Summing It Up

Keeping you ahead of the curve with timely news & updates.

The New 529-ABLE Plan

529 ABLE Plan - Freed Maxick CPAs

Families of Those with Disabilities Can Save on Qualified Expenses

Section 529 of the Internal Revenue Code has been around nearly 20 years now, so most taxpayers with children are aware of the advantages of investing in a “529 Plan” for tax-advantaged savings for future college costs. Though enacted as part of the federal tax code, these plans are administered by states, and many states, such as New York, even offer a tax deduction for investing in them.

A new version of 529 plans is now becoming available. On December 19, 2014, the Achieving a Better Life Experience (ABLE) Act was enacted as section 529A of the Internal Revenue Code. The ABLE Act authorized states to establish programs allowing taxpayers to save and invest funds for disability-related expenses of eligible individuals (defined below).

Even though federally enacted in 2014, it takes states time to adopt the Act and get their programs up and running. The New York ABLE Act became effective on April 1, 2016, but is not yet available for taxpayers to invest in. New York expects the program to launch by year end 2016.

Eligible Beneficiaries

529-ABLE accounts are designed to support individuals with disabilities. To be eligible, an individual must have a disabling condition or blindness that occurred before reaching the age of 26. An account is established in the name of the beneficiary (the disabled person) or his/her parent, legal guardian, or representative, and while there is no deduction for contributions to the plan, earnings on funds invested grow tax-free as long as used on qualified disability expenses of the beneficiary. Qualified expenses include the following:

  • Education
  • Housing
  • Transportation
  • Employment training and support
  • Assistive technology and personal support services
  • Health, prevention, and wellness
  • Financial management
  • Legal fees
  • Funeral and burial expenses
  • Other expenses approved by the Treasury

It is not necessary that the beneficiary currently be under the age of 26. Any age may be a beneficiary, as long as the condition was diagnosed prior to reaching age 26. When opening an account, a certification process must be completed to ensure the beneficiary qualifies as an eligible individual.

Even though the account is held in the name of the beneficiary, the intention is to supplement any Federal/State aid the beneficiary may be receiving, such as Medicaid, SSI, and even private insurance. This is important, because the funds in a 529-ABLE plan are generally not included in total assets for federal means-tested benefits. However, if the plan balance exceeds $100,000, distributions to pay for housing will be considered for SSI.

A beneficiary is allowed to have only one ABLE account, and there is a cap on the amount contributed each year, equal to the annual gift tax exclusion (currently $14,000). Excess contributions will be subject to a 6% excise tax, and any distribution made for non-qualifying expenses will be subject to a 10% penalty. Each state will set its own limits on how much can accumulate in the plan. In New York, the plan balance is limited to $375,000. Once the account balance reaches $375,000, earnings will still grow tax-free, but no additional contributions may be made until the account balance falls below that level.

Upon death of the beneficiary, the remaining funds will be used to first pay any outstanding qualified expenses. Any excess remaining will be repaid to the state, as creditor, for reimbursement of any expenses paid by Medicaid for the beneficiary from the date the account was established. Finally, any remaining funds will be distributed to the deceased’s estate or a designated beneficiary. Any portion of that balance that represents earnings on the account will be taxed as investment earnings.

The passage of the ABLE Act provides a long overdue tax-advantaged way for families of those with disabilities to save for the costs of caring for those individuals. For help navigating what the Act can mean for your family, contact us.

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The Process to Claim Your Possible R&D Tax Credit

Claim_RD_Credit_iStock_43230472-650936-edited.jpgAfter years of being temporarily extended, the Research and Development (R&D) Tax Credit has been made permanent, a policy change that might suggest wider IRS acceptance of true R&D credit claims.

Improving your business often has underpinnings in potential R&D credible activities. Every company wants to grow and differentiate itself – and one of the common denominators for differentiation is improvement in technology, whether it is to create a new or improved product or process. If you rely on the hard sciences or use technology in your business to create or improve products or processes, you might be able to reduce your federal taxes by a portion of the related costs incurred.

