Monthly Archives: April 2014

Deadline Coming Up to Report Foreign Account Holdings

FSA Foreign Accounts BankThe deadline is approaching for US taxpayers to report accounts they hold in foreign banks and other financial institutions (foreign account holdings).

You also may be required to report foreign account holdings over which you have signature authority, such as an account that you maintain on behalf of a relative or employer — or if you have power of attorney over an elderly parent’s foreign account holdings, even if you never exercise that authority.

By June 30, 2014, citizens and residents of the United States, as well as domestic partnerships, corporations, estates, and trusts, must generally file a Report of Foreign Bank and Financial Accounts (FBAR) form electronically with FinCEN if:

  1. They have a direct or indirect financial interest in — or signature authority over — one or more accounts in a foreign country. This includes bank accounts, brokerage accounts, mutual funds, trusts, or other types of foreign financial accounts; and
  2. The total value of the foreign accounts exceeds $10,000 at any time during the calendar year.

Taxpayers also may be subject to FBAR compliance if they file an information return related to: certain foreign corporations (Form 5471); foreign partnerships (Form 8865); foreign disregarded entities (Form 8858); or transactions with foreign trusts and receipt of certain foreign gifts (Form 3520).

Some individuals are exempt.

Exceptions to the Foreign Account Holdings Reporting Requirement

There are FBAR filing exceptions for the following United States persons or foreign financial accounts:

  • Certain foreign financial accounts jointly owned by spouses;
  • United States persons included in a consolidated FBAR;
  • Correspondent/nostro accounts;
  • Foreign financial accounts owned by a governmental entity;
  • Foreign financial accounts owned by an international financial institution;
  • IRA owners and beneficiaries;
  • Participants in and beneficiaries of tax-qualified retirement plans; and
  • Certain individuals with signature authority over — but no financial interest in — a foreign financial account.

To determine eligibility for an exception, consult with your tax adviser.

Increased Scrutiny, Stiffer Penalties for Noncompliance

Take the FBAR requirement seriously. Several legislative changes, as well as a clarification of the IRS’s interpretation of the “willful standard,” have led to increased enforcement and stiffer penalties for noncompliance of foreign account reporting requirements.

The IRS states that the form “is a tool to help the United States government identify persons who may be using foreign financial accounts to circumvent United States law. Investigators use FBARs to help identify or trace funds used for illicit purposes or to identify unreported income maintained or generated abroad.”

Failing to File an FBAR Can Result in the Following Penalties:

  • A civil penalty of as much as $10,000, if the failure was not willful. This penalty may be waived if income from the account was properly reported on the income tax return and there was reasonable cause for not reporting it.
  • A civil penalty equal to the greater of 50 percent of the account or $100,000, if the failure to report was willful.
  • Criminal penalties and time in prison.

Consult with your Ciuni & Panichi international tax adviser if you have an interest in — or authority over — a foreign account. Your tax adviser can ensure you meet the FBAR reporting requirements and remain in compliance with the law.

Other posts relating to personal finance:

Changing Jobs: What About My Old Retirement Plan?

Retirement Planning: When to Increase Contributions

Watch Out for These Personal Finance Strategies

 

Business Tax Deductions: Meals and Entertainment

plateWho’s subject to the 50% limit on tax deductions?

In general, when meal and entertainment expenses are incurred in the context of an employer-employee or customer–independent contractor relationship, one party will be subject to a 50% limitation on the deduction.  But which party?  Last year, the IRS finalized regulations that address this question.

In the employer-employee setting:

  • If the employer reimburses the employee for meal or entertainment expenses and treats the reimbursement as compensation, the employee reports the entire amount as taxable income. The employer deducts the payment as compensation, and the employee may be able to claim a business expense deduction, subject to the 50% limit.
  • If the employer doesn’t treat the reimbursement as compensation, the employee excludes the entire amount from taxable income and the employer deducts the expense, subject to the 50% limit.

In a customer–independent contractor setting, the final regulations allow the parties to agree as to who will be subject to the 50% limit.  If there isn’t an agreement, then:

  • If the contractor accounts to the customer for meal and entertainment expenses reimbursed by the customer (i.e., properly substantiates the expenses), the 50% limit applies to the customer.
  • If the contractor doesn’t, the limit applies to the contractor.

