Year-End Thank You Gifts From Business Owners

During the holiday season, it’s natural for business owners to think about giving something to key individuals. On your list might be your employees, customers, suppliers, or others who helped your business during 2017. If you haven’t already made plans, do so quickly so the gifts may be distributed before year-end.

            Lavish gifts may make an excellent impression, but you probably don’t want to go overboard by spending too much. You should have a budget for these gifts and stick to it. You also should know the tax consequences of your generosity.

Employee gifts

 Amounts you spend on gifts to your workers probably will be tax deductible for your company. However, the key question for employees is whether the gifts will be treated as taxable income.

            Generally, a cash gift or anything that looks like cash, such as a gift card or gift certificate, will be taxable. The amount will be subject to federal and any state or local income tax withholding as well as unemployment tax and FICA taxes.

            Non-cash gifts will be untaxed if they fall under the de minimis classification, meaning that the value is so low that it would not be reasonable for an employer to bother with record keeping, withholding, and so forth. The IRS has not spelled out an upper limit for spending on tax-exempt gifts. That said, you’re probably safe giving away hams or turkeys during the holidays.

 Business gifts

 Instead of or in addition to employee gifts, you may want to give something to selected outsiders who helped your company during 2017. In this case, the issue is not whether the gift will be taxable income for the recipient, but whether you can deduct the cost of gifts to clients, vendors, and so on.

A business may deduct no more than $25 for business gifts per recipient. You can’t exceed this limit by making indirect gifts to a customer’s family member. Therefore, if you give a $200 sweater to the husband of a key customer, it will be considered an indirect gift over the $25 limit, and the excess amount will not be tax deductible. However, this rule does not apply if you have a bona fide, independent business connection with the family member receiving the gift, and it is not intended for the customer’s eventual use.

For this purpose, a partnership and its partners are treated as one taxpayer. Similarly, a married couple will be treated as one taxpayer subject to the $25 limit. It doesn’t matter whether the spouses each have their own company, are employed at different places, or have independent connections with the recipient.

Example: Steve Harrison’s company does business with ABC Corp., which is a valued customer. Steve and his wife Tina give four baskets of wine to ABC as a holiday gift.

The Harrisons paid $100 apiece for these baskets, for a $400 total. Four ABC executives each took a gift basket home for their personal use. The Harrisons have no independent business relationship with any of the executives' other family members. They can deduct only $100 (4 times the $25 limit) of the cost of the gift baskets.

Incidental costs, such as engraving on jewelry, packaging, insuring, and mailing, are generally not included in determining the cost of a gift for purposes of the $25 limit. That’s true, as long as the incidental cost doesn’t add substantial value to the gift.

Beyond $25

 The following items aren’t considered gifts for purposes of the $25 limit:

●       An item that costs $4 or less that has your name clearly and permanently imprinted on the gift and is one of many identical items your company widely distributes. Such items might include pens, desk sets, plastic bags, and cases.

●       Signs, display racks, or other promotional material to be used on the business premises of the recipient.

Keeping good records can enable you to support deductions for business gifts, if those deductions are challenged.

Emily Acevedo
Year-End Tax Planning for Charitable Donations

Some surveys indicate that more than 30% of all charitable giving occurs in December, and that over 10% of donations are made in the last three days of the year. The year-end holiday spirit may be a factor in the early winter philanthropy, but taxes probably play a role, as well. A check you write to your favorite charity in December gives you a tax deduction the following April, but if you wait until New Year’s, you’ll have to wait a full year for the tax benefit.

            To do well while doing good, you might reconsider the typical practice of writing checks for gifts to charity. Instead, give appreciated securities. Going into the ninth year of a bull market, you probably have stocks or stock funds that have gained value and would be ideal for contributing to your favorite cause.

            Example 1: Wendy Harris donates, by check, $5,000 every year to a cancer research charity. This year, Wendy looks over her portfolio and sees that one of her stocks has appreciated substantially since its purchase in 2015, so she decides to reduce her exposure to that company.

            Wendy paid $30 each for the shares, which now trade at $50. If she sells $5,000 worth of those shares, Wendy would have a $2,000 long-term capital gain and owe $300 to the IRS, at a 15% tax rate. Instead, she donates $5,000 worth of shares to her favorite charity.

