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CPA must be able to respond to whatever tax complication a taxpayer may face. A CPA would be even better served by being proactive and working to improve the future climate of the tax environment. Annette Nellen, CPA, chair of the AICPA’s Tax Executive Committee, has recently done just that. Nellen testified before the Senate Committee on Small Business and Entrepreneurship about several tax reform proposals effect on small business owners and provided some recommendations as to how our nation’s tax system might be improved. This issue of CPA Magazine features Nellen’s statement so all CPAs might be educated on current actions being taken to improve the CPA profession. Sidney Kess has put together an easy-to-read breakdown of tax rules in order of the age they apply to a taxpayer. Martin M. Shenkman addresses how much of your current technology can help clients transfer from utilizing your estate tax services to utilizing your longevity planning. Robert E. McKenzie details what the IRS may now do to collect delinquent taxes from taxpayers. Julie Welch explains how interest can be deducted when money is borrowed to buy investments. As many CPAs do accounting in the construction vertical, Peter J. Scalise describes a proactive methodology for accelerated depreciation planning. The aforementioned articles not only keep you up to speed in the current world of tax but are also the content for the CPE course on page 29. Once you have finished this issue of CPA Magazine, you can take the CPE quiz and receive three CPE credit hours. More CPE credit over articles by Sidney Kess and Martin M. Shenkman can be found at www.CPE.CPAMagazine.com.
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Trends Driving Small Firm Growth
BY LAUREN CLEMMER
W
hat does it take for a small firm to be on the path to growth? It takes vision and the willingness to do things differently. If you want different results, you can’t rely on the status quo. You should question the tried and true and create a new path. Firms experiencing the most growth are running their businesses in a different way. They are finding areas for focus that provide a competitive advantage. And they all put the client at the center of what they do, ensuring needs are met and they are helping them succeed. The following details the ways firms are driving growth from their own perspective.
Intentionally Establish Your Culture
Firms that are able to do things differently have a culture that supports growth at their core. MiddletonRaines+Zapata (MRZ) set out from Wesley Middleton its inception to think outside the box, even looking outside the industry for best practices. “Growth starts with culture,” said Wesley Middleton, managing partner. “It has to be intentional.” Culture has helped the firm grow from one office four and half years ago to four offices today. Known for energy, responsiveness and providing innovative solutions, MRZ is a place people want to work. “Transparency is at the core of our business model. It’s how we build trust,” Middleton said. “Not only is innovation encouraged, but it is okay for someone to fail. That’s how they learn to do things better.” Firm success also stems from: • Investing in marketing and business development.
• Embracing digital marketing. • Making client relationship managers the center of the client service model. • Allowing partners to be great CPAs and not sales people. • Trusting everyone to excel at what they are good at. • Encouraging staff to become true advisors. • Listening to what the client needs and delivering it. By having a culture that puts the client first, plays upon individual strengths and focuses on the importance of the marketing and business development process, MRZ has created a winning business model.
Narrow Your Focus
High growth firms are twice as likely to be specialists according to Lee Frederiksen of Hinge Marketing. These firms experience 13.1% growth compared to 6.6% growth seen by generalist firms. Family friendly and tech savvy firm Bohlmann Accounting Group wanted to build a firm that was “not your father’s CPA firm,” said Stehli Krause, office manager. Bohlmann has a laser focus – specializing in international tax. Their staff is culturally diverse and representative of the industry they serve. “Staff members are encouraged to promote our services in their home countries,” Krause said. Their focus is on serving the client and bringing services to them that help them manage their lives.” The firm has uncovered a need for bookkeeping services in the international space, but they feel like they have just scratched the surface. They will continue to keep close to clients to discover other needs. This specialized focus is why the firm is up 21% over last year.
Specialties level the playing field, allowing small firms to compete with larger ones, even on an international scale.
Package Services Clients Need
Rather than have a client come to you and tell you what they want to buy, try packaging and selling them what you know Jody Padar they need. New Vision CPA Group takes this novel approach to selling services and keeps things simple. Every client starts with the Small Business Accounting & Tax Package which includes year-round advisory services. The firm specializes in working with small businesses, and they know what they offer and what they don’t. “We meet with all clients four times a year, and they love it” said Jody Padar, CEO and principal, and author of The Radical CPA: New Rules for the FutureReady Firm. Through a customer-centric focus, Padar utilizes cloud solutions and social media to attract customers. She then provides value through a unique experience that is spelled out in her packages. As a result, the firm grew by 30% last year.
Don’t Skip the Strategy
If you want to have leverage when it comes to growing your firm, you have to start with a good strategy. But what should you include in your strategy? This article is continued
on www.CPAmagazine.com.
CPE
Related CPE Quiz on Page 29
Lauren Clemmer is the executive director of the Association for Accounting Marketing (AAM).
Manage, Enhance and Expand Your Practice A U G U S T/ S E P T E M B E R 2 017 I 5
Key Tax Laws by Birthday
M
“
When a beneficiary in a Coverdell ESA attains age 30, the account must be distributed to him or her within 30 days of this birthday.
Many of the tax rules for individual taxpayers depend on age. Attaining a birthday may entitle an individual to a special tax break or end entitlement to another. Here is a rundown of key birthdays and what they mean for federal income taxes. It should be noted that some apply on the date of the birthday, some rules apply when the birthday is achieved as of the close of the taxable year, and some apply with respect to the half-year birthday.
”
Tax Advisor
Age 13
The dependent care credit can be claimed for a child who has not attained age 13 (Code Sec. 21(b)(1)(A)). This means that expenses up to this birthday can be taken into account for the year in which this birthday occurs. Age, however, is disregarded if the child is a dependent who is physically or mentally incapable of self care (Code Sec. 21(b) (1)(B)).
Age 17
A tax credit of up to $1,000 can be claimed for a child under the age of 17 (Code Sec. 24(c)(1)). If they turn 17 during the year, no credit is allowed for that year; the credit is not prorated for this purpose. There is no age exception for a disabled child (Polsky, CA-3, USTC ¶ 50,506).
Age 18
A contribution of up to $2,000 can be made annually to a Coverdell Education Savings Account (ESA) until a child attains age 18 (Code Sec. 530(b)(1)(A)(ii)). However, a contribution can be made until the birthday. For example, if a child becomes 18 years old on May 1, 2017, a contribution of up to $2,000 can be made for 2017 until April 30, 2017. The contribution amount does not have to be prorated for the portion of the year in which the child was under age 18.
Ages 19 and 24
For purposes of treating a child as a qualifying child for the dependency exemption, these two birthdays come into play (Code Sec. 152(c)(1)(C)). A child can be a qualifying child if younger than the taxpayer claiming the exemption and is under age 19. A child can continue to be a qualifying child up to the age of 24 if he/she is a full-time student and younger than the taxpayer. However, a parent may still claim a dependency exemption for a child who does not meet the definition of a qualifying child if the child can be treated as a qualifying relative (Code Sec. 152(d)). Thus, if a parent is supporting a child who is 32 years old in the parent’s home, a dependency exemption can be claimed as long as the child’s gross income is not more than a set amount ($4,050 in 2017) and other requirements are met. Ages 19 and 24 are also key birthdays for the kiddie tax (Code Sec. 1(g)). Once this age is obtained, all of a child’s 6 I A U G U S T/ S E P T E M B E R 2 017
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Sidney Kess, CPA, J.D., LL.M unearned income is taxed only at the child’s rates rather than the parent’s top tax rates.
Age 26
Under the Affordable Care Act, a child can remain on his/her parent’s insurance policy until the age of 26. This is so whether the child is a dependent or even lives with the parent. However, once the child attains age 26, this coverage is no longer permissible.
Age 30
When a beneficiary in a Coverdell ESA attains age 30, the account must be distributed to him or her within 30 days of this birthday (Code Sec. 530(b)(1)(E)). Even if there is no actual distribution, it is deemed to occur on this date. Earnings in the account become taxable at this time. However, the deemed distribution rule does not apply if the beneficiary has special needs. Also a deemed distribution can be avoided by changing the beneficiary of the account to a “member of the family” (as defined in Code Sec. 529(e)(2), such as the beneficiary’s child, sibling.
