Recovering Unsaved Excel Workbooks

You’ve likely experienced that flash of panic that occurs when suddenly the Excel spreadsheet you’ve been laboring over unexpectedly vanishes off of your screen. I’ve certainly gotten lost in my work innumerable times over the years and forgotten to save periodically. This often sets the stage for any of a number of bad things to happen: your computer crashes; the power goes out; you close the wrong workbook without saving—the list goes on and on. Fortunately in Excel 2010 and later you have pretty good odds of being able to recover your work.

Microsoft Excel has long had a Document Recovery feature that in many cases will present a list of workbooks that were open at the time that Excel crashes unexpectedly. Ostensibly Excel creates a back-up copy of your document every 10 minutes, and it’s these back-up files that are presented to you after a crash. However, if you close the Document Recovery window without making a selection, those back-up files are lost forever. Fortunately in Excel 2010 and later you have a couple of additional recovery options.

Learn more about Excel documentation management.

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Self-Employment Tax Developments

With the growth in sole proprietorship and partnership returns, self-employment tax continues to be a significant tax for individuals and their return preparers. The sharing economy has not only created more freelancers (contractors), but also more owners of short-term rentals who might be subject to self-employment tax. This article addresses developments of the past 18 months involving self-employment tax and reviews the rules as relevant in today’s sharing economy.

RECENT DEVELOPMENTS

Recent cases have generally centered around whether an individual’s activity constituted a trade or business subject to self-employment tax. Some cases focused on the nature of the receipts and application of the definition at IRC Section 1402 on “net earnings from self-employment tax.” In addition, the IRS issued regulations in May 2016 involving certain partnership arrangements. Summaries of this guidance follows.

Is it Self-Employment Income?

Case Study: Blogger’s Ad Revenue Subject to Self-Employment Tax: In 2012, Mr. Clark was a full-time video blogger. He had an agreement with Google to allow ads on his blog website. For 2012, ad revenue was just over $20,000 and Google issued Clark a 1099-MISC for this amount. Clark reported this as other income on his Form 1040. After an examination, the IRS imposed self-employment tax on Clark.

The Tax Court found that Clark was engaged in a trade or business as his intent was to make a profit. In addition, he worked six to eight hours per day seven days a week, making this a regular and continuous activity.

Clark’s argument that the revenue constituted royalty payments not subject to self-employment tax failed. The court noted that per Section 1402, “royalty payments received from a trade or business are subject to self-employment tax.”

Tax Shelter Activity Can Be Subject to Self-Employment Tax: Mr. Chai, an architect, became involved in tax shelter activity through a Harvard College classmate who married his cousin. Millions of dollars flowed through some of the more than 100 entities set up by the classmate. At issue was a $2 million payment to Chai in 2003. At one point, Chai was told the payment was a non-taxable return of capital (although he had not invested in the entity) but it was eventually reported on Form 1099 for consulting services. Chai did not report the income, arguing it was a return of capital from his investments.

Chai argued that he did not provide “any meaningful services” to the partnership. But the IRS argued that even if he delegated duties to others, the “risky nature and large receipts of the tax shelters provide ample justification for the high compensation relative to the low amount of personal effort involved.” Chai also indicated he signed a lot of documents. The IRS noted that whether Chai understood the transactions “does not eliminate the significance of the services he provided to Delta and the other tax shelters by signing the formation and organizational documents.” Also, Chai received large payments in the past (over $1 million) and had properly reported then as nonemployee income. The court also noted that the payment was not a gift because the payor expected work from Mr. Chai.

The court agreed with the IRS that the $2 million payment was income and subject to self-employment tax, finding that Chai’s “activities were continuous and regular.”

The court also upheld penalties against Chai. Chai’s argument that he relied on advice from his tax return preparer failed because he had not given all of the details of the transactions to his preparer.

