Earlier this year, the U.S. Tax Court made a controversial ruling regarding IRA rollovers that contradicted an IRS publication designed to explain the law to taxpayers. In Bobrow v. Commissioner, the court ruled that the one-rollover-per-year rule applies to all of a taxpayer’s IRAs in aggregate, rather than on an account-by-account basis.

Soon after, the IRS issued Announcement 2014-15, which adopted the court’s less taxpayer-friendly interpretation of the rollover rules. The IRS also plans to revise Publication 590, Individual Retirement Arrangements, which included the IRA-by-IRA rollover guidance.

Taxpayers with multiple IRAs will have to be much more careful when making rollovers to ensure they don’t violate the aggregate rules and generate unnecessary tax liability — and possibly interest and penalties.

The IRS expects to propose regulations providing that the IRA rollover limitation applies on an aggregate basis. The regulation would not be effective in 2014, and the IRS has indicated it will not enforce the decision retroactively.

Snapshot of Bobrow
In the case, married taxpayers received a series of IRA distributions in 2008 involving several IRA accounts. They didn’t report any of the distributions as income, claiming that all the distributions had been rolled over tax-free.

The tax court ruled that the husband had used up his one-rollover-per-year privilege on his first distribution and, therefore, subsequent distributions were taxable. The court looked to the original law, finding that the plain language indicated the aggregate rule applies. The court felt that if Congress had intended for the rollover rule to apply on an IRA-by-IRA basis, it would have worded the statute differently.

The wife’s IRA distribution was also taxable but under a different rule: Her rollover didn’t occur within the requisite 60-day period (though it was only one day late).

In addition to more than $51,000 of unpaid federal taxes related to the botched rollovers, the tax court upheld a 20% accuracy-related penalty on the unpaid balance.

The court refused the taxpayers’ motion to reconsider its decision on the basis that it conflicted with IRS Publication 590. The court noted that neither the taxpayers nor the IRS mentioned Publication 590 at trial. Even if the parties had posed this argument, the court determined that the publication wouldn’t have provided substantial authority for the taxpayers’ position.

Some exceptions remain
There are still some important exceptions to the one-rollover-per-year limitation. Neither of the following transactions counts as a rollover for purposes of this limitation:

1. A direct trustee-to-trustee transfer made from one IRA to another without passing through the taxpayer’s hands.
2. Distributions between a qualified retirement plan and an IRA.
3. ROTH IRA conversions and re-characterizations.

Also be aware that, in the case of married individuals, the one-rollover-per-year rule is applied separately to IRAs owned by the individual and to IRAs owned by the individual’s spouse. So what your spouse does with his or her IRAs has no effect on what you can do with your IRAs.

Points to remember
The general statutory rule is that an amount distributed from an IRA (except to the extent the distribution consists of nondeductible contributions) must be included in the recipient’s gross income for federal income tax purposes. If the taxpayer is under age 59½, a 10% early withdrawal penalty generally also will apply.

An exception to the income inclusion and early withdrawal penalty may apply, however, when the distributed amount is rolled over into an IRA, individual retirement annuity or qualified retirement plan, such as a 401(k), by no later than the 60th day after the day on which the taxpayer received the distribution.

The following statutory fine print related to IRA rollovers may trip up taxpayers:

• The 60-day period begins the day after you receive the distribution.
• The funds are due back in an IRA on the 60th day. You don’t get a break if the 60th day falls on a holiday or weekend.
• If you make the contribution after the 60-day deadline, you could be subject to a 6% excess contribution penalty.
• The same property or proceeds from the sale of the property must be rolled over. For example, if you withdraw 100 shares of ABC Company from IRA-1, those shares must be rolled over to IRA-2.
• You can’t roll over a required minimum distribution.

Of course, the one-rollover-per-year limitation also must be met.  It is important to note that the once-per-year requirement is within a 365 day period rather than a calendar year period, and the one-year waiting period between rollovers begins the day you receive the distribution.

Where do we go from here?
As the complexity of IRA plans has blossomed over the last 40 years, Publication 590 has likewise grown to 114 pages (including tables and indices). The publication contains enough fine print to confuse even sophisticated taxpayers. Now the one-rollover-per-year limitation further complicates matters. Furthermore, the situation continues to evolve with additional IRS guidance to come.

If you’re considering an IRA rollover, contact us to make sure it will meet the applicable rules to avoid unnecessary taxes and penalties.

We want to hear from you! We encourage you to comment below on this blog post, share it on social media or contact Andy Whitehair at awhitehair@cohencpa.com or a member of your service team for further discussion.

Posted by Ray Polantz, CPA, MT

Doing business internationally is practically a necessity to survive in today’s competitive business environment. Many companies find that setting up a separate legal entity in a foreign jurisdiction is the best way to conduct business there. Operating through a foreign subsidiary, however, presents many challenges, including the potential for double taxation of profits.

Generally, profits earned in foreign subsidiary corporations can be subject to two layers of tax:

• tax in the foreign jurisdiction; and
• U.S. tax when profits are repatriated, often in the form of a dividend.

At times this potential double taxation is mitigated by the U.S. tax system’s foreign tax credit regime, which allows a dollar-for-dollar reduction of U.S. tax for foreign income taxes paid, subject to certain limitations. However, not all U.S. owners are eligible to claim foreign tax credits for the income taxes paid by a foreign subsidiary corporation.

Thankfully, there are options for those who plan upfront. Taxpayers may benefit from making a “check-the-box” election that treats the foreign subsidiary as a disregarded entity for U.S. tax purposes. By making this election, taxpayers forfeit U.S. tax deferral on foreign profits. However, the election will make the underlying foreign income taxes eligible to be claimed as a credit, which may allow taxpayers to mitigate double taxation.

If you are considering forming a foreign entity to conduct business overseas, be sure to properly plan upfront to minimize worldwide taxes.

We want to hear from you! We encourage you to comment below on this blog post, share it on social media or contact Ray Polantz at rpolantz@cohencpa.com or a member of your service team for further discussion.

This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.
 

Posted by Andrew Whitehair, CPA/PFS and Ryan McKenna, MT

Back in 2008, the U.S. Supreme Court issued its ruling in Knight v. Commissioner, holding that fees paid to an investment advisor by an estate or non-grantor trust generally are subject to the 2% floor on miscellaneous deductions. The 2% floor requires that miscellaneous deductions do not exceed 2% of a taxpayer’s adjusted gross income (AGI). This decision differed from proposed regulations issued in 2007, hence a long process culminating in the final regulations, issued on May 9, 2014, which attempt to clarify what is and is not subject to the floor.

General Rules
Section 67(a) of the Internal Revenue Code (IRC) provides individuals the ability to deduct miscellaneous deductions in excess of 2% of AGI. For expenses incurred by estates and non-grantor trusts, expenses subject to the floor include costs classified as miscellaneous itemized deductions that would be commonly or customarily be incurred by a hypothetical individual holding the same property. Sections 67(b) and 67(e) exclude certain costs from treatment as miscellaneous itemized deductions, such as costs incurred by an estate or non-grantor trust for administrative purposes. 

