January 2016 - Anders CPA

January 27, 2016

Benefits of an IC-DISC

IRS offers large tax incentives for manufacturers who export their product internationally.  An Interest-Charge Domestic International Sales Corporation (IC-DISC) is a separate corporation which acts as a sales commission agent for the exporting entity.  The election must be made within 90 days of its first taxable year by filing IRS Form 4876-A.  It is categorized as a domestic C corporation that is tax-exempt from federal income tax purposes.

IC-DISC Qualification

To qualify as an IC-DISC you must meet the following tests:

  • At least 95% of its gross receipts during the tax year are qualified export receipts.
  • At the end of the tax year, the adjusted basis of its qualified export assets is at least 95% of the sum of the adjusted basis of all its assets.
  • It has only one class of stock, and its outstanding stock has a par or stated value of at least $2,500 on each day of the tax year.
  • It maintains separate books and records.
  • It is not a member of any controlled group of which a foreign sales corporation (FSC) is a member.
  • Its tax year must conform to the tax year of the principal shareholder who has the highest percentage of voting power.
  • Its election to be treated as an IC-DISC is in effect for the tax year.

Typically ownership is held by the pass-through entity for greatest tax benefit. The parent company pays a commission to the IC-DISC and deducts this commission from its ordinary business income.  This results in a deduction at ordinary tax rates, with the current highest bracket of 39.6% in tax savings.  The IC-DISC receives the commission as income, but does not pay federal taxes since it is a tax-exempt organization.  The IC-DISC then distributes this cash as a dividend to its shareholders.  The dividend is taxed at the qualified dividend rate, with the current highest rate being 23.8% including the additional net investment income surtax.   This results in a net permanent 15.8% tax savings (39.6% tax savings – 23.8% tax costs).  The IC-DISC may also choose not to pay a dividend to its shareholders.  In this scenario an interest charge would apply to the deferred tax which is where the IC-DISC received its name.

Contact an Anders advisor to determine your potential tax savings.

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January 20, 2016

Adulting 101: A Millennial’s Guide to Filling out Form W-4

I hear many clients in their 20’s and 30’s ask, “How do I fill out the IRS Form W-4?” Many folks don’t understand what this form is, or why they have to fill it out.  If you’ve recently started your first job, switched jobs, gotten married or had a child, you may need to complete a new W-4.  Don’t wait to make these changes- planning now will help later!

The Goal of Form W-4

Form W-4 is the form employees complete to tell their employers how much federal taxes should be withheld from their wages.  It’s not just coincidence that when most people file their tax returns they get a small refund.  If your tax return is rather basic and you properly fill out the Form W-4 this will tell your employer how much to withhold from your paycheck.  If you find out during tax time that you owe a large sum of money or you have a large refund coming, it may be time for you to adjust your Form W-4 with your employer.  The goal of completing the Form W-4 properly is to either have a small refund or tax liability.  Ideally you would like to get your withholding for the year to match up exactly with your tax liability when you file your tax return.  Why let Uncle Sam keep more of your earnings than necessary or be required to write a large check in April?

Figuring out Your Allowances

The Form W-4 “Personal Allowances Worksheet” section will help you figure out how many allowances you are claiming in order to determine how much you should have withheld from your wages.  Use the steps below as a guide:

  • Read each question A thru G and determine the numbers you should write down at the right side of the page based on your personal situation. Read each line and answer independently of any of the other lines.
  • Line H is the total of all of these numbers and will transfer to line 5 of the Form W-4 at the bottom of the page. Fill out the Form W-4 at the bottom with all of your information checking whether you are single, married, or married but would rather withhold at the higher single withholding rate.
  • Input your total from line H above on line 5.
  • If you have been owing tax on your tax returns in the past or would like to have additional federal tax withheld from your wage then put any additional amount per paycheck in box 6.
  • Don’t write “Exempt” in line 7 unless you are absolutely positive you won’t be owing any federal tax for the year in question. I’ve seen folks who write exempt on this line and don’t realize it until they get their Form W-2 at the end of the year that they had no federal tax withheld during the year. It is never a pleasant finding when you go to file your tax return and owe a large lump sum amount that would have been taken out of your paycheck periodically during the year.
  • Sign and date the form and give it to your employer.

Not sure about your allowances? Some suggested situations are below.  Choose which one fits you or fill out the “Personal Allowance Worksheet” to be sure.

Dependent of another, Single, 1 Job and no children?
  – Mark Single and 1 Allowance

Not a dependent, Single, 1 job and no children?
  – Mark Single and 2 Allowances

Married, 1 job, spouse works, and no children?
  – Mark Married and 2 Allowances

Married, 1 job, spouse doesn’t work and no children?
  – Mark Married and 3 Allowances

If you have children or claim itemized deductions, those situations will affect how many allowances you should mark down on Form W-4.  Please use the “Personal Allowance Worksheet” to calculate your allowances if you have these situations.  Note that the allowance calculations above may lead you to having too little tax withheld under certain circumstances.