How to See if You Qualify for the R&D Credit

First, it’s very helpful to take a critical look at activities that anyone in your company is undertaking to pursue an idea that would make a process more efficient, more streamlined, greener, and so on. Or perhaps you’re testing the feasibility of a new or improved product, looking at overhauling an outdated software, or exploring how to communicate more effectively with your client base through the internet.

Another helpful step is to identify and review those documents that address/substantiate project initiatives and their progress (or even lack of progress—setbacks can actually be a sign that you probably have some credible R&D activity). These documents can include project reports, engineer reports, data updates, feasibility studies, outside contracts, project aspiration memos, or memos that show your company had to change the course of the project or even abandon the project altogether.

From our experience, accumulating the data and information required to support R&D activities can be fairly easy using, for instance, such readily available financial data as payroll records and supply usage compilations that went into any department or project undertaken for an R&D initiative. It might also be wise to investigate the entire history of the project. It's not unusual to discover there are unclaimed R&D credits for prior years as well.

Don’t assume that your potential credit would be too small to be worth your research time.

Even if your company has only one engineer working on a project, that engineer might need two support staffers and a supervisor. (Experienced advisers can help you determine if your applying for the credit is worthwhile.)

Keep your data and documentation simple by focusing on criteria the IRS is looking for when claiming the R&D credit. If the documentation is not there, your R&D credit team can still vet those business improvement ideas for credibility and potential by talking to project leaders or those who have been involved with the ideas on improvement.

Another key to exploring and securing the R&D credit is efficiency and finding the right advisers to guide you through claiming the credit, both when filing the refund claim and in the unlikely event of an IRS audit. Our firm has had remarkable success in retaining the R&D credits claimed if initially challenged by the IRS. We do our homework up front. For example, we have conversations early on that explore succinctly our clients’ potential for claiming and supporting their R&D credible activity.

We also look at a company’s ability to actually generate cash refunds when claiming the credit. In a limited number of cases, the R&D credit may not generate a cash refund upon filing an amended return to claim such credits. In those cases we explore the amount of benefit and when it is expected to be realized before undertaking an R&D credit study. This rarely occurs and the IRS, beginning in 2016, has further expanded the group of companies eligible for receiving a cash benefit from the credit. Beginning this year, certain small businesses with annual revenues under $50 million may qualify to claim the credit against its alternative minimum tax liability. Prior to this companies paying AMT had to carry forward the credits for use in future years. In addition, certain small business with less than $5 million in gross receipts may offset payroll taxes by the R&D credit.

We can help you explore the potential of the R&D credit for current and prior open tax years and talk about how your efforts to grow your business could generate cash savings on your federal (and state) tax returns via the R&D credit. Contact our R&D credit experts today.

R&D Tax Credit Assessment - Freed Maxick

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Don’t Be A Stranger! Stay in Touch With Your CPA Throughout the Year.

1031 Like Kind Exchanges - Buffalo Rochester NY

Your CPA Can Help You Avoid Paying Taxes—But Only if They Know What's Going On!

For many people, the process of putting together tax information for their accountant is a burdensome chore. The chore can be that much worse when you have a small business or rental properties, etc. You finally get it done and submitted, and you sit and await your fate: refund or balance due. Whew. With that behind you, you file your records away, and are happy you don’t have to deal with that for another year. You go about your life, dealing with your real life issues… should I sell this property? Buy this one? What do we do with mom’s home, now that she is entering assisted living?

More than the messenger of whether you owe additional taxes

Your CPA is your strategic partner in minimizing taxes due. We are your advocate. But we can’t help you after the fact, when you turn in your records at tax time. We need you to contact us during the process of making these decisions, in case there are things you need to know.

Here is a real world example from the 2016 filing season.

A client of mine sent his records in and included information on the sale of one rental property and the purchase of another rental property. He assumed that because he rolled the profit from the sale into a new property, he wouldn’t be taxed on that gain. Unfortunately, that was an incorrect assumption.