Common and Customarily Incurred Costs
Some miscellaneous itemized deductions subject to the floor include ownership costs, tax preparation fees, investment advisory fees, appraisal fees and certain other fiduciary expenses. However, the new regulations clarify that several exceptions to the floor apply to additional costs, including:

• Ownership costs, which are typically subject to the floor unless fully deductible under another section of the IRC.
• Tax preparation fees relating to all estate and generation skipping transfer tax returns, fiduciary income tax returns, and decedent’s final individual income tax return.
• Investment advisory fees beyond the amount that normally would be charged to an individual investor
• Appraisal fees incurred to determine the Fair Market Value (FMV) of the assets at the date of the decedent’s date of death, to determine the value for purposes of making distributions, or fees required to properly prepare estate or trust returns.
• Certain fiduciary expenses including probate court fees, fiduciary bond premiums, and legal publication costs of notices to creditors or heirs.

Bundled Fees
Estates or non-grantor trusts that incur “bundled fees,” i.e. fees that are partially subject to the floor and partially exempt), must allocate the fees between those subject to the floor and those that are not.  However, only the portions of bundled fees not calculated on an hourly basis and related to investment advice are subject to the floor; certain non-allocable expenses, including out-of-pocket expenses billed to the estate or non-grantor trust, payments made from bundled fees to third parties subject to the floor, and fees or expenses for services commonly or customarily incurred by an individual must be subjected to the floor even if part of a bundled fee.  The new regulations provide that in the absence of specific tracing of investment expenses any reasonable method may be used to allocate bundled fees.

We want to hear from you! We encourage you to comment below on this blog post, share it on social media or contact Andy Whitehair at awhitehair@cohencpa.com or a member of your service team for further discussion.

This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.

Posted by Angel Rice, CPA, MT, MAcc

A reminder for business owners:  if you have self-funded accident and health insurance or major medical insurance coverage and the plan year ended between January 1, 2013, and September 30, 2013, your PCORI fee of $1 per member is due July 31, 2014 — and cannot be extended.

A member is defined as all covered lives — employees, their spouses and their dependents. This is different than the definition used for Form 5500 participant count, which only counts employees.

There are four different methods that can be used to calculate the number of covered lives; the one that is the most beneficial to your situation can be used.

1. Actual count. Count the total number of covered lives for each day of the plan year; add them together and divide by the number of days in the plan year.
2. Snapshot dates. Count the total number of covered lives on a single day on each quarter; add those together and divide by the number of dates on which a count was made.
3. Snapshot factor (used if there is both “self-only coverage” and “other than self-only coverage”). Determine the sum of the number of participants with self-only coverage plus the number of participants with other than self-only coverage and multiply by 2.35.
4. Form 5500 method (used only if Form 5500 will be filed prior to the deadline for the PCORI fee). For self-only coverage, combine the total participants at the beginning of the plan year with the total number of participants at the end of the year as reported on Form 5500; divide by two. For self only and other than self only, sum the total number of participants covered at the beginning and end of the year as reported on Form 5500.

Read our previous post for more background on PCORI fees.

We want to hear from you! We encourage you to comment below on this blog post, share it on social media or contact Angel Rice at arice@cohencpa.com or a member of your service team for further discussion.

This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.

Posted by Lisa Loychik, CPA

Over the last few years many landowners have begun receiving cash bonus payments for land leases related to the Marcellus and Utica Shale boom. In our work with clients in the Marcellus and Utica Shale regions, we have seen a recent uptick in landowners receiving offers to sign "pipeline right-of-way” agreements, as the need for pipelines has escalated due to the increasing maturity of the industry.

The payment for this right-of-way is considered an easement. The tax treatment of easements may result in income, a reduction in basis of all or part of the land, or both. The amount a landowner receives for granting an easement is generally considered to be a sale of an interest in real property. If the amount received is more than the basis of the part of the property affected by the easement, the basis is reduced in that part to zero and the excess is treated as a recognized capital gain.

Usually easement contracts describe the affected land using square feet. A landowner’s basis may be figured per acre, which equals 43,560 square feet. In a 1968 ruling, for example, the IRS held that a taxpayer receiving $5,000 from a power company for an easement to construct and maintain electric poles across a 600-acre farm with a basis of $60,000 could use only $2,000 — the portion of the cost basis allocable to the 20 acres directly affected by the easement. As a result, the taxpayer realized a $3,000 gain.

Where it was impossible or impractical to allocate the taxpayer’s cost basis between the property affected by the easement and the rest of the land, the tax courts treated the amount received as a return of capital in its entirety. The leading case in this area, Inaja Land Company v. CIR, has been accepted by the IRS. This case allowed the taxpayer to reduce the basis in the whole property by the payment for the easement, since it was impractical to separate the basis for the part of the property affected by the easement.

Sometimes the payment will also serve to compensate the land owner for surface damages, e.g., a farmer’s damaged crops. This payment would be considered ordinary income and would not reduce the basis in the property.

Considering all of the above, I’m often asked what advice I have for landowners when they receive a right-of-way payment? The best answer I can give is to consult with your tax advisor, as we have seen situations in which the payments are incorrectly reported on a 1099, indicating ordinary income to the landowner. The most favorable treatment for the taxpayer would be to indicate capital gains, resulting in a lower tax rate.

We want to hear from you! We encourage you to comment below on this blog post, share it on social media or contact Lisa Loychik at lloychik@cohencpa.com or a member of your service team for further discussion.

This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.

Posted by Mike McGivney, CPA, MSA

With increased tax rates and expired accelerated depreciation provisions, it’s not surprising that many business owners are looking for additional tax-savings opportunities. For those who own real property, a cost segregation study may provide some unexpected relief.

A cost segregation study is a one-time reclassification of longer-lived property (such as property with a depreciable life of 27.5 or 39 years) to shorter-lived property (such as a depreciable life of five, seven or 15 years). The study is usually performed by a third-party cost segregation provider. The actual process is relatively painless; a qualified professional walks through a property and reviews building plans, assesses the opportunities for reclassification, and provides a report with his or her findings. The cost for conducting the study can vary, depending on the size of building and scope of work, but your accounting team should be able to help you determine if the present value of the potential tax savings outweigh the study’s cost.

General characteristics of buildings that could make prime cost segregation targets include buildings:

• That cost more than $2 million,
• That were acquired in the past 10 years,
• With no/minimal depreciable basis classified as five, seven or 15-year property, and
• Whose owners can benefit from additional depreciation deductions.

Consult with your tax advisors to determine if this opportunity makes sense for your particular tax situation.

We want to hear from you! We encourage you to comment below on this blog post, share it on social media or contact Mike McGivney at mmcgivney@cohencpa.com or a member of your service team for further discussion.

This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.

Posted by Teri Grumski, CPA

The research and development (R&D) tax credit offers benefits for a wide range of research activities in a host of industries. This credit is not just for “white coat” researchers in a back laboratory. In fact, entities from manufacturers to technology and other service providers can realize sometimes significant opportunities — if they overcome common misconceptions, such as what actually qualifies and how complex it is to apply.

While we are still awaiting updates on the fate of this credit, which expired at the end of 2013 but is expected to be renewed for 2014, it is a good idea to understand the basics of how the credit may apply to your company so you can be ready.

Qualifying Research
To qualify, research activities must pass the following three tests:

1. Technological Information Test
   Research may qualify for the R&D credit if it is undertaken for the purpose of discovering information that is:
   
   - Technological in nature, i.e., it must rely on principles of physical or biological sciences, engineering, or computer science.
   
