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Summing It Up

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


Samuel DiSalvo

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Funding, Contracts, and the R&D Credit

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When you think of the Research and Development (R&D) Tax Credit, you might focus on the technology involved and costs incurred to create or enhance a product or process. Another important consideration though is whether the costs incurred in connection with any activity qualifying for the credit are “funded.” The essence of this requirement is to determine if the taxpayer claiming the credit has an adequate financial risk for the costs incurred and retains rights to the research results.

The tax concept of funding was essentially created to eliminate the ability for two taxpayers to claim the R&D credit on the same costs. Seminal questions to ask:

  • Who actually bears the economic risk per the contractual terms of the relationship, particularly if the project is unsuccessful? 
  • Who retains substantial rights to the research results?

Is it "Funded?"

In order for a taxpayer to be eligible for the R&D credit the related activity cannot be funded. Activity is not funded if: The taxpayer is deemed to be at risk for the costs incurred and retains substantial rights.

The questions of adequate risk and retention of rights typically arise when one party hires a contractor to perform qualifying research on a product, process, or other development.

According to the IRS, if a contractor hired to perform research for another company retains no substantial rights to the research developed under the terms of their agreement, the research is treated as “funded” to the contractor and no expenses paid or incurred by the contractor in performing the research qualify for the R&D credit. This would be the case even if the contractor was deemed to be at economic risk for the costs incurred.

Who Has the Right to Use the Research?

Retention of substantial rights does not require that the taxpayer retain exclusive rights to the research. However, a taxpayer does not retain substantial rights in the research if the taxpayer must pay for the right to use the results of the research. Basically, “substantial rights” is interpreted to mean the right to use the research.

For example, does the contract say the research is exclusive to the company that the contractor is under contract with, or can the contractor use the research and resulting technology for other companies/industries without paying royalties?

Contract Language Matters

The concept of substantial rights and risk relies heavily on specific contractual language. If a contract is poorly written, possibly neither the contractor or the company can qualify for the R&D Credit. If there is potential for significant R&D credit in connection with a contract, it is prudent to carefully review the language in the agreement and speak with tax advisors to ensure the intended party or at least one party can claim the credit.

Generally, a contractor who is paid regardless of the success of the project does not bear the economic risk and cannot claim the R&D Credit (i.e. the research is “funded” to the contractor for purposes of the credit). However, if payment will only be made contingent on the success of the efforts, then the contractor bears the economic risk and may potentially claim the credit if it also retains substantial rights to the results.

Courts have held that research expenses incurred by a contractor under fixed-price contracts were not “funded research” under the R&D credit rules because the contractor was at risk for the costs unless the project was successful. Thus the qualifying costs incurred were eligible for the R&D credit to the contractor performing the research, assuming it also retained substantial rights to the results.

Other Payment Arrangements

For cost plus arrangements on the other hand the contractor is not generally deemed to be at economic risk since it is guaranteed to be paid for its efforts. Therefore, it is not eligible for the credit. On the other hand the company paying a contractor is at economic risk and could the claim the credit on the costs paid to the contractor if this company also retained substantial rights.

Other types of contractual payment arrangements can generate costs eligible for the credit to the contractor. For instance, a cap cost-plus margin pay arrangement may allow for the contractor to claim the credit for the qualifying costs incurred. Again, the major issues are whether the taxpayer is at economic risk contingent on the success of the project and whether the taxpayer retains substantial rights to use the work, which are dependent on the terms of the contract.

Whether you are a contractor or a company using a contractor, you can maximize your chances of claiming the R&D credit in the future or allowing the other party to claim the credit by careful consideration of the contract terms. This can be a complicated issue, which can be resolved with simple solutions. Contact us for guidance.

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R&D Credit Rules for Internal Use Software Finalized

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New Rules Represent Significant Easing of Requirements on Businesses That Would Like to Claim the R&D Credit

Regulations finalized by the IRS on October 3 suggest that the costs a business incurs to develop software for internal use may be more likely to qualify for the Research and Development (R&D) Tax Credit than many taxpayers previously understood.

Internal use software (IUS) has always been held to a higher standard than other types of research when it comes to qualifying for the R&D credit. But the new IRS guidance clearly suggests some software development costs that were previously thought to be IUS were in fact likely to be exempt, and the new guidance also eases some requirements on IUS software 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, IUS must meet three additional criteria—referred to as the high threshold of innovation test—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.