When exchanging like properties, there is a way to avoid paying taxes in the near-term. Known as a Section 1031 exchange, there are several requirements that must be met. Had my client contacted me when he was contemplating the sale, I could have helped him do it in a way to avoid taxes on the transaction in 2015. But because he didn’t call me, he ended up paying a few thousand dollars in tax. This was not good news for me to deliver, and it was not good news for him to receive.

Here’s another example… My own mother.

A retiree, my mother decided to withdraw from her IRA to finance a small addition to her home. She had taxes withheld from the distribution, and assumed she would be OK. She never even thought to call and ask me. What she failed to consider was that her distribution was substantial enough to make her Social Security income taxable. She ended up paying several thousand dollars in tax, much more so than interest she would have paid on a bank loan.

The moral of the story is that we are here to help you, if you just stay in touch with us during the year. Sometimes a quick ten-minute phone call may be all that is necessary. It never hurts to ask, and there are no stupid questions. Other times, we may need a bit more information from you to sort it out. But the time necessary to evaluate it saves us time during busy season, and could potentially save you a lot of tax dollars.

So please, don’t be a stranger. We want to hear from you! For starters, contact us today.

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Time to Investigate Your Possible R&D Tax Credit


If you rely on the hard sciences or use technology in your business to create or improve products or processes, you’re probably familiar with Research and Development (R&D) Tax Credit that can be used to reduce federal taxes by a portion of the related costs incurred.

In 2015, after 35 years of being extended over and over, the R&D credit has been made permanent—a significant change in policy that suggests a wider acceptance by the IRS of bona fide R&D credit claims.

Beginning with the 2016 tax year, your small business might qualify to claim the credit against your alternative minimum tax liability. (Qualifying small businesses include partnerships, sole proprietorships, and privately held corporations with average annual gross receipts of less than $50 million, among other conditions.) Certain eligible small businesses can also use the R&D credit against the employer’s old-age, survivors, and disability insurance liability (aka FICA taxes).

In addition, the Treasury has issued taxpayer friendly regulations that provide guidance on claiming a credit for internal use software (IUS) used principally for general and administrative purposes. R&D credit eligibility for IUS credit is subject to a higher standard and the proposed regulation provided clarity and relaxed the more stringent standards for qualification. There was also guidance that clearly acknowledged that some software development that was thought to be IUS was in fact eligible for the credit under the normal rules—for example, software design costs to improve or allow for third party interfacing.

As a result, you may have a better chance than ever of claiming the credit, one of the most generous tax incentives that the federal government offers to businesses. Now is the time to take a fresh look at your firm’s R&D efforts and your projects over the last couple of years, including software development. Any R&D activities that attempt to bring innovation into the business or its' products or services itself can be eligible for the credit.

In short, costs related to any activity that uses a technical discipline to improve a product or process may qualify. Almost any combination of using hard sciences with uncertainty as to the feasibility or design of a new or improved product or process provides opportunity to claim the federal R&D tax credit. (Note that many states also provide tax incentives for R&D activity.)

Industries That Could Benefit From the R&D Credit

Most manufacturers still don’t know they might qualify for the tax credit, which is designed to reward manufacturers who are bringing a new or improved product to market or who make the manufacturing quicker, cheaper, or greener. All types of manufacturers could be eligible for R&D credit benefits in future and prior tax years.

Similarly, many architectural and engineering firms may overlook activities that could qualify for the credit: green building design and energy efficiency innovation; structural engineering; experimenting with materials, HVAC/plumbing/electrical system designs for increased efficiencies; and high-tech equipment/manufacturing installation and design improvements.

Lastly, as discussed above, (1) software design costs to improve or allow for third party interfacing and (2) costs associated with IUS that is highly innovative may also be eligible.

The federal R&D may be a perfect financial break for your business if you know what to look for and how to navigate terms such as “Permitted Purpose” and “Elimination of Uncertainty”—in other words, the process to claim the credit.

Contact Us

We can help unravel the complexity and get you the R&D credit for your open tax years. Contact us today.