Learn more about recent developments in Self-Employement Tax Law at: http://issuu.com/cpelink/docs/cpe_link_fall-winter_2016/12?e=16662403/38589379

 

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Posted in Tax

Business Analytics

How do business analytics apply to the CFO’s finance and accounting function? It is increasingly apparent that corporate accounting is evolving from its traditional role of collecting and validating data and subsequently reporting information to a more value-adding role of providing and supporting analysis for decision making. To be clear, the message here is not about accountants simply getting better with traditional financial analysis methods like cost-volume-profit (CPV) breakeven graphs and expense-to-sales ratios. The message here is about how accountants can use “deep analytics” to discover relationships to discern knowledge not previously made visible – to provide information to line managers for better decisions.

Accountants’ progress with analytics has been notable. With the recent explosion of available digital data, accountants are certainly getting better at measuring and reporting more. But are the measures and reports the most relevant ones? Do they answer critical questions to drive growth and profits? The upside potential to applying analytics with the accountants’ financial planning and analysis (FP&A) role is substantial.

As the CFO’s scope of responsibility broadens with more oversight and as CFOs become that “strategic advisor” so often written about, they now have the opportunity to become catalysts for introducing innovation and change. This can include leading transformational projects that increase efficiencies, lower costs, increase revenues, and better execute strategies. Accountants traditionally have been reactive to historical information. Business analytics enables them to help their organization be more proactive.

The trend clearly is toward increased use of business analytics and enterprise performance improvement (EPM) methods within the finance function. An example described in this IIA Research Brief is a shift beyond just reporting profitability by product and service line toward providing a more encompassing view of channel and customer profitability reporting using activity-based costing (ABC) principles. With this type of reporting business analytics can take decisions to a higher level by providing insights as to what factors differentiate higher from lower profit levels from a supplier’s customers other than just the customer’s sales volume with the supplier. Learn More

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Measuring and Managing Customer Profitability

The only value a company will ever create for its shareholders and owners is the value that comes from its customers – current ones and new ones acquired in the future. To remain competitive, companies must determine how to keep customers longer, grow them into bigger customers, make them more profitable, serve them more efficiently, and target acquiring more profitable customers.

But there is a problem with pursing these ideals. Customers increasingly view suppliers’ products and standard service lines as commodities. This means that suppliers must shift their actions toward differentiating their services, offers, discounts, and deals to different types of existing customers to retain and grow them. Further, they should concentrate their marketing and sales efforts on acquiring new customers who have traits comparable to those of their relatively more profitable customers.

Some customers purchase a mix of mainly high-margin products. However, after adding the non-product related costs to serve for those customers apart from the products and service lines they purchase, these customers may be unprofitable to a company. This is because they demanded extra services that caused greater expenses than low demanding customers. How does one properly measure customer and supplier profitability? How does one deselect or “fire” a customer?

As companies shift from a product-centric focus to a customer-centric focus, a myth that almost all current customers are profitable needs to be replaced with the truth. As just noted, some high-demanding customers may indeed be unprofitable! Unfortunately, many companies’ managerial accounting systems aren’t able to report customer profitability information to support analysis for how to rationalize which types of customers to retain, grow, or win back and which types of new customers to acquire.

With this shift in attention from products to customers, managers are increasingly seeking granular nonproduct-associated costs to serve customer-related information as well as information about intangibles, such as customer loyalty and social media messaging about their company and its competitors. Today in many companies there’s a wide gap between the CFO’s function and the marketing and sales function. That gap needs to be closed! www.cpelink.com/cokins

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Tax Rules for Your Shared Economy Clients

The “new economy” really means new ways of doing business that involve digital and borderless transactions. That is, a business likely connects with clients via an Internet connection organized by software or an “app.” The location of the customer may not be important, particularly if the “product” is digital or services that can be provided electronically (online). Often, the costs to start generating revenues in the new economy are minimal. It might just involve signing up at a website as someone who can provide services (face-to-face or online) or offer to share (rent) property, such as a room in their home or their car. This part of the new economy is often referred to as the sharing economy or peer-to-peer networked economy where parties seeking to offer or use services or property are easily connected. Many aspects of the connection, such as payment and assessment, are completed on websites or apps that are simple to navigate.

