such as the qualified business income deduction. Contact us to make the most of your tax planning opportunities.

© 2019

2020 Q1 tax calendar: Key deadlines for businesses and other employers

Here are some of the key tax-related deadlines affecting businesses and other employers during the first quarter of 2020. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

January 31

  • File 2019 Forms W-2, “Wage and Tax Statement,” with the Social Security Administration and provide copies to your employees.
  • Provide copies of 2019 Forms 1099-MISC, “Miscellaneous Income,” to recipients of income from your business where required.
  • File 2019 Forms 1099-MISC reporting nonemployee compensation payments in Box 7 with the IRS.
  • File Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax Return,” for 2019. If your undeposited tax is $500 or less, you can either pay it with your return or deposit it. If it’s more than $500, you must deposit it. However, if you deposited the tax for the year in full and on time, you have until February 10 to file the return.
  • File Form 941, “Employer’s Quarterly Federal Tax Return,” to report Medicare, Social Security and income taxes withheld in the fourth quarter of 2019. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the quarter in full and on time, you have until February 10 to file the return. (Employers that have an estimated annual employment tax liability of $1,000 or less may be eligible to file Form 944, “Employer’s Annual Federal Tax Return.”)
  • File Form 945, “Annual Return of Withheld Federal Income Tax,” for 2019 to report income tax withheld on all nonpayroll items, including backup withholding and withholding on accounts such as pensions, annuities and IRAs. If your tax liability is less than $2,500, you can pay it in full with a timely filed return. If you deposited the tax for the year in full and on time, you have until February 10 to file the return.

February 28

File 2019 Forms 1099-MISC with the IRS if 1) they’re not required to be filed earlier and 2) you’re filing paper copies. (Otherwise, the filing deadline is March 31.)

March 16

  • If a calendar-year partnership or S corporation, file or extend your 2019 tax return and pay any tax due. If the return isn’t extended, this is also the last day to make 2019 contributions to pension and profit-sharing plans.

© 2019

2 valuable year-end tax-saving tools for your business

At this time of year, many business owners ask if there’s anything they can do to save tax for the year. Under current tax law, there are two valuable depreciation-related tax breaks that may help your business reduce its 2019 tax liability. To benefit from these deductions, you must buy eligible machinery, equipment, furniture or other assets and place them into service by the end of the tax year. In other words, you can claim a full deduction for 2019 even if you acquire assets and place them in service during the last days of the year.

The Section 179 deduction

Under Section 179, you can deduct (or expense) up to 100% of the cost of qualifying assets in Year 1 instead of depreciating the cost over a number of years. For tax years beginning in 2019, the expensing limit is $1,020,000. The deduction begins to phase out on a dollar-for-dollar basis for 2019 when total asset acquisitions for the year exceed $2,550,000.

Sec. 179 expensing is generally available for most depreciable property (other than buildings) and off-the-shelf computer software. It’s also available for:

  • Qualified improvement property (generally, any interior improvement to a building’s interior, but not for the internal structural framework, for enlarging a building, or for elevators or escalators),
  • Roofs, and
  • HVAC, fire protection, alarm, and security systems.

The Sec. 179 deduction amount and the ceiling limit are significantly higher than they were a few years ago. In 2017, for example, the deduction limit was $510,000, and it began to phase out when total asset acquisitions for the tax year exceeded $2.03 million.

The generous dollar ceiling that applies this year means that many small and medium sized businesses that make purchases will be able to currently deduct most, if not all, of their outlays for machinery, equipment and other assets. What’s more, the fact that the deduction isn’t prorated for the time that the asset is in service during the year makes it a valuable tool for year-end tax planning.

Bonus depreciation

Businesses can claim a 100% bonus first year depreciation deduction for machinery and equipment bought new or used (with some exceptions) if purchased and placed in service this year. The 100% deduction is also permitted without any proration based on the length of time that an asset is in service during the tax year.

Business vehicles

It’s important to note that Sec. 179 expensing and bonus depreciation may also be used for business vehicles. So buying one or more vehicles before December 31 may reduce your 2019 tax liability. But, depending on the type of vehicle, additional limits may apply.

Businesses should consider buying assets now that qualify for the liberalized depreciation deductions. Please contact us if you have questions about depreciation or other tax breaks.

© 2019

Manage Your Working Capital More Efficiently

Working capital is the difference between a company’s current assets and current liabilities. For a business to thrive, its working capital must be greater than zero. A positive balance enables the company to meet its short-term cash flow needs and grow.

But too much working capital can be a sign of inefficient management. In general, you want to generate as much income as possible from the money that’s tied up in receivables, inventory, payables and other working capital accounts. Here’s how to find the sweet spot between too little and too much working capital.

Benchmarking performance

Current assets are those that can be easily converted into cash within a 12-month period. Conversely, current liabilities include any obligations due within 12 months, including accounts payable, accrued expenses and notes payable.

In addition to calculating the difference between these two amounts, management may calculate the current ratio (current assets ÷ current liabilities) and the acid-test ratio (cash, receivables and investments ÷ current liabilities). A company’s working capital ratios can be compared over time or against competitors to help gauge performance.

You can also compute turnover ratios for receivables, inventory and payables. For example, the days-in-receivables ratio equals the average accounts receivable balance divided by annual sales times 365 days. This tells you, on average, how long it takes the company to collect customer invoices.

Staying positive

There are three main goals of working capital management:

  1. To ensure the company has enough cash to cover expenses and debt,
  2. To minimize the cost of money spent on funding working capital, and
  3. To maximize investors’ returns on assets and investments.

Maintaining a positive working capital balance requires identifying patterns of activity related to line items within the current asset and liability sections.

Digging deeper

Suppose your company’s current ratio has fallen from 1.5 to 1.2. Is this good or bad? That depends on your circumstances. You’ll need to identify the reasons it’s fallen to determine whether the decline is a sign of an impending cash flow shortage. Often the answer lies in three working capital accounts: 1) accounts receivable, 2) inventory, and 3) accounts payable.

For example, when it comes to collecting from customers, how much time elapses between the recognition of an accounts receivable and its collection? Are certain customers habitually slower to pay than others?

Inventory has significant carrying costs, including storage, insurance, interest, pilferage, and the potential for damage and obsolescence. Has your company established target inventory levels? If so, who within the organization monitors compliance? To avoid running out of materials, companies often hold too much inventory. And it’s often financed through trade debt, which can prove costly over the long term.

With respect to the payment of accounts payable, does your company pay according to the credit terms offered by the vendor? Are there penalties for paying past those terms? It might be time for your company to renegotiate its payment terms.

We can help

Working capital management is as much art as it is science. Contact us to help determine the optimal level of working capital based on the nature of your business. We can help you brainstorm ways to fortify your financial position and operate more efficiently.

© 2019