            With this tactic, Wendy would get the same $5,000 tax deduction that she would have received with a cash contribution. If the assets have been held longer than one year, donors can deduct the fair market value of the contribution. Yet, the donated shares would have been worth only $4,700 to Wendy if she had sold them and paid the tax on her gain.

            Meanwhile, the recipient can sell the shares for $5,000 and owe no tax as a charitable organization. Therefore, Wendy gets a full tax break, the charity keeps the full amount, and the capital gain tax obligation is never paid.

Multiple choice

 The strategy followed by Wendy can be effective if you wish to make one or two charitable gifts of appreciated securities. However, if you want to make many gifts to various charities, the process can get cumbersome. (See the Trusted Advice box.) In these situations, you might want to contribute via a donor-advised fund.

            Example 2: Jack Franklin donates $5,000 a year to 10 different charities, at $500 each. Jack sends $5,000 of appreciated securities, bought years ago for $3,000, to a donor-advised fund. If he donates the securities by December 31, 2017, Jack can take a $5,000 deduction on his 2017 tax return. Once the money is in the donor-advised fund, Jack can request grants of $500 each to his 10 designated recipients. Even if he requests the grants after 2017, his tax break for this year won’t be affected.

            Many financial firms and community foundations offer donor-advised funds, and they might have different requirements for the initial contribution, subsequent contributions, and individual grants.

Senior strategies

 Yet another charitable opportunity is available for IRA owners over age 70½. Instead of writing checks or donating appreciated assets, they can make qualified charitable distributions (QCDs) from their IRAs, up to $100,000 per donor per year.

            Example 3: Phyllis Thompson, age 77, donates a total of $3,000 a year to 3 different charities. Phyllis takes the standard deduction, rather than itemizing, so she gets no tax benefit from these donations.

            In 2017, Phyllis donates via QCDs: she sends the $3,000 directly from her IRA to the 3 charities. In this example, Phyllis has a required minimum distribution of $15,000 in 2017. The $3,000 QCD counts as part of her RMD, so Phyllis satisfies her full RMD with a $12,000 IRA withdrawal.

            Here, Phyllis has fulfilled her philanthropic intentions and the charities have received their funds. Instead of paying tax on a $15,000 taxable RMD, Phyllis picks up $12,000 of taxable income, saving tax by using QCDs.

            Note that people who itemize deductions can’t deduct QCDs. Even so, there may be tax advantages from using QCDs because making RMDs to charity, rather than to IRA owners, will reduce adjusted gross income (AGI). A lower AGI, in turn, may deliver benefits elsewhere on the IRA owner’s tax return.

Donating Appreciated Shares

 ·         Check with the charitable recipient to determine its procedure.

·         You may need to obtain the charity's brokerage account number, then inform your broker or mutual fund company, which can execute the share transfer.

·         Some financial firms have their own forms to be signed by the donor and the charity's representatives. Other paperwork might be required.

·         The earlier you begin the process, the greater the probability of completing the transfer by December 31, for a 2017 tax deduction.

·         Rather than donate shares that trade at a loss, you can sell those shares, take the capital loss for tax advantages, and donate the cash proceeds.



Emily Acevedo
Year-End Planning for Investors

Regardless of future legislation, some tried and true strategies will help investors trim their tax bill in 2017. Year-end loss harvesting can be worthwhile.

            Example 1: Nick Rogers tallies his investment trades so far in 2017 and discovers he has realized $30,000 worth of net capital gains: his trading profits versus his trading losses. If those gains are all long-term (the assets were held more than one year), Nick would owe $4,500 to the IRS at his 15% rate.

            Therefore, Nick goes over his portfolio to see if he has securities that he can sell at a loss. Although recent stock prices were generally strong, Nick has some energy and telecom shares that have lost value. If Nick takes $15,000 worth of losses in 2017, he will drop his net capital gain from $30,000 to $15,000, cutting his 2017 tax bill from his trading in half.

            Example 2: Suppose that Nick can take $35,000 worth of losses by year-end. That would convert his $30,000 net capital gain for 2017 to a $5,000 net capital loss, avoiding any tax owed on Nick’s trades this year.