   AND
   
   - Intended to be useful in the development of a new or improved business component, such as a product, process, computer software, formula, technique, or invention that is intended to be held for sale, lease, or license or used by the taxpayer in a trade or business.
   
   It is important to keep in mind that your research does not have to be successful to qualify.
2. The Process of Experimentation Test
   Substantially all of the research activities must constitute a process of experimentation, which demonstrates the following steps:
   • Identification of uncertainty and of one or more alternatives intended to eliminate that uncertainty;
   • Identification of a process to evaluate the alternative; and
   • The conduct of the evaluative process, i.e., through modeling, simulation, trial and error, etc.
3. The Permitted Purpose Test
   The research activities must in some way improve the function, performance, reliability or quality of a new or improved business component. Examples include market driven, cost reduction, satisfying industry/government standards, client driven, competitive advantages, increased efficiency and diversification.

Non-Qualifying Research
The following activities do not qualify:

• Research after commercial production
• Adaptation or duplication of an existing business component
• Surveys, studies and research relating to management functions
• Acquisition of another’s patent, model, production or process
• Research in connection with social sciences or humanities
• Research performed outside of the United States
• Research relating to style, taste, cosmetic, or seasonal design factors

Practical Application
To help clarify the tests and limitations discussed above, let’s take a closer look at the manufacturing industry as an example of how the R&D credit may or may not apply in different scenarios.

Example #1
A potential customer asks Company X if they can provide their widget at a lower cost. Using engineering sciences, Company X conducts research to test different materials, designs and manufacturing processes to evaluate if they can manufacture the widget at a cheaper cost. Because cost reduction is a permitted purpose, this research constitutes qualified R&D.

However, Company X also conducts research to determine the best paint and method of application to change the colors of the widgets from blue to orange. Because this is a cosmetic change, this research does not qualify for the R&D credit.

Example #2
Company Y manufacturers a machine that attaches widgets to different mechanisms. Industry standards recently changed that now require widgets to be larger. Because of this industry change, Company Y has to make improvements to their machine to fit the new, bigger widget. The Company decided that, to do this, they only needed to change one component of their machine. Research and a process of experimentation were used to determine how to change this component. Time is spent to manufacture the machine and develop the new component. The process of experimentation test was only met on the time spent on the new component, so that portion of the project qualifies as R&D. The time spent manufacturing the rest of the machine (which has not changed) does not meet this test, and, therefore, does not qualify.

Company Y must segregate the time spent on only the new component in order to calculate their qualified R&D credit.

Example #3
Company Z also manufactures widgets. Over the years they have added new pieces of equipment to their shop floor. The Company conducts research to determine if rearranging the equipment would make their manufacturing process more efficient. These types of process improvements meet the three tests and qualify as R&D.

R&D Calculations
Once you’ve determined that your activities qualify, you can calculate the qualified research expenditures associated with each project. Qualified expenditures include:

1. Wages
   Include wages for employees who are:
   • Engaging in qualified research, or
   • Engaging in the direct supervision or direct support of qualified research.

   Indirect and general administration services do not qualify.

   Without a project tracking system, determining the amount of time each employee spends on qualified projects becomes more involved. However, there are best practices that your tax advisor can discuss with you on how to calculate this number.

2. Supplies
   Any tangible property that is used in the conduct of qualified research (other than land and capitalized property).
3. 65% of Contract Research (or 75% for qualified research consortiums)

While the nuances of the R&D credit can seem daunting, your tax advisor can help you identify qualifying activities and then calculate the credit to maximize your tax savings. 

There is also an opportunity to pick up a missed R&D credit on prior year returns. Read “New Opportunity for Missed R&D Credit."

We want to hear from you! We encourage you to comment below on this blog post, share it on social media or contact Teri Grumski at tgrumski@cohencpa.com or a member of your service team for further discussion.

This communication is for information only, and any action should only be taken after a detailed review of the specific situation and appropriate consultation.

Posted by Andrew Whitehair, CPA/PFS

Effective July 2, 2014, newly issued Treasury Regulations define a new type of investment vehicle: the Qualified Longevity Annuity Contract (QLAC). A QLAC is basically a deferred fixed income annuity purchased in an individual’s qualified retirement plan or traditional IRA that pays a fixed amount at some predetermined future age. The key differentiator for QLACs from other retirement plan annuities is that funds invested into a QLAC are excluded from the participant’s account balance for purposes of calculating the required minimum distribution (RMD) from the plan.

The Rules
The new regulations establish several rules that must be met for an annuity to receive QLAC treatment, and while the rules contain many intricacies that must be considered in practice, below are the key takeaways:

1. No more than the lesser of $125,000 or 25 percent of the account balance may be used to pay premiums on the contract;
2. Annuity distributions must begin no later than the first day of the next month following the employee turning 85;
3. Currently, variable contracts and equity-indexed contracts will not meet the definition of a QLAC;
4. The contract is not permitted to make available any commutation benefit, cash surrender value, or other similar feature; and
5. The contract, when issued, must state that it is intended to be a QLAC.

The rules apply to defined contribution plans such as a 401(k)s, 403(b)s and 457 plans, as well as traditional IRAs. ROTH IRAs and defined benefit plans are not eligible for QLACs.

The Benefit
So what is the benefit of purchasing a QLAC, other than having an investment vehicle with a fancy sounding acronym? The major benefit is that, assuming the requirements are met, the purchase amount of the QLAC is not factored into the plan owner’s account balance for purposes of applying the RMD rules. If a 72-year-old client purchases a QLAC in a traditional IRA for $125,000 and defers annuity payments to age 85, the $125,000 will not be used in calculating the annual required amount the client must distribute from the IRA. This allows the client to reduce taxable income, provide additional IRA deferral, and establish a fixed income payment in the future that can provide additional longevity protection.

As with any annuity, clients should perform their due diligence and ensure the pricing, terms and the insurer’s financial stability meet their non-tax goals. However, these new regulations provide yet another tool for individuals to consider when planning for retirement.

We want to hear from you! We encourage you to comment below on this blog post, share it on social media or contact Andy Whitehair at awhitehair@cohencpa.com or a member of your service team for further discussion.
 

This communication is published by Cohen & Company for our clients and professional associates. Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this publication should be taken only after a detailed review of the specific facts and circumstances.

Posted by Bill Boyer, CPA

Business owners work hard to plan for the future growth and profitability of their companies. The same level of preparation and planning, however, is not always applied to selling the business — the time when an owner’s sweat equity can finally be realized. All too frequently, owners of private, closely held businesses begin preparing for a sale too late, creating an overwhelming and tedious sale process. A well-planned sale, on the other hand, can help ensure the transaction runs smoothly and that owners receive the maximum value of the business.

Three key preparation areas include:

• gathering relevant data,
• empowering other management team members, and
• using financial modeling to help understand the sale process.

Gather Relevant Data
The amount of information required from the different parties involved during an M&A transaction can be staggering. Investment bankers, buyers and due diligence firms often require detailed information that companies might not have readily available. This could include revenue and gross margin by product class, lists of top customers and vendors, revenue by geographical area, and financial projections, to name a few. Prior to taking the company to market, some sellers opt to proactively perform due diligence on their own company, with the help of a third party, to help expose any major issues in advance. In general, companies considering a sale process should consult with their advisors early on to begin accumulating information to expedite the process down the road.