Common W-4 Myths

I’d like to dispel some rumors about this form that I hear from people I speak with throughout the year.  First, whatever allowances you make on the W-4 don’t affect how you fill out your tax return.  People say to me, “I know someone who claims 11 exemptions!” I have to explain they may claim 11 allowances, but on their tax return they may claim exemptions for themselves, their spouse, and maybe a few children.  It more than likely means that they just aren’t having a lot of federal tax withheld from their wages.

Second, the amount of withholding from your check is not the amount of Federal tax the government is permanently taking and keeping.  The amount of withholding is the amount you pay in through the year (supposedly ratably) based on your current earnings. When you file your tax return, the reconciliation of how much you will owe or will be refunded happens.

Lastly, having a large tax refund is not necessarily a good thing.  You are giving the government a free loan for a good part of a year and they won’t pay interest to you on that amount.  Wouldn’t it be better for you to have any extra money throughout the year to help with your bills, emergency savings, paying down loans or funding your retirement?  Increase your allowances so you won’t have a large refund at the end of the year and have access to those funds now rather than in the following year.

The W-4 can be confusing. If you have any questions about which allowances to make, contact an Anders advisor.

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January 20, 2016

How the Rams’ Move to Los Angeles Affects Your Personal Seat License

A personal seat license, or PSL, is a paid license that allows the holder the right to buy season tickets for a specific seat in a stadium. In just about all circumstances, PSLs are put in place to pay for the building or remodeling of stadiums, without demanding extreme public funds. However, these licenses are bought on a team to team basis. Well what about PSLs for seats in a stadium without a team? Can you write those off as a loss? What if those PSLs are transferable to the future stadium in another city? Can those be sold for a capital gain?

A few years ago, these licenses were viewed as a good investment for both individuals and businesses. NFL fans and buyers of Steelers, Ravens and Bears PSLs saw their investment grow anywhere from 131% to 800%, according to Forbes. However, in recent years, the investments have been more risky, and the results have not been as favorable. Especially for an owner of a PSL in a stadium that no longer supports a professional team.

As most sports fans, and nearly all St. Louis residents now know, the owner of the Rams has decided to relocate the team to Los Angeles where they played from 1946-1994. *Moment of silence please*. Ironically, personal seat licenses made their first appearance in the NFL in 1995, when St. Louis used them to pay for the then-Trans World Dome and luring the Los Angeles Rams to the city, per TheStreet. While previous LA Rams fans are ecstatic, St. Louisans are grieving the loss of a professional sports team, and PSL holders are left scrambling for answers.

With the Rams being the first NFL team to move in the PSL era, many questions surround the move to LA. According to the former St. Louis Rams website, fans can “buy PSLs from a current season ticket holder and become the new season ticket holder for those exact seats for all future seasons.” When the Rams first came to St. Louis, their first games were played at Busch Stadium, not the Dome. Because PSLs were sold prior to playing in the Dome, this suggests the licenses are tied to the Rams, not the particular structure, per ThePostGame.

Many argue the owners of PSLs in St. Louis should be allowed to share in the success of the rising franchise value. Especially for businesses who considered the license an asset, will the investment be treated like a worthless stock by the IRS if they aren’t transferable? Assuming the PSLs are tied to the team and not the stadium, will they be considered a non-deductible personal loss? Can individual owners sell the license to the highest bidder in LA, or will the Rams organization buy them all back?

Consult with an Anders Tax Advisor regarding your Personal Seat License and how you can make the most of this unique situation.

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January 19, 2016

Making the Most of Your Required Minimum Distribution

After age 70 ½, taxpayers are required to take a certain amount each year from their IRA and retirement plans.  This is known as a Required Minimum Distribution (RMD).  However, some taxpayers have sufficient assets outside of their IRA and retirement plans making the RMD unnecessary to live comfortably. These taxpayers are forced to withdraw more money than they need and then let the RMD sit in their bank account. However, below are several ideas on what to do with this withdrawn money in order to keep it growing for upcoming generations.

  • Buy Life Insurance: Life insurance can provide heirs more money than they would get by otherwise inheriting an IRA. Life insurance is a tax free death benefit to heirs and is more popular when the heirs are in a higher tax bracket than the taxpayer.
  • Purchase Long Term-Care Insurance: With the cost of health care and assisted living rising, taxpayers can protect their life savings by purchasing LTC Insurance to help ease the cost of long term health care.
  • Fund a 529 Plan: A 529 plan is an educational savings plan and is a great way to leave money to children and grandchildren. There are strategies that you can gift over the annual gifting limit in one year as well.
  • Make a charitable gift using a donor-advised fund: A donor-advised fund allows taxpayers to make contributions to a fund. The fund manager makes distributions to your choice of charities. These are tax-deductible up to 50% of your Adjusted Gross Income.
  • Pay the tax due on the Roth Conversion: RMD’s are not required for Roth IRAs. Taxpayers who do not need their RMD’s may use them to pay the tax for converting the traditional IRA to a Roth IRA (where an RMD is not required).
  • Re-Invest: A taxpayer’s RMD can also be reinvested into a taxable account. The purchase of securities held for the long term will defer gains on the assets.