            In addition, taxpayers generally can deduct up to $3,000 worth of net capital losses on their annual tax returns. Assuming Nick is in a 33% tax bracket, a $3,000 net capital loss would save him $990—much better than a tax bill of $4,500.


Don’t forget funds

When you tally your year-end net gains or losses to date, don’t neglect to check your mutual funds. Many funds make distributions to shareholders in December; estimates of upcoming distributions may be posted on the fund’s website before the payout.

            Whether you receive the money or automatically reinvest in more shares of the fund, distributions from funds held in a taxable account will be taxable. These payouts could be interest, dividends, or capital gains, and taxed accordingly. A distribution of short-term capital gains, for instance, may be taxed more heavily than a distribution of long-term capital gains.

            Be careful of how you purchase funds near year-end. If you buy before the payout (technically, the “ex-dividend” date), you will receive the scheduled distribution and owe tax on that amount. (Reinvested distributions add to your basis, which would produce a better tax result when you sell the shares.) Conversely, if you wait until after the distribution, you’ll avoid the resulting tax and possibly buy at a lower price, as fund shares typically drop after the payout.

            Selling shares before the distribution will enable you to avoid the tax on a distribution you haven’t received. You may sell at a higher price before the payout, which would increase your taxable gain or reduce your capital loss from the sale. The bottom line is that the timing of mutual fund trades can be a topic for discussion in year-end tax planning sessions.


Gaining from gains

In example 2, Nick has a net capital loss of $5,000 in 2017, of which he can deduct $3,000. What happens to the other $2,000? If he wishes, Nick can carry over that $2,000 loss to future years to offset future capital gains. There are no limits to the amount of losses Nick can carry over or the length of time he can do so.

            Example 3: Yet another option is for Nick to sell enough assets to produce an additional $2,000 gain by December 31. This gain will be tax-free, because Nick can use his excess $2,000 net capital loss as an offset. If Nick wants, he can immediately buy back the shares he sold.

            Why would Nick do this? To increase his basis in the shares he sold and bought. As mentioned, a higher basis will yield a better tax result on a future sale. This maneuver might work best with a mutual fund that does not charge for such transactions.


Going forward

After selling assets at a gain, an immediate repurchase can produce a smaller taxable gain or a larger capital loss in the future. A similar repurchase after a sale for a loss, though, can trigger the wash sale rules; then, the capital loss won’t count and no current tax benefit will be allowed. The amount of the disallowed loss will be added to your basis in the repurchased assets.

            To avoid a wash sale after taking a capital loss, several tactics can be used. You can wait for at least 31 days and then buy back the security you sold, if you still want to hold it. If you don’t want to be out of the market that long, you can immediately buy another security that’s not substantially identical to the one you sold. Yet another possibility is to “double up.”

            Example 4: As part of his plan to take losses near year-end, Nick intends to sell $10,000 worth of an energy stock that has lost value. He believes this stock is now well valued, so he wants to maintain his position in this holding.

            To do so, Nick first invests another $10,000 in this stock, then waits 31 days and takes a $10,000 loss by selling shares that he previously held. Nick will wind up in the same position but will be able to take the $10,000 loss on the original shares. Because of the timing, a doubling up strategy must be initiated before the end of November to provide a 2017 tax benefit.


Tax PlanningEmily Acevedo
Year-End Business Tax Planning

IRC Section 179 permits “expensing,” or first-year tax deduction, of outlays for business equipment that otherwise would be recovered through depreciation over many years. For 2017, expensing the costs of up to $510,000 of equipment is allowed, with a phase-out beginning after $2.03 million of purchases.

            Example 1: ABC Corp. spends $400,000 on equipment and off-the-shelf computer software equipment in 2017. The company can deduct $400,000 this year on those purchases. To qualify for this Section 179 tax treatment in 2017, the equipment or software must be purchased and placed into service by December 31.

            Example 2: DEF Corp. spends $800,000 on qualified items in 2017. The first $510,000 can be deducted immediately, but the other $290,000 must be depreciated.

            Example 3: GHI Corp. spends $2.4 million on equipment and software in 2017. Above $2.03 million, there is a dollar-for-dollar phaseout of Section 179 tax benefits, so the $370,000 phaseout limits first year deductions to $140,000. The remaining $2.26 million must be depreciated.