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Nevada's New Commerce Tax

Nevada Commerce Tax

Important Updates for Certain Business Entities in the Silver State

Nevada does not impose a corporate or personal income tax, which has made it an attractive state for many businesses. However, on June 10, 2015 a bill was signed enacting the new Nevada Commerce Tax, which is effective July 1, 2015. The first Commerce Tax Return is due 45 days after the tax year end, or August 15, 2016, for fiscal year July 1, 2015 through June 30, 2016.

The Commerce Tax is an annual gross receipts tax imposed on business entities engaged in business in Nevada that have more than $4,000,0000 of Nevada gross revenue. Business entities subject to the new commerce tax include, but are not limited to:

  • Corporations
  • Sole proprietorships
  • Partnerships
  • Limited liability companies
  • Joint ventures
  • Any other person engaged in business

Certain business entities are specifically exempt from the commerce tax, including IRC section 501 (c) non-profit organizations. Business entities not organized or incorporated in Nevada will need to complete a nexus questionnaire to determine if the Commerce Tax applies.

The Commerce Tax is based on gross receipts apportioned to Nevada, less certain exclusions and deductions. There are no deductions for cost of goods sold or other expenses. However, there is a $4,000,000 allowable standard deduction from gross receipts to arrive at Nevada taxable revenue. The Nevada taxable revenue is then multiplied by the applicable tax rate. The tax rate for each business is based on its NAICS code (North American Industry Classification System) and the rates vary from 0.051% to 0.31% depending on the industry.

In addition, the tax is imposed on a separate entity basis. It is important to note that the $4,000,0000 standard deduction can reduce business revenues subject to tax but does not exempt a business from the filing requirement. However, a business entity with Nevada gross receipts of under $4,000,000 during the taxable year can utilize a simplified reporting method.

The complexities involved with this new tax include sourcing of receipts, determining whether a business entity is subject to Commerce Tax, and the administrative aspects associated with the fiscal year and due date.
Contact Us

If you need assistance, want more information, or have questions as to whether your business is subject to this tax, please contact a member of the SALT Team at Freed Maxick.

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Charitable IRA Distributions and the Significance of the PATH Act

Charitable Giving - Buffalo Rochester NY

Giving From IRAs Now An Annual Planning Opportunity

Since 2006, individual taxpayers have had the ability to make gifts to charity directly from their IRAs, traditional or Roth, through a temporary measure that first appeared in the Pension Protection Act. However, over the years, that provision expired and renewed several times. It could not be relied upon for planning purposes, until extender bills were passed. At the end of 2015, the Protecting Americans from Tax Hikes (PATH) Act made charitable giving from IRAs permanent. With permanency, a great planning opportunity exists.

The ability to gift from your IRA directly to a charity is available only to those individuals who have achieved age 70 ½ or older. It is important to note that the gift must be processed as a direct rollover from the IRA trustee to the charity. If you receive the distribution and then make a donation to charity, none of the following advantages will apply.

Exciting advantages await…

So what are the advantages? First of all, it counts toward your required minimum distribution (RMD). Say that you have enough income from other sources that you really don’t need your RMD that year, and you wish that taking it wouldn’t result in you owing more taxes. Instead, you can gift that amount (up to $100,000) out of your IRA to charity, and have that count as your RMD. (Note that any amounts taken in excess of your current year RMD will not count toward the next year’s RMD.)

Next, and perhaps more importantly, since the gift is made by rollover, it avoids inclusion in income and adjusted gross income (AGI). This is the exciting part!

First, it will not inflate your income, which would increase the likelihood of your Social Security becoming taxable. Second, it will not inflate your AGI, which is used to calculate the limitations on your medical expense itemized deduction and certain other miscellaneous itemized deductions. Other limitations that are triggered by a higher AGI are the phase-out of itemized deductions and the personal exemption. Again, since the gift is not included in AGI, the risk of inflating AGI and triggering these phase-outs is eliminated. Even if you no longer itemize deductions, this still provides an opportunity for charitable giving, without increasing your income that would be included in the calculation to determine if your Social Security is taxable.

