Archives for October 2014

Preparing for Tax-Time

It is still early to be thinking about tax time, but it is just around the corner. There is still plenty of things that you can do to prepare for the opening of tax season. It is better to start planning now then wait until the last minute. Below is a list of steps you can take to be better prepared to for tax time.

  1. Gather up work receipts: If you purchased any item for your job that your employer does not reimburse you for, that item is deductible. These items include but are not limited to uniforms, legal fees related to doing your job, licenses and regulatory fees, education that is required for employment, subscriptions to professional journals and magazines, medical exams required by your employer, etc. If you car self-employed you can also deduct  items such as computers, desks, manufacturing equipment, tools, advertising fees, electricity, gas, etc. It is important to save all your receipts and keep them in a safe place. Having them all in one location will help you find what you can deduct from your taxes that is work related.
  2. Save pictures, receipts or records of charitable donations: The holiday season is coming up shortly and it is also the time where many people chose to donate to organizations. One of the added benefits to donating to a charity is the ability to deduct the contributions on your taxes. Save all records of the donations. If donating a substantial amount or item to charity it is important to document that donation with a few pictures. Formal pictures are not required, but a picture is worth a thousand words. It will also substantiate your deduction to the IRS.
  3. Gather mortgage receipts: Even thought your mortgage company will provide you a 1099 detailing the interest you have paid on your house payment, it is important to keep the receipts to make sure that the bank is accurate while providing you will some sense of what the size of the deduction will be for the year.
  4. Proof of energy efficient goods: There is a deduction of 10% of the cost of the qualified energy efficient improvements. These improvements may include adding insulations, energy-efficient exterior windows and doors, and some roofs. The credit has a lifetime limit of $500, with $200 going towards windows. The qualifying residence must be the principal residence of the taxpayer and be located in the US. New construction and rental propertied do not apply to this deduction.
  5. Locating last year’s tax return: This is probably the most important step. Locating last year’s tax return allows you to review the return. This can provide you with a wealth of knowledge and valuable items that may need to be included on this year tax return. It can tell you tax loss carry forward information, withholding information, and information on how to treat certain income such as capital gains or traditional income.
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Overview of Net Investment Income Tax

Any non-corporate taxpayers, such as individuals, trusts, and estates, beginning in 2013 are subjected to a net investment income tax (NIIT). The NIIT is a 3.8% tax on income and gains made through investments as long as they have a net investment income and a modified adjusted gross income in excess of $200,000 for single individuals/heads of households and $250,000 for joint filers/surviving spouses. Only about 2%-3% of all taxpayers are subjected to NIIT.

Calculating Net Investment Income (NII)

Calculating NII is a two-step process. In the first step, taxpayers add together three categories: gross income from interest, dividends, annuities, royalties, and rents; gross income from trade or business in which the individual is passive; and the net gain from disposing of property. In step two, the individual subtracts deductions designated for the types of gross income and net gain. These deductions include but are not limited to, income derived from ordinary course of trade or business in which the individual is active, gains on properties held in a trade of business in which the individual is active. This is where professionals can help you determine if the income is from active or passive investments.

Not Subjected to NIIT

The following are items that are exempt from the NIIT:

  • Tax Exempt income
  • Wages, unemployment compensation, alimony, Social Security benefits, and income subjected to self-employment taxes
  • Gain from the sale of a principal residence
  • Distributions from tax-favored retirement plans

For high-income individuals, the tax system is not two-dimensional. Taxpayers are governed by income tax and NIIT. To have a better idea how this might affect you, contact us for more information.

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New Rules for Tax Exemptions

In July, the Internal Revenue Service introduced the new Form 1023-EZ. The new form streamlines the application for recognition of tax exemptions. This redesign has caused some criticism from many large charity groups, while other groups have commended the agency for introducing the program. The IRS agency hopes that the new process and smaller application will reduce the backlog on applications.

Every year the IRS receives around 60,000 applications for tax-exemptions status. In the old form, agencies had to fill out nine pages that consisted of many schedules and they had to provide three or four years worth of financial data. The new form only consists of three pages. It can be used by most organizations applying for tax-exempt status with $50,000 in annual gross receipts or less, and assets of $250,000 or less.

The concern surrounding the new form comes from the National Council of Nonprofits. They claim that tax-exempt status should not be granted lightly. The new form lacks details. It asks for no financial data, in the documents.

The IRS claims that the change to the paperwork allows charities to speed up the applications process and get back to work that is more important. The process helps cut back the process time for many smaller nonprofits. Larger, more complicated nonprofits will still be required to fill out the longer Form 1023. Currently the wait time for nonprofit status is nine to fifteen months.

The IRS is not taking the granting of tax-exempt status lightly. They are still processing applications. The additional resources that are freed up to process the more complicated applications.

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Audit Quality

Audits are an important part of any business. How can you tell if the audit quality is good? This question has plagued professionals. Does the quality relate to the person performing the audit, by their ability to discover misstatements, or their ability to meet legal and professional requirements?

In the past, audit quality has been assessed after the audit is finished. It is determined by if the company’s financial statements require restatement, or if a business fails. Recently the quality has been determines by the number and nature of the findings identified during PCAOB inspections. Congress has even tried to regulate auditors and audits with the Sarbanes-Oxley and Dodd-Frank Acts. However, these efforts have done little to reduce the number of restatements or deficiencies reported during PCAOB inspections.

With the inconsistencies in determining a quality audit, the PCAOB and two other organizations have made it their priority to define what constitutes a quality audit. In an effort to create a guide to quality audits, the AQI has three indicators: better informed regulators about audit quality; aid the decision making of audit committees, investors, and managers; positively influence the practices of auditing firms.

Much of what the organizations are pushing is more transparency of audit firm discoursers. This requires publicly releasing information that in the past has remained confidential. Other information would include the number and nature of deficiencies found, the number and size of auditors that resigned, frequency and impact of financial statement restatements, etc.

While there seems to be no answers yet, they are working towards a common goal. Care should be taken when setting regulations so they do not put any undue stress on smaller auditing firms by creating competitive disadvantage that could put the smaller firms out of business. There will be more debates on what is expected, but the results should be beneficial to everyone involved.

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