February 21, 2014

Taxes Take a Bite Out of Olympic Medals

As the excitement surrounding the 2014 Sochi Winter games progress, there is always talk of how many medals each country has won so far. But, did you know that each Olympic medalist receives a cash prize for their medals? The U.S. Olympic Committee awards Olympians $25,000 for gold medals, $15,000 for silver medals and $10,000 for bronze medals. Not a bad deal, right? There’s only one catch: since the U.S. considers the medal bonuses as income earned in a foreign country, that also makes it taxable by the IRS. So how exactly, is the tax calculated, and how much of that bonus do the Olympians actually see?

Medal-winning athletes will be taxed based on their income, and they could also be responsible for state taxes, if the state from which they hail has an income tax. The chart below outlines just how much Uncle Sam will be pocketing from the medal bonuses of Olympic athletes.

Medal

High Tax Bracket

Mid Tax Bracket

Low Tax Bracket

Gold – $25,000

$9,900

$7,000

$2,500

Silver -$15,000

$5,940

$4,200

$1,500

Bronze-$10,000

$3,960

$2,800

$1,000

Bills have been introduced by congress to do away with the medal taxations, and most currently, Texas Representative Blake Farenthold, has reintroduced the Tax Exemptions for American Medalists, also known as the TEAM Act, which would exempt U.S. Olympic athletes from paying taxes on any medals and prizes they win. However, for the time being, Olympic medalists will still have to hand over a portion of their medal bonus once April 15th rolls around.

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February 18, 2014

Common Construction Industry Fraud

The Association of Certified Fraud Examiners’ 2012 Report to the Nations on Occupational Fraud and Abuse (the Report) reported only 3.4% of the fraud cases covered by the report were in the construction industry.  Good news, right?  Not necessarily. The median loss per case was $300,000, which is the third highest of all industries.  Improper billing accounted for approximately 36% of construction fraud according to the Report.  Fraud from improper billings could happen in many ways including the billings between a project manager and subcontractor or invoices being paid to a fictitious company.   

If there is fraud related to improper billings, there is a good chance it’s the result of collusion between the subcontractor and project manager (or another employee who deals directly with the subcontractors).  A subcontractor might approach the project manager about receiving kickbacks because that subcontractor wants the work.  Have you thought about why a project manager might accept kickbacks from the subcontractor?  Are they having financial difficulty at home or trying to maintain a certain lifestyle?  The kickbacks could be cash or non-cash items such as extra concrete that’s being delivered to the project manager’s house to complete his drive-way.  It’s important for a company to ensure there is a third party reviewing invoices or change orders and budget to actual project cost reports to prevent or detect fraud.

A proper vendor verification process is important to prevent payments to fictitious entities from occurring.  Often, payments to fictitious entities are usually for professional or consulting services.  It’s generally more difficult to measure the tangible benefits of these types of services to a project and therefore, these payments might not be questioned. 

The best way to mitigate the effects of fraud is to investigate the suspected fraud immediately.  Strong internal controls can give a company a fighting chance of detecting and preventing fraud. 

Do you suspect fraud is occurring in your company?  Have questions about your internal control environment?  Anders can help investigate suspected fraud and improve your control environment through an internal control risk assessment.

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February 17, 2014

More Delays in the Affordable Care Act!

More delays in the Affordable Care Act will impact employers with 50-99 full-time equivalent employees in 2014. They will now have until 2016 to offer health care coverage to their employees or be subject to the shared-responsibility payments. The penalty was already postponed to 2015 from 2014, this makes the second delay. To be eligible for the delay, employers must not reduce their workforce or hours of service in order to qualify and they must maintain their previously offered health coverage. For additional information, read more from the Journal of Accountancy.

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February 13, 2014

What Does A Unit of Property Mean to the Repair Regulations?

Few areas of the repair regulation generate as much controversy between taxpayers and the IRS as do the rules that relate to a unit of property (UOP). The ever-present dilemma for taxpayers is how to determine when an asset has been improved versus when it has merely been maintained or repaired.  Because the accurate application of the final regulations is dependent upon defining the asset (i.e., the unit of property) with respect to which an expenditure is made, it is important for taxpayers to understand the conceptual framework of functional interdependence and UOP’s.

Components are functionally interdependent if the placing in service of one component is dependent on placing in service other components.  The regulations generally define UOP as all components that are functionally interdependent on other components with reference to:

  1. Building structure (includes building shell and anything not included in a system
  2. Separate building systems
    • Heating, ventilation and air conditioning systems
    • Plumbing systems
    • Electrical systems
    • Escalators
    • Elevators
    • Fire protection and alarm systems
    • Security systems
    • Gas distribution systems
    • Other systems identified in published IRS guidance

For plant property, used to perform an industrial process, a UOP is generally comprised of each component (or group of components) within the plant that performs a discrete and major function or operation within functionally interdependent machinery and equipment.

In the case of leasehold property for a lessee, the UOP is determined based on the portion of the building that is leased. If the entire building is leased, the lessee’s UOP will be defined as the building’s systems and structures that make up the entire building. However, if only a portion of the building is leased (such as an office, floor or certain square footage) then only the portion of the building’s systems or structures associated with that leased space will make up the lessees’ UOP.  In the hands of the lessor, the UOP is the building and its building systems.

An amount paid is considered an improvement to a UOP and is required to be capitalized, if it results in one of the following three outcomes to any one functionally interdependent component:

  • Results in a betterment or permanent improvement to the UOP
  • Restores the UOP to its value or use
  • Adapts the UOP to a new or different use

Taxpayers should understand that this is a significant change from previously issued proposed regulations, given that under prior guidance taxpayers treated the entire building, inclusive of the now separately identified systems, as a single UOP. For example, under prior guidance, expenditures related to heating, ventilation, and air conditioning (HVAC) systems may have been deducted based on the analysis that the UOP, the building, was not improved. Under final repair regulations the analysis must look at only the HVAC system as the UOP.

Routine maintenance remains deductible in the current year.  Maintenance includes work that does not materially increase the capacity, productivity, efficiency, strength, quality or the output of the UOP.  It also includes expenditures paid for maintenance that a taxpayer reasonably expects to perform more than once during the class life of the asset for non-buildings, and more than once during the 10 year period from when the building structure/system is placed in service for building structures/systems.

While taxpayers were hoping for bright line tests to answer these and similar questions, the final regulations still rely on analysis of facts and circumstances to determine how to treat such expenditures. The application of the new regulations to amounts paid will likely remain a source of contention between taxpayers and the IRS, but the final rules provide numerous examples of typical transactions and their treatment to help guide taxpayers. If you have questions on the repair regulations or a UOP, please contact an Anders advisor.

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