Age 50 Individuals with compensation from a job or selfemployment can make a “catch-up” contribution to certain qualified retirement plans and IRAs (including Roth IRAs). These additional contributions are permitted to enable workers to maximize retirement savings. Despite the term “catch up” for those age 50 and older, there is no relationship to prior contributions or the absence of such contributions. For 2017, the additional catch-up amounts (Notice 2016-62): • 401(k), 403(b), and 457 plans: $6,000 • SIMPLE IRAs: $3,000 • IRAs and Roth IRAs: $1,000 Age 55
The 10% early distribution penalty on distributions from qualified retirement plans prior to age 59 ½ does not apply if distributions are made because of separation from service after age 55 (Code Sec. 72(t)(2)(A)(v)). As in the case of retirement plans and IRAs, additional
contributions based on age can be made to health savings accounts (HSAs) beginning at age 55. The additional contribution is $1,000. This amount is fixed by law; it is not indexed for inflation.
Age 59½
The 10% early distribution penalty on distributions from qualified retirement plans and IRAs does not apply after attaining age 59 ½ (Code Sec. 72(t)(2)(A)(i)).
Age 65 An individual who uses the standard deduction can claim
an additional amount for age (Code Sec. 63(f)). For 2017, the additional standard deduction amount is $1,550 for singles and $1,250 for joint filers (for each spouse age 65 and older).This applies to someone who attains age 65 before the close of the taxable year. It also applies to anyone with a January 1 birthday; he or she is deemed to have reached age 65 in the previous year. For example, a person who attains age 65 on January 1, 2018, can claim the additional standard deduction on a 2017 income tax return. This age also impacts the threshold for filing an income tax return (Code Sec. 6012(a)(1)(B)). More specifically, the gross income threshold is increased by the additional standard deduction amount. Age 65 is also the age when distributions from HSAs can be taken penalty free for nonmedical expenses. However, these distributions are still subject to income tax.
Age 70½
Becoming 70½ years old bars any further contributions to an IRA (Code Sec. 219(d)(1)). No contribution is
allowed if this age is attained by the end of the year. This contribution limit applies even though the individual continues to work. However, contributions to a SEP and a SIMPLE-IRA, which are IRA-based retirement plans, continue past this age, even though required minimum distributions simultaneously start at this time, explained next. Attaining age 70½ triggers the required minimum distribution (RMD) rules for qualified retirement plans and IRAs. Owners of these accounts must begin their RMDs by the end of year in which this age is reached. For example, an individual’s 70th birthday is March 1, 2017. She reaches age 70½ in 2017, so her first RMD is due by December 31, 2017. If her birthday had been July 1, she would not attain age 70½ until 2018 and her first RMD would be due by December 31, 2018. The failure to take an RMD can trigger a 50% penalty (Code Sec. 4974(a)). This article is continued on www.CPAmagazine.com.
CPE
Related CPE Quiz on Page 29
Executive Editor Sidney Kess is CPA-attorney, speaker and author of hundreds of tax books. The AICPA established the Sidney Kess Award for Excellence in Continuing Education in his honor, best-known for lecturing to over 700,000 practitioners on tax. Kess is senior consultant for Citrin Cooperman, consulting editor to CCH and Of Counsel to Kostelanetz & Fink.
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New IRS Collection Procedures
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The IRS is now utilizing two menacing collection alternatives. First, the IRS is now assigning collection duties to private collection agencies which are compensated on a contingent fee basis. Second, taxpayers who owe delinquent taxes could lose their right to a United States passport.
Private Collection
If the IRS is bugging you about your unpaid taxes, what if it is a private debt collector collecting for the IRS? That is now a reality, since President Obama has signed the 5-year infrastructure spending Bill. It added private IRS collectors as part of H.R. 22 – Fixing America’s Surface Transportation Act, the “FAST Act.” What does a private IRS have to do with highway funding, you might ask? The answer is money. Congress wants more of it collected from taxpayers, especially what the IRS considers to be hard to collect tax bills. In fact, for some hard to collect bills, the law now requires—rather than just permits—the IRS to use private collectors. Many people think that having the IRS farm out collection work to private contractors is a bad idea. Last year, National Taxpayer Advocate Nina Olson advocated against it in a letter. She said the 20062009 program using private collectors didn’t even raise revenue. The IRS has gone in for private collectors twice over the last 18 years. And although those programs were not especially successful, Congress has gone back to it in a big way. Congress included it in the FAST Act, and the President signed it into law. Here are nine things you should know: 1. First, the private collector usually will contact the taxpayer by letter. 2. If the taxpayer’s last known address is incorrect, the private collector searches for the correct address. Next, the private collector will telephone the taxpayer to request full payment. 3. If the taxpayer cannot pay in full right away, the private collector offers an installment deal for up to five years. 4. If the taxpayer is unable to pay even over five years, the collector asks for taxpayer financial information to see what sort of deal the taxpayer should get. There are controls on financial data, but there is considerable worry about having taxpayer data in private hands. 5. Private collectors cannot accept payments. Do not pay them directly! 6. The Fair Debt Collection Practices Act applies to private collectors. This is the same law that applies to collectors in other circumstances. Notify the collection agency that you refuse to deal with them and that it must cease further communications. 7. There are many reports required under the law. Congress 8 I A U G U S T/ S E P T E M B E R 2 017
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some cases, the IRS "Inis actually required to use private collectors. "
IRS Defense Advisor Robert E. McKenzie, J.D.
and the Treasury Department are trying to determine if private collection is efficient and how well it works. 8. In some cases, the IRS is actually required to use private collectors, where: • The tax bill is not being collected because of a lack of IRS resources or the IRS’ inability to locate the taxpayer. • More than 1/3 of the statute of limitations has expired, and no IRS employee has been assigned to collect it; and • The tax bill has been assigned for collection, but more than a year has passed without any interaction. 9. Some tax bills cannot go to private collectors, as where: • There is a pending or active offer-in-compromise or installment agreement; • It is an innocent spouse case; • The taxpayer is deceased, under age 18, in a designated combat zone, or is a victim of identity theft; • The taxpayer is under IRS audit, in litigation, criminal investigation, or levy; or • The taxpayer has gone to IRS Appeals.
Revocation or Denial of Passports
The passport provision became official, when President Obama signed the 5-year infrastructure spending Bill. It added a new section 7345 to the Internal Revenue Code. It is part of H.R. 22 – Fixing America’s Surface Transportation Act, the “FAST Act.” The law says the State Department can revoke, deny or limit passports for anyone the IRS certifies as having a seriously delinquent tax debt in an amount in excess of $50,000. IRC § 7345 authorizes the IRS to certify that to the State Department. The department generally will not issue or renew a passport to you after receiving certification from the IRS. Upon receiving certification, the State Department may revoke your passport. If the department decides to revoke it, prior to revocation, the department may limit your passport to return travel to the U.S.
Certification Of Individuals With Seriously Delinquent Tax Debt Seriously delinquent tax debt is an individual’s unpaid, legally enforceable federal tax debt totaling more than $50,000* (including interest and penalties) for which a: • Notice of federal tax lien has been filed and all administrative remedies under IRC § 6320 have lapsed or been exhausted or; • Levy has been issued.
Some tax debt is not included in determining seriously delinquent tax debt even if it meets the above criteria. It includes tax debt: • Being paid in a timely manner under an installment agreement entered into with the IRS. • Being paid in a timely manner under an offer in compromise accepted by the IRS or a settlement agreement entered into with the Justice Department. • For which a collection due process hearing is timely requested in connection with a levy to collect the debt. • For which collection has been suspended because a request for innocent spouse relief under IRC § 6015 has been made. Before denying a passport, the State Department will hold your application for 90 days to allow you to: • Resolve any erroneous certification issues. • Make full payment of the tax debt. • Enter into a satisfactory payment alternative with the IRS. There is no grace period for resolving the debt before the State Department revokes a passport.