The concept of IUS, because of the final regulations, is going to largely be restricted to general administrative functions, such as:

  • Financial management
  • Human resources management
  • General day-to-day support services of your company

Clarification of the 3-Point Criteria

The IRS has made it easier and less controversial to comply with the three additional criteria above that IUS must meet to qualify for the credit. For instance, the IRS concluded that the high threshold of innovation doesn’t require that you make a revolutionary discovery or that the software development be successful.

The IUS development involves “significant economic risk” if you commit substantial resources and there is substantial uncertainty, because of technical risks, that you might recover those resources within a reasonable period. “High threshold of innovation” is defined as resulting in a reduction of costs or an increase in speed, either of which are substantial or economically significant.

The new rules, which are largely consistent with the proposed regulations, clarify that some types of internally developed software are not IUS. For example, software you might have developed to interact with third parties or to enable third parties to initiate functions or review data on your business’ systems do not need to meet the additional IUS criteria to qualify for the R&D credit. The determination of whether the software was developed for third party use is based in large part on the intention of the company at the start of the software development effort.

Examples of software that may not qualify as IUS include:

  • Bank transaction software
  • Software apps for a mobile device
  • Software developed by a manufacturer to enable its customers to order products online

Furthermore, software developed to be sold, leased, or licensed is generally not treated as software developed primarily for internal use.

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 4-Part Test to Qualify for the R&D Tax Credit

R&D Tax Credit Test - Buffalo CPA Firm

The Research and Development (R&D) Tax Credit, recently made permanent, can be a financial boon as you work to improve cash flow in your business. As we've discussed in previous posts, 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 qualified costs incurred.

A four-part test can help you determine if your company’s activities qualify for the R&D credit.

#1: Permitted Purposes

To qualify for the R&D credit, the activity must relate to a new or improved business component’s function, performance, reliability, quality, or composition. You don’t necessarily have to discover an innovation or advancement that’s new to your industry, only what may be innovative or new to you and your company’s processes or products.

#2: Technological in Nature

The activity performed must fundamentally rely on principles of physical sciences, biological sciences, computer science, or engineering. For example, if you’re in food production, simply adding more salt to your product won’t necessarily qualify—but a method based in hard sciences to enhance your product’s flavor might, as would similar methods designed to keep food fresher longer.

#3: Elimination of Uncertainty

The activity must be intended to discover information to eliminate uncertainty concerning the capability or method for developing or improving a product or process, or the appropriateness of the product design.

#4: Process of Experimentation

The qualifying activities must constitute the process of experimentation involving: simulation; evaluation of alternatives; confirmation of hypotheses through trial and error; testing and/or modeling; or refining or discarding of hypotheses.

Beyond definitions stipulated by the four-part test, examples of activities that might qualify for the credit include those to advance the design of an existing product or process, or those to correct significant design defects or obtain significant cost reductions or enhanced function. Costs of design, construction, and testing of pre-production prototypes and models can also qualify.

For example...

Let’s say you’re a manufacturing firm developing eyewear and you want to increase productivity 10% to 15%. Your costs for doing an evaluation of the raw materials, considering new molds, and determining such factors as the proper heating and cooling temperatures for that raw material and/or molds may qualify for the R&D credit.

Similarly, if you have a product run by software, costs of developing new software to make that product more reliable and more efficient might quality for the credit. If you’re an architectural or engineering firm, costs of researching and incorporating green technology might qualify.

Other activities potentially qualifying for the credit: conceptual formulation, design, and testing of possible product or process alternatives; launch activities involving a new component or process; or design time, tool design and testing, prototype building, and similar activities. Also:

  • Engineering efforts to develop new plant processes or technical redesign of an existing plant layout that result in substantial production gains;
  • Efforts to solve production problems where there was uncertainty as to the best solution; and
  • Design and testing involved in improving the configuration or altering the composition of an existing product or process to increase efficiency or decrease cost.

Some activities do not qualify for the R&D credit, including funded research (for example, funded by a government grant), ordinary testing and inspection, research done outside the U.S., reverse engineering (unless such engineering involves an enhancement, in which case a percentage of your R&D costs may qualify for the credit), adaptation of an existing business component to a particular customer’s requirement or need (for example, adapting a computer program you sell to a particular customer’s requirement), or research with a non-functional focus such as improving or changing style, taste, or cosmetic changes.