There is an annual limit of $100,000, so it is important to note that this is not a one-time allowance, but an annual planning opportunity. Married couples who file jointly, and the spouse also has an IRA, could combine the annual limit and contribute up to $200,000.

The fine print: What qualifies and what doesn't?

We’ve covered above that it must be a direct transfer from the IRA trustee to the charitable organization, by a person at least 70 ½ years of age, and from a traditional or Roth IRA (401(k), SIMPLE IRAs and SEP plans do not qualify). In addition, the contribution must be made to an organization that qualifies as a charitable organization under Code Section 170(b)(1)(a). Donor advised funds, private foundations, trusts, and gift annuities are examples of some recipient organizations that do not qualify for this treatment. The effect on your state income tax could be different, depending upon where you live. Certain states, like New York, may already exclude a portion of retirement income from state taxation, so using this strategy may not yield as great a state tax savings as on the Federal side.

Careful not to double dip!

Don't fall into the trap of thinking you avoid including the charitable distribution in income AND you get to deduct it on your taxes. That would be double-dipping. Your benefit comes from not having to include it in income, and the intangible benefits from knowing you donated to a worthy cause.

Your unique situation cannot be addressed in an article of this nature. As always, we recommend you speak with your tax advisor when planning to use this strategy.

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Fulfilling Fiduciary Responsibilities When Selecting an Employee Benefit Plan Auditor

Benefit Plan Audit Question - 401k Auditor Buffalo

12 Questions to Ask Your Current or Prospective Auditor to Ensure You're Exercising Proper Due Diligence

Plan fiduciaries for Employee Benefit Plans are held to the highest legal standard and are required to act solely in the interest of the plan and its participants. Plan fiduciaries can be held personally liable if their fiduciary duties are breached. Most fiduciaries are aware of their duties surrounding the selection of investment options, acting in the plan's best interest, and assessing the reasonableness of plan fees. However, most plan fiduciaries may not be aware that exercising the proper due diligence when selecting a plan auditor is also considered an important fiduciary responsibility.

In May of 2015, the DOL released a report titled “Assessing the Quality of Employee Benefit Plan Audits” that found there was nearly a 40% deficiency rate in their review of employee benefit plan audits. The report makes a number of recommendations, including increasing DOL outreach and enforcement related to audit quality.

Further, in November 2015, plan sponsors who either have or were close to having 100 or more participants in their employee benefit plans received a notice from the DOL emphasizing that the selection of a plan auditor is a fiduciary function and that deficient audits can cause plans to fall out of legal compliance and result in significant civil penalties being imposed on the plan administrator. The DOL intends to target 5500’s filed by plan sponsors whose auditor firms perform fewer than 100 audits per year.

What Should Plan Sponsors and Plan Fiduciaries Do?

What can Plan Sponsors do to ensure that they exercise the proper due diligence when selecting or retaining a plan auditor? In the November 2015 notice sent to plan sponsors, the DOL provided a list of questions to ask your current or prospective auditor:

  • How many employee benefit plans does the CPA audit each year, and what plan types?
  • What annual training has the CPA received in auditing plans? Be specific.
  • What is the status of the CPA’s license with the applicable state board of accountancy?
  • Has the CPA been the subject of any prior DOL findings or referrals, or has it been referred to the state board of accountancy or American Institute of CPAs for investigation?
  • Has the CPA’s employee benefit plan audit work recently been reviewed by another CPA (this is called a ‘Peer Review’), and if so, did such review result in negative findings?

You can also follow DOL’s guidance in its “Selecting an Auditor for Your Employee Benefit Plan” booklet by asking your auditor specific questions about whether certain tests were performed during your last audit. The DOL specifically suggests you ask them to confirm the following:

  • Whether plan assets have been fairly valued?
  • Whether plan obligations are properly stated and described?
  • Whether contributions are transmitted in a timely manner?
  • Whether benefit payments are being made in accordance with the plan’s documents and terms?
  • Whether participant balances/benefits, as applicable, are correctly stated?
  • Whether there are any potential disqualification issues?
  • Whether “prohibited transactions” have been identified?