Taxpayer Notification - Notice CP 508C
The IRS is required to notify you in writing at the time the IRS certifies seriously delinquent tax debt to the State Department. The IRS is also required to notify you in writing at the time it reverses certification. The IRS will send written notice by regular mail to your last known address.
to satisfy the debt. • Collection is suspended because you request innocent spouse relief under IRC § 6015. • You make a timely request for a collection due process hearing in connection with a levy to collect the debt. The IRS will not reverse certification where a taxpayer requests a collection due process hearing or innocent spouse relief on a debt that is not the basis of the certification. Also, the IRS will not reverse the certification because the taxpayer pays the debt below $50,000.
Judicial Review Of Certification
If the IRS certified your debt to the State Department, you can file suit in the U.S. Tax Court or a U.S. District Court to have the court determine whether the certification is erroneous or the IRS failed to reverse the certification when it was required to do so. If the court determines the certification is erroneous or should be reversed, it can order reversal of the certification. IRC § 7345 does not provide the court authority to release a lien or levy or award money damages in a suit to determine whether a certification is erroneous. You are not required to file an administrative claim or otherwise contact the IRS to resolve the erroneous certification issue before filing suit in the U.S. Tax Court or a U.S. District Court.
Payment Of Taxes
If you can’t pay the full amount you owe, you can make alternative payment arrangements such as an installment agreement or an offer in compromise and still keep your U.S. passport. If you disagree with the tax amount or the certification was made in error, you should contact the phone number listed on Notice CP 508C. If you’ve already paid the tax debt, send proof of that payment to the address on the Notice CP 508C. If you recently filed your tax return for the current year and expect a refund, the IRS will apply the refund to the debt and if the refund is sufficient to satisfy your seriously delinquent tax debt, the account is considered fully paid.
Reversal Of Certification - Notice CP 508R The IRS will no- Passport Status tify the State Department of the reversal of the certification when: • The tax debt is fully satisfied or becomes legally unenforceable. • The tax debt is no longer seriously delinquent. • The certification is erroneous.
The IRS will provide notice as soon as practicable if the certification is erroneous. The IRS will provide notice within 30 days of the date the debt is fully satisfied, becomes legally unenforceable or ceases to be seriously delinquent tax debt. A previously certified debt is no longer seriously delinquent when: • You and the IRS enter into an installment agreement allowing you to pay the debt over time. • The IRS accepts an offer in compromise to satisfy the debt. • The Justice Department enters into a settlement agreement
If you need to verify whether your U.S. passport has been cancelled or revoked, you should contact the State Department by calling the National Passport Information Center at 877-487-2778. If you need your U.S. passport to keep your job, once your seriously delinquent tax debt is certified, you must fully pay the balance, or make an alternative payment arrangement to keep your passport.
This article is continued on www.CPAmagazine.com.
CPE
Related CPE Quiz on Page 29
Robert E. McKenzie of the law firm of Arnstein & Lehr LLP of Chicago, Illinois, concentrates his practice in representation before the Internal Revenue Service and state tax agencies. He previously served as a member of the IRS Advisory Council (IRSAC) which is a group appointed by the IRS Commissioner from 2009 to 2011. Manage, Enhance and Expand Your Practice A U G U S T/ S E P T E M B E R 2 017 I 9
Technology and CPA Estate and Longevity Planning "
E
Estate planning is a vital service for clients. While historically estate planning may have focused on estate tax minimization planning, for most clients estate taxes are much less of a concern, if any at all. The focus for all but the wealthiest clients is shifting to longevity planning and other non-tax aspects of estate planning. Practitioners can capitalize on this dynamic by modifying practice procedures, implementing new processes and capitalizing on some of the advances technology can offer. In some instances, how estate planning matters should be handled might differ from how other practice areas are handled. Many of the practical points below are simple “off-label” applications of existing software to address some of the unique aspects of the CPA firm’s estate planning clients.
Engagement Letters Practitioners should periodically review
estate planning engagement letters to update them to reflect new ethics rules, changing practices, integration of new technology into their practice, and other factors. For example, if the firm changes its policy on email retention or general document retention, that might be communicated to clients in the estate planning engagement letter. While some practices may destroy documents after a certain number of years, many estate planning documents should be retained indefinitely. From a tax perspective, an estate tax return Form 706 should be retained indefinitely because it can provide vital tax basis data in future years when an asset is sold. But there is another perspective to document retention for estate planning. Practitioner’s meeting notes may be invaluable to demonstrate a client’s state of mind or what the client wished to achieve in terms of his or her dispositive scheme, business succession plan, etc. CPAs will often engage in these discussions and document them. Saving those documents for when they might be needed could be a priceless benefit to the client and his or her family. These considerations may be unique to the estate planning department and it may need different approaches than the firm in general. With technology having effectively reduced the cost of document retention to near zero, this longer duration policy should be evaluated.
Practice Characteristics A practice that predominantly focuses on a large volume of compliance work for lower wealth clients will have a different emphasis than a boutique firm serving a more limited number of ultra-high net worth clients seeking a 10 I A U G U S T/ S E P T E M B E R 2 017
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The focus for all but the wealthiest clients is shifting to longevity planning and other non-tax aspects of estate planning.
"
Tax Planning Advisor Martin M. Shenkman CPA, MBA, PFS, J.D.
different level of service and relationship. The communications, engagement letters and other aspects of administering the estate planning practice must be modified accordingly. While this is certainly obvious it is common to see practitioners implementing forms they obtain without adequately tailoring them to the characteristics of their client base which may differ significantly from the clients of the person who created the procedure or form.
Communications Generally
As the focus of estate planning shifts from estate tax minimization to longevity planning, client needs and goals are evolving. A client who had been consumed with complex tax minimization strategies may have been more transactional in orientation. Complete the note sale or GRATs and thereafter, a much lower level of service may have been viewed as necessary to maintain that plan: e.g., a grantor Form 1041 for the purchasing trust and an annual note payment. These clients may not have required much communication other than a reminder to submit tax compliance information for the trust and a tickler to remind the client to meet or GRAT payments. In contrast, the later-life planning client will require more hands-on regular work from inception of the engagement and throughout their lives. This might include regular write-up of financial and other transactions, which may evolve into bill paying and more as the client’s health declines. These clients may welcome ongoing communication of ideas and planning thoughts. For this work to be profitable, many aspects will have to be automated and handled in as routine a manner as possible. It will also be important to educate the clients that the services involved are not merely bookkeeping, but monitoring and higher level value added services that justify the billing rates of a partner overseeing the matter. Different forms of communication may be warranted. Continued on page 24
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Breaking Developments in 1040 Tax Software BY T. STEEL ROSE, CPA
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here have been many changes to 1040 tax software over the last year. In preparation for the 2018 tax season, are the latest developments.
Drake Software Offers Optional Hardware to Serve Remote Clients Drake offers an optional digital signature pad to esign forms and bank applications. A 2D barcode scanner allows importing W-2s or K-1s with 2D Jamie Stiles barcodes. “Some of the more notable improvements we’re working on will make it easier for preparers to serve the remote client and provide a smooth appointment-free filing experience,” said Jamie Stiles, president of Drake Software. “Streamlining the process of securely transferring documents, communicating with the client, and completing return preparation, including signature and payment, are areas we are focusing on.”
Lacerte from Intuit ProConnect Offers Dual Monitor Support
“[With dual monitors], Lacerte users can speed up their workflow by eliminating the hassle of toggling between input and output screens,” said CeCe Morken, execuCeCe Morken tive vice president and general manager, ProConnect Group of Intuit. “Users set up one monitor as the input screen and see the data flow on their second monitor to validate where it is represented on a tax form.” Lacerte provides automated calculations for depreciation, amortization and debt forgiveness. An optional form reviewer 12 I A U G U S T/ S E P T E M B E R 2 017
tool allows a CPA to check and edit data before importing. Clients can pay tax prep fees out of their refund. Another option is eSignature which includes a function to collect client payment at the same time. Other add-on options include the Lacerte Tax Analyzer and Lacerte Tax Planner.