The rules surrounding meal and entertainment expense deductions are complex.  The tax professionals at Ciuni & Panichi, Inc. know the answers.  Please contact Jim Komos at 216.831.7171 or jkomos@cp-advisors.com to ensure you’re making the most of the deductions available to you but not putting yourself at risk for back taxes, interest, and penalties.

You may also be interested in:
Internal Controls for Business Owners to Use Today
Tax Relief – Make the most of your Net Operating Loss

© 2014

Tax Filing Deadlines – Don’t Miss Them

Tax Filing Deadlines Not Just April 15th

Do you file a paper tax return?  If so, it’s important that you know the IRS’s “timely mailed = timely filed” rule:  Your tax return is due April 15 and it’s considered timely filed if you make sure it is postmarked by midnight on April 15.  Although, just because you drop your return in a mailbox on the 15th, doesn’t mean you’re safe.

april 15Consider this example:  On April 15, Susan mails her federal tax return with a payment.  The post office loses the envelope, and by the time Susan realizes what has happened and refiles, two months have gone by.  She’s hit with failure-to-file and failure-to-pay penalties totaling over a thousand dollars.

To avoid this risk, make sure to use certified or registered mail.  You can use one of the private delivery services designated by the IRS to comply with the timely filing rule, such as DHL Same Day service.  FedEx and UPS also offer a variety of options that pass muster with the IRS.  But beware:  If you use an unauthorized delivery service — such as FedEx Express Saver® or UPS Ground —, your document isn’t “filed” until the IRS receives it, so make sure to check with the carrier so you file on time.

If you haven’t filed your return yet or are concerned about meeting the deadline, another option is to file for an extension.  Doing so has both pluses and minuses, depending on your situation.  Please contact Jim Komos at 216-831-7171 or jkomos@cp-advisors.com for more information or if you have questions about what you should do to avoid penalties and interest.  Our tax professionals are always available to answer your questions or to assist you with filing.

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Tax Deducation:  Is My Elderly Parent a Dependent?

 

Giving Your Real Estate to Charity – Tax Traps

Three tax traps when donating real estate to charity

If you’re considering donating a property to charity, we have three potential tax traps you need to make sure to avoid:

  1. If you donate real estate to a public charity, you generally can deduct the property’s fair real estatemarket value.  But if you donate it to a private foundation, your deduction is limited to the lower of fair market value or your cost basis in the property.
  2. If the property is subject to a mortgage, you may recognize taxable income for all or a portion of the loan’s value, and charities might not accept mortgaged property because it may trigger unrelated business income tax for them.
  3. If the charity sells the property within three years, it must report the sale to the IRS.  If the price is substantially less than the amount you claimed, the IRS may challenge your deduction, and you could be on the hook for more taxes.

These are only some of the traps that could reduce the tax benefit of your real estate donation.  Please contact Jim Komos at 216.831.7171 or jkomos@cp-advisors.com to help ensure that you avoid these and other traps.

Mr. Komos is the Partner-in-Charge of the firm’s Tax Department.  He has experience in all facets of taxation for individuals, closely held businesses, their owners and key personnel.  His clients are in a wide range of industries, including manufacturing, service, real estate, and construction.

You may also be interested in:

Taxes and a Charitable Remainder Trust

Tax Liability and the Wash Sale Rule

Making Sense of Your Financials

What do those monthly financial statements mean?

For non-accountants, financial results can be confusing.  Terms like balance sheet, working capital, EBITDA, etc. are tossed around freely like some sort of second language.  What do they mean and how should a non-accountant monitor their monthly statements?  Here are some key measurables to quickly get a handle on how your business is doing.