Not surprisingly, one of the most important pieces of information that buyers will rely on is the financial statements for the past several years. While internally developed information can sometimes suffice, buyers generally prefer financial statements prepared by an independent audit firm. If you currently prepare your company’s internal financial statements and are planning to sell within the next several years, consider a review or audit for the last few years. The cost of obtaining these attest services is relatively small when compared to the magnitude of a sale transaction and the increased confidence provided to the potential buyer.

Empower Your Management Team
Another area that owners should focus on when preparing for a sale is their own involvement in the company. As a business grows, owners typically find themselves wearing many hats, including running the operations, sales, marketing, human resources and all other departments. As the business moves towards a sale, an owner should begin to empower the rest of the management team, such that the business could continue in the owner’s absence. Frequently, buyers are concerned that without the previous owner, key components of the business will be lost, such as customer relationships, vendor relationships or product development. These concerns could result in the buyer perceiving the business as a riskier prospect, decreasing its value.

Use Financial Models
Throughout the entire sale process, it’s important to utilize some level of financial modeling to help understand the deal. (Read our white paper for more about the mechanics and logic behind financial modeling.) Initially, businesses should rely on their advisors to help develop a range of possibilities for the sale price. Consider a business owner who expects to sell his company for $20 million but, after some initial modeling, realizes that a range of $8 million to $12 million is more realistic for the current market. The owner and advisor would discuss whether it makes sense to focus on growing the company further to increase its value, develop a very specific list of strategic buyers who might be willing to pay a premium, or whether the expectation of a $20 million sale price needs to change. As the sale process proceeds, financial modeling can be used to provide a foundation for a sale price when negotiations begin, and can be tailored as different offers or scenarios arise.

This article touches on just a few of the many planning considerations when selling a company in order to help command a higher value during a sale. The sale process can be intimidating, emphasizing the need for a well-timed, thought-out process and a competent group of advisors. Remember that it’s never too early to start planning for the sale of your business.
 

We want to hear from you! We encourage you to comment below on this blog post, share it on social media or contact Bill Boyer at bboyer@cohencpa.com or a member of your service team for further discussion.

This communication is published by Cohen & Company for our clients and professional associates. Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this publication should be taken only after a detailed review of the specific facts and circumstances.

On July 23, 2014, a settlement was reached in San Allen, Inc., et al. v. Stephen Buehrer, Administrator, Ohio Bureau of Workers' Compensation that will require the Ohio Bureau of Workers’ Compensation (BWC) to distribute $420 million among more than 200,000 private employers in Ohio. In the case, the BWC was found to have overcharged a group of employers that were either excluded or dismissed from the BWC’s group-rating program from 2001-2008. This settlement means that qualifying businesses have an opportunity to claim their refunds, or opt out altogether, on or before September 22, 2014.

As a private employer, you may be eligible to receive part of the $420 million settlement if for one or more of the policy years from 2001 through 2008 you:

• subscribed to the State Workers’ Compensation Fund,
• were not group rated, and
• reported payroll and paid premiums in a manual classification for which the non-group rated base rate was inflated.

If you were not included in a group rate for only some of the policy years above, you could still qualify for a partial refund. Employers self-insured for their Ohio workers’ compensation coverage are not impacted.

Beginning August 22nd, eligible state-funded employers should receive a notice in the mail from the settlement administrator, Garden City Group, regarding eligibility and the process to either file a claim or opt out. Completed forms must be notarized and postmarked on or before September 22, 2014, and sent back to Garden City Group for review. Employers will have the opportunity to correct any issues Garden City Group may find in their claims. The entire process, including the receipt of refunds is expected to be complete in mid- to late January.

However, if you are affected by this ruling, be aware that the court must still approve the $420 million settlement before any payouts can be made.

Contact a member of your service team for more information.
 

This communication is published by Cohen & Company for our clients and professional associates. Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this publication should be taken only after a detailed review of the specific facts and circumstances.

Posted by Andrew Whitehair, CPA/PFS

While the American Taxpayer Relief Act of 2012 extended tax cuts for some individuals and increased rates for others, one resulting benefit that most can agree on is the “permanency” it brought to the uncertain world of estate planning, at least for now.

The Act set the top marginal estate tax rate at 40%, which, even though it marked an increase in the rate, still served as a digestible compromise to the threat of a 55% rate had the Act not passed. The Act also set the estate and gift tax exemption at $5 million, with an option for portability from one spouse to another.

Setting a permanent $5 million exemption was a huge win for individuals with larger estates and significant estate planning needs. But what many people may not know is that their estate and gift tax exemption is actually worth more than $5 million. This is because the Act calls for the original $5 million amount to be indexed each year for inflation, thus creating increasing exemption amounts that can further help reduce an estate on a tax-favored basis.

The following chart shows the amount of the estate and gift tax exemption over a three-year period.

Even if a couple gifted the maximum allowable ($10,240,000) under the gift tax rules in 2012, the indexed exemption creates an opportunity for additional tax-free gifts. For example, spouses who used their full joint exemptions in 2012 would have an additional $440,000 of lifetime exemption between the two of them to use to make additional transfers free of gift tax. By employing the use of wealth transfer techniques, such as Grantor Retained Annuity Trusts (GRATs) and sales to intentionally defective grantor trusts (IDGTs), individuals may be able to leverage this additional indexed exemption to transfer much larger amounts out of their estates with little or no gift tax.

Taxpayers should consider the additional indexed exemption when implementing their annual gifting strategy or as a supplement to a previous asset transfer. Provided inflation grows, the estate and gift tax lifetime exemption should continue to grow as well, offering taxpayers additional tax-free gifting opportunities each year.

We want to hear from you! We encourage you to comment below on this blog post, share it on social media or contact Andy Whitehair at awhitehair@cohencpa.com or a member of your service team for further discussion.

This communication is published by Cohen & Company for our clients and professional associates. Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this publication should be taken only after a detailed review of the specific facts and circumstances.

As an update to our CPE-day presentation in June, the IRS has issued final regulations regarding the proper tax treatment of dispositions of tangible depreciable property under the Modified Accelerated Cost Recovery System (MACRS). The regulations largely complete the IRS’ overhaul of the federal tax regulations addressing the proper treatment of expenditures incurred in acquiring, producing or improving tangible assets. (Read: What is the Impact of New Repair & Maintenance Regs.) The final regulations affect all taxpayers who dispose of MACRS property.

Background
For most tangible business assets with a useful life of more than one year, taxpayers generally must depreciate the capitalized cost, or basis, over a specified period of years. The number of years depends on the asset class.

But when an asset is disposed of before it’s been fully depreciated under MACRS, what’s the tax impact? Temporary regulations issued in 2011 addressed this situation. The final regulations retain most of the temporary regulations’ provisions but make a few changes.

Defining “disposition”
Under the final regulations, a disposition of a MACRS asset occurs when ownership is transferred or the asset is permanently withdrawn from use. It includes an asset’s:

• Sale,
• Exchange,
• Retirement,
• Physical abandonment, or
• Destruction.

It also includes the retirement of a building’s structural components (or a portion thereof, such as a roof) to which the partial disposition rule applies.

Partial dispositions
The partial disposition rule allows taxpayers to claim a loss on the disposition of a component (structural or otherwise) of an asset without having identified the component as an asset before the disposition. The rule reduces the number of cases where an original part and any subsequent replacements of that part must be capitalized and depreciated simultaneously.