Beyond IRC Section 179, “bonus” depreciation is in effect in 2017. Companies can depreciate 50% of the cost of relevant equipment acquired and placed in service this year—that would be a $145,000 deduction in the case of DEF Corp. in example 2 (50% of $290,000), in addition to the $510,000 deduction under IRC Section 179. Bonus depreciation will drop from 50% to 40% in 2018 and to 30% in 2019; this tax break applies only to new equipment, whereas Section 179 expensing applies to used and new equipment.

Sooner or later

There is considerable uncertainty about whether tax legislation will pass this year and what such a law might include. Lower tax rates are a possibility. Consequently, you might plan to defer business income into 2018, when tax rates might drop, and accelerate company deductions into 2017 to offset highly taxed income.

            In terms of deferring income, if your company uses the cash method of accounting, you could delay sending out invoices late in the year, so you’ll receive the payments (and owe the tax) in 2018. Deferring income can be more challenging if your company uses the accrual method of accounting, but, in certain circumstances, you may be able to defer income, even where you have been paid in advance. Our office can let you know if this is a practical approach for your firm and help with the required paperwork.

            Even if tax rates do not drop under a new law, deferring income—and the resulting tax—for a year may be helpful for your company’s cash flow. Similarly, accelerating deductible expenses from early 2018 to late 2017 may be advisable. Necessary equipment repairs might be pushed forward, for example.

            If your company pays substantial bonuses to employees, consider the timing as 2017 ends. Cash method businesses might pay those bonuses in December. Companies on the accrual method generally can deduct bonuses to unrelated employees in 2017, if their obligation to pay the bonuses is fixed and determinable at year-end and they make the bonus payments within 2½ months after year-end

Tax PlanningEmily Acevedo
How to Get 100% Reimbursed for Employee Meal Expenses

Many business owners, self-employed individuals, and other taxpayers are aware that business meals and entertainment expenses are only 50% deductible. You might treat a key client to a restaurant meal and spend $100. Even if this meal has a definite business purpose (you wind up with an important contract), only $50 will be tax deductible.

            Nevertheless, some business meals can be fully deductible. The Tax Court recently overruled the IRS in a case regarding the pro hockey team, the Boston Bruins (Jacobs v. Commissioner, 148 T.C. No. 24, 6/26/17). Although the IRS claimed tax deficiencies totaling about $85,000 over two years’ tax returns, the court sided with the team’s owners and allowed 100% deductions for meal costs.


Pregame preparation


As is the case with most professional sports teams, the Bruins play half of their games away from home. National Hockey League rules require teams to arrive well in advance, so the Bruins schedule hotel rooms for the players and other traveling employees. These hotel arrangements include the provision of rooms where meals are served, with specified menus, before the games.

            All traveling employees are entitled to eat meals there at no personal cost. The players are required to eat there, on time, because considerable game planning occurs at these meals between players and coaches.

            The Tax Court noted that the meal service was nondiscriminatory, as all traveling hockey employees could attend. Moreover, the meal expenses were associated with the active conduct of the taxpayer’s trade or business: winning hockey games.


The Bruins argument


The Bruins argued that the meals were 100% deductible, because the costs of the meals were excepted from the 50% meals and entertainment limitation because they were de minimis fringe benefits.


Five tests


The court found that the meals would qualify as de minimis fringe benefits if they were provided in a nondiscriminatory manner and five other tests relating to the meal were met:


1.      The eating facility is owned or leased by the employer.

2.      The facility is operated by the employer.

3.      The facility is located on or near the business premises of the employer.

4.      The meals furnished at the facility are provided during, or immediately before or after, the employees’ workday.

5.      The revenue or operating cost test is passed. (This last point will be satisfied if the meals are furnished for the employer’s convenience on the employer’s business premises.)


The court found that the team furnished the meals in a nondiscriminatory manner because it provided the meals to all traveling hockey employees. After analyzing the evidence presented, the court decided that the meals met the five tests. Consequently, it held that the costs of the meals was 100% deductible as de minimis fringe benefits not subject to the 50% meals and entertainment limitation in IRC Section 274(n)(2)(B).


Key takeaways


Although professional sports teams operate a very specialized business, the Tax Court’s reasoning in this case may apply to other situations, especially in sports and entertainment industries in which employees are provided meals away from home as part of their work schedule.