Some of the companies creating shared economy opportunities have grown rapidly, such as Airbnb and Uber. There are in fact though, numerous “sharing economy” operations beyond these two. The low barriers to entry, and desire by many to generate income (or at least cash flow), makes it highly probable that at least one of your clients is generating income from sharing or freelancing. It is also likely that your client needs assistance with the recordkeeping and income tax consequences of this cash-generating activity. Planning on how to optimize the treatment of deductions and any losses may also be needed. In addition, freelancing also leads to self-employment tax and perhaps local business license taxes. Home-sharing often also involves local transient occupancy tax (TOT), business license tax and perhaps other local taxes. Some short-term rentals may be subject to self-employment tax.

The continued growth in the sharing economy makes this a practice area that can’t be ignored.

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Depreciation of Assets Acquired as a Gift

Special rules apply to property acquired as a gift. The determination of the basis for depreciation purposes and the amount of deductible loss on the eventual sale of the asset are treated differently for property received as a gift.

The first step in determining the depreciation deduction allowable for property received as a gift is to determine the donor’s adjusted basis, the FMV of the property at the time of the gift, and any gift tax paid by the donor on the gift.

The donor’s adjusted basis plus a portion of the gift tax paid by the donor is used by the taxpayer to establish their depreciable basis in the gift. However, unlike a related party transaction, the taxpayer does not “step into the shoes” of the donor. Instead, the taxpayer starts the depreciation recovery period as of the date of the gift, using the applicable convention and method.

Example: Grandpa decided it was time to abandon his summer home and move permanently to Florida. On April 30, 2015, he gave his house to his niece, Peggy. The FMV of the property at that time was $250,000. Grandpa’s basis in the home was $200,000. He filed Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return, but did not owe any gift tax.

Peggy decides to use the house as rental property. On her 2015 return, she reports the acquisition date as April 30, 2015, and a beginning basis of $200,000. Residential real estate is depreciated over 27.5 years using the mid-month convention and the straight-line method.

For gifts received after 1976, a portion of the gift tax that was paid on the gift is added to the basis. This is calculated by multiplying the gift tax by a fraction. The numerator of the fraction is the net increase in value of the gift, and the denominator is the amount of the gift. The net increase in value of the gift is the FMV of the gift less the donor’s adjusted basis. The amount of the gift is its value for gift tax purposes after reduction for any annual exclusion and marital or charitable deduction that applies.

For an update on depreciation and other tax law changes affecting tax year 2015, get your tax updates today!

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Tax Issues of High-Income Clients

High-income clients face a number of complex tax-planning issues. Recent changes in tax law implemented by the Affordable Care Act (ACA) and ATRA have greatly increased the potential tax liability of this group of taxpayers.

Provisions important to high-income taxpayers include the following.

INCOME TAX MARGINAL RATE – ATRA permanently lowered the marginal tax rates for many middle-income taxpayers. However, it permanently increased the highest marginal tax rate for high-income earners from 35% to 39.6%. This increase affects single taxpayers with 2015 taxable incomes greater than $413,200 and married filing jointly (MFJ) taxpayers with taxable incomes greater than $464,850.

ADDITIONAL MEDICARE TAX – Beginning January 1, 2013, the ACA implemented an additional Medicare tax of 0.9% for taxpayers whose wages, compensation, and self-employment (SE) income exceeds threshold amounts. Thresholds for 2015 are $200,000 for single taxpayers and $250,000 for married filing jointly (MFJ) taxpayers. The additional Medicare tax applies to the following income categories.

  • Wages and other compensation subject to Medicare
  • Compensation subject to the Railroad Retirement Tax Act (RRTA)
  • SE net income (an SE net loss is not considered for purposes of this tax)
  • Taxable wages not paid in cash, such as noncash fringe benefits
  • Tips

CAPITAL GAINS TAX – ATRA permanently set the tax rate for long-term capital gains (assets held for more than one year) at 15% for many middle-income taxpayers. In addition, it eliminated a long-term capital gains tax for taxpayers in the two lowest income brackets. However, ATRA raised the long-term capital gains rate from 15% to 20% for taxpayers with ordinary income taxed at the highest marginal rate. 2015 rate is $413,200 for Single taxpayers and $464,850 for MFJ taxpayers.