The partial disposition rule generally is elective. But it’s mandatory in certain circumstances, including for dispositions that result from a casualty event (for example, a fire or storm) or a like-kind exchange.

The final regulations also include a special partial disposition rule for situations where the IRS disallows a taxpayer’s repair deduction for the amount paid or incurred for the replacement of a portion of an asset and requires capitalization of that amount. In such cases, the taxpayer can make the partial disposition election for the disposition of the portion by filing an application for change in accounting method, as long as the taxpayer owns the larger asset at the beginning of the year of change.

Determining the disposed asset
Generally, the specific facts and circumstances of each disposition are considered when determining the disposed asset for tax purposes. But the final regulations make clear that the asset may not consist of items placed in service by the taxpayer on different dates.
Further, the unit of property as determined under Treasury Regulations Sec. 1.263(a)-3(e) (the rules regarding the proper tax treatment — capitalization or expensing — of amounts paid to improve tangible property) does not apply for purposes of determining the appropriate disposed asset.
 

The final regulations provide special rules for certain types of properties. For example, each building (including its structural components) is the disposed asset unless:

• More than one building is treated as the asset,
• An existing building has an improvement or addition (the improvement or addition is then a separate asset), or
• The building includes two or more condo or cooperative units (each unit is a separate asset).

Similarly, if the taxpayer places in service an improvement or addition to a nonbuilding asset after the asset was placed in service, the improvement or addition is a separate asset.

Determining gain or loss
If an asset is disposed of by sale, exchange or involuntary conversion, then gain or loss is recognized under the applicable section of the Internal Revenue Code. When an asset is disposed of by physical abandonment, on the other hand, loss is usually recognized in the amount of the asset’s adjusted depreciable basis at the time of the abandonment. If the abandoned asset is subject to nonrecourse indebtedness, the asset is treated as a sale.

When an asset is disposed of in some manner other than abandonment, sale, exchange, involuntary conversion or conversion to personal use (for example, when the asset is moved to a supplies or scrap account), gain is not recognized. Loss is recognized in the amount that the asset’s adjusted depreciable basis exceeds its fair market value at the time of disposition.

Determining basis
When a disposed asset is in a multiple-asset account and it’s impracticable from the taxpayer’s records to determine the asset’s unadjusted depreciable basis, the final regulations allow the taxpayer to use “any reasonable method” to determine the basis. The method must, however, be consistently applied to all assets in the same multiple-asset account. Reasonable methods include:

• Discounting the cost of the replacement asset to its placed-in-service year cost using the Producer Price Index for Finished Goods, the Producer Price Index for Final Demand or any other designated index;
• A pro rata allocation of the unadjusted depreciable basis of the multiple asset account based on the replacement cost of the disposed asset and the replacement cost of all of the account’s assets; and
• A study allocating the asset’s cost to its individual components (for example, a cost segregation study).

A taxpayer can also use a reasonable method when the partial disposition rule applies and it’s impracticable to determine unadjusted depreciable basis from the taxpayer’s records.

Determining the placed-in-service year
Taxpayers generally must use the specific identification method to determine a disposed asset’s placed-in-service year (the year a taxpayer can begin claiming depreciation on the asset). Under the method, if an asset is in a multiple-asset account and it’s impracticable from records to determine the year, the taxpayer can use a first-in, first-out (FIFO), modified FIFO or other designated method (but not a last-in, first-out, LIFO, method).

The same methods can be used when the partial disposition rule applies and it’s impracticable from records to determine the year.

Use of general-asset accounts
The final regulations allow taxpayers to maintain general-asset accounts for MACRS property. When an asset in such an account is disposed of, the proceeds are generally treated as ordinary income.

The regulations also include rules for establishing, depreciating and disposing of assets in general-asset accounts, as well as how to determine basis and placed-in-service year. Each general-asset account is treated as the asset.

Effective date
The final regulations apply to tax years beginning on or after January 1, 2014, but taxpayers may choose to apply them to taxable years beginning on or after January 1, 2012.

We anticipate that the IRS will soon issue a revenue procedure to provide guidance to taxpayers to change their method of accounting in correspondence with the final regulations.

We want to hear from you! We encourage you to comment below on this blog post, share it on social media or contact Angelina Milo at amilo@cohencpa.com or a member of your service team for further discussion.

This communication is published by Cohen & Company for our clients and professional associates. Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this publication should be taken only after a detailed review of the specific facts and circumstances.

Posted by Tony Micheli, CPA

Are you considering making a significant charitable legacy gift? What type of vehicle should you use?  Donors often have similar goals in mind — helping a charity dear to their heart and saving on taxes. However, donors may differ in their objectives regarding family involvement, control of grant making and investing, and costs to administer the legacy gift.

To help address different needs, private foundations and philanthropic funds are two of the primary donor vehicles often used. Each vehicle has special nuances to consider. Which one is right for you will depend upon your specific tax situation, philanthropic goals and other non-charitable considerations, which are as important in the decision-making process as the legacy gift itself. Consider some of the following key points regarding each vehicle when making your decision.

The Cost of a Good Deed
Costs associated with a charitable legacy gift can vary greatly. Establishing a private foundation can take up to several months and will involve professional fees for items such as incorporating the entity and filing an application with the IRS. There will also be ongoing professional costs for income taxes, accounting services, professional investment advice, recordkeeping and administrative costs to review grant requests and grant making. While one benefit of private foundations is that they are not limited to gifting only to 501(c)(3) public charities, giving foundations a broader base of eligible charities from which to choose, there will be due diligence costs to ensure an organization is a qualified recipient.

On the other hand, starting a philanthropic fund involves very little time with no professional fee costs to the donor. There are no ongoing professional fees for filing tax returns, recordkeeping or administrative costs. Eligible grant recipients are, however, typically limited to 501(c)(3) public charities. Verifying the organization is a 501(c)(3) and all associated expenses are the responsibility of the sponsoring philanthropic fund organization.

Maintaining Control
The level of control over the vehicle used to make a charitable legacy gift is a key component for many donors. With a private foundation, you can manage the investments yourself or obtain professional investment advice if you wish. Many times the donor is a sophisticated investor or already has trusted advisors and does not want to use unknown third-party advisors to manage legacy gift assets. For a private foundation, a legal entity is established by the donor who then controls the board and grant-making decisions. You also have unlimited succession for control of the foundation to ensure that your legacy can live on indefinitely. 

With a philanthropic fund, you have no control over how the assets are invested. The funds typically go into an investment pool, which means there will be a charge for investment management fees that comes out of your fund. However, typically these equal 1% or less of the fund principle. The philanthropic fund acts as a “giving account,” where the advisory board is selected by the sponsoring philanthropic fund organization. You don’t have control over grant making and must make recommendations to the sponsoring organization for a gift to the charity of your choice. There may also be some limitations on succession and allocation of funds to successor family funds, which could impact the donor’s initial legacy intentions.

Taxing Decisions
And, of course, the tax deduction limit for charitable contributions varies slightly depending on which vehicle you use. For private foundations, the deduction limit for contributions of cash are subject to 30% of adjusted gross income (AGI), while the deduction limit for contributions of appreciated assets are subject to 20% of AGI. For a philanthropic fund, cash contributions are subject to 50% of AGI, and gifts of appreciated assets are subject to 30% of AGI.