Also not qualifying: research after commercial production; management studies or activities; and efficiency or consumer surveys.

Qualified costs include wages paid to employees directly involved with, in direct supervision of, and in direct support of the R&D; materials and supplies used and consumed in the process; and work performed by outside contractors in any of the four parts of the test qualify as long as you retain substantial rights in what the contractors do.

The R&D credit can apply to companies in many industries. 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. Contact us to learn more.

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Time to Investigate Your Possible R&D Tax Credit

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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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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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New Opportunities for the Research and Development Tax Credit


R&D Tax Credits - Buffalo Rochester NYIn 2015, two new sets of published tax rules provided several favorable developments for U.S. taxpayers claiming the research and development (R&D) credits. Many taxpayers, including for example those who developed software interface for third parties to engage in business through the internet, could benefit from these rules.

Proposed treasury regulations, released on January 16, 2015, clarified the types of activities for developing internal use software (IUS) that are eligible for the credit. In addition, the “Protecting Americans from Tax Hikes” Act (PATH Act) enacted on December 18, 2015 established laws that promoted the ability of most taxpayers, including start-up businesses, to claim the credit.

Under the PATH Act, the following provisions were enacted into law:

  • The Credit is Now Permanent. The R&D credit, which had expired for amounts paid or incurred after December 31, 2014, was retroactively reinstated and made permanent. Fiscal year taxpayers whose tax year ended in 2015 might want to file amended returns to claim the credit for amounts paid or incurred on or after January 1, 2015, and before the end of their fiscal year.

  • Certain Small Businesses Can Use the Credit to Offset Alternative Minimum Tax. Beginning with the 2016 tax year, eligible small businesses (ESB) and their owners can claim the R&D credit against the alternative minimum tax liability. An ESB includes partnerships, sole proprietorships, and privately held corporations whose average annual gross receipts for the three-tax-year period preceding the tax year for claiming the credit does not exceed $50 million.

    R&D credits determined for a partnership or S corporation are not treated as ESB R&D credits by any partner or shareholder unless that partner or shareholder also meets the gross receipts test for the tax year in which the credits are claimed.

  • Certain Small Businesses Can Use the Credit to Offset Payroll Tax. Beginning with the 2016 tax year, a qualified small business (QSB) can elect to use the R&D credit against the employer’s old-age, survivors and disability insurance liability (i.e., FICA taxes). The election can be made for up to five tax years.

    The R&D credit is allowed to offset payroll taxes for the first calendar quarter which begins after the date on which the taxpayer files their tax return with the election. A QSB doesn’t include tax exempt organizations.

    Generally, the portion of the credit eligible to offset payroll tax is limited to the lesser of $250,000, the current year credit, or for regular corporations, the amount of the credit carryforward from the tax year determined without regard to the election.

    The credit does not reduce the amount of the FICA payroll expenditure otherwise allowed as a deduction.

    Generally, a QSB is a company that has less than $5 million in gross receipts for the current tax year and no gross receipts for any tax year before the five tax year period ending with the current tax year.

The proposed regulations on internal use software included the following guidance:

  • IRS Noted the Increasing Importance of Computer Software for Businesses. The government explicitly narrowed the application of the IUS rules to general and administrative (backroom) functions. Activities associated with IUS have a much higher threshold and by limiting their application this effectively expanded the software activities eligible for the credit.

  • Website Design Costs. Many businesses develop websites to interface with third parties which may qualify for the credit. The IRS acknowledged that certain of these costs were never subject to the much more narrow IUS rules. As a result, taxpayers may have an opportunity to claim more credit. They should review their web design/third party interface costs for prior open years and file amended returns if they determine these costs were eligible for credit under the standard, less restrictive R&D credit rules.

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IRS Delays Employer Mandate Penalty and Reporting Requirements

Delayed Until 2015, Employers Should Consider that other Reporting Requirements Could Still Apply

The business community has been expressing concerns about the complexity of the reporting requirements under the Affordable Care Act. In response to these concerns the IRS announced on July 2, 2013 (and confirmed on July 9th) that it will provide an additional year before ACA reporting requirements begin. As a result the IRS reporting requirements and the related employer mandate penalty will not apply until 2015. 

The IRS indicated that it expects to issue formal guidance before summer’s end to “simplify” the onerous reporting requirements. 