ProSeries from Intuit ProConnect Has Fixed Asset Manager Import
“ProSeries’ most-requested feature allows customers to lock returns from being changed once filed, and open previous year returns without mistakenly changing them,” said CeCe Morken, executive vice president and general manager, ProConnect Group of Intuit. A missing client information tool solves tracking down client data by pinpointing input fields with missing information and then sending an email to request data from the client. A K-1 data import feature transfers data to individual returns. Other features of the Professional version include Quick Entry Sheets, Split Married Filing Joint, Client Checklist, Client Specific Billing Options, Client Advisor with 71 Planning Suggestions, a Tax Planner, Task Scheduler, Client Snapshot and Import from QuickBooks, Quicken and TXF files.
TaxAct Professional Editions Have Additional Security Options
With TaxAct Professional CPAs can organize their client list with Client Manager and track and review what’s occurred within a client return. Professional Reports may be used to track the status of clients’ e-filed returns. There are client letter, invoice and mailing label templates and optional cloud networking. CPAs can backup client returns on TaxAct’s secure servers and save
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scanned documents with client returns in the Document Manager.
UltraTax CS Increases E-filing
For tax year 2017 Thomson Reuters announced “new electronic filing capabilities for at least 18 filings, spread across a number of states and localities, further limiting the Jordan Kleinsmith number of returns which practitioners and their clients must file on paper,” UltraTax CS said Jordan Kleinsmith, manager for tax innovation for Thomson Reuters. With UltraTax CS professional tax software up to four separate monitors may be used to view input, forms, prior year input and diagnostics. The forms synchronize with one another, so as a CPA navigates to the Itemized Deduction entry, UltraTax CS navigates to show the Schedule A and last year’s Itemized Deductions entries.
CCH Axcess Tax and ProSystem fx Tax Implement IRS Fraud Prevention Initiatives “As part of the IRS/
State Tax AgenciesPrivate Sector Industry Security Summit partnership we’ve implemented tax-payer and tax return preparer safeguards,” noted Jill Deems, product line manager, tax, Wolters Kluwer Tax & Jill Deems Accounting. Improvements for 1040 tax prep include: Jump to Supporting Statement – In Tax Forms view where users will be able to view “see statement” or an icon on any line that includes a statement. Additionally firms can now e-file Form 1040-NR, the U.S. Nonresident Alien Income Tax Return, according to Deems.
Top Small Business Software All Provide Phone Support
BY T. STEEL ROSE, CPA
C
PAs serving small businesses have many demands for their accounting software. Recent updates attempt to meet those demands from the top vendors who all offer phone support.
AccountantsWorld Accounting Power Provides Multiple Data Entry Methods Accounting Power
enables clients to enter transactions in a number of ways – ranging from entry of checks and deposits on screen to modules for A/R and A/P, bank feeds and uploadable transactions from client’s bank and credit card statements, write-up entry, adjustments and a payroll register. CPAs can view the same data and prepare adjustments and financials. The cloudbased system allows the CPA and client to log in to the same application without having to transfer data between incompatible systems.
Red Wing Software CenterPoint Accounting Also Has Farm Accounting With a full complement of
accounting modules Red Wing is probably best known for its payroll. The RedWing General Ledger provides income statements, cash flows, balance sheets, and budgets. You are able to search, view and edit original source transactions and have the information returned to a spreadsheet style report; useful as an internal or external auditing tool. You are able to drill down from summarized reports to detailed reports, and then drill down further to the original transactions. In addition Red Wing also offers Fund Accounting for Non-Profits and Municipalities and Farm Accounting software.
popular apps on the market aimed at helping users eliminate manual entry, save time and reduce errors. Customers who use TSheets to track time, invoice clients and manCeCe Morken age payroll can now easily review, edit and approve time straight from within QuickBooks Online. Users who useBill.com for electronic bill pay will also be able to import, review and pay bills directly from QuickBooks Online, while fans of G Suite can invoice clients directly from Gmail and even schedule billable appointments using Bill My Time with Google Calendar,” said CeCe Morken, executive vice president and general manager, ProConnect Group of Intuit.
Intuit QuickBooks Premier 2017 Includes Smart Search “In the 2017
version [of QuickBooks Premier], new automated reports let you know that your reports are on time and accurate based on the data provided, automatically generated and emailed to you when you schedule them. Additionally, reports filters are easily viewable and can be applied across multiple reports and viewed on one screen. You can now print information about what filters have been included in reports, as well as make multiple-record filter selections more easily. “More improvements to QuickBooks Premier include smart search, which is a personalized autocomplete feature that helps you search for names, account numbers, and transaction amounts quickly,” said CeCe Morken, executive vice president and general manager, ProConnect Group of Intuit.
QuickBooks Online Collaborates with Third-Party Developers “In the past Sage Small Business Adds Sage year, QuickBooks Online has implemented Impact Hub Sage Impact is used by acmultiple new integrations with the most
countants and bookkeepers to access a
variety of apps including making proposals. Although offered free it’s good to review the terms and conditions which state that if you continue to use any of the products for which Sage charges, you may incur charges after four months. Sage offers a head-spinning assortment of accounting products. The starter package is Sage Start which provides Sales Invoicing and the ability to see how much customers owe and chase overdue balances. Clients may connect their bank and bank data flows in automatically. Reports include Profit & loss, Balance Sheet and Trial Balance.
Sage Cloud Accounting
Sage One is described as Simple Cloud Accounting Entrepreneurs and Small Businesses to manage cash flow and invoices. Sage Live is described as customizable cloud accounting for small and mid-sized businesses that create customizable reports, manage inventory, chart of accounts, manage multiple business units or locations and connect with Salesforce. The multi-dimensional general ledger may be used to track financial performance from multiple perspectives: by territory, team or project.
PC Software Accounting® Provides Windows Computer Checkbook
The Checkbook System is designed to directly interface to PC Software Accounting Windows® Client Write-Up System for accounting to prepare payroll and financial reports. The Checkbook System writes payroll and payables checks. It can also prepare deposit slips, and allows “journal entries” to be made to record other accounting transactions such as debit card transactions, online payments or accumulated depreciation. The system has a bank reconciliation feature that allows bank and credit card accounts to be formally reconciled. There is also a job costing feature and a fixed assets system available.
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AICPA Fights for Small Business Tax Reform
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nnette Nellen, Chair, AICPA Tax Executive Committee presented and provided a written statement to the U.S. Senate Committee on Small Business & Entrepreneurship on June 14, 2017. The hearing was on “Tax Reform: Removing Barriers to Small Business Growth.” Nellen’s statement included these 14 AICPA proposals:
1. Tax Rates for Pass-through Entities 2. Distinguishing Compensation Income 3. Cash Method of Accounting 4. Limitation on Interest Expense Deduction 5. Definition of “Compensation” 6. Net Operating Losses 7. Increase of Startup Expenditures 8. Alternative Minimum Tax Repeal 9. Mobile Workforce 10. Retirement Plans 11. Civil Tax Penalties 12. Tax Administration 13. IRS Deadline Related to Disasters 14. Other Small Business Tax Issues
1. Tax Rates for Pass-through Entities As Congress moves forward
with tax reform, it is important to recognize that a rate reduction for only C corporations is inappropriate. The vast majority of businesses are structured as pass-through entities (such as, partnerships, S corporations, or limited liability companies). In 2014, there were almost 25 million individual tax returns that included a non-farm sole proprietorship. Congress should continue to encourage, or more accurately – not discourage, the formation of sole proprietorships and pass-through entities because these business structures provide the flexibility and control desired by many new business 16 I A U G U S T/ S E P T E M B E R 2 017
owners as opposed to corporations which are subject to more formalities. Entrepreneurs generally do not want to create entities that require extra legal obligations (such as holding annual meetings of a board of directors). They prefer business structures that are simple and provide legal and tax advantages, such as the flowthrough of early stage losses. As a business grows, however, it may need to change its structure to raise additional equity funding (such as, having employees become shareholders). If Congress decides to lower income tax rates for C corporations (which are generally larger businesses), all business entity types including small businesses should also receive a rate reduction. Tax reform should not disadvantage sole proprietorships and pass-through entities at the expense of furthering larger C corporations, or require businesses to engage in complex entity changes to obtain favored tax status.