401k Audits Buffalo NY - Freed Maxick CPAs Fiduciaries should consider documenting the questions asked along with their responses in their meeting minutes to provide adequate documentation that the governing body took the appropriate steps to both select and monitor the activities of their plan auditors.

Your CPA should act as a trusted advisor and be able to guide you through the appropriate steps and documentation to ensure you have fulfilled your fiduciary responsibilities.

To learn about Freed Maxick's experienced approach to employee benefit plan audits, contact us here.

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R&D Credit Rules for Internal Use Software Clarified


IRS proposed regs indicate that more costs may qualify for the credit than many people realized.

Rules proposed by the IRS suggest that costs a business incurs to develop software for internal use might be more likely to qualify for the Research and Development Credit than many taxpayers had previously understood. Internal use software (IUS) has always been held to a higher standard when it comes to qualifying for the R&D credit. The IRS guidance clearly suggests some software development costs that were previously thought to be IUS were in fact likely to be exempt, and it eases some requirements on software that is IUS when it comes to qualifying for the credit.

The new rules don’t change the four criteria that qualify an activity for the R&D credit:

  • It must be intended to discover information that would eliminate uncertainty concerning the development, improvement, or design of a product or business component.
  • It must be undertaken to discover information that is technological in nature.
  • The intended result must be useful in the development of a new or improved business component.
  • Substantially all of the activities must relate to a process of experimentation.

Once an activity meets these criteria, the business needs to determine if the activity relates to IUS. If it does, it must meet three additional criteria to qualify for the credit:

  • The activity must involve significant economic risk.
  • It must meet a high threshold of innovation.
  • No comparable third-party software is available for purchase.

Non-Internal Use Software

On one hand, the new rules clarify that some types of internally developed software are not IUS. Software that is developed to interact with third parties or to enable third parties to initiate functions or review data on a business’ systems likely no longer need to meet the additional criteria to qualify for the R&D credit. Examples of software that no longer needs to meet the three-part IUS test include bank transaction software, delivery tracking sites, and programs that allow a customer to search a business’ inventory.

Lowering the Bar for IUS

On the other hand, the IRS made it easier to comply with the three criteria that IUS must meet in order to qualify for the credit. The new rules allow that IUS meets the innovation test if the development “is or would have been successful,” a significant relaxation on the previous requirement that the development must be successful in order to meet the innovation standard.

R&D Credit for Manufacturers - Buffalo CPA On the whole, these new rules represent a significant easing of requirements on businesses that would like to claim the R&D credit for software that they develop themselves or pay outside contractors to develop. If your business incurs costs for software development, this is a great time to take a closer look at those costs in light of the new rules to find out if you may be eligible for additional credits.

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The Research & Development Credit: Do Any of Your Activities Qualify?

It’s all about the science of innovation, no matter what your business does.

R&D Tax Credit - Buffalo CPA FirmThe Research and Development (R&D) Tax Credit has been in the news a lot lately, especially because it was made a permanent part of the tax code in a long awaited move by Congress. Until that action, the credit was included as part of a group of provisions known as “extenders” that required frequent acts of Congress to keep them available to taxpayers. As a matter of policy this is significant and may suggest a wider acceptance by the IRS of bonafide R&D credit claims. Given this newfound reliability, it’s worth a look to see if any of your business’ activities might qualify for the credit.

In short, costs related to any activity that uses a technical discipline to improve a product or process may qualify for the R&D credit. The law requires that the taxpayer use some form of hard science principle to make throughput faster and/or more efficient and that there be some doubt as to the outcome. The credit is frequently used by taxpayers to offset the costs of research designed to improve their products or certain processes.