There are also distinctions between the two vehicles as to what can be gifted and what can be deducted. For a private foundation, contributions may be funded with wide array of donor assets; however, the deduction is limited to cost basis for all appreciated property gifts, except for publicly traded stock. For a philanthropic fund, contributions may be limited to cash or publicly traded stock; therefore, the deduction is fair market value for all appreciated property gifts.

Keep in mind if you use a private foundation, you will be required to make annual donations to other organizations in the amount of 5% of the foundation’s net asset value. In a year marked by poor investment performance, you may have to use some of the foundation’s principle to meet the annual requirement. There is no such requirement for a philanthropic fund; you can park the assets in the philanthropic fund until you are ready to distribute out to a charitable organization. For a private foundation there is also an annual net investment income (NII) tax calculated on the annual federal tax return, so some of the assets will be paid to the government in the form of a tax. There is no tax for a philanthropic fund, so all of the assets are used for charitable purposes.

Final Considerations
When deciding which vehicle to use, remember that there are additional legacy items to consider. A private foundation, ironically, has limited privacy, since the annual tax returns are required to be made available to the public. With a philanthropic fund, you can keep donors’ names confidential, and grants to other charitable organizations can be made anonymously. But only with a private foundation can you employ family members to run the foundation, allowing the next generation to get more involved in philanthropy, the grant-making-decision process, and to continue the family legacy for generations to come.

We want to hear from you! We encourage you to comment below on this blog post, share it on social media or contact Tony Micheli at tmicheli@cohencpa.com or a member of your service team for further discussion.

This communication is published by Cohen & Company for our clients and professional associates. Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this publication should be taken only after a detailed review of the specific facts and circumstances.

Posted by Tracy Monroe, CPA, MT

In each of the last two years, the State of Ohio has made $30 million of training grant funds available to companies on a first-come-first-served basis via an online application process. The program, called the Ohio Incumbent Workforce Training Voucher Program, is returning again this fall for perhaps the final time.

The program is highly competitive; typically all the funds are awarded on the first day they are made available. The program reimburses companies for up to 50% of employee training expenses, limited to $4,000 per employee and $250,000 per legal entity. It is available to many industries with the exception of local service organizations such as retail, hospitality, restaurant, landscaping, auto repair, etc. There are no hiring or capital investment requirements associated with the program.

On a personal note, I worked directly with our controller to submit an application last year. I found it to be a convoluted and labor-intensive process and would strongly encourage anyone who is interested to work with a professional consultant to maximize the chance of receiving funds.

Silverlode Consulting, a local company that helps guide companies to secure and manage public-sector financing and economic incentives packages, shared the following tip with us.

The trick is to have an application completely prepared before the expected application date of September 30th, so it can simply be submitted on that morning.

If you are interested in learning more, we encourage you to take our short survey developed in conjunction with Silverlode Consulting to help identify if your company may be eligible. 

We want to hear from you! We encourage you to comment below on this blog post, share it on social media or contact Tracy Monroe at tmonroe@cohencpa.com of Cohen & Company’s state and local tax team. You can also visit Silverlode’s news feed for more on the program.

This communication is published by Cohen & Company for our clients and professional associates. Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this publication should be taken only after a detailed review of the specific facts and circumstances.

The Financial Accounting Standards Board (FASB) has updated U.S. Generally Accepted Accounting Principles (GAAP) to eliminate a critical gap in existing standards. The new guidance, found in Accounting Standards Update (ASU) 2014-15, Presentation of Financial Statements — Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, clarifies the disclosures management must make in the organization’s financial statement footnotes when management has substantial doubt about its ability to continue as a “going concern.” The guidance applies to all companies and will take effect for the annual financial statement period ending after December 15, 2016.

The gap in GAAP
Until now, GAAP provided no guidance on management’s responsibility to evaluate or disclose certain adverse conditions or events that raise substantial doubt about the organization’s ability to continue as a going concern. Although footnote disclosures regarding these conditions have commonly been provided, different organizations have had different views about when substantial doubt exists. This has led to variations in whether, when, and how organizations disclose the relevant conditions and events.

Other prevailing standards
U.S. auditing standards require auditors — not management — to evaluate whether there’s substantial doubt about an organization’s ability to continue as a going concern for a reasonable period of time not to exceed one year beyond the date of the financial statements being audited. U.S. auditing standards further require auditors to consider the possible financial statement effects, including footnote disclosures on uncertainties about an organization’s ability to continue for a reasonable period of time.

Evaluating “substantial doubt”
The disclosures required under the new guidance, therefore, may not substantially alter the information disclosed in many audited financial statements. The ASU’s definition of “substantial doubt” calls for a focus on significant uncertainties about an organization’s ability to continue, rather than requiring a broader consideration of all uncertainties and risk factors.

Under the new standard, an organization’s management must evaluate whether conditions or events raise substantial doubt about the organization’s ability to continue as a going concern for a period of one year from the date the financial statements are available to be issued. Substantial doubt exists when conditions or events, considered in the aggregate, indicate that it’s probable that the organization will be unable to meet its obligations as they become due within one year.

Management’s evaluation should consider both qualitative and quantitative information about relevant conditions and events. This information includes the organization’s current financial condition, conditional and unconditional obligations due or anticipated within one year, and the funds necessary to maintain operations.

Disclosure requirements
When management identifies conditions or events that raise substantial doubt, it must consider whether its plans for mitigating those conditions or events will be effective. The mitigating effect of the plans should be considered only to the extent that:

1. It’s probable that the plans will be effectively implemented, and, if so,
2. It’s probable that the plans will mitigate the conditions or events that raise substantial doubt about the organization’s ability to continue as a going concern.

Certain disclosures are required depending on whether or not the plans alleviate the substantial doubt. If conditions or events continue to raise substantial doubt in subsequent reporting periods, the organization should continue to make the required going concern disclosures in those periods. Disclosures should become more extensive as additional information becomes available about relevant conditions or events and management’s plans.

Effective date
As mentioned, the changes in ASU 2014-15 will take effect for the annual financial statement period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.

We want to hear from you! We encourage you to comment below on this blog post, share it on social media or contact Jami Blake at jblake@cohenpca.com or a member of your service team for further discussion.

This communication is published by Cohen & Company for our clients and professional associates. Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this publication should be taken only after a detailed review of the specific facts and circumstances.

Posted by Lisa Loychik, CPA

As our busy lives continue to blur the line between “business” and “personal,” it’s a good idea to review the tax treatment of common business items that also may lend themselves to personal use, causing some confusion. Below is guidance on the top three: computers, cell phones and travel.

• Computers. Computers are considered listed property, a specific class of depreciable property subject to a special set of tax rules, unless the equipment is used exclusively at a regular business establishment and owned by the person operating the establishment. Computers considered listed property must be used for business more than 50% of the time to be considered an expense for tax purposes. As listed property, computer-related expenses are subject to the Code Sec 274(d) substantiation requirements, meaning they must be substantiated by providing adequate record of: amount, time and business reason for the use of the listed property. The taxpayer must provide written documentation and taxpayer-maintained records to prove each element of substantiation. The taxpayer also must maintain a log of the business use.
• Cell phones. Cell phones are no longer considered listed property due to a provision in the Small Business Jobs Act of 2010, so they do not have the added record keeping requirements of computers categorized as listed property. Under the guidance issued, where employers provide cell phones to their employees or where employers reimburse employees for business use of their personal cell phones, tax-free treatment is available without burdensome recordkeeping requirements. The guidance does not apply to the provision of cell phones or reimbursement for cell-phone use that is not primarily business related, as such arrangements are generally taxable.
• Travel. Business trips, conventions and continuing education seminars are frequently planned to incorporate leisure time. Naturally, you are not prohibited from enjoying non-business or personal activities while on a business trip, but the primary reason for the trip (and the majority of time spent) must be related to your trade or business. The additional expense incurred to have a spouse join you is also not deductible (or reimbursable under an employer’s travel plan), unless your spouse also is a legitimate employee within the business. There are also special rules for conventions outside of North America.