2. Distinguishing Compensation Income We recognize that providing a reduced rate for active business income of sole proprietorships and pass-through entities will place additional pressure on the distinction between the profits of the business and the compensation of owneroperators. We recommend determining compensation income by using traditional definitions of “reasonable compensation” supplemented, if necessary, by additional guidance from the Secretary of the Treasury. Changes to existing payroll tax rules, such as a requirement for partnerships and proprietorships to charge reasonable compensation for owners’ services and to withhold and pay the related income and other taxes, will also facilitate compliance for small businesses.
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We encourage Congress to consider the existing judicial guidance on reasonable compensation that reflects the type of business (for example, labor versus capital intensive), the time spent by owners in operating the business, owner expertise and experience, and the existence of income-generating assets in the business (such as other employees and owners, capital and intangibles). We acknowledge that reasonable compensation has been the subject of controversy and litigation (hence, the numerous court decisions helping to define it). Therefore, the IRS should take additional steps to improve compliance and administration in this area. For example, the creation of a new tax form (or preferably, modification of an existing form, such as Form 1125-E, Compensation of Officers) or a worksheet maintained with the taxpayer’s tax records, would allow businesses to indicate the factors considered in determining compensation in a reasonable and consistent manner. These potential factors include: a. Approximate average hours per week worked by all owners; b. Approximate average hours worked per week by non-owner employees; c. The owner’s years of experience; d. Guidance used to help determine reasonable compensation for the geographic area and years of experience (such as, wage data guides provided by the U.S. Bureau of Labor Statistics); and e. Book value and estimated fair market value of assets that generate income for the business. Changes are also necessary for existing payroll tax rules to require partnerships and proprietorships to charge reasonable compensation for owners’ services and to withhold and pay the related income and other taxes. These types of changes to existing payroll tax rules will facilitate small business compliance. The partners and proprietors are not treated as “employees,” but rather owners subject to withholding – a new category of taxpayer – similar to a partner with a guaranteed payment for services. Similar rules requiring reasonable compensation currently exist in connection with S corporations
and such owners are considered employ ees of the S corporation. The broader inclusion of partners and proprietors in more well-defined compensation rules, should facilitate and enhance the development of appropriate regulations and enforcement in this area. The AICPA believes there are advantages of this reasonable compensation approach for owners of all business types. These advantages include: a. Fairness that respects the differences among business types and owner participation levels; b. A reduced reliance by both taxpayers and the IRS on quarterly estimated tax payments for timely matching of the earning process and tax collection; c. Diminished reliance on the selfemployment tax system (since businesses would include payroll taxes withheld from owners and paid for owners along with their employees); and d. Simplification from uniformity of collection of employment tax from business entities, and an ability to rely on a deep foundation of case law (in the S corporation and personal service corporation areas) to provide regulatory and judicial guidance. In former Ways & Means Committee Chairman Dave Camp’s 2014 discussion draft, a proposal was included to treat 70% of pass-through income of an owner-employee as employment income. While this proposal presents a simple method of determining the compensation component, it would result in an inaccurate and inequitable result in many situations. If Congress moves forward with a 70/30 rule, or other percentage split, we recommend making the proposal a safe harbor option. For example, the proposal must make clear that the existence and the amount of the safe harbor is not a maximum amount permitted but that the reasonable compensation standard utilized for corporations will remain available to sole proprietorships and pass-through entities. These rules will provide a uniform treatment among closely-held business entity types. Appropriate reporting requirements, when
the safe harbor option is not used, would also address the enforcement challenges currently faced by the IRS. For example, the modification of Form 1125-E would fully disclose factors considered in determining compensation that the IRS currently struggles to track.
3. Cash Method of Accounting
The AICPA supports the expansion of the number of taxpayers who may use the cash method of accounting. The cash method of accounting is simpler in application than the accrual method, has fewer compliance costs, and does not require taxpayers to pay tax before receiving the income. Therefore, entrepreneurs often choose this method for small businesses. We are concerned with, and oppose, any new limitations on the use of the cash method for service businesses, including those businesses whose income is taxed directly on their owners’ individual returns, such as partnerships and S corporations. Requiring businesses to switch to the accrual method upon reaching a gross receipts threshold unnecessarily creates a barrier to growth. Limiting the use of the cash method of accounting for service businesses would: a. Discourage natural small business growth; b. Impose an undue financial burden on their individual owners; c. Increase the likelihood of borrowing; d. Impose complexities and increase their compliance burden; and e. Treat similarly situated taxpayers differently (because income is taxed directly on their owners’ individual returns). Congress should not further restrict the use of the long-standing cash method of accounting for the millions of U.S. businesses (e.g., sole proprietors, personal service corporations, and passthrough entities) currently utilizing this method. We believe that forcing more businesses to use the accrual method of accounting for tax purposes increases their administrative burden, discourages business growth in the U.S. economy, and unnecessarily imposes financial hardship on cash-strapped businesses.
4. Limitation on Interest Expense Deduction Another impor-
tant issue for small businesses is the ability to deduct their interest expense. New business owners incur interest on small business loans to fund operations prior to revenue generation, working capital needs, equipment acquisition and expansion, and even to build credit for larger future loans. These businesses rely on financing to survive. Equity financing for many start-up businesses is simply not available. A limitation in the deduction for interest expense (such as to the extent of interest income) would effectively eliminate the benefit of a valid business expense for many small businesses, as well as many professional service firms. If a limit on the interest expense deduction is paired with a proposal to allow for an immediate write-off of acquired depreciable property, it is important to recognize that this combination adversely affects service providers and small businesses while offering larger manufacturers, retailers, and other asset-intensive businesses a greater tax benefit. Currently, small businesses can expense up to $510,000 of acquisitions per year under section 179 and deduct all associated interest expense. One tax reform proposal under consideration would eliminate the benefit of interest expense while allowing immediate expensing of the full cost of new equipment in the first year. However, since small businesses do not usually purchase large amounts of new assets, this proposal would generally not provide any new benefit for smaller businesses (relative to what is currently available via the section 179 (expensing rule). Instead, it only takes away an important deduction for many small businesses who are forced to rely on debt financing to cover their operating and expansion costs.
5. Definition of “Compensation”
Tax reform discussions have recently considered whether the tax system should use the same definition for taxable compensation of employees as it does for the compensation that employers may deduct.
This article is continued on www.CPAmagazine.com.
Manage, Enhance and Expand Your Practice A U G U S T/ S E P T E M B E R 2 017 I 17
Construction Tax Planning: A Proactive Methodology to Accelerated Depreciation BY PETER J. SCALISE
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properly designed and implemented Construction Tax Planning analysis will proactively identify additional tax savings related to new and / or planned construction projects. It should be duly noted that a Construction Tax Planning analysis should not be confused with a Cost Segregation analysis as there are several notable differences between a Cost Segregation analysis and a Construction Tax Planning analysis. A Cost Segregation analysis will methodically review property, plant and equipment and properly reclassify real property (e.g., property that is generally depreciated for tax return purposes over a period of either 27.5 years in the case of commercial residential apartment buildings or 39 years in the case of commercial office buildings) into personal property (e.g., property that is generally depreciated for tax return purposes over a period of either 3, 5, or 7 years) and land improvements (e.g., property that is generally depreciated for tax return purposes over a period of 15 years) by reviewing all of the structural components within the building structure (e.g., exterior walls, roof, windows, doors, etc.) and the building systems (e.g., lighting, HVAC, plumbing, electrical, escalators, elevators, fire-protection and alarm systems, security systems, gas distribution systems, etc.). In general, floor plans and blueprints are meticulously reviewed and site inspections are conducted to review the building envelope as part of an engineering based Cost Segregation analysis to ensure sustainable tax return filing positions per Circular 230. 18 I A U G U S T/ S E P T E M B E R 2 017
In sharp contrast, a Construction Tax Planning analysis utilizes a proactive “Pre-Design Phase” methodology to identifying, gathering, and documenting additional tax savings related to new and / or planned construction projects whether in connection to: √ Constructing a New Building; √ Adding a New Wing to an Existing Building; or √ Renovating a Single Floor within an Existing Building.