Even though the IRS reporting requirements have been have been delayed for one year, the individual aspects of the ACA, namely an employee’s the access to a tax credit and insurance from an exchange, still applies. As a result each employee who applies for a credit to acquire insurance on an exchange in 2014 could require its employer to fill out 12 page application.

This application can be found on the following website address:  http://www.cms.gov/CCIIO/Resources/Forms-Reports-and-Other-Resources/Downloads/AttachmentC_042913.pdf

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Tax Update

FASB reaches Consensus and Ratifies EITF Issue No. 13-C

On June 26, 2013 the Financial Accounting Standards Board effectively ratified the guidance provided by the Emerging Tax Force Issue No. 13-C. The following is a summary of the consensus:

  • Unrecognized tax benefits should be netted against tax losses or credit carryforwards from the same jurisdiction that could be utilized to offset the UTB.  The UTB would reduce the deferred tax asset established for these losses or credits and would not be recorded as a separate liability.

  • The new standard requires prospective adoption but allows optional retrospective adoption (for all periods presented).

  • For public companies, the standard must be adopted in years beginning after December 15, 2013 (and in interim periods).

  • For private companies the standard must be adopted in years beginning after December 15, 2014 (and in interim periods).

  • No new disclosures are required. However, if the gross amount of the loss or credit (i.e. the amount listed on the income tax returns as-filed) is disclosed, then further explanation may be needed to explain the difference on the returns versus the amount in the financial statements.

  • At this time, it appears as if the SEC requirements for the disclosure of UTBs will not change. Therefore, the gross amount of UTBs would still appear in the footnote disclosure.

  • It will still be important to continue to track the UTBs. For example, there could be an adjustment to the UTB presentation if the position on the UTB changes, or if the loss or credit carryforwards are used. Similarly, if the loss or credit has a full valuation allowance against it, then the VA could change as well if the UTB is no longer necessary. 

When it comes to taxes, Freed Maxick CPAs is different than most accounting firms in Western New York. To us, tax time is all the time. We’re sticklers about deadlines and compliance, but our larger goal is tax management. So we keep a year-round eye on federal, state and local tax laws, including those pending. We alert you to any changes that may affect you and help you respond in a timely way.

We have no doubt that we bring a level of in-house tax expertise second to none in Upstate New York. We have the experience and resources necessary to resolve all your tax issues no matter what the complexity, including:

ASC 740
Canadian Services
Capitalization vs. Repair 
Cost Segregation Services
Foreign Bank Account Report Compliance
IC-DISC
International Tax Services

New York (NY) State Excelsior Jobs Program
Personal Tax Services
Research & Development (R&D) Tax Credits
State and Local Tax Services
State Tax Analysis & Resolution
Tax Credits
Tax Planning and Consulting
Transfer Pricing Analysis – Study
Tax Planning and Consulting

CONTACT US Freed Maxick CPAs is Western and Upstate New York’s (NY) largest public accounting firm and a Top 100 firm in the U.S. Freed Maxick provides audit, tax and consulting services to closely-held businesses, public (SEC) companies, not-for-profits and governmental entities in Buffalo, Rochester, Syracuse, Albany and NYC, New York.

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Affordable Care Act Alert

 

Due Date of July 31, 2013 for Payment of Tax on Certain Self-funded Health Insurance Plans 

The Affordable Care Act of 2010 established the Patient-Centered Outcome Research Institute (PCORI) for the purpose of conducting research to evaluate and compare health outcomes, clinical effectiveness, risks and benefits of two or more medical treatments, services, and procedures. This “PCORI fee” was created, in part, to pay for its activities.

The fee is one dollar, times the “average number of lives” covered under the plan, for each plan year ending after September 30, 2012 and before October 1, 2013 and two dollars per covered person for each plan year that ends thereafter and up through September 30, 2019.

The “average number of lives” is determined by one of four optional methods. For plan years beginning before July 11, 2012 and ending after October 1, 2012 any reasonable method can be used per IRS Form 720.

Employers with self-funded health insurance plans (including VEBAs) are now required to pay a “fee” to the IRS for each plan year ending after September 30, 2012 and before October 1, 2019.

Employers with self insured plans that have year-ends between October 1, 2012 and December 31, 2012 are required to pay the fee and file Form 720, Quarterly Federal Excise Tax Return by July 31, 2013.

The fee is considered to be a deductible tax expense.     