As you can see, taking a RMD does not mean that a taxpayer needs to let the money sit in a checking account. There are many ways to benefit from taking these RMD’s out of an IRA. Each taxpayer’s situation is different so please contact an Anders advisor with any questions.

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January 13, 2016

Benefits of Outsourced Accounting

Managing the company’s accounting process and needs can be a difficult and time consuming task. For this reason, many companies look at hiring an internal resource to manage the process. While this may be effective, there are ancillary issues to consider such as cost, management requirements and other expenses. That’s why companies across St. Louis, Missouri and the region choose to outsource their accounting needs to qualified firms that can not only manage the process but leverage expertise to yield additional benefits. Below is a list of key benefits these companies realize in the outsourcing process.

  • Save money. Some people mistakenly think that hiring an accounting firm to take care of the books will cost more than hiring an internal person, but the fact is you’re more likely to save Instead of paying full-time or part-time wages and benefits to an employee – including insurance, payroll taxes, unemployment taxes, paid time-off, etc. – you pay only for the time you need from a staff focused solely on your financials. You won’t have to worry about lost productivity from office distractions, staff meetings, and vacations or providing a work space and equipment needed to do the job in-house.
  • Bring a team of experts on board. Managing your financials is the one area of the business with which most owners are unfamiliar. Effective financial management requires a deep understanding of accounting best practices, current laws and regulations, and compliance requirements. By bringing in an outsourced provider, you have access to the right set of knowledge for tasks from payroll and accounts receivables to financial statement analyses and tax planning. An accounting firm brings experience from a variety of client situations that other providers simply don’t have.
  • Minimize risk. We have found that well-meaning business owners will often leave tasks such as bookkeeping until the end of the quarter or, worse yet, the end of year. While it’s understandable to want to control costs and manage the function themselves, it’s essential to understand the risk of errors and other issues that can arise from such an approach. When you outsource, you can minimize the risks typically involved with relying on your own knowledge and timing or in-house staff.
  • Access the best accounting software and systems. Keeping up with the latest version of sophisticated accounting software often makes little sense for emerging companies, especially if they have limited needs. By outsourcing, you’re essentially purchasing those tools indirectly without having to do the system research, licensing, or funding. The best software will also keep your accounting files organized and backed up for many years should you ever get audited by the IRS.

There are significant benefits to be realized from leveraging the experience of a seasoned accounting firm to manage your accounting needs. Take time now to assess your current accounting and bookkeeping practices and determine whether process improvements would benefit operations and your peace of mind. If so, Anders is here to help! For additional information, contact Anders.

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January 12, 2016

Tax Deductions for 529 Plans Outside of Your Resident State

A 529 plan is a tax-advantaged savings plan which is aimed towards encouraging saving for education expenses. These plans are sponsored by states and, in some cases, private educational institutions. Many taxpayers wonder whether or not they can contribute to a state plan outside of the state they reside in and the answer is yes, but it may affect your tax deductions. New to the Tax Cuts and Jobs Act, you can now save for primary AND secondary education with a 529.

Most 529 plans have no state residency requirements, so it creates an open market to shop around for the plans each state has to offer. But, as with most things in life, some research needs to be done before making a decision to take your 529 dollars elsewhere. Each state will offer different options for investment which will yield varying rates of return, as well as, varying levels of fees and expenses associated with the options. Most residents choose to opt for an in-state plan, but it’s important to consider whether the state offers an income tax deduction for contributing. If the resident state does not offer an income tax deduction, it’s important to instead focus on fees, expenses and investment objectives. Every state allows a rollover to another 529 plan once per year with no tax consequences, but several states will charge for transferring an account or recapture state tax deductions when moving from an in-state to an out-of-state plan.

Thirty-four states offer tax deductible plans to their residents. However, moving your 529 dollars to a different state may cause you to lose the tax benefits associated with the plan. For example, Illinois allows only contributions to an Illinois 529 plan of $10,000 (filing single) and $20,000 (married filing jointly) to reduce taxable income. Qualified distributions from only an Illinois 529 plan are exempt. On the other hand, in Missouri, residents can contribute up to $8,000 (filing single) and $16,000 (married filing jointly) to a Missouri 529 Plan or another state’s 529 plan and reduce taxable income. Likewise, qualified distributions are exempt whether it is a Missouri or a non-Missouri 529 plan. So, compared to Missouri, Illinois incentivizes its residents to keep dollars in the state and allows higher contributions, whereas Missouri allows more freedom to choose where to put your 529 dollars while still allowing deductions.

To avoid abuse of these plans by trying to set up tax-shelters, the states keep a watchful eye and have certain consequences to protect their 529 funds. If someone is caught contributing money to these plans without the intent of using it for education, they risk having their account terminated and open themselves up to extra penalties.

In the end, where you put your money is up to you. Educate yourself on your state’s rules regarding contributions to a 529 plan and keep in mind many states are similar to Illinois, and will only incentivize residents to contribute to their home state. As you begin your journey of saving for education, do your research and contact an Anders advisor.

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