In many cases, architectural and engineering firms may overlook activities that could qualify for the credit and reduce their tax obligation. For instance, say a cloud services provider engages an architect and an engineer to design a more energy efficient server farm. Some of their costs related to the project, notably wages, could qualify. Also, if the architect designs and tests new floor plans and wall layouts in order to improve airflow, it may be able to claim the credit for costs related to that work.

In addition, (1) software design costs to improve or allow for third party interfacing and (2) costs associated with developing internal use business software that is highly innovative, may also be eligible for the credit.

Architectural/engineering/construction costs that should be evaluated for potential R&D credit benefits include:

  • Green building design
  • Energy efficiency innovation
  • Structural engineering
  • Experimenting with materials
  • HVAC/plumbing/electrical system design for increased efficiencies
  • High-tech equipment/manufacturing installation and design improvements

R&D Credit for Manufacturers - Buffalo CPA If your business engages in activities like these, you should discuss your eligibility for the R&D credit with a Freed Maxick professional familiar with its requirements. As long as the research is based on hard science and the outcome is not certain, you may qualify for significant tax savings.

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Last June 30 Due Date for FBARs: Have You Submitted Your Filings Yet?

The FBAR filing due date will be different next year.

FBAR filing deadlines - Buffalo CPA Firm. Hopefully you have already submitted your 2015 FBAR filing which is due by June 30th this year. If not, you still have a little time left to scramble to get those filings submitted timely. And now just when you may have gotten used to the idea that your FBAR filing is due June 30th, that is all going to change next year. Under the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015, which was signed into law during 2015, the due date for the FBAR next year will be different.

FBAR filings due in 2017 (for the 2016 FBAR) will be due April 15th. There will now be an extension available in order to extend the due date for a maximum of 6 months until October 15th. The official guidance as to how the extension will actually be applied for has not yet been issued but it has been speculated that it will be extended with an extension for your income tax return.

Additionally, there will be a provision for an automatic two month extension for a taxpayer residing outside of the country similar to the rules for income tax returns, and there is supposed to be some penalty relief available for first-time filers who fail to timely request or file an extension.

Recap: Who Has to Report?

I’ve talked about it in a previous post, but here’s a quick reminder of who is required to file an FBAR.

If you are a United States person that has a financial interest in or signature authority over foreign financial accounts, you must file an FBAR if the aggregate maximum value of those foreign financial accounts exceeds $10,000 (U.S. dollars) at any point during a calendar year. Interestingly, this also includes accounts of your employer that you might have signing authority over.

Let’s break this down even further. A “U.S. person” includes all of the following…

  • U.S. citizens
  • U.S. Green Card holders or U.S. residents
  • Foreign nationals or Individuals who spend a significant amount of time in the U.S.

Therefore, there are many times we see individuals who might live in another country, but spend time in the U.S., whether it be traveling for work or for vacations. Many of these individuals may unknowingly trip up a tax filing obligation based on the amount of time they spend in the U.S.

To meet the substantial presence test, you must be physically present in the U.S. on at least 31 days during the current year, and 183 days during the 3-year period that includes the current year and the 2 preceding years.

The test is calculated by counting the following:

  • All of the days you were present during the current year,
  • 1/3 of the days you were present in the first year before the current year, and
  • 1/6 of the days you were present in the second year before the current year

If you meet the test described above you have an FBAR filing requirement.

What Should You Do If You Were Supposed to File an FBAR But Didn’t?

There are options available if you find that you should have filed an FBAR but didn’t. The IRS has made a few different programs available in order to file your delinquent FBAR filings such as the Delinquent FBAR Submission Procedures, the Offshore Voluntary Disclosure Program (OVDP), or one of two Streamlined Filing Compliance Procedures.

Which program you should use will depend on your specific facts and circumstances. Since the penalties for the failure to file an FBAR can be extremely severe, it’s important to consult with a professional who is experienced in this area. An experienced professional can help you to determine which path is right for you in order to get into compliance. Our international tax team here at Freed Maxick has a depth of experience in this area and we encourage you to contact us to assist in determining the best way to proceed with submitting your filings.

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