“Construction Tax Planning analysis should not be confused with a Cost Segregation analysis as there are several notable differences between a Cost Segregation analysis and a Construction Tax Planning analysis.” Construction Tax Planning enables accelerated depreciation deductions through the recommendation of select materials and supplies to be utilized in the “Construction Phase” to ensure that the structural components will be classified as personal property as opposed to real property (e.g., requesting a design-build contractor to utilize modular internal walls to bifurcate office and / or conference room space in a commercial office building as opposed to permanently
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affixing these said internal walls to bifurcate office and / or conference room space within the floor configuration layout will enable the said structural components to be classified as personal property with a 5 year depreciable class life as opposed to real property with a 39 year depreciable class life). In addition, Form 3115 is never filed as Construction Tax Planning is proactive planning and not reactive planning. Noting, there is no need to reclassify asset classifications as all of the structural components of the building envelope are properly classified when they are initially placed into service on a timely filed tax return. This mitigates IRS audit risk as an accounting method change never occurred and consequently Form 3115 is not filed. It should be duly recalled that Accounting Method changes only occur when a transaction is treated a certain way on a tax return (i.e., regardless of correctly or incorrectly) for a period of two years or more. Finally, and as applicable, by combining Cost Segregation analysis with both the principles of Construction Tax Planning and Abandonment Deduction Planning per the Final Treasury Regulations governing Tangible Property (e.g., the retirement or abandonment of structural components within the building envelope before they have been fully depreciated over their asset class life for tax return purposes) you can optimize the true value of a comprehensive fixed asset analysis. Peter J. Scalise serves as the Federal Tax Credits & Incentives Practice Leader for Prager Metis CPAs, a member of The Prager Metis International Group.
How Interest Can Be Deducted When Money is Borrowed to Buy Investments
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If a taxpayer borrows money to purchase investments, such as mutual funds, bonds or stock, the interest paid on the loan can usually be deducted. There are two limitations, however, on the amount of interest that can be deducted. First, a taxpayer cannot deduct the interest on loans used to buy investments that produce tax-exempt income. In other words, if a taxpayer borrows money to buy a municipal bond, the interest paid on the loan cannot be deducted. Second, a taxpayer’s investment interest expense deduction for the year cannot exceed the net investment income for the year. Net investment income is the amount of a taxpayer’s investment income over his or her investment expenses, other than investment interest expense, for the year. Investment income includes interest and short-term capital gains, however it does not include dividends that qualify for the special dividends tax rate. Investment expenses include amounts paid for investment advice, investment publications and safe deposit boxes. Investment expenses do not include brokers’ fees taxpayers pay when buying or selling stock. These are added to the cost of the stock and reduce the gain or increase the loss when the stock is sold. If part of the interest a taxpayer pays is not deductible because it exceeds the investment income, the disallowed deduction is not lost. The amount can be carried forward to future years. The disallowed amount is then deducted in the year or years that the taxpayer’s net investment income exceeds his or her investment interest. EXAMPLE: If your client has $2,000 of net investment income and $2,400 of investment interest expense, you can deduct $2,000 of investment interest. The $400 ($2,400 – 2,000) you could not deduct is carried forward to the following year.
Investment Expenses
In calculating net investment income, investment income is reduced only by the investment expenses you can deduct. If you cannot deduct investment expenses because of the 2% of adjusted gross income (AGI) floor for miscellaneous deductions, you do not need to reduce investment income by the expenses. In other words, the investment income is reduced only by expenses from which a taxpayer receives a tax benefit.
"
The investment income is reduced only by expenses from which a taxpayer receives a tax benefit.
"
Tax Client Advisor Julie Welch, CPA, CFP
EXAMPLE: Your client has $1,800 of interest income and total AGI of $50,000. Your client borrows money from a broker to purchase stock. The investment interest expense is $1,700. The only miscellaneous expenses are $500 for investment publications. Although it appears that the net investment income is $1,300 ($1,800 – 500) and $400 ($1,700 – 1,300) of the investment interest expenses will be disallowed this year and carried forward, this is not correct. Because miscellaneous expenses must exceed 2% of your client’s AGI, $1,000 ($50,000 x 2%), before he or she can take a deduction for the expenses, you cannot deduct the investment expenses. As a result, you do not have to reduce the investment income by the investment expenses. The net investment income is $1,800, so you can deduct the entire $1,700 of investment interest expense.
Qualifying Dividends and Long-Term Capital Gains
Qualifying dividends and long-term capital gains, including capital gain distributions from mutual funds, are not automatically included in investment income. You may elect to include qualifying dividends and long-term capital gains in the calculation of the net investment income.
This article is continued on www.CPAmagazine.com. Julie Welch (Runtz) is the Owner of Meara Welch Browne, P.C. She graduated from William Jewell College with a BS in Accounting and obtained a Masters in Taxation from the University of Missouri-Kansas City. She serves as a discussion leader for the AICPA National Tax Education Program. She is co-author of 101 Tax Saving Ideas. Manage, Enhance and Expand Your Practice A U G U S T/ S E P T E M B E R 2 017 I 19
Headline presents
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he following are recent segments of The Bottom Line weekly video news segment featured only at CPAMagazine.com.
What You Need to Know About Bitcoin
With bitcoin prices recently surging over $2,500 it’s time to explain what you need to know about bitcoin as a CPA. The reason it is important is you can transact with it online with almost no transaction fees. However, its value is volatile. The future of bitcoin is important because of the blockchain technology behind it. Blockchain is a ledger of every transaction documented by distributed computers all over the world. The main thing you need to know is while bitcoin is used as a currency, it is not recognized as a currency in the United States. Therefore every transaction is a capital transaction. The IRS requires gain or loss recognition on the new value of the asset at the time of each transaction. 20 I A U G U S T/ S E P T E M B E R 2 017
Top 5 Things to Know About 1040X
While tax season is over, there may be a few returns that need amendment. Here are the top things to know when correcting a 1040 by filing a Form 1040X. • To amend a 1040, you must file a 1040X on paper. It cannot be e-filed. • You normally don’t need to file an amended return to correct math errors or attach a document. The IRS will automatically correct math errors and send a form to you for missing forms. make those changes for you. Also, do not file an amended return just because you forgot to attach tax forms, such as a W-2 or schedule. The IRS will usually send you a request for those. • You can track the status of the 1040X three weeks after filing with: ‘Where’s My Amended Return?’ at IRS.gov or by calling: 866-464-2050. • If a refund is due from the original return, wait to receive that refund before filing Form 1040X to claim an additional refund. While amended returns take up to 12 weeks to process, it’s okay to spend the original refund while waiting for any additional refund. • If more tax is due, file 1040X and pay the tax as soon as possible to reduce any interest and penalties. • Common errors corrected are filing status, income, deductions and tax credits.
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• To use ‘Where’s My Amended Return?’ enter the taxpayer’s Social Security number, date of birth and zip code. • You usually have three years from the date you filed your original tax return to file Form 1040X to claim a refund. You can file it within two years from the date you paid the tax, if that date is later. See the 1040X instructions for special rules that apply to certain claims. • If you are amending more than one tax return, prepare a 1040X for each year and mail each year in separate envelopes. • If you use other IRS forms or schedules to make changes, attach them to your Form 1040X.
Top 10 TrumpCare Tax Countdown AHCA Would Repeal Most of ObamaCare if it Passes the Senate
The American Health Care Act of 2017 (AHCA) passed the House on May 4, but still has to pass the Senate by a simple majority. Most of the bill would go into effect in 2017. The AHCA, as amended, would repeal virtually all of Obamacare. If the bill is passed in its current form, the top ten tax provisions you absolutely need to know are: Number 10: It will postpone the 40% excise tax from 2020 to 2026. Number 9: It will repeal the tax on overthe-counter medications. Number 8: It will modify rules for enhanced health savings accounts and flexible spending accounts and permit preexisting conditions. Number 7: It will repeal the 0.9%
“The main thing you need to know is while bitcoin is used as a currency, it is not recognized as a currency in the United States. Therefore every transaction is a capital transaction. “ additional Medicare tax in 2023. Number 6: It will modify the small business tax credit. Number 5: It will eliminate penalties for employer mandates. Employers with over 50 employees will not be required to offer full-time employees health coverage retroactive for months beginning after December 31, 2015. Number 4: It will lower the qualifying adjusted gross income threshold for medical care deductions to 5.8% from 10%. Number 3: It will create refundable tax credits from $2,000 to $4,000 based on age for health insurance coverage that phases out after income reaches $75,000 for single taxpayers. Number 2: It will repeal the 3.8% tax on the net investment income beginning in 2017. And Number 1: It will repeal the individual penalty for not having health insurance.
which also serves as a free Microsoft Office replacement. There is also free tax software for consumers. Not just the Free File Alliance software for consumers making under $64,000 but also
CreditKarma and FreeTaxUSA that offer an ever-broader array of forms to the end user at no charge, with no income limitations. While professional tax prep may not be free yet, it seems like an odd decision to not consider free software in 2017.