PERSONAL EXEMPTION PHASEOUT – In 2015, taxpayers are granted a personal exemption of $4,000 for themselves and for each of their dependents. However, this exemption is reduced by 2% for each $2,500 (or part of $2,500) that AGI exceeds a certain threshold and is eliminated entirely at higher income levels. The phaseout begins at $258,250 for single filers and at $309,900 for MFJ filers.

ITEMIZED DEDUCTION LIMITATION – As with the personal exemption, certain itemized deductions are limited once a taxpayer reaches a certain income threshold. This limitation, sometimes called the Pease limitation, was permanently reinstated for tax years after 2012. The Pease limitation is triggered when AGI exceeds the threshold amounts for 2015 of $258,250 for single filers and $309,900 for MFJ filers.

These provisions that affect high-income taxpayers present numerous planning opportunities for tax practitioners. Don’t miss out.  Get your 2015-2016 Tax Updates today!

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Tracking CPE Made Easier for Firm Administrators

If you are a firm administrator responsible for tracking CPE for your staff, you’ll be happy to hear that CPE Link has released a couple of new features on its Compliance Manager dashboard that will make your job easier!

Here is a quick summary of what’s new:

  • Posting Credit for Multiple Staff – Firm administrators can now post CPE credit for multiple staff who attended a course from another CPE provider in one simple entry.
  • Multiple Firm Admins – Firms now have the ability to assign as many administrators to their Firm CPE account as desired. All administrators have full rights to manage staff CPE information.

Not using Compliance Manager yet?  Have questions? Interested in scheduling a demo? Please contact Janaye Fletcher at janaye.fletcher@cpelink.com or (800) 616-3822 ext 220.

 

 

 

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Tax Avoidance vs. Tax Evasion

In addition to preparing tax returns, practitioners may provide additional related services, such as tax planning. Practitioners who engage in tax planning and provide tax advice must keep these rules in mind.

Tax Planning - Tax planning to reduce tax liability is a legitimate goal. However, if the planning includes an element of fraud, deceit, or concealment, it becomes tax evasion. Practitioners who engage in tax planning should keep the following references in mind.

• IRC §7201 relating to tax evasion
• IRC §7206 relating to false returns, concealment, and other prohibited conduct
• Requirements for written advice under Circular 230, §10.37

Tax Evasion - IRC §7201 states that any person who willfully attempts to evade any tax imposed by the Code (including evasion of tax payments assessed under the Code) is subject to felony conviction. Upon conviction, IRC §7201 provides a fine of up to $100,000 ($500,000 for a corporation), or five years’ imprisonment, or both (along with the costs of prosecution). Moreover, under the same Code section, a fine of up to $250,000 may be imposed for tax evasion.

Read more (including some specific examples of tax avoidance vs tax evasion).

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Recent Tax Bills Passed in the House

Since January 2015, several bills have been passed by the House, including ones to make permanent a few of the 50-plus provisions that expired at the end of 2014. Described below is a sampling.

Permanent, higher Sec. 179 expensing: America’s Small Business Tax Relief Act of 2015, H.R. 636, passed on Feb. 13. This bill makes permanent the $500,000 expensing and $2 million threshold amounts for expensing business property, also indexing them for inflation. Software and qualified real property, as well as air conditioners and heaters, would now be Sec. 179 property, and taxpayers can revoke a Sec. 179 election without IRS consent.

Permanent sales tax deduction: State and Local Sales Tax Deduction Fairness Act of 2015, H.R. 622, passed on April 16 (272–152). This bill makes permanent the option to claim an itemized deduction for sales tax rather than state income tax, which has existed in temporary form since 2004.

Permanent research tax credit: American Research and Competitiveness Act of 2015, H.R. 880, passed on May 20 (274–145). H.R. 880 makes the credit permanent and increases the rate for the simplified credit from 14% to 20%. The traditional credit with the 1984–1988 base years would be terminated. This bill also allows small businesses (gross receipts of $50 million or less on average over a three-year period) to use the credit against either regular tax or alternative minimum tax.

Read the full article

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