Convention expenses include:

• registration and attendance fees
• airfare
• taxi and other local transportation
• toll telephone calls and computer rental
• accommodations
• 50% of the cost of the meals

Remember to keep detailed records and a daily log of convention expenses. Travel expenses are also subject to the substantiation requirements of Code Sec. 274(d). You may deduct (or exclude from income if paid by your employer) only the costs associated with the business portion of the convention.  Most importantly, conventions, conferences and seminars must be related to your business and they must benefit your business activities.

We want to hear from you! We encourage you to comment below on this blog post, share it on social media or contact Lisa Loychik at lloychik@cohencpa.com or a member of your service team for further discussion.

This communication is published by Cohen & Company for our clients and professional associates. Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this publication should be taken only after a detailed review of the specific facts and circumstances.

Posted by Joe DiFranco, CPA

One of the most frequent questions our not-for-profit clients ask us is: What are the latest techniques other NFPs are using to find new donors and keep current donors engaged? While there’s no real “secret sauce,” successful not-for-profit organizations seem to know that it is important to continually evaluate the changing donor landscape as well as the available platforms to reach and retain them. Below are two of the latest “trends” or key considerations that are top of mind, or should be, for not-for-profit organizations.

Millennials Hold Power. While it’s always been important to understand your audience, the new Millennial generation offers new opportunities, and NFPs can benefit greatly from learning about the donating habits of this group. Vastly different from other generations in a variety of ways, Millennials make up 25% of the population, according to The Millennial Generation Research Review published by the U.S. Chamber of Commerce Foundation. When it comes to donating, Millennials tend to give more impulsively. When they are inspired by an issue, they want to make a donation on the spot. Typically this means that they will go to your website or social media page, and then it is up to you, via that medium, to convert the opportunity into a donation. Not-for-profits that have earned donations from Millennials have been the organizations that are able to successfully educate potential donors about the issues and people the organization impacts. Donors want to know what is considered a “win” and how their support will help the organization attain that win. According to Derrick Feldman, CEO of Achieve in Indianapolis, “Millennials care about issues, less so about organizations …They’re focused on what your organization does to help them reach their cause.”

Don’t Hesitate to Communicate. Donors appreciate feedback. This has always been relevant but has proven to be more important recently. For all generations, and more significantly for Millennials, the quicker donors receive feedback the better. In The Essential Fundraising Handbook for Small Nonprofits by Pamela Grow, she recommends a number of different ways to keep donors engaged and to provide them with the feedback they want. Some of these ideas include creating welcome kits to educate new donors, which may include hand-written thank-you notes, photos, donor surveys, brochures or a small gift such as a bookmark. She also suggests creating "pass-it packets,” which are packets of information that donors can share with others. Millennials tend to have a core group of friends that they can influence, so a pass-it packet can be very useful. Additionally, organizations can expedite any feedback through the use of social media sites. Grow suggests using sites like YouTube, Facebook or Twitter to share thank-you videos or postings to donors. These messages can come from the program’s staff, board members or individuals your agency works with. She says that NFPs should ask themselves, “’What would happen if I thanked one donor every day for the next year?’” And, with social media sites, this can be done easily.

Keeping on top of who your donors are (or could be), communicating with them regularly and knowing what vehicles exist to reach your audience are more than passing trends — they are foundational elements of any successful NFP.

This communication is published by Cohen & Company for our clients and professional associates. Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this publication should be taken only after a detailed review of the specific facts and circumstances.

Effective October 1, 2014, IRS Notice 2014-57, 2014–2015 Special Per Diem Rates, updates the per diem rates that can be used for reimbursement of ordinary and normal business expenses incurred while employees travel away from home. It also revises the list of high-cost localities for use in the high-low substantiation method. The per diem rates, which are established by the General Services Administration (GSA), are updated before the end of the federal government’s fiscal year. Some employers elect to use these rates to simplify recordkeeping.

Background
As long as employees properly account for their business-travel expenses, reimbursements are generally tax-free to the employees and deductible by the employer. But keeping track of actual costs can be a logistical nightmare. With the government-approved per diem rates, employees don’t have to keep receipts for all of their travel expenses. So, employees and employers alike often prefer this recordkeeping shortcut.

Here’s how the per diem method works: Assuming that the travel qualifies as a business expense, the employer simply pays the employee the per diem allowance designated for the specific travel destination and deducts the per diem paid. The employee doesn’t have to report the payments on his or her personal tax return but still must substantiate the time, place and business purpose of the travel.

Although the rates are set by the GSA to cover travel by government employees, private employers may also use them for their employees. The rates are updated annually for the following areas:

• The 48 states in the continental United States and the District of Columbia (the “CONUS” rates),
• Certain areas outside the continental United States, including Alaska, Hawaii, Puerto Rico and U.S. possessions (the “OCONUS” rates), and
• Foreign countries outside the CONUS and OCONUS areas.

There are also optional rates for high-cost and low-cost areas. These designations simplify the expense reimbursement process even further by providing two per diem rates, one for high-cost localities and another for low-cost localities.

What do per diem rates cover?
Airfare and other transportation costs aren’t covered by the per diem rates. What the rates do include are amounts for lodging and amounts for meals and incidental expenses (M&IE). For this purpose, M&IE includes:

• Meals and room service,
• Laundry, dry cleaning and ironing of clothing, and
• Fees and tips to service providers, such as food servers and luggage handlers.

Typically, if an employer chooses to use per diem rates, it uses them for all employees who regularly travel on business. An employer may choose to use the per diem rates for the specific travel destinations or for the high- and low-cost areas. However, per diem rates for lodging can’t be used by an employee who owns, either directly or indirectly, more than 10% of the company. Instead, these owners must keep track of the actual amount of those business-travel expenses and retain their receipts. For M&IE, even those who own more than 10% of the company may use the per diem rates. 

What’s new in fiscal year 2015?
For fiscal year 2015 — which spans October 1, 2014, through September 30, 2015 — the per diem rate for high-cost areas has risen to $259, an increase of $8 over the prior year. This rate consists of $194 for lodging and $65 for M&IE.

The per diem rate for low-cost areas has increased by only $2. The low-cost per diem rate is now $172, including $120 for lodging and $52 for M&IE.

As usual, the list of cities (and their surrounding areas) included on the list of high-cost areas has been tweaked, and the time periods for which some of the seasonal areas will be included as high-cost areas have been revised. The changes are as follows:

• San Mateo/Foster City/Belmont, Calif.; Sunnyvale/Palo Alto/San Jose, Calif.; Glendive/Sidney, Mont.; and Williston, N.D. have been added to the list of high-cost areas.
• Time periods for Sedona, Ariz.; Napa, Calif.; Vail, Colo.; Fort Lauderdale, Fla.; Miami; and Philadelphia have been modified.
• Yosemite National Park, Calif.; San Diego; and Floral Park/Garden City/Great Neck, N.Y., have been removed from the list of high-cost areas.