• Balance Sheet – One of the required financial statements.  This is a snapshot of your company as of a specific date (usually, the last day of an accounting period).  It presents your company’s assets, liabilities, and equity.
• Working Capital – Calculate this by subtracting current liabilities from current assets.  Both of these figures are often presented on your balance sheet.  Working capital reflects the cash available for day-to-day operations of a company.  Obviously, the higher the number, the better.
• Net Worth – This is the equity of the company or, another way to think of it is, the value of a company to its owners.  It can be calculated from your balance sheet by subtracting total liabilities from total assets.  Obviously, the higher the number, the better.
• Statement of Income (alternatively Statement of Operations) – This is one of the required financial statements.  It is a summary of the company’s profitability (or lack of it) over a certain period of time (month, quarter, year).
• Gross Margin – This comes from the income statement and is usually the difference between sales revenue and cost of goods sold.
• Operating Income – This is usually a subtotal on the income statement and reflects the income earned from a company’s primary business operations.
• Net Income – The “bottom line” is typically shown as the bottom total on the income statement which is the total revenue of an accounting period minus all expenses during the same period.  Net income includes non-cash expenditures like depreciation and amortization.  Net income is different from cash flow because accountants make “accrual-type” adjustments to make net income the most meaningful measurement of company performance.  Obviously, the higher the number, the better.  (Catching a trend, here?)
• EBITDA – This is a key measurable used by banks and others to measure financial performance.  It is computed exactly as its name would suggest: earnings before interest, taxes, depreciation, and amortization.  It is rarely shown on external financial statements.  However, all components of the formula can typically be found on the income statement.  Depreciation and amortization may be only found on the statement of cash flows.
• Statement of Cash Flows – One of the required financial statements.  This very useful schedule summarizes cash inflows and outflows in a company over an accounting period (month, quarter, year).  Since “cash is king,” a business owner should closely monitor this statement.  Specifically, are cash flows from operations strong and flowing?  Are cash flows provided by and used in investing and financing activities appropriate to meet the company’s objectives?  This statement is on the “cash basis” and sets forth cash totals in those categories.  Strong companies generate significant positive cash flows from operations.  Cash flows from investing and financing activities may be positive or negative, depending on business objectives.

With an understanding of the above terms, you can look and sound like a CPA!  Monitoring trends from period to period in the above areas will ensure you are on top of the financial side of your business.  Hopefully, your numbers are trending up!

Still confused?  Contact John Troyer, a partner at Ciuni & Panichi, Inc., to help.  He can be reached at 216-831-7171 or jtroyer@cp-advisors.com.

 

Watch Out for These Personal Financial Strategies

The Top Three Personal Financial Pitfalls to Avoid

Finance Strategy FSA 401(k)There are three financial strategies that seem to make good financial sense at first glance, but have the potential for abuse.

Here are the potentially appealing strategies and their dangers:

1. Purchasing the Largest Home You Can Afford.

Many individuals calculate the maximum amount they can borrow and then purchase a home based on that amount. Then, they find their budgets strained, with little money left over for other expenses. It’s a better personal finance strategy to do an in-depth review of all your expenses, deciding how much you’re comfortable devoting to a mortgage payment. You want to make sure there will be money left over for other financial goals and that unforeseen problems won’t prevent you from making your mortgage payment.

2. Paying off Your Credit Card Debt with a Home-Equity Loan.

Credit card and other consumer debt typically carry high interest rates that are not tax deductible. Home-equity loans, on the other hand, typically have lower interest rates and the interest is tax deductible as long as the balance is less than $100,000. Thus, using a home-equity loan to pay off consumer debt replaces higher interest, nondeductible debt with lower interest, tax-deductible debt. This is not necessarily a bad strategy, but the danger is you will run up credit card balances again. In that case, you reduced your home’s equity without improving your financial situation.

3. Get a Loan From Your 401(k) Plan.

Most 401(k) plans allow participants to borrow against their balances, believing it will increase employee participation by allowing access to funds before retirement age. The loan is not considered a distribution, so it is not subject to income taxes or the 10 percent early withdrawal penalty. Typically, interest rates are reasonable and the loan is fairly easy to obtain. Any interest paid on the loan is going back into your 401(k) plan.

The danger is that most people will have trouble saving enough for retirement without regularly dipping into their 401(k) plans. Also, some of your investments are sold to provide the loan proceeds. Even though your original contributions to the plan were made with pre-tax dollars, the money used to repay the loan is made with after-tax money.

Another danger exists if you leave your job before the loan is paid off, since you must then repay the entire balance in a short time or the balance will be considered a taxable distribution, subject to income taxes and possibly the 10 percent federal income tax penalty if you are under 59 1/2 years of age. For more information and assistance with related questions please contact us at 800-606-2292 or leave us your contact information here.

Related Personal Finance Posts:

Retirement Planning: When to Increase Contributions

Watch Out for These Personal Finance Strategies

Deadline Coming Up to Report Foreign Account Holdings