• A fee of $2,350 paid to the State Department. • A possible exit tax similar to capital gains for those with assets exceeding $2 million. • A 30% withholding tax on certain forms of subsequent U.S.-source income including dividends and deferred compensation. • Be prohibited from purchasing firearms under the Gun Control Act of 1968. • Reciting an oath where you “absolutely and entirely renounce your United States nationality, together with all rights and privileges and all duties of allegiance and fidelity to the United States of America.” This is the one that changed Elizabeth Taylor’s mind in 1968.
Leaving the U.S. and Taxes
Free Software or Why Are You Still Using Microsoft Word
While you were renewing your Microsoft Office productivity software, an increasing number of competitors are free. Apple’s word processor (Pages), spreadsheet program (Numbers), and presentation software (Keynote) are now free to download for both macOS and iOS. Although Apple’s productivity apps are not exactly awesome, it’s hard to argue with free software. Google Docs is a free web-based word processor, spreadsheet, and presentation application. The online app allows users to easily share documents and collaboratively work on them in real-time without asking you to pay for it. There is also the open-source LibreOffice suite
Celebrities threatening to leave America if Donald Trump was elected president included Barbara Streisand, Miley Cyrus, Amy Shumer, Samuel L. Jackson, Rosie O’Donnell and Whoopi Goldberg. According to Salon magazine, O’Donnell and Goldberg also threatened to move abroad if George W. Bush got elected, along with Matt Damon, Tim Robbins and Susan Sarandon. However, Trump and Bush were elected president and all those people are still here. All could have benefitted from wise tax counsel before making such bold statements. First of all, U.S. persons must continue to report their worldwide income and pay taxes. Should someone wish to avoid taxes all together, he or she could join rock star Tina Turner as one of the few high-profile U.S. citizens to renounce citizenship. Renouncing U.S. citizenship requires:
Tax Trivia For Clients
The following is interesting tax trivia CPAs may wish to share with clients, compliments of WalletHub. • 35 Cents – Cost for the IRS to collect $100 in federal revenue. • 6 Billion Hours – Total time Americans spend on their taxes each year. • 17.8 Minutes – Average wait time when calling the IRS in 2016 • 70% – Of filers get a federal tax refund ($2,897 on average). • 90% of refunds are issued in 3 weeks or less but it takes 5 weeks to get a refund from a paper filed return. • 32% of taxpayers fear identity theft Continued on page 25
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Technology and CPA Estate and Longevity Planning That creates a widening gap that those Continued from page 10 Communications Incorporated into committing elder financial abuse exploit. Monthly Billing Your practice is likely A CPA firm can write-up your personal sending out monthly client bills. The cost financial records and monitor them with to process the bills and mail them is a fixed periodic reports. This interim step may cost. You can use regular monthly billing identify and prevent elder abuse or other as a means of communication, not only costly mistakes. It can also lay the for that as a means of billing. For example, foot- firm to take over bill paying if that should ers can easily be added to each month’s become advisable at a later date. bills so that they appear on all client bills • Trust Administration: The cost of creator bills of selected clients. These footers ing an informal accounting each year for a can include practice information that will trust when the tax return is prepared may protect the practitioner, as well as planning be modest. If a formal accounting is not tips. This can provide a no cost means of being prepared, at least consider this lesser communication with clients. Many firms step. It will provide better and more unrely on monthly electronic newsletters to derstandable information to communicate communicate with clients. While this is to beneficiaries who are required to receive a low cost means of communicating with notice of trust information and it will premany clients, is it really effective for the serve records that will make it much more typical estate planning client? Many estate economical to create a formal or court planning clients are much older than other mandated accounting should that be necclients of the firm, and many simply do essary in the future. not use email or even if they do are not • Federal Tax Law Changes: President so facile with it that they will really click Trump proposed the repeal of the estate through all the links to read a relevant ar- tax. With the Republicans controlling the ticle in an e-newsletter. What is the open House and Senate this might in fact be a rate on your firm’s newsletter? Is that re- possibility but there is no certainty what ally high enough to rely on as a means of will be done or the impact. If the estate client communication? Adding informa- tax is repealed will the gift tax be retained? tive footers to a bill will have a 100% vis- Will a Canadian style capital gains tax on ibility rate (if not you have a receivables death be enacted to replace the estate tax issue!). This might include information if repealed? about new tax developments, suggestions • New Jersey Estate Tax Repeal: New Jeras to steps many clients should consider, a sey’s estate tax exemption will increase new firm document retention policy or a from $675,000 to $2 million in 2017 change in how Social Security is calculated and be repealed effective January 1, that might affect the client. For example, 2018. Articles in the media which sugthe following are illustrations of footers gest taxpayers need to do nothing are to add to the billing program and which dangerously incorrect. While it is poscould be updated every month so that over sible no action might suffice, the only the course of any time period every client way to understand the consequences to will receive a range of cautions and plan- clients and their loved ones and heirs is ning ideas. Just as important, these will be to review the plan. Before canceling life saved as a permanent record of a commu- insurance or changing the title to assets, nication with the client that might prove talk to advisers. Wills, revocable trusts, protective to the practitioner if a problem insurance trusts, ownership of assets and later arises. These can be very protective of much more could be effective. For those the practitioner if a client later claims they with smaller estates planning may well be were not informed of certain planning op- less costly and simpler, but that does not suggest no planning will suffice. [use a portunities or changes in the law. • Aging: As we age cognitive abilities can state planning specific planning idea apdecline. Studies have shown that from age propriate for your client base]. 60 onward the skills to make financial de- • New Fees and Billing Arrangements: cisions decline, but our perception of our All work and matters are subject to our financial decision making ability does not. new 2017 “Billing Arrangements,” and 24 I A U G U S T/ S E P T E M B E R 2 017
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“Additional Engagement and Billing Terms.” This can inform clients of new billing rates, services, etc. • Text Messages: It is not possible for the firm to maintain a record of text messages. You should assume any text message directed to personnel of this firm will not be received and will not be read. Some practitioners respond to text messages, many find it difficult. In particular, it may not be feasible to secure or save text messages so they will be part of the firms’ permanent document management system. Thus, you might wish to discourage these. • Annual Review: Every client, entity, and trust requires an annual review to monitor changes in the law, changes in circumstances, annual consents and actions, operations, etc. Failure to participate in an annual meeting, and coordinate all advisers (estate planning attorney, corporate attorney, wealth manager, estate planner, insurance consultant, CPA, etc.), will undermine the planning objectives. Without regular review and maintenance few estate plans will succeed. Use a footer on a regular monthly bill to remind clients of the need to schedule an appointment.
Articles Enclosed with Monthly Billing Your practice is likely sending
out monthly client bills. Consider enclosing with each month’s bill a copy of an article a staff member has published, or if none are available, provide a short planning letter or checklist. This is another almost no-cost means of communicating valuable information. If you can earmark estate planning clients, or better yet, existing clients who could also prospectively become estate planning clients, enclose a short planning piece with each bill.
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Martin M. Shenkman is the author of 35 books and 700 tax related articles. He has been quoted in The Wall Street Journal, Fortune, and The New York Times. He received his BS from the Wharton School of Pennsylvania, his MBA from the University of Michigan, and his law degree from Fordham University.
“The IRS revealed its 2016 Data Book, which reports a 16% drop in audits, a 40% drop in levies, and a 9% drop in liens from 2015 to 2016. “
Continued from page 21 which is almost twice as much a being audited (18%). • 60% will use a tax professional in 2017. • Taxpayers will spend an average of $280 in 2016 up from $269 in 2006.