Generally, health insurance policies and self-insured plans that provide only excepted benefits, such as plans that offer benefits limited to vision or dental benefits, are not subject to the PCORI fee. The PCORI tax applies to tax-exempt organizations and governmental entities.

Employer Mandate Penalty - 2014

Starting in 2014 the ACA will impose an annual penalty on employers who: 

(1) do not offer group health insurance coverage to at least 95% of its employees OR

(2) offer its employees coverage that is unaffordable. Health insurance coverage is considered affordable if an employee's required contribution to the plan for self coverage does not exceed 9.5% of the employee's household income (or Form W-2) for the tax year.

For an employer that offers no coverage, the tax is $2,000 for each full time employee (in excess of 30) if at least one employee is certified and enrolled in qualified health care coverage under an insurance exchange. If an employer offers unaffordable coverage, the tax is $3,000 for each employee that is certified. The penalty is calculated on a monthly basis and applies to tax exempt organizations and government entities.

Applicable tax is determined on 2013 employee levels      
Only an applicable large employer (ALE) is subject to the tax. The ALE threshold is triggered if an employer hires an average of 50 full time employees (which includes full time equivalents or “FTEs”) in the preceding calendar year. FTEs are determined by aggregating part-time employees under specific rules provided. There are also special rules for seasonal employees. Part-time employees are considered only for purposes of determining ALE status. They are not considered in calculating the penalty. 

Thus, for 2014, an employer determines whether it qualifies as an ALE by virtue of its employee count in 2013. An employer can determine whether it has exceeded the ALE threshold by looking at any consecutive six month period it chooses to use in 2013, instead of the full year.

Aggregation of separate businesses may be required in determining ALE status. 
Generally, the employee count for separate businesses that share a significant level of common ownership must be aggregated and treated as a single employer in determining whether ALE status applies. 

In 2013 employers should assess effort to compile information needed. 
Calculating the number of employees subject to the penalty could become very complicated. This is because employers could have a number of different employee “types” (i.e. variable hour, part-time, seasonal, salaried, common law employees v. independent contractors, etc.) Employers should assess the effort needed to make an accurate count of its full time employees There is also an obligation to furnish information to the employees, which is due January 31st of the calendar year following the year for which the employer return is required to be filed. Whether ALEs or employers providing minimal health insurance coverage, there is still a reporting requirement to the IRS even if no penalty is due.

Contact Our Tax Professionals

If you have questions about this issue or other complex tax issues, please contact us for assistance.

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2012 Taxes in Review -- Fiscal Cliff; New Tax Act, and Other Changes

In many respects the U.S. economy is facing unprecedented times. With a cumulative budgetary deficit in excess of $16 trillion dollars few would argue the need for corrective action. In 2012 this need  took on an increased sense of urgency because of the “fiscal cliff” -- the combination of automatic government spending cuts and the expiration of the Bush era tax cuts. These factors threatened to create economic turmoil and wipeout as much as 5% of the gross domestic product, increase unemployment, and trigger yet another recession before we have fully emerged from the Great Recession.    

Fortunately, the American Taxpayer Relief Act of 2012(2012 Act) took the first step in addressing the tax aspects of our fiscal dilemma. In addition to extending numerous tax benefits that expired, tax rates were somewhat stabilized by permanently extending the Bush era tax rates and adding a higher rate of tax (39.6%) for individuals with taxable income in excess of $400,000 ($450,000 for married filing joint taxpayers).  Since the spending side of our fiscal dilemma will need to be addressed in early 2013 and both Congress and the President agree on the need for corporate tax reform, it’s possible that there could be significant tax developments in 2013 as well.    

Notwithstanding the tax changes brought by the 2012 Act, there were a number of significant developments in 2012, including but not limited to the following:  

  • The Supreme Court upheld the constitutional validity of the Health Care Reform laws, which in turn led to additional IRS guidance on (1) the tax applicable to employers who don’t offer minimal heath care coverage and (2) the tax credit available to individuals who qualify for a credit when buying health insurance through an exchange;

  • Issuance of IRS guidance on the additional Medicare taxes that apply in 2013;

To learn more, the 2012 Tax Year in Review briefing provides a concise summary of the tax developments/changes in 2012, which affected everything from estates/trusts, to tax administration, and exempt organizations.

Individuals, businesses, and tax advisors can use this as a reminder when identifying factors to consider for tax planning and compliance in 2013 and 2012. 

More information on how Freed Maxick can help you with your tax planning, Contact us to connect with the experts.

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