            In addition, this decision can be a reminder that certain meal expenses can be 100% deductible. For example, employers might be entitled to deduct the full cost of food and drink at events primarily for the benefit of rank and file employees. Those occasions could be holiday parties, company outings, banquets, and so on. Also, meals, snacks, and beverages provided to employees at no charge, on or near the firm’s premises for valid business purposes, may be 100% deductible.

            The firm can help you structure employee benefits of this nature so that your business will meet the requirements for full tax advantages.


Emily Acevedo
Required Minimum Distributions

Have you taken the required minimum distribution (RMD) from your individual retirement arrangement or workplace pension plan? That’s an important question, because failure to take your RMD on time could result in a stiff penalty of 50% of the amount you should have withdrawn (plus the income tax on the distribution). 

In general, those who are over age 70½ must take at least a minimum payment from their retirement account each year by December 31. (A bonus for first-timers: You have until April 1 of the year following the one in which you turn 70½ to take the RMD.)  One exception to the rule is if you have a Roth IRA, which is not subject to an RMD during the account owner’s lifetime. Each taxpayer’s RMD is based on the amount in their retirement accounts and their life expectancy. You can always take more than your RMD, but your withdrawals are included in your taxable income. My office can help you determine or update what your RMD will be, decide how much income you will need each year and plan ways to minimize your tax.

Emily Acevedo
Plan now to save on Taxes Later

Even though April is far away, now is the perfect time to start your planning so you can take advantage of all opportunities to minimize your tax bill. That begins with ensuring you’ve taken all the deductions that can help reduce your taxable income. Have you maxed out retirement plan contributions, for example? Set aside money for 529 college savings plans or health savings accounts? Considered which charitable donations you want to make before year’s end? Those are just a few of options that might help cut your taxes.

At the same time, since tax rates for high-income taxpayers have risen in recent years, it’s also smart to investigate ways to lower the income you report this year and to avoid generating passive income. Contact the office today for advice on steps you can take now that will pay off on April 15. 

Emily Acevedo
Documenting Your Charitable Donations

Many people make donations to charities whose work they support, but if you are planning to take a tax deduction for your gift, you must have the proper paperwork. Assembling the right documentation can also be tricky because the requirements vary based on whether the donation is cash and on the value of your gift. If you donate less than $250 in cash, for example, a canceled check, credit card statement or similar record may be sufficient, but if you give more, you will need a written acknowledgement from the charity. Large donations can flag IRS attention so its important to ensure that they are properly documented with an acknowledgement from the organization that states no goods or services were provided in exchange for the contribution. Of course, the organization itself must also qualify as a charity under IRS rules.

I can offer advice that will make it possible for you to fund the causes you believe in and qualify for the deductions you deserve. I can also help you incorporate charitable giving into your long-term tax planning. Be sure to contact me with all of your questions on charitable giving or any other financial concern.

Emily Acevedo
Got Foreign Assets? FBAR May Apply to You

Are you aware of the nature of all your investments, domestic and international? Do you know if you have foreign accounts with an aggregate value higher than $10,000 at any time during the calendar year? U.S. taxpayers (including individuals and business entities) are required to report on foreign assets or investments they hold in offshore accounts. Under the Bank Secrecy Act, you may be required to e-file what is known as the FBAR directly with the Financial Crimes Enforcement Network (FinCEN), a bureau of the Treasury Department. Given the diversity of assets that many people hold, I advise against assuming that the FBAR rules don’t apply to you. If you’re not sure, I can help you determine the answers.

As is often the case with tax laws, there are some exceptions and intricacies to the FBAR rules, so be sure to contact my office for more details. I can help you understand whether the rules apply to you and what you need to do to comply with them

Emily Acevedo
The IRS will delay refunds in 2017

In response to identity theft that has occurred in previous years the IRS has taken steps to tighten controls over refunds. A new sixteen digit code will be required on W-2s in order to facilitate matching of information reported on tax returns. The IRS will be delaying the issue of refunds in order to perform additional review, in part due to the additional W-2 matching. Any refund due to the child tax credit or earned income tax credit can be expected to be delayed. The IRS has stated they will not release any refunds until February 27 of this year however filers should not hesitate to file their returns in due course.

Emily Acevedo