IRS Audits Drop 16%
The IRS revealed its 2016 Data Book, which reports a 16% drop in audits, a 40% drop in levies, and a 9% drop in liens from 2015 to 2016. The Data Book also reports over 1 million 1040 returns were audited in 2016, almost 16% fewer than 2015 and the lowest rate in more than a decade. Although, the IRS’ enforcement budget was reduced by $107 million, it collected a record $1.8 trillion of individual income tax and $3.3 trillion overall and refunded over $426 billion. Especially important to practitioners, the IRS claims to have improved its live telephone assistance. It claimed it provided live telephone assistance over 25.5 million times in 2016, an increase of 40% over the previous year. To that end, nine tax practitioner organizations, including the AICPA, presented federal lawmakers recommendations to improve the IRS. Services recommended include centralizing an “executive-level” practitioner unit within the IRS.
Top Celebrities Nabbed by the IRS
The IRS is known for announcing celebrity tax settlements during tax season.
A constant stream of celebrities attempting to find a way around the IRS always seem to provide additions to the list. Wesley Snipes did three years in federal prison for willful failure to file federal income taxes – $7 million to be exact. Nicolas Cage told People Magazine in 2010 he owed the IRS $14 million. At one point, Chris Tucker owed $11.5 million to the IRS for 2001, 2002, 2004, 2005 and 2006. Other celebrities with tax trouble in the past include rocker Ozzy Osbourne as well as Lindsay Lohan, Christie Brinkley, Marc Anthony, Pamela Anderson, Burt Reynolds, Lionel Richie, Robert Downey, Jr., Al Pacino, Snoop Dogg and Forest Whitaker have also been in hot water with Uncle Sam.
PwC Accountant Fumble at the Academy Awards
A highlight of the Academy Awards, at least for CPAs, is the few seconds of fame for the CPAs who count the ballots. This year Brian Cullinan, the PricewaterhouseCooper (PwC) CPA who is Chairman of the firm’s US Board botched the procedure. Cullinan handed
best picture victory to “La La Land” instead of “Moonlight” when he handed Warren Beatty the wrong envelope for the movie industry’s top award. The mistake stunned the live crowd in Hollywood and a worldwide television audience. The mistake was not rectified until the “La La Land” cast and producers were on stage giving their acceptance speeches. Under PwC procedure, two CPAs who are sworn to secrecy memorize the names of the 24 winners placed in two sets of sealed envelopes. The envelopes are locked in two briefcases and driven separately to the event in case of any traffic mishap. The pair stands off stage at opposite sides and hand envelopes to the presenters as each category is announced. Cullinan turns out to be a Harleyriding accountant who’s been handling Oscar ballots since 2014. He told Time Magazine, “Especially for those who aren’t in the business world, the Oscars are what PricewaterhouseCooper’s is known for.” Brand management experts said it could take years for PwC to recover. Reuters news service quoted Tim Calkins, a marketing professor at Northwestern University, saying, “This is not advanced math. PwC had to get the right name in the right envelope and get it to the right person.” Before the event PwC encouraged people to follow Cullinan on Twitter on their “Journey to the Oscars” web page — and before the show promoted a “briefcase journey” on its corporate Twitter page, which showed the bag in various locations around the country in the weeks leading up to the show. In the end, all the Twitter distraction proved to be the downfall for an awards show whose ratings have been in freefall since 2008. Cullinan tweeted a picture of best actress winner, Emma Stone five minutes before he mistakenly handed the back-up envelope for best actress to presenters Warren Beatty and Faye Dunaway.
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August/September 2017 Volume 17, No. 3 Editor T. Steel Rose, CPA, ACG cpa@cpamagazine.com Managing Editor Joshua Fluegel josh@cpamagazine.com Copy Editor Myrna Nelson Advisory Board/Columnists Sidney Kess, CPA, J.D., LL.M Robert E. McKenzie, J.D. Martin M. Shenkman, CPA, MBA, PFS, J.D. Julie Welch, CPA, CFP The opinions given by contributing authors are their own and are not necessarily the opinion of our staff and management. All trademarks used are the property of their respective owner. CPA Magazine (ISSN# 2378-7481) is published four times a year by CPA Magazine, P.O. Box 92342, Southlake, TX 76092, 817-4166650 and 888-610-1144 Standard Mail postage paid at Sussex, WI 53089 ©2017 All Rights Reserved Magazine Publishing Group, Inc. Printed in the U.S.A.
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Answer the following 15 questions and complete the answer sheet on page 31. 1. The dependent care credit can be claimed for a child who has not yet reached his/her: A. 13th birthday B. 14th birthday C. 16th birthday D. 18th birthday 2. A contribution of up to ______ can be made annually to a Coverdell Education Savings Account until a child attains age 18. A. $1,500 B. $1,800 C. $2,000 D. None of the above 3. Individuals with compensation from a job or self-employment can make a “catch-up” contribution to certain
qualified retirement plans and IRAs (including Roth IRAs). Which of the following plans and catch-up amounts are correctly paired? A. 401(k), 403(b), and 457 plans: $4,000 B. 401(k), 403(b), and 457 plans: $5,000 C. SIMPLE IRAs: $3,000 D. IRAs and Roth IRAs: $2,000
4. The 10% early distribution penalty on distributions from qualified retirement plans prior to age 59 ½ does not apply if distributions are made because of separation from service after age ____. A. 60 B. 55 C. 58 D. None of the above Continued on page 30 Manage, Enhance and Expand Your Practice A U G U S T/ S E P T E M B E R 2 017 I 29
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5. When an individual reaches 65 years old, what taxable events occur? A. May claim an additional standard deduction. B. Increases the gross income threshold by the standard deduction to determine if filing a tax return is necessary C. Distributions from HSAs can be taken penalty-free for nonmedical expenses D. All of the above 6. Which of the following was not a proposal made to the U.S. Senate Committee on Small Business & Entrepreneurship by the AICPA representative on June 14, 2017? A. Cash Method of Accounting B. Decrease of Startup Expenditures C. Mobile Workforce D. Tax Administration 7. According to Nellen’s testimony at the U.S. Senate Committee hearing, in 2014 there were almost ________ individual tax returns that included a non-farm sole proprietorship. A. 16 million B. 19 million C. 25 million D. 28 million 8. An estate tax return ________ should be retained indefinitely because it can provide vital tax basis data in future years when an asset is sold. A. Form 1041 B. Form 14039 C. Form 1065 D. Form 706 9. What is a described technique involving monthly billing that might enhance your tax/estate planning practice? A. Include recommendations for other professionals with auxiliary services B. Offer discounts for quick document submission C. Use billing as a form of communication with clients D. Make bills attractive and easy to read
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10. Which of the following is not one of the things listed from where firm success and growth stems? A. Making client relationship managers the center of the client service model B. Telling clients what they need and working toward that goal C. Allowing partners to be great CPAs and not sales people D. Investing in marketing and business development 11. According to Lee Frederiksen, what kind of firms are twice as likely to be high growth firms? A. Family friendly B. Small firms C. Law firms D. Specialists 12. The State Department can deny a taxpayer a passport if the taxpayer has “seriously delinquent” tax debt. What is the threshold considered “seriously delinquent.” A. $35,000 B. $46,000 C. $50,000 D. $60,000 13. Which of the following is not something the state department will give a taxpayer 90 days to do if applying for a passport while having a seriously delinquent tax debt? A. Make full payment of the tax debt. B. Resolve any erroneous certification issues. C. Enter into a satisfactory payment alternative with the IRS. D. All can be done to satisfy the State Department 14. A debt previously certified seriously delinquent by the IRS is no longer considered seriously delinquent when: A. A payment is made to the collection agency B. The IRS accepts an offer in compromise to satisfy the debt. C. T he debt is forgiven because you request innocent spouse relief D. None of the above 15. What is an effect the Fixing America’s Surface Transportation Act (FAST Act) has on taxpayers? A. The IRS can use private collection agencies to collect delinquent taxes B. 1040s must be filed electronically C. A contribution of up to $2,000 can be made annually to a Coverdell Education Savings Account D. Extensions are granted more time
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