The definition of “incidental travel expenses” has also been modified. To remain consistent with Federal Travel Regulations, incidental expenses now include only fees and tips given to porters, baggage carriers, hotel staff and staff on ships.

Transportation between places of lodging or business and places where meals are taken is no longer included in incidental expenses. In addition, the costs of mailing or filing travel vouchers and paying employer-sponsored charge card billings are specifically excluded. So, employers that use per diem rates may separately reimburse employees for transportation and mailing expenses.

Timing is everything
As mentioned, the travel expense updates go into effect on October 1, 2014. During the last three months of calendar 2014, an employer that uses the per diem or high-low method may switch to the new rates or continue with the rates it’s been using for the first nine months of 2014.

But an employer must select one year’s set of rates for this quarter and stick with it; it can’t use 2014 rates for some employees and 2015 rates for others. Likewise, an employer can’t use the 2014 list of high-cost areas for some reimbursements and the 2015 list for others. In addition, if an employer used the high-low substantiation method for the first nine months of the year, it must continue using that method through December 31, 2014.

Because business-travel expenses often attract IRS attention, they require detailed, accurate recordkeeping. The per diem and high-low methods can make recordkeeping less burdensome, but they’re not the best solution for all employers.

We want to hear from you! We encourage you to comment below on this blog post, share it on social media or contact a member of your service team for further discussion.

This communication is published by Cohen & Company for our clients and professional associates. Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this publication should be taken only after a detailed review of the specific facts and circumstances.

Posted by Chris Madison, CPA, MT

It’s been quite a while since the word team has brought so much excitement to Northeast Ohio — the return of LeBron, our improving Cleveland Browns and the fact that it is prime-time fantasy football season! Each week we juggle our rosters in an effort to put the best team on the field.

All of which has me thinking about a question we regularly ask our private business owner clients: “Do you have the right team of advisors in place?” The response is usually something like, “I think so” or “I’m comfortable with my team; they know me and they’ve been my advisors for a long time.”

But how do you really know if your team is really as effective as it could be? How do you build the right team or know you have the right advisors already on your side? Let’s start by looking at a few of the attributes of a good team.

• Everyone understands the ultimate goal.
• Everyone understands the plan to achieve that goal and is committed to it.
• Roles and responsibilities have been clearly communicated and accepted.
• The requisite skills needed to fulfill each role are understood and available.
• There is a system of accountability in place and communicated to those involved.
• Everyone respects and supports one another.
• There is constant flow of information through good communication.

Now apply this to you and your business. Start by taking a hard look at your current advisory team by asking yourself these basic questions:

1. Do my accountant, banker, lawyer, insurance agent and investment advisors know and understand my goals?
2. Do they proactively ask me the questions that will ultimately help my business or lead to other opportunities, or do I have to do the asking?
3. Are they familiar with my business strategy and believe it will take me and the business in the right direction?
4. Do they know what I need from them, and have they agreed to provide it?
5. Do they have the skills and resources necessary to provide what I need today and what I will need in the future as my business grows?
6. Does our contractual relationship provide a level of accountability on both of our parts?
7. Do my outside advisors work together on other clients; do they talk to each other and have a good rapport outside of my business needs?

The fully integrated interaction described above is important because moving in unison, your advisors can be infinitely more effective. For example, your investment advisor needs to know your anticipated tax brackets to properly evaluate if tax-exempt investments may make sense for you, just as your accountant should know if an insurance trust is being set up by your attorney so the proper gift or trust tax returns can be filed.

If the answer to any of the questions is no, it doesn’t necessarily mean you have the wrong team, but it does mean that you have an opportunity or opportunities to improve the interaction between your business and its advisors — increasing their effectiveness in helping you achieve your goals.

As you prepare for year end, take a few moments to think about your answers to these seven questions. Be honest with yourself, and if you don’t like what you uncover, make a point to have an open conversation with your external team to work on tangible areas of improvement for the coming year (and hold them accountable for any agreed-upon changes). If they aren’t open to change, you might want to start looking at the waiver wire for the top free agents. It’s never too late to pick up a valuable player that can help turn your business advisors into a championship team.

We want to hear from you! We encourage you to comment below on this blog post, share it on social media or contact a member of your service team for further discussion.

This communication is published by Cohen & Company for our clients and professional associates. Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this publication should be taken only after a detailed review of the specific facts and circumstances.

Posted by Ray Polantz, CPA, MT

“Invest in tax-free offshore funds!”  Sounds great, right? 

Each year, many U.S. investors fall for these familiar sales pitches. Other investors are simply looking to diversify risk by investing in offshore opportunities. Still others have immigrated to the U.S. and have retained some investments from their home country. In all of these cases, it is important to be aware of the Passive Foreign Investment (PFIC) rules and the tax considerations associated with these investment vehicles.

A PFIC is a foreign corporation that meets either an asset test (at least 50% of the foreign corporation’s assets are passive assets) or an income test (at least 75% of gross income is passive). In the investment world many foreign pooled investment funds, such as mutual funds and foreign hedge funds, are considered PFICs.

Paying the Piper
In general, a U.S. investor in a PFIC defers U.S. taxes until the investment is sold or until certain “excess distributions” are made. That’s the good news. The bad news is that once either of these events occurs, the shareholder must pay tax at ordinary income tax rates — plus a punitive, compounding interest charge for every year that income was deferred. This essentially negates the economic benefit of deferring the taxes in the first place.
     
Easing the Pain
For shareholders of privately held PFICs, the harsh consequences of the default regime may be avoided by making a qualified electing fund (QEF) election. If this election is made, the shareholder is taxed annually on his or her pro-rata share of the PFIC’s income for the year — similar to a U.S. mutual fund.  Importantly, this option allows the various categories of income to retain their character, including preferential capital gain treatment. So why do so few investors make this election? It’s probably because it’s nearly impossible to do so in many cases. Oftentimes foreign funds simply do not provide shareholders with U.S. books and tax records, which is a requirement for making a QEF election.

A New Twist – The Net Investment Income (NII) Tax
Adding even more complexity to the equation, the new 3.8% NII tax rules, effective in 2013, are not the same as income tax rules with respect to PFICs taxed as QEFs. For income tax purposes, a QEF investor is taxed on all ordinary earnings whether distributed or not, while for NII tax purposes these earnings are not currently taxed. Conversely, the NII tax on PFIC income is imposed on the actual distribution or gain amount, while for income tax purposes this amount may not be taxable. This discontinuity can complicate recordkeeping for taxpayers.

The IRS does provide a way to simplify matters. In the case of those investors who have made a QEF election, the regulations allow a QEF investor to make an election to be subject to the NII tax at the same time the income is recognized for regular income tax purposes. Once the election is made, it will remain in effect for all future years. The election simplifies the associated recordkeeping but may not benefit all taxpayers depending on their individual circumstances.

Before investing in a PFIC, make sure you consider all relevant tax considerations with your advisors, including the ability, or inability, to make a QEF election and whether to make the special NII tax election.

We want to hear from you! We encourage you to comment below on this blog post, share it on social media or contact Ray Polantz at rpolantz@cohencpa.com or a member of your service team for further discussion. 

This communication is published by Cohen & Company for our clients and professional associates. Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this publication should be taken only after a detailed review of the specific facts and circumstances.